Financial considerations of South African companies making capital investments abroad : a theoretical and empirical study

ENGLISH ABSTRACT: The increase in globalisation and integration of world financial markets has seen a significantenhancement in the amount in foreign investments. This coupled with the downfall of theapartheid regime has given rise to an opportunity for companies to diversify their investment andoperational portfolios internationally. Furthermore world foreign direct investment has reached ahigh during recent years. This indicates that companies are undertaking more opportunities toinvest internationally.This study was undertaken from the perspective of South African companies who may beconsidering to invest abroad. This is due to the fact that a clear research gap regarding theirperspective has been found. The gap was found because most studies chose to focus on countriessuch as the United States of America, China and Japan, while none focused on the point of viewof South African companies to the best of the available knowledge. The second factor was thatstudies did not only focus on the financial considerations, but instead included social andpolitical factors. This study, due to the research gap found, chose to focus on the financialconsiderations of South African companies when considering making capital investmentsabroad.The top 50 companies in South Africa were chosen according to the Financial Mail’s TopCompanies issue. It was decided that 30 of these companies would be sufficient as the researchsample for the study. A questionnaire was drawn up and used as an aide memoire in personalinterviews with these executives of the relevant companies. This allowed an opportunity toexplore their perceptions and opinions regarding the factors that were selected as important fromthe literature study. In addition to this the executives provided company information that wouldbe used in the sensitivity analysis.It was found that there are a number of company- and country-specific factors that need becontemplated when considering capital investments abroad. The company-specific factorsinclude the profitability, cash flow, liquidity, solvency and future long-term growthcharacteristics of the prospective investment opportunity. This should be done in comparisonwith the host country to ensure that it will be worthwhile to increase the company’s risk factors.The country-specific factors include any restrictions placed on the cross-border movement of capital, the taxation legislation, and the availability of reliable information regarding the foreignmarket. The availability of foreign financing, availability of foreign exchange hedginginstruments, investment incentives and the availability of labour and capital in order to apply thecorrect operating leverages are also important. The company-specific and country-specificfactors need be considered in conjunction with each other. Furthermore all factors need becompared between the home and host countries in order to ascertain whether the advantages ofentering into the foreign market are large enough.