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Foreign Direct Investment And South Africa Case Solution

Solution Id Length Case Author Case Publisher
1958 651 Words (4 Pages) Eric Werker Harvard Business School : 707019
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South Africa has experienced much political instability over the last century. For economic development, African policymakers have made several economic reforms to attract foreign direct Investment (FDI). They believe FDI to be ”the key to improved growth”. However, foreign investors have faced various challenges while doing business in South Africa. Therefore, despite their best efforts, South African government has been unable to attract high amount of foreign investment. Between 1995 and 2004, the net inflow of FDI was only about 1.4% of GDP.

Following questions are answered in this case study solution

  1. Summary

  2. Foreign Direct Investment and Economic Growth

  3. Economic reforms by Government 

  4. Challenges

  5. Conclusion

Case Analysis for Foreign Direct Investment And South Africa Case Solution

2. Foreign Direct Investment and Economic Growth

FDI is considered to be positive by economists due to the ability of generate financial inflow. Foreign investment in South Africa would mean opening up of new businesses and acquisition of South African firms by the multinationals. As new businesses will open in South Africa, employment rate would increase. As employment rises, the household income would increase. This would mean a rise in savings and consumptions. As GDP rises, the economy will also grow.

Another reason why FDI would lead to economic growth is that the foreign investment would bring in new technological and managerial know how to South Africa. With this new knowledge firms, local firms would be able to improve their technologies and methods of production. This would also intensify the competition faced by local firms who will improve their efficiency in production.

According to Solow Growth Model, an increase in capital Labor and technology in the right proportion will increase the total output. Therefore, an increase in foreign investment, with greater employment of labor and increased technology will improve the economic performance of South Africa. South Africa has an abundance of unskilled labor and natural resources which would further enhance the progress of the country with the help of foreign investment.

3. Economic reforms by Government 

In 1994, with the election of ANC , Economic reforms took place to encourage foreign businesses to invest in South Africa. To encourage FDI, 

  • The government reduced the tariffs 

  • Foreign control was relaxed to increase trade.

  • Labor market policies were reversed to avoid discrimination.

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