foreign direct investment in developing countries
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Foreign Direct Investment in Developing Countries: An African PerspectiveTRANSCRIPT
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Group 4:
Adriaan Pienaar
Mardi Palm
Carol-Ann Victor
Kyle Day
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Foreign Direct InvestmentCornerstone of modern Economy | Central to long-term development & sustainable growth
FDI to developing to developing countries has grown from $84bn in 1990 to
$178bn in 2000 (Currently = 61% of total foreign investments)
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• FDI-trend continues in 21st
century (Bain Capital’s purchase of Edcon & Mittal’s takeover of Iscor)
• Competitive advantage from investments in developing countries = increased
• FDI to developing countries are thus continuously increasing
• Global competition is very intense and fierce rivalry exists to find the best investments
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• Unique blend of factors that influences success and profitability of investments in developing countries
• Every country presents their own, unique problems / challenges
• Aim of this study: to develop a conceptual framework with which investments in developing countries could be evaluated
• Conceptual framework is a combination of various existing models
• Only the unique, qualitative factors influencing an investment was considered
• Factors were categorized as Political- , Financial- or Economic Risk
• Application done with data from SABMiller (Pty) LTD
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• Corporations will aim to gain competitive advantage from investments
• Determining the crucial factors influencing competitive advantage?
• 2 models:– Porter’s Diamond of National
Competitiveness– Austin’s Environmental
Model
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Porter’s Diamond of National Competitiveness
• Firms Strategy, Structure & Rivalry
• Demand Conditions
• Related & Supporting Industries
• Factor Conditions
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• Classical Theories – competitive advantage exists in factor endowments (land, resources, labour and population size)
• Porter suggests that advanced factor endowments can be created (skilled labour, technology, knowledgebase and government support)
• Austin’s Model – adaptation of Porter, focusing on developing countries
• Governments in developing countries plays a major role in the success of the economy and any individual investment
• Austin proposes the addition of environmental factors (economical, political, cultural and demographical)
• Understand the inter-relationship of above factors – representative of the developing country’s business environment
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Investment Appraisal Process
1. Financial Feasibility (NPV or IRR)2. Goal Congruence3. Risk Assessment (unique factors)
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• Aim: Calculate a meaningful risk premium
• The model includes factors influencing the potential success and competitive advantage of the investment
• Only non-generic, qualitative factors were included (ie. no NPV / IRR consideration)
• Factor Weightings– Desirable (0.2)– Important (0.3)– Essential (0.5)
• Ranking of each factor using a quintile scale
• Calculating the risk premium
– Minimum vs Maximum Rankings
– Angola vs Botswana (Kyle)
THE CONCEPTUALFRAMEWORK
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Allocation of Weight to Risk Factors (Gupta et al, 2003)
Category Weight
Desirable 0.2
Important 0.3
Essential 0.5
Total 1.0
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Quintile Scale to determine likelihood of occurrence
Ranking Likelihood
1 (Least Likely) 0% – 20%
2 21% – 40%
3 41% – 60%
4 61% – 80%
5 (Most Likely) 81% – 100%
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• Aim: Calculate a meaningful risk premium
• The model includes factors influencing the potential success and competitive advantage of the investment
• Only non-generic, qualitative factors were included (ie. no NPV / IRR consideration)
• Factor Weightings– Desirable (0.2)– Important (0.3)– Essential (0.5)
• Ranking of each factor using a quintile scale
• Calculating the risk premium
– Minimum vs Maximum Rankings
– Angola vs Botswana (Kyle)
THE CONCEPTUALFRAMEWORK
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• SABMiller (Pty) Ltd consider various investment opportunities in different African Countries
• Our study focuses on potential investments in Angola & Botswana
• The two chosen countries are very different and thus a good yardstick to test whether our framework produces a meaningful risk premium
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• Bordered by South Africa, Namibia, Zambia & Zimbabwe
• Pula (local currency) is stronger than the South African Rand
• Economy (similar to SA):– Mining (38 percent - mainly
diamonds)
– Services (44 percent)
– Construction (7 percent)
– Manufacturing (4 percent)
– Agriculture (2 percent)
• One of the fastest growing economies in the world
• Botswana has experienced considerable growth in their GDP / capita
• Thus establishing themselves as a middle-income country with a per-capita GDP of $11,200 in 2006
BOTSWANA
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ANGOLA
• South-central Africa
• Portuguese colony
• Significant oil and diamond resources
• Currently the fastest growing economy in the world
• 2004 – China’s Eximbank provided a loan worth $2bn to Angola to rebuild infrastructure after 25 years of war
• Growth in Angola – driven by the rise in oil prices
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ANGOLAvs
BOTSWANA
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QUESTIONS