The 2011 World Investment Report
Paul Kruger, a tralac Researcher, discusses the 2011 World Investment Report
Last week the United Nations Conference on Trade and Development (Unctad) published its 2011 World Investment Report. The report found that emerging economies increased their prominence in 2010, both as recipient and as outward investor.
Developing and transition economies for the first time attracted more than half of the global foreign direct investment (FDI) flows while the outward FDI from these economies also reached record highs. Most of their investments were directed at other developing economies, illustrating the increasing influence and prominence of a group of emerging countries in global trade. Regions that experienced strong growth in FDI inflows include East and South East Asia and Latin America, but despite the strong performance in these emerging regions, investment in the poorer developing regions, such as Africa, continued to fall.
FDI inflows to Africa fell by 9 per cent in 2010, following the downward trend which started in 2009 after the resource boom. FDI in natural resources (particularly the oil industry) dominated FDI flows to the continent with the largest recipients being Angola, Egypt, Nigeria and Libya. In terms of industry distribution, the primary sector (mainly coal, oil and gas) accounted for 43 per cent, manufacturing for 29 per cent (of which almost half was in the metal industry) and services (mainly communications and real estate) for 28 per cent.
In southern Africa, FDI inflows fell by 24 percent while South Africa’s inflows fell by 70 percent. It can however be argued that FDI in South Africa is characterised by big deals such as the Walmart investment which will boost South Africa’s performance in the coming year. Political factors such as the repeated calls for nationalisation and the intervention of the government in the Walmart deal may nevertheless impact negatively on South Africa’s image as the gateway to Africa. Another concern is the sentiment of the multinationals or Trans National Corporation (TNCs) towards South Africa and other African countries. The results from Unctad’s World Investment Prospects Survey 2011 which provides an outlook on future trends in FDI as seen by the 205 largest multinationals and 91 Investment Promotion Agencies, is telling. As part of the study they had to identify the top potential host economies for foreign investment. As expected, the top five on the list include China, India, United States, Russia and Brazil with other smaller emerging countries such Chile, Columbia, Indonesia, Peru and Vietnam also making it onto the list. No African country has made it onto the list of top potential host economies, something which must be especially worrying for South Africa.
Further concern for the African regional market is that intra-regional FDI within Africa is still limited and mainly originates from South Africa. According to the report, the lack of intra-regional FDI is a missed opportunity as the geographical proximity and cultural affinity should provide regional TNCs with a certain advantage. It notes that the harmonisation of Africa regional trade agreements and the inclusion of FDI regimes could hopefully help Africa to achieve more of its intra-regional FDI potential.
What can South Africa and other African countries do to improve their FDI flows? The Unctad report argues that non-equity modes (NEMs) of international production, such as contract manufacturing, services outsourcing, contract farming, franchising, licensing and management contracts can help countries to integrate in the global value chains of TNCs. These multinational corporations coordinate several activities within their global chains which are either conducted in-house (internalisation) or entrusted to other firms (externalisation). A NEM arises when a TNC externalises part of it operations to a host country based partner in which it has no ownership stake, while maintaining a level of control over the operation by contractually specifying the way in which it is conducted.
There are various forms of NEM as indicated above but a practical example in the South African context is contract farming. The report provides the example of food manufacturer Nestle from Switzerland which has more than 600 000 contract farmers in over 80 developing countries. More recently, the R100 million suppliers’ fund made available by Walmart will be used to identify and develop contract farmers which will eventually become instrumental in Walmart’s strategy to supply the domestic market. Being integrated in that supply chain can potentially lead to increased regional and even international exports to satisfy Walmart’s demands in other markets. Integration in the external operations of a powerful TNC can open global doors. Also in the area of services outsourcing South Africa has the ability to competitively supply a wide range of services, but this potential remains under developed and unexploited.
The report recommends that the most suitable policy depends on: i) a country’s level of economic and technological development, (ii) its actual and latent NEM-potential, and (iii) its broader development and industrial policy. It is time for South Africa to identify the areas in which it has a competitive advantage and articulate a strategy to integrate these firms in the regional and international value chains. Some of South Africa’s services firms are already entrenched in regional operations but can this not be further supported by the government? Services liberalisation at the regional level can integrate the sub-Saharan African market while bilateral services negotiations with the top emerging nations can bring South Africa into the global value chains. One is obvious and the other ambitious, but both are playing to South Africa’s strengths.