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THE ROLE OF FOREIGN DIRECT INVESTMENT IN SOUTH AFRICAN

AGRICULTURE

By

Ernst Idsardi

Faculty of Natural and Agricultural SciencesUNIVERSITEIT VAN DIE VRYSTAAT • UNIVERSITY OF THE FREE STATE • YUNIVESITHI YA FREISTATA

(+27) 051 401 3570 • [email protected] • www.ufs.ac.za/natagri • Bloemfontein • South Africa

Faculty of Natural and Agricultural SciencesUNIVERSITEIT VAN DIE VRYSTAAT • UNIVERSITY OF THE FREE STATE • YUNIVESITHI YA FREISTATABloemfontein • South Africa

OUTLINE

• Introduction

• FDI in South Africa (SA)

• FDI, a development strategy?

• Methodology

• Results and conclusions

• Recommendations


INTRODUCTION

• International capital flows

• Foreign Direct Investment (FDI)

• Expansion strategy

• Benefits

• Economic growth?

• SA: Re‐attract investment


Introduction (2)

• Invest in SA: economic powerhouse, open economy, transport, telecommunication, natural resources, manufacturing industry

• Investment incentives: 84 % market size, 40 % availability of raw materials

• Low FDI inflows in SA: Nigeria(2), Brazil(6), India(4), Australia(4), 2% of GDP, 11 % of African FDI


Introduction (3)

• SA’s FDI performance low (122th)

• SA’s FDI potential (74th)

• Low per GDP capita, low share of exports in GDP,

low amount of telephone connections, low share in

imports of electronics and cars, low share in export

of services


FDI IN SOUTH AFRICA

0.1

39.8

27.0

0.0 0.33.1 2.0

27.5

0.12.6

6.4

17.8

2.3 3.4

15.4

10.7

21.619.7

‐7.0‐1.4

9.26.3

35.5

12.3

10.5

17.7

7.5

‐10.0

0.0

10.0

20.0

30.0

40.0

50.0

Agriculture Mining Manufacturing Electricity Construction Whole sale, retail and tourism

Transport and communication

Financial, business and real estate services

Government and personal services

%

Share in total FDI inflows Contribution to GDP GDP Growth per industry

FDI per sector


FDI in South Africa (2)Sources of FDI

87.6%

7.9%

1.1%3.1% 0.2%

Europe

North and South America

Africa

Asia

Oceania


FDI in South Africa (4)Trends in UK’s GDP and FDI in SA

1000000

1200000

1400000

1600000

1800000

2000000

2200000

2400000

2600000

2800000

0

10000

20000

30000

40000

50000

60000

70000

80000

1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

(million USD

)

(Million USD

)

UK ‐ RSA FDI (USD million) UK GDP


FDI in South Africa (5)Trends in SA’s total and agricultural FDI inflows

0

100000

200000

300000

400000

500000

600000

700000

800000

0

100

200

300

400

500

600

700

800

900

1000

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Total FDI X

1 mil. ZAR

Agricultural FDI X

1 mil. ZAR

FDI inflows in agriculture Total FDI inflows


FDI in South Africa (6)Agricultural FDI inflows and competitiveness

0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

0

100

200

300

400

500

600

700

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

RTA

(Million ZA

R)

FDI inflows in agriculture Agric Competitiveness


FDI, A DEVELOPMENT STRATEGY?

• Previous studies on food sector• Promoting exports, creating an export base, increased land use, technology transfer, job creation

• Determinants of (agricultural) FDI?• Data!• Characterisation of FDI inflows • FDI environment


METHODOLOGY

• Data limitations: correlation analysis, interpretation

• FDI, foreign liabilities of SA: equity capital, reinvested earnings, long‐ short term capital

• Agricultural FDI inflows / agricultural FDI

• Determinants : literature

• FDI environment: SWOT analysis


Methodology (2)

Variable Measure / proxy Expected sign

Gross Domestic Product (GDP) market size +

GDP growth market attractiveness +

Agricultural GDP size of the agricultural sector +

Growth of agricultural GDP sectoral performance +

Real Effective Exchange Rate (REER) favourable incentive for foreign investment

-

Agricultural trade openness ratio of total agricultural trade to agricultural GDP

+

Inflation rate economic stability -

Government expenditure on agriculture as share of agricultural GDP

importance of agriculture in the national policy framework

+

Agricultural trade linkages with the EU relationship of trade flows and FDI with SA’s most important agricultural trade partner

+

Agricultural Competiveness Status (RTA) measurement of global competitiveness of the agricultural sector

+

Determinants


RESULTS & CONCLUSIONSCorrelation analysis

Factor Direction of correlation

Total real GDP +

GDP growth +

Real agricultural GDP -

Agricultural GDP growth + / -

REER +

Agricultural trade openness +

Inflation rate -

Agricultural trade linkages with EU + / -

Government spending on agriculture as share of agricultural GDP +

Agricultural Competiveness Status + / -


Results & conclusions (2)FDI environment

• Strengths: well‐ established agricultural sector , sound macro‐economic policies, good infrastructure, most FDI is market‐seeking, factor market above average for developing country, most critical resources locally sourced, tax treaties in place with most partners, an open economy, monetary policies to attract FDI



• Weaknesses: little Greenfield investments, poor administrative environment, low worker productivity, agro‐ food sector is marginally competitive, high cost of doing business, high transport cost, government capacity is very limited, low agricultural R&D output



• Opportunities: large labour base, proposed creation of a one‐stop FDI facilitation centre, privatization of state enterprises, more focus on capital intensive FDI, international promotion of South African agriculture as an attractive investment opportunity, creating a South African identity in the international business environment, social and environmental responsible production, induced and market driven innovation



• Threats: uncertainty around land‐reform, too much focus on labour intensive FDI, uncertainties about the new presidency, strength of labour unions and its alliance with the ANC, high crime rate, limited availability of qualified black managers (BEE), historical legacy of the country, FDI targeted at resource extraction and cheap labour will not enhance development, large carbon footprint of exports, financial and economic crisis


RECOMMENDATIONS• Further research on impact of FDI, types of foreign investment and foreign investment incentives(survey)

• Influence of sector on FDI attractiveness?

• Sector broad strategic plan:

o Inclusive

o Ownership: stakeholder involvement

o Development enhancing


THANK YOU!

BAIE DANKIE!

KE YA LOBOGA!

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