Toivino Kais Junior Massamba

The impact of FDI on economic growth of Congo Brazzaville

Introduction

The advent of globalization has fostered the integration of economies, and the distances that once
paralyzed trade between states are increasingly being overcome. New ways of financing growth
have emerged with the expansion of international financial flows. Indeed, all developing
countries are now competing fiercely to attract foreign direct investment (FDI). Over the last
fifteen years, the spectacular economic growth of China and India lead to the flow of foreign
direct investment from industrialized countries has finally convinced the majority of African
countries, who saw this as a neo-colonial policy, that foreign direct investment is an essential
way to establish development and get their economies out of the vicious circle of poverty
(Ngouhouo, 2008).
Today, the theme related to the impact of foreign direct investment (FDI) on economic growth
is a key problem faced by many African countries. Since the 1997s political crises which span to
current day, today, the Congolese State has decided to treat the investment problem by setting
laws and regulations, and giving a great importance to investment as the engine of the national
development. The Republic of Congo has regularly attracted FDI. Like many countries in the
region, Congo is rich in oil and raw materials and is greatly affected by the fall in world prices
and the resulting macroeconomic consequences.
macro-economic policies that result from it. According to UNCTAD's World Investment Report
2020, FDI inflows increased from $4.3 billion to $3.3 billion between 2018 and 2019, while the
FDI stock in 2019 is estimated at $29 billion. The country's natural resources are its main asset.
Oil and wood are the main sectors attracting FDI (China is the main buyer of Congolese wood,
followed by France). In order to compensate for its reduction in oil production, emphasis has
been placed on the mining sector, which is attracting a growing number of investors.
Indeed, the role and importance of FDI is crucial in an economy given the role that
Multinationals are called upon to play in the process of globalization and development of nations
today as FDI is taken into account in the endogenous growth model as an additional input for
production. More specifically, FDI is considered as an additional investment that increases local
capital reserves because it is assumed that FDI stimulates growth through the creation of
dynamic comparative advantages leading to technology transfer, human capital accumulation and
the intensification of international trade.
This paper contributed to the debate on the question of the relationship between foreign direct
investment and economic growth. The question that emerges from this study is what is the effect
of foreign direct investment on the economic growth of the Republic of Congo? To answer this
question, the main objective of this study is to examine the effect of foreign direct investment on
economic growth in the Republic of Congo.
2.Literature review

Many specialized agencies have tried to define FDI. We mention a few that will allow us to
better understand this notion. According to the Organization for Economic Co-operation and
Development (OECD) cited by D’Agostino (2001, page 398), FDI refers to: "the acquisition of a
long-term interest in a company (existing or fully created), operating in a country other than that
of the investor. The purpose of the latter is then to really influence the management of the
company, in order to gain market share and/or reduce production costs, and not to make a
financial investment. These investments are therefore made in a productive and/or commercial
logic and not financial. "
This definition is shared by IMF (2000) cited in Demate (2006, page 19). This institution
considers FDI as: "an investment that involves a long-term relationship, thus reflecting a lasting
interest of an entity resident in a country of origin (the direct investor) in another resident entity
(the invested company); the purpose of the latter being to have effective decision-making power
in the management of the company".
From these definitions, the following characteristics of FDI can be identified: the notion of
sustainability of interest in the target company, the exercise of control and influence over the
management of a foreign company, the transfer of knowledge, know-how, complex technological
skills, coordination, management and production logic. It is these characteristics that distinguish
them from any other investment, particularly a portfolio investment that results in an investment
in shares, bonds or other financial investments and that is by nature volatile. The IMF (2000)
also specifies that FDI manifests itself at the level of a country foreign to the investor, either
through the creation of new companies (Greenfield), the acquisition of an equity stake in an
existing company (Brownfield), the involvement in financial flows between affiliates of the same
group or the reinvestment of profits abroad.
Foreign investors are also of various kinds. They may be a natural person, a public or private
company with or without a separate legal personality, a group of natural persons or associated
companies, a government or an official body. But the main FDI comes from Multinational Firms
(MNF). MNFs are in fact international direct investment companies located mostly in developed
countries that, from a national base, extend their reach to several other countries, according to a
strategy designed by a parent company. The development of subcontracting in recent years has
extended the limits of MNFs. The composition of the MNFs now goes beyond these subsidiaries.
It includes the subcontracting firms that are partners of the MNF and that receive technical and
financial assistance from the latter, which has become their principal. These firms are legally
independent of a group, but economically dependent on these MNFs.
Investment relocations are mostly motivated by the prospects of reducing production costs.
Michalet (1997) distinguishes three types of MNF according to the strategies adopted by them in
offshoring. These are primary MNFs, relay MNFs and workshop MNFs. For Michalet (1997),
primary MNFs are those that adopt supply strategies, i.e. produce raw materials, agricultural
products, etc. to meet the needs of the processing industries. It defines relay MNFs as those that
develop market strategies, i.e. produce in foreign countries rather than export to them. This is the
case, for example, for companies producing durable consumer goods, service companies such as
financial institutions, insurance companies, trade and telecommunications companies,
advertising agencies. Finally, it considers the FMN workshops as those that develop
rationalization strategies aimed at lowering production costs, particularly by setting up in
low-wage countries. But in reality, some MNFs combine several strategies. Following this
distinction, Congo Brazzaville has a presence mainly of relay MNFs, most of which operate in
the sectors (banks, insurance, trade, commerce, telecommunications, breweries, etc.) through
investments such as Brownfield and some of them such as Greenfield.
Traditionally, international trade theories have demonstrated the factors that condition FDI
flows. Thus, Heckscher-Ohlin's model advocates that the flow of FDI depends on the endowment
of factors in the country, while Michael Porte's more recent theory of the competitive advantage
of nations adds three other factors in a nation's attractiveness to FDI. For Porter (1990), apart
from factor endowment, there is also the demand condition, the strategy and the degree of rivalry
between firms, but also the situation of the support sectors (Chan, 2011).
In the theoretical literature, the FDI received is supposed to stimulate the growth of the host
economy at several levels. Directly, firstly, through its contribution to value added and through
the productivity gains generated by technology transfers to local firms that are bought out or
integrated into production chains. But beyond these direct effects on production and on the
modernization of productive equipment, FDI can have more indirect positive effects on host
country firms and their productivity. According to the standard neoclassical model, production is
a technology of constant output at scale, with the level of production being linked to aggregates
of means of production. FDI is taken into account in this model as an additional input to
production. Specifically, FDI is considered as an additional investment that increases local
capital reserves. This is not, however, the only mechanism by which FDI can influence growth.
This hypothesis has been developed in endogenous growth models (Balasubramanyam et al.
1996; Bende-Nabende and Ford 1998; Borensztein et al. 1998; De Melloet Luiz, 1999) that
consider knowledge, a source of productivity gains, as a particular type of capital.

Although there seems to be a consensus at the theoretical level regarding the positive impact of
FDI on economic growth, the results of empirical studies that have attempted to verify this
positive impact are not generally conclusive. Studies on industrial organization highlight the
singular character of FDI, which is best written as "a combination of capital stock, know-how
and technology" and which can therefore influence the productivity of labor and capital. (OECD,
2002), Azeroual (2016). However, there is thus uncertainty about the net effects of FDI on
growth since the ability of FDI to accelerate growth in the host country is not strongly supported
by the most aggregate analyses.
Dependence theorists, for their part, argue that dependence on foreign aid and investment can
have a negative effect on growth and a positive effect on income inequality (Chase- Dunn, 1975;
Bornschier et al. 1978). Bornschier et al (1985) argue that foreign investment creates an
industrial structure in which monopoly is predominant, leading to what they describe as an
"underutilization of productive forces". Chase-Dunn (1975) suggests that FDI could crowd out
domestic investment and thus create distortions that could be detrimental to the development of
the host economy.
Alaya (2006), in an empirical study covering seven countries on the southern shore of the
Mediterranean, over a period from 1975 to 2002 using a structural model applied to panel data,
found that the presence of FDI seems to act negatively on economic growth in Morocco, Tunisia
and Turkey. This result could be justified by several elements. First, foreign investors tend to
crowd out natives, which can significantly limit its contribution to economic growth. Second,
FDI flows to these countries are relatively unstable. Other authors such as Mansouri (2009), in a
study on the effects of FDI and trade openness on economic growth in Morocco, find that neither
FDI nor trade openness, as separate variables, were found to be statistically significant in the
estimated model. In contrast, the combined effect of FDI and trade liberalization was positive
and statistically highly significant.

3-Evolution of Foreign Direct Investments (FDI) in Congo Brazzaville

The FDI in Congo has several sources with France, predominantly involved in all sectors of
economic activity. France investments in Congo amounted to about 459 million Euros of FDI
from 1993 to 2004 corresponding to 20% of the total stock of FDI in the country. This
percentage places Congo as the 50th French colony worldwide of France’s FDI in terms of stock.
In the same year, French FDI flows entering Congo was 85 million euro, thus placing Congo as
the 29th sovereign state in the world benefiting from French FDI flows. The other countries
which have invested in Congo are the United States of America (who signed a convention for the
protection of investments with Congo in 1990), Italy which happens to be a signatory of an
agreement with Congo in 1994, China with the 2000's convention and Great Britain which
signed a convention with Congo in 1989.
The FDI in the Central Africa region, Congo in particular is very volatile and insignificant at the
global level. However, this investment can boost the Congolese economies which will benefit the
economy through tax incomes from multinational enterprises and also from revenues generated
by the exploitation of all resources produced by those firms. Since the boom of FDI in the world,
few studies have been conducted in Africa, Congo in particular. Congo is one of the countries
with very high risk in CEMAC, and the distribution of its FDI in economic sectors is influenced
by this factor. FDI is concentrated in the oil sector to more than 70%; 20% in industry excluding
oil and 10% in the primary sector. There are virtually no industries in the country apart from a
few units of timber, sugar or beer production. Political conflicts that led to the civil war got
almost all destroyed. In non-oil industry, FDI is concentrated in wood processing, mining, plate
and some construction materials, while the rest goes to the oil sector (production and
distribution).
In the tertiary sector, there are a few companies in the construction industry, electricity and water
as well as banks and insurance. Congo has seen an average entry of FDI of around 30 million
dollars a year between 1980 and 1991. It is often retained that FDI helps creating jobs,
maintaining productivity, transfers skills and technology, increasing exports and contributing to
economic development in developing countries. The central question here is whether there is and
what are the benefits of FDI in Congo. In 1992, FDI fell to its lowest level for more than two
decades ($3 million). In 1993, FDI inflows made a spectacular jump to $ 286 million. Then, they
remained stable at 50 million averaged between 1994 and 1998 before reaching a record level of
$ 521 million in 1999. The three years that followed this record level saw FDI decline to 120
million on average, before making a bend never equaled since the independence with 668 million
dollars in 2004(Mouele Mboungou Patrick Joe Stivell, Jinlin Zhang).

4-Factors Promoting FDI in Congo Brazzaville

A number of factors have led to the entry of FDI in Congo. One of these factors remains the
discovery and exploitation of new oil wells. In general, the FMN invests the most in oil and gas
sector. The second factor favorable to FDI entry is the privatization phenomenon undertaken in
the context of IMF's structural adjustment. Several public companies have been privatized such
as the NCE (National Company of Electricity), the banking sector which, since the restructuring
changed shareholders in most of the countries from the Central Africa zone. Others companies
are already in the portfolio of companies awaiting privatization. Another favorable factor may be
the existence of texts regulating capital flows entry in different countries. The existence of the
code of investment, incentives on tax and repatriation of profits has helped to attract FDI.
However, most of those codes are somewhat obsolete. For example in Congo the old code was
replaced by an investment Charter which did not clearly mention FDI but does within the overall
framework of investment. The creation of export processing zones has also promoted the arrival
of MNF to establish their subsidiaries. In macroeconomic terms, the growth rate of real GDP
which had become negative since the advent of the economic crisis became positive. The
devaluation of the currency in January 11th, 1994 also made it possible to restore the Congo’s
external competitiveness.
The Government, with the support of the development partners is engaged in a reforms process
for the improvement of the business environment. This includes revisiting the fundamentals of
public and private support to SMEs in order to enable them adapt to the requirements of the new
economic situation. The welfare State has given way to State facilitator-regulator. The first axis
of the strategy is to create support structures for new born companies, while the second axis
focuses on its promotion and expansion. The expected results are: reduction of the cost of
enterprises creation, reduction of disputes related to land, reduction of the establishment period
of companies, the increase in the number of formal enterprises. These measures are also reducing
the time devoted by the companies to pay taxes and the choice of the appropriate legal system in
the country according to regulations (Mouele Mboungou Patrick Joe Stivell, Jinlin Zhang).
5. Methodology