Realizing the Potential of FDI in the Development of Africa: a Strategic Framework - Literature review Example

 Introduction As discussed at the United Nations Conference on Trade and Development (2002a), FDI is a highly welcome and actively pursued by almost all African countries as it highly contributes towards economic development and helps bring Africa into a recognizable position to be recognized in the world economy. Realizing the potential of FDI in the development of Africa, the African leaders formed an organization called NEPAD which is the New Partnership for Africas Development used as a strategic framework for pan-African socio-economic development in which one of its main aims is to attract FDI to the continent (NEPAD, 2010). The definition of FDI has undergone alteration over time and has a lot of characteristics with regards to the country the actual investment it is taking place. The United Nations Conference on Trade and Development (2002b) defined FDI as an investment made by an investor in enterprises of another economy with the intention of acquiring lasting interest. Similarly, Moosa (2002) defines FDI as a process that involves residents of a source country acquiring asset ownership of firms in a host country for the purpose of controlling the activities of those firms. Rationale for Choosing this Topic As shown by Forbes (2004), FDI has contributed hugely towards the economies of United States, China and Japan. This topic will help in gaining a broader understanding of FDI implications and whether their impact can be as successful in South Africa. Aim and Objectives This literature review has the objective of critically evaluating the impact of Foreign Direct Investment (FDI) in South Africa by assessing the relationship between FDI and economic growth. This will involve conducting a detailed analysis of foreign direct investment in South Africa by critically reviewing the research methodologies employed in the literature, looking at the commonalities between countries, how investment can be attracted to countries. Literature Review Philosophy and strategy Philosophical ideas and strategies of inquiry are a considerable asset to a successful research project. Many aspects of philosophy and strategy have been used by researchers in the evaluation of the impacts of FDI on South Africa. According to Creswell (2008), the nature of these researches is the one that determine the research methods used. Most of the research on FDI impacts was done from a pragmatic, philosophical point of view. This involves using an approach that helps the researcher to understand the actions, situations, and consequences of an issue. From a pragmatic point of view, the researcher can use both qualitative and quantitative strategies to clarify the aim of his or her study (Creswell, 2008). According to Trochim (2006), all research processes have a basis of assumptions about the topic under investigation, and how one can best prove or disapprove the ideas. With this in mind, we can say that just like Creswell, Trochim agrees that the idea behind the research is what establishes the research methods applied. This research study aims at analysing the effects of FDI by looking at how it has affected economic growth. One can approach this study by either using the strategy of qualitative or quantitative analysis of the data acquired. African countries have had exposure to FDI for quite some time, and this is evident in many ways. A country like South Africa, which is in the transition state, has had a successful and improving business sector because of its integration into the international community. This is because of a significant increase in foreign investment into the country (Fortanie, 2007). In this case, one cannot restrict themselves to just one strategy of research. However, James and Vinnicombe noted that, in some cases, people have preferences for certain research methods that are likely to shape the direction of research done (2002). One might prefer to use a certain research design and regardless of the nature and parameters of the research, they will insist on using that research method. In this case, there is a wide literature on the correlation of FDI and the economic growth of South Africa which suggests that FDI is a prime source of capital in these countries. The philosophical basis of this study focuses on literature that identifies three main channels that FDI can affect economic growth. Therefore, one might decide on reviewing the literature from past research exercises only and without using first hand data. This approach requires the researcher to ensure that they link the mode of research to the aim of the research. Otherwise, they might use research methods that are incompatible with the objective of the research, thus leading to poor results (Blaikie, 2000). One needs to apply a strategy in this research which will ensure that all aspects of data analysis are utilized. The use of a pragmatic philosophy approach and a combined strategy of using both quantitative and qualitative means and mixed method designs give the researcher the freedom of using all the relevant data to prove their objective (Moosa, 2002). The choice of a research strategy can be done depending on its prevalence in management of research, and also because of its efficiency and effectiveness. A research of this nature requires one to consider various research philosophies and strategies so as to avoid any bias or unreliable findings. Data analysis FDI has had a significant impact on South Africa for many years because of participation of both investors and the host state governance and economy. A study by Campos and Kinoshita (2006) shows us the significance of institutions and accumulation with reference to the original status and other factors that determine how investors choose their location their article; Why Does FDI Go Where it Goes?: New Evidence from the Transition Economies. In their study, they use a unique set of 25 country economies between 1990 and 1998 that covers countries at both the developing and developed stages of transition. This aimed at providing a fuller and well rounded identification of issues that impact on the success and failure of most countries in transition such as South Africa in attracting FDI (Campos and Kinoshita, 2006, p36). According to Campos and Kinoshita (2006), institutions, labour expenses, agglomeration, economies, and availability of natural resources are the main causes of FDI inflows to these countries. Another study by John C. Anyanwu (2012), who wrote the article Why Does Foreign Direct Investment Go Where It Goes?: New Evidence from African Countries, seeks to understand how the factors affecting the development of FDI will help the policymakers of South Africa in the formulation and execution of policies for attracting FDI. In this study, they used cross-country regressions for the period 1996-2008. Because they used cross-sectional data, they had to carry out four different empirical techniques to add more weight to their empirical results (Anyanwu, 2012, p451). These techniques include robust pooled ordinary least squares (OLS); the feasible generalized least squares (FGLS); both OLS and FGLS methods to check historical data; and finally, the two-step (IV) efficient, generalized method of moments (GMM). These techniques ensured that the results are relevant to the African continent, its sub regions and individual countries (Anyanwu, 2012, p452). Similarly, there was another study done by Ajayi (2006) titled The Determinants of Foreign Direct Investment in Africa: A Survey of the Evidence. In this study, they used case studies of countries under consideration as a way of collecting information about FDI just like Anyanwu, their main area of focus in these case studies was identifying the common point that unites various factors that attract FDI to a country. They also sought to find out some factors about some countries and see whether they could be successfully and beneficially applied to others (Ajayi, 2006, p14). From these studies, we get to understand the magnitudes and make up of FDI, trends, factors affecting the flows of FDI to the country, current state of the country with regards to FDI, and the policies enacted to attract FDI (Ajayi, 2006). On a different basis, Adewumi, in his article; The Impact of FDI on Growth in Developing Countries: An African Experience, looks at how FDI has contributed to African economic growth by using the techniques of graphical and regression analysis. With the help of data in the time set of 1970 to 2003, they used empirical analysis to examine information from South Africa. This method was a bit different from the one used by Campos and Kinoshita because of the nature of the data which focused on effects on FDI rather than the attractants on FDI. From this study, they came up with the inference that there is a positive but insignificant contribution of FDI to economic growth (Adewumi, 2006). Transferability Fortanie (2007) reviewed that African countries are now especially in the last decade trying to create a more business friendly environment for foreign direct investment in terms of law reforms and political stability pursuing democratic leadership methods. There has not been much evidence linking foreign direct investment and economic growth of Africa, and it is still questionable. There are several features that African countries need to have to reap the prospective benefits of foreign direct investment. A lot of African countries are not reaping the full benefits of FDI due to the lack of favourable laws, property rights, democratic political system that is free from corruption, bribery and high level of technology. Technology transfer is one of the big impacts of FDI in Africa. Technology diffusion has benefited Africa in many ways in the technological advancement of Africa. Africa’s economic crisis alongside the poverty level, high level of unemployment and high international debt, endorsing and facilitating technology transfer through foreign direct investment will be key in bridging the gap of technology and resources between developed countries and Africa (Communications of the IBIMA, 2008). In their literature reviewing South Africa’s economic growth using FDI for technology transfer concluded that FDI can enable economic growth by technological spillages to local firms, inspiring innovation and technological modernization thus tolerating technological adoption and developing human capital. Furthermore, Ikiara (2003) explained that technology transfer can come about two ways directly through a joint venture with the multinational corporations increasing the efficiency and productivity of local firms or indirectly, through technological spillages benefiting unaffiliated local firms. In contrast, Adams (2009) highlighted that the low level of education has made it difficult for Africa to secure the full benefit of technology brought by foreign direct investment. The knowledge available in developed countries will be extremely useful to Africa and have an immense impact given that the level of education in Africa was high and up to standard. To be able to utilize this FDI benefit, Africa needs to concentrate more on education as it is the grass root. In contrast, Ajayi (2006) cited that foreign direct investment has a massive influence in economic growth as it is the most stable form of capital flow. Benefits of FDI include serving as a source of capital, creating employment for locals, creating new markets for Africans hence generating more profit and bringing in foreign income into African countries. Foreign direct investment facilitates bringing African countries into the global economy encouraging trade between countries. Conclusion From the literature review above, we can conclude that Foreign Direct Investment (FDI) is a growing investment tool that plays a role in the globalization of the world economy (Herman, Chishol & Leavell, 2004). Researching about the impact of Foreign Direct Investment (FDI) in South Africa by assessing the relationship between FDI and economic growth requires one to use a philosophical approach that allows the collection of all the data involved. From the literature reviewed, we can see that there are two ways of undertaking this research. One can choose to let the nature research determine the research methods used, or decide to use the research method the fits their preferences best, regardless of the nature of the study. Both these approaches have to be taken seriously so as to make sure that one gets reliable results. Several studies about the effect and causes of FDI have already been done by several authors. This paper has reviewed some of their works with the intention of evaluating the impact of Foreign Direct Investment (FDI) in South Africa by assessing the relationship between FDI and economic growth. The study done by Campos and Kinoshita in 2006 provided a fuller and well rounded identification of issues that impact the success and failure of most countries in transition such as South Africa, in attracting FDI. Another study done by Anyanwu in 2012 shows the ways in which the factors affecting the development of FDI will help the policymakers of South Africa in the formulation and execution of policies for attracting FDI. We also get to comprehend the magnitudes and make up of FDI, trends, factors affecting the flows of FDI to the country, current state of the country with regards to FDI, and the policies enacted to attract FDI (Ajayi, 2006). Finally, a study done by Adewumi shows that there is a positive, but insignificant contribution of FDI to the economic development South Africa (2006). All these studies used different methods of data collection and analysis which brought out the aims of their studies. There was the use of cross-country regression methods, graphical and regression analysis techniques, use of case studies, and combination of data sets. These techniques showed the various ways in which FDI impacted the economic growth of South Africa. For one, we see that technology transfer is one of the big impacts of FDI in Africa. In addition, FDI has an immense influence in economic growth due to its reliability and stability as a source of capital flow from external sources. All in all, the literature above clearly brings out the fact that FDI has had significant economic development impacts on South Africa. However, there have also been a few indications of some African countries not reaping the full benefits of FDI. This is because of the lack of favourable laws, property rights, democratic political system that is free from corruption, bribery and high level of technology (Fortanie, 2007). Despite all this, we can see improvements in South Africa courtesy of FDI. References Adams, S. (2009) Can foreign direct investment (FDI) help to promote growth in Africa?. African Journal of Business Management, 3 (5), p178-183. Adewumi, S. (2006) The Impact of FDI on Growth in Developing Countries: An African Experience. Jönköping International Business School, Jönköping University, 1-16 Ajayi, S.I. (2006) The Determinants of Foreign Direct Investment in Africa: A Survey of the Evidence. African Economic Research Consortium, 11-32. Anyanwu, J.C. (2012) Why Does Foreign Direct Investment go where it goes?: New Evidence from African Countries. Annals of Economics and Finance 13(2), p433-470. Blaikie, N. (2000) Designing Social Research, 1st ed. Cambridge: Polity Press. Campos, F.N., and Kinoshita, Y. (2006) Why Does FDI Go Where it Goes?: New Evidence from the Transition Economies. African Economic Research Consortium, 33-54. Communications of the IBIMA. (2008) Nigeria’s Economic Growth: Emphasizing the Role of Foreign Direct Investment in Transfer of Technology. Communications of the IBIMA, 3 (1), p76-78. Creswell, O. (2008) The Selection of a Research Design: Components Involved in a Design, 1(4), p5-11. Fortanie, F. (2007) Foreign direct investment and host country economic growth: Does the investor’s country of origin play a role? Transnational Corporations, 16 (2), p42-60. Fry, M. 2003. Foreign Direct Investment in a Macroeconomic Framework: Finance, Efficiency, Incentives, and Distortions. Hoboken: Wiley-Blackwell. Herman, M., Chishol, D., &Leavell, H. (2004).FDI and the effects on society. Proceedings of the Academy for Studies in Intenational Business, 4(1), p15-17. Hurmes, N &Lensink, R. (2003) Foreign direct investment, financial development and economic growth. Journal of Development Studies, 40 (1), p142-163. James, K. and Vinnicombe, S. (2002) Acknowledging the Individual in the Researcher. In: Partington, D. (ed.) Essential Skills for Management Research, 1st ed. London: SAGE Publications Ltd, p. 84-98. Moosa, I. A. (2002) Foreign Direct Investment: Theory, Evidence and Practice. New York: Palgrave. Read More