Foreign direct investment (FDI) is an investment made by a legal entity (individuals or companies) purchasing assets (which can include companies, buildings or industrial equipment) in another country. The investor conducts its business by employing its own technology to generate long-term revenue greater than the initial investment. In a country where conflicts of interest, corruption and incompetent public governance exist overwhelmingly, only a small group of individuals take advantage of the profits produced by foreign investment and it does not affect ordinary citizens. Such examples would include Nigeria and Liberia. In a country where political authorities get replaced by elections or other reasons, they blame foreigners for poverty and exert all kinds of pressure on foreign investors. Furthermore, they eventually demand new management in foreign companies under the name of nationalization, so that they can be in charge of resource re-allocation. It can be clearly seen in countries such as Venezuela and Bolivia. On the contrary, in countries that pursue long-term policies that clearly set out what technology has to be introduced in which sectors, that have consistent laws and regulations, and ensure transparency, foreign direct investment is a great opportunity; ready to be seized because politicians understand that regardless of what may happen in the future, investors cannot simply take their capital and leave the country. A good example is China, our neighbor to the south. Deng Xiaoping fully understood the benefits of foreign investment and initiated the Open Door Policy. The implementation of this policy started in 1979 and there were only 100 foreign companies operating in China at the time. Since then, the number reached 300,000 in 2010. General Motors Corporation invested two billion USD and established its Buick manufacturing plant in Shanghai. Motorola Company spent 1.2 billion USD to build their mobile phone manufacturing plant in China, and General Electric Corporation invested 1.1 billion USD as well. Hundreds and thousands of Chinese people gained employment because of these foreign investors and many others that made investments in China. Two other countries that are seeing the full benefits of foreign direct investment, are the United States and England. The Shard, which is a 76-story skyscraper and the tallest building in Europe, was erected with a 2.2 billion USD investment by Sheikh Hamad bin Khalifa of Qatar. The Sheikh also bought Harrods, the most famous department store in England, from the Egyptian billionaire Mohamed Al-Fayed. Likewise, the most expensive buildings in West London have been purchased by Arab and Russian business magnates. Jaguar Land Rover, the pride of many Englishmen, was bought for 2.5 billion USD by Tata Motors of India in 2008. The new ownership brought technological improvements to its automotive manufacturing plants and created many new jobs. The British public was quite happy about the whole thing. Besides, England’s biggest football clubs are being purchased by foreign billionaires who make investments worth millions of dollars. Why are the Russian oligarchs buying assets in England? They are not doing it because they love the country. The underlying reason is that England has a strong set of laws, conducts consistent rules and regulations, promotes an easy-to-understand business environment, and ensures judicial independency. Such an environment absorbs the capital into itself and allows it to be distributed equally across every dimension.
IN MONGOLIA
We cannot think of the economic development of Mongolia for the past 20 years without foreign direct investment. Mongolians worked hard to create a legal environment that would attract foreign investment and to promote investment opportunities in our country. However, the hard work only continued until 2000. The total investment that has been made in Mongolia since 2000, is about 13 billion USD, most of which went into the mining sector. It might seem like a big number, but it is absolutely minimal when compared to the global foreign direct investment flow. According to a Financial Times report released in 2011, global foreign direct investment that year was 858 billion USD, and China had acquired 15 percent of it. Today, Mongolians are talking about utilizing our mining revenue to carry out economic diversification and promote renewable resources. It means that Mongolia has to build necessary infrastructure, and first of all, develop high quality human resources in order to become competitive on an international market level in any given industry. The main reason we still have not become competitive internationally, is that Mongolia lacks the required infrastructure and fell behind in technological advancements. Foreign direct investment brings experience and technology know-how, along with capital, which is why we need it more than ever today.
WHAT TO DO?
Looking back at our experiences over the last 20 years, I suggest that we need to improve our legal environment first, in order to attract foreign direct investment, ensure consistency and distribute its benefits equally to every associated party. We need to consider the next three tasks: a) remove subjectivity in the interpretation and implementation of law in government circles, b) improve the process of legislative drafting, and c) fully ensure the implementation of law. Only then, can we deserve to be called a country that follows the rule of law. If these tasks are effectively accomplished, more reliability will be created in business relations and it will allow businesses to predict their outlooks with more certainty. Increased trust in the legal system will help bring about new business opportunities. Another place where foreign direct investment is needed, is in human resources management. Although some companies that have made some headway in the field claim to know what they’re doing, one can argue that there is currently not a single company that employs human resources management that is both efficient and consistent enough to be widely recognized. Due to the absence of promotion and development in human resources, labor productivity and average salary in Mongolia are much lower than the world’s norms. Therefore, 15 percent of our total workforce, which does not even reach one million, has left Mongolia to work in foreign countries, and most of them are doing hard labor. Mongolians today, are disregarding the golden opportunity before us rather than readily seizing it. Are we following the path of those politicians who refuse to take an opportunity just because they are too full and too rich? We have lost our wit to learn about the things we do not know how to do. We have forgotten that Chinggis Khaan used to protect cross-border trade with his own troops and brought the best blacksmiths, woodworkers and builders into Mongolia from other nations. Thanks to his vision, we built the glorious city of Kharkhorin. We have sufficient conditions to attract every investor to Mongolia and have every inch of capital in the world invested here. We have everything that may be required to do so: our own land, peace, freedom, people full of vitality, and an intelligent younger generation looking ahead to the future. It is time for us to remember that our ancestors have always taught us to take advantage of an opportunity rather than let it pass. We should always remind ourselves of the Mongolian saying, “Do not let the butter in your mouth go to waste.”