Foreign direct investment won’t create enough jobs to resolve SA’s unemployment crisis
When Amazon’s entry into South Africa made news last year there was excitement about the potential jobs that would come from the world’s biggest retailer’s foreign direct investment (FDI).
But Amazon’s announcement that it is cutting 18 000 jobs globally has doused some of that euphoria, once again underlining the need for South Africa to drive its own job growth.
Amazon said affected workers would be informed of their situation from 18 January.
Amazon said it had “hired rapidly” during the Covid-19 crisis to meet the increased demand for deliveries, doubling its staff globally over the past two years. It had more than a million employees by the end
of last year. However, it said the economic outlook was uncertain at the moment.
The hiring spree also applied to South Africa, with BusinessTech reporting in October the e-commerce giant had more than 200 positions available in the country.
Unemployment in South Africa is at 32.9%.
Amazon has announced plans to roll out its platform in South Africa next month and analysts believe this will still happen. The country certainly needs the FDI, but the trend in foreign investment has been downward in recent years.
According to EY’s latest Africa Attractiveness Report, the continent suffered a 50% drop in FDI in 2020. It said southern Africa was the hardest hit, with regional giant South Africa suffering its steepest GDP fall (by 7%) in more than a century, off the back of the Covid-19 pandemic.
According to expatriate services firm Xpatweb, studies in countries such as the United States, Macedonia, Saudi Arabia and Malaysia have shown that FDI can stimulate job creation and boost economic growth in the host country but the drawback is that this is a long-run relationship that must be maintained.
Hugo Pienaar, the chief economist at the Bureau for Economic Research, said that job creation from FDI cannot be the only driver of employment, given the risk of things falling apart when investors decide to pull out or cut jobs, as in the case of Amazon. He gave the example of South Africa’s vehicle manufacturing sector.
“In vehicle manufacturing, if Ford were to pull out, you would probably see those folks lose their jobs.
“Do the operations get taken over by a domestic operator or does the operation simply close down when the foreign company exits?
“If it is the latter, then you are likely to see some job losses.”
According to Lloyds Bank International Trade Platform, most FDI in South Africa is directed to the transportation, manufacturing, mining, financial and retail sectors. The Beijing Automotive Industry Holding, BMW and Nissan have been the largest investors in recent years.
FDI into South Africa doesn’t usually trigger much employment creation because the investors often partner with, or acquire, an existing company, Pienaar said.
“Think of the Walmart-Massmart deal, for example, or the Chinese bank that invested a lot in Standard Bank.
“These are large FDI transactions but it does not necessarily result in employment because it’s not like a global mining company coming here, building new mine shafts, and employing more people.
“It is often a company buying a stake in an existing South African company. You get the inflow of capital, which is great, but you don’t necessarily get the job creation.”
US retail giant Walmart bought a 51% stake in Massmart in 2011 for more than R18 billion.
Up until last year, when Walmart announced it would take Massmart private, it had a controlling share and was the parent company.
Public policy think-tank the South African Institute of International Affairs said this type of FDI falls under mergers and acquisitions, which result in the inflow of FDI capital but not necessarily new productive capacity.
Pienaar said: “From a government policy perspective we need to make it attractive for both South African companies and foreign companies to want to expand and invest in South Africa.
“You can do that by trying to reduce the cost of doing business in South Africa. This is done by improving infrastructure, getting Transnet’s rail and ports better.”
Concurring with Pienaar, independent equity analyst Simon Brown said FDI was good for the economy and helped boost economic growth through capital inflow but “it’s never going to replace real job creation within the country”.
“We need to employ millions locally; no FDI will do that,” Brown said, adding that one of the risks when a country centres its job creation on FDI is that this can crowd out local businesses while profits flow out of the country.
Casparus Treurnicht, portfolio manager and research analyst at Gryphon Asset Management, said although FDI was essential for an emerging market, such as South Africa, it must come in the form of additional capacity — in other words, factories and facilities that would add to the GDP on a sustainable basis.
“You want to increase output to support the local economy which, in turn, has a multiplier effect, but also you want to export,” Treurnicht.
Sanisha Packirisamy, an economist at Momentum Investments, said global FDI flows had recovered off their pandemic lows but the rising risk of recession in key developed markets could halt this.
“As such, we would need to place more emphasis on creating conducive conditions for accelerating local investment,” Packirisamy said.
