The Dark Side of Foreign Direct Investment: A South African Perspective

Photo © grahamvphoto/Flickr
Photo © grahamvphoto/Flickr

The current account in the balance of payments is always of interest to the international finance community and South Africa is no exception in this regard.

The current account signals a country’s ability to meet its external financial obligations, an important signal to investors. However, the effect of all the components of the current account is not always well understood. One of these components is net investment income, which is often a source of vulnerability for the current account during an economic downturn, particularly for a middle-income country such as South Africa. Net investment income for a country is the balance between income payments to foreign investors on their inward investments and income receipts to domestic investors on their outward investments abroad. This component is dependent on the decision of firms to declare dividends on their profits or reinvest their earnings in Brownfield investments. These types of decisions have significant repercussions for emerging liberalised economies. This study thus explores how these decisions aligned with maximising shareholder value have important implications for the current account.

The role of government is to channel the most productive investments into labour absorbing and, if possible, export-orientated industries to reinforce the current momentum of export orientation. As companies seek to reinvest their earnings in their companies, value chains or subsidiaries based in South Africa, investment income payments will decrease and the pressure of the net investment income balance on the current account balance will be eased, thus placing South Africa in a better position to ride out an economic downturn.

18 Dec 2013