Welcome to the March Edition of our Feature.
This feature highlights different traits and recommendations that Africa can adopt to attract and create an enabling business environment for Foreign Direct Investment (FDI). According to the State of African Cities Report, Africa’s share of total world FDI remains small at roughly 5%. This compares poorly to the continent’s 15% share of the global population and over 30% of the world poverty, there is therefore a need for increasing FDI in Africa. It is often argued that one of the ways developing economies can speed up the process of catching up with developed economies is by attracting FDI. Today, the world is increasingly recognising FDI as an impetus for development, and many developing countries are becoming more receptive to FDI inflows. Emerging economies like China, Brazil, Vietnam and India have built their growth on FDI inflows and despite growing global uncertainty.
Africa as a continent has been one of the biggest spots for such capital inflows in form of FDI especially given the huge resource endowment and other investment opportunities that the continent presents as a whole. African governments are responsive, but do not have enough measures to utilise their available resources or strategic prioritisation required to deliver those needs. They struggle to translate their ideas into reality. This can be even more challenging in developing countries because of a lack of implementation expertise, ambiguous laws and weak enforcement and overlapping responsibilities among ministries, agencies and levels of government. Africa has for a long time been portrayed as a backward continent beset by war, high disease burden, high levels of poverty and ethnic conflict. Despite this, the continent presents enormous and attractive investment opportunities.
In Africa, FDI spreads across different sectors ranging from extraction, construction, retail trade, manufacturing, entertainment, energy and agriculture. With liberalisation and privatisation measures both geared at opening up to global market forces and attracting private investment to replace state intervention and public ownership. However, since the advent of the industrial revolution in Great Britain, many Western countries turned to Africa as a source of raw materials to feed into their growing industries from the abundance of natural resources in Africa such as copper in Zambia, Fossil Fuel in Nigeria, iron ore in Morocco, gold in South Africa, Etc.
Economic growth per capital is derived by bringing improvement in productivity, also known as efficiency of an economy. Improving the productivity refers to generating various goods and services by using the right amount of labour, capital and raw material. Africa’s poor infrastructure has major ripple effects and creates a significant drag on the economy.
Africa needs to improve its business environment to attract FDI. Despite many current policies in place in Africa, the reality is in the execution of these policies. In addition, poor infrastructure poses a great challenge when it comes to attracting investors. Lack of adequate grid power and reliable energy for businesses, in some areas have been major constraint. Only few countries in Africa have constant electricity. Recent power privatisation efforts have been less than successful due to a host of issues including the ability of some people to access power without paying, poor transmission infrastructure and difficulties among some power plants in accessing reliable gas supply. Most conglomerates have put a hold on some of their plans due to concerns about profits on investments hence, the need for improvement on infrastructure which would have an immense impact on the economy thus attract private investments and improving the well-being of citizens.
Though recent data on FDI inflows to Africa shows that FDI has been on the increase on the continent compared to as of old. A good example is Morocco, – today it stands as one of the largest recipients of FDI in Africa and it is at the forefront of changing the image of Africa. Morocco has attracted more FDI mainly due to improvements in the macro-economic frameworks, the establishment of sound institutional and legal framework for FDI and the liberalisation of the economy. Kenya recorded one of the biggest increases in FDI, with project numbers rising from 49 percent to 85 percent, totalling $2.4bn in investments in 2015 (AIR, 2016), but in 2017 there was a decline in the economy’s FDI. In 2015, Mozambique and Ethiopia were the only two countries in the top 10 to witness a decline in FDI by number of projects. The East African countries recorded the largest nominal increase in FDI projects in 2015 (International Monetary Fund). South Africa continues to dominate FDI by number of Projects till date. There was also a great improvement in Ethiopia’s FDI in 2017 amongst others. Nigeria’s position over the years for FDI has always been a top notch.
Regionally according to world investment report, FDI flows to North Africa were down 4% to $13 billion. Investment in Egypt was down, but the country continued to be the largest recipient in Africa. FDI in Morocco was up 23% to $2.7 billion, including as a result of sizeable investments in the automotive sector. Lingering effects from the commodity bust weighed on FDI to sub-Saharan Africa, with inflows declining by 28%, to $28.5 billion. FDI flows to Central Africa decreased by 22% to $5.7 billion. FDI to West Africa fell by 11% to $11.3 billion, due to Nigeria’s economy remaining depressed. FDI to Nigeria fell 21% to $3.5 billion.
In East Africa, the fastest-growing region in Africa, received $7.6 billion in FDI in 2017, a 3% decline on 2016. Ethiopia absorbed nearly half of this amount, with $3.6 billion (down 10%) and is now the second largest recipient of FDI in Africa. Kenya saw FDI increase to $672 million, up 71%, due to strong domestic demand and inflows in information and communication technology sectors.
Southern Africa, FDI declined by 66% to $3.8 billion. FDI to South Africa fell 41% to $1.3 billion, due to an under performing commodity sector and political uncertainty. FDI into Angola turned negative once again (down to -$2.3 billion from $4.1 billion in 2016) as foreign affiliates in the country transferred funds abroad through intra-company loans. In contrast, FDI into Zambia increased, supported by more investment in copper. Multinational enterprises (MNEs) from developed economies (such as the United States, United Kingdom and France) still hold the largest FDI stock in Africa. At the same time, developing-economy investors from China and South Africa, followed by Singapore, India and Hong Kong (China), are among the top 10 investors in Africa. FDI outflows from Africa increased by 8% to $12.1 billion, reflecting a significant increase in outward FDI by South African firms (up 64% to $7.4 billion) and Moroccan firms (up 66% to $960 million). Outward FDI by Nigerian firms, in contrast, remained flat at $1.3 billion, focused almost exclusively on Africa.
African FDI inflows, by sub region, 2010–2017
According to Bureau of Economic Analysis, direct investments US made in Africa were valued at approximately 50.29 billion U.S. dollars. The total direct position of the United States abroad amounted to 6.01 trillion U.S. dollars in 2017. United States businesses and investors made more FDI in Africa than counterparts from any other country in 2017. These US entities increased the number of American FDI projects in Africa by 43% to 130 in 2017 nearly twice the next country, according to Global 2018 Africa Attractiveness report.
Overall, African countries saw FDI number rise by 6% to 718 projects up from 2016 – 676 projects, which was the lowest in 20 years. More than three-quarters of the expansion was driven by real estate, hospitality and construction. Ernest & Young(www.EY.com) says in the recent past, US economic ties with Africa has been driven by the African Growth and Opportunity Act (AGOA), which grants 40 African countries duty-free access to the US for approximately 6,400 products and programs, such as Power Africa.
Generally according to UNCTAD’s world’s investment reports 2018, FDI flows to Africa slumped to $42 billion in 2017, a 21% decline from 2016. Weak oil prices and harmful ongoing macroeconomic effects from the commodity bust saw flows contract in major host African economies. “The beginnings of a commodity price recovery, as well as advances in inter regional cooperation through the signing of the African Continental Free Trade Area agreement, could encourage stronger FDI flows to Africa in 2018, provided the global policy environment remains supportive.’’ (UNCTAD Director, Division on Investment and Enterprise, James Zhan). It was also found that human capital interaction with FDI also plays a vital role but the quality of political environment should also be considered for foreign direct investment.
It is with no doubt that high level of economic, political, social integration and globalisation wave has increased the level of capital openness among countries. FDI’s role in development of Africa has been and still remains positive and crucial, though argument still exist that FDI has positive effect on economies of countries only for short period, in long run foreign direct investment has adverse impact on country’s economy such as crowding out effect, monopoly power effect, profit repatriation, dual economy effect, environmental issues amongst many others but Africa has benefited in various ways including reduced poverty through economic growth and employment creation among others. All firms will always try to maximise profit by all means and if there are no good policies existing in such economies to support such goal, the investor companies are most time worse off. United States has a significant role in African economies and it is in the best interest of the government of these countries to create a friendly environment and allow absorption for full utilisation of countries resources.
Finally, the current wave of globalisation sweeping through the world has intensified the competition for FDI among developing countries. Consequently, concerted efforts are needed at the national, regional, and international levels in order to attract significant investment flows to Africa and improve the prospects for sustained growth and development.
Few things African countries can do to attract foreign direct investment.
- The government of the day should treat all investors with equity, transparency and ensure continuity or protection for all investments and FDI inflows. A strong institutional framework and a clear code of conduct for investment should be accessible and open for all and quality education should be provided for all citizens.
- Infrastructure – This is a huge challenge to foreign investors as businesses need easy access to ports, an adequate and reliable supply of energy and relative certainty that the country will be good to invest in. PPP can also be used to drive infrastructural developmental investments in certain sectors such as power, health and housing. Improving infrastructure would have an immense impact on the economy and on well-being of citizens.
- Consequently, concerted efforts are needed at the national, regional, and international levels in order to attract significant investment flows to Africa and improve the prospects for sustained growth and development, the African government should encourage partnerships between foreign and local businesses. Good institutions promote FDI.
- Host governments should also ensure that they have a clear policy on environment so as to regulate the activities of the foreign companies and at the same time ensuring that there is compliance with regulations. This can help in protecting the environment effects associated with FDI activities especially in the mining sectors.
- Global good business practices should be encouraged as it will bring about synergy between economies since there are five regions in Africa, and these regions all have unique opportunities and challenges, a positive business climate should be created to attract more foreign investments.