Foreign direct investment in South Africa.

• Author: Clark, Hunter R.

Foreign direct investment ("FDI")(**) can be like the quality of Portia's mercy: "twice-bless'd."(1) It can rain high profits on multinational enterprises. And for host nations, especially developing countries, FDI can create jobs and capital for new investments, while providing access to know-how, technology, and lucrative export markets. For these reasons receptivity to FDI has long been a cornerstone of Nelson Mandela's vision for post-apartheid South Africa's approximately 40 million people. As leader of his political group, the African National Congress ("ANC"), Mandela made the importance he attached to FDI clear in an article he wrote for Foreign Affairs in 1993, the year before he assumed the South African presidency. Mandela stated:

It is obvious to me that the primary components of our international economic relations, which must feed our development strategy, are the strengthening of our trade performance and our capacity to attract foreign investment. In addition, we must examine the possibilities of obtaining technical and financial assistance from the developed industrialized countries. We do not expect foreign investment to solve our economic problems, but we understand it can play a valuable role in our economic development ... The ANC believes the most important way to attract foreign investment is to create a stable and democratic political environment. Also important is the development of legitimate, transparent, and consistent economic policies. Foreign companies should be treated as domestic companies, obeying our laws and gaining access to our incentives, and the ANC is committed to the principle of uniform treatment. And while we do not plan to provide exclusive incentives for all foreign investors, we realize it might be necessary to make special arrangements to attract the kind of investment that will make a real difference in South Africa.(2) No wonder it seemed as though the world was only waiting for Mandela to become the official leader of a post-apartheid South Africa to re-invest in his nation. After all, there are many reasons why South Africa would appeal to foreign investors. Foremost, South Africa has the "most powerful economy" on the African continent.(3) According to the Africa Competitiveness Report 1998, published by the World Economic Forum, "South Africa's comparatively open economy (when compared to the rest of Africa) dominates the southern region and the continent, as a whole. Its $134 billion size is more than twice the size of any other African economy...."(4)

Among the many advantages of doing business in South Africa are that "[i]ts transport and telecommunications infrastructure is unrivaled on the continent, it produces more electricity than the rest of Africa put together and it has a third of Africa's telephone lines."(5) South Africa is also rich in mineral resources, including gold, of which it is the world's leading producer and exporter; coal; chrome; copper; diamonds; iron; manganese; nickel; silver; and uranium.(6) Moreover, according to the U.S. Department of State, South Africa's "value-added processing of minerals to produce ferroalloys, stainless steel, and similar products is a major industry and an important growth area."(7) Also, South Africa's "diverse manufacturing industry is a world leader in several specialized sectors, including railway rolling stock, synthetic fuels, and mining equipment and machinery."(8)

In addition, there are indications that currency dealers' speculations may have caused the South African rand's undervaluation.(9) This being the case, investing in South Africa now may be less expensive than in the future, when the rate might correct itself. Already several multinational corporations operating in South Africa have started to retool or add the capacity to increase export production.(10) In 1996, the annual rate of return on South African investments was an appealing 18% to 19%, compared with 14% on investments in Latin America, 12% to 13% on investments in Asia, and 9% on European investments.(11) Recently, the Investor Responsibility Research Center of Washington, D.C., surveyed the 261 U.S. companies currently doing business in South Africa. Respondents gave South Africa high marks for its infrastructure, legal system, supply of raw materials and macroeconomic management.(12)

However, despite apartheid's demise and South Africa's re-acceptance into the world community, it has yet to experience the high levels of FDI it needs or expects.(13) According to South African finance minister Trevor Manuel, 1998 saw some 955 international companies engaged in business in South Africa, with interests in about 2,050 operations.(14) These operations controlled roughly $45 billion in assets, and employed approximately 380,000 people.(15) But according to the Financial Times, the statistics are somewhat misleading. Most of the foreign interests and assets in South Africa have been there for many years, while the "flow of foreign investment into new factories or businesses remains modest for a market of South Africa's size."(16)

This article will explore some of the reasons why FDI fled South Africa during the apartheid era; the current status of FDI in South Africa; and how South Africa is today addressing the concerns of present and prospective foreign investors. Finally, it will analyze why FDI in South Africa is so necessary and important to that nation, to the African continent as a whole, and to the industrialized world.

Historically, South Africa never rejected the ideological premises of FDI in the way that nations opposed to, or suspicious of, capitalism did. Vietnam, for example, passed laws expropriating and nationalizing private holdings of foreign and domestic individuals and corporations. FDI was viewed by that nation's leaders as an extension of imperialism and hence anathema to socialism and communism. Worse, the expropriations occurred during the decades when Vietnam did not necessarily recognize a duty to pay restitution.

Today, however, Vietnam has altered its ideology, in part because of its dire economic circumstances.(17) Laws have been put in place to protect and attract FDI, and 25 years after the end of the Vietnam War, Vietnam has recognized its duty to pay, in full, reparations or restitution for the expropriated or nationalized property of U.S. citizens.(18) Consequently, foreign investors are returning to Vietnam to do business in the new ways and forms acceptable to that government.(19)

In contrast, the problem for South Africa was not that it rejected FDI. Instead, foreign investors rejected South Africa. Although ostensibly committed to the growth-oriented economic policies of free enterprise capitalism, South Africa during the apartheid era instituted policies that were not conducive to FDI. Those policies included extensive state intervention in the economy; apartheid itself, which created economic distortions and political unrest; and a "dual rand" monetary policy. As one analysis has expressed it:

South African economists in the 1980s described the national economy as a free-enterprise system in which the market, not the government, set most wages and prices. The reality was that the government played a major role in almost every facet of the economy, including production, consumption, and regulation. In fact, Soviet economists in the late 1980s noted that the state-owned portion of South Africa's industrial sector was greater than in any country outside the Soviet bloc. The South African government owned and managed almost 40 percent of all wealth-producing assets, including iron and steel works, weapons manufacturing facilities, and energy-producing resources. Government-owned corporations and parastatals were also vital to the services sector. Marketing boards and tariff regulations intervened to influence consumer prices. Finally, a wide variety of laws governed economic activities at all levels based on race.(20) In an article for the March-April 1996 edition of Foreign Affairs, R. Stephen Brent, an officer in the U.S. Agency for International Development mission in Pretoria, South Africa, assessed South Africa's governmental policies and performance under white rule as follows:

Despite South Africa's reputation for a well-run economy under white rule, the policies of the National Party hampered growth severely. Apartheid brought about international isolation and economic sanctions, but the government's economic management was also poor. For all its criticisms of the ineptitude of African states under black rule to the north, the National Party followed policies after 1948 that resembled much of the rest of Africa. It developed massive bureaucratic and parastatal structures to provide public employment for Afrikaners, many of whom were poor in 1948. It embraced strong protectionism and import substitution. It spent lavishly on public investments, especially defense and supposedly strategic industries. And it set up puppet regimes in the so-called homelands it established that had all the elements of bad governance that the National Party criticized: autocracy, patronage, corruption, and enormous budget deficits. These policies did not have the same catastrophic effects as in other countries, partly because South Africa was trying to subsidize only 15 percent of the population [i.e., the whites] and had a cushion of vast gold revenues. But the policies did limit growth. After steady gains in per capita income from 1946 to 1974, income stagnated from 1974 to 1981 and fell by 20 percent from 1981 to 1994. Today South Africa's per capita income of $2,700 is practically what it was in the mid-1960s.(21) The institutionalization of apartheid 1948 culminated decades of racial discrimination and formally created dual economies and societies within South Africa. Laws like the Group Areas Act of 1950 restricted the free movement of blacks and "had the effect of zoning all of South...