Foreign direct investment
In a past life, I was responsible for network operations for the third largest internet service provider (ISP) in the United States. At that time, we provided internet access via dialup phone lines to more than five million customers. The team, which I led, was responsible for managing a budget of nearly US$400 million in telecom vendor contracts. Our goal was shorter-term contracts, low rates and on-time delivery of provisioned lines.
The phone company’s goals included longer-term contracts, a maximization of revenues by charging as much as possible and providing services to a rapidly growing industry by maintaining the poor quality service status quo they had developed in operating a monopolistic industry for decades. It didn’t matter where in the United States we operated and which phone company we partnered with, the ‘Big Bell’ culture was ingrained and the status quo endured. Conflict rapidly developed between growing ISPs and old Bell companies that were unwilling to adjust to the rapidly changing technological environment, meetings were contentious and politicians were forced to intervene.
Eventually, the balance of power benefited ISPs that were growing and adding jobs to the economy. Lobbyists were engaged to educate politicians as citizens screamed for improved services as slow phone line delivery caused them busy signals when they attempted to get online. The conflict resulted in laws being passed to deregulate the telecoms industry forcing Big Bells to wholesale phone services to new entrants in the marketplace called Competitive Local Exchange Carriers (CLECs).
CLECs brought competition into the market place, rates dropped, service improved, and technology advanced significantly. More customers signed up for service, modems delivered faster dialup service, and then later high-speed internet service (DSL) was introduced. The infrastructure improvement then created the foundation for the former and current technology revolution in the United States and around the world.
In the past 30 years in Guyana there has been ongoing public angst among citizens and directed at government and companies regarding the terms of various foreign direct investments (FDI), the disadvantages of monopolies and the sometimes poor quality of service delivered. Citizens continue to worry and rightly so, about whether they are getting value for their tax dollars and for the financial obligations in the form of international loans for which their children will be responsible.
My own example identifies the critical role played by all stakeholders in the service delivery process and why understanding both sides of the issue is important in delivering value for money and advancing a global technology revolution, while allowing investors to achieve a return on investment, acceptable for the level of investment risk they absorb.
Risks faced by investors
Historically, the biggest risks faced by foreign investors were in developing countries with immature or volatile political systems. The chief concern was ‘expropriation risk’, the possibility that host governments would seize foreign-owned assets.
Another, ‘policy risk’ happens when a government discriminatorily changes the laws, regulations, or contracts governing an investment—or will fail to enforce them, in a way that reduces an investor’s financial returns. A World Bank study in 2004 revealed that 15% to 30% of the contracts covering $371 billion of private infrastructure investment in the 1990s were subject to government-initiated renegotiations or disputes.
An understanding of these risks provides a window into the reasons why investors push for longer-term contracts, monopoly contracts, and high rates. The goal is to reduce significant risk by recouping their financial investments in a short a period as possible.
Managing risk
In addition to monopoly contracts, many foreign companies manage their risks by building a local network to influence policy outcomes, especially in countries with weak legal systems. To turn these networks to their advantage, investors identify and engage local politicians’ power bases. Others focus on using local vs foreign suppliers, employing more local employees and commit to conducting knowledge-transfer, training, and development seminars for them. Another way to manage risk is by funding the construction of various public works, including national libraries, schools, computer labs, and multifamily housing units for the poor. As a result, citizens feel like they have a stake in the success of those companies. The more successful companies broaden their perspectives by reaching out to non-business organizations that can help them anticipate and preempt consumer concerns about environmental, health, safety and other issues important to citizens.
Benefits of foreign investment
Foreign investments can offer significant benefits to host countries. These include offering an employment and economic boost - creating new jobs, an increase in income and more buying power to the people; development of human capital resources - the value gained by training and sharing experience would increase the education and overall human capital of a country; resource transfer - allowing resource transfer and other exchanges of knowledge, where various countries are given access to new technologies and skills and increased productivity - the facilities and equipment provided by foreign investors can increase a workforce’s productivity in the target country.
In the final analysis, investors take on significant economic risk but host countries should not be exploited. Investors who are committed to adding value to their host countries as they execute on their business functions eventually become an acceptable part of a country’s fabric. Others that are intent on exploiting citizens, the environment or a country’s resources in an unfair way are often labelled ‘modern day economic colonialists’ and find themselves the target of protests and political reprisal leading to significant business risk. Smart companies survey the environment and make the relevant adjustments to reduce their risks.