Factors influencing foreign direct investment of South African financial services firms in Sub-Saharan Africa

Abstract

This research investigates the key elements that South African financial services firms consider before making foreign direct investments (FDI) in Sub-Saharan African (SSA) markets. Specifically it aims to establish the order of importance of the key factors influencing FDI as well as understanding the motivation behind these investments and what methods of entry are preferred when these firms decide to enter a new market. The research performed was largely qualitative and used a questionnaire-based descriptive survey method to solicit opinions from key South African financial services firms across all spectra of the industry. Based on responses it appears that South African financial services firms are most strongly influenced by the political and economic stability of the country in question as well as the profitability and long-term sustainability of its specific markets. The degree of available infrastructure in terms of IT and telecommunications as well as the existence of credible financial systems were also viewed as highly important considerations before investing in SSA. Other factors deemed important, but not necessarily critical, included local labour and cultural considerations as well as the volatility of local exchange rates. Factors such as the degree of economic agglomeration, presence of trade incentives, barriers and agreements as well as geographic proximity of the new market did not appear to be a major influence on South African firms expanding into new markets. Given the uncertainty and ambiguity of most SSA markets many South African financial services firms prefer to enter existing markets via a majority stakeholder joint venture with a local partner, or via a new investment if the market does not currently exist. The nature of the financial services firm also seems to influence the iii entry method and once in a new country most firms seem to prefer a full service presence. Additionally, the key motives cited for expansion northward were to broaden revenue bases and improve profit margins as well as to stay close to local customers. With local South African markets becoming cramped many South African financial services firms are looking to SSA for future growth. Given the risks and complexities of conducting business in Africa the findings of this research should be borne in mind by these firms before making critical investment decisions in this regard.