US embassy cable - 03PRETORIA2471

UNCLAS SECTION 01 OF 03 PRETORIA 002471 
 
 
E.O. 12958: N/A 
TAGS: EAID, PREL, PGOV, ECON, SF 
SUBJECT: FOREIGN INVESTMENT IN SADC. 
 
SUMMARY 
------- 
 
1.   THESE TWO REVIEWS OF FOREIGN INVESTMENT PRESENT SOME NEW OR 
DIFFERENT INFORMATION ON THE PICTURE. THE STUDY ON EUROPEAN 
INVESTMENT INTO SOUTHERN AFRICA EMPHASIZED THAT ALL THE FIRMS SELL 
LOCALLY, BUT ONLY 14% OF THE FOREIGN OWNED FIRMS EXPORT FROM THE 
REGION. THEIR MAIN REASON FOR BEING IN SADC IS TO SELL TO SADC, 
NOT TO EXPORT AND NOT BECAUSE SADC IS AN INEXPENSIVE PLACE TO 
PRODUCE. AGOA IS CHANGING THIS, BUT MAINLY FOR TEXTILES AND 
CLOTHING (WHICH ARE LIKELY TO LEAVE SADC ONCE PREFERENTIAL ACCESS 
IS WITHDRAWN). PRIVATIZATION (INCLUDING PUBLIC-PRIVATE 
PARTNERSHIPS) IS A GOOD WAY TO ATTRACT FOREIGN INVESTMENT, BEING 
THE REASON GIVEN FOR 19% OF THE FIRMS BEING HERE. 
 
2.   FDI IS NOT A GOOD WAY TO CREATE JOBS. WHILE A QUARTER 
EXPANDED EMPLOYMENT, A THIRD CONTRACTED EMPLOYMENT IN THE LAST FIVE YEARS. 
TWO-THIRDS OF THE FOREIGN FIRMS EMPLOY EXPERTS; IN 1/3 OF THE 
CASES THERE WAS LOCALIZATION OF FOREIGN POSITIONS, THUS DECREASING 
THE NUMBER OF FOREIGNERS AND INCREASING TECH TRANSFER. 
 
3.   HALF THE FOREIGN FIRMS EXPECT TO EXPAND IN THE NEXT FIVE 
YEARS COMPARED TO 10% OF THE FIRMS (ALMOST ALL IN ZIMBABWE) WHO EXPECT 
TO CONTRACT. 
 
4.   INCENTIVES WILL NOT WORK IN ATTRACTING FIRMS TO SOUTHERN 
AFRICA AS THEY COME DUE TO FACTORS NOT INFLUENCED BY INCENTIVES 
(SIZE OF THE MARKET, PRIVATIZATION, AND PERSONAL REASONS) BUT WILL 
5. WORK IN DECIDING LOCATION ONCE THEY HAVE DECIDED TO COME TO 
THE REGION. THIS MAKES INCENTIVES ESSENTIALLY A ZERO-SUM GAME FOR 
THE COUNTRIES IN THE REGION. 
 
6.   THE REVIEW OF FOREIGN INVESTMENT IN AFRICA NOTED THAT TOTAL 
RESOURCE FLOWS TO NON-SOUTH AFRICA SUB-SAHARAN AFRICA  HAVE FALLEN 
SLIGHTLY SINCE THE EARLY 90S BUT THIS IS BECAUSE OF REDUCED 
FOREIGN DONOR LOANS (REDUCED WORLD BANK ACTIVITY). THERE HAS BEEN 
AN INCREASE IN FOREIGN DOMESTIC INVESTMENT AND FOREIGN DONOR 
GRANTS HAVE BEEN ROUGHLY CONSTANT. THE PICTURE IS DIFFERENT FROM 
OTHER REGIONS WHICH HAD A LARGE EXPANSION IN FOREIGN DIRECT AND 
FOREIGN PORTFOLIO INVESTMENT IN THE MID-90S BUT WHICH HAVE HAD 
REDUCTIONS SINCE THEN. 
 
7.   ALSO INTERESTING IS THAT FDI IN ALL OF SUB-SAHARAN AFRICA HAD 
ACCOUNTED FOR 3.6% OF TOTAL INVESTMENT IN THESE COUNTRIES IN THE 
EARLY 90S, BUT ACCOUNTS FOR OVER 11% NOW. WITH FDI INCREASING IN 
ABSOLUTE AMOUNTS, THE PICTURE EMERGES THAT IT IS NOT FDI THAT IS 
ABANDONING SUB-SAHARAN AFRICA, IT IS AFRICAN DOMESTIC INVESTMENT, 
AND FOREIGNERS ARE NOT INVESTING ENOUGH TO MAKE UP FOR THIS 
DECREASE. 
 
8.   US DATA SHOWS THAT THE RATE OF RETURN ON AFRICAN INVESTMENTS 
IS THE HIGHEST OF ANY REGION, 21% NOW COMPARED TO 30% IN THE EARLY 
90S. WHILE SOME ARGUE THAT THIS IS BECAUSE OF GREATER VOLATILITY 
IN RETURNS IN AFRICA THE DATA DOES NOT BEAR THEM OUT. AFRICA'S 
VARIABILITY IN RETURNS IS CLOSE TO THAT IN THE MIDDLE EAST AND 
LOWER THAN THE VARIABILITY IN SOUTH AMERICA WHERE THE AVERAGE 
RETURNS ARE LESS. PERCEPTIONS OF RISK ARE HIGHER.  END SUMMARY. 
 
BACKGROUND 
---------- 
 
9.   THIS SUMMARIZES PAPERS PRESENTED AT A WORKSHOP ORGANIZED BY 
THE OFFICE OF THE PRESIDENCY ON 9 APRIL 2003.  THE FIRST DEALS 
WITH EUROPEAN INVESTMENT IN SADC AND THE SECOND WITH FOREIGN 
INVESTMENT IN SUB-SAHARAN AFRICA. THE PRESENTATION WAS PART OF AN 
EFFORT BY THE OFFICE OF THE PRESIDENCY TO PRESENT NEW RESEARCH ON 
TOPICS OF CRUCIAL INTEREST TO SA. 
 
JENKINS AND THOMAS: FDI IN SOUTHERN AFRICA 
------------------------------------------ 
 
10.  THE JENKINS/THOMAS PAPER IS A RESULT OF INTERVIEWS WITH 81 
UK, SWISS AND GERMAN FIRMS ON THEIR INVESTMENTS IN SADC. 
 
 
WHY INVEST IN SADC? 
------------------- 
 
?    84% - SIZE OF THE LOCAL MARKET, 
?    40% - LOCAL RAW MATERIALS 
?    26% - PERSONAL REASONS 
?    21% - STRATEGIC REASONS (NEAR PARTNERS) 
?    19% - PRIVATIZATION OR PUBLIC-PRIVATE PARTNERSHIPS. 
 
11.  FIRMS ARE IN SADC TO SELL TO SADC, NOT  FOR EXPORT (EXCEPT 
FOR THE MINERAL COMPANIES) AND NOT BECAUSE THE AREA IS A CHEAP 
PLACE TO PRODUCE.  BECAUSE THEY ARE IN THE REGION FOR THE LOCAL 
ORE FOREIGN FIRMS WILL INVEST, BUT THEY ARE MOST LIKELY TO INVEST 
IN SA. 
 
12.  MORE INTERESTING IS THEIR RESULTS ON THE DESTINATION OF THE 
OUTPUT FROM THEIR INVESTMENT. ALL SUPPLIED THE LOCAL MARKET, WITH 
45% SUPPLIED THE REGIONAL MARKET AND 14% EXPORTED OUTSIDE THE 
REGION. FOR ALMOST ALL FIRMS THE REASON FOR INVESTING IS LOCAL, 
NOT TO USE SADC AS A BASE FOR EXPORTS (TEXTILES AND GARMENT 
MANUFACTURERS ESTABLISHED DUE TO AGOA ARE A RECENT NON-EUROPEAN 
EXCEPTION). 
 
13.  ALL OF THE NON-PRIMARY SECTOR FIRMS EXPORTING GLOBALLY ARE IN 
SA AND THEIR ORIGINAL REASON FOR COMING TO THE REGION WAS TO 
SUPPLY THE LOCAL MARKET. ELSEWHERE IN SADC FIRMS SELLING LOCALLY 
ARE NOT DEVELOPING AN EXPORT CAPACITY. 
 
14.  IMPLICATION SADC: THESE RESULTS SUGGEST BOTH THE IMPORTANCE 
OF EXPANDING THE REGIONAL MARKET TO INCLUDE SADC AS THE LARGER MARKET 
WILL ATTRACT ADDITIONAL FOREIGN INVESTMENT, AND THE NEED TO MAKE 
CROSS-BORDER MOVEMENTS EASY. AT PRESENT SA WILL ATTRACT NEW 
INVESTMENT TO SELL INTO SADC BECAUSE OF THE SIZE OF THE SA MARKET. 
TO OVERCOME THIS ADVANTAGE, SADC MUST MAKE THE REGION APPEAR AS 
ONE. UNLESS THAT OCCURS, THE BENEFITS OF FDI IN TERMS OF INCOME 
AND JOBS WILL FLOW OVERWHELMINGLY TO SA. 
 
JOB IMPACT 
---------- 
 
15.  FDI IS USUALLY PRESENTED AS CRITICAL TO JOB AND INCOME 
GROWTH. UNFORTUNATELY ONLY A QUARTER OF THE FIRMS EXPANDED EMPLOYMENT 
IN THE LAST FIVE YEARS (AND MOST OF THESE WERE NEW INVESTMENTS) WITH 
OVER A THIRD CONTRACTING. ONLY HALF OF THE FIRMS THAT EXPANDED 
PRODUCTION RECENTLY ALSO EXPANDED EMPLOYMENT WITH A NUMBER 
EXPANDING PRODUCTION AND DECREASING EMPLOYMENT. 
 
16.  THERE ARE FREQUENTLY COMPLAINTS ABOUT THE NUMBER OF 
FOREIGNERS EMPLOYED, AND 2/3 OF THE FIRMS HAD EXPERTS BUT 1/3 HAD 
LOCALIZED PREVIOUSLY FOREIGN POSITIONS. 
 
FUTURE PLANS 
------------ 
 
17.  ALMOST 2/3 OF THE FIRMS HAVE EXPANDED (OR STARTED) IN THE 
LAST FIVE YEARS AND JUST OVER HALF PLAN TO EXPAND IN THE COMING YEARS. 
ONLY 8% HAVE CONTRACTED OF LATE AND 10% EXPECT TO CONTRACT IN THE 
COMING YEARS. MOST OF THE CONTRACTIONS ARE CONCENTRATED IN 
ZIMBABWE. THE PICTURE FOR THE REST OF THE REGION IS THUS MUCH MORE 
OPTIMISTIC PICTURE. 
 
TYPE OF INVESTMENT 
------------------- 
 
18.  HALF THE NEW INVESTMENTS WERE GREENFIELD (NEW ENTITY) AND 
MOST OF THESE ARE IN SERVICES AND USUALLY ARE WHOLLY CONTROLLED BY 
THE FOREIGN OWNER. ACQUISITIONS, WHICH ARE MORE LIKELY TO BE IN 
PRIMARY PRODUCTION, ARE USUALLY WITH A LOCAL PARTNER. THESE 
ACCOUNT FOR JUST OVER 1/3 OF THE TOTAL BUT ARE OF INCREASING 
IMPORTANCE. 
 
LEAPE: FDI IN AFRICA 
-------------------- 

19.  LEAPE'S PAPER IS A REVIEW OF CURRENTLY AVAILABLE DATA ON FDI. 
 
20.  IN THE 90'S RESOURCE FLOWS TO NON-SA SUB-SAHARAN AFRICA 
DROPPED SLIGHTLY. BUT THE DROP WAS ALMOST SOLELY DUE TO THE 
REDUCTION IN LONG-TERM OFFICIAL LOANS (ESSENTIALLY THE WORLD BANK) 
WITH FOREIGN GRANTS REASONABLY STEADY AND PRIVATE FDI INCREASING. 
PRIVATE FDI TO NON-OIL PRODUCING COUNTRIES GREW SLIGHTLY FASTER 
THAN FDI TO OIL PRODUCERS AND THE TWO ARE APPROXIMATELY EQUAL NOW. 
COMMERCIAL BANK LENDING, NEVER VERY HIGH, BECAME ESSENTIALLY 
NEGATIVE AS REPAYMENTS BECAME GREATER THAN NEW LOANS. 
 
21.  THE SITUATION WITH ALL LOW-INCOME COUNTRIES IS DIFFERENT. FDI 
(AND PORTFOLIO INVESTMENT) OUTSIDE AFRICA BOOMED IN THE MID-90S 
AND THUS THE COLLAPSE IN PORTFOLIO INVESTMENT AND THE REDUCTION IN 
FDI HAD A MUCH GREATER IMPACT IN THE LATE 90S AND EARLY IN THE NEW 
CENTURY. COMMERCIAL BANK LENDING WAS MORE IMPORTANT EARLY IN THE 
90S BUT, AS IN AFRICA, HAS TURNED NEGATIVE. 
 
22.  ALL OF SUB-SAHARAN AFRICA'S SHARE OF FDI HAS FALLEN SINCE THE 
80S, BUT HAS BEEN ROUGHLY CONSTANT AT 3.4% SINCE THE MID-90S. THE 
SAME PATTERN EMERGES EVEN IF WE EXCLUDE OIL-PRODUCING AFRICAN 
COUNTRIES. 
 
THE 80S FDI IN NON-OIL EXPORTERS IN 
 
AFRICA WAS 3.6% OF THE REGION'S TOTAL INVESTMENT WHILE IT IS OVER 
11% NOW. FOR LOW-INCOME COUNTRIES GENERALLY THE INCREASE WAS ONLY 
FROM 3.3% TO 7.9%. THIS APPEARS TO CHANGE THE CONCLUSION FROM 
FOREIGN INVESTORS ABANDONING AFRICA TO ONE OF DOMESTIC AFRICAN 
INVESTORS ABANDONING AFRICA. THE INCREASE IN FOREIGN INVESTMENT IS 
INSUFFICIENT TO MAKE UP THE FALL IN DOMESTIC INVESTMENT.  IN ANY 
CASE, DOMESTIC INVESTMENT ACCOUNTS FOR 89% OF TOTAL INVESTMENT, 
ATTENTION SHOULD BE PAID ON INCREASING IT, FINDING WHY ITS 
IMPORTANCE TO THE ECONOMY HAS FALLEN, WHY RESIDENTS ARE NOT 
INVESTING. 
 
24.  US DATA SHOWS THAT CURRENTLY THERE IS A 21% RETURN ON 
INVESTMENTS IN SUB-SAHARAN AFRICA; IT HAD BEEN 30% IN THE EARLY 
90S. THE AVERAGE RETURN IS MUCH HIGHER THAN FOR ANY OTHER REGION. 
FOR EXAMPLE THE AVERAGE RETURN IS 9.5% IN SOUTH AMERICA AND 14.8% 
IN THE MIDDLE EAST. WHILE THE VARIANCE IN INVESTMENT IN SUB- 
SAHARAN AFRICA IS HIGHER, THE COEFFICIENT OF VARIATION IS 
APPROXIMATELY THE SAME AS IN THE MIDDLE EAST AND BETTER THAN IN 
SOUTH AMERICA. THE VARIABILITY IS CONSIDERABLY GREATER THAN IN ANY 
OF THE RICHER COUNTRIES. 
 
 
HUME