FDI in whatever form…
— Dany Chung
In present days, we are hearing about FDI everywhere. What is FDI ? Some right-brainer artists are thinking about Fashion and Design Institute. Some left-brainer analytical minds are thinking Foreign Direct Investment and juggling the millions and billions in their head. Some no-brainers are wondering how legitimate are all the billions that Mauritius invested in India?!? Our politicians are campaigning loudly about all the FDI that Mauritius received. And a minority are thinking instead about Foreign Direct Input. In all cases, we do need FDI in whatever form.
We need Foreign Direct Investment to sustain and promote the growth of our country. To attract investments, two main factors are primordial: safety (laws and regulations), and short term profits.
Looking at history, places like Singapore and Hong Kong thrived in the past because of not only their strategic geographical location, but also of their strong and safe legal systems. Multinationals used them as a safe platform to target and arbitrage the bigger markets like ‘communist China’ or ‘corrupted India’. But is that model sustainable with China moving more and more into pro-capitalism?
Many multinationals have closed office in Singapore or Hong Kong to move directly into China, mostly in the coastal areas, like Shanghai or Shenzhen. Newcomers, new companies and expatriates trying to grab a piece of the Chinese pie, are nowadays simply going directly to China.
On the other side of the world, Argentina has just recently expropriated the Spanish oil company Repsol® of their rights to the Argentinean oil sources. This is a clear and negative signal to multinationals from the Argentinean government. A spokesperson from the Spanish government stated: Argentineans are shooting themselves in the foot. Definitely, FDI in Argentina can be expected to decline significantly after such an episode.
What lessons can be drawn for Mauritius? Clearly, our 2-way FDI gains with India are not sustainable in the long run. The moment India will decide to stop the Double Taxation treaties, we will be done. Similarly to Singapore, we have inherited a strong and safe legal system too, but we are not leveraging it enough to attract more FDI. The Singaporeans did a better job in shouting out their British colonial past and hence promoting their safe legal system. Although we might not like it, we could also leverage likewise to attract more FDI.
We should also focus more on the short term profit generation. Investors and hedge funds are more interested in high risks, high rewards hit and runs schemes rather than on boring, low returns yielding long term bonds, but within a safe legal framework.
The main organisms for credit ratings are US-centric like the S&P, Fitch and Moody’s. Mauritius has a credit rating from Moody’s and that also, not a great one of Baa1 and Baa2. We are nowhere near the AAA of first world countries. We could take a different path, leverage more on our strong relationship with China to get a good rating from the Chinese credit agency like the Dagong Global Credit Rating. We might be able to attract more eastern FDI.
Moving on to FDI as Foreign Direct Input
“Global labour arbitrage” refers to the tendency of jobs, in mostly manufacturing, to flow towards whichever country has the lowest wages per unit output at present and has reached the minimum requisite level of political and economic development to support industrialisation. China is at present taking the lion share of this game.
What is our ‘right to play’ by bringing in cheap labour from those poorer regions like China, India or Bangladesh? How sustainable are our Business Process Outsourcing activities, cheap bilingual call centres or Information Technology helpdesks. We are simply pulling down the wage levels and competing against the unlimited supply of cheap labour of these bigger countries. We do not really have a valid wage disparity relative to those emerging nations and we are merely setting ourselves up to be engulfed in a deep low cost hole.
We should rather focus on higher end production and attract higher end technology (e.g. Biotech) and the accompanying brains, Silicon Valley style. Tax paying brains will also contribute to Mauritius as a whole. Furthermore, if they become citizens of Mauritius, they will also help to support our pension system.
To sustain a healthy pension pyramid, a reproductive rate of > 2 is necessary. However, Mauritians are reproducing only at a rate of < 1.5. This doomsday scenario simply means we are moving to an inverted pension pyramid, similar to the demographics crisis faced by countries like Japan, Germany or Singapore. Moreover, it is well known that Mauritius faces an important brain drain. We need to look no further at how many of our laureates ever come back.
However, there’s a caveat. In trying to overcome this similar problem, the Singaporean government opted to rely heavily on ‘Foreign Talent’ (note the use of ‘Talent’ and not ‘Labour’) and canvassed by and large to attract brains globally, especially from China, and even Mauritians. Hence, they managed to sustain their growth by almost doubling their population over a decade. But at a big expense: they are now facing demographics issues whereby the local population is having cultural clashes with these ‘foreign talent’ and exorbitant housing costs.
There are basically 3 categories of immigrants: the skilled, the unskilled and the refugee. Clearly, we should target only the first category. Skilled migrants would be less prone to social rifts due to their higher education and would more easily integrate socially. But what we are seeing in Mauritius is more pockets or ghettos of Chinese or Bangladeshi workers nearby our industrial zones. Or another local depiction is the South African (probably running away from post Apartheid challenges) with a bungalow in Tamarin selling Avon-type cosmetics. What is the added value of this type of activity? None.
The United Kingdom had for several years a special HSMP visa (High Skill Migrant Programme) targeting and attracting the brains to their shores. Whoever graduates with an MBA from the top European business schools are automatically eligible for such a visa. China is granting more residency permits often referred to as “green cards”, for easier visa-free entry and greater incentives to attract foreign expertise.
Mauritius should be careful and not just follow blindly in such footsteps. Small steps can be implemented. For instance, to avoid brain drains, laureate scholarships should only be awarded at high achieving students who will return to Mauritius and have a burning desire and commitment to contribute to the country. Those who will opt to stay abroad must simply pay back to the Mauritian government.
We need to plant sustainable seeds in good industries and support these growths with key enablers, our people. Eco, bio, marine projects are all nice for the long run, but we must also focus on more intangible, service-centric projects which require less capital expenditure, hence a more positive Cost-Benefit ratio, and which are faster to implement. There is a huge opportunity for us to be the Apple® of Africa.
Dany Chung is a global strategist at a US multinational