When it comes to foreign direct investment (FDI) in the agribusiness sector, the involvement of the host economy or local players can make or break a project. Bringing a list of positives to an investment destination can seal the success of an investment, whereas recovery from a project that adversely impacts local people or the environment can be close to impossible.
Agribusiness is an umbrella term for the activity surrounding the whole food system; not just most farm activities, but also the likes of consultancy services. However, it is primary sector activities within agribusiness – such as land cultivation and food processing – where most controversies take place.
Inclusivity in agribusiness FDI benefits the local economy
A paper on the impact of agricultural FDI on developing countries, produced by the UN’s Food and Agriculture Organisation (FAO), states that inclusive business models are the best way to provide a positive outcome for the recipient local economy.
These models involve using local farmers “as equal business partners” and are seen as long-term strategies, as the FAO paper points out that it is unlikely the foreign investor will see much of a financial return in the first few years of the investment.
FDI, with the right types of projects, could bring a lot of value-added to Mongolia, and really help to improve various aspects of the value chain.
However, there are factors involving the host economy, the investing process and the investor itself that play a big role in the success or otherwise of agribusiness FDI projects. According to the FAO, they are:
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- Good governance
- Local context
- Involvement of local stakeholders
- Formulation and negotiation process
- Contents of the investment contract
- Profile of the investor
- Support from third parties
- Type of production system and crops
Having regulation in place for foreign investment, agriculture and the use of natural resources is a key determinant for the outcome of FDI projects in the agribusiness sector, according to the FAO. The capacity of the host economy to be able to oversee and keep in check the investment is central, but so is the local context and more precisely the socio-economic conditions of the area. It is here where farmer organisations can also prove to be of value to the foreign investor.
The involvement of local stakeholders in the initial negotiation process can lead to a better outcome even if it causes the investment process to take longer. Daniel Nicholls, Destination Strategies
In line with this, the contents of the investment contract are another important piece of the agricultural investment puzzle, as they are often “too general and vague”, according to the FAO paper. The benefits that the project might bring to the local economy and area, in general, ought to be included in the agreement.
What does the investor bring to the party?
The investment company’s profile can play a decisive role in the outcome of the project, as this will inform the local players of the management and technical skills it will bring to the host location, as well as what the company’s priorities are. The FAO paper cites a project in Zambia where the investor’s “willingness to accept lower than average financial returns on its capital in the initial phase contributed to the success of the project”.
From a more technical side, the production systems used and the crops chosen can also play a part in enabling an investment to be beneficial for both the investor and the local community.
The FAO paper states that production systems that require imported inputs and equipment are the least positive to the local economy, while systems such as agro-ecological farming and organic agriculture are the most positive.
Can agribusiness FDI be a force for good?
The relationship between agribusiness FDI and economic development is not straightforward, but this is an issue in all types of FDI. How to bring economic benefits to an investment destination, however, is a less ambiguous matter.
Nigel Driffield, professor of international business at Warwick Business School, explains that generating economic development boils down to three options.
These consist of a country developing new businesses, improving the businesses that are already present, or bringing in outside expertise and capital, the latter being FDI.
When referring to developing economies in particular, multinational firms can bring in their own research and development and skills, which will hopefully then spill over to the host economy.
With regard to technical skills, data from the World Bank shows that some countries with a higher percentage of their GDP coming from agriculture, fisheries and forestry also have the smallest ratio of agricultural machinery per 100km² of arable land. Conversely, developed economies where a low proportion of the GDP comes from agriculture have the highest rates of agricultural machinery.
For example, 37% of Mali’s GDP in 2019 came from the agriculture, forestry and fishing sectors, but the country’s agricultural machinery ratio is a mere 2.2 per 100km² of arable land. By comparison, Switzerland’s ratio is 2,611.9 per 100km² of arable land, even though agriculture made up a paltry 0.7% of its GDP in 2019.
Daniel Nicholls, managing director of consultancy Destination Strategies, says that this gap could be filled by FDI. He highlights Mongolia as a country that has not yet seen great levels of FDI in agribusiness, but could benefit hugely from foreign know-how and capital.
“FDI, through the right types of projects, could bring a lot of value-added to Mongolia, and really help to improve various aspects of the value chain from rearing cattle to processing them, and value-added activity such as packaging, exporting and so on,” says Nicholls.
Mongolia’s GDP from agriculture, forestry and fishing stood at 10.8% in 2019, while the agricultural machinery ratio was 40 per 100km² of arable land.
When exploring why FDI in the agribusiness sector has steered clear of Mongolia, Nicholls explains that it is due to a wide range of issues, from the investment climate and the country’s investor-unfriendly laws, FDI restrictions and the absence of an investment dispute resolution system, to problems with its infrastructure.
When agribusiness FDI goes wrong: land-grabbing
Another FAO report looking at the challenges and opportunities for agribusiness FDI in developing countries criticises a phenomenon often referred to as ‘land-grabbing’ as the type of investment model that is “least likely to bring substantial benefits to local communities”.
The term ‘land-grabbing’ came into common use during the food price crisis of 2007–08, when large-scale land acquisitions increased in developing countries. The main concerns around these practices come from the impact they have on the host economy, and more specifically on local people who are dependent on this land.
Although large-scale land acquisitions are not only made by foreign investors, these deals tend to create the most controversy when they have an FDI tinge as they touch on other issues such as national sovereignty and independence, according to the FAO report.
The Land Matrix Initiative is an independent global land-monitoring initiative made up of a number of global and regional partners that collects large-scale land acquisition data. The monitor’s Land Matrix Analytical Report II: International Land Deals for Agriculture analysis shows that the food security of smallholder farmers is affected by large-scale land acquisitions when there is a loss of cropland. It also shows that the loss of forestry translates into a loss of biodiversity and carbon sequestration, impacting not only the local area but at a global level too.
Agribusiness FDI has the potential to be beneficial to the local economy, but like other types of foreign investment, this is not always the case. However, as research shows, it is in the instances when the local communities are involved in the FDI process that it is more likely for a positive spillover to occur.