Academic journal article Journal of International Business Research

Mauritius as a Success Story for Fdi: What Strategy and Policy Lessons Can Emerging Markets Learn?

Academic journal article Journal of International Business Research

Mauritius as a Success Story for Fdi: What Strategy and Policy Lessons Can Emerging Markets Learn?

Article excerpt

ABSTRACT

This study uses a policy approach to examine the role of Foreign Direct Investment (FDI) in the 'Mauritian economic miracle' years of 1970-2000. In the early stage of industrialization, the Mauritian government turned the island into an Export Processing Zone. The objective was to attract foreign direct investors in the textile and clothing industry who would then export the finished manufactured products to European and North American markets. This study analyzes how the spillover and linkage effects between FDI, productivity, domestic investment, and exports impacted economic growth. The results indicate that it was FDI stock, rather than FDI inflows, that led to the growth success. In addition, it was the heavily FDI-driven export sector which was the driving force of economic growth. The study also highlights the challenges that Mauritius faced during its development path, lessons that emerging countries can learn and policy recommendations on how to reposition Mauritius going forward.

Keywords: FDI spillovers, exports, growth, emerging markets

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

Mauritius has recurrently been cited as a development success story by the World Bank and the International Monetary Fund (Subramaniam, 2001; Zafar, 2011). This small island economy has been a historical evidence against the pessimistic prognosis of Nobel Laureate James Meade who regarded the Mauritian economy as a case of the Malthusian trap (Meade, 1961, 1967). He predicted that the economy would have poor development prospects due to its heavy dependence on its sugar-based agricultural sector, high vulnerability to trade shocks, rapid population growth rate and rising ethnical tensions. Yet, in addition to maintaining national stability and social cohesion, the island economy has sustained a high and stable economic growth rate averaging 5 percent annually between 1970 and 2000 (World Bank's World Development Indicators, 2002). This period, often called the "Mauritian economic miracle," has generally been attributed to the role of foreign direct investment (FDI) transforming the country from a stagnant mono-crop economy to one with sustainable growth and development. Supporters of FDI argue that FDI, as a composite bundle of capital stock, knowledge and technology (Balasubramanyam et al, 1996), has the potential to act as an engine of economic growth by providing the necessary conditions for the economy to move up the value chain.

When the island gained independence from Britain in 1968, the economy was characterized by high unemployment, chronic balance of payments deficit, low levels of savings and investment as well as low economic growth averaging to less than 0.3 percent annually (WDI, 2002). The then newly formed government soon realized that the heavy dependence on sugar exports and the import-substitution policies would not remedy the poor economic health of the country. Significant structural changes had to be made to compensate for the lack of domestic natural resources. In order to address the domestic problems, the government took a daring decision to adopt an export-oriented strategy, starting with the establishment of the Export Processing Zone (EPZ) in 1970. The aim was to attract export-oriented foreign direct investors and to rely on the potential benefits of FDI through spillover and linkage effects.

Special fiscal and financial incentives were offered including tax holidays on corporate profits, exemption from income tax for distributed dividends, highly subsidized infrastructural provisions, duty-free imports of inputs, unlimited repatriation of profits and unrestricted ownership. These investment incentive schemes attracted not only FDI but also domestic entrepreneurs to the textile and clothing industry. Over the 1970-1977 period, the EPZ sector took-off, driven by increase in FDI, domestic investment, exports and employment. The balance of payments situation improved noticeably during this period. …

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