A daily stream of multinational executives ask Zimbabwe's industry and commerce minister the same question: Does President Robert Mugabe plan to seize my company?
"I can't give them any firm assurance," said the minister, Welshman Ncube, who belongs to the Movement for Democratic Change, one of three political parties that form Zimbabwe's fragile coalition government. "That is always going to be difficult when we have people in government who are speaking strongly in favor of takeovers."
Indigenization Minister Saviour Kasukuwere, who works a few floors above in the same building, had a different answer. He said companies from Western nations targeting Mr. Mugabe and his allies with sanctions are likely candidates for a majority local acquisition, or "indigenization," as it is known under an embryonic Zimbabwean law. That stance is sowing doubt among investors.
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Mr. Mugabe greeting backers Wednesday before a speech blasting foreign sanctions.
"Hostile Western countries are not showing any signs of relenting, and the only way to protect ourselves against that hostility is by making sure those companies are in the hands of local people," said Mr. Kasukuwere, who belongs to Mr. Mugabe's Zanu-PF party.
Amid the war of words over foreign investment in Zimbabwe, the economy is suffering collateral damage. Foreign companies have been considering exit strategies, scaling back or not investing in the southern African country renowned for its mineral riches, fertile farmland and educated work force.
On Tuesday, Mr. Mugabe, who has ruled the country since 1987, faced not only external pressure but the threat of protests by local opposition groups. A heavy police and military presence that included armored cars, trucks of riot police and water-cannon vehicles appeared to be effective in deterring the planned antigovernment protests in Harare, the capital. Activists who tried to organize via Facebook and mobile phones said they were inspired by the protests in the Middle East.
Mr. Mugabe doesn't tolerate gatherings of political opponents. Zimbabwe's security forces recently arrested 45 political activists for allegedly plotting to end his rule. The U.S. Embassy has called on Zimbabwe's government to investigate allegations the activists were tortured.
On Wednesday, Mr. Mugabe continued efforts to halt the Western sanctions with a mass rally in Harare. His party aims to get two million people—or about one-sixth the country's population—to sign a petition to protest the measures. At the rally, he said indigenization should start with the "400 British firms" now operating in Zimbabwe.
"Time has come to take action," he told an estimated 30,000 of his supporters. "We have nothing to be afraid of."
Zimbabwe's president has resorted to draconian economic measures before to drum up political support. In 2000, he allowed his supporters to seize white-owned farms ahead of elections.
Following violent elections in 2008, Mr. Mugabe and his political rival, Morgan Tsvangirai, were forced into a coalition government, with Mr. Tsvangirai becoming prime minister. Mr. Mugabe has argued for elections this year, while Mr. Tsvangirai has said constitutional reforms must be tackled first. The two are also butting heads over the indigenization law, with Mr. Tsvangirai warning that expropriation of assets will scare away investors.
The prospect that the fractious "unity government" could break up and lead to elections this year is heightening uncertainty among investors.
South Africa's Massmart Holdings—a company Wal-Mart Stores Inc. is in talks to buy, aiming to pave the way into Africa's billion-person market—said it was in the process of selling two of its stores in Zimbabwe to a local retailer. A Massmart representative cited uncertainty over the indigenization law.
"Zimbabwe is not ready for prime time," said R. Michael Jones, chief executive of Platinum Group Metals, which has invested heavily in South Africa but is steering clear of its neighbor despite its massive platinum reserves. "Until there's a change in the business environment, we won't be investing there."
Aside from depriving a weak economy of capital and jobs, the investor caution means Zimbabwe's factories and mines often aren't getting technical upgrades needed to stay competitive, analysts say.
The Confederation of Zimbabwe Industries says factories on average are operating at 30% capacity because of lack of lending and the reluctance of foreign firms to invest in their Zimbabwe subsidiaries.
Zimbabwe's economy grew 8.1 % in 2010 compared with 5.1% the prior year, thanks to a confidence-building political settlement and the introduction of the U.S. dollar as an official currency. Officials and economists say the figure would have been far higher without the controversy around the indigenization law.
"Industry is suffocating," said the confederation's president, Joseph Kanyekanye.
Few companies say they are opposed to increasing levels of local ownership and bringing more black Zimbabweans into the economic mainstream through employee-shareholding plans and community-development projects. But the debate over levels of local ownership, and the timetable for reaching them, has polarized government camps. And some officials are now taking swipes at specific corporate targets.
Reserve Bank of Zimbabwe Governor Gideon Gono, a close ally of Mr. Mugabe, has accused "aloof" foreign banks of sabotaging economic recovery by refusing to lend. Mr. Kasukuwere, the indigenization minister, said food giant Nestlé is a "prime" target after it refused to buy milk from Mr. Mugabe's farm after the company faced word-wide threats of a boycott.
A spokeswoman for Nestlé Equatorial Africa Region Ltd., Brinda Chiniah, declined to comment on the minister's remarks. She said the company has no plans to pull out of the country.
Some foreign companies have sought to stay ahead of any requirements from the legislation. SABMiller PLC, which owns a 36% stake in a local joint venture, Delta Corp., a major contributor to its earnings in Africa, has already awarded shares and options to employees.
The Indigenization and Economic Empowerment Act states that companies with a net asset value above $500,000 should sell majority shareholdings to local Zimbabweans. Although the law was published in March 2010, it hasn't been enforced. Government panels continue to wrangle over various ownership levels in different industries.
Political tensions have inflamed the indigenization debate. Zimbabwe's defense minister, Emmerson Mnangagwa, touted as a potential successor to Mr. Mugabe, has warned that the government would take over multinationals whose executives don't publicly campaign against sanctions. At a recent party conference, Mr. Mugabe echoed that threat.
"We can read the riot act," he said. "If the sanctions persist we are taking over 100%."
Zimbabwe's president has adopted draconian economic measures before. In 2000, he allowed his supporters to forcibly take over white-owned farms ahead of elections. Mr. Mugabe touted the steps as land reforms, but violent farm seizures sent agricultural production into a tailspin, prompted Western sanctions and triggered capital flight. Zimbabwe's government estimates its economy contracted by nearly 50% from 2000 to 2008.
The sanctions have stayed in place. Last month, the EU extended a visa ban and asset freeze relating to 163 individuals and 31 businesses viewed as aiding Mr. Mugabe's effort to subvert property rights. The sanctions include an arms embargo. The U.S. has imposed financial and travel sanctions on over 200 individuals and companies viewed as propping up Mr. Mugabe's regime.
Mr. Ncube said the threats from Mr. Mugabe and others have done more harm to the economy than sanctions. "Virtually all foreign companies have stopped major funding for their Zimbabwe operations because of the uncertainty and confusion," he said.
Write to Peter Wonacott at peter.wonacott@wsj.com
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