CHINHOYI UNIVERSITY OF TECHNOLOGY

SCHOOL OF BUSINESS SCIENCES AND MANAGEMENT

DEPARTMENT OF ACCOUNTING AND FINANCE

RESEARCH PROPOSAL

AN IMPACT ANALYSIS OF FISCAL INCENTIVES ON PROMOTING

FOREIGN DIRECT INVESTMENTS IN ZIMBABWE TEXTILE
INDUSRTY

SUBMITTED TO THE SCHOOL OF BUSINESS SCIENCES AND

MANAGEMENTIN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE
AWARD OF

BACHELOR OF SCIENCE (HONS) IN ACCOUNTACY

DONE BY

(PRISCILLAH CHAKANYUKA (C096848S

DECEMBER 2012
1 RESEARCH TOPIC

An impact analysis of fiscal incentives on promoting Foreign Direct Investmentin Zimbabwe

Textile Industry

1.1 BACKGROUND INFORMATION

The increasing mobility of international firms and the gradual elimination of barriers to
global capital markets have stimulated competition among governments to attract Foreign
Direct Investment, often through tax incentives. As more and more governments have tried to
attract multinational companies and enhance the associated technology spill over, fiscal
incentives have become a global phenomenon, Jacques Morisset (2003). According to
ShahZahir, (2003), the movement of capital around the world gets significant attention of the
policy makers and researchers in both developed and developing economies and cross border
capital flows are mainly concentrated in FDI through the involvement of TNCs. He further
said that “Global factories” search for highest financial returns and greatest security for their
operation in the host regions. High return in investments is linked with the incentive
mechanism offered by the host country in attracting FDI to fill the investment gap and
diffusion of other skills.

Most of the nation states particularly developing countries compete with each other to make
their country an attractive destination for private foreign capital inflows and facilitating
private investment activities. To attract the foreign investors the government of Zimbabwe
offers various investment incentives in the form of tax concessions and direct expenditure on
infrastructural provisions.

Despite the numerous advantages and potential that Zimbabwe enjoys, and notwithstanding
the various fiscal incentives stipulated in investment laws for encouraging foreign
investment, FDI in Zimbabwe remains on the decline.A clear trend of disinvestment can be
seen from the early 1990s. Evidently, even with its huge advantages of natural resources and
skilled labour, foreign investors have preferred to steer clear of Zimbabwe.Zimbabwe was
once one of Africa's strongest economies.As Zimbabwean economic situation exacerbate,
capital flight has amplified and traditional the underperformers in terms of FDI potential and
performance UNCTAD (2000). In terms of FDI potential the country was ranked 131 st out of
141 countries and last for FDI performance.Statistics available from the Zimbabwe Ministry
of Finance show that FDI, which averaged 14-20% of Gross Domestic Product from 1980-
2000, has declined remarkably in the last ten years to the current 1.1% of GDP.

Yes, FDI is on its decline in Zimbabwe as a whole but the research will focus on Textile
industry. The textile sector plays a major economic role in many developing economies
especially in Africa. For many countries the textile sector provide one of the first stages of
economic upgrading or diversification away from a dependency on primary commodities and
it has significant forward and backward linkages. The textile industry has played, and
continuesto play, a major role in the Zimbabwean economy as one of the key manufacturing
sub-sectors in Zimbabwe.

The sector is made up of eighty players registered under the National Employment Council
for the textile industry but only thirty (43%) companies are functional at more than 70%
operational capacity since the Zimbabwean economic hardship of 2008. The former market
leaders for textile sector closed the doors since 2010 such as David Whitehead Textiles,
Merlin, Merspin and Martin textiles due to lack of insufficient working capital.

According to the survey that was carried out by ZimTrade, S.Nkala (2012),the period 2000 to
2010 has been the most difficult for the textiles sub sectorthis has been seen by a no of
companies and a number of people losing their jobs. A study byFAFO (2000), also suggests
that ten companies closedin the textiles between the periods 1990 to 2005. The study further
entails that of the total investments made 30% was by foreign investors, 30% by joint
ventures between Zimbabwe and foreign investors and 40% by Zimbabwean
investors.Foreign investors give textile sector go-bye and thereby FDI decline in the economy

1.2 PROBLEM STATEMENT

The history of Zimbabwean economy, as a whole, fixed foreign investment for the three
decades since Independence is one of low inflow and indeed accelerating disinvestment,
prompted by a growing acknowledgement by businesses and societies worldwide that the
political and economic dispensation in the country is controversial and financially risky.
A clear trend of disinvestment can be seen from the early 1990s. Evidently, even with its huge
advantages of natural resources, skilled labour and fiscal incentives stipulated in investment
laws for encouraging foreign investment, foreign investors have preferred to steer clear of the
textile sector of Zimbabwe.

1.3 RESEARCH OBJECTIVES

1.3.1 To analyse realistic and in depth fiscal incentives and their response to foreign
investors in the textiles sectors of Zimbabwe.
1.3.2 Deduce factors influencing the decline of FDI inflow in the textile sector of the
economy.
1.3.3 Suggest strategies for improving the inflow of FDI in the textiles industry of the
economy.

1.4 RESEARCH QUESTIONS

1.4.1 What are the fiscal incentives put in place for foreign investors in Zimbabwe?
1.4.2 Are the fiscal incentives in place effective in promoting foreign direct investment in
the textile industry of Zimbabwe?
1.4.3 What other factors other than fiscal incentives can promote foreign direct investment
on the sector?
1.4.4 How can fiscal incentives and any other factors be improved in order to improve FDI
inflow in the textiles industry?
1.4.5 Are there any other government policies in place that are hindering or improving FDI
in the textiles industry?

1.5SIGNIFICANCE OF THE STUDY

The study is going to be done in partial fulfilment of requirements of Bachelor of Science

Honours Degree in Accountancy and will provide the researcher with the research skills for
future academic and scientific researches and will enhance the researcher’s understanding in
the field of accounting. It will also apply knowledge acquired over the years at Chinhoyi
University of Technology in moulding practical solutions applicable to the industry.

If the outcome of the research is superb as will be determined by the supervisor, the
university will get credit and hence use the material as reference to other students.

The findings are intended to improve the inflow of FDI in Zimbabwe and analysing whether
fiscal incentives have an effect on promoting FDI in the textiles industry. It will also
contribute literature for future reference should the problem arise again in Zimbabwe.

Moreover the findings can be used also to cover the educational gaps that couldhavebeen
omitted by previous researchers.

1.6DELIMITATIONS OF THE STUDY

The research will be limited to the textile industry of Zimbabwe, analysing the impact of
fiscal incentives on promoting Foreign Direct Investment.

1.7 LIMITATIONS OF THE STUDY

It is imperative to inform any reader of the piece of work of the analysis. The quality of the
research is likely to be curtailed by the following:

1.7.1 Monetary constraints

1.7.2 Withholding of information by the company personnel
1.7.3 Time constraint

However, as the saying goes, where there is a will there is a way, because of the interest that
the researcher has in carrying out this exercise the limitations’ influence shall be minimised
so as to present an accurate picture of what is actually on the ground.

2 LITERATURE REVIEW

2.1 Introduction

Hart C (2008) defines literature review as a body text that aims to review the critical points of
current knowledge including substantive findings as well as theoretical and methodological
contributions to a particular topic. This chapter of the research paper will concentrate on what
have been advocated by other authors and researchers on the subject matter.The literature
review will focus on the historical information about fiscal incentive as a measure to promote
FDI. Fiscal incentives which include, export incentive, growth point incentive, industrial park
developers, Built Own Operate Transfer (BOOT) and other incentives applicable will be
discussed. This will be in a funnel approach where the focus will be from the globe, Africa,
Southern Africa to more specific Zimbabwe's economy. Relevant empirical and theoretical
research on fiscal incentive and FDI will be discussed to prove and/or refine the prior
findings.
2.2 Sources of literature

Information is going to be obtained from the published printed sources (books, journals,
magazines and newspapers), published electronic sources (e-journals, websites), government
records,researches done in other countries, public sector records (NGO’s survey data) and the
relevant past theories.

2.3 Review on literature

The Neo-classical Investment theory pioneered by Jorgenson (1963) predicts that lowering
tax burden through the drop in the cost of capital increase investment. According to this
theory if tax reduction decrease the user cost of capital investment goes up. The existing
empirical literature on the relationship between tax and investment has generally found that
while other factors are also important determinants of investments taxes has significant
effects. The relationship between taxation and FDI has been a major focus of tax policy for
more than half a century and the results of econometric studies have changed significantly
over time this was according to Zahir Shah, (2003). Historically fiscal considerations were
found to have an insignificant impact on FDI more recent research has concluded that under
certain circumstances taxation can be influential in investment decision (Michael Kransdorf,
2010). Empirical studies have found positive relationship between FDI and fiscal incentives
offered by host countries (Nishat and Anjum, 1998). Fiscal incentives are preferable for
developing countries, as such expenditure have no direct drain on the government resources
(UNCTAD, 2000).Zahir Shah,(2003) concluded that the cost of capital has strong
implications for investment firms and public institutions as it can be influenced by the fiscal
incentives and public actions.
2 RESEARCH METHODOLOGY

3.1.1 Conclusive research

Conclusive research is that form of research that is intended to verify insights and which also
help the decision maker in the process of selecting the appropriate course of action Flynn
(1997). As the term suggests, conclusive research is meant to provide information that is
useful in reaching conclusions or decision-making. The purpose of conclusive research is to
provide a reliableor representative picture of the population through the use of a valid
research instrument

3.1.2 Questionnaire

A questionnaire is a research instrument consisting of a series of questions and other prompts

for the purpose of gathering information from respondents.This instrument have other
advantages over some types of survey in that they are cheap, they do not require as much
effort from the questioner and often have standardised answers that make it simple to compile
data. However, such standardised answers may frustrate users. Questionnaires are also
limited by the fact that respondents be able to read the questions and respond to them.

A distinction was made between open-ended and closed ended questions. An open ended asks
the respondents to formulate his own answer whereas a closed ended has the respondent pick
an answer from a given number of options.Jackson (2009) states that open ended questions
allow for a greater variety of responses from participants but they are difficult to analyse
statistically because data must be coded in a scientific manner whilst the closed ended
questions are easy to analyse statistically, but they seriously limit the responses that the
participants can give.

3.1.3 Personal interviews

Personal interview survey is also called face to face survey, is a survey method that is utilised
when a specific target population is involved. The purpose of conducting such a survey is to
explore the responses of people to gather more and deeper information. High response rate,
higher degree of control over data collection process and better observation of behaviour can
be achieved. However, it is costly and time consuming as compared to the questionnaire.
4METHODOLOGY

4.1 Introduction

This chapter highlights methods to be used in data collection, presentation and analysis of
data in a motive to provide in-depth knowledge on how the existing fiscal incentives promote
FDI in Zimbabwean textile industry and the economy at large. This chapter serves to shed
light on how data and information on how fiscal incentives lead to increased FDI to
Zimbabwe textiles. The research design, data collection and data presentation methods will
be encompassed in this chapter.

4.2Research design

The researcher shall make use of the conclusive research design in the form of a descriptive
research as it clearly suits the type of research to be undertaken. Weakness and strength will
be also to be highlighted for the present fiscal incentives. Other FDI factors other than fiscal
incentives in Zimbabwe will be identified, analysed and the final possible solution factors
will be elaborated that can increase FDI.

The design allows for the use of both field and desk research. Desk research focuses on
literature while field research involve the use of case study approach to point-out people’s
knowledge, beliefs, preferences, opinions, views and attitudes in situ to answer the research
questions. Also the author will use personal experience and insights as an important part of
inquiry.

4.3Data sources

Both primary and secondary data is going to be used.Kothari (1990) defined primary data as
the one which collected for the first time, and thus, happen to be original in character and
secondary is the one which have already been collected by someone else and which have
already been passed through statistical processes.

4.3.1 Primary data

Primary data which is not published yet is more reliable, authentic and objective because the
data has not yet been changed or altered by human beings. A survey is going to be used using
the questionnaire method and personal interviews in order to collect the primary data. A
questionnaire can be conducted via telephone, electronic mail and fax.

4.3.2 Secondary data

Secondary data is going to be obtained from the published printed sources (books, journals,
magazines and newspapers), published electronic sources (e-journals, websites), government
records and public sector records (NGO’s survey data).

4.4Research instruments

The researcher is going to make use of questionnaires and personal interviews as her research
instruments for this paper. Leedy (1980)states that data sometimes lie buried deep within the
minds or within attitudes, feelings or reactions of men and women and this problem is to
devise a tool to probe below the surface, an instrument for observing data beyond the
physical read of the observer.After obtaining permission to carry out the research by the
school and relevant corporates, the researcher will inform various heads of departments of her
intention and staff members relevant to complete the research. One factor will be analysed
separate from each other.

4.5Population and sampling

4.5.1 Target Population

Cooper et al (2003) explains a population as the total collection of elements about which we
wish to make some interests and as a selection of some the elements in a population so that
we may draw conclusions of the entire population.

The targeted population of the research will include CEO, directors and middle managers
fromthe selected textiles firms in Zimbabwe out of the total population of eighty (80)
companies in the sector. The targeted population is crucial for this research as they are the
people with a high level of knowledge and are in better possession of knowledge concerning
the topic.
4.5.2 Sampling techniques

Out of the total of 80 companies in the sector, 8 (10%) companies shall represent the whole
populationand probability sampling technique will be most preferred. The companies shall be
selected according to their performance being the top three market leaders,three intermediate
and the last two performers.In this study the strata are going to be divided into three that is
the CEO, directors and the middle managers of the selected companies. Random sampling
will be applied within the strataso as to ensure that all parts of the population will be
represented in the study and each subject has an equal chance of being selected so as to
increase accuracy on results.

4.7 Data collection procedure

After obtaining the permission to carry out the research, the researcher will inform various
department of each company on the intention of the study. A pilot study will be taken from 5
samples to makesure that each question sounds the same to all samples. Theinterviews and
questionnaires shall be short and precise. This can be justified as permission shall be
requested so as to know and abide by the rules stated by the authorities in the organisation.

4.8Data presentation and analysis

Data shall be analysed though facts and shall be presented in the form of narrative notes and
graphs where necessary. The data collected by the author shall be tabulated and analysed in a
sequential order of obtainment. The process of data analysis included will use descriptive
statistical methods in the form of percentiles, graphs, pie charts and statistical parameters
(deviations, mean and variances). This will be done to give a clear picture of the study to the
lay mans.

TIME BUDGET

Activity Date of completion

Research proposal 20/08/2012
Chapter 1 27/08/2012
Chapter 2 09/09/2012
Data collection 22/09/2012
Chapter 3 29/09/2012
Chapter 4 10/10/2012
Chapter 5 20/10/2012
Editing and coding 27/10/2012
Printing and binding 29/10/2012
Report Submission 31/10/2012

The time budget predicts the time which shall be conducted in order to complete a task. Time
budget is one of the best ways to stay focused, limit distractions and get more done.

MONETARY BUDGET

Expenses $ US

Transport and accommodation 200.00

Printing and stationery 80.00
Internet Services 50.00
Miscellaneous expenses 100.00
Total 430.00

Cash budget outlined above is a budget for cash planning and control that presents the
expected cash outflow for a designated time period of the project. It helps in avoiding cash
shortages.

REFERENCE LIST

1. Ahmed Qazi. Masood, (1997), Influence of Tax Expenditures on Non-resident

Investment, University of Bath, London.

2. Cooper D.R, (2003), Business Research Methods,8Th Edition, Tata McGraw -Hill, New
York

3. FAFO, (2000), Textiles, Clothing and Leather Sector In the Southern Africa, Final
Regional Paper, May.

4. Hart C, (2008), Literature Reviewing and Argumentation, Gerald Hall and Jo Longman,
United Kingdom, London

5. Jorgensen Dale .W, (1971) "Econometric Studies of Investment Behaviour: A

survey", Journal of Economic Literature, Volume 9, New York.
6. KransdorfM, (2010), Sustainable Development, Volume 3, University of
Witwatersrand, Johannesburg

7. Leedy P. D, (1985), Practical Research, Planning and Designing, 4th Edition, McMillan,
New York.

8. Nishat M and Anjum A, (1998), The Empirical Determinants of Direct Foreign

Investment, Savings and Development

9. ShahZahir, (2003), Fiscal Incentives, The Cost of Capital and FDI in Pakistan A Neo-
classical Approach, Institute of Development Economics

10. Shao T. A, (1999), Marketing Research: An aid to decision making, South Western
College, Johannesburg.

11. UNCTAD, (2000), World Investment Report.

12. ZimTrade, (2012), Textile and Clothing Sector Zimbabwe