PwC South Africa Senior Economist Christie Viljoen looks at the effect of foreign investment on our economy.
As South Africa navigates its complex economic landscape, an often-overlooked yet crucial aspect of our economic narrative is the significant influx of foreign direct investment (FDI).
In 2023, our economy attracted a substantial R100 billion in FDI inflows, equivalent to 1.4% of our GDP. This welcome trend is not a one-off, as we have consistently seen net positive FDI since 2018, totalling over R900 billion.
This investment is not only a testament to the resilience of our economy but also a vote of confidence from international investors.
FDI is a potent driver of business and economic development in South Africa. It injects capital into our industries, enables market expansion and cost reduction through economies of scale, and enhances the skills of our workforce.
At a macroeconomic level, FDI contributes to our GDP, boosts employment and household income, and generates taxes for the national fiscus. The cumulative value of our inward investment stock totalled nearly R3 trillion in 2022, with manufacturing, mining and financial services leading the way.
Despite our challenges, foreign investors remain optimistic about our economy and business environment. This optimism is rooted in our positive attributes, including world-class financial services, communication industries, a deep capital market, quality tertiary institutions, abundant natural resources, a strategic geographical location, and a transparent legal system. Our factory sector is home to production facilities for some of the world's largest producers of vehicles and consumer goods, demonstrating our potential for industrial development.
South African CFOs should be heartened by the value of FDI inflows, as it signals that foreign companies still view our country as an attractive investment destination. This presents an opportunity for local businesses to access foreign capital and markets, provided they can demonstrate commercial sustainability and growth potential. By attracting FDI, our businesses can tap into global expertise, technology, and networks, enhancing their competitiveness and contributing to our economic growth.
To attract foreign investment, businesses must demonstrate a track record of commercial sustainability, a strong future growth trajectory, and relevance in a growth industry underpinned by solid fundamentals. Financial due diligence (FDD) and commercial due diligence (CDD) are essential tools in this process, providing peace of mind to buyers and sellers alike.
FDD analyses and validates financial, commercial, operational, and strategic assumptions, while CDD assesses historical and forward-looking assumptions from a market, customer, competitor, and internal capabilities perspective.
If a company seeks foreign investment, enlisting the expertise of a financial or deal advisor can facilitate the process. The advisor compiles a preliminary investment memorandum, familiarising potential international buyers with the business’s fundamental aspects. The company can also undertake Vendor Due Diligence (VDD), an independent assessment of the business’s performance and prospects, providing comfort to both parties. VDD specialists work alongside the C-suite to ensure opportunities and issues are understood and addressed, expediting the investment timeline.
While the onus is often on the buyer to conduct due diligence, the seller can take control of the process and expedite the investment timeline by undertaking VDD. However, this approach comes with considerable costs for the seller. Nevertheless, the benefits of FDI make it an opportunity worth exploring.
In conclusion, the recent trend in FDI signals continued international interest in investing in South African businesses and our country’s future. Local business leaders must be open to foreign investment and take the necessary steps to demonstrate their competitiveness and sustainability in a global context.
By embracing foreign investment, we can unlock our economic potential, drive business and economic development, and create a brighter future for all South Africans.
