BUSINESS PAGE is dedicated to providing objective information and issues of intrest to the business community and the public at large. The articles in Business page are prepared and contribuated by CHRISTOPHER RAM. Christopher Ram is the Managing Partner of Ram & McRae. Chartered Accountants, Professional Services Firm.

Introduction

On Wednesday September 19, 2001 the United Nations Development Programme launched its World Investment Report for 2001 titled 'Promoting Linkages,' yet another outstanding output by the United Nations. Every year, I continue to be impressed with the Human Development Report also published by the United Nations Development Programme (UNDP) and wonder why such publications do not form part of the national debate and engagements particularly in developing countries.

Another report worth mentioning is one by the Caricom Secretariat which, under the leadership of Mr Maurice Odle, produced the excellent publication 'Caribbean Trade & Investment Report.'

Some of these reports are worth an array of well-meaning but often ill-suited consultants. Organisations such as the UNDP, which continue to support our country financially and otherwise, should strongly recommend that our public officials be familiar with and be guided by their contents. Such organisations should also be more pro-active in fostering discussions on, and public dissemination of these highly relevant and extremely useful publications. The piece on 'Taxing Lost Skills' in the 2001 Human Development Report ought to be compulsory reading for those responsible for fiscal, education and economic policy and management of a country like ours which increasingly suffers from the brain drain to the developed world.

The other story

World Investment Report 2001 falls in the must read/highly useful category of publications. Its subtitle 'Promoting Linkages' tells only part of the story. The liberalised trade and investment policies which drive globalisation have seen the unabated expansion of Foreign Direct Investment Flows. While this Report is replete with information about flows of investment and capital, it also tells another story.

Unfortunately for Guyana, a small number of countries account for much of the foreign direct investment (FDI) outward and inward flows. As the Report notes the world's top 30 host countries account for 93% of inward FDI flows while the top 30 home countries account for a staggering 99% of outward FDI flows. Not surprisingly there is an even greater concentration among a small number of trading blocs and within countries.

As I read the Report I looked in vain to see a mention of Guyana that places us in a positive light. We clearly do not warrant any reference of significance and it is important that our policy makers and private sector understand the reasons. A review of tables 1.18 and 1.19 of the Report dramatically reflect this insignificance. We do not appear on table 1.18 dealing with FDI inflow where the cut starts at US$0.2Bn. Table 1.19 indicates that as a percentage of Gross Fixed Capital Formation, Guyana was less than 20% compared with 82% for St. Vincent and 53% for Trinidad and Tobago. Bear in mind that among CARICOM countries, Guyana has a low rate of Fixed Capital Formation. Even if we allow for the inadequacies of international economic data, the situation is no one which makes Guyana comfortable or proud.

Resource rich, poor country

Guyana is a resource rich, poor country with a small population and therefore an internal market of no significance. Our principal resources are gold, bauxite, timber, fishing, sugar and rice. To serve a population of about a three quarter million, utilities such as electricity and telecommunication complain about high unit cost and low ability to pay by most consumers. We have a small and relatively inefficient manufacturing sector and a services sector dominated by a few banks and mainly domestic insurance companies.

Against this background we compete very unsuccessfully for FDI and the reasons perhaps are not too difficult to identify. We have suddenly been thrust in a sea where market forces dictate economic behaviour, and where the rules of the WTO, and multilateral and bilateral trade arrangements deprive governments of their influence, if not sovereignty, in economic matters. As a consequence, the space available for such matters as a national policy on promoting and supporting linkages is limited indeed.

So convinced do we appear to be of the virtues of globalisation that it is now a contentious issue of the timing and extent to which the government ought to intervene to influence economic decisions whether in rice, bauxite or gold.

The virtues of linkages

There is no question about the benefits which linkages between foreign and domestic operators provide to developing countries. Invariably foreign affiliates bring stronger knowledge and skills base, technology, brand image and the financial resources which domestic entities often lack. Linkage also takes place at various stages in the value chain so that there is an infinite possibility whereby the Guyana enterprise can link with the foreign counterpart backward, forward or laterally. So obvious are the benefits of linkages, that it does not seem to warrant further emphasis.

Let me say however, that linkages assume two very obvious conditions:

1. That there are domestic enterprises capable of operating successfully to international standards.

2. That international entities consider that the host countries offer sufficient opportunities to generate returns over and above those available to them in their own country.

Policies to promote linkages

The policies pursued by host countries government must therefore be designed to create a pool of successful domestic businesses, while attracting foreign investors to the country. There needs to be genuine engagement between the private sector and the government rather than each side criticising the other. There are inadequacies on both sides and we need meaningful engagement to remove any misunderstanding which seems to characterise the relationship and hinder the formulation of policies to promote private sector development.

Traditionally a number of tools were employed to encourage foreign affiliates to link with local firms. These include:

1. Local content requirements in exchange for incentives

2. Joint venture requirements to facilitate access to the domestic pools of funds

3. Export performance requirements

4. As in the case of Trinidad and Tobago a Corporate Registration Requirement

Conclusion

In the globalisation mantra, such tools are becoming less and less popular and the question of the marriage of domestic and foreign investors is not seen as a policy issue but one that is best left to the market, and foreign and domestic parties. Guyana legislation does not even contemplate Joint Ventures and leaves their management to the more general rules of corporations and partnerships - clearly not a satisfactory situation.

Part 2 of this article will appear in Business Page next week.

Copies of The World Investment Report 2001 are available at the UNDP office on Brickdam, Georgetown.

Introduction

In the first part of this article we examined the flow of foreign direct investment (FDI) around the world in 2000 and noted the concentration among a small number of countries of both outward and inward flows. We noted that except for Trinidad and Tobago, which has seen a boom in their petrochemical sector, the rest of the Caribbean including Guyana has not been able to attract any significant inflows. We also identified the benefits of linkages, and the preconditions for the development of such relationships. These are:

1. That there are domestic enterprises capable of operating successfully to international standards.

2. That international entities consider that the host countries offer sufficient opportunities to international investors to generate returns over and above those available to them in their own country.

It was also suggested that generally fiscal and other policy measures need to be put in place to promote linkages. This piece seeks to identify some of the conditions existing in Guyana which militate, not only against linkages, but against businesses in general.

Making linkages difficult

The principal factors which inhibit joint ventures of foreign and domestic investors are:

1. The continuing political instability which places a serious rating limitation on an investment in Guyana. A risk premium is demanded for any loan or equity, the proceeds of which are destined for Guyana. It is true that many of the activities which attract foreign investors to Guyana take place away from the contentious political arena and we note for example that the largest gold mining company in Guyana has even shifted much of its Georgetown operations to the Essequibo River. Yet that does not impress the stock market in Canada where the parent company resides. In an era when branding is everything, the name Guyana rings a negative bell, not only to foreign but very worryingly to domestic operators as well. Indeed, there are outward capital flows from Guyana which usually accompany the migrating person, thus we lose both corn and husk.

2. The sectors which are likely to attract foreign investors are those in which the domestic operators offer little advantage to a linkage. For example, there was no entity with which ATN for example could have gone into telecommunication, CDC into electricity or even Omai into gold.

3. With the high cost of power and a small internal market, the domestic manufacturer has not produced the kind of financial results which would attract foreigners to join with them. Even though Guyana has some five finalists in this year's Caribbean Entrepreneur of the Year Programme sponsored by Ernst & Young, the international professional services firm, not a single one of them is in any joint venture with either a domestic or international partner. It needs to be said as well that while we have some outstanding entrepreneurs, the group is too small and many of them are notoriously undercapitalised, poorly managed and pay too little attention to being competitive with regard to reliability and quality.

4. There appears to be some cultural barrier to linkages among our domestic operators and even successful family businesses sometimes fragment into inefficient pieces when succeeding generations take over.

5. Domestic operators have an obsessive preoccupation with control negating all the theoretical and economic advantages which linkages with international entities offer.

6. Foreign investors sometimes seek relationships with a domestic entity so as to ensure access to the corridors of power. Experience in Guyana has shown that such access seldom resides in the business community but rather in a small group with influence in the political circles. Linkage in the Guyana context often means seeking out an attorney or other professional with political influence to negotiate and obtain concessions which a domestic business entity cannot obtain. Indeed a linkage with a domestic enterprise that does not enjoy a good relationship with the political directorate may be fatal ab initio.

7. Many of the Guyanese businesses simply do not match up to the demands of the international market place in quality, price and reliability.

A word of caution

It would be unfair of me to suggest, however, that such alliances are necessarily a guarantee of success. Conventional wisdom has it that the best way to do business in another country is through an equity joint venture (EJV) with a well connected domestic partner. For example, until recently, most multinationals thinking about setting up in China saw joint ventures as the only possible route. In some industries, they are the only foreign involvement allowed by the Chinese government.But China is also a good case of joint ventures going wrong. Great care has to be exercised by both parties to the joint venture. The foreign entity may find itself conned into a relationship with all kinds of promises while some domestic venturers have joined, to their chagrin, with footloose individuals seeking to make a quick buck.

There is no single model of what a joint venture should look like. Clearly it will be shaped by local laws and practice but the feasibility of any particular arrangement lies in the details. Just about every element of the arrangements is a matter for negotiation. What each venturer brings to the table including both tangible and intangible assets, responsibility and the rewards for management, finance, technology, marketing and operations are matters which should be subject to a great deal of detailed consideration and be written into an agreement to which both parties are committed to complying in both spirit and letter.