Post on 24-Jan-2023
‘FDI and Poverty’ Evidence from KwaZulu Natal – SA
A Dissertation submitted in partial fulfilment of the requirements for the award of
MSc in International Development
Submitted on: 29th September, 2011 Word Count: 12, 289
Kenneth Okwaroh Ochieng’ ID No. 1078103
Supervised by Dr Philip Amis International Development Department
School of Government and Society
ii
Dedicated to the two most special women in my life
Ms Nancy Aruwa and Mrs Monica Ochieng’
True, a good woman can sure inspire a man to be a
better and greater person
iii
Acknowledgements
This piece of research is the product of hard work, patience and diligence of a host of individuals in the
UK and the RSA. I thank Dr Gill Bentley of the Centre for Urban and Regional Studies ‐ University of
Birmingham, Professor Khadiagala of the University of the Witwatersrand, Dr Fiona Nunan and Gareth
Wall of IDD, University of Birmingham for blessing me with the confidence to research on this subject. I
also extend my gratitude to Anne and Debra and the IDD fraternity for the encouragement and goodwill
and most sincerely appreciate the patience, insight and friendliness of my supervisor Dr Philip Amis
throughout the process of researching and writing this dissertation.
I say thank you to my esteemed friend Jerry Asaka, for squeezing in time to read through my drafts with
‘toothpick precision’ and to comrades Cosmas Butunyi and Hezron Ogutu for hosting me in Jo’ Burg and
making the field work fun; the many late nights and informal chats at Stones, Dros, the PiG sure added
value to this piece. Very grateful to the eNseleni community, especially Zakhele Zulu for translating and
supporting me during the FGDs when my isiZulu couldn’t suffice and to E.Mthinyane for rescuing me on
the night I arrived in Richards Bay with no clue where to go. Special gratitude to the DTI, the Department
of Labour, The IDC and the MNCs in Richards Bay for the crucial information without which this research
would not have materialized.
I am forever indebted to the Allan and Nesta Fergusson Charitable Trust for the scholarship, Dr Joshua
Odongo Oron of Widows and Orphans International, London for funding my maintenance, Dr Adrian
Campbell for promptly responding to my distress call and to Mohamed Khalif for being my brother away
from home.
Lastly, William Shakespeare said that ‘love is a spirit of fire, not gross to sink but light and will aspire’. I am humbled
by the grace of the almighty God for blessing me with an awesome family. Addy, Adiki, Hilary, Beryl, Tony,
Marion, Nancy, Mom and Dad, you guys kept me alive. The prayers, the phone calls and most importantly
the LOVE; thank you so much.
Okwaroh Kenneth Ochieng’, Birmingham – UK
okwaroh@gmail.com
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Abstract
‘Foreign Direct Investment continues to be seen as a driver of economic development, a precursor
for employment creation and a tool for eliminating poverty in many developing economies. The
justification being that it is possible to intensify place marketing, attract investment and let the
benefits ‘trickle down’ to the poor. That FDI expands opportunities for creating employment that
can better the livelihoods of poor people. This approach to poverty reduction has been subject to
criticism on the account of increasing polarisation, unemployment and exacerbated poverty in many
urban areas against a background of active place marketing, increased investment and economic
growth. This paper interrogates the aptitude of FDI to generate employment accessible to the poor.
It considers the impact of MNCs on employment creation in a poor urban setting in South Africa: An
area where decades of industrial decentralization, place marketing and investment promotion is
perceived to have yielded a considerable influx of foreign capital. Notably, the characteristic capital
intensiveness of most of the foreign companies in the area, their inability to create and sustain
strong linkages with local enterprise and to induce employment intensive knowledge and
technology spill‐overs has limited creation of pro‐poor employment. This paper also elucidates the
crucial role of skills and work–experience in determining the capacity of the poor to benefit from
employment created by MNCs. It illustrates how FDI without robust policy undertakings for actively
seeking labour intensive investments, for supporting local enterprises established out of linkages
with MNCs and for executing effective demand‐side skills development programmes accessible to
the poor is unlikely to have significant leverage in reducing poverty.’
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Contents
Dedication ‐ii‐
Acknowledgements ‐iii‐
Abstract ‐iv‐
Contents ‐v‐
List of Acronyms ‐vi‐
Chapter One – Introduction 1
Chapter Two – A Review of Literature 4
Chapter Three – Analytical Framework 13
Chapter Four – Methodology 17
Chapter Five – Context 21
Chapter Six – Findings and Analysis 25
Chapter Seven – Conclusion 40
References 43
Appendix I – Summary of Relevant Studies Reviewed
Appendix II – Discussion Guide
Appendix III – Data Analysis
Appendix IV – Maps
vi
List of Acronyms AIDS Acquired Immune Deficiency Syndrome
BPM5 Balance of Payment Manual – 5th Edition
CIA Central Intelligence Agency
DBSA Development bank of Southern Africa
DTI Department of Trade and Industry
EPZ Export Processing Zone
FDI Foreign Direct Investment
FGD Focus Group Discussions
GDP Gross Domestic Product
GEAR Growth Employment and Redistribution Strategy
GNI Gross National Product
HIV Human Immunodeficiency Virus
IDZ Industrial Development Zone
IPAP Industrial Policy Action Plan
MNC Multinational Corporation
MTSF Medium Term Strategic Framework
NALEDI National Labour and Economic Development Institute
OECD Organization of Economic Cooperation and Development
PRSP Poverty Reduction Strategy Paper
RIDP Regional Industrial Development Programme
RSA Republic of South Africa
SADC Southern Africa Development Corporation
SDI Spatial Development Initiative
SMME Small Medium and Micro Enterprise
UNCTAD United Nations Conference on Trade and Development
UNECA United Nations Economic Commission for Africa
UNIDO United Nations Industrial Development Organization
Chapter 1 ‐ Introduction
1.1. Background
Inward Foreign Direct Investment continues to be seen as an important driver of economic
development, a precursor for employment creation and as a tool for eliminating poverty and
addressing spatial economic imbalances (Hill and Roberts, 1998; Aaron, 1999; Jenkins and Thomas,
2002; Mwilima, 2003; Tambunan, 2005; Jenkins, 2006). The business of inward investment attraction
has become an integral part of economic policy and a standard operation of state departments
especially in developing economies today. In academia as well, the subject of inward investment has
received considerable attention, been well researched and substantively written on. However, the
link between FDI and poverty reduction remains insufficiently investigated; there is inadequate and
inconclusive evidence on the impact of FDI in improving the livelihoods of the poor (Sumner, 2005).
Aaron (1999) argued that there is no direct link between FDI and poverty reduction. That what exists
is a two tier relationship i) between FDI and economic growth and ii) between economic growth and
poverty reduction. This argument is reinforced by Te Velde (2002) who asserts that in principle a
direct link between poverty reduction and FDI does not exist though the possibility of indirect links is
defensible. The overall assumption has been that it is possible to enhance location competitiveness,
intensify place marketing, attract inward investment, and then let the benefits of investments
‘trickle down’ to the poor (Davila, 1996; Gilbert, 1997; Potter and Moore, 2000). That attracting
inward FDI increases the opportunities for the creation of employment which the poor can take up
in order to increase their incomes and to improve their overall wellbeing.
Critics of this approach to poverty reduction have argued that the mere influx of FDI does not
guarantee the accrual of economic benefits to the poor. That there exist a host of intervening
factors that determine the creation of employment through inward investments; and a host of
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others as well that determine the capacity of the poor to take advantage of such employment
opportunities to improve their socio‐economic standing. Experience with place marketing and
inward investment attraction has indicated that the trickle down is problematic and there is no
guarantee that the benefits of such investments reach the poorest, most deprived and socially
excluded segments of the population (Turok and Bailey, 2004; Tallon, 2010). There is evidence of
increasing polarisation, unemployment and exacerbated poverty in many urban areas against a
background of active place marketing, increased investment and economic growth (Boddy, 2002).
1.2. Significance of the Study
This piece of research sought to contribute to the debate on the link between FDI and poverty
reduction. It set out to interrogate the argument that FDI can be relied on to reduce poverty
especially in developing economies. It involved an analysis of perspectives of MNCs, Government
Departments and the local population on inward investment and employment creation and how this
affected the poverty situation in eNseleni ‐ Richards Bay; an urban setting in post‐apartheid South
Africa where close to two decades of government policy on industrial decentralisation, place
marketing and investment promotion was considered to have succeeded (Aniruth and Barnes, 1998;
Jourdan, 1998; Rogerson, 2001); yet the poverty situation had not significantly improved (May et al,
2006; Department of City Development, 2009).
1.3. Structure of the Paper
The paper is divided into seven chapters namely; the Introduction, Literature Review, Analytical
Framework, Methodology, Context, Findings and Analysis and lastly Conclusion. Chapter Two
represents a survey of literature on the link between inward Foreign Direct Investment and poverty
reduction. It defines FDI and explores the channels though which Foreign Direct Investment could
contribute to poverty reduction via employment creation. It also examines the influence of human
capital (skills/training/work experience) on the success of FDI in proffering such benefits to the poor.
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The content of Chapter Three largely draws from the survey of literature in the previous chapter. It
presents a framework of analysis developed from Tambunan (2005) that depicts the relationship
between FDI and poverty reduction bridged by pro‐poor employment creation. Chapter Four
outlines the approach employed in gathering data for the study; the overall research methodology is
discussed here in detail.
Chapter Five provides a background profile of the context within which the study was undertaken; a
succinct account of the poverty situation in South Africa and some recent socio‐economic
developments of relevance to the study. Chapter Six is a presentation of the findings from the field.
It involves a detailed analysis of the key themes drawn from the analytical framework: a summary of
overarching perceptions of respondents is used to stimulate a discussion on the capacity of FDI to
contribute to the reduction of poverty. Chapter Seven outlines the conclusions drawn from the
analysis and the key recommendations for further research as well as policy suggestions for future
government action on poverty reduction buttressed on FDI in South Africa and other developing
economies.
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Chapter 2 ‐ A Review of Literature
2.1 Introduction
This chapter examines literature on the role of inward investment in generating employment that is
accessible to the poor in their host economies. It begins with an overview of Foreign Direct
Investment, and then proceeds into a succinct exposition of the incoherent link between inward FDI
and the reduction of poverty. What follows is a discussion on how FDI could lead to employment
creation and what might prevent this. It ends with a reflection on the critical issues of concern that
guide the analysis of the case study and some concluding thoughts on the literature.
2.2 Inward Foreign Direct Investment – An Overview
The fifth edition of the Balance of Payment Manual defines FDI, also referred to in this paper as
inward investment, as investment made to acquire a lasting interest in an enterprise operating
outside of the country of the investor. Hill and Roberts (1998) defined FDI as ‘the ownership and
control of productive assets in [a host economy] by foreign persons’ (Hill and Roberts, 1998:31). The
OECD Benchmark definition of FDI states that it involves ‘obtaining a lasting interest by a resident
entity in one economy in an entity resident in an economy other than that of the investor’ (OECD,
1996:7). Essentially FDI reflects the injection of money from sources outside a country for the
purposes of establishing or purchasing capital goods necessary for locating or developing a lasting
business presence in the country in question. What the lasting interest implies is that the external
entity reserves a substantial degree of control and influence in the management of the
establishment, normally in the form of equity ownership or voting power of not less than 10%
(UNCTAD, 2006). Though FDI can be either inward or outward, it is inward investment that is of
profound importance to this study.
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2.3 Inward FDI and poverty reduction – ‘an incoherent link’
Many developing economies see inward investment as an important driver of economic
development, a precursor for employment creation and as a tool for reducing poverty and
addressing spatial economic imbalances (Hill and Roberts, 1998; Aaron, 1999; Ngowi, 2001; Jenkins
and Thomas, 2002; Mwilima, 2003; Tambunan, 2005; Jenkins, 2006). However, the link between
inward investment and poverty reduction remains unclear and insufficiently investigated. There is
inadequate and inconclusive evidence on the impacts of FDI on the improvement of the livelihoods
of the poor (Sumner, 2005). Nonetheless most of the scholars1 who have attempted to trace the link
concur that the degree to which inward investment generates employment opportunities accessible
to the poor and the ability of the poor to take advantage of such opportunities so far represents the
most tenable linkage.
FDI proffers a range of benefits that include (but not limited to) the attraction of private capital,
creation of competitive business environments, growth of domestic enterprise through linkages and
spill‐overs as well as human capital development through employee training and capacity building
that all have crucial bearing on the improvement of job opportunities in a host economy (Blomström,
2002; Stimon, Roberts and Stow, 2002). Tambunan (2005) studied the impact of FDI on poverty
reduction in Indonesia; he argues that providing the poor with productive employment underpins
the relevance of FDI in developing countries where unemployment is perceived to be a product of
dismal domestic and foreign investment. Aaron (1999) notes that FDI could stimulate the expansion
of employment, improve human capital and enhance transfer of technology and diffusion of skills
from developed nations to developing economies. He however cautions that the capacity of FDI to
deliver such benefits is subject to context specific investment environments prevalent in different
economies.
1 See annex 1 for a comprehensive summary of studies on the link between FDI and poverty reduction that were reviewed by the researcher
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In his study on FDI and employment in Vietnam, Jenkins (2006) argues that FDI that supplements
domestic investment; creates new labour‐intensive industries; stimulates backward or forward
linkages and generates spill‐overs to domestic firms has better prospects for employment creation.
He however notes that it is possible for FDI to have marginal (may be even negative) consequences
on employment if it severely crowds out domestic enterprise to the extent that the volume of jobs
lost far outstrips that created by the MNCs (Jenkins, 2006:116). Jenkins and Thomas (2002)
investigated the trends of FDI and its implications for economic growth and poverty alleviation in
Southern African countries. They argue that though it does create new jobs and facilitate technology
transfer and diffusion of skills, without effective mechanisms for equitable distribution of benefits, a
positive impact on poverty alleviation and improvement of social welfare is not guaranteed (Jenkins
and Thomas, 2002). Te Velde and Morrissey (2002) note that FDI may increase labour productivity
through technology or skills transfer, but its impact on poverty reduction might be constrained by
inequitable distribution of such benefits amongst sectors, regions or cadres of workers. Using
evidence from studies in Africa and East Asia2, they demonstrate how FDI often raises income
inequalities leaving less skilled workers more disadvantaged as their skilled counterparts continue to
attract higher wages.
2.4 How inward FDI may or may not create employment for poverty reduction
Academic literature has approached the link between FDI and employment creation in three main
ways. Through labour intensive investment; through backward and forward linkages between MNCs
and domestic firms that stimulate growth of domestic SMMEs; and through spill‐overs from MNCs
that improve human capital and enhance productivity and ability of domestic enterprises to absorb
more labour.
2 Mazumdar (1995); Ramstetter (1998); Te Velde and Morrissey (2001); Lipsey and Sjoholm (2001); Matsuoka (2001)
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2.4.1 Backward or Forward Linkages and employment creation
Backward or forward linkages are the complementary business contacts and relationships between
MNCs and local enterprises (Jenkins, 2006). They emerge when the presence of MNCs stimulate the
growth of local firms or sectors that supply them; when MNCs generate demand for inputs that
induce the establishment of domestic enterprise for instance through subcontracting arrangements
for supply of inputs that are more economical to produce locally (Hirshman, 1958). Linkages may
also emerge when MNCs produce intermediate goods that induce local firms to process further –
these are known as forward linkages (Jenkins, 2006).
Proponents of this approach argue that inward investment linkages create business opportunities
for local enterprise; they open up new markets for SMMEs, offer stable and regular payment for the
supply of inputs and help local firms achieve economies of scale by increasing demand for locally
produced intermediate goods. The logic is that by inducing additional domestic investment and
increasing productivity of local firms, such linkages bolster the ability of local enterprises to absorb
more labour thereby expanding job opportunities for poor locals (Hirshman, 1958; Dunning, 1992;
Jenkins, 2006). O’Hern (1989) argues that since there must exist adequate investment outlets for
FDI to succeed even marginally in creating pro‐poor jobs, such linkages are a possible way through
which such outlets could be established. In 1999 alone, backward production linkages between
foreign companies and local firms were responsible for the employment of over 13 million people
worldwide (Aaron, 1999). This implies that besides directly employing locals, MNCs can indirectly
create jobs in a local economy where they exist through supplier arrangements and subcontracting
relationships.
Tambunan (2005) cautions though that while FDI might stimulate additional investment and
domestic economic activity, its implication on employment creation is profoundly dependent on the
quality and magnitude of the linkages (Tambunan, 2005:12). The linkages must involve a substantial
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volume of business and a considerable degree of stability in order to guarantee productivity of
domestic enterprise and security of jobs created. However, empirical evidence to show that the
existence of foreign firms creates or increases such linkages in developing countries is inconclusive.
Javourcik (2003) argues that data limitations prevent researchers from providing conclusive
evidence on the conduct of the externalities created by FDI. Calagni (2003) nonetheless, noted that
FDI skewed in natural resource extraction sectors3 limits linkages with local enterprise and
constrains job creation in Sub‐Saharan economies. And that overly liberalised FDI policies that allow
MNC to import most of their inputs also fundamentally eliminate possibilities of linkages and
profoundly limit job creation.
2.4.2 Spill‐overs and employment creation
FDI might also generate employment accessible to the poor through the diffusion of skills and
transfer of new technologies, knowledge and innovations from foreign enterprises into a domestic
economy (Tambunan, 2005). This is what is referred to in the literature as the spill‐over effects ‐
normally actualised through imitation of production systems introduced by foreign investors,
through demonstration of exotic technologies to domestic enterprises or through competition
induced by MNCs (Mac Dougall, 1960; Blomstrom, 1989). Foreign companies educe spill‐overs
through their demand for technical or managerial skills which necessitates the training and
interaction of local employees with foreign personnel to adapt to the exotic production systems
(Jenkins and Thomas, 2002). This way, they transfer new knowledge, technologies and other
intangible assets that enhance efficiency and productivity of domestic enterprise and employability
of local workforce (Graham and Krugman, 1995). Such technological capabilities, entrepreneurial
and managerial skills accrued from MNCs have the potential of generating new SMMEs that create
additional jobs especially where trained personnel leave MNCs to establish new businesses or work
for local firms (Smallbone, 2006). 3 Dunning (1993) argues that natural resource extraction investments are often characteristically labour extensive; their demand for labour is limited to those required to operate highly technical machinery. They are less likely to absorb much labour.
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However, the capacity of FDI to generate such spill‐overs and the possibility of the poor benefitting
from them has been questioned. Rodrick (1999) noted that policy literature on investment attraction
is laden with claims about possibilities of industrial externalities and spill‐overs without adequate
evidence to back it. A host of studies4 examining the productivity of firms correlated with the
presence of MNCs cast doubts on the existence of FDI induced spill‐overs in developing countries.
Haddad and Harrisson (1993) investigated the effect of inward investment in Morocco. They reject
the assumption that the presence of large MNCs in a host economy automatically accelerates
growth in domestic enterprise and stimulates spill‐overs. Javoucick (2003) analysed firm‐level panel
data sets on FDI spill‐overs in Lithuania and concluded that there was limited evidence of such spill‐
overs. Calagni (2003) notes that the mere influx of FDI does not guarantee spill‐overs; they are
subject to prevailing domestic investment environments and the capacity of local enterprise to seize
market opportunities. Even where spill‐overs have occurred, like in Penang‐Malaysia, Singapore or
Bangalore‐India, there was limited evidence to show that employment generated was accessible by
poor. They loosely affected the skills and capacities of lower echelons of the workforce and
completely marginalised those not employed at all. Lyanda and Bello (1979) also studied fourteen
MNCs in Lagos, Nigeria and established that their training programmes targeted highly qualified
white collar than blue collar (less skilled) workers.
2.4.3 Labour intensive investment and employment creation
Most developing countries are labour rich, but capital poor (Jenkins and Thomas, 2002; UNECA,
1995). This is attributable to low per capita income that limits domestic saving capacity, poor
financial intermediation and low export GDP ratios that translates into insufficient resources for
domestic investment (UNECA, 1995; Tambunan, 2005). Inward investment therefore functions to
4 Studies carried out at industry level, based on firm level panel data or case study oriented like Santiago (1987) in Puerto Rico, Aitken and Harrison (1999) in Venezuela and Djankov and Hoekman (2000) in the Czech Republic. Also see Appendix 1 for a comprehensive summary of some of the studies reviewed
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bridge the gap between available domestic savings and the volume of investments that a country
requires in order to achieve economic growth (Smallbone, 2006; Jenkins and Thomas, 2002). Aaron
(1999) argues that inward investment that enhances capital formation and creates demand for more
labour as well is strategic for job creation and distribution of economic growth benefits to the poor.
UNIDO (2006) recommended that low income countries should focus on labour intensive
investments since they involve greater engagement of people and utilisation of cheap labour if they
aim to succeed in ameliorating poverty. There are three main arguments for this approach. The first
one is that the main tasks in labour intensive enterprises (like apparels, textiles and garments or
footwear) do not require high qualifications, skills or experience and thus can easily be performed by
the poor (UNIDO, 2006). Secondly, that labour intensive investments offer substantially higher
wages than earnings from rural peasant production but low enough to maintain their competitive
edge (UNIDO, 2006). The third argument is linked to the capacity of labour intensive investments to
absorb more labour than capital intensive ones. The export oriented labour intensive garment
industries in Kenya and Bangladesh for instance absorb more labour with wages significantly higher
than the countries’ poverty lines 5 . Lall (1995) argues that though labour intensive MNCs
characteristically have limited capacity to generate deep linkages and spill‐overs, they create
substantial additional employment and encourage entrepreneurship and "export culture" (Lall,
1995:9).
However, not all labour intensive investments create pro‐poor employment. Those centred in non‐
poor sectors (non‐agricultural, non‐manufacturing) that employ skilled, non‐poor urban labour are
likely to have marginal impact and may further income inequality (UNIDO, 2009). Labour intensive
FDI must have low entry barriers (in terms of skills, training or experience) and allow for flexible
work patterns in order to accommodate the poor (Aaron, 1999).
5 Questions have however been raised before on the quality of such employment since many EPZs have been accused of poor working conditions and low wage levels
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2.5 Human Capital ‐ A key determinant of the impact of FDI on job creation
Human capital has a strong influence on the embededness6 of foreign investments and the transfer of
their benefits to a local economy (Morgan, 1998; te Velde, 2001; Blonigen and Wang, 2004). Borensztein,
De Gregorio and Lee (1998) found that human capital profoundly determines the impact of FDI on per
capita income in many developing countries; that a particular threshold of growth in skills or education
levels must be attained for MNCs to confer tangible benefits to a local population. Te Velde (2001) adds
that a well‐educated, trained or trainable workforce is crucial for attracting MNCs and encourages a wide
spectrum of spill‐over effects with domestic enterprises (Moran, 2005). Morgan (1998) argues that the
impact of FDI on employment creation is subject to the quality of human capital in the host economy;
skills and training determine the adaptation to new technologies and rate of new innovations. And
according to Javourcik and Spatareanu (2004) human capital has significant bearing on the ability of
domestic enterprises to qualify for production subcontracting or supplier relationships with MNCs which
are the major avenues through which FDI could generate employment.
Jenkins (2006) however, cautions that where FDI is dominated by MNCs that demand highly specialised
skills, the net effect on employment accessible to the poor is conversely marginal and might create short
term job attrition. Bhorat and Poswell’s (2003) study of the impact of FDI on the South African labour
market established that technological change reinforces demand for skilled or highly qualified labour
which fundamentally furthers the skewing of employment and income distribution against poor
workforce normally with limited educational qualifications or skills.
Te Velde and Morrissey (2001) therefore argued that a host economy’s investment policy must aim to
enhance human capital; support the provision of specialised training, skills upgrading or basic education
for low or unskilled workers not only to attract MNCs but also to improve their bargaining power and
6 Embededness refers to the “… the depth of and quality of the relationships between inward investors and local firms and organizations, and the extent to which spillovers provide opportunities for local economic development” (Phelps et al, 2003). Also see Dicken et al (1994) and White (2004) for a more detailed discourse on the concept of ‘embededness’
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access to employment. This is because foreign investors certainly are business people looking to make
profits hence would not have sufficient capacity and be adequately incentivised to train low skilled
workers (Aaron, 1999; Te Velde and Morrissey, 2002).
2.6 Conclusion
The linkage between FDI and poverty reduction has been explored extensively in this chapter.
Multiple avenues through which inward investment could generate employment accessible to the
poor in developing economies have been considered. Whilst the evidence is not sufficiently
conclusive on the link between inward investment and employment creation and further on poverty
reduction, a few critical issues emerge from the literature that could perhaps form the foundation
upon which the case study is analysed:
1. The influence of the mode of production (in terms of labour or capital intensiveness) on the
capacity of foreign firms to generate employment that the poor can take up.
2. The idea of linkages between MNCs and domestic enterprises and the scope of employment
such business relations can generate.
3. Technological and skills transfers, how they influence the productivity of domestic
enterprises, and the benefits the poor can draw from them.
4. The influence of human capital on the link between FDI and poverty reduction. How
skills and work experience affects the creation of jobs and the ability of the poor to
profit from such employment.
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Chapter 3 ‐ Analytical Framework
Drawing from the critical issues outlined in the conclusion of the literature review, a framework
developed from Tambunan (2005) study of the impact of FDI on poverty reduction in Indonesia was
adopted to analyse the case study and interrogate the critical issues that emerge in order to provide
answers to two main research questions:
1. How has the nature of investments in Richards Bay influenced the creation of employment
accessible to the poor in eNseleni?
a. Are the MNCs labour or capital intensive?
b. Do the foreign firms do business with local enterprises?
c. Have the MNCs transferred new skills, technologies or innovations to local
enterprises and people in eNseleni?
2. Of what influence is human capital on the ability of the poor in eNseleni to benefit from
employment generated by MNCs in Richards Bay?
a. What skills do the MNCs prefer?
b. Does the local population have the skills preferred by the MNCs?
c. Are there any skills development programmes to equip the local population with the
qualifications demanded by the MNCs?
Figure 1.0 below is a schema of the framework showing the possible link between FDI and poverty
reduction. What follows is a succinct discussion of the framework, an explanation of the schema and
a justification for the employment of the framework in the study.
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Figure 1: ‐ Analytical Framework. Developed from Tambunan (2005) pp 5‐18
3.1 The Channels
The framework indicates that there is no direct link between FDI and poverty reduction but an
indirect one facilitated by the creation of employment7 ‐ that FDI must create employment
accessible to the poor if it is targeted at reducing poverty. It suggests three possible ways MNCs
could increase job opportunities for poor people living in the areas they locate. It shows that:
1. FDI can generate spill‐overs ‐ the diffusion of knowledge and innovations, skills
and new technology into a host economy. Conceptually, such spill‐overs can
stimulate growth of new enterprise, improve productivity of domestic firms,
create additional jobs and augment individual incomes in a local economy.
2. MNCs may induce backward or forward linkages that might expand business
opportunities for local firms and also stimulate the emergence of SMMEs to
engage in subcontracting arrangements or supply inputs considered cheaper to
produce locally. The net effect of this is a possible augmentation of demand for
labour with profound implications on the creation of jobs that poor people can
take up in order to increase their incomes and improve their livelihoods.
7 Though Tambunan (2005) also discusses the possibility of host governments committing tax revenue accrued from FDI to social policy and Corporate Social Responsibility initiatives carried out by foreign MNCs in their localities as other possible links
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3. Foreign companies can directly employ poor unskilled/semi‐skilled workers
through labour intensive production. When foreign companies demand more
physical labour than capital equipment or machinery, they create more jobs
most suitable and accessible to the poor since a lot of labour intensive
investments involve modest entry levels (in terms of skills, experience or
training) that accommodate the specific characteristics of the poor’s labour.
3.2 Determinants of the impact
The framework shows that it is however imperative to underline the importance of human capital in
appreciating the link between FDI and poverty reduction. MNCs may indeed be labour intensive,
generate spill‐overs and sustain sufficient linkages with local enterprises, yet still fail to appeal to the
interests of the poor. The quality of their labour – skills, training or work experience is crucial for: i)
acquiring and adopting skills and technologies imported by foreign firms, ii) attaining the entry
requirements for employment in the MNCs and iii) increasing their eligibility to better wages.
Moreover, human capital profoundly influences the quality and effectiveness of the linkages.
Linkages only thrive where there exist skilled entrepreneurs, who venture into employment
generating local enterprises to do business with foreign companies. A marked deficiency of human
capital would greatly limit the benefits that the poor accrue from MNCs in their localities; in fact, it
might exacerbate their alienation from employment and economic activity hence furthering existing
income inequalities.
3.3 Justification
This study’s key objective was to contribute to the debate on the link between FDI and poverty
reduction; to interrogate the argument that FDI can be relied on to reduce poverty especially in
developing economies. Having outlined the link between FDI and poverty reduction; the channels
through which MNCs could generate employment for poverty reduction and what factors might
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determine the accessibility of such employment to the poor, the framework presented a suitable
conceptual basis for investigating the conduct of MNCs in the case study area and for stimulating a
discussion on their propensity towards job creation for the poor in eNseleni. It neatly blended with
the critical issues of concern that emerged from the literature and the research questions that the
study sought to answer. It therefore profoundly informed the choice of methods employed in data
collection, guided the analysis of data and informed the structure of the discussion of the findings.
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Chapter 4 – Methodology
4.1 Introduction
As already indicated in chapter three, the analytical framework formed the basis of the design and
choice of the methods of data collection and analysis employed in this study. This chapter outlines
the research approach pursued and discusses the main methods employed to collect data. The
researcher believes that the calibre and amount of information captured by these methods
established a sufficient factual basis upon which the research questions could be answered and
conclusions drawn from them.
4.2 Research Approach
The study adopted an entirely interpretative approach as this offered the option of collating
people’s experiences, thoughts and perspectives. This suited the researcher’s interest in the reality
of relying on FDI to confer benefits to the poor from the perspective of the investors (MNCs),
beneficiaries (eNseleni residents) and the executors of the approach (government officers).
4.3 Secondary Data
A substantial amount of study data was obtained through systemised secondary sources. This
involved a documentary analysis8 of materials on the history of inward investment, industrial and
regional development policy and how these affected the conduct of poverty reduction programmes
and approaches in South Africa and more specifically, Richards Bay. This was obtained from the
Department of Trade and Industry, Industrial Development Corporation, Department of Labour,
uMhlathuze Municipality, the Development Bank of Southern Africa, NALEDI, and the Richards Bay
8 All references included in the bibliography
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Industrial Development Zone. This information was very instrumental and indeed indispensable in the
verification of primary data.
4.4 Primary Data
4.4.1 Selection of respondents
A sample was derived based on the researcher’s judgement on the suitability and convenience of the
respondents9. The firms involved in the study were selected on condition that they had at least 10%
ownership attributable to entities located outside the Republic of South Africa. Government officers
involved were recruited depending on their contribution to the country’s industrial development,
investment and labour policy. eNseleni respondents must have been resident there since 1994,
willing and able to participate in the interviews to be selected.
4.4.2 Semi‐structured interviews
Semi‐structured interviews were extensively utilized in gathering primary data. A discussion guide
(see appendix II) comprising a set of questions framed from the key thematic areas in the analytical
framework was administered to the three categories of respondents. Though the questions were
structured differently, they all probed for perceptions along those themes, allowed for broader
discussions and accommodated emerging issues from respondents. This broadened the scope and
deepened the depth of information collected within the duration of the study while still maintaining
a precise focus on the salient issues that were of interest to the researcher.
Three government officers linked to the DTI and the Department of Labour were interviewed to
capture their perceptions on the character of foreign investments in Richards Bay and the conduct
of their programmes in ensuring that MNCs conferred substantial benefits to the local economy (in
terms of employment generation, linkages with local enterprise and enhancement of technological
9 It was however acknowledged that this might not have provided a sufficiently representative sample.
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transfers and knowledge spill‐overs). Five representatives from four Multinational Corporations
located in Richards Bay were interviewed to establish the conduct of their modes of production
(whether labour or capital intensive), the extent of their linkages with local enterprises, their
capacity to generate spill‐overs and the implication of this on the creation of jobs accessible to the
poor. The interviews also probed for employment trends in the firms, the skills their production
systems required and how they sourced their workforce. Though not initially in the design of the
study a researcher from NALEDI and Professor from the University of Witwatersrand was
interviewed as well to augment the data on linkages.
4.4.3 Focus Group Discussions
Three FGDs were employed to gather information that may not have been effectively captured by
the secondary sources and the semi‐structured interviews and also to allow for interaction amongst
respondents and joint determination of responses to the questions asked during the individual semi‐
structured interviews. Groups comprised 6‐8 employed and jobless individuals of both gender and
who were in employment age by 1994 when the post‐apartheid government began aggressive
inward investment attraction and liberalised FDI. Participants were carefully guided to explore the
issue of access to employment, the impact of skills on their ability to take advantage of job
opportunities created by the MNCs around Richards Bay, perceptions on the possible ways the
investments could improve their livelihoods, what might have been preventing this and what role
government should play.
4.5 Case Study
This offered a manageable scope for more focussed and in‐depth analysis and helped execute the
overall interpretative approach adopted. The choice of eNseleni was informed by the fact that
alarming levels of unemployment, poverty and deprivation still persisted in the area yet Richards Bay
was considered as one of the few localities in South Africa where close to two decades of
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government incentives targeted at industrial decentralisation, investment attraction and place
marketing as a strategy for job creation and poverty reduction had succeeded (Aniruth and Barnes,
1998). This was thus a sufficiently pragmatic but suitable setting considering the scope of the study
to ask the critical questions about the suitability and capacity of FDI as a poverty reduction
mechanism in a developing economy.
4.6 Limitations of the methodology
The researcher recognises that the use of a case study as part of the methodology traded off the
capacity to make generalisations and the arbitrary choice of Richards Bay might raise concerns on
the representativeness of study data. Accessing respondents from the MNCs (particularly
management) was indeed a challenge. However, the researcher improvised and utilised insiders
interviewed in confidence outside the formal confines of the companies. In addition, exploring the
link between FDI and poverty reduction is itself a complex venture. Poverty is a complex
phenomenon (with contested conceptions) and poverty reduction involves a myriad, often
overlapping approaches that take long to produce tangible measurable results. Attributing results or
linking them to a specific determinant or channel is normally problematic. This study like many other
preceding pieces of research on poverty and poverty reduction is no exception to the difficulty in
constructing these links.
4.7 Conclusion
Nonetheless, by triangulating the data collected through semi‐structured interviews with FGDs and
observation, the researcher sought to overcome weaknesses that might have emerged from
inherent selection and researcher biases. He is therefore confident of the validity of the data, the
analyses and inferences made as well as the subsequent conclusions drawn from them.
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Chapter 5 ‐ Context
5.1 South Africa ‐ Some basic facts
The RSA was established in 1961 but gained majority rule in 1994 after decades of oppression and
racial segregation under the apartheid regime (CIA Fact Book, 2011). It spans an area of 1,219,090
Km2 with a population of 49.3 million and density of 106.2 miles2 (see appendix IV for map). It is
listed as an upper middle income country and amongst the top 50 largest economies in the globe.
5.2 Poverty in South Africa and some recent socio‐economic developments
Poverty remains a significant challenge and an object of policy in South Africa. The legacy of
apartheid has ensured that the country continues to struggle with entrenched and chronic poverty
despite its economic profile as a middle income economy. In 2006, 17.4% were living on less than a
US$1.25 a day and 35.7% living on less than US$2.25 a day (OECD, 2011); 32% were living below the
R322 lower bound national poverty line and 53% below the R593 upper bound poverty line
(Armstrong, Lekezwa and Siebrits, 2008). There are high income inequalities in the country despite
signs of economic growth (GDP growth rate of about 2.8% with a GNI per capita of US$ 5,786) ‐
employment generation continues to lag and the Gini coefficient is still at 0.67 (World Bank, 2011).
High unemployment (about 25% overall and 29.3% for urban areas), decline in domestic savings and
investment, large fiscal deficits and the burden of HIV/AIDS are the major underlying structural
issues facing the country (Word Bank, 2011).
Post‐apartheid governments have a history of calculated macroeconomic policy and targeted
programmes aimed at reducing poverty. The 2009‐2014 MTSF for instance has prioritised more
inclusive economic growth, creation of more decent jobs and securing sustainable livelihoods for the
country’s poor (RSA, 2009). Prior programmes include the Reconstruction and Development
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Programme, the Growth Employment and Redistribution Strategy (GEAR) that aimed to attain 6%
growth and create 400, 000 jobs by 2000, and the Community Based Public Works Programme that
sought to improve labour force skills, enhance service delivery and generate large scale temporary
employment in public works projects. Others that carried implicit poverty reduction objectives
include the Local Economic Development programme, Spatial Development Initiatives, National
Spatial Development Framework and the Manufacturing Development Programme (May, ed, 2000).
Of profound relevance to this study are those targeted directly or implicitly at increasing inward
investment as a strategy for reducing poverty.
5.3 Inward Investment in South Africa
Inward investment in South Africa has grown exponentially since 199410 and evolved to become one
of the most important drivers of the economy (UNCTAD, 1999). FDI inflows have grown from $1,248
million in 1995 to $9,632 million in 2008; FDI stocks have expanded as well from $15, 014 million in
1995 to $110, 415 million in 2008 (OECD, 2011). South Africa receives a large proportion of FDI to
Africa, it accounted for 48% of the $15 billion invested in mining in Africa in 2004 (Mining Journal,
2005). It dominates the FDI inflows of the SADC region and hosts the largest number of MNCs.
Between 1997 and 2001 it accounted for 70% of all SADC FDI inflows and more than 70% of MNCs in
the SADC region were in South Africa (Jenkins and Thomas, 2002; Akinboade et al, 2006).
5.4 Inward Investment in Richards Bay – A historical perspective
‘[Richards Bay] is considered … one of the few localities where government incentives targeted at
industrial decentralisation was reasonably successful’ (Hill and Goodenough, 2005:2; Aniruth and
Barnes, 1998). Below are some of the inward investment strategies the government has employed
since the 1970s and their impact on employment and poverty reduction:
10 South Africa stepped up the pursuit of more liberal FDI and macroeconomic policy
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5.4.1 The Regional Industrial Development Programme (RIDP)
The RIDP aimed to address regional economic disparities through provision of incentives to
investors to locate in designated growth points. This induced an influx of mobile capital into such
areas; firms capitalised on the incentives, concessions and exploitable labour (Nel, 1999). The
designation of Richards Bay as an industrial growth pole in the 1982‐1990 RIDP immensely influenced
the establishment of crucial infrastructure and location of new businesses. However, the withdrawal
of such state supported industrial programmes in 1994 led to the relocation of firms formerly
attracted by the incentives, massive deindustrialization, loss of jobs and a surge in unemployment
ensued. This severely impoverished locals in the affected areas. Almost an eighth of manufacturing
jobs were lost across the country and employment fell by nearly 50% (Nel, 1999).
5.4.2 The Spatial Development Initiatives
The SDIs were tasked to unlock underutilised economic potential of previously neglected areas,
reduce poverty through creation of employment and to enhance competitiveness of the national
economy. They prioritised investment attraction to generate long term sustainable jobs for poor
locals and growth of SMMEs from such investments to further expand employment opportunities
and boost regional development (Rogerson, 2001). The Richards Bay SDI identified potential
industrial projects in mining and chemical manufacturing that were packaged and promoted to
potential investors aiming to crowd‐in investment in the area, maximize on their linkages and
multiplier effects to create jobs and increase government revenues (Rogerson, 2001). However,
evaluations on the SDIs indicate that they did not have significant impact on job creation and SMME
development.
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5.4.3 Industrial Development Zones
The IDZs are specialized industrial areas designed to create a conducive and attractive investment
environment for export oriented investors and for employment creation. They involve public sector
provision of advanced infrastructure, Research and Development support, export financing and a
host of incentives targeted at creating the image of an internationally competitive business location.
They were designed to involve ‘manufacturing activities linked to local industry that incorporates
substantial local inputs [and] downstream manufacturers’ (Rogerson, 1999:268). They recruit light
manufacturing factories, assembly plants and technologically intensive firms that involve high levels
of value addition and employ both highly skilled and unskilled labour. They also incorporate natural
resource extraction based capital industries. There is an IDZ in Richards Bay that is currently
operational.
5.5 Putting eNseleni into context
eNseleni is a suburban fringe of Richards Bay town in the KwaZulu Natal Province of South Africa
with a population of about 14,682 and a density of 6,421 Km2 (see appendix III for map). Despite the
industrial investments around Richards Bay, poverty remains a big challenge in eNseleni with over
23% of households not earning any income at all and over 4,500 economically active individuals
earning less than R400 a month against a national poverty line of R593. By 2010 unemployment rate
was 55% compared to 36.28% for the municipality and 24.3% nationally (Statistics South Africa, 2011;
uMhlathuze Municipality, 2009). Manufacturing is the largest source of employment ‐ accounts for
24% of all employment11. Levels of formal education are fairly low – only 30% have post‐secondary
education qualifications; 20% have elementary skills/education, 14% have some craft and trade related
capabilities, 9% have some skills in plant operations, 11% have clerical skills. Only 2% of total
employable workforce is regarded as skilled (uMhlathuze Municipality, 2009).
11Other sources of employment include community service – 16%; trade – 13%; finance – 10%; construction – 8% and mining – 5% (uMhlathuze Municipality, 2009)
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Chapter 6 ‐ Findings and Analysis
6.1 Introduction
In the course of the research, relevant secondary literature in the form of study reports, financial
statements, government departmental records and policy documents related to employment creation,
industrial development, and poverty reduction were reviewed. These were sourced from South Africa’s
Department of Trade and Industry, Industrial Development Corporation, Department of Labour,
uMhlathuze Municipality, the Development Bank of Southern Africa, NALEDI, and the Richards Bay
Industrial Development Zone. A three weeks field work was also carried out in eNseleni‐Richards Bay, in
the KwaZulu Natal Province of South Africa that involved 10 semi‐structured interviews and 3 FGDs with
23 local residents of eNseleni. This chapter is a presentation of the data captured and an ordered analysis
oriented towards answering the two research questions.
6.2 What FDI in Richards Bay looks like and what it implies for employment
creation and access in eNseleni
The study assessed the foreign investment situation in Richards Bay; the character of MNCs and how
the type of investments (in terms of their ability to absorb labour, their linkages with local
enterprises and spill‐over effects) influenced access to employment by the poor resident population
in eNseleni. Four major issues became apparent: investments were acutely capital intensive, induced
significant but weak linkages with local enterprises, generated limited spill‐over effects and that the
population was constrained by skills inadequacies in their pursuit of decent work.
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6.2.1 Acutely Capital Intensive investments
Guided by the analytical framework, the question of the mode of production favoured by the MNCs ‐
whether labour or capital intensive ‐ was considered. This aimed to establish the extent to which the
MNCs involved in the study depended on capital equipment or machinery compared to human labour in
order to determine the scope of employment the MNCs could generate that the poor could benefit from.
Nearly all the major industries in Richards Bay were capital intensive. Though this was not surprising,
since two World Bank reports on the investment climate and the character of FDI in South Africa (in 2007
and 2010) had indicated that a lot of investments in the country were capital intensive, the finding that
over 90% were capital intensive was not obvious. Most of the investors in the area were incetivised by
the occurrence of rich mineral deposits and other natural resources like wood/pulp and extensive arable
land. The three main industries were involved in coal mining, beneficiation of minerals (alumina, bauxite,
rutile, rock phosphate, zircon, titanium dioxide, vermiculite) and production of eucalyptus hardwood
pulp and liner boards. Other subsidiaries were involved in woodchip production and ferrochrome
exportation. Essentially, these companies produced goods that fundamentally did not require large
investments in labour but in heavy machinery dependent on a limited threshold of human support.
There was a general agreement amongst a majority (90%) of those interviewed that Richards Bay’s
investments were largely capital intensive. A senior economist at one of the country’s investment
promotion departments bluntly indicated that ‘investments in Richards Bay and South Africa in general
[were] extremely capital intensive and thus essentially limited the scope of employment opportunities
they could generate’. This was congruent with Calagni (2003) argument that investment skewed in
natural resource extraction sectors limits linkages with local enterprise and constraints job creation.
Similarly, 86% of the participants involved in the two FGDs in eNseleni expressed the overall opinion that
one of the greatest impediments to getting jobs at the industries in Richards Bay was the fact that the
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existing firms, as they were, did not employ many people at any given time. At another FGD with
teachers at a local technical training institute in eNseleni, 78% participants agreed that the characteristic
capital intensiveness of the companies in the area had limited their capacity to employ more people.
Although accessing management in the MNCs was indeed a challenge, 90% of the MNC insiders
interviewed in confidence indicated as well that the nature of their businesses, the products and systems
were more efficient, profitable and competitive when capitally intensive and thus explained their
orientation towards lesser investment in manual labour.
These findings were confirmed when the asset base of each of the companies and their investment on
capital equipment and machinery was compared with the expenditure on human labour in the period
between 2000 and 2008. The MNCs massively invested on machinery that potentially limited their
capacity to create many jobs. On average the companies had up to R3, 000 worth of capital investment
for every single employee (World Bank, 2007; 2010). One MNC for example invested over R650 million in
a ferrochrome manufacturing plant and a further R400 million on expansion in the next year. It created
about 1, 000 jobs during the plant construction phase but contracted only 130 people for permanent
employment (World Bank, 2007; 2010; South Africa info, 2011).
Therefore, the implication was that Richards Bay had attracted significant investments that should in
principle have created sufficient jobs for the locals if the FDI‐employment‐poverty reduction discourse
fronted by the South African government was mechanistically followed. However, since investment
persisted in natural resource extraction, processing or beneficiation alone, which are sectors traditionally
characterised by production systems dependent on heavy machinery and a very limited scope of physical
manpower, the capacity of the MNCs to absorb more labour was equally restricted. The South African
government needed to actively attract more highly labour intensive manufacturing investments in order
to generate sufficient jobs to address the extent of unemployment in eNseleni. Otherwise FDI would not
succeed as an effective poverty reduction strategy.
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6.2.2 Significant but weak Linkages between MNCs and local enterprises
In Tambunan (2005) framework, besides labour intensive investment, FDI could benefit the poor if MNCs
induce backward or forward linkages with local firms with the capacity to generate additional
employment. Unlike the question of capital or labour intensiveness, the idea of linkages was a rather
problematic one. It was important to establish that the MNCs actually did have business relations (of
some form) with domestic companies and then to understand the demeanour of such linkages and the
extent to which they thrived. This was important in judging the prospects of the linkages creating
employment but of what volume and of what character.
6.2.2.1 Significant Linkages
A majority of the respondents affirmed that the MNCs did have some form of business relations with
local enterprises. At least for every foreign owned company that was mentioned during the FGDs and
interviews, be it Mondi, BHP Billiton, RBM (Rio Tinto), Tata Steel, a list of local companies that reportedly
did business of some form with them was recorded. Business ranged from supply of raw materials (both
forward and backward), provision of security services, catering, HR services ‐ mostly executed by labour
contractors, to routine maintenance during annual ‘plant shut downs’. This was a notable illustration of
the arguments by Hirshman (1958) and Dunning (1992) that linkages create business opportunities
for local enterprise and open up new markets for SMMEs. The MNCs had induced some additional
economic activity in the area which was a significant source of employment to the local population.
Incidentally, all those interviewed and 73% of FGD participants acknowledged that such local firms that
thrived on contracts and business relations with the MNCs were indeed an important source of
employment to many people in eNseleni.
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‘They are keeping Richards Bay alive, if RBM closes tomorrow and Alusaf closes
tomorrow, then we are talking 90% of the population that work all out, those little
satellite businesses, the little welding shops, they will all close down because they are
all depending on the big companies’ (Participant, uMfolozi FGD, 21/08/2011)
‘They employ many people, half of the Richards Bay people [working population].
You do a survey, walk around and ask, you will find that over 70% of the people are
working there [the MNCs], the other 20% or 10% are working with the satellite
companies that get contracts from them, the service equipment people, the small
engineering firms, the zikizelas [small businesses]; they are all little ticks connected to
this big mother sheep of those three big foreign companies’ (Participant, uMfolozi
FGD, 21/08/2011)
‘Yes, there are so many people around here that we do business with. They supply
equipment, maintenance tools; like the guys who provide security ‐ they are not our
people, the cleaning guys are contracted from outside, the people who do catering at
the canteen are not our people, and we get some people who come to do projects
inside here that aren’t part of the company. All those are local companies that
wouldn’t exist if the big foreign companies did not locate here’ (Interview, MNC
insider, 19/08/2011)
‘The company being here employs a lot of people directly and also through the
enterprises that do business with us; like our contractors, people who do
maintenance, we have at least one ‘shutdown’ annually during which we need more
labour; local companies are contracted to do maintenance’ (Interview, MNC insider,
22/08/2011)
An example of such linkages (forward linkage) that emerged in almost every interview and FGD
was a local company that manufactured aluminium products. It sourced its raw material
(aluminium) from a MNC and produced goods that were sold locally. It was established that
government export policy that permitted export oriented MNCs to sell in the domestic market at
export parity price enabled such local companies to procure their raw materials competitively
30 | 1 0 7 8 1 0 3
and sustained such forward linkages in profound ways. A senior officer at the Richards Bay
Industrial Development Zone also indicated that the existing MNC in the IDZ was indeed having
significant linkages with local enterprises: it procured some raw materials it utilized in producing
exported ferrochrome from domestic companies.
6.2.2.2 Weak Linkages: unstable local enterprise – inability to absorb more labour
However, despite the evidence pointing immensely towards significant linkages – respondents
acknowledging and even mentioning credible instances demonstrating the existence of the linkages;
government officers confirming business relations between MNCs and local enterprises and the MNCs
themselves recounting the same ‐ the statistics was still evident; the high poverty levels, the acute
unemployment rates, the income inequalities and the human development indices were still real.
Following the discourse in a host of studies on FDI linkages and employment creation, for instance Lall
(1980), Siburang and Brimble (1988), Markusen and Venables (1996), Aitken and Harrison (1999) and
Batra and Hong (2000), the evidence of the existence of the linkages should have meant more
productive domestic enterprises with the ability to absorb more labour. This was however not the case in
reality. The same respondents, especially eNseleni residents, still reported frustrations in accessing
decent and stable employment, unemployment rates in the area were still high and there were reports of
a significant population who didn’t earn any income at all12.
As argued by Tambunan (2005), it emerged that the strength of the linkages and stability of the
enterprises created from the linkages profoundly affected their capacity to produce more jobs. The
linkages were weak: a bulk of the enterprises induced by the linkages were lower calibre SMMEs that
were not deeply rooted; unstable, with limited HR capacity and therefore could not generate sufficient
jobs to meet the threshold of demand prevalent in eNseleni. Two interviews with a professor at the
12 See ‘Putting eNseleni into context’ in chapter 5 for the actual figures on unemployment
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University of the Witwatesrand and an industrial development researcher at the National Labour and
Economic Development Institute (NALEDI) in Johannesburg indicated that most of the enterprises that
emerged and did business with the MNCs were small unstable and fairly unreliable ones in terms of
sustainable job creation. They were susceptible to market shocks, global financial crises and domestic
fiscal uncertainties. Similarly, 67% of the participants at the eNseleni Umfolozi training institute FGD
thought that the inability of the enterprises linked to the MNCs or that at least occasionally had business
contacts with them to employ more people was attributable to their characteristic modesty; that they
were fairly weak SMMEs that could not guarantee sustainable permanent employment that households
could effectively rely on for their livelihoods.
‘with the recession, mines got down, Bell for example doesn’t get big orders, so they
make few machines, they don’t require extra labour, they can’t employ more people,
they can’t subcontract much’ (Interview, NALEDI, 27/08/2011)
‘At the moment you can go talk to the small businesses, they all will tell you they are
‘ticking over’. You know what ticking over means? They are virtually living on the
breaking line, if his budget used to be like R20, 000 a month, he will only have like R8,
000 to settle his debt, to pay his workers. He’s not going to employ more people if he
doesn’t get more work.’ (Participant, uMfolozi FGD, 21/08/2011)
Even the fairly stable companies could not absorb much labour and guarantee permanent employment.
The raw materials that the MNCs utilised fundamentally required large capital outlays (in form of
equipment or heavy machinery) that local firms were not able to raise in order to do business with them;
to effectively engage in supplier linkages or subcontracting arrangements. This immensely contradicted
O’Hern (1989) contention that FDI linkages with local enterprises represent a neat way through
which investment outlets can be created for FDI to succeed in creating pro‐poor jobs. Though the
evidence pointed towards significant FDI linkages in Richards Bay, the linkages seemed inadequate and
incapable of stimulating and sustaining more robust and stronger domestic enterprises with the ability to
absorb more labour.
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6.2.3 Invisible Spill‐overs
As argued by Mac Dougall (1960) and Blomstrom (1989), the existence of the MNCs in Richards Bay
should have facilitated the transfer of new skills to the local population, improved their
employability, business acumen or entrepreneurial capacity with significant implications on
employment generation and access. This could have happened through imitation of the exotic
production systems by domestic enterprises, demonstration of new technologies to the labour force
and entrepreneurs in the local economy or induction of competition to incentivise local businesses
to improve their production systems in order to thrive.
6.2.3.1 Demonstration
Incidentally, not one of the respondents 13 even alluded to the knowledge of any bilateral
arrangements between local companies and the MNCs for ordered demonstration of the new
technologies, skills and production systems. Likewise, none of the respondents could remember or
authoritatively report any one occasion when the MNCs organised or participated in a trade fair or
exhibition within the area to share the content of their work, their technologies or skills with
domestic firms and local populations. When participants in the FGDs and interviews were asked to
confirm whether local workforce got training, in‐servicing or skills development of some sort from
the MNCs, 83% felt that the foreign firms were not interested in developing the skills of local workers.
Only one respondent out of the eight interviewed indicated that he was aware of a training
programme for employees that was operational where he worked. He said:
13 Respondents included staff attached to the Training or HR departments of the MNCs involved in the study that arguably should have been aware of any such arrangements
33 | 1 0 7 8 1 0 3
‘We are a chemical company, people don’t come with experience […] We get people
as learners; they come straight from matriculation14 – with English/Afrikaans, Maths
and Science. People for plant operation get new skills; we train them for one year and
then we recruit a specific percentage for permanent employment. The rest leave with
the skills and the experience and get employment elsewhere in other companies.’
(Interview, MNC insider, 26/08/2011)
One participant at the uMfolozi FGD also indicated that his former employer was beginning to roll
out a skills development programme by the time he was leaving though this was restricted only to
permanent staff. Employees on contract only benefited from the interaction with the machinery,
equipment and the entire production systems that they could learn from albeit proactively. The
remaining majority, over 90% of the interviewees and FGDs participants, affirmed that they were not
aware of any robust skills development programme for employees underway in any of the existing
MNCs. And the MNC insiders interviewed also gave the implicit indication that their companies
preferred to work with HR subcontractors – commonly referred to as ‘labour brokers’, through
which they recruited skilled and experienced individuals who they did not need to further train. One
government officer indicated that it is not in the interest of the MNCs to develop the skills of the
local population.
‘Investors come in here to exploit new markets, extractible resources, they don’t
come in with social objectives; the social objective is the role of government. A
company would train people because it has an incentive to do it. It trains people
selfishly, if I train people, am doing it for my own interest. They can do it on paper,
but not in reality.’ (Interview, IDC, 16/08/2011)
It was however apparent that the companies provided a platform for those with some specific
intermediate skills – like welding, boiler making, and instrument handling to get work experience.
This was useful for obtaining tradesman qualifications since besides the training they needed the
14 Matriculation is a common terminology used in South Africa to imply attainment of standard 10 (end of secondary education)
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experience in order to sit the trade test to become qualified artisans – more eligible to better
employment and better pay.
6.2.3.2 Imitation and Competition
The other two routes ‐ imitation of the exotic technologies by domestic enterprises and competition
inducing improvement in the production systems of local enterprise ‐ turned out to be rather
impractical. First of all, the question of competition could not arise in this context having established
that most of the local firms were not the calibre of businesses that could invest in the heavy
machinery and technologies to engage in natural resource extraction that was the major investment
activity in Richards Bay. A government officer at the IDC unequivocally indicated that there was no
way the local enterprises could adapt the skills and technologies employed by the foreign companies
let alone competing with them.
‘This is all IP stuff, the type of technology employed by those MNCs are more
advanced and expensive. This is one of the greatest impediments to the effectiveness
of such linkages, spill‐overs and technological transfers’ (Interview, IDC, 16/08/2011)
Secondly, it also emerged from the uMfolozi FGD that the culture of entrepreneurship was not
sufficiently inculcated in the resident population; 78% of the participants felt that the idea of starting
a business, imitating or rather adopting new technologies was not very prevalent around Richards
Bay. This had prevented the emergence of local enterprises that would compete or adapt exotic
technologies or new innovations in their businesses.
‘People don’t have that mentality of self‐employment. Very few people are grabbing
the idea of establishing SMMEs to benefit from the opportunities that emanate from
the existence of the MNCs around Richards Bay’ (Interview, MNC insider, 17/08/2011)
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What this data meant was that the transfer of new knowledge, technologies and other intangible
assets from the MNCs to the local economy to enhance efficiency and productivity of domestic
enterprise and employability of local workforce as argued by Graham and Krugman (1995) did not
take off in earnest. Though the foreign companies introduced new technology and production
systems, there was limited evidence to show that this effectively cascaded into the local economy
hence echoing Rodrick’s (1999) assertion that literature on investment attraction is laden with
claims of industrial externalities and spill‐overs without sufficient evidence to back it up. Ultimately,
despite the anecdotes of training or skills development programmes reportedly operational in a few
select companies, the spill‐over effects of the foreign companies in Richards Bay were limited and
considerably inconsequential in as far as enterprise development, enhancement of employability of
the poor and generation of new, additional employment opportunities was concerned.
This last set of evidence indeed demonstrated that without targeted policy or strategies executed in
partnership with MNCs and in collaboration with local populations, to ensure investments are not
overly capital intensive, to support domestic enterprises that spring out of FDI linkages and to
encourage spill‐overs, FDI does not succeed in generating substantial employment opportunities for
the poor in the areas where the MNCs are located.
6.3 Inadequate skills/training/work experience and its implications on
employment access in eNseleni
The second research question sought to understand the role human capital (skills/training/work
experience) had played in determining access to employment in eNseleni. The investigation
explored the calibre of skills the MNCs in Richards Bay demanded; the stock of skills or qualifications
that was prevalent amongst a majority of the residents in eNseleni; and what the interaction of
these two phenomena implied for access to employment in the area.
36 | 1 0 7 8 1 0 3
6.3.1 Skills demand from MNCs vs The stock of skills in eNseleni
When the question of the calibre of skills and training most preferred by the MNCs was posed, the
most mentioned skills during the FGDs and interviews were: first of all tertiary education – electrical
and mechanical engineering, then a host of intermediate skills that included welding, fuel cutting,
boiler making, electrical skills, instrument handling, fork lifting, fitting and general plant operations.
According to the MNC insiders interviewed such skills effectively blended with their production
systems and hence the bias. However, uMhlathuze Municipality and the Department of Labour
records showed that only about 30% of the total eNseleni population had attained above Grade
12/standard 10 and 20% had some elementary education. Of the total workforce, 14% had some craft
and trade related capabilities, 9% had skills in plant operations, 11% had clerical skills while only 2% of
the total employable workforce was regarded as skilled15. This revealed a marked discrepancy in the
demand and the stock of skills/training available in eNseleni which could logically explain the
unemployment levels; besides the three other issues already dealt with above.
6.3.2 The influence of skills/training/work experience deficiencies on employment
access in eNseleni
83% of the participants in the FGDs attributed the unemployment in eNseleni to the lack of sufficient
and appropriate skills and work experience demanded by the industries in Richards Bay. They also
thought that skills, training and work experience were a prerequisite for employment consideration
in the MNCs. Even though some 33% of the participants at the uMfolozi college FDG thought that the
issue of skills was not much an issue, they too concurred that the demand for job experience
exacerbated the problem.
15 Skilled in this sense refers to having undergone a trade test and duly certified as an artisan
37 | 1 0 7 8 1 0 3
‘The main challenge here is the lack of skills, and even when you have the skills, they
need experience’ (Participant, eNseleni FGD 1, 18/08/2011)
‘They need a lot of qualifications. If you are matriculated only, you can’t get a job. You
must have some sort of qualifications like fork lifting, computer skills, welding etc to
get employment’ (Participant, eNseleni FGD 1, 18/08/2011)
‘OK you have your matrics; you have good results. Again they ask for trade
qualifications. I do have good marks, have training in welding – they still ask for
experience, trade test […] there are too many obstacles’ (Participant, eNseleni FGD 2,
23/08/2011)
80% of the MNC insiders interviewed admitted that the capital intensiveness of their production
systems provided a limited scope for unskilled/semi‐skilled individuals to access decent jobs because
most of the jobs required some plant operation related training coupled with work experience
which almost literally locked out segments of the population without the capacity to acquire
intermediate or professional skills beyond matriculation. This was indeed consistent with Bhorat and
Poswell’s (2003) argument that where FDI induces demand for skilled or highly qualified labour; it
fundamentally skews employment away from the poor who most often have limited skills or
educational qualifications. However, the respondents also thought that the government lacked
robust systems for skills development especially those that targeted the demands of the existing
and prospective investors. This was in fact acknowledged in the country’s Industrial Policy Action
Plan for 2011/12 – 2013/14:
‘A key structural constraint […] has been the absence of demand‐driven, sector‐
specific skills strategies and programmes, aligned with investment, employment and
technological imperatives, flowing from key industrial sector strategies under IPAP. A
supply‐driven approach to skills planning and delivery, as well as the poor
interpretation and measurement of medium‐to‐long term skills demand, have
persisted under the National Skills Development Strategy for 2005 – 2011 and the
decentralised skills delivery system, through the Skills Education and Training
Authorities (SETAs)’ (the dti, 2011:67)
38 | 1 0 7 8 1 0 3
An officer at the IDC also conceded that the lack of a robust government skills development plan
was partly to blame for the low levels of skills in eNseleni, though he also mentioned that the history
of a prejudicial apartheid designed education system had greatly contributed as well to the
prevalent inadequacies.
‘The South African government is inept in rolling out policy and providing leadership
to establish and sustain effective demand side skills development programmes that
can enhance the skills and capabilities of the local workforce to match up and take
advantage of employment created by such MNCs’ (Interview, IDC, 16/08/2011)
Contrary to Te Velde and Morissey’s (2002) argument that a host economy’s policies must aim to
support the provision of specialised training and skills upgrading for low/unskilled workers to improve
their access to FDI generated employment; the FET colleges, the Skills Education and Training
Authorities (SETAs) as well as the private organizations providing training in the area were
ineffective in developing employable skilled personnel. Though the DTI had outlined in the IPAP
2011/12 – 2013/14, objectives towards developing responsive programmes oriented towards
enhancing qualifications in artisan and professional skills like the National Artisan Development
Programme, it was clear from the interviews and secondary data that the institutions charged with
this responsibility were not sufficiently and effectively oriented towards demand side skills planning
and development. This in effect had limited the acquisition of appropriate skills suitable for the kind
of investments that were prevalent in Richards Bay and could as well explain the access issues. This
was well illustrated by a participant at the Umfolozi training institute FGD who said:
‘They [MNCs or government] should approach such training institutions and tell us
[…] listen we are expecting employees equipped with this and this qualifications. So
that we can train exactly what they need, so that these people [students] can be 100%
employable. That way we can train based on the demand from the MNCs; to develop
relevant skills that match what’s expected. That way we can improve the
employability of those we train’ (Participant, uMfolozi FGD, 21/08/2011)
39 | 1 0 7 8 1 0 3
6.3.3 Synthesis
Since the object of this chapter was to answer the two research questions as outlined in Chapter
Three, it is prudent to revisit the critical issues; to reflect on the key themes in order to establish the
extent to which the analysis – the data and foregoing discourse – has dealt with the questions.
Question one probed for the influence of the nature of the investments in Richards Bay on the
creation of jobs accessible to the poor in eNseleni. Clearly, the data has sufficiently exuded the
overly capital intensive character of most of the investments in the area and how this has limited the
scope of job opportunities that the MNCs could generate. The foreign firms indeed had linkages and
business relationships with local enterprises which was a notable source of employment to a
significant population of the workforce in the area. It is however important to underline the
profound influence of the strength of the linkages since most of them were not strong enough to
sustain robust domestic enterprises that could generate sustainable decent employment that the
poor could depend on to improve their livelihoods. Regarding the ability of the MNCs to facilitate
the transfer of new skills, technologies and other intangible assets, the data has indicated that this
failed to take off in earnest. Spill‐overs did not suffice in bolstering the productivity of local
enterprises neither did they enhance employability of the local workforce. The impact of spill‐overs
on employment creation was near negligible save for a few anecdotal skills development
programmes operational in some MNCs.
Question two sought to establish the influence of human capital on the ability of the poor to benefit
from employment created by the MNCs. The data revealed marked discrepancies between the
calibre of skills preferred by the MNCs and the skills and capabilities of the local population. Demand
for high qualifications by the foreign companies coupled with skills and work experience deficiencies
fundamentally limited access to decent employment by the poor in the area. This was exacerbated
by inept government policies on skills development.
40 | 1 0 7 8 1 0 3
Chapter 7 : ‐ Conclusion
The thrust of this piece of research was to contribute to the debate on the link between FDI and
poverty reduction; to interrogate the argument that FDI can be relied on to reduce poverty
especially in developing economies. It has explored extensive literature on FDI, employment
creation and poverty reduction in different developing economies across the globe and established
three major avenues hypothesised as the main ways through which FDI could contribute to the
creation of jobs accessible to the poor: through spill‐over effects, backward or forward linkages
between MNCs and domestic enterprises and through labour intensive investment. The literature
also showed that a significant threshold of skills, training or work experience is essential for the poor
to benefit from employment opportunities generated by MNCs. Perspectives of MNCs, Government
Departments and residents on inward investment and employment creation and how this affected
the poverty situation in eNseleni ‐ Richards Bay, South Africa were collated from which four major
issues became apparent:
1. Though FDI could generate employment, this won’t reach the poor when
investments are overly capital intensive, as it was in Richards Bay, since this
not only limits the volume of job opportunities MNCs can create, but it also
involves production systems that demand considerably high calibre skills and
qualifications. This technically locks out the poor due to their characteristic
inadequate access to proper educational foundation, training or skills
development.
2. Backward or forward linkages between MNCs and local enterprise could be
so far the best bet for a poverty reduction approach buttressed on FDI.
However, the strength of the linkages hugely influences the magnitude of
employment that FDI can generate. The weakness of the linkages and the
instability of the enterprises established from them in Richards Bay was a
notable impediment to sustainable job creation.
41 | 1 0 7 8 1 0 3
3. The feasibility of transferring technologies, new knowledge or innovations
was somewhat tricky in a developing economy setting like the case dealt with
in this study. Spill‐overs demand a significant threshold of skills, commitment
from MNCs to disseminate their exotic technologies or skills as well as
effective domestic policies to support local enterprise. Without these
requisites, spill‐overs just do not materialize; neither do they fundamentally
contribute to the creation of jobs for the poor.
4. Skills, training and work experience indeed determines the ability of the poor
to accrue benefits from FDI in profound ways. Suitable demand‐side skills
development programmes are necessary for adaptation of new knowledge,
technologies or innovations and to equip the poor with the skills demand
from foreign companies.
In a nutshell this study has shown how FDI without effective policy for actively seeking labour
intensive investments; for supporting local enterprises established out of the FDI linkages, and for
running effective demand‐side skills development programmes accessible to the poor, is unlikely to
have significant leverage on poverty reduction at least in the context of Richards Bay, South Africa.
While the finding that the capital intensiveness of most of the MNCs in Richards Bay was an
impediment to employment creation was not much a surprise, the discovery that linkages between
MNCs and local enterprises were significantly visible and acknowledged as a source of employment
in the area was not very much anticipated. This raises the question of whether to continue the
pursuit of inward investments as a strategy for reducing poverty anyhow, the inadequacies
notwithstanding. It is an area that deserves further research and more critical consideration.
Nonetheless, government policies have a considerably sufficient scope to determine the impact of
inward investment on employment creation and on poverty reduction. Incentives could be tailored
to attract investment in employment intensive sectors, to focus investment in labour training,
technological development and improvement of local workforce quality. Moreover, carefully
crafted and properly negotiated performance requirements could induce foreign investors to
augment the creation of jobs and reduction of poverty.
42 | 1 0 7 8 1 0 3
Ultimately, it is imperative to underline again that this was a context specific study with an
appreciably limited focus judging by the vastness of the Republic of South Africa, the diversity and
the possible variances that might have arisen if a broader scope and depth was considered. It is
therefore not possible to make generalizations based on the conclusions drawn from this study as
they might be unique to the Richards Bay case. However, the findings could be effectively
juxtaposed with similar or related studies to draw sufficiently generalizable conclusions; a more
representative study, with a wider scope could function as a barometer, not only to verify these
findings but also to make wider claims regarding the aptitude of FDI as a poverty reduction formula
for developing economies.
43 | 1 0 7 8 1 0 3
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App
endix I – Relev
ant S
tudies Rev
iewed
Stud
y Ch
anne
ls/D
eterminan
t Main Find
ings
Aitke
n, B and Harriso
n, A (199
9) ‘D
o Dom
estic Firms Be
nefit fr
om For
eign
Direc
t Inv
estm
ent?’ T
he American Eco
nomic Rev
iew. 8
9(3):605‐618
This is an inve
stigation of bac
kward an
d forw
ard lin
kage
s an
d sp
ill‐ove
rs in
firms in Ven
ezue
la betwee
n 1976 ‐198
9.
Ba
ckward an
d Fo
rward
Link
ages
, Spill‐ov
ers
Increa
sed FD
I red
uces outpu
t and pro
ductivity of loc
al
enterpris
es and le
ads to crowding out of d
omes
tic
inve
stmen
ts; h
owev
er, smaller d
omes
tic firm
s increa
se th
eir
prod
uctiv
ity th
roug
h lin
kage
s an
d sp
ill‐ove
rs. Joint ven
tures
so fa
r pro
vide better o
ption for a hos
t eco
nomy to suc
ceed
in in
ternalising the be
nefit
s of FDI.
Aitke
n, B, H
anso
n, G H and Harriso
n, A.E (199
7) ‘S
pill‐ov
ers, For
eign
Inve
stmen
t and Exp
ort B
ehav
ior’. Jou
rnal of Interna
tiona
l Eco
nomics. 43: 10
3‐132
Stud
y invo
lves th
e us
e of pan
el data from
2014 Mex
ican firm
s to te
st th
e hy
pothes
is th
at M
NCs stim
ulate ex
port beh
aviour in dom
estic firm
s of a hos
t ec
onom
y.
Sp
ill‐ove
rs
The pres
ence of for
eign firm
s an
d their p
roximity to
domes
tic firm
s increa
ses the po
ssibility of d
omes
tic firm
s ad
optin
g ex
port culture. MNCs in
crea
se exp
ort s
pill‐ov
ers,
they act as co
nduits m
arke
t infor
mation, new
tech
nology
and inno
vatio
ns dom
estic firm
s.
Batra, G and Hon
g, T (2
000) In
ter‐fir
m Linka
ges an
d Pr
oduc
tivity Gro
wth
: Ev
iden
ce fr
om M
alay
sian M
anufac
turing
. Was
hing
ton DC: W
orld Ban
k.
They use
d ev
iden
ce from
man
ufac
turin
g fir
ms in M
alay
sia to in
vestigate the
relatio
nship be
twee
n grow
th in firm pro
ductivity and th
e es
senc
e of in
ter‐f
irm
linka
ges.
Ba
ckward an
d Fo
rward
Link
ages
They find out th
at in th
e Malay
sian case, fo
reign inve
stmen
ts
enga
ge m
ore in sub
contracting arrang
emen
ts and re
ly a lo
t on lo
cal firm
s for s
ubco
ntracting. The
y also estab
lish that
subc
ontrac
ting lin
kage
s sign
ifica
ntly in
crea
se firm
prod
uctiv
ity.
Be
nde‐Nab
ende
, A (199
8) ‘A Static Ana
lysis of th
e Im
pact of F
DI o
n th
e Hos
t Dev
elop
ing Co
untries’ Eco
nomic Gro
wth
: A Case fo
r the ASE
AN‐5 Eco
nomies’.
Pape
r prese
nted at t
he ESR
C Co
nferen
ce ‘F
inan
ce and Dev
elop
men
t’,
Birm
ingh
am, U
K, Sep
tembe
r 7‐8, 199
8. M
imeo
. Th
is pap
er in
volves a re
view
of e
mpiric
al and th
eoretic
al literature on
tech
nology tr
ansfer, h
uman cap
ital, grow
th and employ
men
t. It is an
inve
stigation of th
e sp
ill‐ove
r effec
ts of F
DI o
n ec
onom
ic gro
wth of A
SEAN
co
untries be
twee
n 1970 and 19
94.
Link
ages
Spill‐ove
rs
Hum
an Cap
ital
The role of F
DI in ec
o ec
onom
ic gro
wth is la
rgely effected
thro
ugh hu
man cap
ital d
evelop
men
t ‐ tr
aining and skill‐
upgrad
ing an
d tran
sfer of t
echn
olog
ies, cou
pled w
ith
increa
sed internationa
l trade
.
2 | 1078103
Stud
y Ch
anne
ls/D
eterminan
t Main Find
ings
Blom
stro
m, M
and Hak
an, P (198
3) ‘F
oreign In
vestmen
t and Spill‐ov
er
Effic
ienc
y in an Und
erde
velope
d Ec
onom
y: Evide
nce from
Mex
ican
Man
ufac
turing In
dustry’. World Dev
elop
men
t. 11(6)
This is a study in
vestigating the effects of FDI ind
uced spill‐ov
ers in M
exico
Sp
ill‐ove
rs
Stud
y co
nclude
s that firm
s in a hot eco
nomy may ben
efit
from
link
s in th
e internationa
l marke
t fac
ilitated by Foreign
MNCs
.
Blom
stro
m, M
and Kok
ko, A (199
6) ’T
he Im
pact of F
oreign
Inve
stmen
t on Hos
t Cou
ntries
: A Rev
iew of t
he Empirica
l Evide
nce’. P
olicy
Research W
orking Pap
er 17
45
They re
view
empiric
al evide
nce on th
e im
pacts of Foreign Dire
ct In
vestmen
t on
a ho
st eco
nomy
Fo
reign inve
stmen
ts in
deed hav
e a sign
ifica
nt effec
t on ho
st
coun
try prod
uctiv
ity and exp
ort g
rowth th
ough th
is m
ay
have con
textua
l variatio
ns created esp
ecially by a ho
st
coun
try’s inve
stmen
t env
ironm
ent.
Borenz
stein, E., De Grego
rio, J and Lee
, J W (199
8) ’H
ow doe
s Fo
reign Direc
t Inve
stmen
t Affec
t Eco
nomic Gro
wth
?’ Jo
urna
l of Interna
tiona
l Eco
nomics. 45:
115‐135
A cros
s co
untry regres
sion ana
lysis of FDI flows to 69 de
veloping cou
ntrie
s for
1970‐89 inve
stigating the ec
onom
ic gro
wth im
pacts of FDI.
Sp
ill‐ove
rs
Hum
an Cap
ital
FDI c
ontributes a la
rger propo
rtion of gro
wth com
pared to
domes
tic in
vestmen
ts and hav
e a crow
ding in effec
t on the
volume of bot
h do
mes
tic and fo
reign inve
stmen
t. Th
ey are
effective in stim
ulating an
d indu
cing te
chno
logy diffus
ion
thou
gh th
is dep
ends on a requ
isite th
resh
old of hum
an
capital.
Ca
ves, R (199
9) ‘S
pill‐ov
ers from
Multin
ationa
ls in Dev
elop
ing Co
untries: th
e Mec
hanism
s at W
ork.’ W
illiam Dav
idso
n Institu
te W
orking Pap
er 247
. Michiga
n: W
illiam
Dav
idso
n Institu
te.
This is a re
view
of e
mpiric
al and th
eoretic
al evide
nce on For
eign Dire
ct
Inve
stmen
t in de
veloping cou
ntrie
s
Sp
ill‐ove
rs
Spill‐ove
rs (e
spec
ially m
anag
erial skills) a
re m
ore lik
ely whe
re
a thresh
old of abs
orpt
ive ca
pacity (lev
el of p
rodu
ctivity
) has
been attaine
d by dom
estic firm
s.
3 | 1078103
Stud
y Ch
anne
ls/D
eterminan
t Main Find
ings
Dollar, D and Kraay
, A (2
000) ‘G
rowth is Goo
d fo
r the Poo
r’. D
evelop
men
t Re
search Gro
up. W
ashing
ton, DC: W
orld Ban
k.
An in
vestigation of th
e lin
k be
twee
n grow
th and in
comes of p
oor p
eople –
invo
lves a com
parativ
e ex
amination of rich and poo
r cou
ntrie
s du
ring bo
th
crises and nor
mal periods
. An aspe
ct of t
he ro
le of p
olicy an
d institu
tions in
influ
encing th
e im
pact of g
rowth o
n the po
or is studied
Th
ey estab
lish that on av
erag
e, th
e inco
mes of t
he poo
r increa
se at a
n almos
t con
grue
nt ra
te as grow
th. T
hey
howev
er argue th
at th
ough policies an
d institu
tions m
ay
raise inco
mes of t
he poo
r by increa
sing GDP pe
r cap
ita, the
y margina
lly affec
t inc
ome distrib
ution. Non
ethe
less, p
olicy
unde
rtak
ings aim
ed at fisca
l discipline an
d mac
roec
onom
ic
stab
ility, m
ay som
ewha
t hav
e inco
me distrib
utiona
l effec
t.
Feen
stra, R C and Han
son, G H (199
5) ’F
oreign Direc
t Inv
estm
ent a
nd Relative
Wag
es: E
vide
nce from
Mex
ico’s Maq
uilado
ras’. N
BER Working Pap
er 5122.
Cambr
idge
, MA: N
ationa
l Bur
eau of Eco
nomic Res
earch
This study exa
mines how
the influ
x of FDI into Mex
ico affected th
e de
man
d for
skilled la
bour betwee
n 1975 and 19
88 and th
e im
pact of this on w
ages
.
Th
e stud
y foun
d a stro
ng cor
relatio
n be
twee
n an in
crea
se in
inward inve
stmen
t and a rise in dem
and for m
ore skilled
labo
ur.
Graha
m, E H (199
5) ‘F
oreign Direc
t Inv
estm
ent in th
e W
orld Eco
nomy’. IMF
Wor
king Pap
er W
P/95
/59. W
ashing
ton, DC: In
tern
ationa
l Mon
etary Fu
nd.
This is a surve
y of th
eoretic
al and empiric
al literature on the de
term
inan
ts of
Foreign Dire
ct In
vestmen
t and th
eir impa
cts on a hos
t eco
nomy an
d inve
sting
coun
try as w
ell.
Sp
ill‐ove
r effec
ts
He co
nclude
s that th
ere is ove
rwhe
lming ev
iden
ce on
positiv
e im
pacts of FDI; that th
e im
pacts are mainly
conferred via tech
nology tr
ansfers an
d diffus
ion of other
intang
ible assets which in
crea
se efficienc
y an
d prod
uctiv
ity
of lo
cal e
nterprise. FDI m
ight also ge
nerate som
e ne
gativ
e effects thou
gh th
e ev
iden
ce is not con
clus
ive – for e
xample
whe
n MNCs dom
inate an
d crow
d ou
t dom
estic in
vestmen
ts
due to th
eir m
arke
t pow
er
Had
dad, M and Harriso
n, A (199
3) ‘A
re th
ere Po
sitiv
e Sp
ill‐ove
rs fr
om Direc
t Fo
reign Inve
stmen
t?’ Jou
rnal of D
evelop
men
t Eco
nomics. 42: 51‐7
4 Th
ey use firm‐le
vel d
ata to in
vestigate the ex
istenc
e of externa
lities in
man
ufac
turin
g se
ctor in M
oroc
co
Th
is study re
jects the argu
men
t tha
t the prese
nce of M
NCs
increa
ses prod
uctiv
ity of d
omes
tic firm
s. The
y fin
d that th
e im
pact of F
oreign Dire
ct In
vestmen
t on firm pro
ductivity is
statistic
ally in
sign
ifica
nt.
4 | 1078103
Stud
y Ch
anne
ls/D
eterminan
t Main Find
ings
Kokk
o, A., Ta
nsini, R an
d Ze
jan, M C (199
6) ‘L
ocal Tec
hnolog
ical Cap
ability and
Prod
uctiv
ity Spill‐ov
ers from
FDI in th
e Uru
guay
an M
anufac
turing Sec
tor’ The
Journa
l of D
evelop
men
t Studies. 3
2(4): 6
02‐611
A regres
sion ana
lysis of 15
9 firms in Urugu
ay’s m
anufac
turin
g se
ctor te
sting for
the pres
ence of s
pill‐ov
ers
Sp
ill‐ove
rs
Spill‐ove
rs are m
ost likely to occur w
here firm
s do not hav
e se
vere te
chno
logy gap
s. M
ost s
pill‐ov
ers em
erge w
here lo
cal
firms ha
ve m
oderate tech
nology gap
s
Lall, S (198
0) ‘V
ertic
al In
ter‐fir
m Linka
ges in LDCs
: An Em
pirica
l Study
’. Oxford
Bulle
tin of E
cono
mics a
nd Statis
tics. 42: 203‐226
Lall stud
ied the micro le
vel d
eterminan
ts of b
ackw
ard lin
kage
s be
twee
n tw
o prom
inen
t truck m
anufac
turin
g MNCs in In
dia an
d loca
l sup
pliers
Ba
ckward Link
ages
The stud
y es
tablishe
d that a lo
t of b
ackw
ard lin
kage
s (o
f va
rying type
s – whe
ther m
anag
erial, fin
ancial or t
echn
ical)
inde
ed existed b
etwee
n the truc
k man
ufac
turin
g MNCs and
the loca
l firm
s that sup
plied them
Lall, S and Pau
l, S (197
7) For
eign In
vestmen
t, Trans
natio
nals and Dev
elop
ing
Coun
tries. Bou
lder, C
olor
ado: W
estview Press.
A co
st‐ben
efit an
alysis of t
he effec
ts of F
DI o
n na
tiona
l welfare. S
tudy in
volved
an exa
mination of 88 MNCs and lo
cal e
nterprises in six cou
ntrie
s
The main fin
ding w
as th
at in gen
eral, F
DI p
rodu
ces po
sitiv
e ne
t effec
ts on the welfare of the lo
cal e
cono
my, th
ough it
might also lead to som
e ne
gativ
e im
pacts brou
ght a
bout by
prot
ectio
nist policies
Marku
sen, J R and Ven
ables, A (199
9) ‘F
oreign Direc
t Inv
estm
ent a
s a Ca
talyst
for Ind
ustrial D
evelop
men
t’. Europ
ean Ec
onom
ic Rev
iew. 4
3: 335‐356
This study in
volves an inve
stigation of th
e sp
ill‐ove
r effec
ts, linka
ges an
d marke
t disto
rtions in
duce
d by FDI effects
Ba
ckward Link
ages
It con
firms fin
ding
s from
Taiwan in
dica
ting that in
ward
inve
stmen
ts can im
prov
e the prod
uctiv
ity of loc
al
enterpris
es. B
y increa
sing dem
and for s
upply, FDI c
atalyses
the grow
th lo
cal e
nterprise an
d increa
ses their a
bility an
d prop
ensity to exp
ort.
5 | 1078103
Stud
y Ch
anne
ls/D
eterminan
t Main Find
ings
Maz
umda
r, D and M
azah
eri, A (2
000) ‘W
ages and Employ
men
t in Africa’.
Region
al Program
on En
terpris
e Dev
elop
men
t Discu
ssion Pa
pers. W
ashing
ton
DC: W
orld Ban
k Th
is is an an
alysis of e
mploy
ee w
ages from
8 sub‐Sah
aran African cou
ntrie
s to
establish whe
ther employ
ee earning
s are de
pend
ent o
n firm size an
d skill
endo
wmen
t of t
he w
orke
rs th
emse
lves
Hum
an Cap
ital
They estab
lish that in m
ost o
f the cou
ntrie
s invo
lved in th
e an
alysis, large fo
reign an
d state ow
ned firms influ
ence th
e leve
l of w
ages and th
at w
orke
rs end
owed w
ith sup
erior s
kills
attrac
t highe
r rem
uneration
Ramac
hand
ran, V and M
anju, K
.S (199
7) ‘T
he Effec
ts of F
oreign Owne
rship in
Africa: Evide
nce from
Gha
na, K
enya and Zim
babw
e’. R
PED Pap
er No. 81.
Was
hing
ton, DC: W
orld Ban
k.
An eco
nometric ana
lysis of firm‐le
vel d
ata from
three Af
rican cou
ntrie
s (K
enya
, Gha
na and Zim
babw
e) on the im
pacts of fo
reign ow
nership on value‐add
ed
Sp
ill‐ove
rs
They estab
lish that a signific
ant s
hare of o
wne
rship in M
NCs
by fo
reign inve
stor
s ha
s grea
ter p
rosp
ects fo
r tec
hnolog
y tran
sfers. The
y argu
e that African eco
nomies sh
ould pursu
e mor
e lib
eralised FDI p
olicies that allo
w fo
r major
ity
owne
rship in M
NCs by foreign inve
stor
s to in
crea
se th
e prop
ensity to
wards te
chno
logy and kno
wledg
e sp
ill‐ove
rs.
Rodr
igue
z‐Clare, A (199
6) ‘M
ultin
ationa
ls, L
inka
ges an
d Ec
onom
ic
Dev
elop
men
t’. American Eco
nomic Rev
iew. 8
6(4): 8
52‐873
. An in
vestigation of th
e im
pact of F
DI ind
uced bac
kward an
d Fo
rward lin
kage
s in dev
elop
ing ec
onom
ies
Ba
ckward Link
ages
Rodrigue
z co
nclude
s that FDI c
ould hurt d
evelop
ing
econ
omies un
less th
e co
ndition
s in th
e ho
st eco
nomy
facilitate the de
velopm
ent o
f bac
kward lin
kage
s: ‐ MNCs
mus
t utilise interm
ediate goo
ds m
ore intens
ively, find it
expe
nsive to com
mun
icate with th
eir h
eadq
uarters an
d fin
d the differen
ce in lo
cal p
rodu
ction of in
term
ediate goo
ds
from
that of t
he in
vesting co
untry su
bstantially m
argina
l
Sibu
nrua
ng, A and Brimble, P (198
8) ‘T
he Employ
men
t Effec
ts of
Man
ufac
turing M
ultin
ationa
l Ent
erpr
ises in Tha
iland
’. Multin
ationa
l En
terp
rises Program
me Working Pap
er 54. Gen
eva: In
tern
ationa
l Lab
or O
ffice
An ana
lysis of 678 M
NCS in Tha
iland M
anufac
turin
g se
ctor and th
e effect of
their p
rese
nce on employ
men
t gen
eration
Ba
ckward Link
ages
Spill‐ove
rs
Main fin
ding
s were that bac
kward lin
kage gen
erated th
e larges
t volum
es of n
ew employ
men
t, thou
gh a sub
stan
tial
prop
ortio
n of th
e co
untry’s to
tal lab
our for
ce w
as also
employ
ed dire
ctly by the MNCs
. Th
ey also es
tablishe
d that M
NCs w
ere instrumen
tal in the
enha
ncem
ent o
f pro
ductivity of loc
al firm
s es
pecially
thro
ugh kn
owledg
e diffus
ion an
d training of t
heir
subc
ontrac
tors in th
e loca
l eco
nomy.
6 | 1 0 7 8 1 0 3
Appendix II – Discussion Guide
Discussion Guide – MNCs
1. Please tell me about your job
2. What were the major determinants of your decision to invest here?
• Incentives
• Natural Resources to what extent did they influence your decision?
• Cheap Labour
• Infrastructure
3. Were there any conditions set by the investment recruiting agency that you had to
meet/maintain in order to continue investing here (operating in Richards Bay)?
4. Please DESCRIBE the type/nature of technology employed in your production systems
5. What calibre of workforce does your production systems require?
• Highly skilled – management/professionals
• Medium skilled – artisans structure of the workforce
• Low/unskilled
6. Does your company have any linkages with local firms?
• Production sub‐contracting
• Supply of inputs
• Customers of intermediate goods
7. Are there any challenges/issues limiting the development of such linkages?
8. How have local enterprises benefited from your investment
• Adoption of new technologies
• Training of personnel/demonstration
• Imitating your imported technologies, systems of production
9. Do you have any programmes in place for the development of employee capacity – skills
development or specialized on job training?
10. In what ways do you think your location here is benefiting poor people around Richards
Bay?
7 | 1 0 7 8 1 0 3
Discussion Guide – Government Officers
1. Please tell me about your job
2. What strategies/mechanisms have you employed in attracting investments to Richards
Bay
• Incentives
• Infrastructure How successful have they been?
• Investment Promotion
3. To what extent have the industrial investments in Richards Bay created linkages with local
enterprises?
4. Have such linkages stimulated the creation of domestic enterprises?
5. What volume of employment has been generated by the industries and the domestic
enterprises (SMMEs) linked to them?
(COMPARE THE NUMBER AND QUALITY OF JOBS CREATED WITH THE COST OF INCENTIVES
AND CAPITAL INVESTMENTS)
6. What challenges exist in creating such linkages?
7. Have the investments generated any spill‐overs?
• Diffusion of new technologies
• Improvement of productivity and efficiency of local firms
• Training of local workforce
8. How has this affected access to employment? Has it created more employment or
contributed to loss of jobs?
9. I what ways does skills/education/training affect access to employment; wage bargaining;
job security; working conditions (especially for poor workers)?
10. What challenges do you face (in general0 as a department/agency in attracting
investments to this region (most so pro‐poor investment)?
8 | 1 0 7 8 1 0 3
Discussion Guide – Community
1. How is it getting a job in the industries in Richards Bay?
2. What are the main challenges?
3. Do you think the industries benefit the local population around Richards Bay?
4. What calibre of employees (in terms of skills/education/work experience) do the
industries require?
5. Do you think that possessing better skills improves your chances of getting a job (may be
even better wages) in the industries in Richards Bay?
9 | 1078103
App
endix III – FGDs an
d Interview Data – Ana
lysis
FGD Data ‐ A
nalysis
FGD 1
FGD 2
uM
folozi college FGD
Total
%
Y N
Total
Y N
Total
% Y
N
Total
Y N
Capital o
r lab
our inten
sive
?
7 1
8 5
1 6
7 2
9 23
83
17
Loca
l enterprises link
ed to th
e MNCs ‐
sign
ifica
nt sou
rce of employ
men
t?
7 1
8 4
2 6
6 3
9 23
74
26
Wea
knes
s of th
e loca
l enterprises to
blam
e for t
heir inab
ility to employ m
ore
peop
le?
‐ ‐
‐ ‐
‐ ‐
6 3
9 9
67
33
Do loca
ls get skills; lea
rn new
tech
nologies from
the MNCs
?
2 6
8 1
5 6
1 8
9 23
17
83
Une
mploy
men
t in eN
seleni ‐ a resu
lt of
lack of s
kills/training/wor
k ex
perie
nce?
7 1
8 6
0 6
6 3
9 23
83
17
Entrep
rene
ursh
ip culture w
ell
incu
lcated in eNse
leni/Richa
rds Ba
y area
?
‐ ‐
‐ ‐
‐ ‐
2 7
9 9
22
78
10 | 1
078103
Interview Data ‐ A
nalysis
*Ind
epen
dent Pro
fessiona
ls – Res
earche
r at N
ALED
I and Pro
fessor at U
nive
rsity of t
he W
itwatersran
d
Gov
ernm
ent
Officers
MNC inside
rs
Inde
pend
ent
Prof
ession
als
Total
%
Y N
Y N
Y N
Y N
Y
N
Capital o
r lab
our inten
sive
?
3 0
4 1
2 0
9 1
1 90
10
Existenc
e of bila
teral a
rran
gemen
ts betwee
n MNCs & lo
cal e
nterprises fo
r dem
onstratio
n of
new te
chno
logies
?
0 3
0 5
0 2
0 10
10
0 100
Do the MNCs do bu
sine
ss w
ith lo
cal e
nterpr
ises
? (link
ages
)
2 1
5 0
2 0
9 1
10
90
10
Do yo
u remem
ber a
nytim
e the MNCs organ
ised
or partic
ipated in a fa
ir or exh
ibition and
demon
strated the co
nten
t of t
heir wor
k to lo
cal
entrep
rene
urs/wor
kers?
0 3
0 5
0 2
0 10
10
0 100
Are the loca
l enterprises link
ed to th
e MNCs a
sign
ifica
nt sou
rce of employ
men
t?
3
0 5
0 2
0 10
0 10
100
0
Existenc
e of M
NC with ope
ratio
nal skills
deve
lopm
ent p
rogram
me for e
mploy
ees in
Rich
ards Bay
?
0 3
1 4
0 2
1 9
10
10
90
Wea
knes
s of th
e loca
l enterprises ‐ a reason fo
r inab
ility to employ m
ore pe
ople?
‐
‐ ‐
‐ 2
0 2
0 2
100
0
Capital inten
sive
ness of M
NCs in
crea
sed
deman
d for h
ighly skilled la
bour ‐ a reas
on fo
r un
employ
men
t?
‐ ‐
4 1
‐ ‐
‐
4 20
80
12 | 1
078103
Figu
re 2 M
ap of S
outh Africa sh
owing Kw
aZulu Natal Pro
vinc
e whe
re Richa
rds Ba
y an
d eN
elen
i are lo
cated
13 | 1
078103
Figu
re 3 M
ap of R
icha
rds Ba
y sh
owing eN
seleni fr
inge
Sour
ce: u
Mhlathu
ze M
unicipality
14 | 1
078103
Figu
re 4 Not
ice th
e pe
rcen
tage pop
ulation liv
ing be
low pov
erty line
, high so
cio‐ec
onom
ic seg
rega
tion an
d instan
ces of soc
ial u
nres
t in Kw
aZulu Natal.
Sour
ce: U
NEP