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Opening the door to foreign investment

A new report recommends that the debate surrounding foreign direct investment (FDI) in South Africa be refocused.

The report, by The Edge (Economic Development, Growth & Equity) Institute, said the current debate was too narrowly focused on whether the country was receiving enough FDI and what had to be done to get more companies ”through the door”.

The report, entitled: ”Foreign Companies in South Africa: Entry, Performance & Impact,” said this approach did not question the benefits FDI brought to South Africa or the costs it incurred.

The preliminary findings of the report, and a comparative study involving Egypt, India and Vietnam, were unveiled at a function in Johannesburg on Monday night.

”Indeed, there has been no systematic collection of information about what foreign companies do once they enter South Africa, or what their impact has been,” the report says.

Addressing the function, Trade and Industry Minister Alec Erwin said he hoped the endeavour would usher in a new era of ”detailed research on the South African economy and its place in the world”.

Erwin said government’s macro-economic policies were based on intensive research conducted in the 1980s and 1990s.

”I think we got our phasing right. Macro-economic policies first and now micro-economic reform,” he said.

This would take about five or six years and peak around 2010.

The report’s writer, The Edge executive director Stephen Gelb said his research was based on interviews with 162 companies that entered South Africa after 1990.

He believed this was a representative sample of the estimated 550 to 600 foreign firms that had invested in the country since that date.

The bulk of the companies (57%) were from Europe with 22% from the United States and Canada and 15% from East Asia.

The majority invested between 1995 and 1999 with a peak in 1997.

Looking at job creation, Gelb said new ”greenfields ventures” –establishment of new businesses through joint ventures or buying or merging with an existing business — created more jobs than mergers and acquisitions. However, the bulk of these ventures had small staff contingents and relied heavily on outsourcing, which had the potential to create jobs elsewhere in the economy.

A third of all the companies surveyed employed between 10 and 50 workers and more than half employed less than 100 (the median was 91), he said.

Actual investments were also small — the median value of capital stock being $1,87-million (about R13-million).

This and other facts gathered suggested a number of things, Gelb said.

Firstly, it was wrong to bemoan mergers and acquisitions and to assume greenfields investments would bring more job creation and actual capital flows.

Secondly, the vast majority of firms were happy with the return on their investment, which suggested South Africa was ”a very attractive investment destination”.

Thirdly, most of the firms invested in order to penetrate the South African or regional market — and not to escape high production costs at home.

Finally, ”hopes that foreign investment would be one of the primary vehicles for black economic empowerment have been realised more in relation to participation in the directing of economic assets than in relation to ownership”.

This meant they were often more representative than local companies and more likely to appoint black people to key decision-making positions.

London Business School professor Saul Estrin, who conducted the comparative research, said the South African study, as well as the studies conducted in the other three countries, indicated that FDI, while an efficient means of technology transfer, was not a solution to high unemployment.

Estrin said one outcome that surprised him was that businesses generally looked at the same aspects in all four countries, such as strong local management and marketing skills, when deciding whether to invest.

This meant South Africa faced strong competition for FDI in places it had perhaps not previously anticipated, he said. – Sapa

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