• Mozambique’s business lobbies sign MoU to help local SMEs gain access to the extractive industry’s potential
  • FDIs can have negative effects on poor countries that display low human development index

 

The Confederation of Economic Associations of Mozambique (CTA) and the Institution for the Promotion of Small and Medium Size Businesses (IPEME) have signed today a memorandum of understanding (MoU) of a three-year period aimed at improving competitiveness of the Mozambican entrepreneurial fabric.

The covenant covers sectors such as those of agriculture, infrastructure, institutional capacity, renewable energies, financial services and tourism. One of the central components of the MoU lies in the agreement between CTA and IPEME to work together in order to facilitate access for Mozambican SMEs to educational projects such as the Management and Production Technology 2017-2020 program (TPG 2017-2020) aimed at improving their productivity.

“while Mozambican SMEs are vital for the wealth creation process they are also the ones which face major difficulties and obstacles in terms of access to funding”

Training manuals will also be provided to SMEs to help them apply for tenders from mega projects involving multinational foreign companies in the natural resources and extractive sectors. This tool aims at increasing the participation of local companies in the procurement and supply of various goods and services to foreign big-size companies. This initiative is backed by the World Bank.

Quoted by the Portuguese-speaking online news media Sapo Notícias, Agostinho Vuma, CTA’s president, observes that “while Mozambican SMEs are vital for the wealth creation process in that they are the major contributors to employment and taxes for the State they are also the ones which face major difficulties and obstacles in terms of access to funding”. This is so in a country where the reference lending rate is currently at 27.25%.

CTA President Agostinho Vuma
Agostinho Vuma, CTA’s President

How such initiatives translate into practical reality is yet to be seen. However, these cannot be under-estimated given that Mozambique will rely for still a long time to come on foreign direct investments (FDIs). It just so happens that FDIs are not necessarily a factor of growth in situation where local companies suffer heavy competitive disadvantages, which is the case of Mozambican SMEs.

It is widely accepted that FDIs can only have net positive spillovers for the economies where those flows of capital are directed at, especially for countries of the developing world. They generate growth and employment, are accompanied by significant technical and technological spillovers and are critical factors of productivity improvement for local SMEs and workers.

However, in an article published by the European Journal of Interdisciplinary Studies in December 2010 their authors lay stress on the wide divide that separates academics, even among those sharing a common free-trade mindset, when it comes to appreciating the degree and direction of correlation between FDIs and growth (from the point of view of the country that receives the investments).

Thus, on the basis of empirical observations, Hanson (2001) argues that FDIs have “very few positive effects” on growth as it tends to crowd out local enterprises. According to Greenwood (2002) FDIs have “mostly negative effects”, while Lipsey (2002) is of the view that FDIs have a few positive effects but these are not necessarily correlated with growth.

Nevertheless, there is a consensus on the role that a country’s human development index plays in determining the nature of the impact that FDIs may have on that country. The lower this index, the more negative the effects. In countries where the education system is weak and where training for the middle class does not produce the skills and knowledge that are desired in the practical world of work FDIs can literally annihilate the local industrial fabric.

Kojima and Osawa (1984) had indeed showed that for any company to decide to engage in capital investments abroad it needs to fulfill three main idiosyncratic or company-specific conditions. It must make sure it enjoys a monopoly of resources in a specific asset (patents, privileged access to an exclusive market, a non-replicable or unique product). It must also be endowed with technological power (therefore a powerful means of technological dissemination), as well as financial power (privileged networks of lenders and equity investors, strong cash position, easy access to capital markets).

During the third quarter of 2017 total FDIs ($235 million) reached only 26% of what they were in the third quarter of 2016. The figure is sequentially 47% lower compared to the previous quarter

If the country of destination lacks any of these three pre-requisites then FDIs can have strong negative social implications there. The MoU between CTA and IPEME is therefore all the more important. The implementation will be critical. What are the material and human resources that Mozambique will consent to invest in the elevation of Mozambican human development?

In the meantime, however, latest FDIs figures show a sharp decline, reflecting the ongoing aftermaths of the discovery of illegal and occult sovereign debts a year ago. During the third quarter of 2017 total FDIs ($235 million) reached only 26% of what they were in the third quarter of 2016. The figure is sequentially 47% lower compared to the previous quarter, according to data from the Mozambican Institute of Statistics (INE).

FDIs in Mozambique

                                                                                        Source: Banco de Moçambique (BdM)

FDIs in the agriculture sector stood at $11.8 million in the third quarter, their lowest level since the fourth quarter 2015. Even in the extractive sector FDIs have diminished significantly at $56.6 million in the third quarter versus $454.6 million a year earlier and $272.2 million during the previous quarter.

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