Foreign Direct Investment Links between South Africa and

Report
Foreign Direct Investment Links
between South Africa and China
Stephen Gelb
The EDGE Institute & University of Johannesburg
Workshop on China-South Africa trade & investment
TIPS, July 27 2012
Introduction & Methodology
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China was SA’s top trade partner in 2009 ($14.2 bn) & 2010 ($19.3 bn),
China surplus $3.45 bn
 Very rapid trade growth over past 15 years, mixed impact on SA
Other BRICS:
 India – ranked 6th, total trade $5.8 bn 2010 (2009: $4.0 bn), SA surplus
$0.2 bn
 Brazil – total trade $2.05 bn
 Russia – total trade $0.77 bn
But little attention to the scale & significance of FDI links, despite much
media discussion of Chinese FDI in Africa
Look at FDI links in both directions – China into SA and SA into China
Overall size and shape of the FDI relationship
Impact of FDI on growth & development – policy & analytical issues
 Use two in-depth sector case studies
 Chinese brown goods manufacturers in SA (TV and other electronic
appliances)
 Financial services firms in both countries
FDI between China & SA: Official aggregate data
 Data from both countries is contradictory & inconsistent
Official data on FDI stocks & flows
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Other BRICS:
 India: FDI in SA $2.3 bn, FDI in India $0.93 bn
 Brazil: FDI in SA $0.2 bn, FDI in Brazil $0.62 bn
 Russia: FDI in SA $5.4 bn, FDI in Russia $0.17 bn
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China-SA FDI stocks appear to have grown very rapidly since 2007 &
important for both countries
 China has a significant share of South African FDI stocks for both
inward and outward FDI – 4.2% for IFDI & 6.3% for OFDI (SARB data)
 South Africa has a significant share of Chinese outward FDI stocks –
8.2% (adjusted MOFCOM data)
But official data is unreliable:
 Inconsistencies: between 2 countries, over time, stocks vs flows
 3rd country routing
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And not very useful:
 Growth almost all from 2 holdings: ICBC in Standard Bank, Naspers in Tencent
 No sectoral or flow breakdown by country
FDI between China & SA: Firm-level data
The EDGE Institute FDI Database
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Chinese firms in SA
 47 present
 19 withdrawals
 12 possible entrants
 Of 47 present: 25 SOEs, 13 private, 9 uncertain
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SA firms in China
 32 present
 7 withdrawals
 9 possible entrants
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Comparison with India:
 93 Indian companies present in SA
 2 withdrawals
 36 possible entrants to SA
 45 South African companies in India
 3 withdrawals
Sectoral distribution: Chinese firms in SA
N = 47
F&B services
13%
Consumer
services
9%
IT/Media Mining
2%
13%
Consumer goods
4%
Materials
8%
Electronic
11%
Infrastructure &
construction
23%
Auto
Other machinery 11%
6%
Source: EDGE Institute FDI database
Sectoral distribution: SA Firms in China
N = 32
IT/Media
6%
Mining
23%
F&B services
17%
Consumer services
3%
Infrastructure &
construction
23%
Consumer goods
8%
Materials
9%
Other machinery
11%
Source: EDGE Institute FDI database
Electronic
0%
Auto
0%
Date of Entry (% of firms)
China in SA: N = 57
SA in China: N = 38
60
50
40
30
20
10
0
< 1994
1995-99
2000-5
Source: EDGE Institute FDI database
Note: Number of firms includes withdrawals
>2006
Mode of entry (% of firms)
China in SA: N = 57 SA in China: N = 38
70
60
50
40
30
20
10
0
GF
JV
PA
Source: EDGE Institute FDI database
Note: Number of firms includes withdrawals
FA
Assessment
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Very small number of entries in either direction
 Linkages are not ‘dense’ – firms thinly spread across many sectors
 Linkages are not ‘pivotal’ – firms not dominant in any significant sector
Many ‘early’ entries on both sides – SA/China amongst the first international
destinations of investing companies
But also many withdrawals – failed entries – on both sides
 Entries too small
 Poor acquisitions
 Companies over-extended internationally
 Small market size in SA (Chinese autos: temporary withdrawal?)
Most successful Chinese firms have been large SOEs, both market- and
resource-seeking
Most successful SA firms have been ‘national champions’ (including
‘emigres’)
Case study I - Chinese brown goods manufacturers in SA
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5 producers in SA - 3 are Chinese
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Questions:
 Why did Chinese firms invest in apparently declining manufacturing subsector in SA?
 What are Chinese firms’ ‘O’ advantages? How do they invest profitably?
 Should SA be encouraging more Chinese (or other Asian) firms to
invest in SA manufacturing to enhance job-creation, skills transfer &
manufacturing exports?
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All three investors are major electronics groups in China, and entered SA
very early in their own internationalisation which was response to intense
competition in Chinese TV manufacturing as plan shifted to market
Chinese firms have a key ‘O’ (ownership) advantage – ability to import own
CRTs & other key components
They entered SA due to its strong market potential in early 1990s
Potential has not been fulfilled – market growth, but supplied by imports
• Limited competition, small market with few scale economies,
unpredictable policies
Case study I – Brown goods (continued)
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Domestic firms have withdrawn from own production into contract
production & importing
But Chinese firms have been profitable and expanded & diversified in SA
 Operate at low end of TV market & moved into washing machines,
stoves
 Collectively supply almost 60% of local TV set output, 25% of domestic
market
 Now also importing higher-end home electronics appliances and
establishing brands in market
Limited ‘dynamic’ gains or spillovers transfer of technology but benefits
nonetheless higher consumer welfare, stable employment
Demonstration of potential for durable investment in manufacturing in SA
providing modest but stable profitability
 Manufacturing ‘business model’ – low margins, mass market products
 Low overheads
 Access to low-cost production in home economy
Case study II – Financial services in China & SA
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Extensive presence of financial institutions from each country in the other’s
market
 4 major Chinese banks in SA, entered ‘early’ in internationalisation
 3 of 4 major SA banks in Chin, and other SA financial services
companies
 Several alliances - ICBC/Standard, CCB/First Rand, Discovery/Ping An,
OM/BSAM, also BoC/Ecobank/Nedbank
Questions:
 Why the significant market presence in both directions?
 Why the early entry?
 Why the predominance of alliances?
Both countries have strong financial sectors but with very different histories,
so financial services firms have different but complementary capabilities
 SA: long history of foreign engagement, complex corporate/project
financing, retail product innovation for middle class
 Broad capabilities and skills, but small market size limiting capital base
& international network growth
 China: very large but shallow domestic market (corporate & retail), state
backing (& control) of financial institutions
 Very strong capital base, but narrow product range & borrowers’ soft
budget constraints have limited capability development
Case study II – Financial services in China & SA (continued)
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Reasons for market presence & early entry vary between 2 countries
 For SA banks: market-seeking - relatively low entry cost for banks
 For Chinese banks: market-seeking (trade & immigrants) maybe less
important than to support learning (part of banking reform)
Early entries had limited impact in host (wholesale) markets
 Limited scope of ‘O’ advantages is characteristic of ‘South’ firms –
difficult to succeed internationally as stand-alone operators
Alliances are more recent – based on complementary strengths & potential
mutual benefits – more effective market access & expanded networks
(Including China/Africa trade), new products & capabilities
Explicit choice of other ‘South’ firms as alliance partners
 Perception that operating environment & risk in EMs is distinctive from
developed economies - familiarity is itself an ‘O’ advantage
 ‘South’ firms have more favourable view of risk/return trade-off in Ems
Conclusions
 China is SA’s major trading partner but FDI relationship is less well developed
 Official data reflects large value and fast growth since 2007
 But small number of firms & relationship is not ‘dense’ – firms spread
across many industries, limiting impact
 Qualified support for view that ‘South-South’ investors are more willing to
enter than ‘North-South’ & bring greater benefits to host economy
 Very early entry by many firms
 But high failure rates suggest poor risk assessment & premature
internationalisation are common
 Benefits from ‘South-South’ FDI need to take account of specifics of
investors’ advantages and of their performance
 Policies:
 Better official data – more accurate financial values & firm-level data
 More focus on investment relationship with China (in addition to trade)
 SA needs more Chinese (& Asian) inward FDI, especially in labourintensive activities (with appropriate trade policy support)
 SA needs to promote OFDI, especially by ‘national champions’, with
mechanisms to facilitate home country gains
 Both governments should encourage & facilitate co-operation between
SA & Chinese firms, in both economies & in third markets
The End
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