Foreign Direct Investment is an investment in a business by an investor (company or individual) from another country for which the foreign investor has control over the company purchased. The Organization of Economic Cooperation and Development (OECD) defines control as owning 10% or more of the business. Indirect investments are when financial institutions or companies purchase shares of stock on a foreign stock exchange i.e. financial securities. Foreign direct investment is critical to many emerging markets as this type of overseas investment is more long term and has a higher potential to translate into employment in comparison to indirect investment.
The Foreign Direct Investment has declined in 2017 to less than a quarter in value to that of 2008 (over 10 years). According to President Cyril Ramaphosa (Press release, 16 April 2018) “This has been driven by low business confidence and regulatory uncertainty; and has resulted in slow growth, along with poor growth in employment.”. But what has driven the reducing Foreign Direct Investment? Invstors are driven by risk and reward and typically move their investments to environments where they perceive that the reward risk ratio is the highest (best) either where the risk is low or the reward is very high versus the risk.
The President of South Africa has targeted a Foreign Direct Investment of R240 billion per annum over the next 5 years – approximately 3 times the 2008 investment level or 14 times the 2017 level in nominal terms. This would be a phenomenal achievement for South Africa but how can we attract this level of investment? There are concrete steps we need to take to achieve this level of investment confidence in South Africa instead of relying on the fragile and current wave of economic confidence which has washed over South Africa since President Ramaphosa’s inauguration. In other words we need to make economic change a reality rather than rely on political change.
What are the major deterrents to investment confidence? From the eyes of an investor, it all revolves around how competitive the country is as an investment target – where does South Africa rank in terms of our competitiveness? The World Economic Forum (WEF) produces a global competitiveness index annually which ranks countries on the basis of how competitive their economy is. South Africa has declines from the 47th to the 61st most competitive economy out of the 137 economies (WEF Global Competitiveness Report 2017 – 2018). The report ranks countries on the basis of three sub-indices namely; Basic Requirements, Efficiency Enhancers, and Innovation and Sophistication factors. Table 1 details the factors (pillars) identified under each of these sub-indices as well as their rank relative to the comparator group.
Bolded figures rank in the lower half of the sample – these are the critical pillars which should be addressed with the utmost urgency to improve South Africa’s competitiveness in the global market:
- The Basic Requirements sub-index three largest challenges are;
- high prevalence of tuberculosis and HIV,
- low life expectance and
- poor quality primary school education (primary school education quality ranked 116 out of the 137 country sample).
- The Efficiency Enhancers sub-index has two major challenges; namely,
- higher education and training with poor quality maths and science education (ranked 128 out of 137), while the education system as a whole ranked 114 out of 137 countries.
- the labour market which has a low correlation between pay and productivity and an abrasive relationship between employers and employees. Cooperation in labour-employee relations ranked 137 out of 137 – the worst in the sample, whilst flexibility in wage determination ranked sixth worst at 132 out of 137..
Given these international rankings, it becomes clear where South Africa should be focussing its efforts if it wants to increase its global competitiveness to attract increased Foreign Direct Investment:
- Education, from primary school to tertiary education, must be prioritised. Better teachers, better infrastructure, better learning material and learning aids and better standards need to be targeted over the next 10 to 20 years.
- Health care – government plans to roll out the full National Health Insurance (NHI) system by 2025 which will have a positive impact on many South Africans’ lives. This is still some way away and the benefits of the NHI will take some time to translate into meaningful results. In light of South Africa’s current poor health rankings, more should be done in the short term to improve public healthcare while awaiting the long term benefits of the NHI.
- Labour relations – relations between employees and employers require a drastic change if South Africa is to be more economically competitive. Real wages, productivity and employment (https://www.21century.co.za/real-wages-productivity-and-employment/) need to be addressed as well as the inflexibility of the labour law.
The way forward for South Africa is very clear as it contains only three points that need to be urgently addressed for South Africa to become more competitive. This in turn will make us more attractive for Foreign Direct Investors.
However, there is no quick fix to any of these three problem areas and it will take more than 12 years before the benefits of addressing these is seen in our economy eg. Primary school children with improved education standards will only enter the market of tertiary education in 12 years. Similarly, the public healthcare system will take time to evolve into the envisioned NHI and the positive results will be seen within the coming generations rather than in the short term. Finally, relations between employers and employees are considered ‘hostile’ by global standards but will also take time to change as it needs legislative change and change management of the working landscape.
It is very simple to identify the key target areas required to improve economic competitiveness (and therefore investment), but making these changes requires strong, long-term thinking leadership to effect long-lasting, meaningful, inclusive change.
B.Com (Hons) Economics
B.Sc Chem. Eng., MBA (Leadership & Sustainability)