Foreign Direct Investment (FDI) is a vital component in the pursuit of economic growth. It allows for foreign capital to erect firms in the domestic country with the intention to transfer necessary skills, technology and create employment for the individual’s situated in that location. Furthermore, FDI also seeks to create opportunities for domestic entrepreneurs through the collaborative efforts in supply chain management and sub – contracting relationships. While all this reads so rosy and fantastic, this is not all there is to FDI, especially in the context of developing countries.
Detractors of FDI explain that it is not all that amazing once we get over the euphoria of new technology and its effect on unemployment. Stats illustrate that the effect of FDI on unemployment is non-existent in the short run and only significant if the firm is stable and has longevity. This downstream effect suggests that FDI creates jobs in the long run.
The probability of domestic entrepreneurship penetrating the market is an excellent way to measure the downstream effects of FDI. This method allows us to see whether domestic firms will indeed improve productivity, engage in collaborative efforts, have access to markets, diversify their products, employ more people and in the end contribute towards the economy.
Most of the literature argues that the positive spill – over effects of FDI outweigh that of the negative. Personally, I would argue in favour of the latter.
FDI can deter domestic entrepreneurs from market entry. This occurs when foreign firms build companies that acts as substitutes to domestically owned firms and not complements. This level of competition due to the large scale of business and innovation of foreign firms does not only cause barriers to entry but also results in existing firms closing down shop because of customer preference.
Considering this information, is it not time to shift focus from FDI to investing in small domestic business?
According to Entrepreneur Magazine based in the United States, there are roughly 26 million small businesses in the country that account for about 70% of all the jobs in the nation. These businesses thrive because of the government together with the private sector being able to create an environment for these businesses to become profitable and create employment.
In the context of South Africa, a collaborative effort between the State, big business and civil society organisations is needed to create an environment for small business and entrepreneurs to thrive. According to Collin Timmis, Head of Accounting at Xero, the state needs to focus on 5 building blocks to ensure that domestic entrepreneurship is a success.
He argues that the state needs to increase investment in domestic firms, provide tax breaks, provide continuous education, remove barriers to entry and open access to finance. Once these building blocks have been established who knows what the outcome could be?
Foreign Direct Investment has been a great pillar of employment and economic growth all over the world. Its emergence has allowed smaller businesses to thrive and the advancement of technology in all industries. However, it is a double-edged sword that seeks to erode domestic entrepreneurship and champion financial flows outside of the domestic country.
Greater investment must be made in domestic firms to ensure that financial flows remain in the county. Entrepreneurs need to be educated and afforded access to funding to build their businesses and stimulate the economy. Policy makers need to stay clear of obsolete policies that are unable to adapt to changes that are happening in the markets.
Danakol, S.H., Estrin, S., Reynolds, P & Weitzel, U. 2013. Foreign Direct Investment and Domestic Entrepreneurship: Blessing or Curse?
Timmis, C. 2017. 5 Ways government can help South Africa’s small businesses. IOL Magazine.
Author: Thebe Matlhaku