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THE CASE OF BOTSWANA: A DIAMOND

IN THE ROUGH

INVESTING ABROADDIRECTLY

I. BACKGROUND

• A landlocked country located in South Africa.

• Population around 2 million people.

• Botswana gained independence in 1966.

- Language: English, Setswana

- Natural Resources : Diamond, Copper, nickel and mineral.

• FAMINE • FEW ROAD • FEW GRADUATES• NO RESOURECES• LACK OF NATIONAL CURRENCY• LACK OF CUSTOMS TARIFFS

TO SOLVE THE COUNTRY PROBLEMS?

• Find sources of Funds in Norway, Denmark, Canada)

• Join a member of the South African Customs Union (SACU)1. Received a fixed percentage share of the total Import taxes across

the union’s member.2. Botswana boosted its revenue and spurred cross- border Trade.3. Botswana stumbled onto a remarkable open free-trade Regime.4. Government encouraged foreign firms to prospect in Botswana for

mining concessions.

An internationalisation strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital, technology, labour, plant and equipment.

• Background

- Producer and marketer of gem

diamonds based in South Africa.

- Control diamonds market

with CSO (Central Selling Organization).

- Today, nearly all diamond produced

under the watchful of De Beers.

In history :

- Creation of De Beers Botswana Mining Company which owned 15% by the government and 85% by De Beers.

- Provide 100% capital needed.

Greenfield investment.

II. Relationship between Botswana’s Government and De Beers (MNCs)

Time to remind: FDI can be in 2 form

- Mergers and acquisitions: the combination of two or more companies belonging to the same legal entity (or not) to achieve strategic and financial objectives. Companies involved in the operation may come from different economic sectors.

- Greenfield investments: creation of a subsidiary from scratch by one of more nonresident investors.

- Early year of cartel Central Selling Organization (CSO) => controlled.

•Strategy: Strategy:

- Diamonds no rare no precious

- To be value => limiting

the number of diamonds release. (Market)

- Nature resources seeking. (Production)

- After world war II, new discoveries => threatened

=> Bigger mines, bigger threat and Opportunity => more mines <= => Bigger mines, bigger threat and Opportunity => more mines <= Botswana???Botswana???

De Beers

• Nationalizing resources?

• Raise tax and impose demand?

Clause agreement that allow

renegotiation due to changed circumstances.

=> partnership (50% share) and half of seats of the board.

- 75% profit=>government and 25%=> De Beers.

=> Type of ownership : JOINT VENTURE WITH GOVERNMENT

=> CONFLICT.

Botswana's solution

-De Beers and Botswana had intimate partnership due to discover the Jwanang mine.

-Agreement : 72-80% profit to the government and role in managing diamond supply.

Reservation of diamonds.

Government:

-1987: sold reservation, received cash and issued new shares.

Benefits?????

Government: Firms:

-Expand its influence. - Control over the resources.

-Have capital needed.

FDI, Diversification and other Economy Policies

• The government openly acknowledged the important role of the private sector in harnessing mining revenues and nurtured investors both current and investors with tremendous care.

• The returns from foreign investment were used in education, health, roads, dams, no fancy cars, no places.

• Created a host of institution to fill gaps left by the private sector.

• On the financial front, two special funds were established to channel mineral revenues into long ter loans for local authorities and parastatal bodies.

• The development of diamonds brought not only prosperity but peace as well. Elections were held every four years...

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FDI and economic development in Botswana since

independence• Went from one of the poorest nation in the world to an upper middle- income country.

GDP growth averaged 13% per anumm over the entire post-independence period

GDP per capita was about eight times in 1989 than it had been in 1966

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Botswana’s Location-Specific Factors and Attraction of FDI

• Political stability

• Macroecomic policy

• Transparent legal system

• 1995 Huyndai opened operations in Gaborone

• As of 2002, five textile companies had already been established

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• From a poor rural state dependent upon external aid, Botswana became a financially independent country. By 1976, the government was running persistent surpluses and the country established its own currency and central bank.

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Solutions

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Conclusion

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