Trade openness and the efficiency of government regulation are amongst the most influential factors globally on the value of foreign direct investment (FDI) inflows that a country receives.
Among upper middle-income economies like South Africa‚ the next most influential factors are the ease of trading across borders and safety and security considerations. These are some of the key highlights from an analysis carried out by PwC’s Strategy& economists‚ issued on Thursday.
Foreign direct investment is critical to stimulate economic growth and financial sustainability. In particular‚ for emerging economies‚ foreign investment inflows are vital for transferring money and expertise from multinationals to local enterprises.
Foreign investors look to a number of macro factors when considering FDI. These not only relate to the economic outlook for a particular country but also policy decisions taken by a government. Investors also tend to be wary of any economic and political uncertainty. In South Africa‚ recent political and economic uncertainty‚ including the perception of corruption‚ have clouded investor sentiment.
‘What foreign investors want: South African insights from a global perspective on factors influencing FDI inflows since 2010’ – sets out to ascertain what foreign investors are looking for when investing in a country‚ with a particular focus on South Africa’s performance in this regard.
The analysis identifies 19 key variables that potential investors will consider in their investment decisions: political stability; policy continuity; exchange rate stability; labour force affordability and flexibility; safety and security; property rights; state stability; investment freedom; competitiveness of the economy; quality of infrastructure; efficiency of government regulation; control of corruption; rule of law; quality of governance; trade openness; investor protection; corporate tax rate; ease of trading across borders; and natural resources.
Data from the United Nations Conference on Trade and Development (UNCTAD) indicates that FDI inflows into South Africa declined from an equivalent 2.3% of gross domestic product (GDP) during 2013 to 0.5% of GDP in 2016‚ with PwC estimating a reading of around 0.4% of GDP for 2017.
The overall number of completed deals with South Africa as the target market declined from 163 in 2015 to 117 in 2016‚ and fell to just 79 in 2017.
On a positive note‚ President Cyril Ramaphosa has taken steps to address FDI confidence in South Africa. In his SONA 2018‚ President Ramaphosa promised “a major push this year to encourage significant new investment” in the economy. To this end‚ the President has organised an Investment Conference on October 26th‚ 2018‚ “targeting both domestic and international investors to market the compelling investment opportunities to be found in our country.”
With the Investment Conference approaching fast‚ it is important to consider what foreign investors are looking for when they consider a direct investment into a specific country. What do potential investors want to see to improve the attractiveness of an economy to them? These are some of the questions challenging governments and investment agencies worldwide in their quest to attract FDI inflows.