FACTORS AFFECTING FOREIGN INVESTMENT DECISION IN DEVELOPING COUNTRIES
Research Questions 7 1. Research Objectives 7 1. Methodology 8 1. Justification for the Research 8 1. Outline of the Chapters 9 1. A Report By Santander Trade Portal (www. santandertrade. com) 18 2. Summary 20 CHAPTER THREE 22 RESEARCH DESIGN AND METHODLOGY 22 3. Introduction 22 3. Introduction 27 4. Application of Methodology 27 4. Analysis 28 4. Sierra Leone Agricultural Sector 28 4. The Mining Sector 31 4. Background to the Research Developing countries such as Sierra Leone offer excellent investment destinations, but poor infrastructure, an illiterate workforce, and rampant corruption constitute critical challenges that any outside investor should take note. Because its attraction as an investment destination in Sub-Sahara Africa, Sierra Leone’s potential remains unscathed. The country’s extremely fertile land offers an excellent opportunity for commercial farming. The country boasts an abundance of minerals such as an Iron and Diamond. The extractive industry has proven to be so lucrative to the extent that it remains the sole driver of the country’s exponential economic growth.
The decade-long civil war cut short learning for the most of Sierra Leone’s students, and that has translated to illiteracy levels of about 40%. For any prospective foreign investor, lack of Human Resource should be a worthy challenge consideration. The extractive industries would have to rely on expatriates entirely. The Ebola epidemic of the past few years brought economic activity to a standstill once again to this young nation. The restrictions imposed on the people meant that no activity was going on while health facilities were stretched beyond capacity. The telecommunications sector boasts of higher private sector participation when compared to the previous ones mentioned. The liberation of the sector and the entry of four mobile operators pushed this sector considerably in comparison to other sectors.
However, penetration of this critical service still lags behind the average in most of its neighboring country. Sierra Leone was late in the adoption of the internet whose penetration stands at a paltry 0. way behind that of neighboring states (Davies, 2005). This method analyzes various works that study a particular phenomenon and use comparative metrics; my methodology will concern itself with both microeconomics and macroeconomics; 1. Justification for the Research Sierra Leone is known for its violent past and the recent Ebola epidemic, therefore not many would consider investing in the country; let alone visiting the country. This research will try to prove why Foreign Direct Investment is a good idea for both the investors and the country. Sierra Leone achieved double-digit GDP growth of 15.
in 2012 and 20. Parent Discipline/fields 2. Main Theme, and its application 2. Review of Relevant previous Research 2. Summary Chapter 3 Methodology 3. Introduction 3. Previous Research 4. Findings for each research question discussed in the light of the literature 4. Summary Chapter 5. Conclusion and Interpretation 5. Introduction 5. Some companies in iron ore mining have found remarkable profits propelling the growth of the county’s GDP to record phenomenal growth. These two companies serve as an example of the kind of success that any foreign investor can achieve. This research paper will try to find out more information on why Sierra Leone deserve Foreign Direct Investment because very little positive information exist about this country, and the extent of some of the negative information we get hear about Sierra Leone.
CHAPTER TWO 2. LITERATURE REVIEW 2. The exploitation of iron ore drives this country's economic output. The economy has been expanding and contracting according to the extraction and export of iron ore; other sectors contributions are minimal. The country’s economic output is at the mercy of destabilizing effects such as political instability and the recent Ebola outbreak. Without these two factors, Sierra Leone’s economic output can grow at a very high percentage (Africa Development Bank, 2018). However, the country is susceptible to external shocks such as the reduction of iron ore prices. African minerals filed for bankruptcy after the reduction of iron ore prices in the international market. Despite the withdrawal of these mining companies, it is evident how just handful companies could change the situation of this small country (Steinweg &Indra Romgens, 2015).
The entry of Chinese mining companies ushers in hope for Sierra Leone. The recent regulation changes by the government hope to attract more foreign investments. The government has reduced the period required to register a company from seven days to just three. The second factor is the abundance of natural resources as is the case in Sierra Leone. The rise of lower-middle-class population translates into growth in demand. After enjoying peace for more than a decade, Sierra Leone is an example of a country with a rapidly growing lower middle-class population who desire products that were once out of their reach (Deloittte, 2014). The key drivers contributing to the surge in economic growth is the discoveries of natural resources in countries such as Sierra Leone, Kenya and the Democratic Republic of Congo.
There is a huge demand for financial services, especially for Sierra Leone which is yet to have a stock exchange. while that of the rest of the world stands at 0. With a rapidly growing population comes the ever-growing need for services. Deloitte estimates that six of the ten countries with highest urbanization rates are in Africa. Urbanization is beneficial owing to the need to access the market as easy as possible. Sierra Leone has a very poor road network; therefore, people moving to urban centers where they can be easily accessed is an attractive phenomenon to FDR. Sierra Leone accepts full foreign ownership of a business. Many countries have local empowerment laws, which require a certain percentage, allocated to local citizens.
In most of the cases, local investors lack enough capital to invest in these companies, especially if the investment is capital intensive. In cases where the investor prefers to have a local partner, finding one who has a long-term interest in the business is not easy. Political instability is a thorn in the flesh for most African countries. Only 20% of the land under cultivation is used to grow cash crops. This represents a paltry 3% of all the arable land (UNCTAD). The mining sector is in recovery. This sector once contributed 20. of Sierra Leone’s GDP. The equivalent Ambassador of Sierra Leone to Germany described his home country as a paradise full of investment opportunities in Tourism, trade, and agriculture. He might have purposely avoided mentioning the mining sector to show the Western investors that his country is endowed by other opportunities apart from mining.
The official was able to explain the various infrastructural and policy changes taking place in his country, which would enable investors to do business with relative ease as compared to the past. Mr. Kodeh was right in mentioning these sectors which have so much unexploited potential. The report also shows that at 30% corporate tax, Sierra Leone taxes less than the Sub-Sahara Africa which stands at 38% corporate tax. The most important information published by this report must be the heavy investment by the Chinese. China is currently financing a new airport, a hydroelectric dam and medical facilities. China’s Hainan Rubber production company has committed USD 1. billion in the growth and production of rubber. The Ebola epidemic proved how fragile the country is when faced with disasters (www.
santander. com, 2017). A general view of this report shows that Sierra Leone is fast in laying down the necessary capacity to attract the investment it needs. The Chinese have committed in revamping key sectors of this county’s economy. The country’s investment policies seem to favor foreigners. Nevertheless, the country is susceptible to instability due to its under-developed government capacity to deal with cases of disease epidemics or a charged political environment. CHAPTER THREE RESEARCH DESIGN AND METHODLOGY 3. Introduction This chapter focuses on the research design and specific methodology that was employed by this research paper. It includes sampling procedure and sample size, target population, research instruments, data collection procedure and data analysis. Research concerning investments in well-established entities is best conducted through the collection and analysis of data generated by well-established agencies with the resources and expertise to generate reliable data.
In this field, primary researchers often constitute well-funded organizations with sophisticated technology and a capability to involve larger samples. Secondary data enables small and novice researchers to research in a very short time. Use secondary data eliminates aspects such as measurement development and data collection. This research will sample several authority publications on the investment climate in Sierra Leone and a comparison drawn. I will use frequency tables, pie charts and Histograms and any analytical tool that will seem fit for the intended purposes. I will use multi-stage sampling strategies to give the research a comprehensive study of the country. This is appropriate since Sierra Leone has had two development phases since the end of the Civil war; that is pre-Ebola period and Post-Ebola period.
The Reliability and Relevance of research instruments Reliability is the degree to which an assessment tool produces stable and consistent results. The study employed the parallel forms reliability, which is a measure of reliability obtained by administering different versions of an assessment tool to the same group of data This study used simple sampling but narrowed down to data from well-known agencies and business news publisher. However, in this research, the data or research used is highly appreciated considering the kind of resources used to gather this kind of data. As mentioned before, all the data used in this research is from credible sources from the World Wide Web. This research recognizes the sovereignty of the people of Sierra Leone. The journey that this country has undergone is special, and with all due respect, the potential in Sierra Leone is immense.
Summary 1. S Security Exchange Commission’s website, Google Finance, Wikinvest and Bloomberg. Simple sampling was used in identifying these sources, but the sampling narrowed down to those sources whose credibility was beyond question. Ethics in this regard has to do with plagiarism. All the sources used will be well referenced, and the authors acknowledged accordingly. Conclusion The chapter has captured the fact that the study used case study method of research. Application of Methodology Methodology involved refers to the discussion of previous data or research then an analysis is conducted where opportunities for FDI are available or not. An analysis per sector will enable readers to spot either an opportunity or a concern. This chapter will go through available, published research.
Descriptive research analysis will be most appropriate for this kind of research. However, the use of statistical visual objects (such as pie charts and bar graphs) will be used where appropriate. Rice as a food crop offers a good investment opportunity for foreign direct investment. The country is barely food secure, and poor quality rice is often imported into the country to fill the gap left. There is immense potential for any investor who is ready to add value to rice as a staple food in the country (World Food Program, 2011). One Foreign investor doing quite well in Sierra Leone is Mountain Lion Agriculture Corporation. The company has a vision to grow make Sierra Leone food secure. A survey conducted by the World Bank in 2011 marked Sierra Leone as one of the countries that lack food security.
This should be good news to any outside investor. The World Bank is working hard to change the fortunes of small farmers by introducing methods and best practices to increase rice yields. Under the new System for Rice Intensification (SRI) the country the World Bank is providing fertilizers, herbicides and new farming methods. Production of Biofuels is another agriculture related niche worth any investor’s attention. Sierra Leone is a net fish exporter netting $11,000,000 compared to $1,400,000 imports for the year 2007. A whole industry exists around fishing employing an additional 200,000 indirectly. These jobs can be found in fish processing, marketing and boat building. Main fish exports include shrimp and finfish demersal trawlers (Nexus Commonwealth Network, 2018). Sierra Fishing Company will serve as our case study under the Sierra Leone fishing sub-sector.
A lot of potential exists in this sector (Sierra Fishing Co, 2018). According to The Sierra Leone Telegraph (2016), the country loses over $100 million dollars of revenue every year due to poor governance, weak surveillance and poor monitoring, and corruption. Foreign companies have, for a long time, exploited the unmonitored waters of Sierra Leone (Thomas, A. R. Local companies lack the capacity and goodwill from the government to compete with the foreign ones. Diamonds export recorded for that year increased by 7. Bauxite production dropped by 22. when compared to the previous year. The fall in extraction of Bauxite was chiefly influenced by the falls of global prices. The rest of the minerals also recorded a decline; Gold declined by 17. Despite this the generation of electricity has been improving constantly over the years as shown by the table below.
Year Total Units Generated 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 52,874,886 61,385,728 106,312,033 123,499,068 109,387,209 84,816,249 53,212,105 31,980,820 30,681,499 138,537,950 131,977,192 Source: Bank of Sierra Leone 4. Transport and Communication Sector The transport sector in Sierra Leone is still young when compared to most African countries. Sierra Leone has no cross-country railway track; a critical infrastructure for a nation, which has substantial mineral deposits and abundant agricultural resources. The number of commercial vehicles has been increasing steadily. and 6. from the year 2008 to 2011. This kind of growth is quite high to attract many investments. A sharp rise in growth rate can be noticed from the year 2012 to 2013 up to a growth rate of 20. This astronomical growth can be attributed to the mining activities of African Minerals Ltd. The vision of Sierra Leone is anchored on accessibility. The poor state of roads in the country frustrates a majority of Investors eyeing the agriculture sector in this country.
The opening up of the country’s rural areas will unleash the country’s agricultural potential, which remains untapped. Lack of infrastructure is the main reason why the fishing industry remains untapped, while foreign vessels take advantage of lack of surveillance to exploit the country’s stock. Developing capacity within the government and the local business people will enable manufacturers to set base within the country. Sierra Leone as a country might have a small domestic market, but a huge market exists for its exports. CHAPTER FIVE 5. CONCLUSION AND INTERPRETATION 5. Introduction This chapter gives an honest opinion of whether it is advisable for any foreigner to consider investing in Sierra Leone. The opinions expressed in this chapter emanate from careful analysis of all the factors discussed in this research.
According to SIEPA (2018), Sierra Leone has built 1,800 Kilometer of road between the year 2008 and 2012. A private port management company has been sub-contracted to operate the Sierra Leone port. Sierra Leone’s only international airport has undergone multiple refurbishments for the past decade. Sierra Leone has signed several agreements/pacts to offer duty-free access to its market. One of such a pact is the African Growth and Opportunity Act (AGOA) with the US and the European Union under the Cotonou Agreement. The company invested heavily in infrastructure; a 200-kilometer railway and the Tonkolili port facilities. The company was able to export a large consignment of minerals in 2013, proving that Sierra Leone had the metals in abundance. Below are sample financial results (Steinweg &Indra Romgens, 2015).
Core Financial Results Half year 2014 (in US $ million) 2013 (in US $ million) 2012 (in US $ million) Revenues 399. Operating profit -58. Investors interested in agriculture would have to face impassable roads to access rice fields in rural Sierra Leone. Lack of electricity in the rural areas is another weakness that a foreign investor expects to experience once in the country. Currently, a Hydroelectric project is underway, but it is not yet complete. The main port at Freetown offers a lot of hope for Sierra Leone businesses. The harbor at Freetown is one of the largest in the world. Market forces can ruin even the most lucrative of businesses; African Minerals Ltd is a good example. An investor in the extractive industry should be ready to comply with a raft of requirements, which range from revenue sharing models to non-pollution and land conservation agreements with the local government, the community and environmental organization.
The government of Sierra Leone offers very good deals to investors interested in other sectors that are less known, like the tourism sector. The tourism sector is untapped, and the government has a mission to develop this sector. An early investor could benefit tax exemption ranging from 5 years to 10 years. There is a shortage of statistical data for Sierra Leone; that made this research to rely more on literal explanations rather than numbers. Recommendations Sierra Leone as a country should publish more information about the potential of other sectors like agriculture and fisheries since the country is only known for Diamond and Iron ore. The country also needs to take stock of their overreliance on Aid as a means of financing government budgets.
Overreliance on Aid is not a good indicator of economic growth or prowess. References 1. state. gov/e/eb/rls/othr/ics/2015/241735. htm. Accessed on January 16, 2018 4. Davies, C. Doing secondary analysis. London, UK: Unwin Hyman. Toe, Nobert et al. Sierra Leone: Selected Issues and Statistical Appendix. International Monetary Fund. portal. santandertrade. com/establish-overseas/sierra-leone/investing-3). World Food Program, 2011. The State of Food and Security and Nutrition in Sierra Leone 2011. com/sierra-leone/unemployment-rate. Retrieved on 17th January, 2018 13. Bank of Sierra Leone, 2009. Annual Report and Statement of Accounts for the Year Ended 31 December 2009. Deloitte, 2014. The Sierra Leone Telegraph. Retrieved from:http://www. thesierraleonetelegraph. com/sierra-leone-fisheries-ministry-corruption-report/. Accessed January 17, 2018 16. Accessed January 17, 2018 18. Steinweg &Indra Romgens, (2015). African Minerals in Sierra Leone: How a Controversial Iron Ore Company Went Bankrupt and What that Means for the Local Communities.
Center for Research on Multinational Corporations (SOMO) 19. Sierra Leone Agricultural Sector Review, (2011).
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