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Sustainable Investment Promotion – Best practices from the World to South Africa

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Following the BRICS investment report released late last year, which highlighted the BRICS group accounted for 22 per cent of global GDP but received only 11 per cent of global inward FDI stock in 2016.

FDI flows to the five BRICS countries last year rose by 7 per cent to $277 billion. The increase in inflows to the Russian Federation, India and South Africa more than compensated for the decline of FDI to Brazil and China.

Thembinkosi Maduna
Thembinkosi Maduna, Operations Executive Support Services – CDC

This is clear evidence that there is a positive role some of the investment promotion policies and frameworks have played within the South African context. Further, South Africa’s average range of FDI inflow is between 2 – 2.9 billion (dollars) compared to the share of Africa to the 3.4% which equates to $59 billion (dollars) in 2016.

South Africa, the economic powerhouse on the continent, continues to underperform, with FDI at $2.3 billion in 2016; that was up 31 per cent from a record low in 2015 but still well off its past average. Nonetheless, State-owned Beijing Automotive International Corporation (China) agreed to build a $759 million (R11 billion) automotive plant ? the biggest investment in a vehicle-production facility in the country in four decades at the Coega SEZ.

It is evident that the African continent along with its economic power house (SA) still have a long way to go. As the business as usual scenario is producing a GDP average of 2.87% of over the 1997-2017 period. The World Bank has rose its economic growth projections to 1.8% for 2018 up from 1.1% last year September 2017. This has also been responded to by the new President of the Republic, Mr Cyril Ramaphosa, who has assembled an investment envoy with a target of inward fixed FDI amounting to 100$ billion in 5 years.

With the above mentioned, there are a number of investment promotion perspectives that need to be considered. The first one being, the consideration of being able to have sustainable fixed foreign direct investment. Namely, the quality of fixed FDI, the quantity of fixed FDI and the type of fixed FDI.

These considerations are crucial for ailing economies such as South Africa and particularly other developing economies in the continent. An incorrect blend of fixed FDI can result in a regression of an economy, which sparks environmental damage, human resource violations and market distortions. Market distortions in the form of “bribery and collusion” being the one that has a direct impact on an economy.

It is clear that when a country attempts to attract and retain foreign direct investment the approach should vary depending on the life cycle of a particular economy of the host country.

According to (Freund and Moran, 2017) in a work paper titled “Multinational investors as Export Superstars: How Emerging-Market Governments Can Reshape Comparative Advantage.”

  • The stance that should be taken by emerging economies is a clear position of attracting efficiency seeking fixed FDI, to stimulate exports this is in favour of the South African economy since the country has an efficient port system, particularly, the Eastern Cape that boasts of 3 ports within its region.
  • As an example, in the Coega SEZ there a number of efficiency seeking fixed FDI examples that have over-achieved in terms employment figures such as Dynamic Commodities, Discovery and WNS to mention but a few.

For other emerging economies that are, land locked with natural endowments the obvious solution will be the attraction of resource seeking fixed FDI.

  • In these situations policy and decision makers in land locked SEZs need to be cautioned to have in place strict arrangements for the beneficiation of locals and have comprehensive industry charters which resonate the “socio-economic development element” from the Broad-Based Black Economic Empowerment Act (BBBEE) (BBBEE Commission, 2016).

The desired end state then for the pursue of efficiency and resource seeking FDI should be evident on the changes of the export profile of South Africa or region over a period of years, 5 years in the case of South Africa. The monitoring and evaluation of the investment process can be measured using the Balassa index (refer below graph) which reveals the comparative advantage (RCA) in a particular host country.

In conclusion, the emerging economies particularly those that are in the African continent need to seriously consider the two strategies of attracting efficiency and resource seeking FDI to stimulate economic growth. Host countries need to set targets on the quantities of FDI and most importantly be mindful of the quality and type of FDI to be attracted. Further, revealed comparative advantage indicated by the Balassa index can be very useful as it can be used by the host country as a leading indicator to monitor and possibly predict the present and future export profile of the host country. Leading to more sustainable investment promotion initiatives informed by world best practices.

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Alan Straton

Chief Cook, Bottle Washer and Broom Mechanic at MyPE
Passionate about Port Elizabeth and definitely NOT packing for Perth. Alan's ethos is epitomised in the words of Nelson Mandela; "I have fought against white domination and I have fought against black domination. I have cherished the idea of a democratic and free society. If need be, it is an ideal for which I am prepared to die." See more articles by Alan.