CUTS INVESTMENT FOR DEVELOPMENT PROJECT
2nd SA NRG MEETING
Institute for Global Dialogue (IGD) Seminar Room
Braamfontein, Johannesburg
5 July 2002 ______
Introduction
The second Republic of SA (SA) IFD NRG meeting was held on Friday, 5 July 2002 at the Braamfontein offices (seminar room) of the Institute for Global Dialogue (IGD). Invitations to the NRG meeting and copies of draft Report B - case studies: automobiles and components, telecoms, and food and beverages - were circulated to the participants two weeks prior to the meeting. The hope was expressed that the participants would familiarise themselves with the broad contours and content of the report so as to facilitate valued discussion and inputs.
The meeting was attended by 15 participants from national and sub-national government ministries, government agencies, business, civil society, academics and experts, and the media (approximately 90 invitations were sent out; the NRG meeting unfortunately coincided with the launch of the new African Union (AU) in Durban, SA).
List of participants:
Participant / Institutional affiliationDr Garth le Pere / Executive Director, IGD
Mr Brendan Vickers / IFD Researcher, IGD
Mr Mwamba Makasa / CUTS ARC, Lusaka
Ms Carin Voges / Trade and Investment SA (TISA)
Ms Nonkqubela Maliza / Trade and Investment SA (TISA)
Mr Lungisa Magwentshu / Trade and Investment SA (TISA)
Representative / Trade and Investment SA (TISA)
Mr E Seiler / Southern African-German Chamber of Commerce and Industry
Ms Denise Meadon / Clover SA (Pty) Ltd
Mr Matthew Simmonds / Japan External Trade Organisation (JETRO)
Mr Rupert Dedekind / Japan External Trade Organisation (JETRO)
Mr Rudolph / Embassy of the Republic of Germany
Ms Durandt / Embassy of the United States
Mr Bethuel Maserumule / National Labour, Economic and Development Institute (NALEDI)
Dr Stephen Gelb / The Edge Institute
Mr Taki Thambani / National Consumer Forum
Mr John Fraser / Business Day
Mr Mwamba Makasa from CUTS ARC, Lusaka, was invited to the meeting as observer. Although there was a healthy mix of opinions and expertise on FDI at the meeting, there was a noticeable absence of civil society participation. The programme for the meeting was structured around four guiding themes for discussion (see appendix A).
Dr Garth le Pere, the Executive Director of the IGD, chaired and opened the meeting at 13h00 and welcomed the participants to the IGD. He thanked them for their positive response to the IGD’s invitation and expressed the hope that the participants would remain engaged with the IFD project. Dr le Pere in particular welcomed Mr Mwamba Makasa from CUTS ARC. He then outlined the broad objectives of the IFD project.
Mr Brendan Vickers, IFD Country Researcher, presented the findings of Report B and invited comments and advice from the participants with the objective of improving the final version of the Report.
The participants commended the presenter for preparing a well-researched and informative report. The discussion is summarised below:
1. Omissions in the report
1.1 The report is perhaps very broad. More in-depth analysis is required of:
- The foreign companies engaged in the automobile sector, particularly questions on local content, local value-added, exports to domestic sales ratios, and employment (quantity versus quality). It was suggested that a structured questionnaire would be the appropriate methodology for obtaining this information.[1] Given the problems of poor response to the questionnaires, these questionnaires should be endorsed and channeled through the various chambers of commerce (including the German, Japanese and Euro chambers). Representatives from these organisations at the meeting volunteered their support.
- The skills match of labour demand and foreign investors. This is a central obstacle to FDI in SA. There is a huge labour demand in SA but insufficient skilled persons.[2] It was noted that there are up to 500 000 vacancies in SA.
- The nature of efficiency-seeking investment in SA, particularly how value-added chains in the automobile sector fit into the global network of OEMs.[3]
- It would be useful to study the relationship between domestic and foreign investment in SA.
2. General comments on the report
1. The 'cherry picking' nature of FDI in SA is symptomatic of a very permissive enabling environment. The main concern of Trade and Investment SA (TISA) is to: (i) market SA exports overseas and identify markets for products; (ii) attract FDI, particularly JVs; (iii) technology transfer; and (iv) this ultimately serves job creation.[4]
2. The real benefit of FDI lies in backward linkages. In efficiency-seeking FDI, foreign investors are no longer only interested in cheap labour and natural resources. Local sourcing has become increasingly important.[5] It is however difficult to get spin-offs from competitiveness-seeking FDI because this type of investment is characterised by a race to the bottom, high value-added and high R&D.
3. Large companies dominate FDI in SA. What are the possibilities of attracting medium-scale companies (such as breweries, car parts) to SA, particularly in light of the importance of SMMEs for employment creation? It was noted that a number of investors are contributing to small business development, such as Ford Motor Company which outsources a lot of production.[6]
4. It was noted that SA only uses 80% of its productive capacity. Two questions - largely unanswered - were posed: i) is this an international norm that countries consistently only utilise 80% of their productive capacity? ii) does this mean SA does not need FDI because the country has a 20% excess of productive capacity?[7]
5. It would be very useful to get an analysis of a region with similar problems to southern Africa, but which has been very successful in attracting FDI (e.g. Eastern Europe). This comparative paper should determine what this region has been able to do better compared to SA to attract FDI. The School of Development Studies (University of Natal) has studied different economic sectors - clothing, textiles, leather, thread, wood and furniture - and compared these sectors with sectors in certain countries, including eastern European countries. These countries are now doing well in terms of eroding SA's market share in these products. Eastern European countries are performing extremely well despite the fact that they were command economies and had little international contact.[8]
6. It would be useful to compare the structure of FDI in developed, emerging and developing countries. FDI in SA, particularly in the automobile sector, has a history of over 40 years. The change in structure of FDI in SA over the last 6 years is mainly due to the change in linkage between SA and the global market. Trade between SA and Germany has increased consistently over the past 6 years: 19% (1998), 18% (2000) and 18% (2001). The driving force of this increase in trade is the logistical link with Europe. FDI has increased foreign trade between SA and Germany.[9]
7. Foreign investors are not only interested in domestic market access. AGOA saw investment into Swaziland and Lesotho, but this was primarily for export.[10] Japanese investment in the automobile sector in SA has also been transformed as Japanese companies increasingly follow the lead of German OEMs integrating their subsidiaries into global value chains. Rand competitiveness is also an important factor for this practice.[11]
8. Up to the early 1990s, the SA dairy industry was relatively protected and less production-driven because of a closed economy. Price increases, up to three times a year, were common. The SA market, from a dairy perspective, was reluctant to innovate because of costs involved. Liberalisation has meant that local companies are now forced to do so, hence Clover SA's JV with French company Danone. Clover now produces the best yoghurt in SA because of Danone's skill, technology, R&D and training. There will always be competition with Parmalat.[12]
9. The meeting discussed the question of how FDI can be related to industrial policy in a way that ensures that FDI supports socially productive purposes. There was no clear answer to this.
10. The participants agreed that the reasons cited in the report why SA is struggling to attract FDI are generally sound. They however noted:
- The low return on investment only refers to certain industries (the motor components industry is certainly a race to the bottom; AGOA has helped to increase exports of motor components to the US).
- Low growth refers to market growth.
- The perception of SA's inflexible, over-regulated labour laws is problematic and needs to be unpacked and explained. TNCs have been extraordinarily successful in laying off workers. This perception is largely the result of racist SA capital; foreign companies are picking up on this domestic sentiment towards the labour environment.[13]
- There are a number of hidden costs that are disincentives to foreign investors. These include the costs of rail transport, uncertainty of arrival, congestion at ports (particularly Durban; companies are looking to Walvis Bay or Maputo), bureaucratic costs, and labour costs.[14]
- Predictability, particularly the requirement that foreign companies should have a black economic partner for government contracts. US companies do not reject this idea, but have difficulty finding such black economic partners.[15]
- The small size of the domestic market is a major impediment to employment creation. The workforce is generally unemployable due to a dearth of skills.
- Published information on DTI incentive schemes is readily available. It is however highly problematic to get hold of the appropriate person who can explain the technicalities of the incentive scheme.[16] It would be useful to look at the types of incentives available in countries that have attracted FDI and tease out recommendations. SA's General Export Incentive Scheme (GEIS) was phased out because it violated the WTO's rule against such incentives.
3. Strategies to be adopted in the three case sectors
- Intense sector-based research is important.
- Market identification. All SA embassies abroad have TISA representatives attached to the embassy. Investors have choice of other markets. TISA must expand and broaden knowledge of opportunities in SA.
- Reference was made to the 'ethical' investment policies of Dutch TNCs. In the case of SA this largely relates to skills development, HIV/AIDS awareness, training, business against crime, and sound environmental and labour practices. These are however highly self-interested strategies.
- In the dairy industry, SA companies cannot export into Europe because of EU legislation. Clover cannot compete with Danone. SA companies cannot grow outside the country because of dairy laws.[17]
- SKILLS DEVELOPMENT is perhaps the most critical factor in SA. This is particularly important in the ICT sector.
- The state has a primary role to play in development.
______
Conclusion
Dr le Pere closed the meeting at 15h30.
APPENDIX A
Investment for Development (IFD) project
National Reference Group meeting
5 July 2002
Institute for Global Dialogue
Programme
13h00 Welcome and introduction
Garth le Pere: Executive Director
13h05-13h30 Overview of project and research findings Brendan Vickers: IFD Researcher
13h30-15h30 Discussion and comments
Questions to be addressed:
1) Are there any observations, comments or concerns arising from a reading of the draft IFD report on South Africa?
2) What are the concerns of civil society, local business and multinational companies about:
• FDI into South Africa generally?
• FDI into South Africa's automobile and components, telecoms, and food and beverages sectors?
3) How can FDI into South Africa (particularly in the above sectors) be used for development purposes?
4) What strategies need to be adopted in the above sectors (and more generally) to attract greater inflows of long-term, productive FDI into South Africa and the region?
15h30 Closure
1
[1] Input by Mr Mathew Simmonds, JETRO.
[2] Input by Mr Mathew Simmonds, JETRO.
[3] Input by Ms Carin Voges, TISA.
[4] Input by a representative from TISA
[5] Input by Ms Caren Voges, TISA.
[6] Input by Ms Durandt, US embassy.
[7] Input by Mr Matthew Simmonds, JETRO.
[8] Input by representative from TISA
[9] Input by Mr Seiler, SA-German Chamber of Commerce.
[10] Input by Ms Durandt, US embassy.
[11] Input by Mr Matthew Simmonds, JETRO.
[12] Input by Ms Denise Meadon, Clover SA.
[13] Input by Mr Matthew Simmonds, JETRO.
[14] Input by Mr Matthew Simmonds, JETRO.
[15] Input by Ms Durant, US embassy.
[16] Input by Mr Matthew Simmonds, JETRO.
[17] Input by Ms Denise Meadon, Clover SA.