Foreign Direct Investment (FDI) from Multinational Corporations (MNCs) is considered as one of the main channel for the acquisition of technology and knowledge by Less Developed Countries (LDCs). The driving force of Mauritius’ development has been its exports sectors, namely the sugar sector, tourism and the Export Processing Zone (EPZ).
The relatively dynamic financial sector has also played a crucial role in the development process. These sectors have all benefited from both domestic and foreign investments throughout their development.
It is only from the mid-1980s that Foreign Direct Investment (FDI) started entering Mauritius significantly, mostly in the EPZ and in tourism. It played a significant role at the time more because of the technological know-how it brought, rather than because of the capital inflows per se.
FDI to Gross Domestic Investment (GDI) remained quite low throughout the 1980s, representing 6 per cent of GDI in its peak year. The FDI in tourism and the EPZ brought in the necessary technologies and know- how to transform them into leading sectors of the economy.
FDI in Mauritius were successful in allowing local investors to acquire and assimilate these technologies and know-how and develop domestic firms in the EPZ and the tourism sector. However, FDI in Mauritius have also been highly concentrated regarding sector as well as in skills and capabilities, therefore limiting the capacity to rapidly upgrade and diversify production. One other key factor of the development success of Mauritius has been the large proportion of domestic investments in these leading economic sectors, in particular private domestic investment as can be seen on.
Indeed, the large proportion of private domestic investment in sectors such as the EPZ, tourism and the financial sector is thought to have prevented large dependency on foreign capital and to have facilitated joint ventures and therefore technological spillovers. Looking at the structure of investment in Mauritius in the last 25 years and comparing it to other middle - income industrializing economies, we can see that the low proportion of FDI to the Gross Fixed Capital Formation (GFCF) is not unique to Mauritius. Countries such as South Korea and Taiwan also had low FDI as a proportion of GFCF, while Singapore, Malaysia and Hong Kong had much higher FDI inflows as a proportion of GFCF. However, all these countries experienced incredible growth rates in the last 30 years.
Therefore, given the mixed evidence, it is difficult to know whether FDI in Mauritius has been growth-enhancing or not on the basis of the small proportion of FDI to GFCF. Nevertheless, it could be argued that given the existing evidence on the relationship between FDI and economic growth, we would expect FDI in Mauritius to be growth-enhancing. The conditions for growth-enhancing FDI are all met in Mauritius: the country has a large human capital base, it is an export-oriented economy, and the high rate of domestic investment in sector with relatively high FDI inflow suggests there is a relatively high complementarity between domestic and foreign investments.
Last Updated on: 19-04-2010
