Document Sample

I completely defer to the Almighty for giving me power to do what I intended to do in the
academic sphere and for giving me the staying power amid all hindrances and challenges
that I met.

I am deeply indebted to my family.        My wife, Sethepele for the continued support,
sometimes during very tough times when my energies were sapped. She shared with me
the testing times as an able partner. My children for their endearment that encouraged me
to proceed, and my parents who never let up in their encouragement. I sorely miss my
father who had hoped to see my completion of this work. My mom who I so dearly
appreciate continues to inspire me to work harder.

I wish to say a big thank you for a colleague who kept on encouraging me and assisted
with the proof reading and corrections.

My sincere gratitude goes out to my study leader, Prof. A.E. Loots and Prof. R. R. Mears
as co- leader for their professional guidance, assistance and valuable evaluation. I greatly
appreciate their continued encouragement, inspiration and meticulous mentoring.


                               EXECUTIVE SUMMARY
Title of thesis :       Foreign direct investment flows to the SADC region in a
                        globalising economic environment.
Author              :   Kwena Silas Mapetla Matjekana
Study leader        :   Professor A.E. Loots
Co-study leader :       Professor R.R. Mears
Degree              :   MA
Department          :   Economics
Faculty             :   Arts

Foreign direct investment (FDI) has become the most important source of development
finance. Foreign direct investment is said to be taking place when a foreign corporation
buys at least a 10 percent shareholding in a domestic firm or undertakes a greenfield
investment in a foreign country.      Recognising that FDI can contribute to economic
development, all governments want to attract it. The world market for FDI is highly
competitive, and developing countries, in particular, seek such investments to accelerate
their development efforts. Both developing and developed countries are competing for
global FDI flows.       The result is that FDI flows are concentrated in few developed
countries. It becomes critical for economic development to developing countries to
attract more FDI flows into their economies.        FDI flows are basically the result of
investment decisions taken by trans-national corporations in response to certain pull
factors. Whether a TNC will undertake FDI in a foreign country or not depends on the
existence of determinants that influence such a decision. The increase in global FDI
flows is a result of firms decid ing to invest in foreign markets rather than to export to
those markets. What makes FDI attractive is that, unlike portfolio investment, it is almost
of permanent nature. FDI is also more desirable than loans and official development
assistance (ODA) in that it does not create debt. For this and other reasons, countries are
seeking to attract FDI flows.       Various economic development theories have been
advanced to explain the reasons firms undertake FDI rather than export to those foreign
markets.    These theories include theories that focus on internal organisation or the
intending firm. These theories assume the imperfect market condition. Foreign firms

will undertake FDI if they have superior oligopolistic advantages over the local firms.
The Southern African Development Community (SADC) like other regions and countries
is seeking to attract foreign direct investment. The present analysis of the performance of
this region show that its share of global FDI flows is very small. The region is facing big
challenges as a result of weaknesses in its individual member countries. South Africa is
the best performing member in terms of attracting FDI flows and undertaking FDI in
other regional countries. FDI inflows into the SADC region are predominantly goin g into
resources. This evident when case of Angola and Democratic Republic of the Congo is
analysed. It can be said that the FDI inflow into the region is predominantly resource-
seeking. It can, however, also be said that some FDI is driven by the market-seeking
motive. This is evident in the case of FDI in the food and beverages sector.

It is important that the countries in the SADC region work hard to address those
determinants that are critical to attracting more FDI. It is evident that some countries can
improve their international image if they can address negative factors such as conflicts,
crime and government apathy to disregard of the rule of law. Policies and strategies that
are aimed at improving the image of the region need to be coordinated among member
countries, if the region is to increase its share of global FDI.

                               TABLE OF CONTENT

Acknowledgements                                                         i
Executive Summary                                                       ii
Table of Content                                                        iv
List of Tables                                                          vi
List of Acronyms and Abbreviations                                      vii

CHAPTER 1: PROBLEM STATEMENT AND METHOD OF                              1
1.1       Problem statement                                             1
1.2       Relevance of the study                                        1
1.3       Method of investigation                                       2
1.4       Demarcation of the study                                      2

CHAPTER 2: A LITERATURE OVERVIEW OF FDI                                 4
2.1       Introduction                                                  4
2.2       Foreign Direct Investment and globalisation                   9
2.3       FDI, investment and growth                                    10
2.4       Theories of Foreign Direct Investment                         12
          2.4.1    The Dependency Theories and FDI                      12
          2.4.2    The Modernisation School Theories and FDI            13
          2.4.3    The OLI paradigm explanation of FDI                  14
          2.4.4    The integrative theories of FDI                      15
          2.4.5    Other theories: Oligopolistic explanations of FDI    17
          2.4.6    Market-seeking and sales explanations of FDI         19
2.5       Determinants of Foreign Direct Iinvestment                    20
          2.5.1    Types of determinants of FDI flows                   23
          2.5.2    Determinants of outward FDI                          23
          2.5.3    Determinants of inward FDI                           24
2.6       Conclusion                                                    28

              SADC REGION
3.1   Introduction                                                         30
3.2   Comparative FDI flows in the SADC region                             31
3.3   Performance of different categories of countries                     39
      3.3.1   FDI and the South African economy                            39
      3.3.2   FDI in the conflict affected economies of SADC               42
      3.3.3   FDI flows into recently liberalized and small economies of
              SADC                                                         44
3.4   Conclusion                                                           45

              MENTS IN THE SADC REGIONS                                    47
4.1   Introduction                                                         47
4.2   Comparative FDI determinants in selected SADC countries              47
      4.2.1   National policy framework to facilitate FDI                  48
      4.2.2   Business facilitation of FDI                                 48
      4.2.3   The macroeconomic determinants of FDI                        49
4.3   Conclusion                                                           56

5.1   Summary and conclusion                                               58
5.2   Future policy options                                                61

BIBLIOGRAPHY                                                               66

                               LIST OF TABLES

2.1   The largest developing country recipients of FDI during the period
      1970 – 79, 1980 – 89, 1990 – 96 and 1997 – 2000                         6
3.1   FDI flows to SADC countries for the period 1985 to 2000
      (billion US$)                                                           32
3.2   FDI flows as percentage of GFCF in SADC countries for the period
      1985 to 1999                                                            34
3.3   FDI stocks in SADC countries for the period 1985 to 2000                35
3.4   FDI stocks as percentage of GDP in SADC countries for the period
      1985 to 2000                                                            36
3.5   An overview of mergers and acquisitions overview in SADC countries      37
3.6   Number of parent corporations and foreign affiliates                    38
4.1   Comparative investment weighted ratings as measure of political
      stability in selected SADC countries for 2000                           50
4.2   Comparative weighted rating of financial infrastructure as a measure
      of investment attractiveness                                            51
4.3   Comparative weighted ratings of the market to measure conditions
      for FDI                                                                 52
4.4   Comparative weighted ratings of privatisation related to FDI            53
4.5   Comparative weighted ratings of macro-economic policy related to FDI 54
4.6   Comparative weighted rating of physical infrastructure related to FDI   55


      APEC       Asia-Pacific Economic Co-operation
      ASEAN      Association of South Eastern Asian Nations
      AU         African Union
      COMESA     Common Market for Eastern & Southern Africa
      COMECON    Council for Mutual Economic Assistance
      EU         European Union
      FDI        Foreign direct investment
      FIAS       Foreign Investment Advisory Service
      GDP        Gross domestic product
      GFCF       Gross fixed capital formation
      HIPC       Highly indebted poor country
      IFC        International Finance Corporation
      IMF        Internationa l Monetary Fund
      IPO        Initial public offer
      MERCOSUR   Latin American southern cone trade bloc
      MIGA       Multilateral Investment Guarantee Agency
      MNF        Multinational firm
      M&A        Mergers and acquisitions
      NAFTA      North American Free Trade Association
      NEPAD      The New Partnership for Africa’s Development
      OECD       Organisation for Economic Co-operation and Development
      OPIC       Overseas Protection of Investment Corporation
      SADC       Southern African Development Community
      TNC        Trans- national Corporation
      UNCTAD     United Nations Conference on Trade and Development
      UNCTC      United Nations Centre on Trans-national Corporations