Foreign Direct Investment Links between South Africa & China

  • Date: Tuesday, 16 November 2010
  • Main Speakers: Stephen Gelb


China became South Africa's biggest trading partner in 2009, when total trade between the two countries amounted to US$14.1 billion (ZAR119.5 billion). China's appearance at the top of the rankings was partly due to the global recession, which affected trade levels of the industrialised countries far more than those of emerging markets. Germany had been South Africa's biggest trading partner up to 2008, when Germany-South Africa trade totalled US$17.9 billion (ZAR148.3 billion), compared with US$ 14.2 billion (ZAR 116.8 billion) between South Africa and China. But in 2009, South Africa's trade with Germany dropped 35.5 percent in US dollar terms, while trade with China rose marginally by 1.8 percent and China moved to the top of the rankings. But total trade between South Africa and China had grown by 26.5 percent per annum (in US dollar terms) between 2000 and 2009, so that it was only a matter of time before China became the country's largest trading partner.1
The importance to South Africa of its trade relationship with China raises the question as to whether the foreign direct investment (FDI) relationship between the two countries is equally significant. While much has been written about China's growing investment presence in South Africa and in many other African economies, very Little of this discussion has been based on detailed empirical analysis or been located explicitly within the theory of foreign direct investment. It is important to examine the FDI linkages not only quantitatively, but also qualitatively, in terms of their impact on
economic growth and on the internationalisation of business in the two countries. This paper investigates these issues looking at the FDI links in both directions between China and South Africa.

The paper has two parts. Part A examines the size and structure of the bilateral FDI relationship between South Africa and China. Section I reviews the estimates provided in the literature regarding the size of the relationship. Section II reviews the FDI policies of the two countries, on both inward and outward FDI. Section III examines official data from both countries on the value of FDI stocks and flows between them, and Section IV assesses the importance of the bilateral relationship to
each partner by contextualising it within the two countries' overall FDI stocks and flows, also using official data. Sections V through VII turn to firm-level data from The EDGE Institute FDI Database, a living database with verified data on firms' cross-border operations. Section V reports on the number of firms and their sectoral distribution, while Sections VI and VII discuss firms' dates of entry and mode of entry respectively. Section VIII concludes Part A of the paper.

Part B presents case studies of two sectors in which the China-South Africa FDI relationship is prominent: assembly of home electronic appliances ('brown goods') by Chinese firms in South Africa, and financial services in both countries. The case studies use firm interviews and extensive documentary analysis to examine both the internationalisation process of firms from the two countries as well as the broader economic impact within the two economies of their FDI relationship. The discussion is framed by the analytical questions and policy challenges raised by the growing importance of 'South-South' FDI, of which the China-South Africa link is an example.