Political Stability and FDI in SADC: A Love-Hate Relationship

This study empirically analyzes the effects of political stability (PS) on FDI inflows in SADC members in the post-Cold War period (1996-2013) by utilizing panel-data-appropriate econometric models as well as regression discontinuity design methods, instrumental variable approaches, simultaneous equations and GMM as robustness checks. The main finding is that there is a non-linear causal relationship, whereby political stability can only positively influence FDI inflows once a certain minimum level of stability has been reached. The critical point is identified to correspond to an approximate value of -1.0 of the World Bank’s ‘Political Stability and Lack of Violence’ governance indicator, which is used a measure for PS and a main independent variable. Angola and the DRC are identified as the only two members which display PS levels consistently below the cut-off point and also as the only two severely natural-resource-dependent countries. A narrative is developed of why these do not fit the pattern, while stressing the necessity to address PS and regional integration as key factors in FDI attraction and economic development in the SADC and other emerging economies alike. Introduction Foreign direct investment (FDI) is undoubtedly one of the most important factors for economic advancement in developed and developing economies alike. The theoretical and empirical literature supporting that claim is so massive it that cannot possibly be overviewed or cited without committing innumerable errors of commission, and in light of it, a similar exercise could not be said to constitute anything remotely newsworthy and as such will be omitted from this study, whose broad focus is to establish the aspects of governance in Sub-Saharan African countries (SSA) most relevant to the attraction of the so intensely desiderated FDI, and in particular, to evaluate the role of conflict and political stability in the member states of the Southern African Development Community (SADC) in post-Cold War trends in FDI inflows in the region. The aim to is to ascertain to what extent the level of political stability can affect FDI inflows in the very peculiar and unprecedented case of an economic community of Southern African Peace and Security Studies 4(2) 6 post-conflict and post-apartheid states and what sets them apart from other countries. The paper is organized as follows: first trends in FDI inflows to Africa and their determinants are overviewed, paying special attention to political stability, then an empirical model is formulated and estimated based on existing literature and hypotheses, and finally a discussion elucidates the causal relationships and the lack thereof elicited through the statistical analysis. Trends in FDI Flows to Africa and SADC Since the early 1980s 1 , world FDI flows, now attributable to almost 54,000 transnational corporations (TNCs) which have an estimated $3.4 trillion invested in about 449,000 foreign affiliates throughout the world, have grown tremendously. The value of sales by these foreign affiliates has increased more rapidly than that of foreign trade (world exports), reaching an estimated $9.5 billion. Developing countries’ share in total FDI inflows rose from 26% in 1980 to about 54% in 2013, excluding transition economies. Among developing countries, though, the distribution of world FDI inflows is uneven. In 1997, for example, developing Asia received 22%; Latin America and the Caribbean 14%; and Africa 1%. In relative terms, however, the picture looks different: expressed as a ratio of gross fixed capital formation (GFCF), FDI inflows to Africa were 7% of GFCF in 1996 due to the low GDP of African countries, which was the same ratio as in developing Asia. In other words, inflows to Africa have a greater impact on the countries of that continent in relative terms than the absolute figures might suggest. As far as SSA is concerned, FDI inflows there have increased dramatically in the past three decades, especially since 2000: However, the FDI that goes to Africa is concentrated only in a few countries. The traditionally biggest recipients, namely Egypt, Nigeria, Angola and South Africa (the latter two being SADC members), pocket a significant proportion of FDI inflows – their share reached approx. 62 % of African FDI in 2002. On the one hand, the increased inflows that South Africa has enjoyed in recent times have been attributed mainly to the privatization process, the return of companies based in the neighboring countries during the apartheid period and the interest of investors in the South African large domestic market. On the other hand, Nigeria and Angola are the largest oil producers on the continent and FDI in the oil industry accounted for over half of all FDI inflows to Africa in 2002 (UNCTAD, 2005). Since FDI is highly concentrated, swings of FDI inflows to the main recipients exerts a major impact on the flows of FDI to Africa as a whole. (Ajayi 2006) Not only has SSA’s relative global FDI position relative to other developing regions deteriorated in the past decades, but in addition, the relative standing of SADC members within SSA, has been declining – whereas five out the top seven FDI destinations in 1 World Investment Report, UNCTAD (2014). Political Stability and FDI in SADC: A Love-Hate Relationship 7 SSA were SADC members back in 1980s (when SADC was first established as SADCC) and by 2014 that number has declined to three (refer to Table 1). Figure 1. FDI stock in African regions (Millions of USD). Source: UNCTAD. Table 1. Ranking of top SSA FDI recipients (Millions of USD). Source: UNCTAD. In terms of the sectoral allocation of FDI, Africa differs from the rest of the world in that whereas the structure of FDI has shifted towards services elsewhere, Africa continues to attract FDI mainly into sectors where competitive advantages outweigh the continent’s negative factors which include minerals, timber, coffee, and oil (Mills and Oppenheimer 2002). Notably, a number of post-conflict economies, especially SADC members Angola and Mozambique have also seen sharp increases in mineral production