Foreign Direct Investment in Developing Economies:

A Study of Mozambique and Uganda

Carrie Cutter
Student of International Relations
Centre College

The growing role of foreign direct investment and multinational corporations (MNCs) in developing countries in the age of globalization is rarely disputed. The nature of the impact of FDI on the growth and development of the Third World, however, is a controversial topic in contemporary international relations and economic development theory. The purpose of this research is to investigate the relationship between levels of FDI by MNCs in developing countries and the resulting levels of economic development, particularly in the cases of Mozambique and Uganda, and, furthermore, to identify any existing patterns in this relationship and their implications for more generalizable patterns of growth and stability.

Historically, developing countries heavily depended on the economies of the industrialized world for their own economic survival. During the past two decades, however, the world economy has increasingly "globalized" through the liberalization of world trade and capital markets, the growing internationalization of corporate production and distribution, and the destruction of barriers to the trade of goods and services through technological advances. Meanwhile, the world’s developing countries are now more important, and influential, actors in international trade and the global market. Consequently, developing states now have a significantly greater impact on the global economy, particularly on the economies of industrialized states. The recent crises in Southeast Asia and in the former Soviet Union , and their effects on the United States and global stock markets perfectly illustrate the sensitivity of this relationship.

The increasing integration of developing countries into international trade and the global market is accompanied by an dramatic influx of foreign capital in developing countries, particularly in the form of foreign direct investment (FDI) through multinational corporations (MNCs). The Third World received 23 percent of the world’s FDI inflows during the 1980’s, but by 1994, their share had risen to 40 percent. While developing countries received $24.2 billion in FDI in 1990, by 1995, this figure increased nearly 400 percent to $91.8 billion. The flow of foreign direct investment is not, however, divided equally among developing states. Between 1989 and 1992, 72 percent of the total FDI flows to the developing world were directed to 10 states, including China, Mexico, and Indonesia. On the contrary, total private capital flows to Sub-Saharan Africa are lower than in any other developing region of the world.

This trend, however, seems to be changing, as states in Sub-Saharan Africa have recently attracted FDI at faster rates than countries in other developing regions. For example, CFA countries (members of the African franc zone north of the Sahara) received a consistently declining share of FDI during the 1980’s, however non-CFA states experienced a rapid increase in FDI levels during the late 1980’s and extending into the 1990’s. While developing countries continue to accumulate greater amounts of FDI than do states in Sub-Saharan Africa, the faster rate of growth in FDI levels in these countries suggests that Sub-Saharan Africa may one day attract a greater share of foreign direct investment than other developing regions.

This paper will examine the increasing flow of foreign direct investment in developing countries and its effect on economic growth and development through the combination of a theoretical approach and a comparative analysis of two case studies. First, I will discuss contemporary theoretical perspectives concerning foreign direct investment in developing countries. Second, I will examine two cases, Mozambique and Uganda, and the specific effects of recent increases of foreign direct investment in their respective economies. Finally, I will combine the two approaches to reach a conclusion on the relationship between FDI and economic growth and development in developing countries.

Economic Models and Theories

Throughout the 1970’s and 1980’s, economists predominantly supported the dependency theory of foreign direct investment and its impact on developing countries, arguing that developing economies suffer negative consequences from foreign investment as a result of profit repatriation, declining reinvestment, and lack of local economic spinoffs. While dependency theory retained the support of some, recent challenges suggest that foreign direct investment has the potential to positively affect developing economies, shedding new light on the potential for FDI and MNCs as catalysts for economic growth and development in the Third World.

As a result of these emerging theories, economic models concerning the role of FDI in developing economies, no longer limited to the narrow perspective of the traditional dependency theory, now cover a wide range of perspectives. However, current theories generally fall into one of three categories regarding the effects of foreign direct investment on economic growth and development in developing economies: 1) models following the traditional dependency theory in which FDI has a negative impact on the Third World, rendering developing economies more dependent on external capital in order to survive, 2) models which consider FDI to positively impact developing countries, assuming that purely economic criteria, such as aggregate demand, are sufficient to support long-term production and growth, 3) and finally models which recognize the potential for FDI to create growth and development in developing countries based on both economic and political contextual factors such as macro- and micro-economic policies, political stability, long-term policy credibility and consistency, and economic and political transparency. In this paper, I address the latter two categories of research, particularly emphasizing the political factors and their implications for economic growth in developing countries.

The first of these categories approaches the impact of FDI on developing economies from a strictly economic perspective. These studies tend to be highly quantitative, assigning specific variable and, furthermore, quantifying them in order to develop complex mathematical fumulations as a means to calculate future economic conditions based on contemporary variables. This often renders these studies more scientific, and, consequently, more accepted. The quantitative nature of these studies, however, may limit the scope of variables economists consider in their research to factors which are, themselves, inherently quantifiable (ie. aggregate demand, costs of production, and employment figures). For example, through a series of formulae and derivations, Hamid Beladi and E. Kwan Choi conclude that the spillover effects of FDI benefit developing economies. Beladi and Choi argue that the spillover effect of multinational corporations, while reducing employment in the multinational sector, actually increases employment in the local sector of the developing economy. As a result, overall employment increases, as does the total income of the host country. Furthermore, they argue that foreign direct investment by multinationals and the resulting spillover effect may outweigh the adverse effects of foreign capital investment on developing countries, thereby reversing the potential for continuous dependency of Third World economies on developed countries.

Andrés Rodríguez-Clare focuses on the impact of multinationals on developing markets through the generation of linkages between economies. He makes three assumptions concerning linkages: 1) efficiency of production is improved with a wider variety of specialized inputs, 2) physical proximity is necessary between the supplier of many such inputs and the user (producer of final goods), 3) the size of the market restricts the availability of specialized inputs. Rodríguez-Clare also assumes that a variety of specialized inputs is beneficial to the production of final goods, that domestic firms must purchase inputs locally (the international transfer of inputs may only occur if a firm is multinational), and that inputs are produced at returning rates to scale.

Linkage occurs, therefore, as a final-good firm’s demand for specialized inputs increases, resulting in local production of a variety of the inputs, and integration of the local economy in the activities of the multinational. The local production of the specialized input creates an increased level of employment for the indigenous labor force, which further benefits the host country and its economy. Higher levels of linkage, which Clare describes as having a positive linkage effect, are characterized by a higher equilibrium variety of specialized inputs, while lower levels of linkage, levels with a negative linkage effect, are characterized by a lower equilibrium variety of specialized goods.

In another study, Epstein, Crotty, and Kelly suggest that identical levels of foreign direct investment will have differing effects on developing economies depending on the existing aggregate demand within the market and the number and nature of regulations concerning economic competition. The effect, then, of foreign direct investment by multinational corporations cannot be characterized as either inherently positive or inherently negative. Rather, the impact of FDI on an economy is determined by the context in which the investment is made, and in particular, by the host country’s level of aggregate demand. High levels of aggregate demand accompanied by effective rules limiting destructive competition result in positive economic effects on both the host country and the home country of investment. On the contrary, high rates of unemployment, and, therefore, low levels of aggregate demand, coupled with high levels of competition, both economic and political, in the absence of appropriate regulation result in negative economic outcomes for the host and the home economies. Therefore, investors of foreign capital invest in economies providing high levels of aggregate demand and appropriate, effective regulations concerning competition.

Murtha and Lenway, whose model falls under the category which incorporates political as well as economic factors into their research, also contend that the development and success of foreign direct investment in a particular economy is dependent on certain contextual factors. However, they specify in their study that for a successful industrial strategy to exist within a country, a certain foundation is necessary which can only be established by effective policies and strategies by the indigenous government. Murtha and Lenway argue, moreover, that for the success of an industrial strategy, the government must be capable of integrating the complex order of structures and institutions within the state to formulate a consistent and strong economic and political environment able to support industrial growth and development. The power to build such an industrial strategy, moreover, rests on specific and credible economic policies and the competence of the existing organizational structure and institutions to carry out these policies.

In their conclusions, Murtha and Lenway argue that in states with both transitional and capitalist economies, policy credibility is key in influencing the strategies of multinationals. Multinational corporations cannot enter into the process of formulating a joint industrial strategy with a state unless it is assured that the government’s actions and policies will be consistent through time. Moreover, governments may facilitate the process of sustaining policies when their level of specificity is politically reasonable.

Scott Shane takes a similar, however distinctive, perspective on the role multinationals play in developing countries, particularly in their choice between licensing and investing directly into the economy on the basis of the national identity and culture of the host country. He theorizes that in high-trust countries, where monitoring is less necessary, multinational corporations tend to license industrial firms. Meanwhile in low-trust countries, or what Shane calls power-distant countries, where interpersonal trust is often lacking and the monitoring of labor and management through hierarchical control is more necessary, multinationals tend to invest directly in the economy by locating production branches in the country. Shane contends, however, that while these societal and political factors influence the behavioral tendencies of multinationals in developing countries, economic factors provide the predominant impetus for particular behaviors of multinational corporations.

Although, quantitative studies provide a necessary foundation for the study of patterns in foreign direct investment and its impact on developing economies, a more effective method for studying the patterned effects of FDI on developing countries is through a detailed series of detailed case studies, examining not only the numbers and configurations discussed in quantitative economic studies, but more abstract factors as well, including social and political histories and their impacts on the contemporary setting, fundamental cultural ideals and values, etc. However, the basic theories proven by quantitative studies, such as those by Murtha, Lenway, Epstein et al, and Choi and Beladi, provide important insight in an arguably more scientific form, on the relationship, which may be lost or hidden in a qualitative case study. While the above studies begin to expand the means of explaining and predicting the effects of FDI on developing countries through quantitative measures to the pertinent political and economic factors of policy formulation and credibility, they fail to fully investigate the individual economic and political structures, institutions, and environments of developing countries and their relationships to foreign capital investment.

In this investigation of the impact of FDI on economic growth and development in developing countries, therefore, I will use the findings of the aforementioned quantitative studies and theories to provide a stronger foundation for an examination of the relationship through the comparative case studies of Mozambique and Uganda.

FDI in Mozambique and Uganda: A Practical Application

Sub-Saharan Africa has long been equated with economic and political failure, chronic social unrest, and environmental degradation. The continent of Africa has historically held the world’s poorest countries with little hope for the future. Monopoly governments under the leadership of often authoritarian, totalitarian elite have generally run African states since independence from European colonial rule. Meanwhile, the economies of Africa have become increasingly indebted as western powers and international institutions continue to disperse loans to the continent. Recently, however, certain African nations have shown rapid economic improvements, decreasing debts, increasing per capita income, and attracting foreign companies to invest in their economies. Botswana, for instance, was at one time one of the world’s most impoverished countries. In the 1980’s, Botswana’s per capita GDP was $350, however today it is nearly $3,350, more than the per capita GDP of either Indonesia or the Philippines. Perhaps even more astounding is the example of Mauritius, an island off Africa’s east coast, which has a per capita income of $6550. Moreover, its economy grew an average of 5 percent annually from 1980 to 1997. One study of 103 countries determined that Mauritius, between 1975 and 1995, demonstrated one of the most dramatic increases in economic freedom in the world.

If there are such dramatic cases of economic growth in Africa, why, then, should this investigation focus on Mozambique and Uganda, countries which continue to be among the poorest in the world? The reason is simple. Both Mozambique and Uganda are in the process of development. They are both currently addressing the economic and political issues keeping them from being Botswana or Mauritius, and they are also presently designing and building the institutions which will guide and support their economies during their transition. Furthermore, both Mozambique and Uganda share chillingly similar histories, however certain important variations exist which may explain their slightly different patterns in growth, development, and foreign direct investment.

Mozambique, while still one of the world’s poorest countries with an annual per capita income of $80 in 1996, has made steady progress in economic growth since the early 1990’s. Between 1990 and 1995, the annual growth rate of GDP reached 7.1 percent, while between 1980 and 1990 the average annual growth rate of GDP was -0.2 percent. By contrast, the average annual growth rate for all developing countries between 1990 and 1995 was 3.1 percent, and the same figure for the developed world between 1990 and 1995 was 2.3 percent. Furthermore, the average annual growth rate of per capita GNP between the years 1985 and 1995 was 3.8 percent. Total export figures for Mozambique more than doubled between 1985 and 1995, rising from $77 million in 1985 to $170 million in 1995. Consequently, the expansion of Mozambique’s economy has been accompanied by a dramatic increase of foreign direct investment to the country, increasing from no investment in 1985 to $45 million in 1995.

While Mozambique experienced steady economic growth through the late 1980’s and 1990’s, and large increases in FDI flows during the 1990’s, the rates of economic growth and FDI flows in Uganda during the 1980’s and early 1990’s steadily declined. Only in the most recent years have these rates reversed. This shift, however, is quite dramatic. For instance, between 1994 and 1995, exports from Uganda nearly doubled, increasing from $254 million to $537 million. Meanwhile, the annual growth rate of GDP between 1994 and 1995 rose from 6 percent to 10.4 percent and per capita GNP growth rate more than doubled in the same time, increasing from 2.6 percent to 7.6 percent. Furthermore, between the 1990 and 1996, foreign direct investment in Uganda rose from $0 to $121 million.

From these figures, it is clear that there is a definite positive correlation between levels of foreign direct investment in the economies of Mozambique and Uganda, and their respective levels of economic growth and development. For instance, foreign direct investment to Mozambique rose rapidly increased between the years 1985 and 1995. Receiving no foreign direct investment in 1985, Mozambiqe experienced inflows of $35 million in FDI in 1994, and $45 million in 1995. Consequently the average annual growth of the Mozambican economy also increased dramatically, rising from negative growth in the 1980s to 5 percent in 1996, a significantly higher rate of growth than high income states experienced. Other indicators of economic growth, particularly the growth rates of exports and trade, domestic investment, and GNP also suggest that a positive correlation exists with increased FDI in Mozambique.

Likewise, economic growth rates in Uganda compared to the increasing rates of FDI suggest a similar correlation. The increase in FDI in the Ugandan economy from -$4 million in 1985 to $5 million in 1995, even reaching $121 million by 1996, positively correlates to the GDP growth rate from 3.1 percent in the 1980s to 6.6 percent by 1995. Uganda also experienced significant growth rates during these years in its industrial and service sectors followed by increasing rates of exports with further industrialization. Meanwhile, the average annual growth rate of GNP in Uganda reached 9.4 percent by 1996, a significantly higher rate than most developing countries, twice the growth rate of average states in Sub-Saharan Africa, and more than three times the growth rate of average high-income countries.

These statistics clearly illustrate the correlation of increasing FDI levels in Mozambique and Uganda to positive growth rates. Given these correlations, common patterns evident in the development experiences of Mozambique and Uganda may be beneficial to other developing countries, particularly in Sub-Saharan Africa. Correlations, however, cannot prove causations. Thus, variables beyond those indicated in the above statistics (including levels of FDI) and in the above economic models contribute significantly to the economic growth and development of Mozambique and Uganda, as well as to the nature of the effect of foreign direct investment on their economies. The political and economic environments and conditions within each state must be considered in order to apply the experiences and strategies of Mozambique and Uganda to the general strategies and processes of economic growth and development.

Mozambique and Uganda: Political and Economic Environments

The recent increases of foreign direct investment in the developing world follows a growing trend among Third World states to openly invite foreign capital investment, a sharp contrast to the highly closed economic policies of developing countries in earlier decades. Developing countries are now repealing the protectionist policies formerly preventing foreign capital from penetrating their economies, replacing them with broad privatization policies. Selling industries previously run by highly centralized governments, developing economies are quickly attracting new foreign investors into their markets who are willing to risk economic failure for the impressive rates of return available in the developing world. This trend holds more potential for Sub-Saharan African economies than in other developing nations since, between 1990 and 1994, rates of return on foreign direct investment in Sub-Saharan Africa reached 24-30 percent as compared to an average 16-18 percent in other developing economies. According to Murtha and Lenway, however, the policies implemented by governments in order to attract foreign investment and development must be credible for effective and positive investment projects and strategies.

For both transitional and capitalist states, policy credibility plays

the critical role in determining whether either home or host governments’

strategies really influence MNCs’ strategies or only appear to do

so. . .MNCs will not enter into processes of mutual strategic adaptation

with governments unless they have assurances that the governments can

and will pursue consistent policies over time.

The state, then, has an enormous effect on the development of its own economic environment and its stability. Specifically, the power of states to reform and establish institutions and policies is key in the process of development and positive economic growth, particularly in developing countries where civil strife, disorder, corruption, and overregulation of the economy often prevail. For instance, the World Bank claims that "[e]fforts to restart developing countries with ineffective states must start with institutional arrangements that foster responsiveness, accountability, and the rule of law." Environments lacking these factors often fail to stimulate economic growth and development as is regularly illustrated in the politically unstable states of Africa, Lain America, and Southeast Asia.

The rapid economic growth in Mozambique follows, almost immediately, drastic political and economic changes within the country. While Mozambique had a firmly established, secure infrastructure in 1975 following its independence from Portuguese colonial rule, civil war between the governing Frelimo party and the National Resistance Movement (Renamo, or MNR) forces, in addition to years of rigid central economic planning resulted in the destruction of nearly all existing infrastructure by the late 1980’s. Moreover, much of the Mozambican population also disappeared during and immediately after the civil war. During the 15 years of constant war between the MNR and the the ruling party, 750,000 people were killed either in the fighting or indirectly through related famine and disease, while 10 percent of the population was displaced, and one million fled. Consequently, following the war, Mozambique’s GDP and per capita income fell dramatically while the country’s debt burden rose to 45 times total exports, and poverty levels reached 67 percent of the national population.

After ending nearly 15 years of civil war in 1992, however, Mozambique held its first multiparty election in October 1994, established by the Constitution of Mozambique adopted in 1990. This election, furthermore, initiated an exceptionally smooth transition from the Marxist-Leninist system abandoned in 1989 to a more democratic system of governance, in hopes to attract the much needed economic development assistance from external sources. In addition, President Chissano, elected by the Frelimo party as its leader and president in 1986, appointed well-respected technocrats to his cabinet for both their unique expertise in the various fields of policy making as well as their legitimate concern and dedication to the amelioration of the political and economic conditions in the country.

The drastic change in Mozambique’s economy accompanied a program of political restructuring and a subsequent series of long-term reforms. The Program for Economic Rehabilitation (PRE) was initiated in 1987 by the new reformist government in an attempt to correct the damaging effects of its former political and economic policies. According to Leo Paul Dana, "Mozambique is the poorest country in the world (per capita GNP in 1994 was $80 U.S.), not because of lack of resources, but largely due to historical and psychological factors." The recently established reforms replace the protectionist policies established under Portuguese control implemented to prevent non-Portuguese investments within the colony. These modern economic reforms include the liberalization of price and trade regimes, the restructuring of taxes and tariffs, the establishment of a market-based foreign exchange system, and the privatization of over 500 enterprises. Financial sector reforms, while relatively slow in progress, include the privatization of state banks, while monetary policies have gained control over the expansion of the money supply in order to curb inflation. In an extensive trip to Africa in July 1998, United States Secretary of the Treasury Robert E. Rubin praised the government of Mozambique for its "economic austerity and liberalization."

The result of these trends toward economic stability in Mozambique is the increasing inflow of foreign direct investment. In 1997, $6 billion in foreign investment projects, more than twice the amount of total foreign direct investment in all of Sub-Saharan Africa (not including South Africa) in 1995, for Mozambique had either been proposed or were under study. Moreover, a number of the larger projects under consideration, ranging from tourism and eco-tourism to paper and pulp production, would outweigh the current value to of the entire economy of Mozambique as it now exists, offering the potential for massive expansion and growth of the country’s economy. As Rubin stated in a recent report on the development of African economies, it is clear that "investors have begun--although this is still a beginning--to take a new look."

Like Mozambique, Uganda’s economy suffered under political turmoil, civil war, and economic inefficiency throughout the 1970’s and 1980’s. Having won full independence from the British in 1963, the state of Uganda soon fell under the leadership of Milton Obote, leader of the Ugandan People’s Congress, who banned all opposition parties and established a one-party state and the socialist program known as the Common Man’s Charter. In 1971, however, former Major General Idi Amin Dada mounted a coup in which he seized power as the new Ugandan president/military dictator, suspended the existing constitution, and dissolved the National Assembly. Under Amin, the people of Uganda suffered from mass slaughter and and horrific, widespread human rights atrocities. In the years leading to the late 1980s, however, power in Uganda shifted again to the civilian autocrat Obote, whose rule was followed by period of anarchy instituted by the Uganda National Liberation Army.

Upon taking power in 1986, the National Resistance Movement (NRM), under the leadership of Uganda’s President Yoweri Kaguta Museveni, assumed control of a highly regulated and inefficient economy: parastatals were predominant in every sector, numbers of inefficient trading boards existed, and extreme government control rendered private business initiatives nearly impossible. By 1987, however, Museveni implemented an economic recovery program which included provisions for the reduction of poverty through the reestablishment of fiscal discipline and monetary stability; improvements in the incentive structure and investment environment for trade activities; the rehabilitation of economic, political, and social infrastructure; and the promotion of savings and investment in the private sector. Specific reforms in Uganda’s development program include the liberalization of interest rates, the liberalization of exchange rates and the external trade system, the privatization of the central bank, the implementation of an investment code, and increased incentives for export diversification. While little economic growth resulted immediately from the implemented changes, the dramatic developments of Uganda’s economy in recent years suggests the success of the newly liberalized market and the market reforms of 1987.

In 1996, Uganda held its first direct presidential elections, in which Museveni gained 75 percent of the vote. Although President Museveni is not yet ready to accept a multiparty democratic system, the country is currently experiencing more freedom than it has ever before in its history. Under the current "no party" system, anyone may run for public office on an individual platform and criticism of the government is tolerated. While valid concerns exist for the lack of certain democratic principles in the newly established political system of Uganda, President Museveni claims that democracy, vulnerable to religious and ethnic factionalism, must wait for market stability and the development of a united middle-class to withstand existing religious and tribal differences. Thus, according to Museveni, economic growth and stability has been a prerequisite for the implementation and survival of a fully democratic political system in Uganda.

Conditions and Commonalities

While a positive correlation between levels of foreign direct investment accompanied by the implementation of political and economic reforms and economic growth is clear in the cases of Mozambique and Uganda, the question remains if FDI spawns growth and development, or if, perhaps, other conditions within a state’s political and economic environment foster growth. Furthermore, if the political and economic conditions of a state serve as a catalyst for growth, rather than FDI, do these conditions, then, also serve as a catalyst for FDI increases in developing countries, in particular, Mozambique and Uganda?

The answer to these questions are revealed in the parallels or commonalities between the development experiences of the case studies. Both Mozambique and Uganda clearly have similar political and economic histories. Each country recently experienced years of bloodshed, internal conflict, and civil war. Likewise, Mozambique and Uganda both emerged from war and civil strife emphasizing new democratization and marketization goals for their respective countries.

Furthermore, these common visions directly led to the implementation of similar political and economic reform policies, transforming Mozambique and Uganda, countries once riddled with political corruption, authoritarian rule, closed markets, and inefficient socialist economies, into increasingly legitimate democracies. Thus, as democratized states, the current governments of Mozambique and Uganda are based on the ideals of popular political participation, the rule of law through established constitutions, and transparent policies to open markets and increase the capitalist forces on their respective economies.

Furthermore, both Mozambique and Uganda have experienced political consistency since 1986, when each of their respective current presidents first obtained power. The continuous rule of President Chissano and President Museveni, however, does not necessarily imply the traditional political tactics of each country’s former dictators and authoritarian leaders in establishing and retaining power without popular consent. Rather, the leadership of Chissano and Museveni were decided in the popular elections held in Mozazambique and Uganda in 1994 and 1996, respectively.

The unchanging nature of each government, as determined by the people of Mozambique and Uganda, thus provides an established consistency in their policies. Again, the consistency of policy, consequently, is integral in the process of stabilizing economies and attracting the capital of foreign investors as suggested in the study of Murtha and Lenway. Clearly, in both case studies, the economic and political transformations since the civil wars of the late 1980s are imperative for the development of the economies of Mozambique and Uganda and for their effectiveness in attracting foreign direct investment.

Despite the clear similarities between the development experiences of Mozambique and Uganda, however, there are several fundamental differences which separate them. These differences may provide an explanation for the variation in the patterns of growth and the impact of foreign direct investment increases within each country.

For instance, although the Mozambican and Ugandan governments implemented economic reforms nearly simultaneously, the rate of FDI levels in Mozambique rose steadily throughout the late 1980s and early 1990s. On the contrary, FDI levels in Uganda actually declined in the 1980s and early 1990s, but rose dramatically during the mid-1990s. The variation in the democratic systems of Mozambique and Uganda, furthermore, is likely to be a key determinant in the attraction of FDI into their respective economies. While the stabilization of governments is certainly a primary incentive for foreign investment, the degree of democratic implementation has an impact on the attraction of FDI in these cases. While Mozambique immediately implemented a multiparty democratic system, Uganda implemented democratic processes into a "no-party" system, a system which caused concern among more developed democratic countries. Investors were hesitent to invest in a country they suspected was still under the reign of totalitarian leadership, despite Museveni’s own praises of democratization. Unsure of Mozambique’s political, and therefore economic, future, investors and multinational corporations refrained from developing firms and industrial facilities in the country. Mozambique, therefore, experienced lagging FDI rates through the mid-1990s, when investors began to realize Museveni’s genuine interest in fully democratizing Mozambique through the gradual implementation of democratic processes and institutions.

Furthermore, the success of Museveni’s 1987 economic and political reform program on the stabilization of the Ugandan economy in addition to his proven dedication to the liberalization of the economy and political democratization as was illustrated in his recent signing of the Entebbe Summit for Peace and Prosperity in March 1998 provides an explanation to the country’s increasing levels of foreign direct investment in the 1990s. Finally, the recent rise in coffee revenues in Uganda, a result of newly implemented taxes and other market controls, provides additional explanation for the rapid rise in foreign direct investment in Uganda in the 1990s, compared to the steadier increase of FDI levels in Mozambique since the implementation of political and economic reforms in 1987 under President Chissano.


The most fundamental element in the promotion of economic growth in a developing economy is trust in the existing political and economic system within the country, and in the capacity for these systems to provide an environment conducive for development. Building confidence in the governing bodies, however, is a complex, deliberate, and time-consuming task, requiring the establishment of appropriate institutions and bodies to properly govern and provide order.

The relationship between FDI and economic growth within Mozambique and Uganda has developed a cyclical pattern. Both economies, having reached a certain minimal growth rate, experienced a resulting increase of foreign direct investment, thus serving as a catalyst for increasing amounts of economic growth and development and further increases in foreign direct investment.

What is not clear, however, is how the economies of Mozambique and Uganda have been able to stimulate the economic growth necessary to attract increasing amounts of foreign capital investment, while other developing countries are consistently overlooked by foreign investors. Commonalities between the two systems suggest that certain criteria including political stability, macroeconomic stability, steady economic growth, the liberalization of trade, rapid privatization, and strong infrastructure are necessary to provide the economic growth needed to increase inflows of foreign direct investment. The political and economic developments in Mozambique and Uganda thus serve as a model for the development of Third World economies, emphasizing the common criteria necessary to stimulate developing markets and attract foreign direct investment.