The agreement focuses entirely on technical matters related to the implementation of a country’s foreign direct investment policy, in the interest of improving the investment climate and helping to attract more and better foreign direct investment.
With an unemployment rate of 33% (and 46% for young individuals aged 15-34 years), South Africa needs jobs, jobs, jobs. Jobs can only be created if there is investment, including foreign direct investment, a crucial part of the equation.
Unfortunately, in 2022 South Africa attracted only US$9-billion in foreign direct investment, which seems likely to decline even more in 2023 to just over US$5-billion. That is half of what Vietnam achieved.
But there are ways to improve this level, and one way would be for the South African government to get help through the new World Trade Organisation’s (WTO’s) Investment Facilitation for Development Agreement.
The text of this agreement was submitted to the WTO’s 13th Ministerial Conference in Abu Dhabi in February 2024, for integration into the WTO’s rulebook. It is sponsored by 125 WTO members, with 89 of them being developing countries, including nearly two-thirds of African WTO members – but unfortunately that group does not yet include South Africa.
It is an agreement open to all WTO members. South Africa should support this effort, particularly since it is supported by local business leadership.
The agreement is useful to developing countries because it helps them attract not only more, but also more sustainable and impactful foreign direct investment to advance their sustainable economic growth and development. For this reason, the negotiations surrounding this agreement have been led, from the beginning, by developing countries, most recently by Chile and South Korea.
Key economic issues
The agreement does not itself influence some of the key economic issues that determine where international investors decide to invest, like the quality of infrastructure. But it does help improve the two other determinants that largely shape locational decisions, namely the quality and predictability of the regulatory framework affecting foreign direct investment and investment promotion.
More specifically, the agreement focuses entirely on technical matters related to the implementation of a country’s foreign direct investment policy, in the interest of improving the investment climate and helping to attract more and better foreign direct investment.
Thus, it focuses on transparency, predictability and administrative procedures related to the implementation of a country’s foreign direct investment policy, all of which is important for business. For example, the agreement encourages the publication of laws and regulations pertaining to foreign direct investment and providing investors the opportunity to comment on proposed new foreign direct investment measures, establishing a single online information portal, charging reasonable authorisation fees, and using information and communication technology/e-government. It also promotes the establishment of supplier databases, implementing supplier-development programmes, and promoting the uptake by companies of responsible business conduct practices. Many of these measures are also helpful for domestic firms, as well as the larger sustainability and local empowerment agendas.
Furthermore, developing countries get special and differential treatment, and the agreement anticipates technical assistance and capacity building from such international organizations as the UN International Trade Centre, the World Bank and the World Economic Forum. Developing countries can also determine themselves the pace at which they implement individual provisions. As a result, countries improve their global competitiveness and their ability to attract more foreign direct investment.
Market access
It should also be noted that the Investment Facilitation for Development Agreement explicitly does not deal with market access, the protection of foreign direct investment and investor-state dispute settlement. It also leaves it entirely in the hands of individual WTO members what foreign direct investment policies they want to pursue; for example, if they wish to provide incentives, they can do so.
Clearly, countries can improve their investment climate on their own, unilaterally. But for many countries, anchoring investment facilitation reforms in shared international commitments helps them overcome domestic resistance to such reforms. As a commitment device, the agreement sends a positive signal to international investors that a country is serious about investment-climate reforms and attracting foreign direct investment. And for many developing countries, the technical assistance and capacity-building to be provided for the implementation of the Investment Facilitation for Development Agreement is an important resource they need to improve their chances in the highly competitive world foreign direct investment market.
For South Africa (as for many other countries, including developing ones), an additional consideration comes into play: the country’s firms are already significant outward investors and are poised to become even more so in the future, as part of the maturation of the country’s economy.
South Africa’s large firms increasingly invest abroad, to gain better access to international markets and resources. They are therefore interested that the investment environment in host countries is transparent and predictable, and that excessive red tape does not hinder the establishment of their foreign affiliates. Shouldn’t the government support its own national firms in their quest to increase their international competitiveness (as many other countries do)? After all, they need to maintain and strengthen their competitiveness to be able to create new jobs and sustain existing ones at home.
Consensus requirement
South Africa, because of the WTO’s consensus requirement, has the power to block the Investment Facilitation for Development Agreement and prevent developing countries from reaping its benefits. This would prevent many developing and the 27 least-developed country members supporting the agreement (many of them in Africa) from receiving the technical assistance and capacity-building support they need to attract foreign direct investment to advance their development. Conversely, South Africa also has the power to unlock these benefits and such support, by allowing the agreement to go forward and be integrated into the WTO rulebook.
In doing so, the agreement would build on the WTO General Agreement on Trade in Services (which already covers foreign direct investment in services sectors, about two-thirds of global foreign direct investment) and the WTO Agreement on Trade-Related Investment Measures, both of which explicitly address certain aspects of WTO members’ foreign direct investment measures. In other words, addressing foreign direct investment issues is not a novelty for the WTO. This recognises that, to trade, firms first need to invest — investment is the other side of the trade coin; in fact, much of trade takes place within global value chains and (as intra-firm trade) within the international production networks of multinational enterprises. The inclusion of plurilateral agreements in the organisation’s rulebook is also not new: it would just add to those plurilateral agreements that are already part of the WTO rulebook.
Moreover, the Investment Facilitation for Development Agreement is deliberately conceived as an agreement open for acceptance by all WTO members. Given the nature of its provisions (to improve the investment climate in host countries), its benefits extend to all WTO members — while not imposing any obligations on non-participants. Therefore, South Africa’s firms investing abroad would benefit from the improvements made in Investment Facilitation for Development Agreement participants’ host countries in which South African firms undertake foreign direct investment. Since this is good for business, South Africa’s formal commerce and industry bodies — such as Business Leadership South Africa and Business Unity South Africa — would do well to engage on this matter with the government.
Risk of forfeiting goodwill
Conversely, should South Africa oppose an agreement desired by the vast majority of developing countries in the WTO (and three-quarters of its membership), it risks forfeiting the goodwill of its fellow developing (and African) countries – something that the broader set of stakeholders in South Africa need to be aware of.
Of course, if South Africa joined the agreement, it could reap all its benefits. In particular, the government would send a strong signal to international investors that it is serious about facilitating foreign direct investment inflows — which would help the country reduce unemployment by creating jobs. Investment is not everything, but everything is nothing without investment.
South Africa’s government should seize this opportunity and support the Investment Facilitation for Development Agreement, to help create jobs, jobs, jobs. DM