foreign direct investment in developing countries

Group 4:

Adriaan Pienaar

Mardi Palm

Carol-Ann Victor

Kyle Day

Foreign Direct InvestmentCornerstone of modern Economy | Central to long-term development & sustainable growth

FDI to developing to developing countries has grown from $84bn in 1990 to

$178bn in 2000 (Currently = 61% of total foreign investments)

• FDI-trend continues in 21st

century (Bain Capital’s purchase of Edcon & Mittal’s takeover of Iscor)

• Competitive advantage from investments in developing countries = increased

• FDI to developing countries are thus continuously increasing

• Global competition is very intense and fierce rivalry exists to find the best investments

• Unique blend of factors that influences success and profitability of investments in developing countries

• Every country presents their own, unique problems / challenges

• Aim of this study: to develop a conceptual framework with which investments in developing countries could be evaluated

• Conceptual framework is a combination of various existing models

• Only the unique, qualitative factors influencing an investment was considered

• Factors were categorized as Political- , Financial- or Economic Risk

• Application done with data from SABMiller (Pty) LTD

• Corporations will aim to gain competitive advantage from investments

• Determining the crucial factors influencing competitive advantage?

• 2 models:– Porter’s Diamond of National

Competitiveness– Austin’s Environmental

Model

Porter’s Diamond of National Competitiveness

• Firms Strategy, Structure & Rivalry

• Demand Conditions

• Related & Supporting Industries

• Factor Conditions

• Classical Theories – competitive advantage exists in factor endowments (land, resources, labour and population size)

• Porter suggests that advanced factor endowments can be created (skilled labour, technology, knowledgebase and government support)

• Austin’s Model – adaptation of Porter, focusing on developing countries

• Governments in developing countries plays a major role in the success of the economy and any individual investment

• Austin proposes the addition of environmental factors (economical, political, cultural and demographical)

• Understand the inter-relationship of above factors – representative of the developing country’s business environment

Investment Appraisal Process

1. Financial Feasibility (NPV or IRR)2. Goal Congruence3. Risk Assessment (unique factors)

• Aim: Calculate a meaningful risk premium

• The model includes factors influencing the potential success and competitive advantage of the investment

• Only non-generic, qualitative factors were included (ie. no NPV / IRR consideration)

• Factor Weightings– Desirable (0.2)– Important (0.3)– Essential (0.5)

• Ranking of each factor using a quintile scale

• Calculating the risk premium

– Minimum vs Maximum Rankings

– Angola vs Botswana (Kyle)

THE CONCEPTUALFRAMEWORK

Allocation of Weight to Risk Factors (Gupta et al, 2003)

Category Weight

Desirable 0.2

Important 0.3

Essential 0.5

Total 1.0

Quintile Scale to determine likelihood of occurrence

Ranking Likelihood

1 (Least Likely) 0% – 20%

2 21% – 40%

3 41% – 60%

4 61% – 80%

5 (Most Likely) 81% – 100%

• Aim: Calculate a meaningful risk premium

• The model includes factors influencing the potential success and competitive advantage of the investment

• Only non-generic, qualitative factors were included (ie. no NPV / IRR consideration)

• Factor Weightings– Desirable (0.2)– Important (0.3)– Essential (0.5)

• Ranking of each factor using a quintile scale

• Calculating the risk premium

– Minimum vs Maximum Rankings

– Angola vs Botswana (Kyle)

THE CONCEPTUALFRAMEWORK

• SABMiller (Pty) Ltd consider various investment opportunities in different African Countries

• Our study focuses on potential investments in Angola & Botswana

• The two chosen countries are very different and thus a good yardstick to test whether our framework produces a meaningful risk premium

• Bordered by South Africa, Namibia, Zambia & Zimbabwe

• Pula (local currency) is stronger than the South African Rand

• Economy (similar to SA):– Mining (38 percent - mainly

diamonds)

– Services (44 percent)

– Construction (7 percent)

– Manufacturing (4 percent)

– Agriculture (2 percent)

• One of the fastest growing economies in the world

• Botswana has experienced considerable growth in their GDP / capita

• Thus establishing themselves as a middle-income country with a per-capita GDP of $11,200 in 2006

BOTSWANA

ANGOLA

• South-central Africa

• Portuguese colony

• Significant oil and diamond resources

• Currently the fastest growing economy in the world

• 2004 – China’s Eximbank provided a loan worth $2bn to Angola to rebuild infrastructure after 25 years of war

• Growth in Angola – driven by the rise in oil prices

ANGOLAvs

BOTSWANA

QUESTIONS