Foreign Direct Investment in Developing Countries

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Foreign Direct Investment in Developing Countries: An African Perspective

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Foreign Direct Investment in Developing Countries

  1. 1. <ul><li>Group 4: </li></ul><ul><li>Adriaan Pienaar </li></ul><ul><li>Mardi Palm </li></ul><ul><li>Carol-Ann Victor </li></ul><ul><li>Kyle Day </li></ul>
  2. 2. <ul><li>Foreign Direct Investment </li></ul><ul><li>Cornerstone of modern Economy | Central to long-term development & sustainable growth </li></ul><ul><li>FDI to developing to developing countries has grown from $84bn in 1990 to </li></ul><ul><li>$178bn in 2000 (Currently = 61% of total foreign investments) </li></ul>
  3. 3. <ul><li>FDI-trend continues in 21 st century (Bain Capital’s purchase of Edcon & Mittal’s takeover of Iscor) </li></ul><ul><li>Competitive advantage from investments in developing countries = increased </li></ul><ul><li>FDI to developing countries are thus continuously increasing </li></ul><ul><li>Global competition is very intense and fierce rivalry exists to find the best investments </li></ul>
  4. 4. <ul><li>Unique blend of factors that influences success and profitability of investments in developing countries </li></ul><ul><li>Every country presents their own, unique problems / challenges </li></ul><ul><li>Aim of this study: to develop a conceptual framework with which investments in developing countries could be evaluated </li></ul><ul><li>Conceptual framework is a combination of various existing models </li></ul><ul><li>Only the unique, qualitative factors influencing an investment was considered </li></ul><ul><li>Factors were categorized as Political- , Financial- or Economic Risk </li></ul><ul><li>Application done with data from SABMiller (Pty) LTD </li></ul>
  5. 5. <ul><li>Corporations will aim to gain competitive advantage from investments </li></ul><ul><li>Determining the crucial factors influencing competitive advantage? </li></ul><ul><li>2 models: </li></ul><ul><ul><li>Porter’s Diamond of National Competitiveness </li></ul></ul><ul><ul><li>Austin’s Environmental Model </li></ul></ul>
  6. 6. <ul><li>Porter’s Diamond of National Competitiveness </li></ul><ul><li>Firms Strategy, Structure & Rivalry </li></ul><ul><li>Demand Conditions </li></ul><ul><li>Related & Supporting Industries </li></ul><ul><li>Factor Conditions </li></ul>
  7. 7. <ul><li>Classical Theories – competitive advantage exists in factor endowments (land, resources, labour and population size) </li></ul><ul><li>Porter suggests that advanced factor endowments can be created (skilled labour, technology, knowledgebase and government support) </li></ul><ul><li>Austin’s Model – adaptation of Porter, focusing on developing countries </li></ul><ul><li>Governments in developing countries plays a major role in the success of the economy and any individual investment </li></ul><ul><li>Austin proposes the addition of environmental factors (economical, political, cultural and demographical) </li></ul><ul><li>Understand the inter-relationship of above factors – representative of the developing country’s business environment </li></ul>
  8. 8. <ul><li>Investment Appraisal Process </li></ul><ul><li>Financial Feasibility (NPV or IRR) </li></ul><ul><li>Goal Congruence </li></ul><ul><li>Risk Assessment (unique factors) </li></ul>
  9. 9. <ul><li>Aim: Calculate a meaningful risk premium </li></ul><ul><li>The model includes factors influencing the potential success and competitive advantage of the investment </li></ul><ul><li>Only non-generic, qualitative factors were included (ie. no NPV / IRR consideration) </li></ul><ul><li>Factor Weightings </li></ul><ul><ul><li>Desirable (0.2) </li></ul></ul><ul><ul><li>Important (0.3) </li></ul></ul><ul><ul><li>Essential (0.5) </li></ul></ul><ul><li>Ranking of each factor using a quintile scale </li></ul><ul><li>Calculating the risk premium </li></ul><ul><ul><li>Minimum vs Maximum Rankings </li></ul></ul><ul><ul><li>Angola vs Botswana (Kyle) </li></ul></ul><ul><li>THE CONCEPTUAL </li></ul><ul><li>FRAMEWORK </li></ul>
  10. 10. Allocation of Weight to Risk Factors (Gupta et al , 2003) 1.0 Total 0.5 Essential 0.3 Important 0.2 Desirable Weight Category
  11. 11. Quintile Scale to determine likelihood of occurrence 81% – 100% 5 (Most Likely) 61% – 80% 4 41% – 60% 3 21% – 40% 2 0% – 20% 1 (Least Likely) Likelihood Ranking
  12. 12. <ul><li>Aim: Calculate a meaningful risk premium </li></ul><ul><li>The model includes factors influencing the potential success and competitive advantage of the investment </li></ul><ul><li>Only non-generic, qualitative factors were included (ie. no NPV / IRR consideration) </li></ul><ul><li>Factor Weightings </li></ul><ul><ul><li>Desirable (0.2) </li></ul></ul><ul><ul><li>Important (0.3) </li></ul></ul><ul><ul><li>Essential (0.5) </li></ul></ul><ul><li>Ranking of each factor using a quintile scale </li></ul><ul><li>Calculating the risk premium </li></ul><ul><ul><li>Minimum vs Maximum Rankings </li></ul></ul><ul><ul><li>Angola vs Botswana (Kyle) </li></ul></ul><ul><li>THE CONCEPTUAL </li></ul><ul><li>FRAMEWORK </li></ul>
  13. 13. <ul><li>SABMiller (Pty) Ltd consider various investment opportunities in different African Countries </li></ul><ul><li>Our study focuses on potential investments in Angola & Botswana </li></ul><ul><li>The two chosen countries are very different and thus a good yardstick to test whether our framework produces a meaningful risk premium </li></ul>
  14. 14. <ul><li>Bordered by South Africa, Namibia, Zambia & Zimbabwe </li></ul><ul><li>Pula (local currency) is stronger than the South African Rand </li></ul><ul><li>Economy (similar to SA): </li></ul><ul><ul><li>Mining (38 percent - mainly diamonds) </li></ul></ul><ul><ul><li>Services (44 percent) </li></ul></ul><ul><ul><li>Construction (7 percent) </li></ul></ul><ul><ul><li>Manufacturing (4 percent) </li></ul></ul><ul><ul><li>Agriculture (2 percent) </li></ul></ul><ul><li>One of the fastest growing economies in the world </li></ul><ul><li>Botswana has experienced considerable growth in their GDP / capita </li></ul><ul><li>Thus establishing themselves as a middle-income country with a per-capita GDP of $11,200 in 2006 </li></ul><ul><li>BOTSWANA </li></ul>
  15. 15. <ul><li>ANGOLA </li></ul><ul><li>South-central Africa </li></ul><ul><li>Portuguese colony </li></ul><ul><li>Significant oil and diamond resources </li></ul><ul><li>Currently the fastest growing economy in the world </li></ul><ul><li>2004 – China’s Eximbank provided a loan worth $2bn to Angola to rebuild infrastructure after 25 years of war </li></ul><ul><li>Growth in Angola – driven by the rise in oil prices </li></ul>
  16. 16. ANGOLA vs BOTSWANA
  17. 17. <ul><li>QUESTIONS </li></ul>

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