Question

question2

2.1 Highlight the recent investment outflow from South Africa.

2.2 Explain the consequences of the outflows on the South African economy.

2.3 Further discuss possible ways in which investment can be attracted to South Africa.

Answer 1

1. The trend of declining foreign direct investment (FDI) to Africa is set to exacerbate significantly in 2020 amid the dual shock of the coronavirus pandemic and low prices of commodities, especially oil. FDI flows to the continent are forecast to contract between 25% and 40% based on gross domestic product (GDP) growth projections as well as a range of investment specific factors.Manufacturing industries intensive in global value chains are also strongly affected, a sign of concern for efforts to promote economic diversification and industrialization in Africa. Although all industries are set to be affected, several services industries including aviation, hospitality, tourism and leisure are hit hard, a trend likely to persist for some time in the future,”

2. The effects of capital inflows on South Africa's macroeconomy and on the transmission mechanisms of credit extension, asset prices and household consumption expenditure. We find that the capital inflows have varied macroeconomic effects. Furthermore, we establish that the central bank uses a strategy of ongoing sterilisation for portfolio inflows and Foreign Direct Investment (FDI), but does not sterilise other inflows. With regard to the impacts of the capital inflows on the transmission mechanisms, the results indicate that only portfolio inflows have a positive impact on private sector credit extension, mortgage extensions and credit card expenditure. In addition, the results confirm that portfolio and other inflows have more of a positive impact on asset prices than FDI. Finally, we establish that FDI and portfolio inflows lead to increased household consumption expenditure on durables while other inflows have a negative effect on all forms of household consumption.

3. Strategies for attracting quality FDI in South Africa-

1. Open markets and allow for FDI inflows. Reduce restrictions on FDI. Provide open, transparent and dependable conditions for all kinds of firms, whether foreign or domestic, including: ease of doing business, access to imports, relatively flexible labour markets and protection of intellectual property rights.
2. Set up an Investment Promotion Agency (IPA). A successful IPA could target suitable foreign investors and could then become the link between them and the domestic economy. On the one side, it should act as a one-stop shop for the requirements investors demand from the host country. On the other side, it should act as a catalyst in the host’s domestic economy, prompting it to provide top notch infrastructure and ready access to skilled workers, technicians, engineers and managers that may be required to attract such investors.
3. Think carefully about sectors/activities to be targeted. Investment and location decisions of suppliers may be dependent on those of prime multinational investors in the host economy.
4. Encourage first-time foreign direct investors. Foreign firms that are not already part of an extensive network of subsidiaries are readier to accept linkages to domestic suppliers.
5. Provide access to credit by reforming domestic financial markets. Setting-up a business-friendly financial system helps indigenous firms to respond to challenges and impulses from foreign entrants, to self-select into supplier status, and to thereby grow and prosper. Thank you.