The changing role of political risk analyses in foreign investment decision-making: A case study of South Africa

Thesis (MA)--Stellenbosch University, 2018.ENGLISH ABSTRACT: Political risk has historically been identified as a significant determinant of foreign direct investment (FDI). Numerous studies confirm that investors sometimes eliminate whole geographical regions for political reasons. However, with the intensification of globalisation and the changing sources and nature of political risk, the international investment landscape has been transformed. This transformation, combined with conceptual and practical constraints on political risk analyses, is challenging the determining role of political risk. This situation is significant for both host countries as well as practitioners in the industry. Given the propensity of FDI to be a catalyst for modernisation, understanding these shifts in dynamic is especially significant for developing countries. For capital scarce economies, FDI can be a vital driver of economic growth, improved competitiveness, increased employment and technological advancement. If developing countries want to attract more FDI, understanding the role of political risk analyses in FDI decision-making is paramount. Furthermore, with political risk analysis recognised as a growth industry, understanding how the role of political risk analyses has shifted is likewise critical for analysts in the field. This research study thus investigates to what extent political risk still plays a determining role in the FDI decision-making process. Accordingly, the main research question of this study considers to what extent declines in FDI into South Africa’s key economic sectors between 1994 and 2014 were attributable to increased political risk. Sub-questions, aimed at exploring this in more depth, consider to what extent declines in FDI differ from sector to sector. Lastly, this study considers other regional and global factors which contributed to FDI declines. This case study takes a qualitative approach in the consideration of FDI into three of South Africa’s key economic sectors. Using secondary sources, a process of inductive reasoning is applied, to establish patterns of behaviour. The study found that the majority of the declines in FDI into South Africa’s key economic sectors were less attributable to increased political risk and were, to a greater extent, attributable to global and regional factors. While a greater understanding of how political risk analyses are incorporated into FDI decision-making is still required, this study indicates that the international investment community may have shifted from an era of political risk avoidance to one of political risk mitigation.AFRIKAANSE OPSOMMING:Politieke risiko is histories as ’n betekenisvolle determinant van regstreekse buitelandse belegging (RBB) beskou. Talle studies bevestig dat beleggers soms groot geografiese gebiede om politieke redes uitskakel. Die verskerping van globalisering, asook veranderinge in die oorsprong en aard van politieke risiko, het egter tot gevolg gehad dat die internasionale beleggingslandskap getransformeer is. Hierdie gedaantewisseling, saam met die konseptuele en praktiese beperkings van politieke risiko-ontleding, het tot gevolg dat die bepalende rol van politieke risiko bevraagteken word. Dié situasie is beduidend vir sowel gasheerlande as praktisyns in die bedryf. Omdat RBB neig om ’n katalisator vir modernisering te wees, word dit noodsaaklik vir veral ontwikkelende lande om hierdie veranderende dinamika ten volle te verstaan. Vir kapitaalhonger ekonomieë kan RBB ’n noodsaaklike dryfveer vir ekonomiese groei, verbeterde mededinging, verhoogde indiensneming en tegnologiese vooruitgang wees. Indien ontwikkelende lande meer RBB wil lok, is dit van kardinale belang dat hulle die rol van politieke risiko-ontleding in die RBB-besluitnemingsproses deeglik verstaan. Met die erkenning van politieke risiko-ontleding as ’n groeiende bedryf, is dit eweneens noodsaaklik vir ontleders in die bedryf om te verstaan hoe die rol van politieke risiko-ontleding verskuif het. Hierdie navorsingstudie ondersoek dus in watter mate politieke risiko steeds ’n bepalende faktor in die RBB-besluitnemingsproses is. Gevolglik sentreer die kernvraag in hierdie studie op die mate waartoe die afname in RBB in Suid-Afrika se hoof- ekonomiese sektore, tussen 1994 en 2014, toegeskryf kan word aan verhoogde politieke risiko. Sekondêre vrae is daarop gemik om in groter diepte vas te stel in watter mate die afname in RBB van sektor tot sektor verskil. Laastens beskou hierdie studie ander streeks- en globale faktore wat tot afnames in RBB bygedra het. Hierdie gevallestudie gebruik ’n kwalitatiewe benadering in die beskouing van RBB in drie kernsektore van die Suid-Afrikaanse ekonomie. Deur sekondêre bronne te gebruik, word ’n proses van induktiewe redenering toegepas om gedragspatrone vas te stel. Hierdie studie het bevind dat die grootste deel van die afname in RBB in die kernsektore van die Suid-Afrikaanse ekonomie minder aan politieke risiko en tot ’n meerdere mate aan wêreldwye en streeksfaktore toeskryfbaar is. Alhoewel ʼn beter begrip van hoe politieke risiko-ontleding in die RBB-besluitnemingsproses geïnkorporeer word nog ontbreek, dui hierdie studie daarop dat die internasionale beleggingsgemeenskap hul fokus van ’n era van politieke risikovermyding na een van politieke risikoversagting verskuif het