Foreign direct investment (FDI) flows into SA are expected to gain momentum in the coming year after declining over the past 12 months.

FDIs are more desirable than other forms of investment such as portfolio inflows as their long-term nature means they help create sustainable and permanent jobs. This is helpful to a country with chronic unemployment such as SA. FDI can also help promote a country’s productive capacity.

FDI flows into SA fell sharply from US$8,3bn in 2013 to $5,7bn last year, according to the UN Conference on Trade & Development’s (Unctad) World Investment Report released in June.

SA has an attractive profile, says Yunus Hoosen, head of the Investment Promotion & Inter-Departmental Clearing House at the department of trade & industry.

Manufacturing investments are also beginning to take off after struggling over the past few years, he says.

SA wants investments to move away from the traditional resources and manufacturing to other sectors.

“As we are scaling up the Industrial Policy Action Plan we are looking at diversifying beyond reliance on commodity investment,” Hoosen says.

Manufacturing has been in the doldrums, hit hard by weak demand, rising input costs and low global commodity prices.

Companies such as Unilever, Nestlé, Procter & Gamble and BMW are investing for the long term in SA, Hoosen says.

SA’s economic challenges, including pedestrian economic growth and strikes, may have weighed on investment sentiment, but these have not led to any company pulling out of investing in the country, he says.

This is supported by recent comments from BMW’s global group marketing head, Ian Robertson, who says uncertainty over industrial policy and labour stability will not deter the German car maker from further investment in SA.

BMW’s SA production plant in Rosslyn, Pretoria, produces around 80 000 3-Series models a year, most of which are exported to other countries.

Whether FDI flows into SA improve or remain stagnant next year will depend a lot on what happens in China and other emerging markets, says Frost & Sullivan senior economist Craig Parker.

He says though European companies see SA as safe for FDI, the country has to maintain stable politics and avoid corruption as these “scare away investments”.

The economic slowdown in China will negatively affect the amount of investment it will be able to make in SA, Parker says.

Unctad forecasts global FDI flows to increase from US$1,2trillion last year to $1,4trillion this year and to $1,5trillion next year.

These projections are mainly based on growth prospects in the US, the demand-stimulating effects of lower oil prices, accommodating monetary policy, and continued investment liberalisation and promotion measures, says Jorge Maia, head of the research & information department at the Industrial Development Corp.

An Unctad survey of more than 1000 top executives of large multinational enterprises found that executives from Africa and the Middle East were the most optimistic about FDI prospects: 67% expect global FDI activity to increase in the next few years.

A number of economic and political risks, including ongoing uncertainty in the eurozone, potential spill-overs from geopolitical tensions and persistent vulnerability in emerging economies, were seen as downside risks to the FDI flows outlook.

Platinum miners embarked on a five-month strike last year, which dented economic growth. This year, GDP declined by 1,3% in the second quarter due to contractions in agriculture, mining and manufacturing. These are some of the factors weighing on investor and business confidence.

The economy’s “short-term constraints” are not enough to deter investors, who still find SA a good investment destination, according to Hoosen.

“Overall, I think we have a healthy and steady investment pipeline of R43,8bn over last year that we have attracted as potential investment projects,” he says.

FDI inflows to SA were registered at around R30bn from January to July this year, resulting in the creation of just over 5 000 jobs.

The slow growth in FDI is not unique to SA. Globally, FDI flows slowed to $1,2trillion last year from $1,5trillion in 2013.

Companies and countries have had to slow investments down because of weak global demand and weak economic growth.

Unctad is confident a recovery in global FDI “is in sight in 2015 and beyond”. FDI flows today account for more than 40% of external development finance to developing and transitioning economies.

FDI flows out of SA are bucking the trend. They are gaining momentum and are an indication of the growing appetite by local companies to invest in high-growth and high-demand markets, particularly in other African countries. SA’s outward FDI increased to $6,9bn last year from $6,6bn in 2013. Retail companies and banks are leading investments outside SA.

Though the widespread fall in commodity prices over the past year will have a mixed impact on the terms of trade of a net oil importer like SA, it may also delay investment spending and projects, particularly those relating to the extractive industries and construction sectors, Unctad warns.