What is the Impact of Foreign Direct Investment on Unemployment in Post-Apartheid South Africa?

Bridging the Chasm between Ideology, Scholarship and Policy-Making by Siyaduma Biniza

2013

Table of Contents
Table of Contents.............................................................................................................................. 1 Introduction ...................................................................................................................................... 2 Background................................................................................................................................... 2 Scope 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? ..............................................15 What 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

| Table of Contents 1

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 postApartheid government; from the Growth, Employment and Redistribution (GEAR) macroeconomic package to the most recent National Development Plan (NDP). Moreover, the government’s 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.

| Introduction 2

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 Africa’s 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 FDI’s 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 | Introduction 3

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 Africa’s vast mineral resources, political stability and economic environment; which are characteristics that are often asserted as conducive to attracting FDI (Arvanitis, 2006). South Africa’s 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)

10000 BoP, Current US$, Millions 8000 6000 South Africa 4000 2000 0 -2000 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 Botswana Namibia

Source: International Trade Centre and World Bank Databank

| Introduction 4

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.

| Introduction 5

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 ‘hotmoney’ (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 | Understanding FDI 6

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 country’s 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 | Understanding FDI 7

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 | Understanding FDI 8

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 country’s 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

| Understanding FDI 9

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, | Understanding FDI 10

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 country’s 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 don’t 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 | Understanding FDI 11

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 country’s 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 country’s 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 | Understanding FDI 12

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 Wholesale and Retail trade 4%

Unspecified Secondary* 28%

Business Activities 26%

Mining and Quarrying 42%

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

| Motives, Mode of FDI and Policies 13

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 Africa’s 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 | Motives, Mode of FDI and Policies 14

means that, unless South Africa’s 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 postApartheid government’s adoption of the Apartheid government’s debt and it was followed by the GEAR macroeconomic package which was an indigenised policy package similar to | Motives, Mode of FDI and Policies 15

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 government’s 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 government’s 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 | Motives, Mode of FDI and Policies 16

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&A’s 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 | What does the evidence show? 17

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 Africa’s 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)
12 10 8 6 4 2 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 -2 2011 Foreign Direct Investment, Net Inflows (BoP, Current US$)

Billions

Source: World Bank Databank

| What does the evidence show? 18

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)

120 100 80 60 40 20 0 -20 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Unemployment, total (% of total labor force) FDI Inflow (Billion US$)

Source: World Bank Databank

| What does the evidence show? 19

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 government’s 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.

| What does the evidence show? 20

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. | What does the evidence show? 21

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 resourceseeking 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.

| What does the evidence show? 22

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 stateowned 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 SABMiller’s 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.

| What does the evidence show? 23

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 exportorientated 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 crowdingout 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 (Wöcke & 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. | What does the evidence show? 24

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

80 70 60 50 40 30 20 10 0 -10 2004 2005 2006 2007 2008 2009 Change in FDI Inflows (% of 2004) Employment in Agriculture Employment in Industry Employment in Services

Source: World Bank Databank

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 | What does the evidence show? 25

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 (Wöcke & 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 (Wöcke & 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: (Wöcke & Sing, 2013, p. 23)

| What does the evidence show? 26

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

Source: (Wöcke & 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 | What does the evidence show? 27

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 government’s 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 | What does the evidence show? 28

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 resourceseeking 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

| What does the evidence show? 29

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 | Conclusion and Policy Recommendations 30

Africa due to its disregard for mode-specific impacts of FDI. Moreover, this study’s 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 country’s 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 Africa’s 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 | Conclusion and Policy Recommendations 31

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.

| Conclusion and Policy Recommendations 32

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 MIDP’s 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. | Conclusion and Policy Recommendations 33

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.

| Conclusion and Policy Recommendations 34

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