FDI Attraction

Malawi collaborates with foreign investors to supplement the country’s insufficient export manufacturing in its efforts to promote export-led industrialization. To a larger extent, the successful FDI-attracting countries have employed various fiscal and non-fiscal incentives and preferential policies (see Table 6 below). In the case of Malawi, as already mentioned, the

“unfenced-in” EPFs make use of the same infrastructure, utilities, employment and environment legislations, etc. that is available and applicable to the non-EPFs. Thus, the EPZ programme in Malawi attracts FDI mainly through the provision of fiscal incentives.

According to MoIT (2015), Malawi’s EPZ programme is still struggling not only to attract FDI into the country, but also to retain it. The scheme has managed to attract only five companies over the

2006-2015 period.²⁰ Within the same period of time, six EPFs left the programme and opted for a share in the domestic market.

“Table 6: Fiscal and Non-fiscal Incentives and Preferential Policies for FDI Attraction”

FDI Promotion Tools EPZ Programme Provisions in Malawi Initial Provisions Current Provisions

Streamlined administrative process X

Sound infrastructure X X

Inexpensive land and facility use X X

Rapid customs clearance X X

Ability to repatriate profits and capital

investments √ ?²¹

Reduced/No duties on imports √ ?

Corporate tax exemption √ X

Export tax exemption √ √

Flexibility in hiring and firing workers X X

Depreciation allowances X X

Limited license to sell into the domestic

market” X X

“Sources: Enright et al. (2005), Nkhoma (2007), and MoIT (2016)”

As illustrated by Figure 4 below, Malawi hosts relatively higher private foreign investment compared to the Sub-Saharan African region and other low-income countries, respectively (World Bank Enterprise Surveys, 2014). But the majority of such investments target the domestic market and not the export market. In that same vein, one interesting observation is that during the period 2010-2015, more than twenty foreign direct investors channelled their investments to Malawi (MoIT, 2015), but only three FDIs joined the EPZ programme. The rest opted for the tourism, agribusiness, and infrastructure development sectors, inter alia. As captured by Table 6 above, the scheme is found not to be attractive enough by most investors (Interviews, 2016-2017).

The unattractiveness of the programme emanates from its regulations/administration and structure.

For instance, the EPFs enjoy neither streamlined administrative processes nor the sound infrastructure that zoned EPFs in other countries have access to. As a result, EPFs in Malawi operate with the same business environment obstacles that non-EPFs encounter (Interviews,

20 Two more firms joined the programme in 2016.

21 ? means the provision is still available but less attractive: e.g. repatriation of profits was initially not regulated and it is currently regulated. Similarly, some items which used to be imported duty-free have been scrapped from the duty-free imports schedule.

2017). These include problems pertaining to electricity supply; access to finance; corruption; tax rates; access to land; transportation; and licenses, permits and procedures such as slow customs clearance (World Bank Enterprise Surveys, 2014). Second, the 100% export clause, as stipulated by the EPZ Act of 1995, pushes the investors towards the domestic market where they are at liberty to choose their own export and local sales proportions.

Figure 4 Malawi’s Private Foreign Investments in Comparison with the Sub-Saharan Africa (SSA) Region and other Low-income Countries in 2014

Source: World Bank Enterprise Surveys, “Malawi Country Profile,” 2014

Lastly, and of particular interest in this study, is the issue of corporate tax exemption, which was scrapped from the EPZ programme incentive tools list in 2011²². Also, the list of goods not eligible for duty/tax exemption has expanded since then (see the original non-scheduled materials list in Appendix I). Meanwhile, during this reviewed tax regime (2011-2015), only two FDIs have joined the programme and three have left for the Industrial Rebate Scheme (MoIT, 2015). Thus, the reviewed tax incentives regime seems to have a negative impact on the ability of the EPZ programme to attract FDI. Subsequently, there can only be limited collaboration with foreign investors to supplement Malawi’s insufficient export manufacturing and promote export-led

22 EPFs pay 30% corporate tax since 2011.

industrialization. And since the main arguments for EPZs as far as FDI inflows are concerned revolve around the role of the latter in the host country’s industrialization process, the researcher assumes that the limited collaboration with foreign investors does affect the short- and long-term benefits Malawi has derived from FDI in EPZs. These include export development, foreign exchange earnings, employment creation, technology and skills transfer, and linkages with the host economy. The assessment results of the performance of the EPZ programme in the aforementioned parameters is reported in the next subsections. But before that, a summary of EPZ programme’s investment levels is given in Table 7 below.

Table 7 Sectoral Investment Levels in Malawi, 2015

Industry Number of EPFs Investment Level (US$ million)

Agro-processing 6 63.5

Textile and garments 2 22

Wood and wood products 2 17.5

Exotic leather 1 2

Total 11 105

Source: MoIT, 2015

On one hand, the agro-processing industry has generated about 60% of EPZ programme’s FDI. On the other hand, textile and garments, wood and wood products, and leather industrial sectors have accumulated 21%, 17%, and 2% of the total investment inflows, respectively. On average, the investment is distributed as follows: capital equipment (30%), infrastructure development (25%), raw materials (20%), expansion (15%), and training (10%) (MoIT, 2015). But the share of raw materials for the textile and garments EPFs is substantially higher than the average – unlike the other sectoral industries, the former imports almost everything for its production processes (Interviews, 2016-2017).