How FDIs can improve economic growth in Somalia

In the last decade the situation of this country has improved dramatically. This has been helped with the full formation of federal states that are part of the Federal Government of Somalia. Plus, the introduction of economic reforms coupled with passing multiple laws that are crucial for business climate formation.

The efforts to attract investments, particularly Foreign Direct Investments (FDI) into Somalia were driven by Somali led institutions such the Somali Economic Forum, the Horn of Africa Business Association and now SOMINVEST.

However, it’s only recently that FDI become a possibility for Somalia’s growing economy, with a growth rate of 3.3% in 2021.

There has been a few positive changes in Somalia in recent years. Some of the main factors include the fact that the Somalia’s improved dialogue with the International Monetary Fund and Somalia’s membership to Multilateral Investment Guarantee Agency (MIGA).
There is also a wave of investments to Somalia mainly driven by the Somali diaspora which have led to a real estate boom in major cities, the highlight of which is Garacad Port, the largest private investment in the history of Somalia.

There has always been the question of whether FDI’s would lead to economic growth. Much economic research has been done on the subject. It clearly boils down to the type of companies involved and the reason for the investment because there are various levels and forms of FDI’s. Here are a few of the most common FDI types: Resource-seeking FDI – This is the oldest type of FDI in developing countries. It is where the investor focuses on the production of primary commodities for foreign market. The host country can additionally benefit from the processing of natural resources. However, potential profit gains are discouraged by huge tariffs imposed by importing countries, typically the developed countries.

Market-seeking FDI – The market size of the host country plays a significant role when it comes to attracting FDI. The bigger the local or regal market size the better. Efficiency-seeking FDI – This takes place when an investor company locates part of their value-added chain abroad in order to improve the profitability of overall operations. It can also be referred to as a labour seeking investment which is when wages rise in the home country and the investor seeks to get access to low-cost labour in developing countries. Strategic-asset-seeking FDI – This takes place at an advanced stage of the globalization of a firm’s activities when firms invest abroad in order to acquire research-and development capabilities.

All the above listed FDI types have advantages and disadvantages and it’s the host country’s responsibility to insure that the FDI is beneficial both economically and socially. One way is to ensure there are FDI policies in place.

Secondly, organisations such the Somali Stock Exchange (SSE) encourages FDIs to set up shop in the country so that it creates jobs in the local economy to improve their skills and knowledge. This will reduce unemployment and increase consumption as people earn higher wages, which will ultimately lead to economic growth. The SSE also encourages FDI to participate in joint ventures with local business to reduce risk. This can be done through listing on the local stock exchange.