Trade and INvestment Policy Training Workshop

Trade and INvestment Policy Training Workshop introduction to domestic and foreign direct investment

1. TRADE AND INVESTMENT POLICY TRAINING WORKSHOP
Introduction to Domestic and Foreign Direct Investment
LESLEY WENTWORTH, ECONOMIC DIPLOMACY – SAIIA
21 JULY 2015

2. DEFINITION OF FDI
-Foreign direct investment is understood as the acquisition
of a lasting interest, usually with at least 10% stake, in an
enterprise operating outside of the country of domicile of
the investor, with the purpose of gaining effective say in
the management of the enterprise.
-Source: Balance of Payments Manual: Fifth Edition
(Washington, D.C., International Monetary Fund, 1993)

3. IMPORTANCE OF FDI
-Economic growth is driven by capital accumulation,
therefore increasing investment in developing countries
in particular is viewed as a key policy objective.
-In countries with persistently insufficient domestic capital
formation, foreign direct investment (FDI) is often
welcome as a means to financing development and FDI
has become the leading source of external financing.

4. IMPORTANCE OF FDI
-Inward FDI is an important foreign capital inflow because it
consists of concrete and intangible assets deployed into the
domestic economy by important corporate members of the
global economy. FDI has been shown to contribute to
growth and development, complementing domestic
investment and by facilitating trade and technology transfer.
-Yet, the overall effects of FDI on economic growth in
developing economies are far from certain, and contrasting
perspectives on the developmental impact of FDI.

5. SUSTAINABLE FDI
-International organisations have been promoting a new generation
policy framework for sustainable investment:
-Create synergies with wider economic development goals or
industrial policies, and achieve seamless integration in development
strategies;
-Foster responsible investor behaviour and incorporate principles of
corporate social responsibility (CSR);
-Ensure policy effectiveness in their design and implementation and in
the institutional environment within which they operate. UNCTAD, 2012.
Investment Policy Framework for Sustainable Development. Geneva.

6. IMPORTANCE OF FDI
-FDI is found to be favourable to economic welfare of the
host country only if appropriate conditions exist. This
includes adequate absorptive capacity (new financial
capital and new technologies in plants, as well as human
capital).
-Also it is important that domestic businesses are not
"crowded out" and are able to face up to foreign
competition.

7. …AND DOMESTIC PRIVATE INVESTMENT?
-Ideally, market gaps filled by foreign companies are over
and above those that can and should be filled by home
producers.
 This means that industrial policy - while
staying within the precincts of the rules of the
multilateral trading system - should also seek to prop up
infant industries to the degree that they are competitive
and do not distort competition

8. SUPPLY AND VALUE CHAINS
-With the rise of MNCs, complexity of supply and value chains
has grown, spreading across continents. Today, global value
chains have enhanced the significance of FDI as a critical engine
of trade and development, creating jobs, and promoting
knowledge and technology transfers. In 2012, global GDP was
USD$ 70 trillion, global exports in goods and services were
USD$ 22 trillion, the global stock of FDI was also about USD$ 22
trillion, and global sales from FDI affiliates were USD$ 28
trillion. MNCs account for 80% of world exports with half of this
located in global value chains. WEF Global Agenda Council on Global Trade and FDI.

9. GLOBAL VALUE CHAINS

10. SA IN GLOBAL VALUE CHAINS
-South Africa is integrated into several global value chains
(GVCs), particularly in the automobile, mining, finance and
agriculture industries. It may be unique in Africa in
possessing the efficiency and scale to drive a global value
chain.
-As the (2
nd
) largest African economy it is also an important
regional hub, and South Africa capitalises on regional value
chains, especially in retail, finance and telecomms.

11. SA IN GLOBAL VALUE CHAINS
-South Africa would benefit from the diversification promoted by
linkages and spillovers between industries. In order to increase the
depth of value chains, measures that target skills development,
expansion of technological capabilities and access to capital are
essential.
-A country's ability to participate in GVCs is essential for economic integration;
however, being able to benefit from GVCs depends on how much value that
country creates within the GVC.
-In 2009, 70% of final demand for manufactured goods and services in SA
represented value created domestically. The foreign value share was 30%.
-Foreign value is more important in final demand for manufactured goods than in
market services (which had the largest domestic value addition).

12. SA IN GLOBAL VALUE CHAINS

13. SPILLOVERS AND LINKAGES
-The evidence of positive spillovers is strongest and most
consistent in the case of backward linkages, with local suppliers
in developing countries where MNCs can benefit the host
economy through relations with local suppliers of intermediate
inputs in their production process. Backward linkages from FDI
are beneficial to local suppliers in forms of increased output and
employment, improved production efficiency, technological,
managerial capabilities and market diversification.

14. SPILLOVERS AND LINKAGES
-Spillover benefits may be realised through forward linkages
when MNC operates at the upstream sector of the
domestic firm where the MNC operates as the input
supplier of the domestic firm. Forward linkages with
customers include marketing outlets, which may be
outsourced, for instance petrol stations and restaurant
chains.

15. SPILLOVERS AND LINKAGES
-Horizontal linkages occur when domestic firms benefit from
foreign affiliates which are operating within the domestic
firm’s sector from technology leakage from MNCs to local
firms in the same industry. There are three types of
spillover effects, which can potentially work at the
horizontal level: the human capital effect, the
demonstration effect and the competition effect.

16. SPILLOVERS AND LINKAGES
-The human capital effect: refers to the need for developing countries to have
reached a certain point of development in order to absorb new technologies.
Enhancing human capital can lead to higher productivity and profitability.
-The demonstration effect: occurs when local firms learn from foreign firm by
simply observing and mimicking their product innovations, techniques,
managerial performance or forms of organisation – with local adaptations.
-The competition effect: occurs as a result of competition from foreign
affiliates in the sector introducing competitive pursuits from domestic firms
trying to catch up with MNCs through R&D activities and reallocation of
resources.

17. BEE AND LOCAL CONTENT
-While considered rational by many, the government’s greater
focus on maximizing the domestic benefits of FDI, including
implementing local and black economic empowerment
partnerships, as well as local content agreements, does
complicate the structuring of FDI transactions.
-M&As - the local firm is mostly equipped to comply with these
requirements is most used FDI model.
-Greenfield investment persistently weak into South Africa,
would likely be more complicated – if much more desirable.

18. FDI: POSITIVE EFFECT ON DOMESTIC INVESTMENT?
-Foreign capital as a source of development financing in
developing countries can exert spillovers to the host
economies, provided that MNCs effectively engage
contributing to productive capacity – not just participation in
trade-related activities that tend towards enclaves with no
real linkages to the domestic economy.

19. TYPES OF FDI
Source: SAIIA OP 105

20. FDI: POSITIVE EFFECT ON DOMESTIC INVESTMENT?
-The “right kind of FDI” – long term, high quality and sustainable –
is probably more responsive to a positive business environment
and investment climate, emphasising the protection of private
property rights, that provides the investor with the perception of
safety of invested capital.
-he inflow of FDI can have unintended consequences on an
economy, including the development of hostility between foreign
and domestic firms. It is therefore necessary to accelerate and
sustain market economic reforms alongside policies aimed at
regulating FDI.

21. THANK YOU