Building

Presented by Group 1: Jelani Bertoni, Joshua Johns, Ami Thomas

Using Strategic FDI

On “Foreign Direct Investment and South Africa” by Eric Werker

Main Question this Case Raises...

Emerging from Apartheid, and operating as a Post Apartheid Country, how can South Africa grow its economy in a way that benefits the highest number of people?

Building South Africa Using Strategic FDI

History

Building South Africa Using Strategic FDI

500 A.D. San, Khoikhoi, and Bantu Speakers inhabit South Africa

Mid 1600’s French and Dutch Settlers arrive in South Africa, later named “Afrikaners”

1836-1854 Afrikaner Expansion, “The Great Trek”. Drove out the Zulus

Late 1700’s The British Arrive in South Africa

1899-1902 The Boer War between the Afrikaners and the British

1910-1948 English speaking United Party dominates political government

1948 Afrikaner National Party gains national vote & implements Apartheid policies

1990 Ban on African National Congress is lifted by National Party Government

1994 Nelson Mandela and ANC party win first true democratic election in South Africa

End of Apartheid Changes...ANC Policy Initiatives included:

● Reducing Tariffs● Reforming the Labor Market● Relaxing Foreign Exchange Controls● Reigning in Domestic Spending ● Bringing Down Inflation

* Basically, the ANC Party wanted to open up the economy and make it as easy as possible to do business in South Africa.

Building South Africa Using Strategic FDI

In 2003, Black Economic Empowerment (BEE) points were instituted as a way to encourage participation of previously disadvantaged groups.

Building South Africa Using Strategic FDI

Appendix 1 From Case Study

Challenges Facing South Africa (from the Case)

Politically- Recent changes in Government (Apartheid to Socialist ANC)- After 10 years there was some unrest within ANC party- Unemployed and impoverished people were dissatisfied with

recent policies which they felt “favored businesses and elite foreign investors”

Building South Africa Using Strategic FDI

Socially- Unemployment ranged from 30-40% in 2005 with populations of

unemployed being largely black South Africans- Poverty- Crime- Over 20% of population were HIV positive

Economically- Shortage of Skilled Laborers- Restrictive Unions- Poor Port System- Unstable Electricity- Expensive Telecom- High Turnover Due to Mortality

Solutions to Address Domestic Market Challenges

Quick Fixes: - Repair port system- Strengthen electric grid capacity - Diversify telecom market.

Long term or Strategic Fixes:- Encourage Entrepreneurship (especially among students)- Expand Manufacturing

Building South Africa Using Strategic FDI

Smiliing South Africa Image: http://www.bbc.com/news/world-africa-14094760

What is FDI? FDI is as an Investment from one country into another (normally by companies rather than governments) that involves establishing operations, and acquiring tangible assets, patents and the use of other technology.

• Classified as direct only when foreigner acquires at least 10% of the firms equity.

• FDI is distinguished from portfolio foreign investment (the purchase of one country’s securities by nationals of another country) by the element of control.

- FDI is not just a transfer of ownership, it plays an extraordinary role in global business as it can provide a firm with access to new markets, marketing channels, cheaper production facilities, technology, products, labor skills and financing.

Building South Africa Using Strategic FDI

Three Types of FDI

• Inward and Outward FDI

• Horizontal FDI - Little or no cross relationship among companies because they carry out the same activities abroad as at home.

• Vertical FDI - Is when different countries make different parts for products and then are shipped to one location for final assembly

• (M&A) - Mergers and Acquisitions otherwise known as Joint Ventures.

• Greenfield Investment - Construction of new operational facilities from the ground up.

Building South Africa Using Strategic FDI

Incentives for FDI

• Increase efficiency by:

• Reducing or lowering costs of labor.• Take advantage of cheap, site-specific resources.

• Acquiring the use of existing firms specific assets such as a patents & technology.• Provides better products for consumption in the target country’s economy.

Building South Africa Using Strategic FDI

Factors Affecting FDI

• Macroeconomic and Political Instability - Open economies with political stability, infrastructure and growth prospects tend to attract larger amounts of FDI than closed, highly regulated economies.

• Regulatory Barriers - Limit opportunities for further expansion, which were significantly constrained by apartheid-era sanctions and restrictions. However, this all changed in the 1990’s

• Market Infrastructure - Port & harbor facilities, access roads, available technology, skilled Vs. unskilled labor

• Tax Policies - Tax cuts lead to incentives and other advantages

• United Nations

Building South Africa Using Strategic FDI

FDI in South Africa

FDI was looked at as a resource to help finance the current account deficit and to promote competition in industries dominated by few players.

• Unilever – For example, had been in the country for over a century selling Sunlight Soap.

• DHL - Focuses on providing small and medium-sized enterprises (SME) with easier access to international markets, because they are viewed as a key driver of growth for Africa. DHL has been critical for this success as it transfers important documentation from banks and other corporations to their intended destinations.

• Coca Cola - Takes advantage of growth opportunities in the 1990’s and opens a bottling plant in Mozambique

Building South Africa Using Strategic FDI

Sectors With Most FDI

Update / Recommendation: Focus on Key Success Factors

South African Outward FDI

From Exhibit 7 in caseSource: Compiled by casewriter fromThe Quarterly Bulletin, South African Reserve Bank, June 2007

Derived from Exhibit 7 in case

South Africa to Africa FDI After the UK and US, South Africa is the third largest source of FDI into Africa.

Though only 8% of South Africa’s total outward FDI, For African countries it is very significant.

South African FDI into Africa 2002 US$700m in Mozambique, half the total•US$400m in Mauritius,•US$83 m in Namibia,•US$60 m in Zimbabwe•US$29 m in Botswana•US$27 m in Swaziland•US$17 m in Lesotho•US$15 m in Zambia.

Information for this slide was derived from The overseas development institute, 2004

South Africa as a primary source of FDI

Information for this slide was derived from The Overseas Development institute, 2004

Image:From EY’s AttractivenessSurvey Africa, 2014

SAs South-South FDI Advantages First mover- Lower competition in African markets Geographic- South Africa is closer to African target markets, reduced transportation Knowledge- Experience in relevant industries and ability to work under difficult conditionsCost Advantages- Clusters, hub & spoke, scale and scope of operating in multiple countries Regulatory- Tariff jumping, prefered foreign exchange rates, New Partnership for Africa’s Development

Building South Africa Using Strategic FDI Building South Africa Using Strategic FDI

From Earnst & Young’s Attractivness survey Africa, 2014

Incentives for South-South FDI

-South Africa as the Gateway for African FDI.

-Regional economic growth means increased opportunities for established South African firms.

-FDI is a way to spread, technology, development, and talent that is much needed throughout Africa

-South African FDI can help strengthen Sub-Saharan Africa’s place in the global supply chain.

Building South Africa Using Strategic FDI

From Works Economic Forum Global Competitiveness report, 2014-2015

Other New and Emerging Partners (NEP7) Share of all construction equipment imports to Africa

-New Partnership for Africa’s Development (NEPAD) reports that 30% of infrastructure projects from the NEP7 utilize the “Angola Mode,” a combination of Foreign Aid, Trade, and FDI.

-The NEP7 countries have resource hungry economies and are primarily investing in Africa’s extractive industries.

-South Africa needs to expand their economy in the face of new competition by leveraging their strengths in finance, mining, and manufacturing. From NEPAD Report: Infrastructure Development within the Context Of Africa’s

Cooperation With New and Emerging Development Partners, 2014

Outward FDI from other BRICS -BRICS: Brazil, the Russian Federation, India, China, and South Africa.-South Africa has a small percentage of the total outward FDI compared to other BRICS countries.-This highlights the importance of focusing on FDI on areas South Africa holds strategic advantages.

(From: The Rise in BRICS FDI and Africa, UNCTAD, 2012)