Walmart, Massmart, nationalisation and MTN

Pick ‘n Pay recently rolled out its Smart Shopper card, one of those loyalty cards that allows you to amass redeemable points. Do I smell the influence of the recent move of US retailer Walmart into South Africa, via Massmart?

It’s a possible small example of the benefits of competition or the threat of competition. An even greater one would be lower prices on foodstuffs and other goods. It’s true that Walmart doesn’t have a great reputation for labour relations in its home market, but for years Pick ‘n Pay workers went on strike so routinely I wonder if Walmart could be worse.

In any case, isn’t the entry of Walmart rather an opportunity to look at how robust labour protection for retail workers is than to shut new competition out? Or to examine whether foreign ownership makes a difference to labour rights or not?

It was ironic that unions tried to use the Competition Commission, whose job is to ensure competition, to try to stifle it. It also made me smile to see Checkers pop up there, apparently to bolster the union argument that jobs would be lost and more cheap goods from the East imported.

As JK Galbraith remarked, all love the free market as long as it does not apply to themselves.

For a small economy, which doesn’t save much and needs long-term capital to grow, South Africa hasn’t been particularly interested in foreign direct investment, commonly known by its three-letter abbreviation FDI.

FDI very simply is when a company in one country invests long-term in another country, either by buying all or a substantial part of a company, or by creating something new, like a factory, or by expanding an already existing investment.

And when I point to a lack of interest, I am not talking only about the persistent ANC Youth League call for the nationalisation of mines, or the attempt to stop Walmart buying Massmart.

A while back I mentioned in passing to a senior dti official that there was no publicly available, detailed database of FDI in South Africa. His response was, “We don’t get much anyway, so it’s not really a problem.”

But that is a problem, especially as what FDI we do get is generally in takeovers or share purchases rather than money that is invested in new factories or companies.

FDI into a country, as economists commonly call it, is important for a number of reasons, not the least of which is that it is not as volatile as the flows of money into our bond and share market.

Another important facet of inward FDI is that it shows how strongly your country is linked to the global economy, and therefore into global supply chains. There could also be gains in technology and expertise.

Without FDI there would be no motor industry in South Africa.

If foreigners are not interested in your economy, it could be because it is in a bad way because of poor governance, or because your policies actively keep them out, but FDI and FDI policies vary a lot. Japan doesn’t have a lot of inward FDI.

In Zimbabwe, economic policy has served to deter FDI on the one hand, but on the other the effect of those policies made some assets so cheap that they were irresistible to risk-seeking investors. You don’t really want carpet-bagger investors buying for a song what more careful investors shun, however.

And there is the potential for new competition, but this is not automatic. The entry of Independent Newspapers through the purchase of the Argus company did nothing for competition. However, FDI in the early 1990s did enable the Weekly Mail to survive and transform into the Mail & Guardian, preserving at least one news entity that is not part of the Big 4. It also allowed a Nigerian investor to bring money into the country to start the ill-fated This Day, which would have been a welcome addition to our newspaper market had it survived.

What we miss about FDI often is that it’s not one way. And this was the irony of the opposition to Walmart. South Africa’s Checkers retailer group has moved aggressively into Africa, causing the same kind of fear and resentment as Walmart. If South African groups managed to keep Walmart out, what could South Africa say to those African countries resisting the entry of Checkers, or Woolworths, or Pick ‘n Pay, or for that matter companies like MTN, which has been singularly successful in Africa?

In a sense, this flow of money, from our companies investing in other countries, outward FDI, is more important to study, because South African firms investing outwards successfully is a fairly new phenomenon. The obvious benefit is inward foreign exchange flows through dividends, but diversifying the geographical sources of earnings also insures a company against dependence on only one market.

With all that as background, it is with relief that I see the Treasury released a discussion document along with the Budget, on regulating what it calls direct cross-border investment, another term for FDI. Journalists and commentators seem to have ignored the pending change in policy while the Walmart war of words was still raging. Perhaps they did and I didn’t notice.

The document points out that the flow of FDI is average for an economy of South Africa’s size, but if you look at the stock of FDI in South Africa it is rather high. Part of the reason for this is that some of our biggest companies, like Anglo American, shifted their HQs offshore, and are now classified as foreign investors. I wonder about the effect of exchange rates on stocks. Still, we appear to have high levels of existing FDI.

This is no reason to discourage FDI. The review document makes it clear that what we need is some kind of consistency and transparency in government decision-making on FDI deals, for the sake of both inward and outward FDI, instead of reliance on exchange controls.

The review framework does a good job of proposing a clear framework for evaluating big cross-border, non-greenfield investment to see if it does not harm the interests of South Africa in a number of ways, including allowing tax cheating. It is not interested in regulating greenfield investment, and in smaller investments, only in those that may have a big and bad effect.

South Africa is not the only country to impose conditions on FDI, and indeed in some areas we have light regulation or none. In some countries investments in the print media are regulated, for instance, but not in SA.

What a new framework would do is make it less urgent to try to use the Competition Commission and Tribunal to block acquisitions that may be deemed to not be in the national interest on grounds other than competition. There will be another mechanism, and transparency and clear rules should encourage investors, because there will be more certainty.

Foreign investors would not have to prove that the investment would be more beneficial than it would if it were a domestic investment. It will simply not have to fall foul of certain requirements, such as not affecting national security considerations.

Some of the proposed areas in the document for keeping out FDI seem a bit broad and abstract, and I would have liked to have seen more examples. For instance, what does, “To support the domestic economy through encouraging the growth and development of domestic and international markets for local firms” actually mean? I worry that rules that are too vague could be used by special interests to block competition.