South Africa is a country with huge potential to grow economically and socially but it is hindered by many socio-economic factors such as poverty, poor standard of education, high crime rate and lack of investments. Foreign direct investment (FDI), generally refers to an investment by an individual or firm in a business in another country. FDI is crucial for economic growth it provides capital, entrance to foreign technology, knowledge and managerial skills and leads to other essential inputs. South Africa’s attractiveness to FDI is high compared to other African countries because of high returns on investments. Contradictory, though there had been small interest in South Africa. There are numerous reasons why south Africa is struggling to attract FDI even though it has high attractiveness on FDI. The biggest problem South Africa is facing are investment barriers such as crime rate, poor infrastructure, political instability and weak domestic conditions that can hamper the ability of a country to profit from ingoing FDI. Without the necessary preconditions, FDI can limit knowledge spillover, crowd out domestic investments and intensify market concentration. South Africa has been undoubtedly struggled to attract FDI. According to data from South African reserved bank, foreign direct investment decline significantly from a record of 8.3 billion dollars in 2013 to 2.3 billion dollars in 2016, a more than triple reduction over the past three years, notwithstanding high returns. A country’s attractiveness to FDI is related to macroeconomic factors such as exchange rate, inflation rates and political stability. When a country is associated with high corruption levels it becomes more difficult for the country to lure FDI.
The high levels of corruption in South Africa possess negative impact on attracting FDI. Investors want to invest in a country where corruption is low, transparency and reliable. The corruption that has been happening in South Africa over the past years and that is still happening is making harder for South Africa to attract foreign investments and because of poor leadership and the corruption that has been connected with people who are in high position in parliament. Countries, before they invest to other countries, look at the reputation and the status of that country and if it is associated with poor governance and corruption that decreases the chances of them investing in that country. The most important things they look at is economic risk which refers to a country’s ability to pay back its debt, a country with a stable finances and stronger economy is considered as more reliable investment than a country with weaker finances another is political risk which refers to the political decisions made within a country that might result in an unanticipated loss of investors and lastly they look at sovereign risk which refers to the risk that foreign central bank alter its foreign exchange regulations. South Africa has been linked with junk status. This signals the investors that there is a bigger chance that the government will not be able to pay back its debt and creates negative outlook to potential investors. The corruption that is happening in South Africa does not only have a negative effect in attracting FDI but on the country’s development too and is one of the reasons why South Africa is struggling to grow and fight poverty.
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The impact of corruption goes beyond the corrupt individuals, it also affects the innocent who are implicated or the reputation of the organization they work for. Corruption erodes the trust we have in the public sector to act on our best interest it also wastes tax that are reserved for crucial community projects meaning people have to put with poor quality service, due to corruption we have financial loss, wasted taxpayers fund, poor infrastructure and lower community confidence in the public authorities. These are the reason that will make South Africa struggle to attract FDI even though it has high attractiveness to FDI.
To sum it all up based on the evidence provided it is clear that South Africa will continue to struggle on attracting FDI dispute having democratic economy and natural resources that are desired by foreign countries. This is because of investment barriers such as political instability, corruption and poor infrastructure.
References
- Sabelo, M., 2018. Investment Barriers Are Number One Problem. Available: https://www.google.coo.za/amp/s/my.co.za/article/2018-09-07-00-investment-barries-are-no-1/%3famp [Accessed 12 May 2020].
- Brian, P., 2018. Evaluating Country Risk for International Investment. Available: https://www.investopedia.com/articles/stocks/08/country-risk-for-international-investing.asp [Accessed on 23 May 2020].
- Krista, T., 2011. The Role of Investment Climate and Tax Incentives in the Foreign Direct Investment Decision: Evidence from South Africa Journal of Business 12(1):133-147.
- PricewaterhouseCoopers, 2010. What Foreign Investors Want: South African Insights from a Global Perspective on Factors Influencing FDI Inflows since 2010. Available: https://www.pwc.co.za/en/assets/pdf/strategy-and-what-foreign-investors-want.pdf [Accessed on 22 May 2020].
- Hunter, R., & Army B., 2009. Foreign Direct Investment in South Africa Denver: Journal of International Law and policy, 27(3): 337-339.
- Richard, W.R., 2016. Past Legal Development and Future Political Treads: Foreign Mining Investment Law. Switzerland: Springer International Publishing. 28-29.
- Independent Broad Based Anti-Corruption Commission, 2020. Impact of Corruption. Available: https://www.ibac.vic.gov.au/preventing-corruption/corruption-hurts-everyone [Accessed on 25 May 2020].
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Why South Africa May Struggle to Attract FDI: Analytical Essay.
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