RESTRICTIONS BY DEVELOPING COUNTRIES TOWARDS FDI

Developing countries employ different political tools to ensure that the behaviour of the investment companies is aligned with their desired objectives, as follows:

 Requirement of performance.

 Laws of assimilation.

 Control on profit transfer to outside.

 Taxes incentives.

Requirements of performance can be detailed to suit each field of industry, such as a car assembly company being obliged to gradually add more locally-made components into the car, and mining companies being asked to make future commitments to have their future investment financed locally.

2.7.1 Restrictions

Restrictions aim to encourage policies which require the companies to recruit more local staff in their operations; this policy is not only confined to the creation of jobs but also aims to increase the ability to assimilate technology through these companies.

Some governments force companies to invest in certain training programmes; an example of this is the oil sector in Indonesia (Golfer, 1995).

Developing countries have requested a number of requirements aiming to transfer technology, in addition to training programmes. Some countries have obliged the companies to bring the most modern machines into the country and refused to allow old ones.

There is another commonly used policy which partially targets technology transfer - the insistence of developing countries on accepting foreign companies only as partners to national companies in joint ventures, in what is known as laws of assimilation. These stipulate that MNCs shall sell an agreed stake to the national companies of the host country; this philosophy is based on the notion that national companies have the ability to digest and control the incoming technology, hence using it locally, but many of the local partners enter into business with the MNCs based on their relations with the political centres so they are likely to be inexperienced in the business sector. MNC headquarters are also hesitant in allowing transfer of technology via joint ventures, and prefer operating through their solely-owned branches.

Other restrictions imposed by developing countries come in the form of an upper limit on profit transfer, aiming at reducing the outflow of resources from the developing countries to the outside world; this policy is largely used in South America and India.

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2.7.2 Tax incentives

Developing countries should make available for companies which fully comply with the requirements a package of positive incentives, such as tax remission and other privileges, such as a monopoly on the local market and assurance for the transfer of profits.

Tax incentives are most commonly used by countries to attract MNCs, where tax remission is always conditional and dependent on the foreign company working in a certain area, usually poor or underdeveloped areas.

2.7.3 Hindrances to foreign investment and arbitration

We discuss here the barriers to FDI that face foreign investors in general, and Arab investors in particular. There are a number of policies and processes which come together to create obstacles to the smooth inflow of capital and investments to host countries.

In spite of efforts by all governments, there are still some hindrances that should be eliminated through employment of certain measures and procedures to achieve the desired objectives:

1. Weakness in the infrastructure of the most countries, such as roads, airports, services and transportation.

2. Lack of political stability with many disputes and conflicts (Abubakar Adam El-Tahir, 2001).

3. Intricate and complex regulations and legislation governing investment activities, which are also subject to sudden change at any time, something that may provoke the concern of investors. In most cases, governments of developing countries opt to monopolise some of the activities with claims of strategic oversight.

4. Weakness in the incentives and privileges given to the foreign investments, which leads to the reluctance of the foreign investors to invest, instead looking to better conditions in another country.

5. The number of government departments concerned with investment, which prolongs the process and makes it more complicated.

6. Lack of information necessary for investment decisions and the absence of information on specific investment projects is regarded as one of the main obstacles to investment.

7. Difficulty in obtaining the necessary licenses for investment projects as the result of unhelpful processes and practices by the authorities concerned, which wastes the time of the potential investors.

8. The lack of a proper banking system and the prevalence of traditional banking systems in most developing countries, including Sudan, which does not meet the need of foreign investors for quick transfer of profits, or making available required funds in a timely fashion (Ragab El-Bana, 2001).

9. Weakness of the local market, in that it does not accommodate large scale production of the foreign projects. This is a result of the weakness of the purchasing power and would oblige investors to look for outside markets, adding more cost to the products, hence reducing profitability.

10. A policy of nationalisation and confiscation of projects indicates a lack of respect for people's rights and lessens the investor's confidence.

11. The local population’s tendency not to respect the foreign investments might threaten the life of the investors. This has happened before, when some foreign investors were confronted by the local population in Sudan.

12. If there is a lack of economic stability with swings between inflation, recession and deflation with no clear governmental policy, this will make the investor cautious. Likewise, a lack of security could jeopardise the safety of the investors.

13. Non-availability of foreign currencies in the host country may prove a barrier to the investor in acquiring some of materials and requirements of the project,

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in addition to the devaluation of the local currency which results in degeneration of the profits of the investors when transferred abroad.

14. Lack of a skilled workforce for the investment would concern investors; lack of experience in working with foreign investors and restrictions on foreign labour might be a barrier where some countries make it obligatory to employ the local population to control high unemployment (Arab Authority Investment Report, 2001).

15. A double tax system whereby the government can impose more than one form of tax on the product produced by the foreign investors in spite of the remission granted for these projects.

16. Lack of a clear investment programme in many countries means the absence of clear investment policies and priorities. In addition, an investment plan and investor directory, including the country’s potential and investment opportunities and descriptions of infrastructure are necessary for decision-making by potential investors.

17. Restrictions imposed on the movement of the business people, whereby the authorities at the airports do not easily allow investors into the country.

18. Restrictions imposed on profits and money transfer to outside countries and the conditions that must met before making any movement like this.

19. Restrictions on imports and exports; some countries restrict exports by investors when seeking markets, or impose more tax on these exports on the grounds that these exports can allow the escape of capital outside the country.

20. Weakening of the finance incentives by decreasing government grants such as credits and securities from the banks, plus securities on credits from international finance institutions and government grants for training and reductions in the cost of services such as electricity, water and drainage (UNCTAD, 1995).

21. Weakness of promotion is one of the main problems for investors in many of the countries; the media is unable to reflect the country's investment potential to potential investors and the incentives and privileges given to encourage the investors, in spite of the fact the investment law in Sudan is regarded one of best in comparison to others in term of incentives and privileges.

22. Weakness of the stock markets, in comparison with the developed countries which take much more account of the large role played by these markets in trading with shares, bank securities and banknotes. They also protect investors and inform people of trade transactions, and help acquire monetary resources for the public and private enterprises by making available more liquidity for the tenders issued by these enterprises.

23. The state's fiscal policy retreat, where any decrease in the size of the government expenditure in different economic sectors would have negative effects, such as a delay in spending on infrastructure projects would have negative effects on other projects pertaining to it (El-Mahar, 1981).