Differentiating Extractive, Manufacturing and Service Investments in LDCs

Article excerpt

The problems facing foreign investors in LDCs depend on the type of investment, whether in an extractive industry, manufacturing for the host market or for export, or a service industry. Differences arise from the objectives of MNCs, capital investment, timeframe, balance-of-payments, currency stability and operating controls in the host country. An awareness of these differences is important/or the multinational investor's pre-in vestment planning and negotiating with a host government.

Extractive, manufacturing and service investments create different types of problems for companies planning foreign direct investments (FDIs), especially in less developed countries (LDCs). For manufacturing, there are differences between plants producing primarily for the host market and those seeking low-cost labor to produce exports. The problems affecting EDI have not previously been presented systematically, and there is a need for a comprehensive scheme that multinational executives can use to analyze different types of investments.

Exhibit 1 highlights the different characteristics under four categories of investments. The exhibit illustrates how issues that are highly controversial for one kind of investment are less controversial for others.

MNC Objectives

Extractive. A foreign investor's primary concern when setting up an extractive facility is a reliable source of raw materials to feed downstream operations. The majority of mining and petroleum companies are highly integrated, and the extractive operations are the first in a long series of processing facilities. Hence, the concern is to control costs, not necessarily show a profit.

Manufacturing for host market. An import-substituting investment is motivated by a desire to make a profit or preserve and gain market share. Multinational corporations (MNCs) try to head off competition by negotiating subsidies or tariff protection from a host government, and they may have the bargaining power to gain more protection than is possible in industrialized countries. However, this type of investment is particularly sensitive to economic conditions and political pressures in LDCs, which makes the objectives more problematic.

Manufacturing for export. In export operations, MNCs seek low cost operating locations. They want cheap labor for labor-intensive operations, primarily assembly of components into standardized products. The products tend to be mature and price-competitive, so cost control is an important objective. Foreign companies typically are concerned about quality assurance and reliability of supply. They are also concerned that their investments be free of administrative costs and hassles when setting up and operating plants.

Services. The most common types of FDI are hotels and financial services, mostly banks. Both types of foreign operations frequently focus on serving the needs of the international community, i.e, foreign travelers in the case of hotels and local affiliates in the case of banks. When foreign hotels service locals, they are usually the wealthiest and most internationalized citizens. The services rendered by foreign banks relate to foreign borrowings and transfers of funds.

Host Country Objectives

Extractive. The most important benefits that host LDCs hope to obtain from extractive industries are foreign-exchange earnings, government royalties, tax revenues and jobs for host citizens. Technology transfer and downstream marketing may be significant, although these supporting services are increasingly available in "unbundled" form on the open market.

Manufacturing for host market. The benefits host countries seek from foreign import-substituting plants are varied and diffuse. MNCs are likely to bring in a "package" of goods and services, including technology transfers, employment opportunities, capital inflows, training of host citizens as managers, technicians and laborers, and opportunities for local producers to supply raw materials and services to the foreign plant. …