FDI Promotion in Mauritius and Sri Lanka. Ganesh Wignaraja Commonwealth Secretariat

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1 FDI Promotion in Mauritius and Sri Lanka Ganesh Wignaraja Commonwealth Secretariat

2 Years Annual FDI Inflows in Mauritius & Sri Lanka, , $Mn ($ Mn) : Mauritius Began Promoting FDI 1977: Sri Lanka Began Promoting FDI Mauritius Sri Lanka ' ' ' ' ' '

3 %ages FDI Inflows as % of GFCF, : Selected Countries Mauritius Sri Lanka Bangladesh Pakistan Malaysia Singapore Countries

4 % of FD Low & High Skill Manufac. FDI in Mauritius & Sri Lanka Low Skill FDI High Skill FDI SL SL Mau Mau

5 FDI and Manufactured Exports SRI LANKA Manufactured export value, $3.5 billion (1998) Growth rate of manufactured exports 17.3% ( ) % of textiles & garments in manufactured exports 68.2% (1998) % of foreign firms in textile and garment exports 79.7% (1998) MAURITIUS Manufactured export value, $1.5 billion (1998) Growth rate of manufactured exports 14.3% ( ) % of textiles & garments in manufactured exports 84.4% (1998) % of foreign firms in textile and garment exports 55% (1998)

6 Mauritius: Locational Advantages Cheap, literate bilingual labour Preferential market access to EU, USA and Africa Past Colonial and Chinese connections Efficient, business friendly government Political and macroeconomic stability Outward-oriented FDI strategy since 1970

7 Mauritius: FDI Strategy Detailed screening of new investors FDI welcomed in E-O manufac., hotels, financial services Competitive investment incentives 15% corporate tax rate No tax on dividends & capital gains Free repatriation of profits, capital and dividends Duty-free access to imported inputs for export Relatively cost-competitive public & private EPZs Image building by MEDIA (set up in 1985) One Stop Shop for secondary approvals (set up in 1990)

8 Mauritius: Gaps in FDI Promotion Delays in getting approvals (9-30 weeks) Limited targeting of selected activities and investors Inadequate resources for FDI promotion (<$0.5 million in mid-1990s) Inadequate incentives for technological upgrading, local linkages & R&D Lack of aftercare for existing foreign investors

9 % of Firms Negative Constraints to Exporting Freight costs Interest Rate Bureaucracy Exchange Rate Technical Manpower Suppliers Productivity Policy Uncert. 5 0

10 Mauritius: Recent Promotion Efforts 3 week targets for approval times (1998 Budget) New Board of Investment More resources for FDI Promotion Upgrading of SMEs to become suppliers to MNCs Emphasis on outward-investment for African market (Madagascar & Mozambique) New Industrial Competitiveness Strategy

11 Sri Lanka: Advantages & Strategy Locational advantages for FDI: Relatively cheap labour costs Unutilised bilateral Multi-fibre Agreement Quotas Domestic and regional market Outward-oriented FDI strategy since 1977 Few restricted areas (e.g. defence related) Attractive investment incentives (5-15 year tax holidays, dutyfree imported inputs, free repatriation of profits and capital) Relaxed labour laws Powerful agency to approve FDI (& market country) since 1977 (Typically 4 week FDI approval by Board of Investment) Public EPZs & unrestricted access to land outside

12 Sri Lanka: Gaps in FDI Promotion Gaps in FDI Promotion: Most FDI promotion is purely reactive Lack of presence in key overseas markets (e.g. UK) Tax holidays less effective than performance based measures BOI is over-extended (approves FDI, facilitates licences, markets country and owns & manages EPZs) Poor aftercare for existing foreign investors Other Constraints to More FDI (& Upgrading): Political instability Lack of technical manpower and reliable SME suppliers Weaknesses in physical infrastructure

13 Sri Lanka: Recent FDI Initiatives Indo-Lanka Free Trade Agreement, Dec 1998 Creation of FTA by phased reduction of tariffs (adjustment period: 3 years for Indian Industry & 8 years for Sri Lankan Industry) 35% rules of origin criteria for exports Negative lists to protect domestic interests Incentives for Thrust Industries, mid-1990s New incentive package for electronics, rubber products, engineering and non-metallic mineral products 10 year tax holidays for projects exporting 90% of output 20 year tax holidays for large scale projects ($ 8 million) Reform of the Board of Investment Rationalisation of functions and operating procedures Independent investment offices (possibly UK)

14 Some Final Thoughts Mauritius and Sri Lanka successfully used an outward-oriented FDI strategy to enter exports (low skill activities textiles & garments) However, both countries have had limited success in upgrading FDI into high skill activities Both are attempting new policy initiatives to sustain FDI inflows and upgrade but too early to predict outcomes These experiences contain lessons for designing FDI strategies in other developing countries