African countries need to attract more and strategic FDI in manufacturing sector
Talkmore Chidede, tralac Researcher, discusses the importance of manufacturing FDI for industrialisation and economic growth and development in Africa
According to the United Nations Conference on Trade and Development (UNCTAD) World Investment Reports (1996-2016), Africa’s Foreign Direct Investment (FDI) inflows in manufacturing sector has decreased from 30 percent in 1989 to 20 percent in 2015; inflows into the primary sector (extractive and agriculture) slumped from 40 to 20 percent over the period. However, inflows into the services sector increased from 27 to 51 percent. Factors behind the decrease in manufacturing FDI include, inter alia, high tariffs and costs of doing business and production as well as insufficient business infrastructure (UNCTAD 2016). Primary sector FDI plummeted largely due to ongoing low commodity prices that have hampered resource-seeking FDI. In fact, commodity price declines reduced the incentives to invest in the primary sector. Increasing liberalisation and privatisation of the services sector, along with growing consumer market and middle class in Africa have attracted FDI in services (mainly finance, telecommunications, tourism, hotel & restaurants, real estate).
Despite the overall FDI decline, the World Bank (2015) reports that a few countries such as South Africa, Nigeria, Ghana, Egypt, Kenya, Lesotho, Tanzania, Uganda, Rwanda and Ethiopia have attracted increasing FDI in manufacturing industries (like textile and clothing, leather and footwear, vehicles, tobacco, food and beverages) over the years. The model of FDI is mainly greenfield projects (market-seeking FDI) driven by market size and potential – enhanced by the countries’ better economic development and diversification, integration into regional and global markets via preferential trade agreements with overseas partners, for example, African Growth and Opportunity Act (AGOA). In addition, other factors such as political and economic stability as well as macroeconomic and investment policies support the appeal of these investment locations. Uganda Investment Agency survey (2012) found access to local and regional markets as the major factor that influenced FDI decisions, followed by economic and political stability and macroeconomic and investment policies.
The World Bank reveals that FDI in the manufacturing sector is dominated by new (China, India and Brazil) and intraregional partners (South Africa, Nigeria and Kenya) – so-called ‘South-South FDI’. Manufacturing FDI from traditional partners (the European Union and United States) comprised a decreasing share over the period, but was more concentrated and increasing in the services sector.
Why is manufacturing FDI important to Africa?
With inadequate resources to finance sustainable (industrial and economic) development in Africa, weak economic growth, abject poverty and rising unemployment rates, attracting FDI into the manufacturing sector is key. FDI into manufacturing, comparable to other sectors, has great potential to create jobs, alleviate poverty, enhance economic growth and support industrial diversification. It has the capacity to bolster industrialisation via technological and know-how transfers, increasing productive capacity and export performance. These arguments are strongly supported by practical examples: Manufacturing FDI particularly in food and beverages, motor vehicles and transport equipment, textile and clothing, non-metallic mineral products generated 30 percent of total FDI-driven (skilled and unskilled) jobs in Uganda in 2012, in Tanzania in 2013 (43%) and Ethiopia in 2014 (28%) (World Bank 2015). FDI into similar sectors has helped most South-East Asian economies such as Thailand, Taiwan, Hong Kong and South Korea to successfully industrialise, upgrade technology and diversify their export base.
Africa’s quest for industrialisation has been stressed in several continental (regional and national) initiatives. Notably, the 2008 Plan of Action for the Accelerated Industrial Development for Africa (AIDA) and more recently the Agenda 2063 reiterate the importance of industrialisation and attracting FDI into manufacturing was identified as a major catalyst for industrialisation by providing the much-needed capital, technology and expertise sharing.
Africa hosts the bulk of global chromium and platinum (90%), gold (40%), oil reserves (12%), timber resources and other natural resources; yet it has only 1 percent of world manufacturing – lowest among comparable regions like Asia, Latin America and Transitional Economies, said UNCTAD. At the same time, Stuart (2017) observes that African countries are ‘prematurely de-industrialising’. This state of affairs has reinforced the continent’s perpetual dependence on export of traditional agriculture, raw materials (oil, natural gas and minerals) and intermediate products with low value added. Overreliance on raw material exports has in recent years exposed many resource-dependent economies such as Algeria, Democratic Republic of Congo, South Africa and Nigeria to (investment and potential growth) risks of commodity price declines.
Therefore, African governments need to attract more FDI from within and outside Africa in manufacturing to enable countries to beneficiate their abundant natural resources, diversify their export and manufacturing base, enhance productive capacity, and move up value chains (i.e. from raw materials to finished products suppliers/exporters). Manufacturing FDI would also accelerate industrialisation and boost economic growth and development, create jobs and alleviate poverty. FDI in the primary and services sectors are also crucial in this respect.
Though important, FDI does not bring the benefits to the host economy or region automatically. The accrual of FDI benefits to the host economy depends on a number of factors. For example, host governments, need to implement policies that can encourage FDI ensure rapid growth or expansion of the sector (promote sectoral and spatial growth). Labour market regulations, intellectual property rights and tax laws, policies aimed at human development and capacity building, for instance, can play a crucial role in harnessing the potential FDI benefits.
Moreover, the benefits depend on the modalities of the FDI. Greenfield investment which involves new FDI projects may well have greater benefits than mergers and acquisitions model especially with regard to job creation. In addition, market-seeking FDI generates local and regional linkages, creates new jobs and products for local consumers, among other things. This has been seen in apparel exporting countries such as Kenya, Lesotho and Swaziland. Equally important, efficiency-seeking FDI entails established firms seeking to compete in international markets and it is particularly important for economies looking to integrate into the global market and move up the global value and supply chains. Efficiency-seeking FDI is said to have the strongest growth impact of all FDI types (as has happened in East Asia’s manufacturing), but its benefits have not been very pronounced in Africa – perhaps since it constitutes a small portion of the continent’s FDI. Experience has shown that local suppliers and competitors benefit from this type of FDI through adaption and imitation. Strategic-asset seeking FDI is barely present in Africa.
It is also important to note manufacturing (especially in high-tech industries) FDI poses some challenges (e.g. loss of manual jobs to automation, from unskilled to skilled jobs) but its adverse effects should not be overstated nor obscure its benefits. Viable solutions, however, can mitigate these negative effects, for example, sufficient formal education, training and social programmes can quickly assist workers and enable them to compete for skilled jobs.
In the context of this narrative, African governments, individually or collectively, must carefully consider what it takes to attract the type and model of FDI that complements the host economy’s development agenda. Trade openness, improving corporate governance and business infrastructure are key in attracting manufacturing FDI. Incentives may also be important, but the risk of incentive dependence needs to be considered. These are important in the overall assessment of FDI destinations and decisions – investors weigh up the risk-return profiles of different investment locations.
 Including subsectors such as computers, automobiles, primary metals, electronic components, chemicals, electrical equipment, metal products, household appliances, instruments, non-metal materials, pharmaceuticals, machinery, textiles and apparel, wood and wood products, food and beverages.
 Type of FDI that seeks strategic advantages such as access to research and development, innovation and advanced technology.
Stuart, J (2017). Patterns of Premature Deindustrialisation in Africa. Working Paper. Stellenbosch: tralac.
UNCTAD World Investment Reports, available at http://unctad.org/en/pages/diae/world%20investment%20report/wir-series.aspx?Re=1,20
World Bank (2015) Manufacturing FDI in Sub-Saharan Africa: Trends, Determinants, and Impact, https://www.tralac.org/images/docs/7659/manufacturing-fdi-in-sub-saharan-africa-trends-determinants-and-impact-world-bank-june-2015.pdf