Incentives remain an important FDI magnet

Incentives remain an important FDI magnet
Published: 19 June 2018
ONE of the key drawcards of President Emmerson Mnangagwa's administration is the desire to transform Zimbabwe into a middle-class economy by 2030. Since taking over last November, the President has succeeded in influencing the country to debate economics more than mere politics.

That message has been consistent from day one to the extent that every public gathering, be it at national, private business, provincial or local authority level deliberations would not be complete without making reference to the "Zimbabwe is open for business" mantra.

This ideological shift, buttressed by positive foreign policy transformation, has enthused local and international stakeholders who now see hope for Zimbabwe with unparalleled interest in the revival of the economy in particular.

While ease of doing business reforms are being rolled out under the rapid results programme, spearheaded by the Office of the President and Cabinet, economic research and expert insights point to the need for the country to also come up with a comprehensive package of incentives to lure more foreign direct investment (FDI).

This also entails taming cost drivers to enhance competitiveness in the local business environment.

Given the years of stagnation the country has experienced in the last decades, Zimbabwe will have to play a quick game in transforming her investment climate, and incentives will play a huge role in distinguishing the country as a favourable FDI destination. This is even more crucial given the reality of fierce competition within the investment-hungry region and the Global South at large.

The significance of investment incentives is succinctly captured in the United Nations Conference on Trade and Development (UNCTAD) 2018 World Investment Report, which notes how several countries across the globe have introduced fiscal and financial incentives to attract foreign investment.

The Republic of Korea, for instance, has restructured her tax incentives for foreign companies engaged in high-tech businesses and extended their benefits.

Similarly, the Lao People's Democratic Republic has promulgated a new investment promotion law, offering various incentives to attract investment in both promoted industries and hardship areas.

Morocco on one hand has enacted a new finance law, which provides, inter alia, for corporate income tax exemptions for newly established industrial companies for a certain period. In the same view, Nigeria has granted "Pioneer Status" to the creative industry and published a list of 27 new industries that are eligible to enjoy the Pioneer Status incentive.

Thailand has also introduced its new Investment Promotion Act to provide more incentives for advanced technology and innovation activities as well as research and development (R&D).

Tunisia has passed a bill on tax incentives, aiming to streamline that system by focusing on the priorities of the next period. According to the report, even the United States as the biggest global economy has introduced the Tax Cuts and Jobs Act, which provides a corporate income tax cut and other measures to encourage multi-national companies to bring overseas funds back home.

The special economic zones model has provided many countries the leeway for such investments. Zimbabwe has embraced the approach and is in the process of implementing it although some feel progress is rather slow.

In view of such considerations, President Mnangagwa has directed Finance and Economic Planning Minister Patrick Chinamasa to come up with tax incentives and tax holidays for foreign investors to encourage investment and grow the domestic economy.

Last week the President presided over the commissioning of a $30 million Varun Beverages plant in Harare, where he stressed the need to create incentives for investment. Varun Beverages is a subsidiary of global conglomerate RJ Corp and produces Pepsi products.

Tax holidays and incentives, the President said, will help attract more attractive foreign investment into the country, which will go a long way in creating decent jobs for the populace and help the country to attain the Government's agenda of making Zimbabwe a middle income state by 2030.

He noted that while the country benefits from investments in the form of tax, such investments would thrive more within a framework of incentives.

"As Government we will have more companies coming here if we give them incentives, tax breaks. . .while this investment (by Varun Beverages) attests to the steadily increasing attractiveness of our business climate to investors from far and wide, my Government is continuously monitoring our investment climate to ensure that it remains conducive and open for business to grow and succeed," said President Mnangagwa.

Incentives have a transformative effect on investment attraction in any country, writes Dr Gift Mugano, an economist, researcher and trade expert.

To him there is a strong consensus in the literature about why multinationals invest in specific locations.

He argues that multinational corporations are mainly attracted by strong economic fundamentals in the host economies.

"The most important ones are market size and real income levels, skill levels in the host economy, the availability of infrastructure and other resources that facilitate efficient specialisation of production, trade policies, and political and macroeconomic stability," says Dr Mugano.

Foreigners investing in the United States and China, for instance, have mainly been attracted by the large market size, while multinationals investing in Singapore focus on the availability of skilled labour, good infrastructure and political and macroeconomic stability, he says.

"The location of FDI may also be influenced by various incentives offered by governments to attract multinationals. These incentives take a variety of forms. They include fiscal incentives such as lower taxes for foreign investors, financial incentives such as grants and preferential loans to MNCs, as well as other incentives like market preferences and monopoly rights," says Dr Mugano.

Minister Chinamasa on his part has previously conceded that Zimbabwe had high taxes compared to other international destinations, pointing out Government was working on a framework to reduce that as an incentive to grow the cake.

"Taxation, I agree with you, is too high," said Minister Chinamasa while responding to contributions from participants who attended the President's meeting with Zimbabweans in the Diaspora, during his regional tours in January.

"It's a matter that we are going to address, so that we can proceed to move to a position where we get more taxes from more volumes."
- chroncile
Tags: FDI,


Latest News

Latest Published Reports

Latest jobs