SADC’s Struggle with FDI: Opportunities for Growth Amid Regulatory Challenges

The SADC Investment Climate Scorecard highlights the regulatory challenges that have hindered Foreign Direct Investment (FDI) in 15 SADC member states. The report identifies legal barriers such as foreign equity limits, screening procedures, and employment restrictions that deter FDI. While the region has experienced volatile FDI trends, there is potential for diversification beyond resource-seeking investments. The report urges SADC countries to reform their FDI policies, offering recommendations for improving regulatory frameworks to attract more diverse investments and foster sustainable economic growth.

The State of FDI in Southern Africa

Foreign Direct Investment (FDI) has long been recognized as a critical driver of economic growth, offering developing countries access to capital, job creation, and the potential for technological advancements. However, for many member states of the Southern African Development Community (SADC), attracting consistent and significant FDI remains an elusive goal. According to the latest SADC Investment Climate Scorecard prepared by the World Bank in partnership with the OECD, the region faces several regulatory barriers that restrict FDI inflows. These restrictions, ranging from limits on foreign equity ownership to FDI screening and approval procedures, have placed SADC member states at a disadvantage in the global FDI landscape.

The SADC Investment Climate Scorecard analyzed 15 member countries, including Angola, Botswana, South Africa, and Tanzania, and identified specific legal and regulatory hurdles that have kept foreign investors at bay. The findings are a wake-up call for regional governments aiming to integrate into global value chains, diversify their economies, and ultimately, alleviate poverty.

Volatile FDI Trends in the SADC Region

FDI flows to the SADC region have been anything but stable. The report points to a staggering 89% decline in FDI from a peak of $29.5 billion in 2014 to just $3.2 billion in 2018. Although there was a recovery in 2021, driven by a large financial transaction in South Africa, FDI inflows remain highly volatile. The COVID-19 pandemic, the Russia-Ukraine conflict, and rising global inflation have all added layers of uncertainty, not only reducing FDI flows but also stifling growth in developing nations.

SADC countries are primarily resource-rich, and as such, FDI has largely been focused on extractive industries like mining, coal, oil, and gas. The region’s over-reliance on resource-seeking investments leaves it vulnerable to global price fluctuations and geopolitical shocks. The SADC Investment Climate Scorecard notes that there are opportunities for diversification, particularly in sectors like transport, media, financial services, and real estate, where FDI measures could be relaxed to encourage more varied investments.

Regulatory Hurdles Impeding Growth

One of the major challenges identified in the SADC Investment Climate Scorecard is the restrictive nature of foreign equity limits, which are present in multiple sectors across several SADC countries. These limits prevent foreign investors from owning a significant stake in key industries, thereby deterring them from entering markets. For instance, countries like Tanzania have 63% of their FDI-related measures categorized as foreign equity limits, while others, such as South Africa, have more open regimes but still face operational restrictions.

Screening and approval procedures also pose a significant barrier to investment. Many SADC countries require foreign investors to go through cumbersome processes before being approved to operate. While this is common practice in many parts of the world, in SADC, the procedures are often opaque, lengthy, and unpredictable, contributing to investor reluctance. Mozambique, for example, has some of the most stringent screening mechanisms, with 13 different measures in place.

Operational restrictions, such as limits on the employment of foreign personnel, further complicate the investment climate. Countries like Zimbabwe and Namibia impose nationality requirements for top executives, limiting companies’ ability to hire the best global talent. This not only hampers foreign investment but also prevents knowledge transfer, a key benefit of FDI.

Unlocking the Potential of SADC Economies

Despite these challenges, the SADC Investment Climate Scorecard offers a roadmap for member states looking to reform their FDI policies. By adopting a more open FDI regime, reducing regulatory burdens, and improving transparency, SADC countries could unlock significant economic potential. The report recommends liberalizing foreign equity limits, streamlining approval processes, and reducing operational restrictions as critical steps toward making the region more attractive to investors.

The African Continental Free Trade Area (AfCFTA) presents a unique opportunity for SADC to better integrate into regional and global value chains. If SADC countries align their domestic frameworks with AfCFTA’s investment protocols, they stand a better chance of attracting the kind of FDI that fosters sustainable development and long-term growth. The WTO’s Investment Facilitation for Development Agreement also offers guidance on how countries can improve their investment climates by adopting best practices for screening and facilitating FDI.

As global competition for FDI intensifies, SADC member states will need to be proactive in creating more favorable conditions for investment. By addressing the regulatory barriers identified in the SADC Investment Climate Scorecard, countries in the region can position themselves as more competitive, attract more diversified FDI, and ultimately, pave the way for sustainable economic growth.