Findings from a PwC Strategy& analysis
Trade openness and the efficiency of government regulation are amongst the most influential factors globally on the value of foreign direct investment (FDI) inflows that a country receives. Among upper middle-income economies like South Africa, the next most influential factors are the ease of trading across borders and safety and security considerations. These are some of the key highlights from an analysis carried out by PwC’s Strategy& economists, issued today.
Foreign direct investment (FDI) is critical to stimulate economic growth and financial sustainability. In particular, for emerging economies, foreign investment inflows are vital for transferring money and expertise from multinationals to local enterprises.
Christie Viljoen, PwC Strategy& economist says: “Foreign investors look to a number of macro factors when considering FDI. These not only relate to the economic outlook for a particular country but also policy decisions taken by a government. Investors also tend to be wary of any economic and political uncertainty. In South Africa, recent political and economic uncertainty, including the perception of corruption, have clouded investor sentiment.”
PwC’s Strategy& analysis – ‘What foreign investors want: South African insights from a global perspective on factors influencing FDI inflows since 2010’ – sets out to ascertain what foreign investors are looking for when investing in a country, with a particular focus on South Africa’s performance in this regard. The analysis identifies 19 key variables that potential investors will consider in their investment decisions: political stability; policy continuity; exchange rate stability; labour force affordability and flexibility; safety and security; property rights; state stability; investment freedom; competitiveness of the economy; quality of infrastructure; efficiency of government regulation; control of corruption; rule of law; quality of governance; trade openness; investor protection; corporate tax rate; ease of trading across borders; and natural resources.
Data from the United Nations Conference on Trade and Development (UNCTAD) indicates that FDI inflows into South Africa declined from an equivalent 2.3% of gross domestic product (GDP) during 2013 to 0.5% of GDP in 2016, with PwC’s Strategy& estimating a reading of around 0.4% of GDP for 2017. The overall number of completed deals with South Africa as the target market declined form 163 in 2015 to 117 in 2016, and fell to just 79 in 2017.
On a positive note, President Cyril Ramaphosa has taken steps to address FDI confidence in South Africa. In his SONA 2018, President Ramaphosa promised “a major push this year to encourage significant new investment” in the economy. To this end, the President has organised an Investment Conference on October 26th, 2018, “targeting both domestic and international investors to market the compelling investment opportunities to be found in our country.”
With the Investment Conference approaching fast, it is important to consider what foreign investors are looking for when they consider a direct investment into a specific country. What do potential investors want to see to improve the attractiveness of an economy to them? “These are some of the questions challenging governments and investment agencies worldwide in their quest to attract FDI inflows,” Viljoen comments.
The Strategy& research found that differences in factors such as trade openness, efficiency of government regulation, safety and security, property rights, quality of infrastructure, control of corruption, and policy continuity are associated with differences in FDI inflows, as discussed in a South African context in the report. Further, the results show that, across 132 countries, the two factors showing the highest correlation with FDI inflows are openness to trade and the efficiency of government regulation.
“It is encouraging to note that South Africa has already promised to address a number of these issues,” Viljoen says. President Ramaphosa made particular promises in SONA 2018 related to a number of factors identified in our analysis. Some of these are: easing the regulatory barriers for small businesses; intensifying efforts to tackle crime and build safer communities; and improving the quality of infrastructure.
The value of South Africa’s FDI inflows during 2010-2016 was equivalent to an average of 1.2% of GDP, compared to a global mean of 5% of GDP. Countries that received a similar level of FDI to that of South Africa include Cote d’Ivoire, Hungary, New Zealand, Nigeria, Sri Lanka and Swaziland. All of these countries experienced FDI below the global average.
To further encourage investment interest, PwC’s Strategy& economists make the following recommendations:
1. Near-term (period overlapping the Investment Conference) – President Ramaphosa’s investment envoys must be empowered with information on progress and plans regarding the promises made in SONA 2018. Importantly, local investors and the domestic business community must also be well informed about these factors.
2. Short-term (towards the 2019 elections) – Get investment-enablers on board, e.g. consultancy firms, marketing companies, organised business, academics, etc.
3. Medium-term (5-year horizon for the President’s R1.2 trillion investment campaign) – Provide the public, business and investment communities with regular updates about envoy visits and progress on the topics identified in this report.
4. Long-term (reaching the goals of the National Development Plan 2030) – Align R1.2 trillion investment goals and strategies with NDP 2030 goals and strategies. Ensure that economic planning beyond 2030 is communicated timeously.