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Regional integration, FDI, and competitiveness: the case of SADC*
Andrea E. Goldstein
OECD Development Center
OECD-Africa Investment Roundtable Johannesburg, South Africa, 19 November 2003
Posted with permission from OECD Development
Center as part of the OECD-Africa Investment Roundtable, Johannesburg, South Africa, 19 November 2003.
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In partnership with NEPAD and the African Development Bank, OECD organised a Roundtable on Investment
Initiatives which addressed the critical issues of African priorities and ways that OECD countries can
contribute to the improvement of the business environment for domestic and international investors, and
to building the necessary capacities. This roundtable was held in conjunction with the Global Forum on
International Investment which took place on 17-18 November 2003.
Papers can be accessed from the following
url:
http://www.oecd.org/document/47/0,2340,en_2649_33709_18527919_1_1_1_1,00.html
Foreign direct investment (FDI) to non-OECD countries, one of the key features of
globalisation, may contribute to productivity and income growth throughout different
channels – e.g. bridging the savings/investment gap, introducing modern capital goods and
more sophisticated management practices, sustaining the drive to reform host countries’
economic policies, and creating global vertical production networks whereby multinational
firms locate input processing in their foreign affiliates. Although policy interventions may
help to maximise benefits and minimise unintended consequences, they may also introduce
additional distortions and aggravate problems.
This study describes major FDI trends in Southern Africa and analyses its impact on the
region’s ability to compete on global markets following the adoption of economic
liberalisation, including progress in regional integration. Africa lags behind other regions in
attracting FDI for a number of reasons – a high incidence of war, inappropriate governance,
and price and currency instability – all of which also plague Southern Africa. The 14 member
countries established the Southern African Development Community (SADC) in 1992 and relaunched
it as a Free Trade Area in September 2000 to promote development and economic
growth, alleviate poverty, enhance the standard and quality of life for the people of Southern
Africa, and support the socially disadvantaged through regional integration. South Africa’s
market size makes it the natural destination for FDI destined to supply local demand, and the
associated higher quality of physical and human infrastructure further reinforces the
locational advantage. Some of the other SADC members, on the other hand, appear unlikely
destinations for foreign companies, either because their GDP is so small, or for the bellicose
climate that have characterised them in the 1990s. This having said, FDI has reached them as well. FDI flows remain lower than in Asia, Eastern Europe, and Latin America, although they
are still substantial, especially in some countries. A case in point is Angola, which has seen
its strategic relevance as a source of oil for the industrialised world increase in recent years,
with abundant FDI flows despite a civil war ravaging the country for almost 30 years.
Relatively little is known about FDI in SADC, not least because data limitations are massive
outside of South Africa. What is the economic, normative and legal framework of FDI in
SADC? How important is integration in explaining FDI to SADC? What impact is FDI
having in these nations’ arduous path towards growth-enhancing insertion into the world
economy? And what is special about South African corporations that explain their relative
enthusiasm in investing in countries – including in non-SADC Africa – from which OECDbased
ones still stay clear?
This study tries to fill this gap by exploring in some depth a few industrial and service
sectors. There is increasing evidence that the same opportunities that “multinationalisation”
open elsewhere are present in SADC – and so are the problems created in the process. The
automotive industry provides a good example of the possibilities that commodity-dependent,
high-income developing countries have of introducing mechanisms to deepen the process of
manufacturing industrialisation and widen the sources of competitive advantage. Another
sector where there is evidence of a virtuous FDI-efficiency cycle is telecoms – although here
market competition plays a notoriously more important role than the form of ownership
(public vs. private, or domestic vs. foreign). In other supply chains, the arrival of foreign
companies is accompanied by increasing market concentration. While this exposes domestic
firms to the reality of cut-throat competition, consumers may not necessarily benefit unless
appropriate regulatory mechanisms are introduced. This is the case in particular of agribusiness
segments, where the relationships between farmers, processors and retailers are very
complex and emerging issues are similar in SADC and in developed economies.
There are a number of important policy issues that have to be tackled heads-on if the region is
to attract more FDI, make such flows less volatile, maximise their developmental impact, and
minimise the costs that opening to (distorted) world market forces may impose. The record of
Southern Africa, and a fortiori of Africa, is wanting as far as various microeconomic factors
are concerned – and these are the ones that make companies flee. Recurring complains
include the high cost of doing business in the region – in terms of interest rates, labour
administration, transportation and freight costs –, the seemingly unstoppable rise of crime
from notoriously high rates, especially in rural areas, and the deep distortions to business
activity provoked by the HIV-AIDS pandemic. Much can therefore be made to make
economic and political climate welcoming to foreign investors. Firming so-called
macroeconomic fundamentals is clearly necessary for its own good, not only because
foreigners demand it but also and more fundamentally because there can be no reduction of
poverty unless taxes are collected, fiscal receipts are spent on education, health, and
infrastructure, and reduced external vulnerability allows to smooth exchange rate volatility.
Equally fundamental is that domestic investment must increase: the experience of the newlyindustrialised
countries in Asia suggests that growth precedes the FDI boom as foreign
investors will only start venturing into “strange” countries once there is evidence that
residents are putting their money there. This applies to private agents as well as to public
authorities. To generate sustainable growth, economic reforms must succeed in transferring
resources to dynamic sectors and uses and, to achieve this, policy-makers must creatively package basic economic principles into institutional designs that are sensitive to local
opportunities and constraints. For this reason the debate on development strategies that is
now resonating in South Africa and other large emerging economies such as Brazil and India
is not a luxury, but rather a necessary component of a broader package that aims at improving
their competitiveness.
Efficiency spill-overs from inward FDI depend on openness to imports and the technical
capability of local firms. Market competition remains the most efficient tool to put pressures
on producers of goods and providers of services in a non-distortionary way, as proven by the
OECD work on regulatory reform. In the face of the severe budget constrain, the dearth of
qualified labour calls for innovative forms of private-public partnership to improve SADC
countries’ ability to attract high-quality FDI. Although host country policy can influence
both, it is difficult to provide unequivocal policy advice, since some of the policies that
maximize the potential spillovers from a given “pool” of appropriable technology (such as
technology transfer requirements or active competition policies) may actually reduce the
attractiveness of the host country to some foreign investors.
Finally, the political dimension of the increased role of foreign investors must be mentioned.
A growing public concern about “financial colonisation”, especially by South African
companies, has sparked political controversies in countries such as Tanzania and Zambia.
Political opposition to FDI is not exclusive to Africa, and even less so to SADC. It often
originates in the manipulation of public opinion by groups that were exploiting to their
advantages the rents created by autarchic economic policies and are obviously threatened by
the emerging competition from more efficient foreign producers. But it call for a wide range
of measures, from better public education on the reality of globalisation to stronger actions to
transfer its benefits to the public at large and introduce compensatory mechanisms to those
that lose from it.
Different considerations apply to cases where foreign companies have been accused of not
paying sufficient attention to governance issues – when not of being themselves at the origin
of corruption and malpractices. Various approaches have been suggested. One is to make all
such payments a legal reporting requirement. An alternative, proposed by Global Witness and
George Soros, is to make such reporting a requirement for listing on major stock exchanges.
A further alternative is for the companies to report on a confidential basis to the international
financial institutions, which would then collate the information and publish aggregate
revenue figures. This has the advantage of preserving the confidentiality of firm-specific
information while providing a global certification system for information.
In sum, there is no first-best “institutional technology” that is inherently superior and may
work as a quick fix for countries that wish to enhance their pro-active participation on global
markets on the basis of domestic and foreign capital. If anything, this point reinforces the
need for a fair evaluation of different options at the national level, devoid of ideological a
prioris. It also highlights the all-too-obvious issue that national interests diverge between
industrial and developing countries – or OECD and non-OECD ones to use a definition that,
while not very accurate, is common – when discussing the suitability of a multilateral
investment framework.
Footnote:
* This study is a contribution to the 2003-04 programme of work of the OECD Development Centre, Activity 1:
Trade, Competitiveness and Adaptive Capacity. Besides the many people that helped me in gathering data and
information, I am indebted to Kiichiro Fukasaku, Michael Gestrin, Trudi Hartzenberg, Ulrich Hiemenz,
Hildegunn NordРµs, and Simon Roberts for most useful and detailed comments on drafts of this document. The
usual caveat applies: in particular, the opinions expressed and arguments employed are my sole responsibility
and do not necessarily reflect those of the OECD, the OECD Development Centre, and their Members.
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