What does SA need to do to attract more Foreign Direct Investment? | #eBizInsights | Bryden Morton

In a press release, released by the South African Presidency on 16 April 2018, President Cyril Ramaphosa stated that foreign direct investment in South Africa had declined from R76 billion in 2008 to R17.6 billion in 2017. In the same statement Presidency said “This has been driven by low business confidence and regulatory uncertainty; and has resulted in slow growth, along with poor growth in employment.”

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Foreign direct investment (eg: building an operation plant) is critical to many emerging markets as this type of overseas investment is more long term and has a higher potential to translate into employment in comparison to indirect investment  (eg: investing in financial securities).
When making a decision regarding whether to make a direct investment or not, investors will scan the economic and political environment of an economy.
The investor will not invest if he/she feels that the risk is greater than the opportunity. In other words, an investor will seek an attractive investment proposition before deciding to invest and consider a more attractive opportunity either in another geographic region or in a different industry.

Recently a Presidential envoy on investment, made up of a number of South African professional ‘champions’ embarked on an investment road show with the ultimate goal of raising $100 billion over the next five years.
This translates to approximately R240 billion per year which is approximately three times the 2008 level per annum in nominal terms. This would be a phenomenal achievement and surely justify the current wave of economic confidence which has washed over South Africa since President Ramaphosa’s inauguration. As a first step on the road to success, the historical deterrents to foreign direct investment should be analysed so that we can understand the current state of these issues.

We then need to build towards alleviating these problems and improving the value proposition of potential direct investments. Where does South Africa rank in terms of our competitiveness? The World Economic Forum produces a global competitiveness index annually which ranks countries on the basis of how competitive their economy is. South Africa has slid from the 47th to 61st most competitive economy out of the 137 economies included in the analysis (WEF Global Competitiveness Report 2017 – 2018).
The report ranks countries on the basis of three sub-indices namely; Basic Requirements, Efficiency Enhancers, and Innovation and Sophistication factors. Table 1 details the factors (pillars) identified under each of these sub-indices as well as their rank relative to the comparator group.

Table 1: Sub-indices Pillars and Rank

Basic Requirements Rank Efficiency Enhancers Rank Innovation and Sophistication Factors Rank
Institutions 76 Higher education and training 85 Business Sophistication 37
Infrastructure 61 Goods market efficiency 54 Innovation 39
Macroeconomic environment 82 Labour market efficiency 93
Health and primary education 121 Financial market development 44
Technological readiness 54
Market size 30

*Source: WEF Global Competitiveness Report 2017 – 2018

 

Within Table 1, the pillars which rank within the lower half of the sample have been highlighted in red. These highlighted pillars are the pillars which should be addressed with the utmost urgency to improve South Africa’s competitiveness in the global market.

The Basic Requirements sub-index has three of its four pillars performing at a level that is within the lower half of the sample. The largest challenges faced by this sub–index are; high prevalence of tuberculosis and HIV, low life expectance and poor quality primary school education (primary school education quality ranked 116 out of the 137 country sample). The Efficiency Enhancers sub-index reports only two of its six pillars as being part of the lower half of the sample. Higher education and training suffered from challenges associated with poor quality maths and science education (ranked 128 out of 137), while the education system as a whole ranked 114 out of 137 countries. The labour market efficiency pillar is characterised by labour law rigidity, a low correlation between pay and productivity and an abrasive relationship between employers and employees. Cooperation in labour-employee relations ranked 137 out of 137 – worst in the sample. Similarly, flexibility in wage determination ranked 132 out of 137 – sixth worst.

Compiling and processing this information provides some very tacit clues as to where the South African economy is positioned relative to the global market as well as the areas that South Africa should focus on to improve its competitiveness as follows:.

  1. Education, from start to finish, must be prioritised. Recently, much has been done to improve accessibility to tertiary education; however, this will only translate into more skilled professionals if the individuals who study at tertiary institutions have a strong academic foundation.

 

  1. Government plans to roll out the full National Health Insurance (NHI) system by 2025 which will have a positive impact on many South Africans’ lives. This is still some way away and the benefits of the NHI will take some time to translate into meaningful results. In light of South Africa’s current poor health rankings, more should be done in the short term to improve public healthcare while awaiting the long term benefits of the NHI.

 

  1. Relations between employees and employers require a drastic change if South Africa is to be more economically competitive. The relationship between employers has been a deterrent to receiving foreign direct investment. In addition, the local labour market has been negatively affected by factors such as minimum wages, above inflation increase demands and rigid labour laws.

 

The summary above may appear to be simplistic as it contains only three points but addressing these three points will go a long way to improving South Africa’s competitiveness in the long term. However it is no easy task without any quick fixes in sight. Improving education starts at foundational level and dividends of improved foundational education will only be yielded once more skilled employees apply their trade in the economy – there is a long lead time between investment and dividends. Similarly, the public healthcare system will take time to evolve into the envisioned NHI and the positive results will be seen within the coming generations rather than in the short term. Finally, relations between employers and employees are considered ‘hostile’ by global standards as a result of historical factors as well as a poor link between pay and productivity (by global standards). This factor is much easier to address in the short term but needs legislative and change management.

This indicates that although it is very simple to identify the key target areas required to improve economic competitiveness, making these changes requires strong, long-term thinking leadership to effect long-lasting, meaningful, inclusive change.

 

Bryden Morton, B.Com (Hons) Economics, Executive Director – [email protected]

Chris Blair, B.Sc Chem. Eng., MBA – Leadership & Sustainability,  CEO – [email protected]

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