Myth or reality: Social FDI
Annamarie Bindenagel
Published: 29-JUN-06

Foreign direct investment (FDI) is a common concept that encompasses a complexity of drivers for economic growth. Succinctly, FDI represents a long-term relationship between foreign and domestic markets, involving an array of actors: financial investment, equity claims, and production structures amongst the most significant.

As such, FDI operates over a period of time, under a variety of political, economic, social and environmental conditions. Fundamentally, across this expanse, it should be a catalyst for sustained social and economic and environmental development.

'Should’ is the operative word. FDI should be such a catalyst. Within Africa, South Africa is the source of the most FDI, a driving force for stability and security and sustainability.

In fact, FDI’s influence is not nearly so straightforward. This has mostly to do with the existing and evolving political, economic, social and environmental contexts into which it seeks, does, or is sought to flow. Africa, particularly from the point of South Africa, aptly illustrates both the challenges and yet also the opportunities presented by these conditions.

FDI in Africa is challenged notably by the continued relationship of extraction from the continent and manufacture by the former colonisers. It is further hampered by governmental weaknesses, especially lack of transparency and accountability, and entrenched and enduring corruption. This is not a simple issue of African governmental incompetence. The increasing pressures of globalisation, which promise FDI inflows and trickle-down developmental impacts, demand greater governmental capacity to mediate between state and society and the global sphere. At the same time the pressures erode that very governmental capability by making national policies beholden to international ones. Africans must counteract these restrictions and capitalise on the benefits of responsible FDI. It can be done through cooperation between private entities and governments to create conditions conducive to investment for economic, social and environmental sustainability.

The time is now, as FDI dwindles. Indeed, in the past 20 years the trends in FDI have reversed. In the 1980s, FDI inflows doubled over the 1970s, reaching $2,2bn, and then $6,2bn in the 1990s and $13,8bn in 2000-2003. This increase fueled a fourfold growth in GDP. However, at the same time, Africa’s global share of FDI diminished, falling from 6 percent in the mid-1970s to between 2 and 3 percent today. In addition, Africa’s share of world output has declined, dropping from 3,1 percent in the 1970s to 1,8 percent in the period 2000–2003. Africa’s share of world trade also fell over this period from a peak of around 6 percent in 1980 to around 2 percent in 2001. Furthermore, Africa’s share of gross fixed capital formation in GDP dropped, notably in Sub-Saharan Africa where it fell from close to 25 percent in the late 1970s to 17,2 percent in the late 1990s, with a further decline in the early 21st century.

These conditions beg the questions: how can Africa make the most of FDI where it does come into the continent, especially in the extractive sector? How can Africa sustain this investment? How can it increase FDI and integrate it with economic, social and environmental development? The answer lies in responsible FDI from within and outside of the continent, identifying existing and expandable industries for sustainable growth.

Of the FDI that does flow into Africa, most does so into the extractive and oil industries. This is due to the profitability of the exports, its reliance on imported technology and, therefore, its relative independence from the broader economy. However, this schism undermines stable and sustainable development, which in turn undermines its ability to stock growth and FDI. Still it offers opportunity.

Extraction procures relatively predictable and reliable profit returns, and requires comparatively little technological and capacity investment. For instance, the $15bn invested in mining in Africa in 2004 constituted 15 percent of the global total, up considerably (from 5 percent) from the mid-1980s, of which South Africa accounted for 48 percent. Of course mining represents a finite resource. Yet because of the one-way relationship of extraction out of the continent with little reinvestment into it, local supply chains, management and beneficiation, and broader diversification are bypassed, stymieing growth and, therewith, also increased FDI.

Nonetheless, mining remains a volatile industry. Inflows surged by 30 percent in 1999 to reach $11,6bn but then declined 29 percent to $8,7bn in 2000. They surged again to $19,6bn in 2001 but declined sharply to $11,8bn in 2002 before recovering to $15bn in 2003, for instance.

These surges are also likely to reflect increased investor interest in the tertiary sector, particularly the privatisation of publicly-owned service providers. And they should, as FDI and the growth that it promises is dependent on integration into the broader economy: technologically, through infrastructure, capital and skills, as well as through market cultivation and expansion. There is progress in this direction. South Africa plays a leading role in such investment into Africa. It was the largest investor in the continent between 1990 and 2000, with an annual investiture of about $1,4bn. It continues to invest throughout the continent, suggesting scope for growth, particularly in mining. This has two implications: one political and one economic.

Minerals are nonrenewable national assets, control over which is an issue of national sovereignty. As such, the profit that they represent should be reinvested into the people and development progress of the state, which should fuel a perception of potential stable and sustainable economic growth, and thereby attract foreign direct investment. In this way, the synergy between grassroots needs and global demands should be met in a combination of corporate and governmental responsibility.

On the one hand are increasingly multinational companies. These offer technologies and capabilities desperately needed both to attract and retain FDI. They in turn must be provided incentives to operate in a country in the first place, such as abundant natural resources, beneficial employment legislation, tax schemes, location or markets. Mutual benefit is vital, particularly in mining where the broader economy should also reap rewards from extraction. Indeed, trends in the global economy tend to suggest that the bargaining environment has shifted significantly in favour of mining TNCs over the past two decades.

On the other hand are governments. These generally have to deal with existing economic conditions and to find ways and means to generate growth, and there within, social stability and sustainability. With regard to the national assets presented by extractive products, they must corroborate between exploiting, exporting, reinvesting into the rest of the economy, transferring technology and creating jobs, minimising environmental damage and social impact, and expecting firms, regardless of their ownership, to compensate for damages incurred. In order to do this, governments can, and increasingly should, provide regulatory frameworks within which companies operate more responsibly, while continuing and accelerating FDI. “Governments and donors must adopt a creative and flexible approach to promoting long-term growth, with the precise mix of policies reflecting the country context,” states the 2005 Blair Commission document.

Due to the preponderance of multinational companies in the mining industry, there is an increased scope for FDI, also for such investment that should – and does – take into account economic as well as social (particularly health), and environmental issues. Africans must learn to mine this potential, linking increased greenfield investments over mergers and acquisitions (M&As), typically one-off inflows, to include technological and capacity development to spur market growth. South Africa accounts for over half the continent’s M&As, which increased from an annual average of $0,6bn in 1990-1994 to over $2,5bn in 1995-1999 and $7,5bn in 2000-2003. This needs to go further.

In this manner, these multinational companies, in conjunction with local industries, government and non-governmental drivers, can harness FDI for responsible economic, social and environmental sustainability. This synergy between grassroots and global drivers of economic, social and environmental development must begin within Africa and expand outward. For this to happen, the meager 3 percent of FDI stock in Africa that originates from the continent itself needs drastically to be increased. The continent needs to build confidence in itself in order to harness FDI and harvest the economic growth that FDI should be bringing.

An encouraging development in this regard is that various capital-intensive projects are now being funded primarily by banks that have signed up to the Equator Principles, which demand attention to social and environmental risks and management.

The numbers support this: whereas the stock of FDI in the primary sector, principally mining, oil and quarrying in developed countries stood at just 20 percent of the global total in 1980, it rose to almost 60 percent by 1990 and 80 percent by 1997. Africa’s global share of output increased again to 2,2 percent in 2004, though income levels have stayed stagnant, and some FDI is again increasing. Between 1995 and 2002, equity FDI accounted for about 74 percent of the total inflows to Africa, a trend in the right direction.

This article was first published in Business in Africa Magazine, May 2006. To subscribe click here

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