Foreign Direct Investment in China and South Africa

Many countries strive to attract foreign direct investments due to the benefits they often bring into the economy. FDI increases productivity, managerial skills, technology transfer, international networks of production, access to external markets, and reduces unemployment. According to Denisia (2010), FDI achieves economic spillovers, leading to economic growth that impacts on other national investments. It also provides advanced technologies that help local firms. This paper seeks to compare the impact that China and South Africa have made towards making their environments more attractive for foreign direct investments.

The economy of China is about half that of the USA with a comparable mass of land. After more than thirty years of growth in the economy, fueling a boom in the industrial and urban development sector, 171 cities in China have a population of more than one million each; the US has nine similar cities. The GDP of China is still among the highest in the world at about 7.8 % despite the fact that it is slowing down. Responding to this growth, the exports from the USA have increased by close to 500% since the year 2001 (Dippenaar, 2009). It is also likely that China is going to maintain its growth as the third highest importer of goods from the US after Canada and Mexico. The main exporters of products into China are small and medium sized businesses and represent 92 % of businesses exporting into China. The value of the exports made by these products is about 35 % of all goods exported to the US (Isayev n.d.). The main categories of exports include machinery, electronics and computers, transportation and equipment, chemicals and waste and scrap.

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South Africa has just recently entered its 20th year after independence. Over the past 20 years, the country has struggled with attempting to create policies that would create a higher FDI preference (Antonopoulos & Kim, 2011). While the country has shown a drop in preference as a destination for foreign investment, it is still among the best performing countries in Africa. The country has a GDP of about 1.6 %. A 2013 report shows a 15 % decline in strength of the South African currency for 2013 mainly owing to demands for capital exports (Isayev n.d.). The decrease in the value of currency has been similarly impactful in regard to raising the cost of imports. This has made South Africa one of the most uncertain markets in the medium term.

Series Name 2005 2006 2007 2008 2009 2010 2011 2012 2013
GNI per capita, PPP (current international $) 9270 9960 10490 10960 10850 11200 11640 11970 12240
Population (Total) 47639556 48269753 48910248 49561256 50222996 50895698 51579599 52274945 52981991
GDP growth (annual %) 5 6 6 4 -2 3 4 2 2
Life expectancy at birth, total (years) 52 52 52 53 53 54 55 56 ..

                                    (Source: World Bank)

Foreign direct investments are a driving force for the process of globalization and are vital in defining modern day world economy (Isayev n.d.). It provides a means for the national; economies to integrate into the global and regional markets. The flow of foreign direct investments has reached a record high level of over $400 billion thereby becoming one of the most important aspects of capital inflow into national inflows of countries in transition. The theory of exchange rates on imperfect capital markets argues that the appreciation of the US currency has led to a 25 % decrease in the rate of growth of FDI in the US (Isayev n.d.).

Advantages of China as an FDI destination

China has remained a little source of FDI increases, yet that, as well, is evolving quickly. Chinese outward FDI took off from a normal of $3 billion for every prior year 2005 to $60 billion in 2010, catapulting China into the main five sources of FDI on a three-year moving-normal premise. Given the measure of China’s economy, its development rate, and the knowledge of other creating economies, FDI from China is liable to expand by $1-2 trillion by 2020 (Li, 2005).

FDI Inflows for China

(Source: tradingeconomics.com1)

An expansion in FDI overspills is a necessity in China for two reasons. First and foremost, China has a reasonable enthusiasm toward expanding its considerable property of foreign exchange reserves far from low-yielding US Treasuries to genuine gainful holdings with higher returns (Pickworth, 2014). That is the reason China built its sovereign-riches store, China Investment Corporation, and why leaders are looking for more FDI open doors.

Second, China’s organizations have been swayed to “go worldwide” and contribute abroad to discover new markets, secure access to vitality and crude materials, and improve their intensity by gaining new innovations, brands, and administration aptitudes (Cheng, Sun & Tu, 2009). In a late report, the People’s Bank of China urged Chinese organizations to gain remote firms as the first phase of a ten-year plan to ease China’s capital-market confinements – long an objective of US policymakers.

In this way, China’s FDI surges have been concentrated in developing nations and a handful of resource-rich developed nations, including Australia and Canada, and have been gone for encouraging exchange and gaining access to regular assets (Liu, Zhang & Zhang, 2010). However, the patterns and goals of China’s outward FDI will change as climbing wages, an increasing exchange rate, and the entry of new suppliers from other rising nations reduce Chinese organizations’ aggressiveness, persuading them to contribute abroad to update their innovation and administration abilities, find new development open doors, and climb the quality chain.

Presently, the US gets just around 2-3% of FDI streams from China. But China’s immediate speculations in the US has expanded quickly, from less than $1 billion yearly in 2003-2008 (Dippenaar, 2009), to more than $5 billion for every year in 2010-2011. No less than 38 US states now have FDI ventures from China, and rivalry for Chinese speculation has increased as states’ financial plan have contracted.

Another factor that favours the Chinese destination for future investment is the cheap labour. While this met with a lot of conflict for major companies and dubbed sweat shops, the labour aspect is still worth considering. The wages expected of Chinese companies is far lower than what is required in western destinations. This has especially made China to be favoured by many companies worldwide (Lynn & Wang, 2010).

China overtook the United States in the early 2000s as the world’s largest recipient of foreign capital (Sauvant, 2009). Foreign capital is the amount of money an investor is willing to place and risk in a certain region. Conditions in the general economic environment and the worldwide capital markets contribute to the flow of FDI in China. The economy, business environment and capital markets are thriving in China hence creating large amounts of investable capital and which stands a chance of being converted to FDI.

The Chinese destination is also competitive compared to other destinations. Due to the well development of its infrastructure, availability of resources, workforce skills and productivity contribute to the attractiveness of the Chinese destination. The maturation of these factors relative to other countries can contribute to the country’s destination as a destination of FDI compared to other countries like India which compete for the same capital of investment (Sudhakara Reddy, 2009). A developing and growing economy requires a proper infrastructure to facilitate the selling of goods and services (Rogers, 2007). Lowers costs of production caused by the maturation of these elements enables a higher return to investment as their ventures are able to generate more profit. China offers a good combination of these factors. Roads, bridges, highways, and other forms of physical infrastructure are available and offer a safe way for companies to transport their goods and services, as well as raw materials and employees (Cheng, Sun & Tu, 2009). Availability of low cost employees who have the necessary skills, aptitudes and proficiencies to manufacture, create and provide goods and services which can compete worldwide are also available.

Regulatory authorities have enforced rules and policies that make it easier for foreign investors to invest in China (Wang, 2011). Excessive regulations deter commercial and entrepreneurial activities. This is because the workforce must spend more time trying to comply with these regulations. For this reason, employees are forced to move to other destinations which have fewer regulations. An investor who wants to set up a facility in china considers the cost of start-up costs, fewer compliance measures and may be encouraged to set up the facility there. The justice system that is biased against locals who conduct unethical, unfair and illegal activities may also contribute towards a worse environment.

The Chinese government also offers incentives, subsidies, grants and tax breaks to promote investment (Cheng, Sun & Tu, 2009). Such interventions enable a business to start up more easily and to start making profits sooner.

China’s economic and political stability can lead to an increase in FDI. Stability implies predictability and the possibility of investments becoming more aware of their future (Cheng, Sun & Tu, 2009). A community that is lacking in riots, social unrests, social uproars and rebellions are a more attractive business destination for investments. Economic instability may cause hyper-inflation which renders the currency obsolete.

The enormity of the Chinese market is also an attractive aspect of the Chinese destination for investment. The possibility of a firm funded by the high amount of available capital to exploit the sizeable market share provides unlimited means for a company. This has attracted various companies in various sectors including healthcare, IT, robotics and luxury goods. Similarly, FDI and economic growth often start a successful domino effect (Cheng, Sun & Tu, 2009). The more china continues to attract FDI, the more investors identify it as a viable destination for more investments. This point makes the market an even more viable. Further FDI growth leads to higher economic chain reaction, positive impact to sustain the growth.

China is more open to regional and international trade. Openness to foreign businesses serves various important roles in nurturing FDI (Cheng, Sun & Tu, 2009). Of crucial importance is a company’s ability o market its products both locally and internationally. Limitation to foreign customers especially, USA, Western Europe and others, the local market becomes insignificant for consideration. Trade barriers and tariffs are considered as disincentives by investors. A product from the US which is exposed to high tariffs in china gets little demand due to its highly artificially inflated cost.

Actions of that kind will often prompt similar actions from other countries hence diminishing the market for Chinese product (Ghosh & Wang, 2007). Export friendly measures on the other hand can play a major role in whether other countries choose to invest in China. The Chinese authorities have worked towards the creation of a friendlier destination hence enabling for higher rates of FDI.

Advantages of FDI in SA

South Africa is turning into an economic power to be reckoned with in this fast changing worldwide financial times and, by suggestion, the earth, essentially because of the long haul financial vision and the related arrangement making of its legislature (Dippenaar, 2009). Its triumphs, as far as its worldwide recognition and rankings in key persuasive files, for example, the World Economic Forum Global Competitiveness Report, the World Bank Ease of Doing Business Index, the World Economic Forum Travel and Tourism Index – could set a benchmark for other developing nations to take after (Musango, Amigun & Brent, 2010).

What develops is an example of nation execution showing that South Africa matches and outflanks other associate creating nations in basic regions of national competency (Draper, 2010). These are vital markers to use at present situating South Africa as a solid exchange accomplice, and appealing financing objective.

This proceeding with change in execution on the worldwide stage is attributable to solid and exceedingly centred government arrangements that help the nations worldwide and provincial development goals (Musango, Amigun & Brent, 2010). As South Africa sets out toward 20 years of public government, the nation involves an inexorably solid position all inclusive, as a developing country, in the early 21st century.

The numerous worldwide financial pointers used to survey the quality of country brands highlight that South Africa has exceptional competitive qualities in the connection of the developing scene, and these are, no doubt leveraged to great impact to improve the nation’s remaining in the worldwide commercial centre (Musango, Amigun & Brent, 2010; Viviers et al., 2008). This could be seen in the more extensive connection of South Africa’s consideration into the Brics group of countries, and the nation’s intensity contrasted with other developing countries. The latest World Economic Forum’s Global Competitiveness Index positions the nation’s budgetary administrations segment, banks and stock trade as the top worldwide performers, while the nation places fifteenth all around for the nature of its air transport framework (Fu & Soete, 2010).

Moreover, South Africa, if contrasted with alternate Brics countries, starts things out in five of the 10 criteria the World Bank utilization to survey simplicity of working together: beginning a business, managing development licenses, getting credit, securing speculators, and paying charges (Musango, Amigun & Brent, 2010). This implies that South Africa offers security to foreign ventures, and is absolutely a business-accommodating environment wherein new exchange, financing, and related financial co-operations might be cultivated.

The South African government’s dedication to making an environment that makes it simple for organizations to work together in the nation has been perceived in the most recent release of the World Bank’s East of Doing Business Index (DBI), distributed in 2013 (Pickworth, 2014). South Africa now positions first among the Brics countries in six basic DBI criteria. The nation can hence make a solid business case to draw in exchange accomplices, speculation, and customers from individual Brics parts. As a country that offers a few focal points, an open business environment is a paramount gimmick to use as an offering point for South Africa as a business end of the line (Nel, Marais & Blignaut, 2009). New government arrangements presented now make beginning a business in the nation less demanding than at any other time in recent memory, by actualizing new organization law that takes out the prerequisite to save an organization name and disentangles the fuse records. South Africa has likewise made property market less exorbitant and more productive by diminishing the exchange obligation and presenting electronic recording (Fu & Soete, 2010).

The South African Reserve Bank (SARB) reported South Africa’s inflows from direct investments for 2013 to amount to $7.449 billion (Fu & Soete, 2010). Significant inflows were recorded in all quarters around the year. A portion of these inflows is attributed to foreign companies sending support funds to subsidiary companies. There has also been a significant increase in the foreign company equity stake to South African companies in the financial sector.

Globally, FDI inflows rose by 9 % in 2013 to about $1.45 trillion (Plaw, 2005). Africa recorded an increase in inflows by 4 % to $57 billion. This is a reasonably high increase for Africa compared to other regions. Asia, though with a much higher quantum at $426 billion, showed an increase of only 13 %.

For companies seeking investment destinations, reports show that developing countries are the place to start (Hu, 2011; Nissanke & Thorbecke, 2010). This has been blamed on the faster economic growth and the rising prominence on the world stage. The destinations favour both market and resource seeking investments. Investments in services, infrastructure and manufacturing are also favoured by the developing and emerging countries. In general, the African continent is becoming a better destination for major companies for various reasons (Plaw, 2005). Chiefly, the African middle class is becoming an attractive market for external investors. Over the past ten years, the market has increased by over 30%. Reports show that FDI had grown by 24.7 % from 2007 to 2011 and is still the most attractive African market for FDI.

FDI Inflows for South Africa

(Source: tradingeconomics.com2)

Compared to other African countries, South Africa offers a variety of resources that are sought worldwide (Pickworth, 2014). First, the country boasts of a higher education level than most other countries on the continent. It also has the highest amount of gold and diamond as well as other mineral resources. The availability of these resources gives it an advantage in the field when investors are considering where to invest the money.

The country is also still has high levels of unemployment (Viviers & Firer, 2013). This has been a reason for the countries to invest in South African Companies. The high rates of unemployment imply that the company can readily obtain employees from the population for lower fees.


The People’s Republic of China has had a season of growth over the past few years. The country boasts of having over 90% of major industrial minerals and a high population that can readily provide human resources (Antonopoulos, & Kim, 2011). South Africa on the other hand is the largest producer of precious minerals. It’s lagging state of development makes the country to have a higher amount of cheap labour available to accelerate production. Compared, the Chinese population is vaster. The country also has more useable raw materials in higher proportions. China has had one conflict with authorities over the regulation of raw materials. The country being a signatory of certain regulations over the importation of natural resources, has tried to limit raw materials to the US (Dippenaar, 2009). This has led to conflict with regard to whether they should be limiting or not. This rule would however be more favourable to manufacturers located in the USA.

The two countries offer a friendlier environment for foreign direct investments. The high levels of friendliness have complemented them as destinations for FID. The friendliness has come in the form of better policies to support foreign investments, incentives, grants and other forms of support for foreign firms. These factors contribute to how fast companies are able to get started and make profits. Compared, China has shown higher growth in the rate of FID compared to South Africa (Antonopoulos, & Kim, 2011). For this reason, it would be more practical to invest in the same region. The country has a big population that offers a ready market for products generated. The South African market is small but the investor should also consider exploiting the middle class market of Africa which has shown high growth rates.

Internalization theory supports the idea of FDI. It argues that it is more profitable for one company to do the production work than it is for the same company to sell the knowledge to another company to produce (Dippenaar, 2009). Internalization theory puts more emphasis to the ideas of technology transfer. By an international company opening a new enterprise in a foreign country, it brings with it technology that may not have existed before in the country.

Internalization theory also argues that FDI eliminates trade barriers and transportation costs. If a company builds a new enterprise in the foreign countries, they eliminate the problem of lack of sufficient market information. Sellers and buyers experience information asymmetries. For this reason, the company should prefer FDI in countries where it has a better market so as to take advantage of this market (Dippenaar, 2009). While both countries are viable for exploitation, the investor has other factors to consider. First, this company should be located near its biggest market and a source of cheap raw materials. The company can also be placed near a source of cheap labour. Cheap labour is available in both countries (Dippenaar, 2009). It is the other factors that would therefore play the major role combined with other factors like policies and infrastructure.

The OLI paradigm is applicable in both countries. It focuses on the company structure, the ownership advantages, location advantages and internalization advantages. The company structure is dependent on the company itself and its leadership structure. The bigger the company, the more capable it would be to be in invest abroad (Denisia 2010). The ownership advantages pertain to the competitive advantages that a company possesses, the easier it becomes for it to perform in the foreign country. Location advantages pertain to the advantages to the advantages that originate from investing in a certain country. These include raw materials, transportation and good infrastructure, cheap labour and a local market. All these are available in both case countries depending on the industry. Internalization advantages regards the benefits a company gets by preferring to open up in a certain country rather than licensing its rights to another company or exporting products to that country. In the case of China and South Africa, the factors that surround them would favour FDI.


In conclusion, while both countries offer a ready platform of exploitation for the international investor, the Chinese market has more plusses. It has a higher rate of growth, a wider range of raw materials and a higher technology. Investors should therefore be readier to approach this country. The local population also offers a ready market for the products generated. The country also has a high amount of cheap labour, and a good infrastructure. However, other factors like the type of company and the market a company would require to exploit should be put into consideration.


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