Unlocking South Africa's potential: 7 key factors driving foreign direct investment

For South Africa to increase FDI, it must single-mindedly focus on achieving macroeconomic stability, says the author. Photo: Reuters

For South Africa to increase FDI, it must single-mindedly focus on achieving macroeconomic stability, says the author. Photo: Reuters

Published Oct 8, 2024

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Andrew Bahlmann

Foreign direct investment (FDI) is an essential engine for economic growth in developing economies and South Africa is no exception. The country's strategic location, diverse economy and access to key markets make it an attractive destination for international investors. However, despite its appeal, attracting and sustaining foreign investment requires an environment conducive to long-term returns.

One of the foremost concerns for any foreign investor is political stability. Investors need confidence that the government in power will not only remain stable, but will also maintain clear, consistent policies that support the free market and economic growth. While South Africa enjoys a stable democratic process, there are concerns about policy uncertainty, especially in areas such as land reform and mining regulations.

For instance, the government's stance on expropriation without compensation has previously caused alarm among investors, creating a perception of risk that can deter FDI. To increase investor confidence, the government must clarify its policy intentions in areas that affect property rights, business ownership and labour laws.

Consistency and transparency in policy execution are similarly critical to fostering an environment where investors feel secure in committing capital. With the establishment of the Government of National Unity (GNU), there appears glimmers of hope that there will be a democratic mechanism to start forcing a ‘South Africa first’ agenda versus historical bias towards the ruling party at the expense of the country.

Macroeconomic factors such as inflation rates, exchange rates, and overall economic growth play a significant role in investment decisions. Investors prefer economies that exhibit stable and predictable economic conditions, where currency depreciation and inflation do not erode returns. South Africa has faced challenges on this front, including sluggish economic growth and a volatile currency, often driven by external factors like global market dynamics and internal factors such as fiscal mismanagement or energy shortages.

For South Africa to increase FDI, it must single-mindedly focus on achieving macroeconomic stability. This involves maintaining prudent fiscal policies, managing inflation and ensuring that public debt levels are sustainable. Additionally, ensuring that institutions like the South African Reserve Bank continue to operate independently and uphold their mandate to maintain price stability is crucial for long-term investor confidence.

South Africa’s economic future hinges on addressing three critical issues: corruption, crime and its grey listing status. Corruption has eroded trust in both public and private institutions, deterring investment and stifling growth.

The country's high crime rate creates an unstable environment that further discourages foreign and local investors. Being grey-listed by international financial bodies adds to this strain, making it harder for businesses to access global capital. For South Africa to unlock its full economic potential, it must implement reforms, enforce stronger governance and restore confidence in its legal and financial systems to attract sustainable investment and spur development.

Another key factor international investors consider is the quality and availability of infrastructure. For FDI to be productive, there must be reliable infrastructure to support business operations, including transport systems, energy supply, telecommunications and water management. South Africa has long been plagued by energy shortages, which have resulted in widespread load shedding, severely impacting the country’s ability to sustain industrial activity.

Through effective public-private partnerships, the country has mitigated the energy supply risk and demonstrated what can be achieved if all stakeholders focus on a common goal. Substantial work is still required on the transmission and grid infrastructure sides, but indications are that this will be achieved through the current channels - thereby growing FDI interest.

In addition to energy, continued investment in transportation, particularly rail, roads and ports, is crucial to improving South Africa's position as a gateway to the rest of Africa. Investors want assurance that their goods can move smoothly and efficiently across borders, both domestically and regionally.

South African rail and port infrastructure has been crippled by state capture and lack of investment. This will be a critical area that foreign investment will be looking at in order re-establish South Africa as the true gateway into Africa.

Access to a skilled and productive workforce is an essential consideration for investors, and there are valid concerns regarding the skill levels and overall productivity of the workforce. Education and vocational training systems need to be strengthened to ensure that local talent can meet the demands of modern industries.

Investors in sectors such as technology, manufacturing, and services look for a labour force capable of driving innovation and efficiency. South Africa must prioritise investment in education, with a specific focus on science, technology, engineering, and mathematics (STEM) fields, to build a future-ready workforce. Additionally, partnerships between the private sector, educational institutions and government could help bridge the gap between theoretical education and practical skills, making the labour force more attractive to investors.

The ease with which investors can start and operate businesses in South Africa is another critical factor influencing FDI decisions.

According to the World Bank’s ‘Doing Business’ report, South Africa ranks relatively low in areas such as starting a business, dealing with construction permits and enforcing contracts. Streamlining bureaucratic processes, improving regulatory efficiency and reducing red tape can significantly enhance the country’s investment appeal.

Improving digital government services and creating a one-stop shop for foreign investors would reduce the time and cost associated with establishing businesses in the country. It is equally important to simplify and harmonise regulatory frameworks across provinces, ensuring that investors can navigate the legal and regulatory landscape without unnecessary hurdles.

Different sectors present varying levels of attractiveness to international investors. In South Africa, key sectors include mining, manufacturing, agriculture and services (particularly financial services and tourism). Investors look for opportunities where they can gain a competitive edge and high returns.

The mining sector, despite regulatory challenges, continues to attract foreign investment due to the country’s rich mineral resources. However, the future lies in diversifying into new industries such as renewable energy, information technology and green technologies. The government should actively promote and incentivise investment in these high-growth sectors, positioning South Africa as a leader in sustainable and innovative industries.

Andrew Bahlmann is chief executive of Corporate & Advisory, Deal Leaders International.

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