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FOREIGN DIRECT INVESTMENT AND ITS …

FOREIGN DIRECT INVESTMENT AND ITS importance TO THE ECONOMY OF SOUTH AFRICA by AUGUSTINA ASAFO-ADJEI submitted in fulfilment of the requirements for the degree of MASTERS IN COMMERCE in the subject ECONOMICS at the UNIVERSITY OF SOUTH AFRICA SUPERVISOR: PROFESSOR DUNCAN HODGE NOVEMBER 2007 ii ACKNOWLEDGEMENTS My indebtedness and gratitude go to the many individuals who have helped shape this dissertation, most particularly my supervisor, Professor Duncan Hodge for his guidance, constructive comments and valuable advice.

FOREIGN DIRECT INVESTMENT AND ITS IMPORTANCE TO THE ECONOMY OF SOUTH AFRICA by AUGUSTINA ASAFO-ADJEI …

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1 FOREIGN DIRECT INVESTMENT AND ITS importance TO THE ECONOMY OF SOUTH AFRICA by AUGUSTINA ASAFO-ADJEI submitted in fulfilment of the requirements for the degree of MASTERS IN COMMERCE in the subject ECONOMICS at the UNIVERSITY OF SOUTH AFRICA SUPERVISOR: PROFESSOR DUNCAN HODGE NOVEMBER 2007 ii ACKNOWLEDGEMENTS My indebtedness and gratitude go to the many individuals who have helped shape this dissertation, most particularly my supervisor, Professor Duncan Hodge for his guidance, constructive comments and valuable advice.

2 I am very grateful to Etretia de Villiers from the Unisa Library for her help in locating credible sources. Also, special thanks to my husband Eric and to my family for their support, help and patience. iii ABSTRACT This study focuses on FOREIGN DIRECT INVESTMENT ( FDI ) and its importance to the economy of South Africa. Recognising that FDI, notwithstanding the type, can contribute to economic growth and development, most countries including South Africa are constantly working to attract it, and hence its demand has become highly competitive.

3 However, FDI does not go without some negative effects, such as conflicts between host and investor country, and the creation of damaging competition to local firms. These negative effects could be minimised if policies and strategies for the promotion and attraction of FDI is part of, and integrated into, general economic development and economic reform policies, and not seen in isolation. Although South Africa has implemented strategies to attract more FDI, a refinement of some of these policies is needed if the country is to be successful in this regard.

4 Key terms: FOREIGN DIRECT INVESTMENT ; multinationals; balance of payment; FDI models; FOREIGN inflows; FDI policies; exchange rate; host country; South Africa; economic growth . iv CONTENTS PAGE ACKNOWLEDGEMENTS ..ii CHAPTER 1: 1 CHAPTER 2: HISTORICAL BACKGROUND TO FDI .. 7 7 HISTORICAL BACKGROUND TO FDI: EMPIRICAL EVIDENCE AND TRENDS .. 7 SUMMARY.

5 14 CHAPTER 3: DETERMINANTS OF 16 16 DETERMINANTS .. 16 The theoretical model .. 16 The eclectic model .. 19 The gravity model .. 25 SUMMARY .. 27 CHAPTER 4: TYPES OF FDI .. 30 30 TYPES OF FDI .. 30 Export-oriented INVESTMENT .. 30 Market-development INVESTMENT .. 33 Government-initiated 35 Acquisitions and greenfield 38 SUMMARY .. 40 CHAPTER 5: THE EFFECTS OF FDI ON AN 42 42 THE EFFECT OF FDI ON THE BALANCE OF PAYMENTS, INTEREST RATES AND EXCHANGE RATES .. 42 FDI AND EMPLOYMENT .. 51 GENERAL EFFECTS OF FDI ON AN ECONOMY .. 53 SUMMARY.

6 54 CHAPTER 6: THE NEED FOR FDI IN AN ECONOMY .. 56 56 THE BENEFITS OF FDI .. 57 DRAWBACKS OF 66 SUMMARY .. 72 CHAPTER 7: POLICIES TO ATTRACT FDI INTO AN ECONOMY .. 73 73 GENERAL ECONOMIC 74 NATIONAL FDI POLICIES .. 80 INTERNATIONAL FDI POLICIES .. 84 OTHER POLICIES .. 85 SUMMARY .. 88 CHAPTER 8: FDI IN SOUTH 91 91 THE SOUTH AFRICAN ECONOMY .. 92 iv FDI AND ITS IMPACT ON THE SOUTH AFRICAN ECONOMY.

7 96 THE PROSPECTS OF FDI IN SOUTH AFRICA .. 105 RECOMMENDATIONS FOR INCREASE IN FDI IN SOUTH AFRICA 106 SUMMARY .. 112 CHAPTER 9: 114 BIBLIOGRAPHY .. 120 CHAPTER 1 INTRODUCTION 1 CHAPTER 1: INTRODUCTION This research relies mainly on secondary information and data collection. Data collection will involve an indirect approach, such as the gathering of information from academic publications. Credible internet sources on FOREIGN DIRECT INVESTMENT ( FDI ) issues in South Africa and across the world are considered.

8 A review of relevant literature on the subject by previous writers on FDI is also used extensively. The aims and scope of this dissertation are discussed below, chapter by chapter: In Chapter 2, various definitions of FDI by various disciplines are studied and an attempt is made to define FDI in a broader sense by considering the elements of FDI, namely long-term INVESTMENT , control, FOREIGN investors and the host country. FOREIGN INVESTMENT may take another form which is not classified as FDI, but as portfolio flows. In this chapter, the distinguishing feature of FDI and portfolio flows is highlighted.

9 The chapter also considers global trends with regard to FDI flows to host countries as well as attempts to gauge the bias in the flow of such INVESTMENT by comparing the flows to both developed and developing nations. A look at the bias in the flow of FDI to different economies necessitates the study of the determinants of FDI in order to understand some of the factors that determine this type of INVESTMENT . Hence the next chapter is dedicated to a discussion on the determinants of FDI in the form of economic models. In Chapter 3, the various determinants of FDI are discussed in the form of the following FDI models: Under the theoretical model, interest rate is described as a dependent variable and hence FDI is expressed as a function of interest rates.

10 Interest rates represent return on capital, and where capital is in abundance, especially in developed countries, interest rates tend to be lower, compared to developing countries where capital is inadequate and hence the cost of capital has to be raised in order to attract it. The eclectic model is based on the principle that an investor will have a competitive edge in the form of trademarks, production techniques, entrepreneurial skills and returns to scale, and speculates that the intended INVESTMENT location has specific advantages in the CHAPTER 1 INTRODUCTION 2 form of the existence of raw materials, low wages, special taxes or tariffs.


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