Increasing Agricultural Productivity:

Encouraging Foreign Direct Investments in the COMCEC Region

of FDI account for an increasing share of the international activity of MNEs, particularly within

major markets.

Dunning also stresses that the motives for foreign production may change as MNEs become

established and experienced foreign investors. “Initially, most enterprises invest outside their

home countries to acquire natural resources or gain (or retain) access to markets. As they

increase their degree of internationalization, however, they may use their overseas activities as

a means by which they can improve their global market position by raising their efficiency or

acquiring new sources of competitive advantage”

. The location decisions of MNEs have

undergone profound changes in the 1990s.

The knowledge-based factor of production in the

form of skilled labour now predominates, whereas low-wage labour as a location factor

prevailed in the 1970s. Locational advantages arise out of a highly skilled, educated and well-

trained labour force, providing the competitive edge for many industries. One factor that always

remained instrumental relates to economic and fiscal incentives. To what extent and in which

stage of the location decision making process incentives play a role will be further outlined in

the next section.

2.3

The Role of Incentives in FDI Decisions

Attracting FDI through business incentives and economic zones to enhance competitiveness and

achieve economic development goals are fundamental objectives of many governments around

the world. There is now general consensus that having a competitive business climate with

increased levels of FDI positively contributes to a country’s domestic economic development

goals. The benefits of FDI are highlighted and frequently cited by businessmen, policy makers

and politicians, yet less is known about how the benefits of FDI compare to the costs in terms of

the incentives awarded to companies to attract the investment. Greater knowledge of the role

and efficiency of incentives to attract investment is required. Today there are three main

perspectives on investment incentives:



Orthodox: Incentives have little or no effect on investment decisions and their location;



Traditional: It’s all about the incentives. They are the key driver behind investments;

and



Mixed: Incentives do matter, but it very much depends on situation, type and structure.

There are multiple reasons why governments provide incentives for domestic or foreign

investment. Below are some of the main reasons:



To overcome a competitive weakness such as high costs or weak business climate (so-

called site equalization outlays);



To promote investment in deprived areas by offering incentives in poorer areas;



To attract particular industries by offering them incentives to invest;

ibid

Dunning, 1993: 57.

Dunning, 1998.