SA ‘dogged by image problems’

The role of incentives in attracting foreign direct investment — long-term committed capital as opposed to volatile investments in bonds and equities — to Southern Africa is negligible. The size of the market is more important, and strong domestic economic growth may be a precursor to higher levels of such investment.

This is one of the conclusions of a survey on African economies conducted by two United Kingdom-based academics working for separate UK academic centres. Unstable exchange rates and ”regulatory uncertainty” — thanks to the crisis in Zimbabwe — feature as possible fixed direct investment (FDI) deterrents, while HIV/Aids does not.

The survey, Characteristics of Foreign Enterprises and Some Implications for Economic Growth, by Carolyn Jenkins of Oxford University and Lynne Thomas of the London School of Economics, confirms the long-held theory that the size of the market is the biggest drawcard for firms investing in Southern Africa.

Jenkins presented the survey results at a seminar for the presidency at the Union Buildings in Pretoria. They are drawn from interviews with a number of senior executives of parent firms with investment projects across the Southern African Development Community (SADC), with a broad mix of sector, size and age.

Local market size came out tops among motivations for firms locating in Southern Africa. Natural resources and raw materials were, perhaps unsurprisingly, second on the list, while historical and personal links were third. Strategic reasons, such as the need to service a global client that had invested in Southern Africa, were fourth. Privatisation or public-private partnerships came fifth.

The main reasons for choosing South Africa as a location are superior physical and financial infrastructure and the size of the economy.

Jenkins noted, too, that South Africa was seen as a natural base for expanding into the region, pivotal to regional production and trade.

South Africa and Angola attract most of the FDI in the region. For instance, in 1999, South Africa’s share of all of the SADC’s FDI was 27%. Angola’s share was 49%.

Together the two countries attracted three-quarters of all the FDI flowing into the region that year.

Angola’s big drawcard, however, is oil, which, Jenkins said, has skewed the FDI picture in Southern Africa.

The BusinessMap Foundation has commented in the past on the ”enclave economy” of Angola, where money flows in from foreign oil companies and flows out to buy foreign goods for the Angolan elite, with little of it staying in Angola.

The foundation has recently recorded in its investment database a welcome surge of investment in non-oil projects such as hotels.

As well as leading to new investment, historical links led to more stable investment. Firms with historical links are more likely to remain in times of uncertainty, even though new firms might be deterred from entering, Jenkins said.

Most of the firms in Southern Africa — 80% — supply the local market. For some investors, this ”local” market is perceived to be the entire region, particularly when the host country’s market is too small to support the enterprise. Just over a third supply the regional market, and almost a third supply the rest of the world. Most of the firms supplying the rest of the world are primary sector producers, especially mining, where a global rather than a local focus is expected, said Jenkins.

South Africa is the site of all the non-primary sector firms producing for the world market. These firms have built on a presence in the local market to create export capacity over time.

The shift in South Africa followed trade liberalisation after 1994.

Jenkins noted that the few enterprises expanding into export markets were all located in South Africa. A good example would be vehicle manufacturers, which developed assembly businesses here to serve the local market and are now exporting fully built vehicles.

In the rest of the region firms serve the local market and are not developing export capacity.

The study underlines the importance for foreign investment of the SADC regional Free Trade Area. By creating larger markets, regional integration should help attract more FDI into the SADC. The caution is that this might mean a continuation of the trend of foreign firms locating in South Africa to take advantage of markets in neighbouring countries. This, in turn, could limit the potential growth and welfare benefits for other SADC countries, and create political problems in the region.

The compilers of the survey believe compensatory mechanisms — but not compensatory payments — to distribute the economic gains from regional integration may help to address this. One of the benefits could be regional infrastructure projects.

Half the firms interviewed have increased the scale of existing operations in the past five years, and just more than half were planning expansion in the next five. There has been some disinvestment, but firms contracting tended to be doing so because of rationalisation and restructuring. All the firms expecting to contract were located in Zimbabwe.

Of firms surveyed that expanded in the past five years, less than half increased employment. ”Many cases of expansion have involved upgraded technology and productivity improvements. Some enterprises have expanded while simultaneously reducing employment.”

A third of the respondents said they were replacing expatriates with local staff, but since the proportion of expatriates employed tends to be small, this will not help job-creation.

”South Africa can’t expect existing foreign firms to create jobs,” said Jenkins. ”This must come from new investment.”

Foreign firms prefer to own the subsidiary outright, the survey finds. Where they have joint ownership with local partners, they prefer to hold majority control. Government procurement polices can lie behind part ownership. ”Some interviewees argue that this constraint can deter FDI.” On the other hand, there are also good commercial reasons for joint ownership with local partners.

Surprisingly, say the researchers, the respondents did not mention HIV/Aids as a problem. Clearly, at the time of the survey at least, it was not perceived to be as big a problem as the quality of governance, along with volatile exchange rates — such as South Africa’s in the past few years.

”African economies face a particular challenge … in addressing the perceptions of potential international investors that instability is endemic.”

Jenkins said investors were concerned land might become an issue in South Africa. She referred to the effect of the government not distancing itself sufficiently from the Zimbabwe situation as a negative, leading foreign investors to suspect such a course of action might ”be reserved as an option”.