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Global firms rank SA as a priority global investment destination

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Global firms rank SA as a priority global investment destination

17th September 2010

By: Terence Creamer
Creamer Media Editor

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South Africa ranks nineteenth in a league table of "top priority host economies" for foreign direct investment (FDI), which was released last week as part of the latest ‘World Investment Prospects Survey 2010-2012' compiled by the United Nations Conference on Trade and Development (Unctad) - hitherto, South Africa had fallen outside the top 20.

The yearly survey is based on responses to a questionnaire from 236 transnational corporations (TNCs) and 116 investment promotion agencies (IPAs).

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The survey results showed that there was renewed optimism being expressed by TNCs and IPAs about prospects for FDI in 2010, pointing to a likely recovery from the recession-induced slumps of 2008 and 2009. The results also indicated that there could be further FDI growth in 2011 and 2012

As was the case in 2009, China headed the ranking of the top priority host economies for FDI, followed by India, Brazil, the US and Russia.

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It was also the first time that the four major emerging markets (China, India, Brazil and Russia) all ranked among the top five investment destinations.

Unctad noted the continued rise of developing Asia's relative importance as host for FDI, with six countries among the top 15, as against five in the 2009 survey.

By contrast, the attractiveness of developed countries declined slightly, with only six countries ranking among the top 15, with countries such as the UK and Australia moving down the list - the UK fell to seventh from sixth, while Australia declined from eighth to thirteenth.

The survey results, Unctad said, indicated that the global economic crisis had been less destructive to FDI than had been feared. "While investment budgets, including those for FDI, were squeezed during the crisis, TNCs did not engage in wholesale divestment of their foreign affiliates."

The crisis did, however, accentuate the shifting in the geographical focus by TNCs from developed to developing and transition economies.

Further, of the leading 20 most promising investor countries nearly one-half were developing and transition economies. China occupied second spot, behind the US, and ahead of Germany, the UK and France - India ranked sixth and Russia ninth.

Developing country TNCs were more optimistic in the short-term about the global business environment and their investment prospects than their developed country counterparts. TNCs from developing countries, especially developing Asia, anticipate a stronger growth of their FDI expenditures from 2009 to 2012 than those from developed countries, especially Europe.

Global FDI inflows slumped by 37% to $1,1-trillion in 2009, having already fallen in 2008 from the record of around $2,1-trillion achieved in 2007.

Unctad reported in July that there were signs of a pick-up in FDI flows since the second quarter of 2009, but that it was not clear that a rebound in FDI was under way. Nevertheless, it was forecasting a "slow recovery" in FDI in 2010 and that the flows would gain momentum in 2011.

The survey found that 43% of respondents intended increasing their international investment expenditures in 2010 as compared with the low levels of 2009, while 58% of respondents predicted increases in 2011 and 2012.

"On the basis of the findings of the survey, as well as other indicators of TNC and FDI activity, Unctad estimates the level of FDI inflows in 2011 to reach a range of $1,3- to $1,5-trillion, rising in 2012 to between $1,6 and $2-trillion," the survey stated.

FDI growth prospects for the medium term are considered better for the primary and services sectors than for manufacturing.

Already Competitive
Meanwhile, South Africa is already proving its relative competitiveness in the area of competition policy - at least in the view of a leading international competition economist.

Speaking at the fourth annual Conference on Competition Law, Economic and Policy in Johannesburg, Professor Massimo Motta said that South Africa's authorities were possibly pointing the way to the much spoken of "mid-Atlantic convergence" in the way they were dealing with cases of exclusionary abuses by dominant companies. He argued that the approach being adopted by the domestic authorities struck a healthier balance than was currently the case in either the US or the European Union (EU).

Motto, who is dean of the Barcelona Graduate School of Economics and the author of the internationally respected ‘Competition Policy: Theory and Practice', said that the US was erring too heavily on side of their dominant firms, while the EU authorities had moved to the other extreme.

Economic theory had evolved to the point of accepting that dominant firms could profit from engaging in price wars, extending rebates, or exclusive dealing.

In essence the theory showed that, where economies of scale were important, and new entrants required a certain critical mass to compete, incumbents could move to protect their interests by limiting access to the market. They could do this through the extension of rebates, or through pursuing a price war with earlier buyers, while charging monopoly prices to later buyers once their behaviour has illuminated the threat posed by the new entrant.

However, in the US, the burden of evidence fell on the plaintiff, which made success unlikely. In the EU, by contrast, that burden fell primarily on the dominant firm, where it had reached the point where a dominant firm "may not do anything", even when such actions could be shown to be procompetitive.

Motto said that the divergence had its genesis in the fact that the EU had a legacy of entrenched monopolies, owing to the fact that many of these had been legal monopolies owned by the State. By contrast, the US had a longer tradition of competitive markets, which had led the authorities and the courts to be less interventionist.

Given prevailing business concentration in South Africa, practitioners could probably draw lessons from the EU experience, but Motto welcomed the country's attempt seeking to strike a balance in dealing with its dominant firms and their practices.

Nevertheless, Motto advised that authorities should only really prosecute cases when the following variables were in place:
• Where the dominant firm had a ‘super dominant' market share of well above 50%.
• When price/costs tests have been undertaken.
• Where a coherent strategy of exclusion can be shown, not merely "aggressive language".
• When the facts arising are able to meet the tests of the economic theory.
• When there is evidence that the behaviour had an effect on rivals and consumers.
• And, where a dominant firm is given the opportunity to pose an efficiency defence to show that its behaviour was not exclusionary, but the result of precompetitive actions.

"I believe this is consistent with the way the South African authorities are approaching such cases," he concluded.

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