THE ISSUE: Challenge for investors
SEASONED CARIBBEAN economist Professor Compton Bourne summed up the important role foreign direct investment (FDI) plays in the economic affairs of the Caribbean.
Last year, in a commentary on the issue, while reflecting on the United Nations Conference on Trade and Development’s (UNCTAD) World Investment Report 2014, the Caribbean Centre for Money and Finance executive director said a major reason why FDI was vital was because it was “quite substantial relative to the economic size of CARICOM countries”.
“FDI inflows in 2012 expressed as percentages of gross domestic product in the same year were between 12.2 per cent and 16.4 per cent in Antigua and Barbuda, Barbados, Belize, and the Bahamas, and between 6.7 per cent and 11.7 per cent in St. Lucia, Trinidad and Tobago, Guyana and St. Kitts and Nevis. The smallest percentages were in Suriname (1.2 per cent), Haiti (two per cent), Jamaica (3.3 per cent), and Grenada (4.2 per cent),” he pointed out.
The UNCTAD information referenced by Bourne, who is also a former Caribbean Development Bank president, showed that the Caribbean received US$25.7 billion in foreign investment between 2008 and 2013. The major recipients were Trinidad and Tobago (US$6.65 billion), The Bahamas (US$6.25 billion), Jamaica (US$3.48 billion), and Barbados (US$2.62 billion).
At a time when most countries in the region have been struggling economically, remittances from the diaspora and FDI have become more important sources of revenue for governments that are short of cash.
The World Bank defined FDI as “the net inflows of investment to acquire a lasting management interest (10 per cent or more of voting stock) in an enterprise operating in an economy other than that of the investor”. It said FDI was “the sum of equity capital, reinvestment of earnings, other long term capital, and short term capital as shown in the balance of payments”.
The World Bank also linked attracting FDI to the ease with which investors are able to do business, using its Doing Business research as a yardstick. It said “many people who use Doing Business data – particularly in policy making circles and in the private sector – associate better performance on the Doing Business indicators with greater inflows of FDI”, although it added that “the methodology is not explicitly designed for this purpose”.
“But the Doing Business indicators may be a useful signal to foreign investors of the overall quality of the business environment. And some laws may indeed affect foreign-owned firms in the same way that they affect domestic firms,” it said.
A World Bank study on the issue found that “FDI inflows are higher for economies performing better on Doing Business indicators, even when taking into account differences across economies and other factors considered important for FDI”.
“Results suggest that on average across economies, a difference of one percentage point in regulatory quality as measured by Doing Business distance to frontier scores is associated with a difference in annual FDI inflows of US$250 million,” it concluded.
Overall indications are that given the economic uncertainty persisting in 2015, and the increased international competition for FDI, the Caribbean will be challenged to increase its share this year.
Researched and written by Shawn Cumberbatch.