FDI: Competition is heating up in Africa
It was Scott F Fitzgerald who stated that American lives don't have second acts, however we are not discussing America, this is Africa, and this is the second act, or perhaps the third, with Africa entering an era of growth and opportunity that will change the continent and the lives of its people forever.
Foreign Direct Investment (FDI) in Africa is driven by foreign demand for resources and the desire to expand into new markets. Change in the dynamic African environment is often exaggerated with countries continually reassessing their growth, development and foreign strategies and considering their relative position in the African and global context to assess whether they have gained or lost due to the change.
South Africa, the largest country on the continent, used to be the primary gateway to Africa and hence the primary beneficiary from foreign investors before expanding their businesses over the rest of the continent. But how does the South African economy fare in the global view today, and is South Africa still regarded as a positive and keen destination for foreign investment?
South Africa's economy is still the largest economy on the continent, contributing around 23 percent to total African GDP with only 5 percent of population. Initially built on natural resource extraction, the economy has evolved from such primary activities into a manufacturing and services led economy and consequently one of the most developed countries on the African continent. South Africa is known to have a globally competitive financial sector, well developed public institutions and legislative environment, and the peaceful transition to democracy has reinforced its reputation for being both economically and politically stable.
The quantity of FDI received is a function of a number of variables, including those mentioned above. Generally these would comprise a combination of macroeconomic, political and technical factors. Macroeconomic factors include attributes such as monetary and fiscal policy as well as exchange rate and price stability. Political factors include the political stability of the country as well as the political support provided to business. Technical factors include such as the degree of bribery and corruption prevalent, the strength of public institutions and access to liquid capital markets. In a recent EIU report the technical factors were found to be the most important to potential investor countries and ranking above the macroeconomic and political factors.
Each country competing for foreign investment ranks differently on each of the attributes listed, and therefore no single variable by itself will rank above any other in determining whether greater investment is ultimately attracted. It is the combination of these factors that will determine the degree of attractiveness for foreign direct investment. South Africa fares well in a large number of these attributes and therefore remains attractive as a location for foreign investment.
There are other factors that also have an impact of investment attractiveness. These may include the availability of inputs required in the production process, including the availability of skilled labour, raw materials and access to physical capital, the size of the local market for the goods and services offered by the investor, the ease of doing business, the duration over which the investment is made and the general strategy of the investor firm. In this regard, differentiation can generally be made by the economic sector.
As an example, the primary concern for resource extraction industries is the availability of the resources and the security of the property rights surrounding these resources. This has resulted in extraction based companies investing directly into resource rich countries as opposed to securing a foothold on the African continent and then expanding into other countries. In contrast the retail sector tends first to establish a presence in Africa where a balance of many of the above variables exists, i.e. macroeconomic, political and technical factors, as well as infrastructure and reliable suppliers, and from where further expansion necessarily requires an expansion of these networks.
In terms of ease of doing business, South Africa ranks second only to Mauritius, for all African countries and ranks at number 35 globally. However, competition is increasing from Rwanda, Botswana, Ghana, Namibia and Zambia, all of which are ranked higher than the rest of the BRICS countries, again reinforcing the advances made by many countries in Africa with the intention to benefit from the consequential increases in foreign investment. The Institutional Investor Intentions to 2016 report concluded that Africa is seen as holding the greatest overall investment potential of all frontier markets globally. The individual countries in Africa competed for a share of $55 billion FDI into 2011.
It should be noted that, although greater competition for FDI will develop from a larger number of African economies, this is a positive indicator of the size of the prize the African continent presents to both local and global investors. As Africa works towards attracting a greater proportion of global FDI, individual countries, including South Africa, may need to focus or target their FDI strategies to particular sectors and industries where they may have strategic advantage such as having an abundance of a natural resource, good infrastructure, a stable economy and political landscape or even the availability of skilled labour, as different factors are more important to different industries and investor firms.
The competition for FDI will also lead to a greater awareness of the investor image that a country will cultivate through its decision making processes. There are great rewards to be gained from FDI, and disregarding these is becoming increasingly expensive. South Africa is doing well in this regard but the competition for a greater share of this source of investment is coming from a greater number of African economies, and all try to accelerate their economies to higher levels of economic growth and welfare for their citizens.
Sources
Into Africa: Institutional investor intentions to 2016. Economist Intelligence Unit. 2012
Into Africa: Institutional investor intentions to 2016. Economist Intelligence Unit. 2012
African Countries of the Future 2011/12: Winners. www.fDiIntellegence.com. Aug/Sept 2011. asa
Author: Frank Blackmore, BCom (Hons), MCom, MA, is senior economist at KPMG.