Wednesday, 5 March 2014

Development: Why FDI perse is not a sufficient catalyst

KQ: Acquisition by KLM was a lifeline. 
It survived and prospered
 WHY IS IT THAT Air Tanzania Corporation was acquired by SAA and collapsed, while Kenya Airways acquired Precision air and it survives? In turn, Kenya Airways itself is partially owned by KLM and has thrived. Why is it that the developmental impact of cellular phone service is bigger in Kenya than in Tanzania and Uganda although the former were the first to roll out mobile phone services?

These questions point to an important fact: That Foreign Direct Investment (FDI) per se is not a sufficient catalyst for economic development.  Other economic variables also have a positive causality to economic development.  These variables include the availability of skilled manpower, level of education, per capita income, market size and perhaps the capitalist culture.

 Granted, Foreign Direct Investment (FDI) has a strong positive relationship with economic growth. The question; what is the impact of FDI on a country’s economic development? What is the Impact of Direct Domestic Investment (DDI)? Can FDI per se cause economic development? If for instance, economic developments were one (1) what would be the correlation co-efficient for Direct Foreign Investment (FDI) and what would be the correlation co-efficient for direct Domestic Investment (DDI)?

What about other factors that contribute to development such as the market size, skilled manpower, per capita income, internal efficiencies and the reliability of physical infrastructure? Economists are still grappling with these questions. However, such proportions need to be developed in order to help in policy formulation.
 There is a growing school of thought which holds that domestic variables have a greater impact on growth than FDI. Such view is gaining currency because FDI has contributed to development as previously projected.

FDI in some sectors produces spectacular growth amidst stagnation in other sectors. For instance, oil driven growth in Angola and Mozambique. But high growth has resulted in high inflation as demand for goods and services exceed supply.  The existing economic structure is such that it cannot respond quickly to demand. In some instances the opportunities created by high inflation could take years to translate in goods and services. So should FDI be granted a higher weighted index or should DDI be granted a higher weighted index in a country’s development?

In Kenya,a mobile Phone is a Visa Card
 a western Union  rolled into one
 
That foreign direct investment increases the productivity of the concerned sectors is beyond doubt.  The question is what else is needed for FDI or DDI to catalyze economic growth and development.  We go back to the questions we asked at the outset. This story is case study of the impact of FDI in the airlines, telecommunications in east Africa. We will also attempt a shot at other factors that led to success since the success of these other factors seem to play a major role in the growth impact of FDI.

Why did the acquisition of a 26 per cent stake in Kenya Airways by KLM save KQ from collapse?  Now Kenya Airways is one of the three prominent Airlines in sub-Saharan Africa. The others are Ethiopian Airlines and South African Airways.  But Kenya Airways is the only successful privatized airline in Africa. Yet less than 20 years ago, it was living on government life support.

in 1996, KLM, the Dutch airline bought a 26 percent stake in the airline  at the same time a 25 percent stake was floated at the Nairobi Securities exchange , reducing the government’s stake in the airline to 49 per cent. Although the airline was deep in debt, it had begun turning in some profit by the time KLM acquired the stake in it. So why was KLM invited?  The airline needed some little cash, we posit, but most important, a management free from political meddling.

Previously a Chief executive could be fired for failing to hold a plane for delayed Cabinet Minister or senior civil servant or their spouses. The airline was losing business because it could not keep time.
The new Management was different.  Appointed by KLM, it managed the airline on commercial lines. The existing staffs were professional but intimidated. With the support of the new management, it was all systems go. Soon the airline was winging its way to profit and prominence.

Although the airline is back in the hands of Kenyan managers and among its passenger are presidents and other senior government officials in the region, all passengers keep time and order. KLM simply introduced discipline, teaching that all passengers are equal. It rescued KQ from the tyranny of in-disciplined local officials.
 Since then the airline has grown on the strength of its balance sheet. Not expecting handouts from the government or KLM and on this basis it mobilized US$200 million from the local capital market through a rights issue in 2012 to replenish its war chest.  The chest will be used to increase its fleet from the current 44 to 107 by 2030. 

 The growth of the airline has also motivated the growth of its base airport, the Jomo Kenyatta International airport. The second terminal which shall handle 12 million passengers a year is under construction.
 Apart from its own organic growth, KQ has also acquired a controlling stake in a Tanzania airline, Precision Air. This acquisition arose after a fiercely contested bid for the acquisition of Tanzania’s national airline, ATC.

The bid was won by South African Airways. However, the marriage collapsed five years later.  Why did FDI fail in this instance?  We go back to our earlier position: FDI need more than investment dollars to succeed.  ATC was acquired by the wrong Partner. SAA itself was on life support, undergoing a management crisis of its own. Therefore it could not support another collapsing airline. Wrong decision making was the culprit here.

This leads to the second thesis:  where the pool of skilled manpower and per capita income are high, FDI will catalyze economic development. This thesis is aptly demonstrated by the telecoms sector in east Africa. The first Mobile telephony company rolled out in Tanzania in 1994, followed by Uganda in 1998.
In Kenya mobile phone roll out began in 2000. In Just about two years, Safaricom overtook even the providers in Tanzania in terms of subscription. To date, Safaricom alone has a larger subscription base than three mobile operators in Tanzania combined. These are: Vodacom, airtel and zantel. All three boast a subscription base of 20,593,870 while Safaricom boasts of 20,820,618 surpassing them by 227,000subscribers.

According Tanzania Communications Regulatory authority, TCRA, the total subscription base is 27,022, 927 as at September 31st 2013. Kenya on the other hand had a subscription base of 31,301,506 as at the same period.  Kenya’s teledensity says the same report is 76 per cent while Tanzania’s teledensity is 60 per cent. We have left out Uganda because of incomparable date.

The uptake of a service such as Mobile subscription is a function of two things: Literacy level and per capita GDP level. In both respects Kenya is ahead of her neighbours by far. Literacy is 83 per cent compared to 67 per cent in Tanzania and more or less the same ratio in Uganda. Second, in terms of per capita income, Kenya is in the range $1025 while Uganda and Tanzania are in the S$600-650 range. This makes Kenya a mass consumer economy.

 Apart from Consumption, Kenya is also quite an innovative market. Kenyans invented the first mobile money transfer service in the world in 2007.  Kenya controls 20 million of the 61 million mobile money account holders in the world.
 Apart from Mobile Money transfer the country has also  launched M-Shwari, a mobile Banking service which is said to have mobilized US$3 billion in savings over the  last two years. M-Shwari enable customers to open bank accounts deposit and withdraw money from their accounts using their Mobile phones.  This account targets the majority low income customers.


Kenyans also pay their utility bills such as electricity and water bills using the M-Pesa.  They even pay their shopping at the local super markets using M-Pesa. These innovation are made by young tech savvy Kenyans who are now making a living out of developing applications for the  cellular phone companies. As a result of world conquering innovation in the cellular phone market, giant cellular makers such as Nokia, Samsung and Huawei have pitched camp is Nairobi. All are targeting the young innovators to develop new cutting edge applications.



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