Introduction

Foreign direct investment (FDI) is sought after by emerging economies such as South Africa. FDI is an integral part of the international economic system and acts as a major catalyst for development, with resources often channelled to infrastructure and manufacturing investments.

Over the years, South Africa has developed its reputation as a ‘gateway’ for international companies looking at the African continent as an investment destination, but in recent years its ‘gateway to Africa’ status has come under threat, as a result of electricity and logistical weaknesses within the South African economy and a preference for direct bilateral relations between investors and a number of African countries.

The United Nations Conference on Trade and Development (Unctad) ‘World Investment Report’ shows that FDI inflow into South Africa was $9-billion in 2008, before the global financial crisis (Unctad, 2010). This has decreased in subsequent years, with FDI inflow falling to $5.13-billion in 2019 and to $3.11-billion in 2020 (Unctad, 2021). The sharp year-on-year decrease in 2020 is attributed to the impact of the Covid-19 pandemic, with South Africa, as with most other countries, having borne high human and economic costs owing to the health crisis. However, the country entered the pandemic in an already precarious position, with high public-sector debt, particularly among State-owned enterprises (SoEs), electricity shortages and a frustratingly low economic growth rate.

Much like the rest of the world, South Africa has been through challenging times as a result of the impact of the Covid-19 pandemic. Gross domestic product (GDP) contracted by 7% in 2020 (Stats SA, 2021a). Economic activity rebounded in the first two quarters of 2021, with first-quarter GDP growth of 1% (4.20% annualised) and second-quarter GDP growth of 1.20% (4.70% annualised). Despite the gains, the economy is still 1.40% smaller than what it was before the Covid-19 pandemic (Stats SA 2021b). Helped by a commodities boom, the International Monetary Fund (IMF) is forecasting that South Africa’s economy will expand by 5% in 2021 and 2.20% in 2022 (IMF, 2021).

Foreign investment could play an important role in supporting South Africa’s economic recovery following the pandemic. Although the South African government, in principle, encourages FDI, investors and market analysts are concerned that, in practice, its commitment to assist foreign investors is insufficient.

The Inclusive Society Institute (ISI) has met with foreign investors to canvass their views on the barriers to investment in South Africa and to gain an understanding of what new initiatives or changes are needed to shift the economy into a higher growth trajectory.

“Foreign investment could play an important role in supporting South Africa’s economic recovery . . .”

Introduction

This report is a summary of themes from discussions between the ISI and the FDI community, held in collaboration with the Southern African-German Chamber of Commerce in August 2021.

It highlights that South Africa still has many strengths that make it a preferable market. The country continues to be anchored by the institutional strength of the National Treasury and the South African Reserve Bank (SARB), and its infrastructure, although deteriorating, is relatively superior to that of its African neighbours. The discussions, however, have also highlighted limitations regarding crime and security, corruption, skills, electricity supply problems, ethics and governance concerns, as well as diminished State capacity.

The dialogue of FDI forms part of the ISI’s comprehensive research to develop a new growthcentred economic blueprint for South Africa. The intended blueprint aims to reignite economic activity, restore investor confidence, and create sustainable jobs for the millions of unemployed who call South Africa home.

In the first phase of the research, the ISI studied economies – such as, Japan, South Korea and Germany – which at different points in history recovered from distress and turned themselves around, often within a short space of time. In the second phase, the ISI is studying South Africa’s current economic policies to better understand what the country is doing right, what should be changed and what new policies should be pursued.