Im­prov­ing FDI into South Africa through M&As

Finweek English Edition - - Companies & Markets -

EN­COUR­AGED BY su­pe­rior tech­nol­ogy, faster and cheaper com­mu­ni­ca­tions and mo­ti­vated by in­ten­si­fy­ing com­pe­ti­tion, busi­nesses are in­creas­ingly scour­ing the globe in search of new lo­ca­tions of­fer­ing ad­van­tages that im­prove their com­pet­i­tive­ness.

Merg­ers and Ac­qui­si­tions form the ma­jor­ity of FDI deals in the de­vel­oped world, but re­main rel­a­tively scarce in the de­vel­op­ing world. Tash­mia Is­mail, the win­ner of the Uni­ver­sity of Pre­to­ria’s Gor­don In­sti­tute of Busi­ness Sci­ence’s MBA bur­sary in 2007, re­cently com­pleted re­search into the macro-eco­nomic pro­files of de­vel­op­ing coun­tries which at­tract greater M&A ac­tiv­ity. Is­mail’s re­search ex­am­ined 117 de­vel­op­ing economies, analysing their mar­ket char­ac­ter­is­tics, in­fra­struc­ture, in­sti­tu­tions, eco­nomic sec­toral make-up and level of for­eign eco­nomic ac­tiv­ity.

In a com­par­i­son of de­vel­oped and de­vel­op­ing economies, M&A ac­counted for only 333 of 1 442 deals (M&A and Green­field) be­tween 2004 and 2006 in Africa. This is com­pared to 4 011 of 6 498 for North Amer­ica and 7 431 of 17 323 for the EU. In the same time, M&As made up just 19% of the FDI deals con­cluded in de­vel­op­ing economies, com­pared to 51% in the de­vel­oped world.

Some of the rea­sons for re­luc­tance on the part of MNCs to en­ter de­vel­op­ing mar­kets in­clude the fre­quency of pol­icy regime changes and the volatil­ity of growth rate. The in­come in­equal­ity, higher poverty lev­els, gov­er­nance, in­sti­tu­tional con­texts and the level of eco­nomic and hu­man de­vel­op­ment in de­vel­op­ing economies are off­set by the fact that since the early 1990s, th­ese coun­tries have been the fastest grow­ing mar­kets in the world for prod­ucts and ser­vices.

An im­por­tant find­ing of the study is that M&A at­trac­tive­ness oc­curs on two lev­els; the coun­try level where M&A pre­dom­i­nates over Green­field as a choice of FDI en­try and the re­gional level, where an econ­omy at­tracts the great­est M&A ac­tiv­ity within its ge­o­graphic re­gion by virtue of its over­all at­trac­tive­ness as an FDI des­ti­na­tion. South Africa falls into the lat­ter cat­e­gory as it draws the great­est num­ber of M&A deals within the re­gion, how­ever Green­field deals still far out­num­ber M&A deals.

The pro­file of the for­mer group where M&As out­num­ber Green­fields is that of coun­tries with sig­nif­i­cantly smaller GDPs rel­a­tive to the re­gional leaders, the strong­est democ­ra­cies, a rel­a­tively larger in­dus­trial and ser­vices sec­tor and a smaller min­ing sec­tor.

While low labour costs are used by many de­vel­op­ing coun­tries to at­tract FDI, the host’s mar­ket size and dis­tance are con­sid­ered to be of far greater con­se­quence. To­tal costs of pro­duc­tion taken to­gether are how­ever largely in­flu­en­tial in the di­rec­tion of FDI flows. High labour costs may be mit­i­gated by the in­fras­truc­tural spend on health and ed­u­ca­tion, which re­sult in a healthy, skilled and more ef­fi­cient work­force which in turn low­ers costs.

Com­pa­nies will go to for­eign coun­tries if there ex­ists suf­fi­cient de­mand in the coun­try or re­gion, to­tal pro­duc­tion costs in­curred at the lo­ca­tion are low, in­tense com­pe­ti­tion is not a threat, pub­lic poli­cies are ad­van­ta­geous, in­sti­tu­tions cre­ate pro­duc­tive and ef­fi­cient economies in which to op­er­ate, to di­ver­sify and re­duce risk, for ar­bi­trage op­por­tu­ni­ties and to lever­age economies of scale.

Iron­i­cally, it has been found that or­gan­i­sa­tions fol­low into lo­ca­tions where other or­gan­i­sa­tions from their in­dus­try have al­ready en­tered, de­spite the in­crease in com­pet­i­tive in­ten­sity this gen­er­ates. This ten­dency may be linked to sup­ply chain is­sues as well as ben­e­fit­ing from tech­ni­cal spillovers. Th­ese would lower R & D costs thereby im­prov­ing the firm’s com­pet­i­tive­ness.

Re­search shows that when MNCs first plan to in­ter­na­tion­alise, they choose ge­o­graph­i­cally and cul­tur­ally prox­i­mate re­gions; the mar­ket fa­mil­iar­ity prin­ci­ple. In this way, home-based skills, ad­van­tages, man­age­ment and re­sources can be lever­aged to min­imise trans­ac­tion costs. The es­tab­lish­ment and im­ple­men­ta­tion of at­trac­tive poli­cies along with ef­fi­cient in­fra­struc­ture re­duces the lo­ca­tional ef­fect and cost of dis­tance, en­hanc­ing the re­gional FDI at­trac­tive­ness of a state.

M&As are largely driven by firms that have ca­pa­bil­i­ties in their own mar­kets which are not nec­es­sar­ily in­ter­na­tion­ally mo­bile or may not be use­ful in a for­eign mar­ket. By en­gag­ing in cross-bor­der M&As, a firm can ac­cess lo­cal knowl­edge and ca­pa­bil­i­ties in or­der to sup­ple­ment their por­ta­ble ad­van­tages. A na­tional M&A how­ever, looks to re­lieve com­pet­i­tive pres­sure.

Statis­tics show that be­tween 70% and 80% of all merg­ers fail, with only 17% of cross bor­der M&As cre­at­ing value. An alarm­ing 53% of M&As have shown to de­stroy value. Th­ese statis­tics may be part of the ex­pla­na­tion for the lower vol­umes of M&A deals in de­vel­op­ing coun­tries where in­vestor firms may be wary of en­ter­ing into deals al­ready known to have high fail­ure rates and then com­pound­ing this in an en­vi­ron­ment fraught with chal­lenges. Of­ten busi­nesses plan­ning to lo­cate ac­tiv­i­ties within de­vel­oped re­gions have scarce re­sources to al­lo­cate and must care­fully con­sider cost-ef­fec­tive lo­ca­tions wherein they may ex­ploit their firm spe­cific ad­van­tages ad­e­quately. It is there­fore a strate­gic im­per­a­tive to un­der­stand the macro en­vi­ron­men­tal fea­tures which sup­port M&A ac­tiv­ity as this may aid in the choice of the most prac­ti­cal and com­pet­i­tive lo­ca­tion for a firm’s op­er­a­tions.

Of the myr­iad fac­tors which de­vel­op­ing coun­tries should be aware of if they hope to in­crease M&A ac­tiv­i­ties, and there­fore FDI in their coun­try, the fol­low­ing are the most im­por­tant to ad­dress: more friendly to in­ter­na­tional in­vestors in­ter­na­tional busi­ness, par­tic­u­larly with re­gard to le­gal, fi­nan­cial and gov­er­nance is­sues mies in­dus­tri­al­i­sa­tion process is de­layed, which re­sults in a coun­try’s per capita in­come fall­ing be­hind the re­gional leaders

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