This section discusses the relevance of the results and policy implications for the role of FDI in the Solomon Islands economy. With limited capital and resource base, FDI inflows
provide a vital role as a vehicle for stimulating the country’s economic growth and
development. However, the results indicate that FDI inflows alone cannot promote and benefit the development of this island nation as it depends much on the domestic economic and investment environment of the country. In other words, this study emphasise on the opinion that Solomon Islands needs to develop its initial capacity before attracting more FDI inflows. This requires a number of government policies such as foreign investment, trade, and macroeconomic stability that will provide a supportive environment for positive effects of FDI on economic growth. Improvements in these policies will not only attract FDI inflows but will also provide an avenue for Solomon Islands to maximise economic and social benefits. Failure to deliver appropriate policies on the other hand will mean that growth will continue to depend on limited activities based on exploitation of natural resources.
The results for the FDI-led growth nexus indicate that although FDI inflows and growth- enhancing factors have a positive influence, the inherent and on-going impediments outweigh their potential benefits to boost higher economic growth. Policy formulation by the government should therefore be targeted towards improving domestic investment, increase FDI inflows and trade diversification, skilled manpower, as well as maintaining political stability to ensure growth is sustained in the long-run. A broader development policy on improving these growth-enhancing factors which are the main channels for FDI
transfer is therefore important. Such improvement requires substantial amount of capital and takes longer to recoup the investments, thus the need for financial support with appropriate policies by the government is vital to generate sustainable growth.
A favourable and compatible tax framework should also be placed when log export revenues declines, promotion of downstream processing and export orientated producers. This requires better consultations and co-ordination between the Ministries of Finance, Customs Division and the department of External Trade. Trade policies and market reforms such as duty exemptions and tariff structures should be reviewed with improved trade negotiations both regionally and internationally. A nationally owned framework should be established to co-ordinate trade and FDI related activities to stimulate new export possibilities and enhance investment efficiency. The granting of exemptions or removing of tariffs completely as an incentive to attract FDI would not work for small island economies such as Solomon Islands with a small population. Taxation reforms therefore should be geared towards using tax revenues to improve infrastructure and service delivery that will boost both the inflow of FDI and economic growth.
Strengthening of existing policies on natural resources such as forestry, fisheries and mining and other industries is also vital to ensure these industries comply with international standards. Existing policies on issuing of offshore foreign fishing licenses should also be reviewed and move towards more onshore down processing fishing industries. Such policies will not only reduce the exploitation of resources but also provide higher investment returns and competitiveness, employment creation and other investment opportunities important for rapid economic growth. Taxation on natural resources, resource management and strict guidance on sustainable harvest and use of such natural resources should be maintained for long-term growth and development. Re-plantation of forest and sustainable use of this resource with establishment of regulations could see to managing forests and environmental laws improve management and reducing long-term adverse effects.
The intervention of RAMSI along with other major development stakeholders has been instrumental in returning the country to normalcy; however, with rapid economic recovery and development activities highlight the need for better coordination and harmonisation of donor interventions. While these are mainly short-term assistance, what is needed is development initiatives that would strategically improve FDI and growth-enhancing
factors in the longer run.62 A growth path that would generate more employment and investment opportunities, skilled manpower and other economic activities both in the urban and in the rural areas should be a priority development focus in the long-term and this requires the support of all stakeholders. A national development strategy by the government therefore is important to ensure that FDI and donor supports are directed to towards improving investment, trade and human development.
The growth driven-led FDI results reveal the role of FDI and its contributions and linkages to a variety of factors like domestic investment, trade, infrastructure and communication facilities suggest development of the nation. The important policy implication is to
improve these factors in attracting FDI inflows to improve the country’s economic
conditions and investment opportunities. Foreign investment policies need to be supported with adequate national infrastructure and institutional development important for trade facilitation which is critical to attract FDI. This includes improvement, upgrading and maintenance of existing and new facilities such as ports, wharfs, airports, roads and communications associated with stimulating domestic capacity, higher volumes of trade and export competitiveness. A sound policy to improve education level and human capital is also vital for Solomon Islands to absorb FDI spillovers such as new knowledge and modern techniques.63 Thus, government policies should ensure that on-going development programs such as Post-Conflict Emergency Rehabilitation Project by Asian Development Bank to be targeted at improving transportation infrastructures, providing technical support to strengthen institutions, legislative and regulatory reform important for infrastructure, human developments and export productivity enhancement continues until completion ADB (2007).
A policy statement outlined by the previous government (i.e. the National Coalition for Reform and Advancement) in 2010 suggests a need to embark on various reform programs including economic and constitutional reforms to steer the economy to one that is more balanced and sustainable (Office of the Prime Minister and Cabinet, 2010). These include bringing in those foreign investors with adequate capital rather than those relying on the
country’s financial resources. While these proposed reforms are important, a more stable
government with political will, committed to transparent and accountable practices, fiscal discipline and enforcement of contracts is required to attract quality foreign investors and
62 ADB (2005, p. 98) notes that in the long term “RAMSI’s presence will not be sufficient to turn Solomon
Islands into a robust, rapidly growing economy”.
63 Görg and Greenaway (2004) point out that better education and training would increase the pool of
qualified labour in host developing economies and provide them with avenues to benefit from technology transfers and spillovers.
to sustain FDI inflows. Frequent changes of the government affected the implementation of these reforms resulting in little evidence on their potential positive impact in attracting FDI inflows and subsequently contributing to growth in the economy.
While, major stakeholders have mobilised substantial amount of resources towards recovery efforts and to rebuild the economy, Solomon Islands also needs to address high inflation through the harmonisation of both monetary and fiscal policies. More recently, the introduction of a stable monetary policy accompanied with the adoption of fiscal discipline led to a decline in inflation and consequently a rapid inflow of FDI being observed. However, to maintain this trend in the long-run, policy action towards a more open and dynamic economy with substantial macroeconomic framework (to enhance low inflation, adequate reserves, credit availability and lending), credible reform programs, good governance and sustainable economic growth would further provide for sustainable FDI inflows to the Solomon Islands.
As the FDI-productivity nexus results indicate that primary and services sectors benefit from FDI with productivity inducing FDI inflows in these sectors, there is no FDI benefit seen on manufacturing productivity. The priority for the Solomon Islands development programs and policies should be supported by mobilising resources into these productive sectors. Policy action to be targeted towards improved legal and regulatory framework and governance arrangements would address corruption, and reduce transaction, information and communication costs which would encourage increased inflow of FDI and boost productivity in these sectors. Developing absorptive capacities through strong export linkages, new markets, downstream processing and diversifying of exports into more value-added commodities are vital to increase exports and output. Other investment opportunities to improve productivity in the manufacturing sector should be a priority for export diversification and a competitive export sector rather than depending on few primary products.
Promotion of trade and investment policies that establish backward and forward linkages particularly, linking domestic enterprises to the large foreign enterprises is also crucial in achieving high growth and productivity. This includes policies aimed at strengthening linkages overtime among the key sectors and attracting FDI that can generate spillover effects on the whole economy. For instance, policies to improve agricultural products such as root crops and vegetables in the primary sector should also benefit the service industry by providing food or tourism service industries such as hotels, restaurants with cheaper locally produced agricultural products than higher cost imported agricultural products. The
agricultural policies should also benefit the manufacturing sector as the main supply of agricultural inputs for local food processing.
Government policy formulations therefore should continue to support and establish such linkage structures that are not only important for domestic and foreign investments but also crucial for sector productivity growth. The growing service industry, in particular tourism which has the potential for translating to long-run economic growth for this island nation should also be supported.64 This includes more dialogue and collaborations with the Foreign Investment Division, Solomon Islands Visitors Bureau and the Solomon Islands Ministry of Culture and Tourism to address constraints and immediate needs.
Other issues that need to be addressed relate to land, capital and profit transfers where policies such as the land policy and taxation are important for both domestic and foreign investment. Land reforms should be dealt with caution to ensure that benefits are accrued to both the land owners and the foreign investors and this requires proper dialogue and research on the best alternatives to avoid land disputes and other constraints on investment.65 Policies towards strengthening and monitoring of capital transfers and promote the efficient use of available resources should be ensured. Sustainable management of natural resources particularly log forests should also be ensured with more rehabilitation and replanting programs and economic rents gained from this resource should be put into more productive use rather than current practises.