This policy brief is a shortened version of the following paper: Foreign Direct Investment in Sub-Saharan Africa by Paul Kalenga

Kalenga, Paul

English

Cape Town University OpenUCT

1DPRU Industrial Strategy ProjectIndustrialProjectStrategyREGIONAL   INTEGRATION,ECONOMIC COOPERATIONIN SOUTHERN AFRICAD P R UDevelopment Policy Research UnitUniversity of Cape TownDPRU Policy Brief No. 00/P2July 2000What are the major trendsand determinants of foreigndirect investment in SADCcountries?2Major trends and determinants of foreign direct investment in SADCForewordThe Development Policy Research Unit (DPRU), located within the University of Cape TownsSchool of Economics, was formed in 1990 to undertake economic policy-oriented research.The aim of the units work is the achievement of more effective public policy for industrial developmentin South and Southern Africa.The DPRUs mission is to undertake internationally recognised policy research that contributes tothe quality and effectiveness of such policy.The unit is involved in research activities in the following areas:• Trade and Industrial policy• Technology policy• Labour market policy• Industrial organisationThese policy briefs are intended to catalyse policy debate. They express the views of theirrespective authors and not necessarily those of the DPRU.They present the major research findings of the Industrial Strategy Project (ISP). The aim of theISP is to promote industrial development in the Southern African Development Community(SADC) through regional economic integration and cooperation.  It is a three-year project thatcommenced in August 1998 and is funded by the International Development Research Centre(IDRC). Ultimately, this project will identify the policies and programmes that support regionalinteractions that contribute to the industrialisation of SADC national economies.This policy brief is a shortened version of the following paper:Foreign Direct Investment in Sub-Saharan AfricaPaul KalengaIf you have any questions, or comments pertaining to the content of this policy brief,please do not hesitate to contact us:Trudi HartzenbergDeputy DirectorE-mail: trudi@hiddingh.uct.ac.zaTel: (021) 480 7155/62Fax: (021) 423 25013DPRU Industrial Strategy ProjectIntroductionThis policy brief seeks to outline major trends, patterns and determinants of foreign directinvestment (FDI) in the Southern African Development Community (SADC).The importance of FDIFDI is important because it: supplements low domestic savings provides substantial parts of the shortfall in capital needed to finance economicgrowth and developmentFDI deterrentsThe following factors deter FDI: hostile policy frameworks civil strife and political instability high-perceived risks high transaction cost fear of policy reversals high degree of economic volatilityPossible instruments for attracting FDIPossible instruments for attracting FDI include: political stability steady economic growth high returns on investment attractive and profitable locations for FDI SDIs and transport corridors (focus on stimulating investment potential and opportunitiesof different transport routes and areas)Although aggregate FDI inflow data for SADC countries can be misleading when it comes toindividual countries, it can be argued that the 1990s have seen positive developments as faras the ability of the region to attract foreign investment is concerned.Characteristics of countries that have attracted FDIIt is difficult to generalise about factors that promoted positive FDI trends in these countries.However, the countries that have attracted large amounts of foreign capital have: sustained economic policy reforms improved their macroeconomic environment towards greater stability and predictabilityof policies maintained political stability implemented effective privatisation programs4Major trends and determinants of foreign direct investment in SADCSouth Africa has become a primary source of FDI flows to a number of SADC countriesThere is strong resentment about lack of openness of South African markets, however theSADC Trade Protocol is likely to result in improved access to the South African market forSADC exports.Mineral resources remain a dominant attractionMining has been a major FDI determinant during the 1990s in a number of SADC countriesincluding South Africa, Angola, Botswana, Zambia, Zimbabwe and Namibia.  The recentdiscovery of huge gold deposits around Lake Victoria has made Tanzania an attractive sitefor gold exploration and development activity.Why has the international business community renewed theirinterest in SADC countries?One of the reasons why the international business community hasrenewed their interest in SADC countries is because some SADC countrieshave displayed encouraging economic performance.  Compared to otherSub-Saharan African states, the SADC region has recorded positive growthrates since the middle of the last decade.Some SADC countries have also undergone positive political changes,for example, the independence of Namibia in 1990, the end of civilconflict in Mozambique since 1992, and the end of apartheid andinternational sanctions in South Africa in 1994.Another reason for the renewed interest in SADC countries is the sub-regional integration arrangement that is underway, in particular the SADCTrade Protocol, which aims to establish a free trade area (FTA). TheSADC Finance and Investment Sector Co-ordinating Unit (FISCU), beingcoordinated by South Africa (established in 1995) is also contributing torenewing interest in the international business community. This unit aimsto promote sound investment policies, financial harmonisation, andmacroeconomic stability in the sub-region.Benefits of South African FDI flows to SADC countriesCross-border investment flows from South Africa can play a critical role in: counteracting existing trade imbalances, which exist between South Africaand the rest of the region contributing to the transfer of skills and technology increasing extra-regional export capacity5DPRU Industrial Strategy ProjectWhy is mining attracting FDI?The boom in mineral exploration is due to: improved political stability better mining codes privatisation aggressive promotion activities reasonable production costs, particularly the cost of power and labour legal and regulatory reformTen sectors attracting the highest shares of FDI activity in SADCNotes:Positive FDI activity: All activity which has led or will lead to an inflow of investment into the target country.Negative FDI activity: All activity which has led or will lead to an outflow of investment or which results in thecancellation of an inflow of investment.Real FDI activity: Activities which have been implemented or have already led to an inflow of investment.Source : Business Map On-Line Database on FDI Activity in SADC.Cross-border mergers & acquisitions are emergingThe 1990s have seen a global trend towards cross-border mergers and acquisitions (M&As),mostly geographically concentrated in developed countries. Although M&As are not substantialin other SADC countries, M&As have been a dominant mode of a number of South AfricanFDI flows into the region.0510152025Mining andQuarryingFinancialServicesFood, Bev &Tob.Agric, For &FishingHotel, Leisure& GamingOtherManufacturingEnergy & OilTelecom & ITRetail &WholesaleConstructionetc.Percentage% of Total FDI Activity % of Positive FDI Activity % of Real FDI Activity6Major trends and determinants of foreign direct investment in SADCSource:  Business Map On-Line DatabaseLeading home countries for FDI in SADCA total of eleven source countries were each responsible for at least 2 per cent of total FDIactivity in SADC. South Africa accounts for about a quarter of FDI activity in the region,followed by the USA and the United Kingdom.Privatisation   - an emerging catalyst for FDI in SADCPrivatisation programs have strongly attracted FDI in SADC over the last ten years.Practical problems associated with privitisationWhile privatisation contributed to positive FDI flows in some SADC countries, the processcontinues to be riddled with practical problems, such as poor implementation and management lack of transparency high level of politicisation47.4051015202530South AfricaUSAUKMalaysiaAustraliaGermanyPortugalCanadaJapanFranceSwedenPercentage% of SADC total FDI% of non-SA SADC total FDISource countries shares of SADC and non-SA SADC investment activity7DPRU Industrial Strategy ProjectGrowing African transnational companysHistorically, developing countries participated in international production as recipients offoreign investment from developed economies by hosting foreign affiliates of transnationalcompanys (TNCs). This picture is gradually changing.  Most African countries are becominghost to foreign affiliates of TNCs from developing countries, not only from Asia, but also fromwithin the continent.South African TNCs are investing in mining, food processing, financial, retailing and tourismsectors of the SADC region.Mauritius is also emerging as a cross-border investor in Madagascar, Seychelles, South Africa,Ivory Coast and Mozambique.African TNCs are not only limited to South Africa and Mauritius. The Ghanaian companyAshanti Goldfields has gold operations in Zimbabwe and Tanzania.Growing FDI in services and manufacturingFDI activity is becoming increasingly diversified. This includes both primary-intensive FDI inmining and quarrying, food processing and beverages, textile and clothing, financial and otherservices.Mauritius has managed to increase significantly the amount of FDI in manufacturing indus-tries such as textiles, clothing and electronic equipment since the 1980s.Botswana has recorded positive rates of manufacturing growth due to an increase in FDI,particularly Hyundai and Volvo investments in motor vehicle assembly.FDI in SADC (excluding South Africa), (US$m)   1996 1997 1998 1999 Total  Angola 0 1.78 133.03 0 134.81  Botswana 3.58 14.07 55.25 0 72.9  DRC 0 190 199.7 130 519.7  Lesotho 0 2.43 0.4 0 2.83  Malawi 3.83 363.48 41.22 0 408.53  Mauritius 0 0 7.3 0 7.3  Mozambique 163.99 2936.44 3499.2 1.3 6600.93  Namibia 905.81 265.39 138.28 49.2 1358.68  Swaziland 200.83 208.3 63.28 0 81.38  Tanzania 200.83 208.3 63.28 0 472.41  Zambia 34.5 283.53 375.6 185 878.63  Zimbabwe 3 552.79 321.75 1660 2537.54  Total 1315.54 4850.82 4883.78 2025.5 13075.64   Notes:  Amounts include intentions and actual investments.  Figures for Mauritius are for South Africa as a source country only. Source:  BusinessMap 1999  8Major trends and determinants of foreign direct investment in SADCGrowing FDI flows from non-traditional investor countriesTraditionally, most of the FDI in Africa originated in a few OECD countries. New investorswithin the group of OECD countries include Canada, Italy, the Netherlands, Norway, Portu-gal and Spain.Investors from other developing country regions, particularly from South East Asia have alsoemerged as new actors on the FDI scene.Liberalisation of the regulatory frameworkSome SADC countries have enacted liberal regimes for FDI, for example: national policies on foreign investment have been liberalised, particularly allowing foreigninvestors to repatriate profits and dividends, and guaranteeing legal protection of foreigninvestment foreign exchange controls have been relaxedThe regulatory system suffers from corruption and lack of transparency.Investment facilitation and promotionInvestment promotion agencies or one-stop shops have been established in most countriesto: reduce bureaucratic red tape facilitate investors entry and operationsEven in countries where one-stop shops exist to facilitate investment, there are still vastproblems, such as: poor institutional capacities and lack of implementation specific administrative barriers to FDI  - licensing of business activities and securing propertyand land rights work and resident permitsIncentives and FDIFiscal and financial incentives include: corporate tax holidays, ranging between 5 and 10 years exemptions from import duties on equipment and inputs or duty drawbacks accelerated depreciation allowances specific tax deductions or grants related to training and employment of nationals9DPRU Industrial Strategy ProjectExport Processing Zones and FDIExport Processing Zones (EPZs) are generally defined as industrial zones with special incentivesto attract foreign investment in which duty-free imported materials undergo some degree ofprocessing before being exported again (ILO 1998).Generally, EPZs have not been successful in Sub-Saharan Africa. Mauritius is often cited as anexception to the general failure of EPZs in Africa. An EPZ was established in 1970, providingconcessions and incentives to export-oriented enterprises. Mauritius attracted substantial FDIin the EPZ, largely concentrated in the textile and garment industries. EPZ exports were alsopromoted by duty-free access to the EU markets.There is no conclusive evidence that supports the notion that EPZs are successful in attractingFDI. Countries that are succeeding in attracting substantial FDI inflows are doing so largelybecause of other competitive attributes rather than incentives.FDI and regionalismThere has been an observed association between regional integration arrangements (RIAs)and FDI, although this depends on particular circumstances, scope and depth of sucharrangements.African RIAs have been ineffective mostly due to lack of implementation and credibilityproblems. However, there seem to be a renewed interest in this process through seeking toharmonise FDI policy frameworks. Already, within the context of the SADC Finance andInvestment Sector Co-ordinating Unit, South Africa had liberalised its capital restrictions infavour of flows to other SADC member countries. This has encouraged South African firms toinvest in neighbouring economies, although this is not necessarily the only contributing factor.African RIAs are still not fully implemented, and as such, it is not possible to make a definiteconclusion on their impact on FDI determinants.  In the case of market-seeking investment, itis possible that enlarged regional market may act as a potential determinant of FDI.Countries that are likely to succeed in attracting substantial FDI will be those that providethe best opportunities for foreign investors to exploit both country-specific and region-specificadvantages.Are incentives effective in attracting FDI?Although incentives have been instrumental in attracting footloose and labour-intensiveindustries in some countries, they seem to have lost their effectiveness - investors interestedin long term investments look at long term profitability without incentives. A generalobservation can be made that investments are still concentrated in areas offering fewerincentives.Fiscal incentives cannot be used to offset unattractive aspects of the legislative, regulatoryor physical environment.  While the provision of investment incentives has been pervasivein Africa since the late 1980s, their effect on attracting FDI flows remains inconclusive.Other policy measures such as privatisation and foreign exchange reforms seem to haveproduced positive FDI results.10Major trends and determinants of foreign direct investment in SADCConclusionThe 1990s witnessed an investment trend involving African firms investing in other Africancountries, notably from South Africa and Mauritius. This represents a clear indication of a newform of cross-border economic interaction.Privatisation has been an important catalyst for FDI opportunities in Sub-Saharan Africa.While the regions rich natural resources continue to be a critical factor in attracting FDI,some countries are increasingly receiving a diversified mix of FDI, particularly in the servicesand manufacturing sectors.Foreign firms investing in the region are not only attracted by natural resource endowments,but there are also those that are efficiency and market seeking.Another trend is the appearance of non-traditional home country sources of FDI on theAfrican scene, both from the developing and developed world.South Africa is emerging as a major investor in SADC, while acknowledging the tension thatprevails within the region, primarily due to the perceived lack of openness of the SouthAfrican market, regional economies are likely to gain by strategically seeking to benefit fromthe existing capital, skills and technology that exist within the region.Attracting FDI requires: macroeconomic reforms to ensure stability and predictability of policy measures political stability efficient and effective institutions good administration relatively developed human and physical infrastructure an understanding of TNCs corporate strategies and proactive measures by host countriesto benefit from such strategiesThe SADC region still trails behind other developing regions in FDI performance. However,the 1990s have brought some optimism. A number of SADC countries have been registeringa positive trend in attracting FDI over the last years. The concentration of these countries isgradually widening from those that are endowed with natural resources (mostly oil, mineralsand gas) to those that are able to adapt their national policies to TNCs corporate strategiesfaced with the drive to remain competitive.Success in attracting FDI goes beyond mere liberalisation of the regulatory and legalenvironment and the provision of incentives such as tax holidays and EPZs.Such measures are unable to compensate for fundamental distortions in the economy.  Infact, a number of countries that have attracted sustained FDI inflows in the region have notrelied upon such instruments.Governments should go beyond these traditional FDI promotion measures, and create anenvironment in which it is profitable to conduct business.

What are the major trends and determinants of foreign direct investment in SADC countries?

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What are the major trends and determinants of foreign direct investment in SADC countries?

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