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Organisation for Economic Co-operation and Development

Regional integration, FDI, and competitiveness: the case of SADC*

Andrea E. Goldstein
OECD Development Center

OECD-Africa Investment Roundtable Johannesburg, South Africa, 19 November 2003

Posted with permission from OECD Development Center as part of the OECD-Africa Investment Roundtable, Johannesburg, South Africa, 19 November 2003.
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In partnership with NEPAD and the African Development Bank, OECD organised a Roundtable on Investment Initiatives which addressed the critical issues of African priorities and ways that OECD countries can contribute to the improvement of the business environment for domestic and international investors, and to building the necessary capacities. This roundtable was held in conjunction with the Global Forum on International Investment which took place on 17-18 November 2003.

Papers can be accessed from the following url:,2340,en_2649_33709_18527919_1_1_1_1,00.html

Foreign direct investment (FDI) to non-OECD countries, one of the key features of globalisation, may contribute to productivity and income growth throughout different channels – e.g. bridging the savings/investment gap, introducing modern capital goods and more sophisticated management practices, sustaining the drive to reform host countries’ economic policies, and creating global vertical production networks whereby multinational firms locate input processing in their foreign affiliates. Although policy interventions may help to maximise benefits and minimise unintended consequences, they may also introduce additional distortions and aggravate problems.

This study describes major FDI trends in Southern Africa and analyses its impact on the region’s ability to compete on global markets following the adoption of economic liberalisation, including progress in regional integration. Africa lags behind other regions in attracting FDI for a number of reasons – a high incidence of war, inappropriate governance, and price and currency instability – all of which also plague Southern Africa. The 14 member countries established the Southern African Development Community (SADC) in 1992 and relaunched it as a Free Trade Area in September 2000 to promote development and economic growth, alleviate poverty, enhance the standard and quality of life for the people of Southern Africa, and support the socially disadvantaged through regional integration. South Africa’s market size makes it the natural destination for FDI destined to supply local demand, and the associated higher quality of physical and human infrastructure further reinforces the locational advantage. Some of the other SADC members, on the other hand, appear unlikely destinations for foreign companies, either because their GDP is so small, or for the bellicose climate that have characterised them in the 1990s. This having said, FDI has reached them as well. FDI flows remain lower than in Asia, Eastern Europe, and Latin America, although they are still substantial, especially in some countries. A case in point is Angola, which has seen its strategic relevance as a source of oil for the industrialised world increase in recent years, with abundant FDI flows despite a civil war ravaging the country for almost 30 years.

Relatively little is known about FDI in SADC, not least because data limitations are massive outside of South Africa. What is the economic, normative and legal framework of FDI in SADC? How important is integration in explaining FDI to SADC? What impact is FDI having in these nations’ arduous path towards growth-enhancing insertion into the world economy? And what is special about South African corporations that explain their relative enthusiasm in investing in countries – including in non-SADC Africa – from which OECDbased ones still stay clear?

This study tries to fill this gap by exploring in some depth a few industrial and service sectors. There is increasing evidence that the same opportunities that “multinationalisation” open elsewhere are present in SADC – and so are the problems created in the process. The automotive industry provides a good example of the possibilities that commodity-dependent, high-income developing countries have of introducing mechanisms to deepen the process of manufacturing industrialisation and widen the sources of competitive advantage. Another sector where there is evidence of a virtuous FDI-efficiency cycle is telecoms – although here market competition plays a notoriously more important role than the form of ownership (public vs. private, or domestic vs. foreign). In other supply chains, the arrival of foreign companies is accompanied by increasing market concentration. While this exposes domestic firms to the reality of cut-throat competition, consumers may not necessarily benefit unless appropriate regulatory mechanisms are introduced. This is the case in particular of agribusiness segments, where the relationships between farmers, processors and retailers are very complex and emerging issues are similar in SADC and in developed economies.

There are a number of important policy issues that have to be tackled heads-on if the region is to attract more FDI, make such flows less volatile, maximise their developmental impact, and minimise the costs that opening to (distorted) world market forces may impose. The record of Southern Africa, and a fortiori of Africa, is wanting as far as various microeconomic factors are concerned – and these are the ones that make companies flee. Recurring complains include the high cost of doing business in the region – in terms of interest rates, labour administration, transportation and freight costs –, the seemingly unstoppable rise of crime from notoriously high rates, especially in rural areas, and the deep distortions to business activity provoked by the HIV-AIDS pandemic. Much can therefore be made to make economic and political climate welcoming to foreign investors. Firming so-called macroeconomic fundamentals is clearly necessary for its own good, not only because foreigners demand it but also and more fundamentally because there can be no reduction of poverty unless taxes are collected, fiscal receipts are spent on education, health, and infrastructure, and reduced external vulnerability allows to smooth exchange rate volatility.

Equally fundamental is that domestic investment must increase: the experience of the newlyindustrialised countries in Asia suggests that growth precedes the FDI boom as foreign investors will only start venturing into “strange” countries once there is evidence that residents are putting their money there. This applies to private agents as well as to public authorities. To generate sustainable growth, economic reforms must succeed in transferring resources to dynamic sectors and uses and, to achieve this, policy-makers must creatively package basic economic principles into institutional designs that are sensitive to local opportunities and constraints. For this reason the debate on development strategies that is now resonating in South Africa and other large emerging economies such as Brazil and India is not a luxury, but rather a necessary component of a broader package that aims at improving their competitiveness.

Efficiency spill-overs from inward FDI depend on openness to imports and the technical capability of local firms. Market competition remains the most efficient tool to put pressures on producers of goods and providers of services in a non-distortionary way, as proven by the OECD work on regulatory reform. In the face of the severe budget constrain, the dearth of qualified labour calls for innovative forms of private-public partnership to improve SADC countries’ ability to attract high-quality FDI. Although host country policy can influence both, it is difficult to provide unequivocal policy advice, since some of the policies that maximize the potential spillovers from a given “pool” of appropriable technology (such as technology transfer requirements or active competition policies) may actually reduce the attractiveness of the host country to some foreign investors.

Finally, the political dimension of the increased role of foreign investors must be mentioned. A growing public concern about “financial colonisation”, especially by South African companies, has sparked political controversies in countries such as Tanzania and Zambia. Political opposition to FDI is not exclusive to Africa, and even less so to SADC. It often originates in the manipulation of public opinion by groups that were exploiting to their advantages the rents created by autarchic economic policies and are obviously threatened by the emerging competition from more efficient foreign producers. But it call for a wide range of measures, from better public education on the reality of globalisation to stronger actions to transfer its benefits to the public at large and introduce compensatory mechanisms to those that lose from it.

Different considerations apply to cases where foreign companies have been accused of not paying sufficient attention to governance issues – when not of being themselves at the origin of corruption and malpractices. Various approaches have been suggested. One is to make all such payments a legal reporting requirement. An alternative, proposed by Global Witness and George Soros, is to make such reporting a requirement for listing on major stock exchanges. A further alternative is for the companies to report on a confidential basis to the international financial institutions, which would then collate the information and publish aggregate revenue figures. This has the advantage of preserving the confidentiality of firm-specific information while providing a global certification system for information.

In sum, there is no first-best “institutional technology” that is inherently superior and may work as a quick fix for countries that wish to enhance their pro-active participation on global markets on the basis of domestic and foreign capital. If anything, this point reinforces the need for a fair evaluation of different options at the national level, devoid of ideological a prioris. It also highlights the all-too-obvious issue that national interests diverge between industrial and developing countries – or OECD and non-OECD ones to use a definition that, while not very accurate, is common – when discussing the suitability of a multilateral investment framework.


* This study is a contribution to the 2003-04 programme of work of the OECD Development Centre, Activity 1: Trade, Competitiveness and Adaptive Capacity. Besides the many people that helped me in gathering data and information, I am indebted to Kiichiro Fukasaku, Michael Gestrin, Trudi Hartzenberg, Ulrich Hiemenz, Hildegunn NordРµs, and Simon Roberts for most useful and detailed comments on drafts of this document. The usual caveat applies: in particular, the opinions expressed and arguments employed are my sole responsibility and do not necessarily reflect those of the OECD, the OECD Development Centre, and their Members.

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