Foreign direct investment is one of the greater business tools for the international market. There is a number of countries and businesses all across the world which offers opportunities for foreign direct investment. This is an excellent way to not only enhance business controls in the overseas market but it also largely helps to improve the diplomatic relationship between two or more countries which is extremely important in the long run. Over the years there have been number of countries that have been placed in the emerging economy list where China and India are two most important countries with a huge market and great potential to expand its market and reach in the world. It cannot be denied that with the business power of these countries growing somehow the growth of other emerging economies have been kept behind the curtains (Stubbs, 2017). One such nation that has grown rapidly and has the potential to attract foreign direct investment is South Africa. The country has excellent infrastructure pretty similar to some of the first world nations but it still needs to work on certain areas to become first world nation. South Africa has attracted FDI for a long time now due to available opportunity and excellent endowment if natural resources. The present paper focuses on analysing the potential and opportunity of South Africa one of the emerging economies to attract FDI. It will discuss the present position of South Africa in terms of political, financial, socio-cultural and technological influences and the existing trade policies and exchange rates that might underpin the foreign investment in South Africa (Matyrko, 2017).
South Africa is located at the southern part of Africa. The country has a very long coastline that has a length around 2500 km. Oceans like the Indian and South Atlantic cover this country. The country is one of the largest among many nations in the world and in terms of volume South Africa ranks 25th in the world. The country is not so densely populated and the total population is 50 million people who hail from diverse cultures and religions, origins. Accordingly, their languages of speaking differ. Immigration is a factor that has increased the population over the last ten years (Onanuga and Onanuga,2018). Till the year 2008, the population of the country had not increased much and the rate of growth in population was 0 to .501 per cent. But from the year 2009, the population started to increase. The country is of nine provinces with a further division of 52 districts across 8 metro cities along with district municipalities 44 in number. 226 local municipalities form the district civic authorities. The GDP growth rate in the economy is not so phenomenal. From the period of 1993 to 2018 the average growth rate of GDP is 2.77 per cent. The type of economy in the country is first and third world standards. Developed parts of the country in term of economic conditions are same as UK and Australia. The underdeveloped economy of the nation is similar to that of the country such as Congo. Income equality and unemployment are problems in the country (Rahman and Rahman, 2018). The country has cultural diversity. FDI factors in the country are attractive and these are advanced parts of the economy, productive and diversified workforce to support the economy of the country.
Political condition in South Africa is stable and this is the reason amid several ups and downs the country manages to stabilize its economy with GDP rate supports the political and economic standards to uplift overall economy. Government always shows encouragement for accelerating growth in economy and service sector. The country’s employment and economy in the larger sense are supported by the service sector (Sunde, 2017). Manufacturing, as well as the service sector, are important contributors to the overall GDP of the country (Sunde, 2017). Focus on expansion of tourism as well as the development of medium and small business sector has become important. South Africa’s economy is substantially assisted by an increase in consumptions among households along with spending by government. Textile and sugar sectors have been focused on by government (Zhu et al, 2016). The automobile sector has also become important with investment by BMW in the country in the year 2016. Government puts importance on the development of English language for facilitating employment in the country for the betterment of young people. Literacy rate in the country depicts the initiatives of government for building a successful and educated nation. The current literacy rate in the country is 94.3 per cent. Government’s positive approach in R&D reflects through 2.2 per cent GDP allocation in form of investment in the field of research and development. Government is often criticized for inadequate foreign reserves as well as currency depreciation. Politically the country not free from corruption and works as a negative factor but government always put forward the effort to ensure minimization of corruption so that economic growth of the country can be ensured (Tuomi, 2011).
Economically The country has experienced volatility economy and the factor responsible for this is low prices of global commodities. Importance of manufacturing and service sector cropped in and short-term economic prosperity was the main feature of the South African economy in the country. However investment potential on a long-term basis was a motivational factor for improvement in FDI. The economy of the country achieved significant improvement in the third quarter of the year 2018 and the growth rate was recorded at 1.1 per cent. This was just 0.4 per cent in terms of growth in the previous year. If growth after the last quarter in 2011 is considered then this was the remarkable and top performance in economic aspect (Kransdorff, 2010). Many sectors in the country have emerged important and these are manufacturing, transport, communication, real estate as well as service sector driven by business. If GDP on basis of per capita is taken into consideration then South Africa ranks 48th in the world economy. The country has an advanced kind of economic infrastructure (Gohou and Soumaré, 2012). The labour market remains rigid though union membership is not so high. GDP of the country accounts for the combined value of imports and exports. In comparison to earlier periods, the government has become more open to foreign direct investment. Since March in 2016, the rate of interest in South Africa is following an increasing trend. Inflation in the country in the year 2018 has increased up to 5.2 per cent. Economic spending by people in the country is affected due to these trends.
Figure 1 South Africa country report
(Source: https://www.bti-project.org)
Cultural diversity is rich in the socio-cultural sphere in the nation. Many people lead poor lives. The traditional culture of the company is influenced by the rapid westernization of society. Society and cultural dimension of the country are influenced by economic conditions in the country. The problem of unemployment is not so severe but is one of the negative factors which hinder overall social fulfilment. The rate of literacy is moderate and has improved under initiate of government. Education and social awareness have become important and young population show a better amount of knowledge regarding the country’s socio-economic pattern. Service sector and manufacturing industry find no dearth of manpower who are talented and also hardworking (Thangamani, Xu and Zhong, 2010). Socio-cultural aspects in the country have changed. One of the major social problems is the lack of employment that the country has faced so far. Poverty also remains a huge problem for the country for a long time now. However, there has been a change in the scenario in the recent past but it’s still small to mention which clearly shows asks for better social and economic strategies to be brought in the country. It is important to support government and administrations so that society and economy grow together which is for the collective good of the nation. The diversity created by the presence of a wide number of ethnic people has helped it become more tolerant of different communities. This is a great advantage as it has helped to create a more diverse workplace in the country.
Technologically the country has made significant progress, especially in IT and communications. The country and has made progress in ICT implementation which is a good move by the country in the recent past. In fact, the arrival of IT has helped the government to create employment opportunities in the country. Overall it could be said that the development of technological infrastructure has helped the country to stabilise the economy to some extent. One of the major benefits that the government gets from here is the way technological growth is being capitalized by the country which is a positive sign for the country (Kyobe, 2011). FDI volume is dependent on the efficiency of technology and market appears to be more attractive causing more inflow of FDI. However challenges also appear and these are managing talent requirement and implementation and utilization of technology. Service along with the manufacturing sector find additional demand driven by technology-based manufacturing and service delivery (Amighini and Sanfilippo, 2014).
Efficient level of trade and investment have caused the development of South Africa. The country is gifted with a huge amount of natural resources. This possibly the reason the country is not dependent on foreign patronage.due to plenty of natural resources, South Africa is a large source of raw materials. The country accounts for 10 per cent of total gold in the world. A number of mines in the country are not less than thirty. Among natural resources, a large number of mineral reserves are significant for the country (Renard, 2011). Economic structure and development of the nation are largely influenced by gold and diamonds. South Africa exports million of diamonds across the world. Employment is largely facilitated by the diamond trading business in the country.in production of wine this country ranks 10th in the world. Suger and textile. Plenty of resources is hugely helpful for the countries development in the economy (Anyanwu, 2011).
Potential attractiveness in South Africa is high but not as much adequate for the higher level of FDI attraction. Investment potential in infrastructure is promising but comparatively the FDI attraction is not on par with expected level (Mebratie and Bedi, 2013). This is clear from the fact that between the period of 2016 and 2017 the FDI percentage was reduced to 41%. As per economic experts, domestic demand was less and this is the main reason for the decline in the rate of FDI during the period. In 2017, the country became the 68th receiver of FDI (Sunde, 2017).
Foreign currency largely influences trade and commerce between countries and since South Africa is into the active business it largely helps to improve business with lower exchange rates. When mostly the exchange rate is considered in US dollars even a slight deviation in the exchange rates would affect the business and prices would go up. It is important to mention that while effectively analyzing the foreign currency and exchange influences on the market it could be stated that in foreign transactions the weaker currency gets extra benefits (Vijayakumar, Sridharan and Rao, 2010).
Many developed countries were important investors in South Africa in 2016 and they are active investors in the country. These countries are Australia, Japan, the United Kingdom, Germany, Netherlands and Switzerland. Maximum investments were in the areas of mining, manufacturing, transports, retail and financial sector. The automobile sector has also invited FDI (Jadhav, 2012). The investment worth $417 million by BMW in the country is remarkable for the period of 2016. From this year, manufacturing of automobile is one of the major sources of FDI. Production of X3 sport-utility vehicle was the purpose that motivated BMW to invest in the country (Sunde, 2017).
The foreign trade policy of South Africa is regularly checked and analyzed which helps the country to get into the trade. It has several trade treaties with different countries which helps them with their foreign trade. It is important to note that South Africa and other countries have strong existing diplomatic relations and trade treaties where both the entities have been flexible in entering into contracts on their varied resources and for support to each other. South Africa has signed labour agreements with several countries already to pursue cooperation in trade and commerce for better-structured ties.
From the point of views of investors, South Africa’s attractions are due to many factors. These include productive economy and huge natural resources along with the expected level of political steadiness. Country’s legal system is transparent. However, corruption is a factor that often discourages investors and government and the country’s legal system are considerate on this factor for bringing a stable solution. Concerns among investors are high regarding inadequacy in structural reforms and policy framing and implementation in comparison to requirement (Blankley and Booyens, 2010). South Africa has signed 42 bilateral treaties for investment. Although investment potential is high which shows better FDI possibilities, foreign investors are often discouraged by legal uncertainties. In December, the year of 2015 protection of investment Act was promulgated which specifically aims to ensure legal assurance to foreign investors who are willing to make or have made an investment in the country (Mhlanga, Blalock and Christy, 2010). But the outcome is not still very satisfactory. According to World Bank South Africa has achieved the rank of 82 among total 119 nations. The macroeconomic influence in favour of the country’s progress is expedited by economic reforms. The country has huge numbers of workers but in terms of skills presence, they are not able to support jobs which require high knowledge and high skills. The market is mature as well as competitive which makes it difficult for many firms to enter the market.
South Africa achieved significant recovery in FDI even though by past standards it remained low. This growth has been achieved by the country when FDI was almost stagnant in Africa that dropped 1 per cent and recorded $49bn in 2017. In 2016 FDI inflows increased to $2.4bn. in the month of June 2018, FDI in the country increased by2.5 USD bn. But this is not very satisfactory as the country recorded shortage 3.2 billion USD in the month of June 2018. The relationship between inflow of FDI and economic prosperity is low and in this respect for an emerging economy like South Africa, FDI attraction and improvement in GDP are essential indicators of economic growth (Renard, 2011).
Conclusion and Recommendations
Investment opportunities are plenty in South Africa. Better coordination and implementation of policies, as well as the Protection of investment Act, could largely help the country to improve its FDI volume. However, some additional steps can bring about more improvement when it comes to FDI in the country.
By skill development among an educated workforce of the country can attract FDI since investors will be least worried to continue business which requires high skill and knowledge among workers. The government needs to proactively think on improving employment situations in the country.
More encouragement for investment can be supported through investment incentives, simple tax regulations and better policy framing regarding regulations and their implementations (Anyanwu, 2012).
Cultural as well as economic strong parts need to be promoted for attracting investment in the country. South Africa has many natural resources and these need to be highlighted so that investors are interested to invest in the country for the long run. These factors altogether could be helpful for the country to strengthen overall FDI in the country.
References
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Anyanwu, J.C., 2011. Determinants of foreign direct investment inflows to Africa, 1980-2007 (pp. 1-32). African Development Bank Group.
Anyanwu, J.C., 2012. Why Does Foreign Direct Investment Go Where It Goes?: New Evidence From African Countries. Annals of Economics & Finance, 13(2).
Blankley, W.O. and Booyens, I., 2010. Building a knowledge economy in South Africa. South African Journal of Science, 106(11-12), pp.1-6.
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