Mwenda, Kenneth --- "Legal Aspects Of Foreign Direct Investment In Zambia" [1999] MurdochUeJlLaw 35; (1999) 6(4) Murdoch University Electronic Journal of Law

Legal Aspects Of Foreign Direct Investment In Zambia

Author:	Kenneth Mwenda LLB, BCL, MBA, PhD, DBA, FCI, FRSA World Bank
Issue:	Volume 6, Number 4 (December 1999)

Contents

• Introduction
• The Competent Authority
• Fiscal Incentives and Attraction of Foreign Investment
• Fiscal Incentives in the Zambian Investment Act 1993
• Evidence on the Role of Fiscal Incentives in Attracting Foreign Investment
• Technology Transfer and Transfer Pricing
• Technology Transfer
• Transfer Pricing
• Costs and Benefits of Foreign Direct Investment
• Deterrents to Foreign Direct Investment
• Political Factors
• Economic Factors
• Socio-cultural Factors
• Technological Factors
• Conclusion
• Notes

Introduction

1. The study of multinational corporations (MNC) as the primary channel for transmitting foreign direct investment to developing countries has received increasing attention in the last two decades. As Nankani observes: The quest has been for an understanding of both the cause of DFI (foreign direct investment), and the consequences (for home countries, host countries and the international economic and political order) of its rapid growth.[1]

2. This paper examines the efficacy of law and policy on the regulation of foreign direct investment in Zambia. An argument is advanced that legislation on its own is not sufficient to attract foreign direct investment. It is argued further that in attracting foreign direct investment to Zambia there is need also to look at the socio-economic, political and cultural climate in the country.

3. The first part of the paper examines the constitution and functions of the competent authority for regulating foreign direct investment in Zambia. The second part looks at the relationship between fiscal incentives and the attraction of foreign direct investment to Zambia. The third part examines issues of technology transfer and transfer pricing. In the fourth part of the paper we examine the costs and benefits of foreign investment to Zambia. The fifth part then identifies some of the important factors that discourage foreign investment in Zambia. Against this background, we now examine the constitution and functions of the competent authority for regulating foreign direct investment in Zambia.

   The Competent Authority

4. Section 4 of the Zambian Investment Act 1993 - the statute which repealed and replaced the Investment Act 1991 - provides that:

   ...the Investment Centre as constituted under the Investment Act, 1991, shall continue to exist as if constituted under this Act.

5. This statutory provision ensures the continued existence of the Investment Centre from the Investment Act 1991 to the Investment Act 1993. Section 7 of the Investment Act 1993 provides for the establishment of the Investment Board. The section reads as follows: There is hereby established the Investment Board of the Centre which shall be a body corporate with perpetual succession and a common seal, capable of suing and of being sued in its corporate name and with power, subject to the provisions of this Act, to do all such acts and things as a body corporate may by law do or perform.

6. Although the main text of the Investment Act 1993, unlike the text of the repealed Investment Act 1991, does not spell out the constitution of the Investment Board, there is hardly any major difference. In the 1993 Act the constitution of the Investment Board is regulated by the First Schedule to the statute whereas in the 1991 Act the Board's constitutional arrangement is governed by section 6 of that statute.

7. However, for lack of space here we shall not go into details of the First Schedule to the Investment Act 1993 or section 6 of the repealed Investment Act 1991. Suffice it to say that we now turn to examine the respective functions of the Investment Board and the Investment Centre under the Investment Act 1993.

8. The Investment Centre, in contrast to the Investment Board, promotes and co-ordinates government policies on investment in Zambia.[2] In promoting and co-ordinating investment in Zambia, the Investment Centre is required to monitor the performance of enterprises approved by it and to enforce compliance with the terms and conditions of investment certificates approved under the Investment Act 1993.[3]

9. Also, the Investment Centre is required to establish and maintain institutional liaison arrangements; to assist in securing from any Minister, government, local authority or other relevant body permission, exemption, authorisation, licence, bonded status, land and any other thing required for the purpose of establishing or operating a business enterprise; to keep records of all technology transfer agreements relating to investments under the Act; to provide consultancy services to investors; to collect and disseminate information on relevant laws and regulations, and technical matters, including applicable standards, specifications and quality control procedures; and to undertake economic and sector studies, including market surveys, with a view to identifying investment opportunities.[4]

10. When compared with the repealed Investment Act 1991, the Investment Act 1993 clearly shows that section [5] of the 1993 Act has brought in some major changes. As noted above, under section 5 of the Investment Act 1993 functions of the Investment Centre now include providing consultancy services to investors and undertaking economic and sector studies, including market surveys, with a view to identifying investment opportunities. These functions were never part of the statutory tasks assigned to the Investment Centre under the Investment Act 1991.

11. Today, the Investment Centre is also responsible for registering not only manufacturers, but also all other investors falling under the Investment Act 1993. In addition, the Investment Centre is required to implement decisions made by the Investment Board.5

12. By contrast, the duty of the Investment Board is to implement investment policies, formulate investment promotion strategies, establish investment guidelines for the Investment Centre and issue investment certificates to investors.[6] Part III of the Investment Act 1993 sets out procedures on how to make applications for investing in Zambia. It provides that any person investing in a business enterprise in Zambia may apply for an investment certificate provided that in respect of certain industries specified in the Second Schedule of the Act,[7] the Investment Board shall not issue an investment certificate to an investor until the investor obtains the necessary licences, authorisations, or permits from the relevant ministry or body.[8]

13. It must be observed that any applicant for an investment certificate who is aggrieved by a decision of the Investment Board rejecting the application may appeal to the Minister subject to a further appeal to the High Court.[9]

14. Generally, an investment certificate is not transferable without the permission of the Investment Board. The Investment Board may suspend or cancel an investment certificate if it is shown that the investor either transferred or assigned an investment certificate without the prior approval of the Board.[10]

15. Also, the Investment Board may suspend or cancel an investment certificate where the investor obtained the investment licence by fraud, deliberate or negligent submission of false information, or where the investor contravened the Investment Act 1993 or any terms and conditions of the certificate issued to them. Similarly, the investment certificate will be suspended or cancelled where the investor fails without reasonable cause to establish the business enterprise within the time stipulated in the certificate or any extension thereof.

16. That said, it is important to observe that the Investment Act 1993 permits the holder of an investment certificate, at any time during the validity of the certificate they are holding, to apply to the Investment Board for variation of the terms, incentives or conditions on which the certificate is held.[11]

17. The Investment Board may grant or refuse to grant such application. The Investment Act 1993 is, however, silent on any possible means of appeal against decisions of the Investment Board that relate to rejection of applications for variation of investment certificates.

    Fiscal Incentives and Attraction of Foreign Investment

18. At the outset, it must be pointed out that customary international law recognises the sovereign right of each state to tax aliens resident or owning property within its territory.[12] However, the establishment of unfair tax discrimination against foreign nationals and their property is regarded in international practice as an unfriendly act which may give rise to protest or retaliation by restoration.[13]

19. What has not been subjected to legal test, however, is the issue of tax discrimination which favours aliens and operates against indigenous persons. As a result of this gap in jurisprudence, the leaders of a number of developing countries recognise the need to exploit the above sovereign right in international law in order to attract foreign investors through lofty fiscal incentives.[14]

20. In pursuance of this effort, a number of governments in developing countries have enacted legislation which offers generous fiscal incentives to foreign investors. Thus, here we see both policy and legislation being targeted at attracting foreign direct investment to developing countries. Whether this approach increases the flow of capital from abroad or not is an issue we shall touch on below.

    Fiscal Incentives in the Zambian Investment Act 1993

21. On 8th September 1993, the Zambian Investment Act 1993 came into force.[15] The objective of this Act was to revise the law relating to direct investment in Zambia so as to provide a comprehensive legal framework for direct investment in Zambia.[16] As pointed out above, the Investment Act 1993 repealed the Investment Act 1991.[17] Directly relevant to this study is Part IV and Part V of the Investment Act 1993.

22. In Part IV, the following incentives provisions appear:
    An investor shall be taxed on that portion of income which is determined by the Commissioner as originating from the export of non-traditional products at a rate of fifteen per centum...
    An investor shall be taxed on income received from a rural enterprise for each of the first five charge years for which such business enterprise is carried on, reduced by such amount as is required to one-seven of that tax which would otherwise be so chargeable on such income...
    An investor shall be entitled to capital allowance...
    An investor who incurs capital expenditure on the growing of tea, coffee, or banana plants, citrus fruit trees or other similar plants or trees, shall be entitled to a development allowance of ten per centum of such expenditure...
    An investor is entitled to a farm works allowance of hundred per centum in respect of expenditure on farming land in his(sic) ownership or occupation, and for the purposes of farming, or stumping and clearing...[18]

23. Although legislation on direct investment in most developing countries does not explicitly state that investment incentives in the statute are intended for foreign investors, parliamentary debates preceding these pieces of legislation usually indicate that the policy of the host government is such that most of the investment incentives are packaged for foreign investors. Illustratively, the former Minister of Finance in Zambia, contributing on the Investment Bill 1993, observed:

    We are dealing with very serious competition from the neighbouring countries around us... We should create those conditions which can make investors, be they American or British or South African, stay and not merely someone who comes here to use us in transit.[19]

24. Apart from the incentives stated above, there are other incentives provided for in Part IV of Zambia's Investment Act 1993. Chief among them are income tax deductions,[20] income tax exemption on dividend from farming,[21] provision for double taxation agreements,[22] and exemption from customs duty and sales tax.[23]

    Evidence on the Role of Fiscal Incentives in Attracting Foreign Investment

25. There are various schools of thought and theories that explain the determinants of foreign direct investment in developing countries.[24] It is not, however, the aim of this study to explore all these theories. We are concerned, instead, with evidence of systematically observed data on the role of fiscal incentives in attracting foreign direct investment to developing countries.

26. Lowenferd observes that it is not at all clear whether or not fiscal incentives are the major foreign investment determinants.[25] In Mexico, a study conducted on the role of fiscal incentives in attracting foreign direct investment revealed that only 4.2% of the total number of investors that were subjected to the investigation were influenced by fiscal incentives.[26]

27. Similarly, a study undertaken in Jamaica revealed that two out of a sample of fifty-five investors were attracted by fiscal incentives.[27] On the other hand, a similar study undertaken in Korea revealed that fiscal incentives were second to development of markets and management growth in attracting Japanese and American investors to Korea.[28] In Singapore, the results from a similar exercise revealed that fiscal incentives were not important determinants of foreign direct investment.[29]

28. The general position that fiscal incentives are not major determinants of foreign direct investment is reinforced by studies on the Zambian economy. Martin observes that none of the few industries that were granted pioneer status under Zambia's Pioneer Industries (Relief From Income Tax) Act 1969 [30] were attracted by fiscal incentives.[31] Aharoni puts it vividly:

    Tax exemptions are like dessert. It is good to have and no more. It does not help very much if the meal is not there.[32]

29. Also, a study undertaken by the World Bank shows that generally fiscal incentives cannot be regarded as major determinants of foreign investment.[33] However, it must be observed that although the information presented above is based on empirical evidence from various case studies, there are other considerations which may influence the investment decision of a foreign investor.

30. For example, the SWOT matrix (Strength, Weaknesses, Threats and Opportunities), the Boston Consulting Group Matrix or the PEST matrix (Political, Economic, Socio-cultural and Technological factors) may be employed in deciding whether or not to invest.[34] There are other matrices and models that can be employed in formulating the corporate strategy of a multinational company.[35]

31. Also, depending on how important fiscal incentives rate in comparison with other factors under review in an investment appraisal, they could turn out to be either an important investment determinant or an important deterrent to investment.

32. Indeed, further readings on formulating corporate strategy can be found in major texts on strategic management. Our task here is to examine government policy and legislation on foreign investment in Zambia. It is not our intention to delve into the intricacies of corporate strategy.

    Technology Transfer and Transfer Pricing

33. This part of the paper examines first technology transfer and then proceeds to examine the issue of transfer pricing.

    Technology Transfer

34. The broad meaning attached to the term 'technology' is in itself an important factor in explaining the reasons why there are various types of technology transfer in international trade. These forms of technology transfer include conventional trade of capital goods, conventional trade of patents and licenses and the establishment of firms abroad.[36] In this study, we will look at technology transfer in a generic sense.

35. While the term 'technology' encompasses issues such as managerial skill, know-how, production techniques, machinery, information and other intangible forms of capital, it is argued that the term 'technology transfer' must be understood as the process through which superior technological knowledge of one trading partner is transmitted to the geographical location of another partner.

36. Multinational corporations are usually the main transmitters of such technology. As Dickens observes:

    Each of the modes of foreign involvement... - foreign direct investment, collaborative ventures, international subcontracting - is a potential channel for technology transfer. Simply by locating some of its operations outside its home country the TNC (or MNC) engages in the geographical transfer of technology.[37]

37. It is interesting to note, however, that neither the Investment Act 1993 nor the repealed Investment Act 1991 talks about regulating technology transfer to Zambia. An important reason behind this development is the Zambian Government's policy not to have political control over foreign direct investment.[38] Before the 1991 and 1993 Investment Acts were enacted (respectively) it was pointed out in the Fourth National Development Plan that:

    The 1986 Investment Act will be amended to specify more clearly where foreign entrepreneurs can invest.[39]

38. The above policy directive was never carried out. Instead, the Investment Act 1986 was repealed and replaced by the Investment Act 1991. Indeed, the correlation between the political economy and the development of law in a country such as Zambia cannot be exaggerated. The political economy remains a major determinant variable in the development of law.

39. With changes in Zambia's political economy, such as the worsening of her international debt position, state capitalism and the accompanying re-organisation development strategy were abandoned. In their place, a market economy emphasising private enterprise and free market forces was ushered in. This brought along with it the 'new' accommodation development strategy. The new strategy explains, for example, the shift from the 1989 policy directive to amend the 1986 Investment Act to the decision to repeal and replace the statute with the Investment Act 1991.

40. Be that as it may, since the Investment Act 1991 and the succeeding Investment Act 1993 do not contain provisions on the regulation of technology transfer to Zambia the study proceeds to make reference to the repealed Investment Act 1986. The latter Act had provisions on technology transfer.

41. Part VII of the repealed Investment Act 1986, dealing with technology transfer agreements, provided inter alia:
    Every agreement for the transfer of foreign technology or expertise shall be registered with the Director of Investments by any beneficiary...
    An agreement for the transfer of foreign technology or expertise shall not contain any condition -
    (a) which restricts the use of competitive techniques;
    (b) providing for any form of control over the management of the licensee's enterprise;
    (c) which restricts the sources of supply of inputs;
    (e) which restricts the volume or structure of production: or
    (f) which limits the ways in which any patent or other know-how may be used.[40]

42. By contrast, the Investment Code 1985 of Ghana[41] does not provide a list of conditions that should not be included in a technology transfer agreement. Instead, section 27(2) of the Ghanaian Investment Code provides as follows:
    Where an approved enterprise involves a technology transfer agreement the Centre shall:
    (a) evaluate such agreement;
    (b) advise the investor with regard to the choice and suitability of technology;
    (c) monitor and ensure compliance with terms and conditions of such agreements.
    

43. In the case of Zambia, the listing of conditions that could not be included in technology transfer agreements had its advantages and disadvantages. On the one hand, the listing provided certainty to prospective investors on what they could do and what they could not do. On the other hand, the listing made it difficult for the Zambian Government to stop foreign investors from using contractual terms and conditions which were not covered under the Act.

44. Investors had the opportunity to enter into contractual terms not covered by the list. These terms could have been either favourable or unfavourable to Zambia. Here, it must be pointed out that the approach in the Ghanaian Investment Code 1985 is a more flexible way of regulating technology transfer than the approach found in the repealed 1986 Investment Act of Zambia.

45. The Ghanaian approach hinges upon the Investment Centre's evaluation of the appropriateness of the technology. Moreover, section 26(2) of the Ghanaian Investment Code 1985 sets out 'positive' conditions which investors may be required to include in their technology transfer agreements.

46. These 'positive' conditions relate to the amount and source of capital, the size of the project, the need for continuous disclosure on the implementation of the project, the nationality and number of shareholders, the training of Ghanaians, the utilisation of local raw materials and the prevention of environmental pollution.

47. Given the above analysis, it could be submitted that the major shortcoming of Zambia's legislation on regulating technology transfer is that whereas the Investment Act 1986 contained a list of conditions which could not be included in technology transfer agreements, the subsequent Investment Acts (the 1991 and 1993 Acts) are silent on the matter. There is need, however, to examine the costs and benefits of technology transfer to Zambia.[42]

48. To demonstrate this point, let us consider the following situation. A host country may require labour-intensive technology because of the abundance of cheap labour in the domestic labour market.[43] In such a country, labour-intensive technology would create employment opportunities. On the other hand, capital-intensive technology would lead to maintenance and administrative costs in the running of the technology. Capital-intensity could also create unemployment while constraining free market forces and competition by creating oligopolistic tendencies in the market.

49. Indeed, monopolies discourage small domestic enterprises from developing due to economies of scale created by multinational corporations and the introduction of monopolistic practices in the economy. Be that as it may, capital intensity could also provide benefits such as efficiency, effectiveness, mass production, reduced production costs and economies of scale.

50. It is important to observe, however, that in attracting foreign direct investment to Zambia, the Zambian Government must not only be pre-occupied with the positive sides of technology transfer. There is need also to examine the appropriateness of the technology being transferred to Zambia.[44] This foreign technology must complement Zambia's socio-economic plans and needs. However, as shown in the underlying thesis in this study, foreign investment policy and legislation in Zambia are both influenced by the political economy of the country.

51. To this extent, it could be submitted that although it is not easy to provide for fully-contingent statutory rules on the regulation of technology transfer, the lack of any form of statutory rules or discretionary powers in the Investment Act 1993 to regulate technology transfer agreements could lead to inappropriate technology being transferred to Zambia.

52. The issue of 'appropriateness' is a question of value-judgements. Our concern, however, is not with the viewpoint of foreign investors. From a host country point of view, the appropriateness of technology hinges on what is perceived necessary for the development needs of the host country. On this basis, we register our strong reservations to the 'old' views of the UN Economic Commission for Europe. The Commission argued that:

    Where 'technological gaps' exist between countries, international trading opportunities are limited. Now, transfer of technology and of capital embodying high-level technologies is considered as an important means of closing this technological gap. Economic policy, therefore, aims at intensifying these transfers.[45]

53. It must be observed that more important than closing the gap between countries is the appropriateness (to the host country) of the technology being transferred to the host country. Development is a multi-dimensional process and it does not only entail closing the gap (economic growth), but also calls for a sustained commitment to uplifting the general social, cultural and political standards of a people.[46] Indeed, the anatomy of the concept 'development' involves both quantitative and qualitative goals.

    Transfer Pricing

54. Generally, there are various approaches in arriving at transfer prices for transactions between profit centres in a business entity.[47] In this study, we concentrate on the theory of transfer pricing as understood in development studies.[48] For accounting and other quantitative views on transfer pricing, reference could be made to standard texts on management accounting and management control systems.

55. In general, the objectives of transfer pricing are as follows:[49]
    • It should provide each segment with the relevant information required to determine the optimum trade-off between company costs and revenues.
    • It should induce goal congruent decisions - that is, the system should be so designed that decisions that improve business unit profits will also improve company profits.
    • It should help measure the economic performance of the individual profit centres.
    • The system should be simple to understand and easy to administer.

56. Addressing the issue of transfer pricing, Kaplan and Atkinson observe: Interactions among organisational units introduce a second set of problems when local units focus narrowly on their individual performance measures. When such interactions exist, the actions of an individual unit affect not only its own measure of performance but also the measures of other units. For example, when goods or services are transferred from one unit to another, these goods or services are frequently priced in order to recognise revenue for the supplying unit and an input-factor cost to the purchasing unit. This transfer-pricing process is one of the most contentious activities in decentralised firms.[50]

57. Based on the objectives set out above Anthony and Govindarajan add: The fundamental principle is that the transfer price should be similar to the price that would be charged if the product were sold to outside customers or purchased from outside vendors. Application of this principle is complicated by the fact that there is much disagreement in the literature as to how outside selling prices are established. The classical economics literature states that selling prices should be equal to marginal costs, and some authors advocate a transfer price based on marginal cost. This is unrealistic. Few companies follow such a policy in arriving at either selling or transfer prices.[51]

58. As noted above, transfer pricing relates not only to transactions involving capital goods, but also to transactions involving services as well as materials. In essence, transfer pricing is an import-export price manipulating system.[52] It is facilitated by intra-group trading.

59. Multinational companies may avoid declaring profits in a country which has high tax rates by selling their goods to subsidiary companies in countries with low tax rates. As Dickens observes:

    TNCs have a strong incentive to engage in transfer pricing; the very large, highly centralised TNC has the greatest potential for doing so. Transfer pricing is a major problem for all host economies...But it has proved extremely difficult for governments (and researchers) to gather hard evidence on its actual extent...

60. The most frequently quoted is the study of Vaitsos (1974) of overpricing by firms in four industries in Colombia: pharmaceuticals, rubber, chemicals and electronics. Vaitsos found that overpricing by foreign firms was greatest in pharmaceuticals, such that 'reported profits constitute 3.4% of the effective returns, royalties 14% and overpricing 82.6%'

61. The UNCTC (1988) gives an example of the underpricing of timber exports by a TNC from a Pacific Island country to avoid paying taxes. Concern over the use of transfer pricing to avoid or reduce the liability to pay corporate taxes is not confined to developing countries. In the United States a House of Representatives study in 1990 claimed that more than half of almost forty foreign companies surveyed had paid virtually no taxes over the ten-year period.[53]

62. Based on a diagram, it could be argued that in its simple form transfer pricing would involve the following transactions. From country B, the MNC subsidiary undervalues[54] the price to avoid the effect of high tax rates in country A. The common case, however, is for an MNC subsidiary in a country with high tax rates (such as A) to sell to another subsidiary in a country (such as B) with low tax rates.[55] The effect of this intra-group trade is to reduce the tax liability by pricing profits to an area of low tax rates.

63. Transfer pricing also allows multinational corporations to avoid government restrictions on externalisation of profits. Ultimately, intra-group trade would enable the group to declare profits in a country with no restrictions on profit and dividend externalisation.

64. The Investment Act 1993 of Zambia, like its predecessor, the 1991 Act, does not address the issue of transfer pricing. However, mindful of the fact that transfer pricing is a contentious area,[56] and that its control cannot be left to standard rules in a piece of legislation, we strongly contend that the Investment Board, which is a statutory body,[57] should have limited discretionary powers to make regulations and subsidiary laws to regulate transfer pricing.

    It is our view, therefore, that the decision of the Zambian Government not to have any statutory rules regulating both technology transfer and transfer pricing and the decision to suspend the Exchange Control Act 1965 are strong indications of the correlation of policy (including law) to the political economy in Zambia. Thus, we note: Zambia is now bust...At the end of last year (1994), the Government concluded a three-year Rights Accumulation Programme with the IMF which allowed it to borrow to pay the arrears on its debts to the Fund...Until recently the Government has followed IMF advice to the letter. It has abolished all exchange controls, and talks of a balanced budget this year.[58]

65. As pointed out above, the underlying theory of this study is that the political economy of Zambia influences the development of policy and legislation on foreign investment in Zambia. This explains first, the shortcomings of policy and legislation in Zambia on the regulation of technology transfer and transfer pricing and secondly, the decision of the Zambian Government to suspend the Exchange Control Act 1965.

    Costs and Benefits of Foreign Direct Investment

66. This section identifies the major ways in which activities of multinational corporations may affect the economy of a host country such as Zambia. In particular, the section highlights areas of possible damage to the host country and areas of conflict between the host country and the multinational corporation. Also, the section identifies legal provisions for concession agreements in Zambia.

67. Writing on multinational corporations, Dickens observes:

    Their potential impact on employment - not just on the number of jobs but on their type - is likewise immense. But the direction of these effects - whether positive or negative, beneficial or detrimental to national economies and their populations - is not at all easy to determine. It is particularly dangerous to make broad, sweeping generalisations about the effects of TNCs...A single judgement, applicable at all times and in all places, is simply not possible...The 'bottom line' is the net effect which takes into account the opportunities forgone by the presence or absence of the TNC.[59]

68. Against this background, it could be submitted that the costs and benefits to the host country could lie in one or more of the following areas:[60]
    1. Capital and Finance: Here, there is need to consider the problem of transfer pricing, the costs of attracting foreign investment and the problem of harmonising accounting standards for group accounts of multinational corporations and their subsidiaries based abroad.
    2. Technology: This area would involve an evaluation of first, the costs and benefits of technology transfer and secondly, the appropriateness of that technology to the host country. We have already examined these issues above.
    3. Trade and Linkages: Here, two important issues must be addressed. First, what is the role of TNCs in the host country's trade with the outside world, and, secondly, what is the extent to which TNCs are integrated into the local economy through linkages with domestic firms?
    4. Industrial structure and Entrepreneurship: There is need to examine the extent to which a TNCs entry into a host economy may have repercussions on the structure of domestic industry, particularly on the competitiveness, survival and birth of domestic enterprises.
    5. Employment and Labour issues: We must consider the extent to which TNCs entry into a host economy may affect the volume of employment, the type of employment and wages levels, labour relations and the long-term stability of these foreign-controlled plants.
    6. Dependence, Truncation and Hollowing Out: Here, as Dickens notes:

    A major consequence of high level of dependence on foreign enterprises is a reduction in the host country's sovereignty and autonomy: its ability to make its own decisions and to implement them...Truncation...is an 'umbrella concept' which summarises the costs of foreign investment to host countries.[61]

69. Apart from the areas listed above, there are other areas within the host country that are significantly affected by activities of multinational corporations. For example, areas such as taxation and concession agreements must be taken into account. As pointed out above, Parts IV and V of the Investment Act 1993 contain provisions for fiscal incentives and concessions to foreign investors. In the discussion on transfer pricing we also saw how multinational corporations may avoid or reduce liability to pay tax.

70. Other areas of potential conflict and possible damage include environmental protection, purchase of inputs locally, export of final products and export market controls, local participation in top management, training of local personnel, access to local capital markets, extent of local equity participation and issues of profit and capital repatriation.[62]

71. It is clear that whilst most of these issues are predominantly economical and technological in nature, activities of multinational also affect the political, social and cultural patterns of behaviour and the related institutional arrangements in society.

72. For example, multinational corporations may influence the politics of the host country by providing financial support to pressure groups in that country. This support could be in the form of research grants. The concerned pressure groups could be lobbying against policies such as nationalisation, exchange control and restrictions on externalisation of profits by foreign investors.

73. On the other hand, when we consider the cultural influence of multinational corporations, it is important that we apply thinking systems to the problem. This approach enables us to relate the corporate culture of the multinational corporation and its various sub-units to the various recursive levels of the larger system (society and the environment generally).[63]

74. In the final analysis, it could be argued that there is no single judgement, applicable at all times and in all places, on whether foreign investment brings more costs than benefits to the host country. We must therefore adopt a contingency approach when evaluating the costs and benefits of foreign investment to a host country such as Zambia.

    Deterrents to Foreign Direct Investment

75. There are several factors that could discourage prospective investors from investing in a country such as Zambia. We shall group these factors under four heads. The first head relates to political factors, the second deals with economic factors, and the third deals with socio-cultural factors while the fourth relates to technological factors. For Zambia,[64] the following are among the important factors that could deter prospective investors from investing in Zambia.

    Political Factors

76. Generally, Zambia is a politically stable country. Some of the important indicators of this political tranquillity include a peaceful transition from a de jure one-party political system to a multi-party political system in 1991. The observance of basic principles of human rights in the process of Zambia's transition to a multi-party system is unprecedented on the continent.[65] Moreover, Zambia, unlike most other countries in the northern and western parts of Africa, has never been under a military government.

77. It is interesting to note, however, that Zambia's Investment Act 1993 does not only offer fiscal incentives to attract foreign investors. The Act also offers investors protection from nationalisation.[66] Furthermore, the Act guarantees investors the right to transfer funds abroad.[67] These are positive steps towards establishing investor confidence and to attracting investors to Zambia.

78. On the other hand, the poor state of the economy could have significant effects on the future political stability of the country. Also, the IMF and the World Bank are watching how Zambia is servicing her international debt obligations. Indeed, the major players are observing. Privatisation of parastatal companies, the cutting of cost structures (e.g. down-sizing the workforce in major companies), the abolition of subsidies on consumer products, the ceiling of wages and the reduction of state expenditure on social welfare are some of the efforts that have been undertaken by the Zambian Government in an effort to resuscitate the economy.

79. Severe unemployment has, however, resulted from the privatisation programme. This has led to major political spill-off such as the rising rate of crime in Zambia. Secondly, the wage ceiling has led to reduced purchasing power of the workforce. This, in turn, could threaten industrial unrest in the economy. Thirdly, the Zambian Government has radically abolished subsidies on consumer goods. This has led to some form of cultural shock in the majority of the low and average-income earning people.[68] Again this creates the threat of social upheavals in the country.

80. The fourth point to note is that the reduction of state expenditure on social, educational and health facilities has already been met with hostile reactions from pressure groups such as university student bodies and the women's' lobby group in Zambia. All these factors must be taken into consideration when auditing the political environment in Zambia and assessing the extent to which Zambia's political climate is favourable to attracting foreign investors to Zambia.

    Economic Factors

81. The poor state of the Zambian economy cannot be emphasised any further. Whether or not foreign investment is attracted to Zambia remains an issue to be settled by the corporate strategies of the respective foreign investors. In outline, however, the following are some of the important economic factors that could discourage foreign investment.
    • Convertibility of the local currency: The Zambian Kwacha is not an internationally convertible currency.
    • Devaluation of the local currency: The stability of the value of the Kwacha in relation to the values of internationally convertible currencies is not guaranteed. In the last decade, the Kwacha has been devalued not less than ten times.
    • Exchange Rates: Apart from the reasons advanced in (a) and (b), above, it is not easy to establish investor confidence in the domestic market when Zambia's currency does not have a stable exchange value. Investors will not feel confident and secure in a country that has a weak currency with an exchange rate that fluctuates constantly.
    • Inflation: The level of inflation in Zambia, once over 300%, is now in single figures.[69] Wage ceiling is one of the measures adopted by the Zambian Government to curb inflation. We have already discussed wage ceiling. It must be observed, however, that due to factors such as wage ceiling and a weak currency in Zambia, labour is generally cheap to employ. The low cost of employing labour in Zambia is an incentive to attracting foreign investors to that country.

    Socio-cultural Factors

82. Under this head, the following are some of the important factors that could deter foreign investors from investing in Zambia:
    • Tribalism: This feature has become quite rife under the leadership of the MMD Government. The traditional distancing between groups such as the Bembas and the Lozi could discourage foreign investment if prospective investors take into account issues such as the need for team spirit and collective efforts within the workforce.
    • Crime: The issue of crime has already been examined above as a political factor. Crime is also a social problem that can deter foreign investors from investing in Zambia.
    • Unemployment: Like crime, this has already been examined above. Unemployment in Zambia has affected the general purchasing power of the people.[70] It follows logically that prospective investors (e.g. merchant traders) would feel discouraged if they were to target largely financially disenfranchised buyers such as the Zambian public.
    • Conflicting cultures: Culture is a broad term[71] and it encompasses factors such as menti-facts, socio-facts and arti-facts. Culture could generally be understood as a way of life. An organisation such as a multinational corporation will obviously have its own corporate culture. Within that broad paradigmatic way of doing things, there will be sub-cultures of various sub-units in the organisations. All these cultures have distinct characteristics. There could be some common elements between these cultures and there could be some entirely different elements.
      It is these different elements in different cultures that provide a source of conflict. In particular, the corporate culture of a multinational corporation may not be in conformity with the culture of the local people from whom the majority of the workforce is drawn. When this happens, cultural conflict could prove to be a deterrent factor in attracting foreign investment to a country such as Zambia.
    • The literacy levels of the local people: Generally, Zambia has a good literacy level in the urban areas.[72] It is important to stress that since foreign investors usually employ their workforce from the host country, the level of literacy of the local people is an important factor in attracting foreign investment to Zambia. Ideally, the level of literacy of the local people serves two functions. First, it enables the workforce to manage the information technology in the organisation and secondly, it leads to the evolution of a common corporate culture.
    • Corruption: Like crime and unemployment, corruption is both a political and social problem. However, it would be utopian to imagine a society entirely free of corruption. What matters most is to look at the levels of corruption. Although on the average corruption was not a major problem in Zambia, it is now rising fast and a lot of dubious characters are ascending the echelons of political power. However, the vice of drug trafficking, for which Zambia was once said to be heavily involved in, through top government officials,[73] is somewhat on the decline.

    Technological Factors

83. It is submitted that the level of technological advancement in Zambia is below that of most developed countries. In most of the industries in Zambia, there is a use of both capital-intensive and labour-intensive technology. However, with the rapid privatisation of the state-owned business entities and with the government's pronouncement of a free-market economy, Zambia is likely to experience a shift towards a more capital-intensive orientated economy. There is need here to evaluate the extent to which factors such as capital-intensity would complement with the level of literacy of the workforce and the general development requirements of the country.

    Conclusion

84. This paper has examined critical issues of policy and law on the regulation foreign direct investment in Zambia. Fiscal incentives, technology transfer, transfer pricing, costs and benefits of foreign direct investment and factors that deter investment from Zambia have been examined. It was argued that legislation on its own is not sufficient to attract foreign direct investment.

85. It was argued further that in attracting foreign direct investment to Zambia there is need also to look at the socio-economic, political and cultural climate in the country. Indeed, to appreciate fully the arguments raised in this paper (e.g. on technology transfer), we must understand first the nature and agents of technology transfer. Secondly, we must understand the nature of international trade within which technology transfer occurs and thirdly, the terms and conditions of technology transfer.

86. Generally, multinational corporations have centralised operations. Their subsidiaries are integral units of the group. The group is in turn controlled by the parent company. Multinational corporations have economic power to finance research and development. Patent laws are the framework through which multinational corporations maintain their monopoly over technology. To this extent, multinational corporations usually have stronger bargaining power than the host country when it comes to negotiating technology transfer agreements.

87. For multinational corporations, the appropriateness of the technology will depend on the economic viability and technical soundness of the technology. Furthermore, because of the market dominance of multinational corporations in international trade, the host country may not have access to information on other sources of technology transfer. This makes it problematic for the host country to regulate effectively against restrictive business practices and contractual terms such as grant-back provisions.

88. These provisions stipulate that any improvement made by the recipient of the technology to the technology goes to the credit of the supplier of the technology without any payment being made to the recipient of the technology.

89. In the final analysis, to regulate activities of multinational companies in foreign direct investment it is important to consider three levels of regulation. The first level is the national level. This involves regulation through the application of municipal laws and the implementation of government policy.

90. The second level of regulation relates to the application of regional treaty obligations. Here, we must also consider certain aspects of state practice and issues of customary international law in the region. The third level of regulating foreign direct invest in Zambia transcends the national and regional boundaries. This looks at regulation at the international level. Regulation at the international level calls for the application of rules of conventional and customary international law.

91. In this paper, however, we have concentrated on regulation at the national level. The study of all the three levels of regulating foreign direct investment would comprise a separate dissertation altogether. The scope of discussion is vast and the area still requires contribution from scholars in the social sciences.

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Notes

[1] G.T. Nankani, The Intercountry Distribution of Direct Foreign Investment in Manufacturing, (New York & London: Garland Publishing, Inc. 1979), p.1; For a discussion of advantages of foreign direct investment see below; see also C.P. Kindleberger, "Less Developed Countries and the International Capital Market" in J.W. Markham and G.F. Papanek (eds.), Industrial Organisation and Economic Development, (New York: Houghton Mifflin Company, 1970) p. 341.

[2] Investment Act 1993, section 5(1).

[3] Ibid., section 5(2)(b).

[4] Ibid., section 5(2).

[5] Ibid., section 5(2)(i)(j).

[6] Ibid., section 7(2).

[7] Such as any industry manufacturing arms and ammunition, explosives, military vehicles and equipment, aircraft and any other military hardware. Also covered under the Second Schedule to the Investment Act 1993 are industries manufacturing poisons, narcotics, dangerous drugs and toxic, hazardous and carcinogenic materials and industries producing currency, coins and security documents.

[8] Investment Act 1993, section 8.

[9] Ibid., section 11.

[10] Ibid., sections 15 and 17.

[11] Ibid., section 13(1).

[12] See E.I. Nwogugu, The Legal Problems of Foreign Investment in Developing Countries, (Manchester: Manchester University Press, 1965), pp. 9-10; G. Schwarzenberger, Foreign Investment and International Law, (London: Stevens & Sons, 1969), pp. 3-11.

[13] E.I. Nwogugu, op. cit., p.10.

[14] See the statement of the Ghanaian President, October, 1960, "Foreign Capital and Ghana Economic Policy" (Handbook of Commerce and Industry, Accra, 1960 - Folder) and the Opening address of the Prime Minister of Ceylon at the 10th Session of E.C.A.F.E., in Ibid., p.9.

[15] See Preamble of the Investment Act 1993 of Zambia.

[16] Ibid.

[17] Ibid.

[18] Ibid., sections 20, 21 and 22(1), (2), (3).

[19] A.N.L. Wina, Daily Parliamentary Debates, Thursday 29th July 1993, p. 560 (At the time of this contribution, Mr. A. Wina was Minister of Higher Education in Zambia).

[20] Investment Act 1993, section 23.

[21] Ibid., section 24.

[22] Ibid., section 25.

[23] Ibid., section 31.

[24] See J.H. Dunning, Studies in International Investment, (London: George Allen & Unwin Ltd., 1970), pp. 6-10; E.I. Nwogugu, op. cit., p. 9; Organisation for European Economic Co-operation, Report on International Investment, (Paris: OEEC, 1950), pp. 31-34.

[25] A.F. Lowenferd, "Obstacles and Incentives", in F.E. Nattier (ed.), Investment in Developing Countries, (New York: Practising Law Institute, 1972) pp. 17-18.

[26] See generally G.B. Stanford and J.B. Christensen, Tax Incentives for Industry in Mexico, (Cambridge: 1959).

[27] P.A.C. Young, "A study of Tax Incentives In Jamaica", National Tax Journal, (1967), p. 298.

[28] C. Chi, A Treatise on Alien Direct Investments, in T.K. Mabula, The Effectiveness of Fiscal Incentives under the Industrial Development Act 1977, (Boston: Harvard University, unpublished LL.M dissertation, 1981), n.50.

[29] See H. Hughes and Y.P. Seng (eds.), Foreign Investment and Industrialisation in Singapore, (Camberra: Australia National University Press, 1973), pp. 10-25.

[30] This Act has since been repealed.

[31] A. Martin, Minding Their Own Business, (London: Penguin Books, 1975), p.65.

[32] Y. Aharoni, The Foreign Investment Decision Process, (Cambridge: Harvard University, 1966), p.169.

[33] IBRD, Private Foreign Direct Investment in Developing Countries, (Working Paper No. 149: 1973), p. 9.

[34] See generally texts on corporate strategy e.g. G. Johnson and K. Scholes, Exploring Corporate Strategy: Text and Cases, (New York: Prentice Hall, 1993).

[35] Ibid.

[36] See UN Economic Commission for Europe, Factors of Growth and Investment Policies : An International Approach, (Oxford: Pergamon, 1978), pp. 82-84.

[37] P. Dickens, Global Shift: The Internationalisation of Economic Activity, (London: Paul Chapman Ltd., 1992), p. 392.

[38] Interview with T.C. Bwalya, Director of Loans and Investment Department, National Commission for Development Planning, Ministry of Finance, Lusaka, 14th February, 1992.

[39] Ministry of Finance, Fourth National Development Plan 1989-1993, (Lusaka: Government Printers, 1989), p. 541.

[40] Investment Act 1986, sections 36(1) and 37(2).

[41] See also Ghana's Investment Promotions Center Act 1994. This statute is not analysed here since Zambia's Investment Act 1986 bears much more resemblance to the 1985 Investment Code of Ghana.

[42] See for example P. Dicken, op. cit., pp. 391-395.

[43] For an elaborate discussion see H.C. Bos, M. Snaders and C.Secchi, Private Foreign Investment in Developing Countries, (Dordrecht: D. Reidel Ltd., 1974), pp. 36-37.

[44] See P. Dickens, op cit., pp. 391-395.

[45] UN Economic Commission for Europe, op. cit., p. 81.

[46] See L.G. Reynolds, "Is 'Development Economics' a Subject?" in J.W. Markham et al, op. cit., pp. 321-322.

[47] See R.N. Anthony and V. Govindarajan, Management Control Systems, (Chicago: Irwin, 1995), p. 181.

[48] See for example, P. Dicken, op. cit., pp. 390-391.

[49] R.N. Anthony and V. Govindarajan, op cit., p. 181.

[50] R.S. Kaplan and A.A. Atkinson, Advanced Management Accounting, (Englewood Cliffs: Prentice Hall, 1989), p. 538.

[51] R.N. Anthony and V. Govindarajan, op. cit., p. 182.

[52] This point is raised by Anthony and Govindarajan in Ibid. They observe that there is much disagreement as to how outside selling prices are established and that consequently, few companies follow the fundamental principle of transfer pricing.

[53] P. Dicken, op. cit., pp. 390-391.

[54] See Ibid.

[55] For case studies see above.

[56] See R.S. Kaplan and A.A. Atkinson, op. cit., p. 538.

[57] See Part II of the Investment Act 1993.

[58] The Economist, (July 1st - 7th 1995), Vol. 336, No. 7921, pp. 54-54.

[59] P. Dickens, op. cit., p. 409

[60] See R.J. Briston, "Accounting Standards and Host Country Control of Multinationals", British Accounting Review, Vol. 16, No. 1, Spring 1984, at p. 15.

[61] P. Dickens, op. cit., pp. 407-408.

[62] See R.J. Briston, op. cit., p. 15.

[63] For a detailed examination of systems thinking see R.K. Ellis, "Critical Considerations in the Development of Systems Thinking and Practice", Systems Practice, Vol. 8, No. 2, April 1995, pp. 199-214.

[64] See generally J. Clark and C. Allison, Debt and Poverty, (Oxford: Oxfam, 1989).

[65] It is a notorious fact that countries such as Kenya have experienced massive violations of human rights in their political transition to multi-party politics. Similarly, in Nigeria the president-elect M. Abiola, who was supposed to take over office from the military government of General Babanginda, was placed under detention until he died. There were some social upheavals in Lesotho too before multi-party politics were re-introduced.

[66] Investment Act 1993, section 35. This Act adopts the position in international law on nationalisation. Paragraph four of Resolution 1803 (XVII) of the United Nations on Permanent Sovereignty Over Natural Resources provides in part: "... expropriation ... shall be based on grounds or reasons of public utility, security or the national interest which are recognised as over-riding purely individual and private interest, both domestic and foreign. In such cases the owner shall be paid appropriate compensation, in accordance with rules in force in the State taking such measures ... and in accordance with international law."

[67] Ibid., section 36.

[68] See generally J.C. Clark and C. Allison, op. cit.

[69] The Economist, op. cit., p. 55.

[70] See generally J.C. Clark and C. Allison, op. cit.

[71] For a detailed understanding of the term see C. Handy, Understanding Organisations, (London: Penguin Books, 1993), pp. 145, 186, 195-197, 201-208, 210-216, 330-331 and 405; see also R.L. Flood, Beyond TQM, (Chichester: John Wiley & Sons, 1993), pp. 118-123.

[72] See United Nations, Statistical Yearbook, Thirty-ninth issue, (New York: United Nations, 1994).

[73] See Economist, Vol. 332, Issue 7872, July 16th 1994, p. 38.