Globalization in a Middle-income Economy: FDI, Production, and the Labor Market in South Africa

Abstract

This chapter examines the impact of foreign direct investment during the 1990s on South Africa, a middle-income semi-industrialized economy with an established industrial base, a segmented labor market with very high unemployment, and real exchange rate depreciation during the 1990s. The paper argues on the basis of survey data and sectoral analysis that FDI has had some impact on the globalizing of production, in the sense of output being exported into global production networks. But most new FDI in South Africa has not been part of the latter processes, focusing rather on domestic and regional markets. Integration of domestic production processes into global networks remains limited. Furthermore, overall FDI levels have been low, so that policy objectives of increased output and employment from FDI have not been met. In particular, the contribution of FDI to savings, investment and thus employment-creating growth has been low, a matter of concern given unemployment rates in excess of 40 percent. On the other hand, FDI has contributed to skills upgrading, particularly among high-skilled blacks, which is important given the importance of ‘black economic empow-erment’ in the current South African context. But in doing so, it may have also worsened the skills bias in the labor market.

This chapter draws heavily on Gelb and Black, 2004a and 2004b, and on Gelb, 2003a, which were written as part of the London Business School project on FDI in Emerging Markets. We would like to thank the Centre for New and Emerging Markets at LBS for support, particularly Saul Estrin. Section 1 also draws on Gelb, 2003b.