The agricultural sectors across the developing world have experienced under-investment over the past decades. As a result, many governments in developing countries seek to attract increased foreign direct investment (FDI) in their agriculture sectors. FDI is seen by host governments as a potentially important contributor to filling the investment gap and providing developmental benefits, for example through technology transfer, employment creation and infrastructure development. Investing economies view FDI in agriculture as a potential way to increase their food security, particularly considering the volatile global food markets since 2007.
Definition of Foreign Direct Investment (FDI)
The OECD defines FDI as “a category of investment that reflects the objective of establishing a lasting interest by a resident enterprise in one economy (direct investor) in an enterprise (direct investment enterprise) that is resident in an economy other than that of the direct investor. The lasting interest implies the existence of a long-term relationship between the direct investor and the direct investment enterprise and a significant degree of influence on the management of the enterprise. The direct or indirect ownership of 10% or more of the voting power of an enterprise resident in one economy by an investor resident in another economy is evidence of such a relationship.”
The investor is defined as “an entity (an institutional unit) resident in one economy that has acquired, either directly or indirectly, at least 10% of the voting power of a corporation (enterprise), or equivalent for an unincorporated enterprise, resident in another economy. A direct investor could be classified to any sector of the economy and could be any of the following:
(i) an individual;
(ii) a group of related individuals;
(iii) an incorporated or unincorporated enterprise;
(iv) a public or private enterprise;
(v) a group of related enterprises;
(vi) a government body;
(vii) an estate, trust or other societal organisation; or
(viii) any combination of the above.
In the case where two enterprises each own 10% or more of each other’s voting power, each is a direct investor in the other. A direct investor has a direct investment enterprise operating in a country other than the economy of residence of the foreign direct investor”
In recent years, FDI in agricultural land of the size of approximately 49 million hectares has been reported. Most of the deals have taken place in developing countries with agricultural water resources, such as in South East Asia, Latin America and Sub-Sahara Africa, but FDI is also occurring in developed countries such as North America, Australia and New Zealand (ibid). The majority of investors in low and middle-income countries are domestic farmers who invest in their agricultural systems, followed by donors, governments and corporations. A recent trend in agricultural FDI has been private and public sector investment from economies with high population growth, limited water supply and food insecurity aggravated by climate change (see also land and water grabbing). However, the mobilization is viewed as an important pillar of actions targeted at achieving food security by 2050.
From the invested economy’s perspective, a greater promotion of FDI in agriculture is a form of export-led agricultural industrialization making use of its comparative and competitive advantages. In agriculture, comparative and competitive advantages for a target economy could mean the wide and cheap availability of land, water and labour. The benefits of FDI could theoretically involve:
- Provision of additional income
- Creation of additional job opportunities
- Improvement of the livelihoods of local populations
- Supply of capital and technical know how
- Improvement of infrastructure and technology for realization of unutilised agricultural potential
- Positive impact on supply and cost of food
- Increased tax income for host countries
- Market access for farmers in rural areas
However, FDI in agriculture is pursued in some cases only for speculative purposes without making use of the leased land resources. Implementation of FDI projects involves a number of risks, such as:
- Endangerment of local food security and water supply in invested countries
- Aggravation of land conflicts
- Creation of risks in local jobs
- Resettlement without compensation and forced evictions
- Insufficient contractual provisions to protect interest of local people
- Discrepancy between the availability of productive land and supply of water for irrigation
- Ecological and environmental risks, such as over-allocation of water resources and soil degradation
A critical community of international organisations, academia and NGOs has duly pointed out the problems accompanied by FDI in land, which may cause tenure insecurity of local communities, less access to land and water resources and result in severe implications for local livelihoods. A major component lacking in current FDI in land practice is the role of participation of the affected population in decision-making and negotiation during the purchase of lands. In addition, other risks include:
- Information asymmetry and power imbalance between investors, governments and the affected local population (normally the weaker group)
- Lack of information about land rights situation
- Local people are not informed about their rights
- Low level of participation. Usually, local people give consent without understanding the terms of the contract.
- Lack of legitimate representatives in the agreement for all interest groups
As a result, the risks of FDI in agriculture currently outweigh the opportunities. For development cooperation, the inflow of unstructured private capital into agriculture could translate into worsening conditions for local populations and ecosystems, as well as impede attempts to implement good governance models in rural areas, such as rural territorial development concepts. It is feared investors are not willing to share the potential benefits of agricultural FDI. Therefore, recent initiatives have attempted to tackle the risks associated with FDI in land to structure investments.
Although it is acknowledged that FDI in agriculture must be increased to meet the requirements of global food security over the next decades, the role of governance has been on the agenda of international organisations such as FAO, the World Bank, IFAD and UNCTAD, as well as NGOs such as the International Land Coalition and the Oakland Institute. The Committee on World Food Security (CFS) issued the Voluntary Guidelines on the Responsible Governance of Tenure of Land, Fisheries and Forests in the Context of National Food Security in May 2012, which was subsequently adopted by the member states of the United Nations. The guidelines seek to govern FDI in agriculture by highlighting the role of tenure and natural resources. However, CFS has further approved an inclusive consultation process to develop and ensure broad ownership of principles for responsible agricultural investments (RAI). The consultation of the RAIs was endorsed at the CFS annual meeting in in 2012. The goal is a set of principles to promote investments in agriculture that contribute to food security and nutrition and to support the progressive realization of the right to adequate food in the context of national food security. The principles will go beyond mere voluntary guidelines to govern FDI in agriculture and will be presented to CFS in 2014 for endorsement.
As an alternative to large scale acquisitions, development cooperations are suggesting innovative partnerships between agribusiness and farmers, such as contract farming, outgrower schemes or joint ventures. These partnerships are being promoted by several international organisations, including International Water Management Institute (IWMI) and Gesellschaft für Internationale Zusammenarbeit (GIZ). Alternatives to large-scale investments seek to reconcile the need for investment in agriculture by placing the focus on food security for local populations, capacity development and the right to land for smallholder farmers.
Example from Ethiopia
At a time of climate change, greater demand for food, water scarcity and population growth, the government of Ethiopia has sought since the early 2000s to utilize its comparative advantage through several policy measures.
Tamrat (2010) explains that “in 2002, the government issued the first Poverty Reduction Strategy Paper (PRSP), known as the “Sustainable Development and Poverty Reduction Program” (SDPRP), after a consultative process involving various stakeholders at both the Federal and Regional levels. The SDPRP was based on the basic tenets of ADLI with its major focus on agricultural and rural development. Its emphasis was mainly directed to stimulating rural growth centered on small‐holder agriculture. The second round of the PRSP process, known as the “Plan for Accelerated and Sustainable Development to End Poverty'” (PASDEP), covers the period 2005'‐2010 and is the current overarching policy framework in Ethiopia. Although the PASDEP builds upon most of the important strategic directions articulated in the former SDPRP, there is a major shift from the previous policy direction in that it places an emphasis on economic growth with a greater focus on commercialization of agriculture with a strong push from the private sector. The PASDEP aims to accelerate economic growth in the country with the private sector playing a lead role. It is in light of the current policy framework that aims at promoting private large‐scale agricultural investments in Ethiopia by both foreign and domestic investors that the government has, in recent years, been actively engaged in allocating land for large'‐scale agricultural investments“.
However, this top-down approach poses questions about governance principles as developed by CFS to protect the livelihoods of millions of Ethiopians; most of the investors who subsequently invested in Ethiopia since 2005 (private sector companies from India, Israel, China and Saudi Arabia, amongst others) do not have a lasting relationship as outlined by the OECD definition of FDI. The Government of Ethiopia’s strategy included tax breaks for five years to investors to attract a sufficient number of interested enterprises or sovereign wealth funds. Productivity gains and modernization of agriculture are prerequisite to facing the enormous challenges that lie ahead for Ethiopia, e.g. food insecurity due to rapid population growth. However, it is questionable whether the strategy of attracting large scale investments by promising quick economical wins will meet this challenge. It is becoming more and more obvious that the social, economic and environmental outcomes of FDI largely depend on the way investments are structured and thus governed.
- ↑ 1.0 1.1 1.2 FAO (2012). The state of food and agriculture 2012: investing in agriculture for a better future. FAO: Rome. Available online: http://www.fao.org/docrep/017/i3028e/i3028e.pdf (accessed: 30.01.2012).
- ↑ Klaus Deininger et al. (2011). Rising Interest in Global Farmland: Can It Yield Sustainable and Equitable Benefits? Available online: http://siteresources.worldbank.org/INTARD/Resources/ESW_Sept7_final_final.pdf (accessed: 06.01.2013).
- ↑ OECD. (2000). Glossary of Foreign Direct Investment Terms and Definitions. Available online: http://www.oecd.org/daf/inv/investment-policy/2487495.pdf (accessed: 06.01.2013).
- ↑ Land Matrix: http://landportal.info/landmatrix
- ↑ Gesellschaft für Technische Zusammenarbeit (2010). Assessment and appraisal of Foreign Direct Investments (FDI) in land in view of food security. GTZ: Eschborn. Available online: http://www2.gtz.de/dokumente/bib-2010/gtz2010-0478en-foreign-direct-investment-food-security.pdf (accessed: 30.01.2013).
- ↑ 6.0 6.1 6.2 6.3 Tanja Pickardt. (2011). Presentation on large-scale agricultural investments at Tropentag. Available online: http://blog.tropentag.de/node/190 (accessed: 06.01.2013).
- ↑ FAO. (2012). About the Voluntary Guidelines on Tenure Governance. Available online: http://www.fao.org/nr/tenure/voluntary-guidelines/en/ (accessed: 06.01.2013).
- ↑ Committee on World Food Security. (2012). Responsible Agricultural Investments. Available online: http://www.fao.org/docrep/meeting/026/me550E.pdffckLR(accessed: 06.01.2013).
- ↑ Lorenzo Cotula and Rebeca Leonard (2010). Alternatives to land acquisitions:fckLRAgricultural investment and collaborative business models. Available online: fckLRhttp://www.ifad.org/pub/land/alternatives.pdf (accessed 28.01.2013).
- ↑ Imeru Tamrat. (2010). Governance of large-scale agricultural investments in Africa: the case of Ethiopia. Paper presented at the World Bank: Washington DC.
Tim Williams. (2012). Investment Opportunities in Smallholder Agricultural Water Management for Improved Food Security in Sub-Saharan Africa. Available online: http://www.fsdl.qa/Portals/0/pdf/17_WILLIAMS.pdf (accessed: 06.01.2013).