Eastern European economies may be eying soaring numbers of foreign investment in South Africa from countries such as China. Should attracting FDI be on top of the economic agenda?  

Foreign direct investment (FDI) into South Africa has increased by 446 percent in one year, according to a new report from the United Nations trade conference UNCTAD. Total FDI grew from $1.3 billion in 2017 to $7.1 billion (R98.6 billion) in 2018. With these numbers, South Africa managed to successfully turn around the sharp declines in FDI since 2014, as reported by the UNCTAD Global Investment Trends Monitor.

Why is Foreign Direct Investment a political priority?

The example of South Africa shows that foreign direct investment is not an end in it itself, but important for the overall economy. In February 2018 President Cyril Ramaphosa announced that he is aiming to attract R1.4 trillion (88 billion) investment to South Africa in five years during his presidential term. Boosting Economic development and reducing the high rate of unemployment are top priorities of Ramaphosa’s reform plans for South Africa, says a report from TopForexBrokers.Co.Za.

The increase of foreign investments can help both issues over time, but for 2019 South African economy will not have large growth despite the increase of FDIs. Furthermore, while it is expected that the growth indicator for 2019 will be up to 2 percent, many other factors could shift this projection.

While the FDI is skyrocketing in South Africa, the global FDI continues to slump. Investments have fallen from $1.47 trillion in 2017 to $1.2 trillion in 2018. The reasons behind this negative trend are shifts in global value chains and the lower profitability of foreign investments explained the director of UNCTAD’s Investment Division James Zhan. He does not expect these factors to change in the near future, he added in his statement.

China among principal investors

As the amount of foreign direct investments has skyrocketed as South Africa is becoming more attractive for foreign investors. According to the report, the majority of FDI investments were not only devoted to traditional sectors, but also the digital economy. In addition to mining, food processing, petroleum refinery, and renewable energy, the sector of information and communication technologies received significant funding.

South Africa attracted $1.2 trillion of foreign direct investment in 2018, including big infrastructure investments from China. Image courtesy: Photo by _M_V_ on Unsplash

Investments are coming from different countries and some of the biggest companies in the world. For example, China has made R193 billion (12,2 billion) new investments in South Africa. One of the biggest investment was the newly-opened BAIC vehicle plant at the Coega harbor. China’s total investment in this plant alone was a staggering R11 billion (690 million).

Lessons for emerging Europe

In terms of attracting investments, South Africa’s success story seems like a primary example for emerging economies from Central and Eastern Europe. While Eastern Europe is often not seen as lucrative as its western counterparts, it could position itself as a ‘Gateway’ to Western Europe for big investor countries such as China.

However, the recent diplomatic woes around the strong presence of China’s Huawei in Eastern Europe also show that the political reality might be more complicated than that. In Huawei’s case, controversies emerged over Chinese technology that the USA suspected could be used as a tool for spying by Beijing. Apart from foreign technology, the money flows by foreign direct investment equally carry political weight. In the worst case, depending on these FDI flows can jeopardize political independence.  

From a geopolitical perspective, Eastern European countries are often caught in between the big powers of the global West, China and Russia. Consequently, security and economic relations are often intertwined. However, having ample experience in carefully balancing this interest could be a big asset for countries in Eastern Europe – in particular when it comes to attracting the needed foreign direct investment flows.

Read more: Huawei controversy: Eastern Europe’s smartphones turn global diplomatic battle