January 10th, 2018
Costs and Benefits of High and Low FDI in South Africa
Having more FDI in South Africa has various benefits to the country. First among these would be reducing the unemployment level existing in the country. With the country’s unemployment rate being consistently rated among the highest in the world, FDI is one of the tools that could help reduce such high unemployment levels. By entering the South African market via FDI-requiring modes, entities would need human resource to work at their subsidiaries or branches in the country, and thus reduce the level of unemployment.
A second benefit of FDI to South Africa would be fostering growth. Since the country’s savings and investment levels have been very low over the years, relying on domestic entities to finance the level of expansion for the required growth could fail. FDI would in this case provide surplus source of finance to stimulate economic growth to the required levels. Thirdly, higher FDI could lead to high-quality product offerings. This could firstly result from the experience, resources and technology that foreign companies have amassed over the years that enable them to follow a product development strategy without being limited by resources. Secondly, such quality may result from increased competitiveness in the market, following higher foreign entry, which leads to innovative approaches, even by domestic entities, and eventually leading to better quality products as a competitive strategy. Finally, by having higher FDI, the country could have a diversified economy thus shielding it from economic downturns in countries that are markets for its exports.
High FDI in the country could however have its disadvantages. The first among these is that it could create a high barrier for domestic start-ups to compete effectively. Due to the massive resources that foreign entities control, they could offer services at relatively cheap prices making domestic start-ups incapable of generating sustainable growth if they offer products and services at comparative prices. Such a case could be aggravated where the entities’ inputs are comprised of imports that increase the cost of finished products due to levies on such imports. Secondly, high FDI could push the prices of critical resources such as land out of reach for domestic investors and citizens. When this happens, the disparity between the rich and the poor in the society would be enhanced thus increasing tension and political risks.
The benefits of low FDI arises from the disadvantages noted of increasing FDI. Low FDI could provide a conducive environment for start-up domestic firms to gain a considerable market share. This could help them build adequate capital to further expansion activities. Low FDI also could retain the prices of critical resources within the reach of citizens thus not emphasize the poor-rich gap. On the other hand, low FDI may present numerous costs to the country. Such include the lack of adequate resources and skills to further expansions that lead to economic growth and the provision of low-quality products due to limited competition. When FDI result into the former, an additional problem of unemployment could result thus aggravating the social risks the country faces. Go to part 3 here.