What is DDI’s impact on economic development?

Vimal Shah: an economics hero in Kenya

DOES DOMESTIC DIRECT investment (DDI) drive economic development? What is the impact of domestic investment in the development of a country?  Is the impact greater than, equal to or less than the impact of FDI? There are several advantages of encouraging domestic investment.

Among these is that domestic investment is neutral on a country’s balance of Payments.  Local firms do not repatriate their profits to foreign owners. And since they do not have affiliates overseas, they do not engage in transfer pricing thus cheating government out of tax revenue. Some reports have it that Africa loses US$4 billion in legitimate taxes through this form of tax-cheating.

On the contrary local firms invest in expansion at home thus setting the stage for further growth and hence development. In the long term they contribute to balance of Payment credit by earning foreign exchange from exports and profit repatriation.

 Some experts hypothesize that a significant proportion of Africa’s robust growth over the last decade and a half is attributable to growth of domestic enterprise. “The growth of highly profitable local enterprises across all sectors reduced profit repatriation, boosted employment, tax revenue collection and domestic investment as they invested in further growth, said the Economist in a 2011 essay on Africa’s growth. 

 This is not farfetched theory. Let’s look at the growth of the cellular phone service in Africa. In the late 1990s to early 2000, Africa was desperately shopping for investors in the cellular phone sector.  Owing to its reputation as a “hopeless Continent,” it was attracting no takers.

Meanwhile small, home brewed, ICT firms were struggling to provide the same service but were not attracting the attention of governments. Then the dotcom meltdown of 2001 came destroying the credibility of big telcos in the developed world.  It emerged that they were steeped in debt and were in no position to invest in Africa. This spawned the robust growth of small homebred ICT companies as government eased conditions for the upstarts to grow. Many are now Mega corps. Today, Africa’s largest cellular phone companies were brewed in Africa.

 The largest of these is South Africa’s MTN which has grown into a Trans-national Corporation, controlling more than 200 million subscribers in Africa, Middle East and East Asia in less than twenty years.  Egypt’s Orascom is second and then in third place is a company that keeps changing hands, now Airtel. Airtel was originally a homebred Company known as Celtel with a foot print in 15 African countries.  Today, Africa competes with the big boys in telecommunications sector.

In the financial market, indigenous banks are thriving- in some instances, elbowing traditional TNC banks, such as Barclays, Standard Chartered and the like out of large segments of the market. And given the rate of expansion of such banks as Ecobank, UBA, Equity Bank Kenya, the TNCs could be headed for hard times. In East Africa, Kenyan commercial banks dominate.

In trade in east Africa, Kenya’s Retail Chains and commercial banks are leading the integration exercise by setting up shop in east Africa. These companies were originally set up to serve felt needs of the local population and have grown into conglomerates that are now spreading their wings to cover the entire east Africa.  

A good example is the local banks which began as small savings and credit societies in the rural areas targeting the relatively poor hardly 40 years ago. As they grew, they expanded operations until they grew into the level of commercial banks.

A Majority of the Retail Chains began as wholesale shops in local towns and then grew organically to the mega Chain stores they are today. As they grew, they employed more people, created more wealth by buying more and more local products.

The local firms have massive linkages with virtually all sectors of the economy. They buy local materials, employ local labour, sale the products in local market which creates more jobs. As local firms grow, they gain critical wisdom about the market and are able to outsmart even existing subsidiaries of TNCs.

Thus economic growth caused the firms to expand and serve more people. In turn, they employed more people and leading to further growth.  A middle class was created and began to expand too .This growth has added another 60 million to Africa’s middle class whose per capita is $3,000. This number is expected to rise to 100 million in 2015, says the Economist.

Local enterprises tend to focus on solving local problems. They are thus in sync with the local population.  This demonstrated by the blunder made by the TNC banks in Kenya in 1996. Since they could make lots of money dealing win 90 day T-bills, the large banks treated customers with contempt. Many small savers moved to the building societies such as Equity and Family. Other moved to struggling indigenous commercial banks as Kenya commercial Bank, Co-operative Bank and National Bank of Kenya. 

The stage was now set for the eventual takeover of the Kenyan and the regional markets by the upstarts. Ten years later, the upstarts began to muscle their way into commercial banking. And hardly ten year later, they dominate the financial market in the region.

 In the mortar and brick industries the growth path was the same. Start small to solve a local problem then expand and grow. This is the path taken by Brookside Diaries, which now has the largest milk processing capacity in Eastern Africa. It started small and grew through acquisition of struggling milk processors to the current level of 1.5 million litres a day.

Other firms that grew in the same pattern include; BIDCO the largest consumer goods manufacturers in east Africa.  ARM cement, which is now the third largest cement producer in Kenya began as a chemical processing firm in 1970s. It has expanded from local recourses including listing in the Nairobi securities exchange.  The firm is now planning to expand capacity one million tons of clinker a year.

So how did the SMES grow so fast? Three things: The companies are run by aggressive and creative entrepreneurs who make their decisions standing. Two Liberalization of the Kenyan economy in the mid-1980s gave them an elbow room in the market, while the re-birth of the east African community broadened their horizons, our study established. These factors combined catalyzed the rapid growth of SMES into giants.

According to Vimal Shah, the CEO of Bidco-one of the upstarts that has grown into a regional TNC- the TNCs that existed in Kenya then were used to protection. “Consequently, they were not creative.  The Local upstarts then exploited the weaknesses among TNCs to curve a niche for themselves and eventually elbow them out. In the process the upstarts grew into TNCs themselves.