Colonial Legacies and Foreign Direct Investment

Globalization is often understood as perpetuation of colonialism, albeit in different form. The recent rise of investments by emerging economies into major European businesses – including the acquisitions of quintessential British brands by Indian multinationals, the rise of investments in key sectors of Spain by multilatinas and the growing influence of Angolan investors over Portuguese companies – were thus commonly interpreted as ‘colonial reversals’ by major media outlets. But the extent and manners to which colonial legacies remain relevant for understanding the empirical realities of foreign direct investments (FDI) today, has in fact been relatively underexplored in the social sciences.

Are FDI relations more intense across former empires and their colonies?

The European economies that had been imperial powers in the past – the United Kingdom, France, the Netherlands, Spain and Portugal – continue to invest in most of their former colonies at rates that exceeds their relative economic importance. This tendency to favor former colonies as FDI destinations over other developing countries is particularly strong in the case of Portugal. In 2012, 67 percent of Portugal’s FDI to developing countries were in fact located in its former colonies – Angola, Brazil, Cape Verde, Equitoral Guinea, Macau, Mozambique, São Tome e Principe and Timor – even as their economies constituted a mere 17 percent of all developing economies. While the importance of FDI obtained from developing countries is relatively small in EU member states, a very significant part (58% in the case of Portugal) originates from their respective former colonies.

How do former colonial ties continue to influence FDI relations?

One possible way through which past colonial ties might exert an influence on FDI relations today is through the establishment of international governance institutions that guide evaluations of investment opportunities and address political risk. Countries that were once integrated within the same colonial system often have institutional, linguistic and cultural similarities that facilitate the emergence of international institutions across them. The establishment of the Community of Portuguese Speaking Countries (CPLP) is an illustration of this.

Bilateral investment treaties and political risk

The formal institutions of great relevance for FDI are the bilateral investment treaties (BITs) that countries negotiate and sign to promote and protect investments made by investors from their respective countries in each other’s territory. Portugal, for example, has BITs with 55 nations out of the 196 countries today that includes all of its former colonies. BITs are particularly relevant for addressing political risk associated with FDI.

Political risk refers to possible infringements on investments caused by government and/or political events in the host economies, and constitutes a major obstacle to FDI to this day. While straight-out expropriation is less common today, breach of contract, policy instability, adverse regulatory changes and limitations on currency conversion remain prominent as recently illustrated by the restrictions imposed in Angola on the amount of hard currency that Portuguese and other foreign investors could repatriate.

Strategic relations across governmental and non-governmental actors

Close foreign relations can also play an essential role in perceptions of investors that their investments will benefit from protection if challenges arise.  In the context of conversion challenges of Portuguese investments in Angola, the Portuguese government has both provided financial support and put pressure on the Angolan government to address the remuneration challenges faced by Portuguese companies operating in Angola.

Last but not least, informal alliances across the elites of two countries can also be used as potential mechanism to mitigate political risk. In developing countries, partnering with local elites is often mandatory or at least recommended to ensure favorable terms for their investments. Entities from emerging economies also often prefer to invest in developed economies through partnerships with local companies, to benefit from their acquired positions and address regulatory complexities.

Challenges to governing FDI conflict

The memories of past social inequalities, political oppression and economic exploitation can also generate sensitivities that make governance of conflict particularly challenging. When the Spanish-led consortium contracted to expand the Panama Canal put pressure on the government of Panama to pay for big cost overruns, the head of the Panama Central Authority (PCA) claimed that the Spanish “still think we wear feathered headdresses”. Inquiries into the sources of some African investments are often heralded by the leaders of African nations as attempts by powerful European nations to intimidate their former colonies. Investigations by Portuguese authorities into possible corruption and money laundering associated with some Angolan investments, for example, led to significant tension between Angola and Portugal that reached its peak when Angolan president Jose Eduardo dos Santos threatened to end the strategic partnership between them.

While these governance challenges might act as deterrent to FDI, the advantages of former colonial ties are expected to be activated and managed in a manner that they would outweigh the challenges. My investigations of these dynamics in the case of Portugal serve as a primary test of ‘reasonability’ to extend these hypothesis to a broader level.

Palácio da Ribeira, where Casa da Índia was located, first half of the 18th century. Photo by unknown / Public domain

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