South Africa's foreign direct investment has been in steady decline

05 November 2018 4 min. read
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As South Africa moves towards a new chapter in its economic growth under the new President Cyril Ramaphosa, PwC’s strategy consulting arm Strategy& reports that the country is struggling with a steady decline in the levels of its foreign direct investment (FDI), which is an essential component of the country’s growth plans.

South Africa has been struggling with slow economic growth in recent times, particularly since the global dip in oil and commodity prices in 2014. Many of the country’s most important sectors such as mining suffered major setbacks as a result of the dip, which has cause broad economic stagnation.

In addition, the country’s business environment is currently having to contend with an array of scandals and incidents of large-scale corruption, while simultaneously navigating global issues of digital and regulatory disruption. Amid these developments, the country has recently undergone a change of leadership, which many have lauded as a new era for economic growth.

Slippery slope of economic decline

The new president has immediately declared his intentions to promote rapid economic growth in the country, through a combination of widespread privatisation, regiulatory relaxation and the attraction of foreign direct investment. The South Africa Investment Conference is an example of the concerted efforts being take to achieve this goal.

Specifically, the new leader hopes to generate private investment in excess of R1.2 billion over the next half a decade, which is anticipated to bring about a corresponding boom in jobs. Unemployment is one of the most pertinent issues currently plaguing the South African economy – a scenario that is only expected to get worse with the advance of automation.

Nevertheless, a successful implementation of the new leader’s economic growth drive is expected to generate between 1 and 1.5 million new jobs over the next five years. A crucial component of this successful implementation, however, is the generation and attraction of substantial FDI flows.

Correlations with FDI inflows

According to Strategy&’s new report, this component of economic growth appears to be in steady decline. The report cites data from the United Nations Conference on Trade and Development (UNCTAD), which indicates that FDI in South Africa has fallen from occupying a 2.3% share in the GDP in 2013 to a 0.5% share in 2016.

Strategy&’s independent assessment revealed a total FDI share of approximately 0.4%when measured for last year. Perhaps the most damaging consequence of this deterioration in FDI inflows is the fact that the business confidence levels in South Africa have been declining in tandem.

A number of factors are contributing to this decline in FDI flows. Traditionally, the most important features of an economy to attract FDI include the openness of the trade environment, the efficiency of government regulation, and the affordability and flexibility in the labour force.

Correlations with FDI inflows – South Africa over time

South Africa’s issues with corruption and consequent regulatory intervention have led to situation where the trade environment remains relatively restricted and government regulation remains inefficient. Moreover, a lack of skills in the industry 4.0 domain have led to a low level of flexibility in the workforce.

Other factors where South Africa struggles in the context of conventional FDI indicators are the ease of trading across borders, the overall levels of safety and security, state stability and the overall quality of property rights. The country also has issues with policy continuity and investor protection.