THE COLOUR OF MONEY FOREIGN CAPITAL AND TRANSFORMATION

According to the OECD, the flow of foreign direct investment (FDI) to developing countries worldwide now overshadows official development assistance by a wide margin, highlighting the need to address the use of FDI as a tool for economic development, writes Diana Sanchez.

While governments in the developing world could regulate FDI for development purposes, in reality, implementation is problematic. The South African black economic empowerment strategy (BEE), which also applies to foreign companies operating in South Africa, falls into the broad range of attempts to regulate international capital behaviour to serve national goals.

In 1994 Ericsson, the Swedish telecommunications giant, became the sole supplier of network technology for the South African operator MTN. In the following years, the company experienced a rapid expansion into the African market from its Johannesburg office.

South Africa's scarcity of skills and heavy competition between existing companies for the small number of qualified individuals have made employment equity a tricky business.

South Africa's scarcity of skills and heavy competition between existing companies for the small number of qualified individuals have made employment equity a tricky business.

Ericsson in South Africa

Twelve managers, working both in South Africa and Africa, shared with the HSRC in 2008 some of their experiences and perceptions on transformation in South Africa, development in the continent and doing business from South Africa into Africa.

The research was part of the South Africa in Africa project and was concerned with the ways in which multinational companies operating in South Africa have been expanding into the region.

Ericsson is a BEE complier since the early years of the strategy and the company's BEE score is remarkably good, particularly its local ownership score (a full 25% is in the hands of local entities).

But as managers explain, implementation has been difficult overall. It has been challenging to find strategic partners who also add value to the business; and South Africa's scarcity of skills and heavy competition between existing companies for the small number of qualified individuals have made employment equity a tricky business.

Similarly, although all managers acknowledged the importance of skills development, workload - and perhaps lack of incentives - has prevented the establishment of a successful strategy to transfer and build skills. All managers interviewed identified the transfer of ownership as the cornerstone of the strategy and only four out of 12 identified BEE as a programme to address the imbalances of the past and to distribute wealth in a better way. This is despite the fact that the South African government has pushed for a more comprehensive approach to empowerment.

So while the company has invested valuable time and resources in getting the process right (i.e. the company now has a manager for BEE), the so-called ‘soft issues' of economic empowerment, such as the development of human capital, which is central for long-term sustainable development and where multinational companies have a central role to play, seem to have been initially sidelined.

While Ericsson has used South Africa as a regional hub no elements of the BEE strategy are being replicated elsewhere in Africa and there is no intention to do so.

Ericsson in Africa

Significant also is that while a full ten out of 12 companies believed that multinationals had a role to play in the development of host African economies and all strongly agreed that BEE was the right thing to do, they also felt as strongly that it was only applicable to South Africa - given its particular history of apartheid - and not the rest of the continent, into which the company has been rapidly expanding.

Most managers pointed out that their business already contributed to developmental efforts in the region with 11 out of 12 believing that their company was a better corporate citizen than their competitors in Africa.

Research findings showed that while Ericsson has used South Africa as a regional hub to expand into the African telecommunications market and South Africa's transformation imperatives have shaped the company's behaviour and structure, no elements of the BEE strategy are being replicated elsewhere in Africa and there is no intention to do so.

The clear distinction between South Africa and the rest of Africa evidences not only a business rationale but also indicates that transformation initiatives are broadly supported only when there is a clear justification for it, such as in the case of South Africa with its history.

Interestingly, managers' experiences also evidenced a complex mix of ideas and representations of race and nationality which play themselves out in the African business and political environment. All managers (Europeans and South Africans) interviewed hesitated to define South Africa as part of Africa while 11 out of 12 believed that the country, as an economic power in the region, needs to play a leading role in the development of the continent.

The colour of trust

Amazingly, managers are perceived differently on the grounds of being - or not being - Africans, and perceptions are often contradictory. While African consumers expected Africans to be represented within the company's workforce, consumers also strongly preferred Europeans to discuss core technical issues and expected Europeans to provide solutions, as ‘white faces were said to inspire trust in the quality of the products and services'.

Needles to say, pushing for meaningful transformation under this cultural environment seems problematic in South Africa or anywhere on the continent.

As telecommunication multinationals play a central role in Africa's access and use of information and communication technology, the continent's development will depend greatly on the ways in which these resources are used and controlled by both private and public capital.

While African consumers expected Africans to be represented within the company's workforce, consumers also strongly preferred Europeans to discuss core technical issues . . .

The way in which African governments regulate both national and foreign telecommunications capital will be particularly relevant. But if empowerment or broader development efforts are guided by the belief that the ‘colour' of capital is what matters and not the way in which it behaves, this will be highly problematic. The South African BEE experience with FDI illustrates that any attempts to align multinational companies' operations with developmental regulation should be enforced through a combination of instrumental elements and ethical ones as ‘it is the right thing to do'.

Diane Sanchez is a researcher in the Democracy and Governance programme.