Business Page – September 30th, 2001

World Investment Report: 2001 - Promoting Linkages (Part 2)

Today’s Business Page is the second and final part of the adaptation of a presentation by Christopher Ram at the UNDP launch of the World Investment Report for 2001 titled “Promoting Linkages” on Wednesday September 19, 2001.

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 that 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 some to be 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 venture's 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 venture 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. 

Conclusion 

In the final analysis it is the culture of the linked organisations that helps to determine success or failure. The inability to mesh competing goals for a wider joint good has been the reason for some of the more spectacular failures of joint ventures. These offer wonderful lessons to the Guyanese entrepreneur seeking to participate in cross border linkages. There have been few successful domestic efforts but these should not deter attempts at international linkages. 

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