The DTI must Promote Trade and Investment, Not Deter It

Mark Allix reports in the Business Day (SA not opposed to foreign investment – DTI, Apr. 05, 2011) that the Department of Trade and Industry’s acting director-general Lionel October says, “The government’s activist stance in merger proceedings should not be construed as opposing foreign investment”. This comes as a result of two simultaneous objections lodged by the DTI on proposed mergers in SA. Last week the DTI opposed a move by Japan’s Kansai Paint (made in April 2010), to take over South African owned company Freeworld Coatings arguing that such a move be prohibited or conditions imposed on the takeover bid in order to ensure the “public interest”.

In Wal-Marts proposed takeover of Massmart (which has already been approved by the Competition Commission) the DTI has also asked that the Competition Tribunal insist that Wal-Mart voluntarily agree to local sourcing as a matter of “public interest”. This opposition does not augur well for potential future investments and is surely a case of the left hand not knowing what the other left hand is doing.

Investment, especially in fixed assets such as buildings, machinery, equipment etc, commonly referred to as gross fixed capital formation, is essential for increasing wealth and jobs in the future. However, the ratio of gross fixed capital formation to GDP currently stands at about 23 per cent, 2 per cent below the targeted 25 per cent. In order to boost investment, it is vital to have a sufficient pool of savings. But SA suffers from a relatively low domestic savings level (approximately 16 per cent of GDP). By comparison, the average gross domestic savings rate for upper middle-income countries is 24 per cent. When domestic savings are lacking, a country has to rely on foreign capital inflows. But the current opposition to foreign investment by the department, which is supposed to be promoting trade and investment in SA, is sending mixed signals to foreign investors.

Author: Jasson Urbach is an economist with the Free Market Foundation. The views expressed in the article are his own.

FMF Policy Bulletin/ 5 April 2011