09
Mar
There has been much noise recently about President Jacob Zuma’s utterances regarding land ownership in South Africa in the State of the Nation address. The American Chamber of Commerce raised its concern that the announcement was part of a “barrage” of legislation being proposed which is making foreign investors uncomfortable.
Indeed in South Africa, any move towards redistribution is met with the common suggestion (threat might be a better description) that foreign portfolio investors will take their investments out of the country, or those in fixed investments, divest or sell off their South African holdings, with disastrous economic and social consequences.
So, indeed, we need to guard the sentiments of those who come, like “Mother Teresa of Calcutta” bearing much-needed investment, if not for our current account deficit, then to create jobs and reduce inequality.
From this account, one would infer that foreign direct investment is the panacea of all our social and economic challenges, and we better create the environment for this investment to occur.
This means avoiding passing in brief succession legislation aimed at structural transformation of the economy, broad-based black economic empowerment (BBBEE) and the regulation of foreign ownership of strategic assets such as land.
As Carol O’Brien of the American Chamber of Commerce indicated, referring to ownership requirements under the new empowerment codes, US firms find compliance difficult as their parent firms don’t “sell ownership”.
Is foreign direct investment so important that it would bring us to question not just the sequencing and extent, but even the mere amendment and drafting of our policies aimed at transforming the South African economy?
Foreign Direct Investment (FDI) refers to the acquiring of or development of assets by a business in a foreign country.
FDI occurs in many ways, with firms either establishing new operations, with plant and equipment to boot – what is called a greenfield investment – or the use of existing production facilities to launch new production activity, which is referred to as brownfield investment.
There are cases where no new expansion of production occurs, as is often the case with mergers and acquisitions (M&A) and this seldom translates into new jobs.
In South Africa, greenfield FDI has been a negligible relative to M&As and other brownfield transactions, meaning that many of these FDI transactions haven’t added much employment and improved inequality as is often assumed.
However, FDI has its benefits: South Africa relies on foreign portfolio flows into its bond and equity markets to plug the current account deficit, and other benefits include technology transfer, managerial know-how and, in the case of a global brand leader, spill over and demonstration effects for the benefit of local firms.
This, however, is what the “theoretical” benefits of FDI are, and the reality is in many instances less impressive.
Mining company Lonmin’s South African operations paid “sales commissions” averaging R200 million a year to a company it owns in Bermuda.
This repatriation of profits for tax avoidance purposes is a common practice among many multinationals. In addition, significant repatriation of dividends, sales commissions and other contributions offshore create volatility in the net investment income component of the current account.
The prevalence of this kind of practice prompted Cambridge economist Gabriel Palma to note: “Given their little positive impact on overall investment and the huge outflows of profit repatriation, FDI does not seem to be the ‘Mother Teresa’ of inflows.”
Moreover, in instances where foreign companies procure solely from their foreign parent company, this, depending on the extent and volume of the transactions, could create foreign exchange and current account challenges for the recipient nation.
Another Cambridge economist, Ha Joon Chang, noted in his book Bad Samaritans, that the US and the UK are the greatest advocates for removing obstacles to FDI.
Yet in their economic history these counties have not been as welcoming of FDI in important sectors such as banking and automotives.
Indeed, British mercantilism, which led to the industrial revolution and spurred colonialism, was a system which would be rather different from the global scramble for FDI many suggest we take part in.
One might argue they probably don’t need it as much we do. This would be assuming that all FDI, in whatever form, is important and beneficial.
If so, why did the US, UK and the Asian developmental states regulate and set the terms for the kind of FDI that entered their nations?
Perhaps then, the discussion should focus on what factors the successful leveraging of FDI rests on.
Firstly, the mode of entry of these flows needs to be assessed. We should be aiming to attract greenfield and expansive brownfield investments, as these unlock jobs and fixed capital formation.
Secondly, the benefits of FDI in Asia were realised through certain safeguards and guarantees of technology and skills transfer.
As such, in South Africa, FDI deal-specific conditions need to incorporate measures that reflect the nation’s strategic socio-economic objectives; local content, skills transfer, ownership, supplier development, among others.
This has been happening: the Walmart case and the Transnet Freight Rail procurement process are examples of how the state’s regulatory and purchasing roles are being used to alter foreign firm’s investment and commercial behaviour.
Thirdly, the sectoral nature of the investment, and its ability to benefit from public incentives and enabling policy, is determined by the strategic policy priorities of the country as set out in the Industrial Policy Action Plan.
Perhaps this would allow us to understand how we not only regulate FDI to avoid the challenges mentioned above, but also align it to certain social and policy considerations that are specific and peculiar to our historic context.
FDI is important, but mobilising domestic sources of investment is just as important.
The competitive nature of the market for FDI flows need not lead to a race to the bottom; where countries deregulate the business environment, through significantly lower taxes, relaxation of labour laws, disregard for historically inherited challenges and suspending our other social and economic imperatives, to attract foreign capital inflows.
There need to be certain “non-negotiables” and economic transformation of ownership and the structure of our economy are just some of them.
Source: http://www.iol.co.za/news/foreign-direct-investment-the-mother-teresa-of-inflows-1.1828662#.VP2YHUbNjuV