Impact of FDI on Unemployment in Post-Apartheid South Africa by Siyaduma Biniza.pdf

7/27/2019 Impact of FDI on Unemployment in Post-Apartheid South Africa by Siyaduma Biniza.pdf

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2013

What is the Impact of Foreign Direct

Investment on Unemployment in

Post-Apartheid South Africa?

Bridging the Chasm between Ideology, Scholarship andPolicy-Making

by Siyaduma Biniza


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| Table of Contents 1

Table of ContentsTable of Contents.............................................................................................................................. 1

Introduction ...................................................................................................................................... 2

Background ................................................................................................................................... 2Scope of the research .................................................................................................................... 4

Understanding FDI ............................................................................................................................ 6

What is meant by FDI? .................................................................................................................. 6

What are the motives behind FDI? ................................................................................................ 7

What is the theoretical impact of FDI? .......................................................................................... 8

What determines the impact of FDI? ........................................................................................... 10

Things to remember about the impact of FDI .............................................................................. 12

Motives, Mode of FDI and Policies ................................................................................................... 13

What are the motives behind inward FDI in post-Apartheid South Africa? ................................... 13

What is the mode of entry for FDI in post-Apartheid South Africa? ..............................................15What kind of policy environment prevails in post-Apartheid South Africa? ..................................15

What does the evidence show? ........................................................................................................ 17

What are the important trends of FDI in post-Apartheid South Africa? ....................................... 18

1994-1999 ................................................................................................................................... 20

1999-2004 ................................................................................................................................... 22

Summary of 1994-2004 ............................................................................................................... 23

2004-2009 ................................................................................................................................... 24

2009-Present .............................................................................................................................. 25

Summary of 2004-Present .......................................................................................................... 29

Conclusion and Policy Recommendations ....................................................................................... 30

Bibliography ................................................................................................................................... 35

List of Figures

Figure 1: Net FDI Inflows for SACU Countries (1970-2012) .................................................... 4

Figure 2: Sectoral Composition of FDI Inflows Since 2008 ................................................... 13

Figure 3: FDI Inflows Trend in South Africa (1994-2012) ..................................................... 18

Figure 4: FDI and Unemployment Trends in South Africa (1994-Present) ........................... 19

Figure 5: Mode of Investment by Percentage (Rounded to One Decimal) .......................... 20

Figure 6: Top FDI Deals ....................................................................................................... 21

Figure 7: Market Orientation by Sector, South Africa (% of Affiliates Sales) ...................... 23

Figure 8: Employment and FDI Trends, by Sector (2004-2009) .......................................... 25

Figure 9: Top Greenfield Projects (2008-2010) ................................................................... 26

Figure 10: Top Foreign Affiliates in South Africa, by Revenue (2012) ................................. 27


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| Introduction 2

Introduction

Background

The South African economy is challenged by high unemployment and inequality. Dealing

with these two challenges is an explicit focus of most economic planning by the post-

Apartheid government; from the Growth, Employment and Redistribution (GEAR)

macroeconomic package to the most recent National Development Plan (NDP). Moreover,

the governments perspective is that full employment cannot be attained unless South

Africa can deal with the current situation of declining manufacturing jobs and increasing

jobs with low productivity and slow wage-growth in services such as retail, personal

services, security, domestic services and office-cleaning (National Planning Commission,

2011). In sum, South Africa faces some persistent and structural economic changes which

have locked the country in a vicious cycle of low employment growth and worsening

inequality.

Hence there have been various attempts to promote pro-poor and employment-creating

economic growth because sustainable economic growth and development are challenged

by inequality and high unemployment in the country (Patel, 2011). Pro-poor economic

growth here simply means economic growth that can benefit the poor through reductions

in poverty and inequality. This can be achieved by reducing unemployment and increasing

wages (Mohamed, 2012). But this requires heavy investment. Therefore, various

government ministries have embarked on policies to stimulate investment and create

labour-absorbing economic growth.


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| Introduction 3

These policies place a strong emphasis on foreign investment [which] will have to play role

a significant in the context of curbed savings [in order to create] rising output, incomes and

employment growth (National Planning Commission, 2011, p. 106). Inward foreign direct

investment (FDI) is pursued relentlessly as a way to compensate for low domestic

investment and as a stimulant for economic growth and development. In other words,

given the inadequate levels of domestic investment and savings in South Africa, FDI is seen

as an opportunity to overcome the low domestic investment in order to create employment

and reduce inequality (see Moolman, Roos, Le Roux & Du Toit, 2006; Krugell & Matthee,

2008; Department of Trade and Industry, 2012).

Therefore FDI is an integral part of South Africas growth strategy and it is relentlessly

pursued because FDI is believed to have a positive contribution towards economic growth

and development. The pursuit of FDI is underpinned by the ideological view that FDI

creates downward linkages which encourage growth and development through the

trickling down of skills, technology and employment opportunities (Moolman, et al., 2006).

However, evidence as to whether FDI does in fact lead to economic growth and

development is inconclusive. The scholarly body of work has interrogated this view through

empirical analyses and found inconclusive results which both support and oppose this

ideological view.

The critical scholarly work sets out various qualifications as the necessary conditions in

support of the positive view on FDIs impact on growth and development (Sridharan,

Vijayakumar & Rao, 2009; Vadlamannati & Tamazian, 2009). Nevertheless, the scholarly

and ideological discourse has one common ground - that under certain circumstance FDI

can lead to economic growth and development. But there is little agreement as to what


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| Introduction 4

these conditions are. So there is a political and academic chasm between the ideological

underpinnings, the scholarly discourse and the outcomes of policy-making when we assess

the relationship between economic growth and FDI. Hence the central preoccupation of

this study is to critically interrogate the nature of the impact that FDI has on unemployment

in order to bridge the chasm between the ideology, scholarship and policy-making.

Scope of the research

South Africa has attracted very low volumes of FDI even though there has been a concerted

effort to attract FDI. Moreover, FDI has been very low considering South Africas vast

mineral resources, political stability and economic environment; which are characteristics

that are often asserted as conducive to attracting FDI (Arvanitis, 2006). South Africas FDI

has been erratic, low and highly concentrated in a few deals from the primary, mostly

through South African companies listing their stocks abroad, and the tertiary sector

(Sidorov, 2011). The concentrated and erratic nature of FDI in South African is illustrated by

the large variations and sharp spikes in the graph below.

Figure 1: Net FDI Inflows for SACU Countries (1970-2012)

Source: International Trade Centre and World Bank Databank

-2000

0

2000

4000

6000

8000

10000

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

BoP,

CurrentUS$,M

illions

South Africa

Botswana

Namibia


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| Introduction 5

Regardless of the chasm between ideology, scholarship and policy-making, there have

been strong attempts to attract FDI in attempt to harness its growth potential without a

thorough and conclusive understanding of the necessary conditions for FDI to lead to

economic growth and development. The necessary conditions for FDI to be conducive to

labour-absorbing growth are important concerns but this research study is concerned with

interrogating the impact of FDI on unemployment in South Africa since 1994 to date. Thus,

this study is concerned with an in-depth scrutiny of the impact of FDI on unemployment

which has an indirect impact on inequality through employment-creation and wage

growth.

This study seeks to understand the impact FDI has had, or potentially could have, towards

creating employment and indirectly reducing inequality in South Africa. But due to the link

between inequality-reduction and employment-creation this study focuses on the impact

of FDI on employment. Also the study would like to offer an understanding of how South

Africa can implement policies to attract FDI that is conducive to these economic

imperatives.

Firstly the study unpacks what is meant by FDI, the motives behind FDI, and then describes

the theoretical impact of FDI. Secondly these motives and implications are contrasted and

compared in relation to the South African case. Then the theoretical impacts of FDI will be

substantiated with empirical evidence from the South African economy since 1994 to date.

Finally, conclusions and policy recommendations will be made based on the findings.


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| Understanding FDI 6

Understanding FDI

What is meant by FDI?

FDI is often contrasted with foreign portfolio investment (FPI). FPIs are short-term and

involve the transfer of capital for securities, stocks and bonds which primarily concerns the

financial market (CUTS, 2003). On the other hand FDI involves acquisition or creation of

assets in a foreign country, which is classified into four main modes: Greenfield

investments, creation of a new asset or facilities such as factories which are wholly owned

by foreign firm or jointly owned with domestic firm; mergers and acquisitions (M&As),

cross-border M&As often result in a substantial stake in domestic firms being bought by a

foreign firm; and Brownfield investments, which are similar to Greenfield investments but

where the foreign investment replaces all assets and facilities (CUTS, 2003). FDI is often

seen as conducive towards sustainable economic growth because of its fixed nature, as

opposed to FPI which is volatile and liquid investment thus usually referred to as hot-

money (Sidorov, 2011; Mohamed, 2008).

However, as a practical convention, the difference between FDI and FPI a threshold of 10

per cent controlling stake in the shares of a firm by a foreign investor; with anything above

the ten per cent controlling stake being classified as FDI (IMF, 2003). From the latter

definition of FDI as a minimum of a ten per cent ownership threshold the theoretical

definition becomes obscured because of the way in which FDI statistics are actually

measured. For instance the purchase of a nine per cent controlling stake in a firm might be

sufficient to induce Greenfield investments but would not be statistically considered as FDI.

Or alternatively, given the dynamism and connectedness of international financial markets,

investors could very well make short-term investments that exceed ten per cent controlling


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stakes. Nevertheless a closer look at the motives behind FDI may help to better understand

the nature of FDI and its impact on unemployment.

What are the motives behind FDI?

The eclectic view, which is most common in the literature, categorises four motives for FDI

as seeking: resources, markets, strategic assets and efficiency (Jenkins & Thomas, 2002;

CUTS, 2003; Ajayi, 2006; Luiz & Stephan, 2011). Resource-seeking FDI is made in order to

gain access to natural, mineral resources, or other production inputs. Sometime this might

be the consequence of investors seeking resources that are only available in specific

geographic areas which attracts investments in order to gain access to the resources.

Market size turns out to be one of the most significant determinants of FDI (Campos &

Kinoshita, 2006). Market-seeking FDI is based on expectations about future profits which is

a consideration made when investors are looking for new markets to sell their products or

services. Therefore, the market-seeking FDI is underpinned by expectations that the

investment will be a source of future profits. Also, market-seeking FDI is not only restricted

to the host countrys market because regional integration may offer regional market access

for investors.

Efficiency-seeking FDI is attracted by opportunities to increase productive efficiency

through lower production costs related to lower wages, cheaper inputs or geographic

proximity. Sometimes efficiency-seeking FDI is also attracted by geographically-specific

specialisation benefits. Efficiency-seeking FDI is different from resource-seeking FDI in that

the investors are not just after the resources to be later used in the production of other

products; instead the investors use the host economy to expand or shift the productive

operations. Efficiency-seeking FDI is also different from market-seeking FDI in that the


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output is not produced for the domestic or regional market; instead the output is often

produced for the global market.

Lastly strategic-asset-seeking FDI is driven by benefits related to research and

development and other market or production-related benefits (Campos & Kinoshita, 2006).

These motives behind FDI are important because they offer a way of conjecturing about the

future possible impacts of FDI. For example M&As, which do not necessitate new jobs,

might lead to new jobs in the future if the investors intends to expand operations and

export to neighbouring markets for whatever reason (Kariga, Ngobeni & Ngobese, 2012).

So the next step is to unpack the impact of FDI.

What is the theoretical impact of FDI?

At the ideological, or theoretical, level of analysis the discourse on FDI is concerned with

the ipso facto impact of FDI on economic growth and development. This either relates to

theoretical explanations for the impact of FDI on economic growth and development or

empirical examinations of this theoretical impact of FDI. The central assertion is that FDI

contributes towards economic growth and development through employment, skills and

technology transfer, improved competitiveness and trade-related integration into global

markets (Moolman, et al., 2006).

FDI is said to contribute towards economic growth and employment through spill-over and

direct impacts. The logic is that the introduction of foreign goods, technology and means of

production contributes towards development, skills transfer and improved

competitiveness. At the crux of the theory is the argument that South Africa stands to gain

through the transfer of superior technology because there is a lack knowledge or human

capital as opposed to lacking physical capital (Fedderke & Romm, 2006). Therefore FDI is


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beneficial for South Africa because it allows for a transfer of the knowledge (as embodied

by the technology) and increase human capital; which is what South Africa is said to be

lacking in.

Another assertion is that low savings and investment rates in South Africa mean that FDI is

an elixir for economic growth (Moolman, et al., 2006). Therefore FDI is seen as a

prerequisite to ensuring sustained economic growth and development because it increases

the domestic capital stock (Arvanitis, 2006; Mlambo, 2005; Mohamed, 2008).

But empirical studies have found inconclusive evidence when assessing the theoretical

impact of FDI. For instance, in their empirical study of the causal relationship between FDI

and economic growth Sridharan et al. (2009) find that the relationship is bi-directional. This

means that economic growth leads to increased levels of FDI and FDI is also responsible for

economic growth. Furthermore economic growth has been found to have a stronger

impact on FDI than FDI has towards economic growth (Sridharan, et al., 2009). In other

words, more often than not, countries with higher economic growth rates attract more FDI

as opposed to FDI leading to economic growth.

In addition the growth impact of FDI has also been found to depend on the institutional and

policy environment of the host country (Vadlamannati & Tamazian, 2009; Chang, 2004).

For instance, amongst other thinds, the impact of FDI is dependent on the host countrys

institutions and policies because these determine the redistribution of gains and the rules

for repatriation of profits which affects the kind of economic growth and economic

development. Therefore, the literature presents inconclusive results regarding the growth

impact of FDI which suggests that harnessing the growth impact of FDI depends on various


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contextual factors. Thus FDI does not ipso facto lead to economic growth and

development.

What determines the impact of FDI?

The economic growth and developmental outcomes of FDI depend on the international

rules of FDI and global competition (Burke & Epstein, 2001). The bargaining outcomes

between multinational corporations (MNCs), governments and workers determine the

growth and developmental outcomes; more especially the bargaining results determine the

level of skills transfer, technological transfer and the jobs opportunties created. The

demands placed on the MNCs, governments and workers as a result of this bargaining

process is what determines the growth and developmental outcomes.

However the dominant rules of international finance are neoliberal and there is an

asymmetry of bargaining power between MNCs, governments and workers so FDI often

results in detrimental outcomes that favour MNCs (Burke & Epstein, 2001). The dominance

of the neoliberal policies and the multilateral rules set by organisations such as the World

Trade Organisation (WTO) means that the interests of MNCs are disproportionately

favoured at the expense of governments and workers in the host countries. Furthermore,

MNCs are at a bargaining advantage because there are very few MNCs engaging in FDI and

because there are so many countries competing for the FDI (Burke & Epstein, 2001). So

countries have to scramble for a few FDI deals which places the power in the hands of

MNCs since they choose where to invest.

Moreover, given that countries embark on policies that cannot be easy reversed in attempt

to attract FDI, countries are at a greater risk of worsening their growth and developmental

prospects; without guarantee of securing the FDI they are competing for (Burke & Epstein,


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2001; Crotty, Epstein & Kelly, 1998). The implications of this is that host countries need to

critically assess their approach to FDI according to their level of development and influence

in the global economy. Historically this was the approach taken by most developed

economies even though this has become heavily opposed by the dominance of

neoliberalism (Chang, 2004). Hence the current international rules of FDI and global

competition FDI leads to outcomes that tend to favour MNCs at the expense of workers

and governments. However, the host countrys policies are also essentially for determining

its impact.

The macroeconomic policies of a country vastly determine the beneficial impact of FDI. For

example, policies to promote competitiveness, trade and investment as well as the

effective use of tax revenues from international firms determine the benefits of FDI (Pigato,

2000). Thus, the institutional and policy environment of the host country has an important

role in the distribution of gains as well as attracting FDI which affects the growth or

development outcomes of FDI in the host country.

Furthermore an important consideration, which is seldom discussed in the literature, is the

distinct economic growth and developmental impact of the various modes of FDI. The

literature takes a homogenised view of FDI and makes a static comparative analysis of the

growth impact of FDI. However, in reality, FDI involves acquisition or creation of assets of

the various modes discussed above. These various modes of FDI have different impacts on

growth which is mostly overlooked in the literature.

For example M&As have ip so fact less impact on employment than Greenfield FDI because

M&As dont necessitate new jobs or the establishment of a new factors of production

unless investors see opportunity for growth (Kariga, et al., 2012). In addition, M&As might


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alter the competition structure of an economy which has various detrimental and beneficial

impacts for the host country. This explains the different desirability of certain modes of FDI

such as the preference for Greenfield over M&As; and the growing concern about the

nature of M&A in relation to domestic competition and public interest (National Treasury,

2011; Kariga, et al., 2012). Yet the literature takes a homogenised view that simply

contrasts FDI with FPI without a deeper analysis of the various modes of FDI, which is

important to understand the impact of FDI.

Things to remember about the impact of FDI

Not all FDI contributes positively towards unemployment and inequality because the

benefits from FDI depend on its mode of entry and the host countrys institutional and

policy environment. FDI does not ipso facto lead to economic growth and development.

The motives behind FDI are important because they offer a way of conjecturing about the

future possible impacts of FDI. Also the demands placed on the MNCs, governments and

workers as a result of this bargaining process is what determines the growth and

developmetnal outcomes.

MNCs are at a bargaining advantage because there are very few MNCs engaging in FDI

which means that countries have to scramble for a few FDI deals which puts the power in

the hands of MNCs since they choose where to invest. However, the host countrys policies

are essentially for attracting FDI and determining its impact. Moreover, FDI comes in

various modes with different impacts on growth which is something overlooked in the

literature. The domestic policy environment in the host country has an important role in the

distribution of gains as well as attracting specific modes of FDI which determines the

growth or development outcomes of FDI in the host country. Therefore, the three


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| Motives, Mode of FDI and Policies 13

important characteristics that determine the impact of FDI are the motives, domestic

policies and the mode of FDI.

Motives, Mode of FDI and Policies

What are the motives behind inward FDI in post-Apartheid South Africa?

South Africa has had increasingly significant FDI in services, especially financial services and

telecommunication, and persistently dominant investment in mining coupled with waning

investment in manufacturing, with the exception of the motor industry (Sidorov, 2011;

Thomas, Leape, Hanouch & Rumney, 2006). The chart below illustrates the substantial

share of mining and quarrying and business activities suggesting that FDI in South Africa

has been strategic market and resource-seeking (Streak & Dinkelman, 2000; Vickers, 2002).

Figure 2: Sectoral Composition of FDI Inflows Since 2008

Source: International Trade Centre

As discussed above, resource-seeking FDI refers to investment made in order to gain access

to natural, mineral resources, or other production inputs. This mode of FDI is less

BusinessActivities

26%

Mining andQuarrying42%

UnspecifiedSecondary*

28%

Wholesale andRetail trade

4%

*Unspecified Secondary includes: pulp, paper and paper products, iron and steel basic industries.


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concerned with the developmental impact of the investment because the most important

concern is the extraction of resources to be used as factor inputs. Resource-seeking FDI is

sometimes the closely associated with the colonial project in Africa; which led to domestic

and international inequalities.

Colonialism was largely motivated by economic-driven exploitation of raw materials to

catalyse the expansion of capitalism and European industrialism; most of the African

colonies were forced to grow one or two cash crops which resulted in neglecting food

production and import-substitution (Boahen, 1987). This shows one extent to which the

resource-seeking foreign capital has restrained development in Africa. In addition, the

monetary policies in the colonies meant that the colonies were deeply entrenched in an

economic imperialism which encouraged all expatriate companies and banks to repatriate

surplus capital to metropolitan states instead of reinvesting it in the colonies (Boahen,

1987). Therefore the policies favoured accumulation in the European metropolis at the

expense of African development and accumulation. Although this brief picture of the

impact of colonialism has been changed by contemporary development resource-seeking

FDI has a similar effect. In the South Africa this resulted in a path-dependency as evidence

by the historic and contemporary significance of British capital in mining and financial

services.

Moreover resource-seeking FDI often leads to the creation of large-scale low-skilled

primary sector employment which is the case in South Africas mining industry (Solomon,

2011). This may be beneficial for South Africa because there is an excess of unskilled labour.

But this also has the undesirable impact of higher inequality because most of the gains

accrue in favour of the minority of skilled labour because of the disparate skill levels. This


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means that, unless South Africas labour force is able to benefit from FDI with transferrable

skills, the resource-seeking FDI will contribute towards persistent inequality.

On the other hand, market-seeking FDI often depends on investors expectations about

future profits. These may be expectations about future profits in the host market or other

regional and neighbouring markets. This could lead to direct skills and technology transfers

and employment opportunities if the FDI is a Greenfield or Brownfield investment. So the

mode of FDI determines the impact of FDI in relation to employment opportunities.

What is the mode of entry for FDI in post-Apartheid South Africa?

In this regard M&As, which constitute approximately two-thirds of the FDI, have been the

most preffered mode of entry into South Africa since 1994 (Jenkins & Thomas, 2002;

Vickers, 2002; Arvanitis, 2006). As discussed above, FDI does not de facto lead to economic

growth and development so we can understand why or how FDI has had a limited impact in

South Africa. M&As have limited impact on new employment opportunities unless the

investor expects future profits which creates an opportunity for growth. But these

expectations are closely informed by the policy environment in the host country because

this impacts profitability and the distribution of profits.

What kind of policy environment prevails in post-Apartheid South Africa?

The policy environment has favoured neoliberal policies and market-orientated economics

in South Africa. Government has embarked on a piecemeal removal of all regulatory

restraints on international capital flows and trade; which was intended to attract foreign

investment (Vickers, 2002). The era of South African neoliberalisation began with the post-

Apartheid governments adoption of the Apartheid governments debt and it was followed

by the GEAR macroeconomic package which was an indigenised policy package similar to


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the transnational neoliberal package of the IMF (Satgar, 2012). Consequently, subsequent

macroeconomic policies have utilised neoliberal economic tools which GEAR was

instrumental in establishing.

The South African governments commitment to trade liberalisation and global

competitiveness pressures meant that many domestic firms had to restructure through

right-sizing and downsizing which led to large-scale job losses (Satgar, 2012, p. 47).

More importantly labour-intensive import-substitution industries suffered the most whilst

export-led industries failed to create job due to a shift towards capital-intensity in order to

retain competitiveness (Satgar, 2012). Thus transnational neoliberalism has succeeded in

restructuring the South African macro economy towards getting prices right and

establishing governance that protects the interest of global capital against risk as opposed

to serving the interests of South Africa citizens.

Moreover, the policy environment has been in the interest of cross-border M&As at the

expense of some domestic producers, civil society and the government. Therefore, given

the limited impact of M&As on employment, the result has been an effective loss in

employment especially in the manufacturing and import-substitution sectors. Also, the

policy environment has meant that government has a limited ability intervene in the

market in order to fully protect the interest of its citizens. The policy environment has

benefitted MNCs at the expense of governments ability to direct policies and without

much success in attracting FDI. Instead South Africa has attracted FPI which are volatile

and do not contribute towards employment and gross domestic production.

South Africa has attracted relatively small amounts of FDI and significantly greater

amounts of FPI flows which have fuelled stock price appreciations, overextension of private


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| What does the evidence show? 17

credit and increased imports for consumption (Mohamed, 2011). This is because the large

FPI flows have resulted in more liquidity in the domestic economy leading to a significant

rise in household debts and debt-driven expenditure (Mohamed, 2011). In addition there

has been rampant capital flight, legal and illegal, through foreign listing of domestic firms

and other means (see Ashman, Fine & Newman, 2011a; Gelb & Black, 2004). The result is

that FPI have become a mechanism to balance the South African current account and this

has led to unproductive investments in shopping malls, wholesale and retail trade, and

consumer credit (Mohamed, 2011; Ashman, Fine & Newman, 2011b).

Thus, South Africa has attracted resource-seeking and market-seeking M&As which have

limited, and even negligible, impact on unemployment depending on the domestic policy

environment. Meanwhile the South African policy environment has been neoliberal and

beneficial to MNCs at the expense of government and civil society.

What does the evidence show?

This study does not survey all FDI inflows but is really just concerned with the significant

FDI deals that constitute over 50 per cent of the FDI in each period. For the purposes of the

analysis this is sufficient. So the study only assesses the quality and impact of the

significant FDI deals in relation to unemployment. Therefore, the study follows an

analytical framework that interrogates the mode of entry and the motivation for the most

significant FDI deals and assesses its implications in terms of employment. Then the study

relates this to the policy environment to complete the analysis.

However, it is not assumed that the significant FDI deals will have any directly observable

impact on unemployment. Instead the study seeks to analyse and conjecture on the


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theoretically possible impact of the specific FDI deals within quinquennial periods from

1994; and interrogates the validity of the conjectures against the relevant empirical data.

Thus a brief discussion of each period is given before an overview of the decade the

conclusions and recommendations are made in the final section.

What are the important trends of FDI in post-Apartheid South Africa?

The historic trends of FDI since 1994 can be characterised into two periods that are not

clearly distinct. First there is a period dominated by government-led FDI stimulation

through privatisation of state assets; then there is the current period which is dominated by

market-stimulated M&As. As discussed above, South Africas FDI inflows have been erratic,

low and highly concentrated through a few deals FDI. As illustrated in the graph below, this

is readily observable in the sharp spikes which signify the few deals that come from

privatisation and M&As. The spikes around 1997 followed by 2001, 2005, 2009 and 2011

account for more than 50 per cent of the net FDI inflows in South Africa since 1994.

Figure 3: FDI Inflows Trend in South Africa (1994-2012)

Source: World Bank Databank

-2

0

2

4

6

8

10

12

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Billions

Foreign Direct Investment,Net Inflows (BoP, CurrentUS$)


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Arguably, the impact of FDI would be most felt from the FDI deals that are most

quantitatively significant. In other words, the impact from these major FDI deals

overshadows the impact of other smaller FDI. There is an implicit assumption of constant

returns to FDI which means that the gain that may come from a specific quantity of FDI

increase as the quantity of FDI increases. But interrogating the validity of this assumption

falls outside the scope of this study. For the purposes of this study it suffices to say that this

assumption is the central in the discourse on FDI in South Africa.

The view is that the country is challenged by the quantity of FDI it received, which deters its

ability to overcome developmental challenges such as unemployment, and that more FDI is

necessarily a good thing (see Moolman et al., 2006; Arvanitis, 2006; Fedderke & Romm,

2006). But this is mistaken because the qualitative differences amongst modes of FDI,

which determine the possible gains from FDI, are obscured by this perspective. This is

clearly visible in the negligible impact of FDI on employment as illustrated in the graph

below; and this study interrogates why.

Figure 4: FDI and Unemployment Trends in South Africa (1994-Present)


-20

0

20

40

60

80

100

120

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Unemployment, total (% oftotal labor force)

FDI Inflow (Billion US$)


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FDI of various quantities do not have any significant impact in changing the unemployment

trend as the graph above illustrates.

1994-1999

In this period foreign investors increasingly preferred M&As as an entry into South Africa.

For example, the proportion of M&As in relation to total FDI inflows rose from 49 to 58 per

cent during 1996-1997 (Heese, 2000). This is shown in the table below which illustrates the

modal composition of FDI inflows for 1994-1999.

Figure 5: Mode of Investment by Percentage (Rounded to One Decimal)

Source: (Heese, 2000, p. 395)

Furthermore, in this period FDI was driven by the South African governments privatisation

initiatives through the partial sale of state-owned assets such as the Airports Company,

South African Airways, Telkom and Safcol (Heese, 2000; Pigato, 2000). The significance of

privatisation in this period is shown by the quantitative superiority of the Telkom deal as

illustrated in the table below.


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Figure 6: Top FDI Deals

Source: (Heese, 2000, p. 396)

The possible impact of FDI on employment is very limited in this period because M&As do

not necessitate higher output or increased employment. In actual fact, the reverse has

happened since international competitiveness pressures have forced many domestic

affiliates of foreign firms to reduce employment as discussed above.

However, the homogenised view of FDI obscures this and instead praises FDI in South

Africa. The assertion is that, in contrast to other African and other resource-rich countries,

South Africa has managed to attract FDI in other sectors besides minerals extraction (see

Arvanitis, 2006; Sidorov, 2011). This is what often informs the blanket prescription that

South Africa should focus on finding ways to attract larger quantities of FDI. But by

examining the mode of FDI we can understand why simply promoting more FDI will be in

adequate to deal with unemployment unless South Africa can attract a certain mode of FDI.


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Moreover, the sustainability of state-led privatisation in order to stimulate FDI is very

questionable. The state has limited assets and its ability to create more assets is vastly

limited by budgetary constraints and neoliberal policies that seek to diminish the role of the

state in the economy.

1999-2004

In this period the story was similar to previous period. Most of the of the FDI was resource-

seeking and market-seeking M&As with the exception of new investments in

manufacturing (Vickers, 2002). Most medium-sized affiliate enterprises with 100-1000

employees were fully acquired and the largest affiliates were partially acquired or merged

with; meanwhile most of the small affiliates with less than 100 employees were Greenfield

investments but these are negligible since half of them had capital stocks below US$1

million (Gelb & Black, 2004).

A sectoral break-down of the market orientation of affiliates sales in this period shows the

concentration of FDI in resources and the domestic and regional market. The table below

illustrates that, with the exception of the primary sector, the domestic affiliates sales are

orientated towards the domestic market in most the sectors. All other sectors besides

information technology have had negligible increases in their sales to the global market.

However, most of the sectors have increasingly served the regional market (Gelb & Black,

2004). This is evidence that most of the FDI has been resource-seeking as signified by the

global market orientation of the primary sector affiliates; and market-seeking as signified

by the domestic orientation of affiliates sales and increasing significance of the regional

market.


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Figure 7: Market Orientation by Sector, South Africa (% of Affiliates Sales)

Source: (Gelb & Black, 2004, p. 202)

Export-orientated, and hence efficiency-seeking FDI, has been low even though this is the

kind of investment that GEAR was targeting. However the Motor Industry Development

Programme (MIDP) is an exemplary success of the mode of FDI that would be most

beneficial for South Africa. The MIDP is a system of export incentives designed for

domestic car and components producers which enables substantial employment to about

33 000 workers in car production and 47 000 in components and tyre production (Vickers,

2002).

Summary of 1994-2004

This period is characterised by state-led privatisation which has stimulated FDI in state-

owned assets which is unsustainable. Also, there was rampant capital flight which saw

significant mining interest relist their companies abroad which means their operations are

considered as FDI. Therefore, some of the figures do not express new actual investments as

is the case with Anglo American and SABMillers foreign listing (Mohamed, 2010). At the

same time FDI has predominantly been through M&As which have limited, and even

negligible, direct impact on employment.


25/39


Moreover, FDI was motivated by resource-seeking and market-seeking as opposed to

efficiency-seeking. This means that investors are less interested in the development and

sustainable of their resource-seeking investments. In addition M&As that are motivated by

market-seeking only assist in improving the competitiveness of domestic as opposed to the

creation of new employment opportunities. Therefore, due to the mode and motivation of

FDI in South Africa, the FDI does not have a strongly positive impact on employment as the

ideology and the policies believe. However, the success of the MIDP which attracts export-

orientated FDI has had the most significant direct impact on employment by providing new

opportunities and operations that have integrated domestic producers into global supply

chains (Thomas, et al., 2006; Vickers, 2002).

Besides the limited impact that FDI has had in creating employment in South Africa; FDI

has been criticised for crowding out domestic investment especially in dairy,

pharmaceuticals, steel, and electric and electronics sectors (Vickers, 2002). This crowding-

out has had a negative impact on employment by forcing domestic producers to downsize

and shed jobs as capital is drawn away from domestic firms towards MNCs.

2004-2009

This period was dominated by the by significance of the services sectors, especially the

financial services sectors. The acquisitions of ABSA by Barclays PLC in 2005, the purchase

of 20 per cent stake in Standard Bank by the Industrial and Commercial Bank of China in

2007, the purchase of 15 per cent stake in Vodacom by Vodaphone in 2009 are the

significant deals during this period (Wcke & Sing, 2013). The steady decline in

manufacturing jobs and significant dominance of jobs in the tertiary sector signifies this

trend, as illustrated in the graph below.


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Figure 8: Employment and FDI Trends, by Sector (2004-2009)


Of course the employment trends in the graph above are not exclusively related to FDI.

However, it is interesting to note that the trend in services jobs is somewhat correlated to

the FDI trends. Also important to note is the consistent decline in industrial and primary

sector jobs in this period. Most importantly though the real sectors suffered in terms of

employment due to the global economic and financial crisis of 2008 but FDI and service

sector employment seems to have been unaffected by the crisis. This signifies the

financialisation of the South African economy in this period which is further discussed

below.

2009-Present

M&As are still very dominant in this period as well, the most notable example being the

highly contended acquisition of Massmart by Walmart. This acquisition was hotly contested

through the South African Competition Commission where its implications were scrutinised

in relation to public interest (Kariga, et al., 2012). This represents a turning-point in the

mainstream discourse on FDI in South Africa which has begun to scrutinise the deal-specific

conditions that determine the benefits from FDI; as opposed to the previously common

-10

0

10

20

30

40

50

60

70

80

2004 2005 2006 2007 2008 2009

Change in FDIInflows (% of 2004)

Employment inAgriculture

Employment inIndustry

Employment inServices


27/39


view that more FDI is de facto a good thing. But this has had little impact on the kind of FDI

that South Africa is attracting as the evidence shows. The most significant Greenfield

investments have been relatively inconsequential in comparison to the M&As (Wcke &

Sing, 2013). Furthermore, small benefits such as consumer surplus from lower prices and

limited creation of employment allowed the Walmart the Competition Commission to rule

in favour of the acquisition (Wcke & Sing, 2013). The tables below illustrate the relative

insignificance of Greenfield and Brownfield investments in relation to M&As and the

increasing significance of the financial services and telecommunications.

Figure 9: Top Greenfield Projects (2008-2010)

Source: (Wcke & Sing, 2013, p. 23)


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Figure 10: Top Foreign Affiliates in South Africa, by Revenue (2012)

Source: (Wcke & Sing, 2013, p. 20)

From the tables above we can see that Greenfield investments have been very low in South

Africa. Note that this period is characterised by a dominance of mining and financial

services. These investments not only make up most of the top-five in terms of revenue but

they also account for most of the employment by foreign affiliates.

It is important to remember that, since this FDI is due to foreign listings and M&As, the FDI

has almost no impact on reducing unemployment in South Africa. Furthermore, the

financial sector requires highly-skilled and educated labour. Therefore FDI in the financial

sector leads to the accumulation of skills, employment and income benefits to the usually

wealthier and more educated segment of the South African population. Thus the result is

low employment and increased inequality.

But more alarmingly, the rising significance and success of the financial sector is not

something to be celebrated without caution. Financialisation of the South African economy

is actually a treat to employment. In simplified form, financialisation is the phenomenon


29/39


where increases in financial accumulation do not result in more investment because the

additional finance is used for financial speculation as opposed to being invested in real

investment; moreover, the short-term profits of this financial speculation entices

productive capital to speculate with its surplus earnings instead of reinvesting it (Ashman,

et al., 2011b). This means that, even though the financial sector might be attracting FDI,

the M&As in the financial sector will not necessarily benefit the South African economy

directly through direct employment opportunities, or indirectly by increasing the available

domestic capital stock for investment that creates employment opportunities; because the

accumulated finances will be directed towards speculation and credit extension. Moreover

due to financialisation and the prospects of greater gains associated with financial

speculation, as opposed to reinvesting in manufacturing and other labour-intensive

production, productive capital may abandon some of its production in pursuit of short-term

profits (Ashman, et al., 2011b).

Financialisation is not an arbitrary consequence in the South African economy because, as

discussed above, the South African government has successively removed all capital

controls. Moreover, this situation has allowed for unchecked extraction of capital and

repatriation of profits as the evidenced by rampantly high levels of capital flight which

peaked at approximately 20 per cent of gross domestic product in 2007 (Ashman, et al.,

2011a). This negatively impacts tax revenues and the governments ability to undertake

new public programmes to deal with its developmental challenges (Ashman, et al., 2011a).

In addition to this, South Africa has had to balance its rampant capital flight with increased

FPI flows, which are volatile and short-term of course (Ashman, et al., 2011b). So South

Africa has a potent blend of financialisation that is dominated by FPI which are by their


30/39


nature short-term and speculative flows. This could have the impact of further

financialisation and continued dominance of FPI as opposed to FDI which would put the

economy at great economic and financial risks (McKenzie & Pons-Vignon, 2012; Mohamed,

2003). Thus the policy environment has allowed for volatile foreign investments,

unproductive economic growth and detrimental capital flight in South Africa during this

period.

Summary of 2004-Present

This period is characterised by a strong dominance of M&As. As discussed above, M&As

which have limited, and even negligible, direct impact on employment. Furthermore, the

dominance of mining and financial sector points to the fact that FDI is still mostly resource-

seeking and market-seeking. The policy environment has allowed for rampant capital flight

and rapid growth in financial sector which has the ability to redirect capital towards

unproductive financial speculation as opposed to productive reinvestment. This not only

leads to less employment opportunities coming from FDI but it also means that South

Africa cannot utilise tax revenues from the extracted capital which negatively affects

governance. Also this represents future possible risks for the South African economy given

the volatility of non-productive investments and the need to balance capital flight with FPI.

Most importantly these trends mean that, although South Africa has attracted increasingly

higher volumes of FDI but, because of the mode of FDI, more volumes of FDI are

insufficient to alleviate unemployment and inequality. This will continually be the case

unless South Africa is able to attract efficiency-seeking Greenfield investments. But this is

challenged by the domestic policy environment which favours the interests of MNCs and

non-productive capital investments. Moreover, with a policy environment that does not


31/39

| Conclusion and Policy Recommendations 30

restrain or place checks on international capital flows, South Africa will continually fail to

gain benefits from the revenues created by domestic affiliates and foreign firms. This

strongly suggests that capital controls would be useful in many ways for South Africa.

Capital controls in the form of taxes on capital movement are needed in order to shift the

balance of bargaining power in favour of the state, and by extension civil society through

extraction of tax revenues, whilst stimulating productive investment through tax

incentives. This is necessary in order to attract long-term FDI and it benefits civil society by

increasing the public budget which needs to be allocated efficiently towards ameliorating

the developmental impact of FDI in South Africa. However, choosing right policies to

restrain capital, stimulate efficiency-seeking Greenfield and overcome the negative

impacts of capital flight is not something that can be successfully achieved through

deductive reasoning (Asiedu & Lien, 2004).

Conclusion and Policy Recommendations

The issue of economic growth and development, regardless of the advocates position on

state intervention and the efficiency of markets, has been dominated by the view that

economic growth is a necessary and sufficient for development (Pillay, 2007). The logic is

that more economic growth will lead to more employment and prosperity for all. Therefore

the main concern of opposing side on the issue has been how to best distribute the spoils of

economic growth. But the phenomenon of jobless growth has led to a concern about

whether the dominant theories of growth will not lead to more poverty and inequality

(Pillay, 2007). Similarly, the mode-specific impacts of FDI lead to a concern about whether

homogenous analysis of FDI will not lead to more unemployment and inequality in South


32/39


Africa due to its disregard for mode-specific impacts of FDI. Moreover, this studys

approach to FDI has uncovered the mode-specific impacts of FDI in relation to the motives

which have been validated through empirical evidence from post-Apartheid South African.

Thus the study has bridged the chasm between policy-making, scholarship and ideology.

By unpacking the ideological grounds for advocating that FDI has a positive impact towards

developmental, the study found that the theory needs some qualification because FDI does

not ipso facto lead to economic growth and development. The impact of FDI depends on

the institutional and policy environment of the host country, international rules of FDI and

global competition for FDI. In other words, although current global rules of FDI and

competition for FDI often leads to outcomes that favour of MNCs at the expense of workers

and governments; the institutional make-up and policy environment of the host country

has a role in determining the gains from FDI.

Moreover the institutional and the policy environment of the host country have an

influence on the mode of FDI that the country attracts. This is because of the interaction

between the host countrys institutions, policies and the motives behind FDI which

determines the mode of entry. Thus, the institutional and policy environment of the host

country has an important role in the distribution of gains as well as attracting specific

modes of FDI which determines the growth or development outcomes of FDI in the host

country.

In this regard, South Africas institutional and policy environment favours neoliberal policies

and market-orientated economics. The South African government has embarked on a

piecemeal removal of all regulatory restraints on international capital flows and trade with

the intention to attract foreign investment (Vickers, 2002). Thus transnational


33/39


neoliberalism has succeeded in restructuring the South African macro economy towards

getting prices right and establishing governance that protects the interest of global capital

against risk as opposed to serving the interests of South Africa citizens.

The evidence shows that FDI was stimulated through privatisation of state-owned assets

during the first decade of post-Apartheid South Africa. Also, there was rampant capital

flight which saw significant mining interest relist their companies abroad. The foreign

listing of domestic firms which continued to have their South African business as core

operations means that significant mining interests are now characterised as FDI. But this

mode of FDI has not contributed to any technological or skills transfer nor has it

contributed towards additional capital accumulation or new employment opportunities

(Mohamed, 2010).

Coupled with this, FDI in South Africa has been resource-seeking and market-seeking as

opposed to efficiency seeking. Therefore because resource-seeking FDI is strictly

concerned with the extraction of primary commodities and often results in unskilled jobs;

this leads to higher inequality. Furthermore, market-seeking FDI contributes very little in

terms of job because of the domestic orientation of foreign affiliate firms.

Market-seeking M&As have been the dominant mode of FDI in South Africa which have

limited and even negligible direct impact on employment. Besides the limited impact that

FDI has had in creating employment in South Africa; FDI has been criticised for crowding

out domestic investment especially in dairy, pharmaceuticals, steel, and electric and

electronics sectors (Vickers, 2002). This crowding-out has had a negative impact on

employment by forcing domestic producers to downsize and shed jobs.


34/39


Also, the policy environment has allowed for rapid growth in financial sector significance.

Therefore, in order to balance capital flight, South Africa has embarked on neoliberal

policies in attempt to stimulate FDI. But this has attracted FPI instead of FDI leading to the

further financialisation in the economy. This represents future possible risks for the South

African economy given the volatility and speculative nature of FPI.

This means that even though South Africa has attracted increasingly higher volumes of FDI,

because of the mode of FDI, more volumes of FDI are insufficient to alleviate

unemployment and inequality. This will continually be the case unless South Africa is able

to attract efficiency-seeking Greenfield investments. In this regard the MIDPs success

offers invaluable lessons because the MIDP has succeeded in attracting export-orientated

FDI which has had the most significant direct impact on employment by providing new

opportunities and operations that have integrated domestic producers into global supply

chains (Thomas, et al., 2006; Vickers, 2002). But this is challenged by the domestic

institutional make-up which attract M&As and FPI as opposed to the most impactful modes

of FDI. Moreover, in a policy and institutional and policy environment without restraints

and checks on international capital flows, South Africa will continually fail to gain benefits

from the revenues created by domestic affiliates and foreign firms.

Therefore I would recommend that South Africa place certain policies in place in order to

restrain financial capital, which would reduce profitability in the financial sector, making

other sectors more profitable in order to stimulate investment in those sectors. But this is a

very precarious route since the impact of capital controls on FDI depends on regional and

temporal factors. This suggests that this will be something that South Africa will have to

learn through experience.


35/39


Moreover, capital controls pose an economic conundrum for South Africa. On the one

hand, financial regulation reduces profitability of the financial sector and its

competitiveness which dis-incentivises FPI and that is a good thing in relation to reducing

speculative capital in South Africa. But on the other this would mean that South Africa

would not be able to mitigate its capital flight and repatriation of profits which could lead to

a deficit of payments which is potentially something harmful. However, with enough will

and experience an efficient balance could be attained. There are valuable lessons to be

learned from the MIDP which provides a system of export incentives designed for domestic

car and components producers whilst enabling substantial employment.

Thus, South Africa can cross the river of persistent unemployment and inequality by feeling

for firm stones, such as the right policies, on the riverbed as it were.


36/39

| Bibliography 35

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Documents

Impact of FDI on Unemployment in Post-Apartheid South Africa by Siyaduma Biniza.pdf