Abstract

This research is designed to examine the impacts of FDI in Cameroon and specifically bring out the major determinants of FDI, the link between FDI and economic performance of Cameroon. Using data from 1970 to 2008, and based on ordinary least squares technique, we observe that FDI responds to industrialization positively and faster than it does to political stability, gross domestic product, debt servicing, skilled labour force and terms of trade.

The study also reveals that FDI impact positively to the economic performance of Cameroon and responds faster to growth than any of the variable specified in the economic performance function.

Therefore, the results of this study suggest that FDI can be encouraged in

Cameroon through the encouragement of industrialization, political stability, demand factors, qualitative and quantitative man power training. Also Base on this findings, we therefore, suggest the combinations of industrial promotion acts, political stability and guided trade protection, as enabling environments to enhance economic performance in Cameroon through FDI.

CHAPTER ONE

INTRODUCTION

The economic progress of countries depends to a large extent on the opportunity of making profitable investments and accumulating capital. Having access to foreign capital and investments allows a country to invest in both human and physical capital and to exploit opportunities that otherwise could not be used. Recent experiences with opening capital accounts in emerging and developing economies, however, have proved to be a mixed blessing, as it is becoming increasingly clear that not all types of capital imports are equally desirable.

Short-term credits and portfolio investments run the risk of sudden reversal, if the economic environment or even just an investor’s perception changes, giving rise to financial and economic crises. It is therefore frequently advised that such countries should primarily try to attract foreign direct investment (FDI) and be very careful about accepting other sources of finance. In comparison, foreign investments are much more resilient to crises.

The attraction of foreign direct investment (FDI) constitutes a fundamental element to support strategies that aim to achieve sustained economic growth in developing countries. This is because globalization and the attendant opening of the economies to competition require increased financial resources and technology, which would be impossible to obtain under a policy of autarky.

Though relatively well-established principles exist to explain why a multinational company may decide to move into a specific country, each experience has its idiosyncratic elements from which both theorists and policymakers can learn important lessons. There is less consensus, however, on the potential positive or negative effects that

FDI may have on the host economy, and on what factors determine these effects.

1.1 Background To The Study

FDI are usually in the form of loan from abroad, private multinational companies as well as other foreign government investments from developed countries in to less developed economies. This is because the government widely acclaimed that economic growth and development encompass growth with structural and technological transformation, which cannot be provided internally by the domestic authorities alone.

A graph presented by Forgha(2008) shows that while in1970, the net foreign direct investment in Cameroon stood as 9.42 billion FCFA, the real GDP growth per capita was 6.42 percent. Ten years later, while FDI rose to 59.90 billion FCFA, real growth of GDP per capita recorded a negative value of 2.04%.

While the overall trend of FDI between 1986 and 1993 was positive, that of real growth of GDP per capita maintained a negative value of 6.14 on the average. Both trends were positive between 1994 and 2007except in 1995, 1996 and 1999 which FDI net recorded negative values of 227.93billion, 154.22 billion, 154.22 billion and 49.83 billion FCFA respectively (see table1.1 and figure1.1).

Agriculture, which is the main source of foreign exchange in Cameroon economy, has suffered consistent world price fluctuation since 1986. This has seriously affected not only the revenue from it, but has also adversely affected fiscal planning and implementation, as well as development planning. Conventionally, to bridge the gap, the authorities are expected to borrow from outside, attract foreign investors or borrow from domestic money and capital markets.

However, due to the lack of financial market in Cameroon since the Douala stock market is still to develop properly and the government cannot cope with providing the huge capital desired for growth and development in the key sectors of the economy, the government and other investors have no other options than to rely intensively on externally soured funds.

The Foreign direct investment; net inflows (% of GDP) in Cameroon was 3.01 in 2009, according to a World Bank report, published in 2010. Foreign direct investment are the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, reinvestment of earnings, other long-term capital, and short-term capital as shown in the balance of payments. This series shows net inflows (new investment inflows less disinvestment) in the reporting economy from foreign investors, and is divided by GDP. This page includes a historical data chart, news and forecasts for foreign direct investment; net inflows (% of GDP) in Cameroon.

The latest value for Foreign direct investment, net inflows (BoP, current US$) in Cameroon was ($551,206.70) as of 2010. Over the past 33 years, the value for this indicator has fluctuated between $668,329,500.00 in 2009 and ($112,831,300.00) in 1990.

Foreign direct investment, net inflows (% of GDP) in Cameroon was 0.00 as of 2010. Its highest value over the past 33 years was 5.53 in 2002, while its lowest value was -1.01 in 1990.

Foreign direct investment, net outflows (% of GDP) in Cameroon was -0.16 as of 2010. Its highest value over the past 33 years was 0.37 in 2001, while its lowest value was -0.63 in 2009.

Foreign direct investment, net (BoP, current US$)

The latest value for Foreign direct investment, net (BoP, current US$) in Cameroon was $35,250,980.00 as of 2010. Over the past 33 years, the value for this indicator has fluctuated between $809,089,500.00 in 2009 and ($127,926,900.00) in 1990.

1.2 Problem Statement

Whenever the economy of a country is facing crises, that country usually undertakes some structural adjustment programs, these programs can be long term or short term, aiming at revamping its economy. The advent of economic crises in the late 1980s, forced the government of the Republic of Cameroon to undertake some structural adjustment programs. Some of these involved the need for foreign investment.

This was favored by both the International Monetary Fund (I.M.F) and the World Bank. These institutions provided financial assistance and loans to the country. Other friendly countries extended their assistance in many ways to build back the economy so that growth can be assured. This growth significantly leads to poverty alleviation, advancement in technology and raise the interest of donor countries to invest in Cameroon. Such foreign Direct Investment (F.D.I.) if properly utilized may significantly play a great role in economic development in Cameroon. The short comings resulting from poorly utilized funds invested by foreign donors may plunge the country into more economic misery. Foreign Direct Investment (FDI) with its own contributions which may result to the removal of heavy subsidies in agricultural products, lay-offs of many civil servants in private and public enterprises, devaluation of the country’s currency, privatization, liberalization of the economy etc, etc.

It is possible that FDI between the periods of 1993 to 2000 would have contributed significantly to the development of Cameroon.

A recent meta-analysis of the effects of foreign direct investment on local firms in developing and transition countries suggests that foreign investment robustly increases local productivity growth.  The Commitment to Development Index ranks the “development-friendliness” of rich country investment policies.

Foreign direct investment may be politically controversial or difficult because it partly reverses previous policies intended to protect the growth of local investment or of infant industries. When these kinds of barriers against outside investment seem to have not worked sufficiently, it can be politically expedient for a host country to open a small “tunnel” as focus for FDI.

The nature of the FDI tunnel depends on the country’s or jurisdiction’s needs and policies. FDI is not restricted to developing countries.

To secure greater benefits for lesser costs, this tunnel need be focused on a particular industry and on closely negotiated, specific terms. These terms define the trade offs of certain levels and types of investment by a firm, and specified concessions by the host jurisdiction.

The investing firm needs sufficient cooperation and concessions to justify their business case in terms of lower labor costs, and the opening of the country’s or even regional markets at a distinct advantage over (global) competitors. The hosting country needs sufficient contractual promises to politically sell uncertain benefits—versus the better-known costs of concessions or damage to local interests. The benefits to the host may be: creation of a large number of more stable and higher-paying jobs; establishing in lagging areas centers of new economic development that will support attracting or strengthening of many other firms without costly concessions; hastening the transfer of premium-paying skills to the host country’s work force; and encouraging technology transfer to local suppliers.

Concessions to the investor commonly offered include: tax exemptions or reductions; construction or cheap lease-back of site improvements or of new building facilities; and large local infrastructures such as roads or rail lines; More politically difficult (certainly for less-developed regions) are concessions which change policies for: reduced taxes and tariffs; curbing protections for smaller-business from the large or global; and laxer administration of regulations on labor safety and environmental preservation. Often these un-politick “cooperations” are covert and subject to corruption.

The lead-up for a big FDI can be risky, fraught with reverses and subject to unexplained delays for years. Completion of the first phase remains unpredictable  even after the contract ceremonies are over and construction has started. So, lenders and investors expect high risk premiums similar to those of junk bonds. These costs and frustration have been major barriers for FDI in many countries.

On the other hand however, there are multiple factors determining host country attractiveness in the eyes of large foreign direct institutional investors, notably pension funds and sovereign wealth funds. Research conducted by the World Pensions Council (WPC) suggests that perceived legal/political stability over time and medium-term economic growth dynamics constitute the two main determinants

The United Nations Conference on Trade and Development said that there was no significant growth of global FDI in 2010. In 2011 was $1,524 billion, in 2010 was $1,309 billion and in 2009 was $1,114 billion. The figure was 25 percent below the pre-crisis average between 2005 and 2007.

At this point the following questions are asked;

– Are foreign direct investments actually encouraged into the economy of Cameroon?

– If foreign investment complements growth and development, is that true with the case of Cameroon?

– Should foreign direct investment be encouraged or discouraged in Cameroon?

This study therefore, seeks to carry out an in-depth examination of the determinants of FDI in the economy of Cameroon and its contributions towards economic growth and development in the economy.

1.3 Objective of the Study.

1.3.1 Main Objective

The main objective of the study is to assess the impact of foreign direct investment on the economic growth of Cameroon.

1.3.2 Specific Objectives

The specific objectives of this study will include the following:

1. To analyze the effects of cash inflows into the country.
2. To determine the effects of foreign direct investment incentives on the economic growth of Cameroon.

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