Foreign divestment, economic growth and development in South Africa: an empirical analysis
| DOI | https://doi.org/10.1108/JCEFTS-01-2022-0006 |
| Published date | 09 February 2023 |
| Date | 09 February 2023 |
| Pages | 4-21 |
| Subject Matter | Economics,International economics |
| Author | Weliswa Matekenya,Clement Moyo |
Foreign divestment, economic
growth and development in South
Africa: an empirical analysis
Weliswa Matekenya and Clement Moyo
Department of Economics, Nelson Mandela University, Gqeberha, South Africa
Abstract
Purpose –The purpose of this study is to investigate the effect of foreign direct divestments (FDD) on
economicgrowth and development in South Africa for the period 1991–2019.
Design/methodology/approach –The non-linear autoregressive distributed lag technique isused for
the empirical analysis. Two regression models are specified, one for economic growth and the other for
developmentwhich is proxied by poverty.
Findings –The empiricalresults suggest that foreign divestments aredetrimental to both economic growth
and development. Furthermore,the results suggest that the negative effects of foreign divestments outweigh
the positiveeffects of FDI inflows.
Practical implications –South African policymakersshould thus use policies that promote the retention
of FDI inflows together with thosethat attract inflows. Furthermore, policies that promote economicfreedom
such as transparency and reduction in the time frame for granting government permits for business
operationsare also of paramount importance.
Originality/value –Most of the available literature on FDD focuses on the firm perspective. Available
studies on the effect of FDD on economic growth do not investigate the effect of divestment on economic
development. Economic growth is a necessary but not a sufficient condition for the achievement of
socioeconomicdevelopment.
Keywords FDI, Economic development, Poverty, Economic growth, NARDL, Foreign divestment
Paper type Research paper
1. Introduction and background
FDI has been an integral part of the South African economy. In the recent past, foreign
investments have not only been channelled to resource extraction but also investors have
diversified into services and manufacturing which has created more links with domestic
firms and local entrepreneurs. In spite of their importance, FDI inflows into South Africa
declined by 15% to US$4.6bn in 2019 (UNCTAD, 2020). Furthermore, because of the COVID-19
pandemic, FDI inflows declined by 39% to US$3.1bn (UNCTAD, 2021). A decline in FDI
coupled with increased foreign direct divestments (FDD) could undermine economic growth
© Weliswa Matekenya and Clement Moyo. Published by Emerald Publishing Limited. This article is
published under the Creative Commons Attribution (CC BY 4.0) licence. Anyone may reproduce,
distribute, translate and create derivative works of this article (for both commercial and non-
commercial purposes), subject to full attribution to the original publication and authors. The full
terms of this licence may be seen at http://creativecommons.org/licences/by/4.0/legalcode
JEL classification –F21, F23, O11
Conflict of interest/ethical statement: The authors declare no conflict of interest. The authors would
also like to confirm that this paper is an outcome of authors’own work and was not published
elsewhere neither is considered for publication elsewhere.
JCEFTS
16,1
4
Journalof Chinese Economic and
ForeignTrade Studies
Vol.16 No. 1, 2023
pp. 4-21
EmeraldPublishing Limited
1754-4408
DOI 10.1108/JCEFTS-01-2022-0006
The current issue and full text archive of this journal is available on Emerald Insight at:
https://www.emerald.com/insight/1754-4408.htm
and development in the country. FDD refers to the liquidation or sale of foreign affiliates by
multinational enterprises in a host economy. In addition, it can be a closure of a subsidiary in a
host country or an exit from foreign markets (Boddewyn, 1983;Soule et al., 2014).
According to Yeboua (2020), FDD has gained a lot of attention from both academics and
policymakersrecently. In 2018, foreign investment stocks declinedby 15% in Africa because
of divestment. Another indicator of FDD, cross-border mergers and acquisitions, decreased
by 45% to US$3.2bn in African countries mostly because of the COVID-19 pandemic
(UNCTAD, 2021). In spite of South Africa being traditionally regarded as one of the most
attractive destinations for FDI in Africa, it has not been shielded from FDD. According to
Business Insider SA (2019), a number of large investment banks such as Arqaam Capital,
Credit Suisse, Macquarie, Deutsche Bank and Citigroup either pulled out of South Africa or
reduced the size of their operations between 2018 and 2019. Reasons cited for the FDD
included stringent regulation andthe increased popularity of passive investing. Themining
sector has also been plagued by divestmentsbecause of concerns around global warming as
well as regulatory requirements such as the 51% Black Economic Empowerment status
directive (Cunningham, 2019). In the recent past, Capital Partners, South 32 and Anglo
American have scaled-down operations. The Johannesburg Stock Exchange also raised
concerns regarding FDD from SouthAfrica and recommended increasedefforts by both the
privateand public sectors to attractand retain FDI (Bussinesstech,2021).
In most cases, divestment is the opposite of FDI and is mostly a reaction to factors that affect
the business environment such as economic, political and geopolitical uncertainties. Therefore,
factors such as political instability and unfavourable legal and regulatory environments matter in
attracting and retaining foreign direct investment (Benito, 1997). Boddewyn (1983) identified
factors that cause FDD such as low finances of a subsidiary, lack of resources and poor pre-
investment analysis. Economic and financial motives are the most commonreasons for strategic
divestments. These motives include factors like weak cash inflow, poor financial performance,
low market demand and high costs (Duhaime and Grant, 1984;Benito and Larimo, 1995). FDD
has an adverse effect on the performance of the divesting firms either on sales or employment. In
addition, the impact of FDD has a greater effect on the domestic economy where it can further
weaken the growth of the economy and increase unemployment.
The determinants of FDI inflows are well documented, however, no t much is known about
the effects of FDDs. There is limited availability of data or information which makes it difficult
to determine the effect of FDD on host countries’economies, especially in developing countries
(Yeboua, 2020;Borga et al., 2020). Most of the available literature on FDD focuses on the firm
perspective (Belderbos and Zou, 2006;Nguyen et al., 2022;McDermott, 2010;Soule et al.,2014;
Benito, 1997). Available studies on the effect of FDD on economic growth include Khaing (2016)
and Glomsrød and Wei (2018). However, these studies do not investigate the effect of
divestment on economic development. Economic growth is a necessary but not a sufficient
condition for the achievement of socioeconomic development. It is against this backdrop that
this study examines the effect of FDD on both economic growth and development in South
Africa. South Africa is an important case study because of the rise in FDD over the recent past.
Furthermore, FDI contributes significantly to production, employment and exports in South
Africa. Poverty levels have been on an upward trajectory since 2012 coinciding with the
stagnant economic growth and FDI levels. Therefore, FDD would have serious consequences
for the achievement of socioeconomic goals such as poverty. The non-linear autoregressive
distributed lag (NARDL) proposed by Shin et al. (2014) is used for the empirical analysis. The
technique decomposes inward FDI stocks into positive and negative components. Because
FDD is the reverse of inward FDI, the negative component of inward FDI stocks will be used as
a proxy for FDD in South Africa.
Development
in South Africa
5
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