FDI and development in Africa
Sean Woolfrey, tralac Researcher, discusses FDI and development in Africa
Over the last decade the discourse on Africa’s potential for economic growth and development has grown increasingly positive. No longer is Africa considered the ‘hopeless continent’; instead, we are now witnessing a 21st century ‘scramble for Africa’ as emerging economic giants such as Brazil, India and China look to African countries to supply the commodities they require, while trans-national corporations view a growing African middle class as a highly attractive consumer market. Along with improved governance and stability across the continent and the impact of new technologies such as mobile telephony, the global commodities boom of the mid-2000s was undoubtedly one of the main factors behind this apparent turnaround in Africa’s fortunes, as a number of resource-rich African countries achieved unprecedented levels of economic growth between 2002 and 2008 on the back of surging global prices for commodities.
While these factors have certainly created a great deal of optimism within Africa about the potential for growth and development on the continent, there is also a realisation that a reliance on fuels, metals and other minerals is not likely to sustain economic growth over the long term, and that African countries need to improve their ability to produce and trade manufactured goods and services. An increased focus on supply side capacity can be seen, for instance, in the initiative to create a tripartite free trade area (T-FTA) comprising all the countries of the Common Market for Southern Africa (COMESA), the East African Community (EAC) and the Southern African Development Community (SADC).
Unfortunately, developing globally competitive manufacturing industries in Africa is unlikely to be an easy process, especially given the relatively low level of skills and technology that exist in many African countries. Given this discrepancy between the political will to promote manufacturing activities and the resources needed to do so, as well as the increasingly positive attitude many foreign businesses have of African economies, it is important to consider the potential role that foreign direct investment (FDI) can play in the development of Africa’s industries.
Historically, FDI flows into Africa have been much lower than flows to other regions. Furthermore, they have been concentrated in extractive industries, such as mining and oil and gas production. Recent surveys and anecdotal evidence suggest that foreign investors, and especially those from emerging markets, are increasingly participating in non-extractive industries such as manufacturing and services industries. If this is true, then it is a positive phenomenon for Africa, as FDI can play an important role in the promotion of manufacturing and services industries on the continent. Indeed, while the relationship between FDI and economic growth is still much debated in the development literature, studies have indicated that where domestic absorptive capacity exists (e.g. where human capital has been successfully accumulated) certain types of FDI can serve to transfer the technology, skills and know-how that is crucial for improving and upgrading industrial capacity. This was the case in a number of countries in East and Southeast Asia during the 1970s, 1980s and 1990s.
With this in mind it is interesting to examine the United Nations Conference on Trade and Development (UNCTAD) World Investment Report 2012 which was released earlier this month. According to the report, FDI inflows to Africa declined for the third successive year in 2011, totalling US$42.7 billion (or just 2.8 percent of global flows). Much of this decline, however, stems from decreased flows to North African countries due to political unrest in the region, and inflows to sub-Saharan Africa actually increased from US$29.5 billion in 2010 to US$36.9 billion in 2011, not far off the peak of US$37.3 billion in 2008.
It is important not to read too much into the data contained such reports, as FDI flows can change quite significantly from one year to the next. Similarly, difficulties in the tracking and recording of FDI flows into African countries mean that the picture given by such data is not always a perfect representation of reality. Nevertheless, reports such as the World Investment Report (WIR) do give a general idea of trends and patterns in FDI flows. Probably the most notable of these for African countries in the 2012 Report is the dominance of FDI in extractive industries.
According to the Report, oil and gas producing countries are emerging as the major recipients of FDI in Africa. These include Angola, Nigeria, Ghana, Uganda and Equatorial Guinea. Other major recipients of FDI in Africa in 2011 included SA, Congo, Algeria, Morocco, Mozambique and Zambia, suggesting that extractive industries (e.g. copper mining in Zambia) remain important magnets for FDI in Africa. Indeed, 28 percent of greenfield investment in Africa in 2011 was in mining, quarrying an petroleum, a much higher proportion than in other regions of the globe.
Importantly from the point of view of Africa’s industrialisation, the Report does note the emergence of sectoral shifts away from extractive industries and towards manufacturing and, in particular, services. Closer inspection reveals, however, that while 38 percent of greenfield investment in Africa in 2011 went towards manufacturing, much of this was accounted for by resource-based industries such as coke, petroleum and nuclear fuel production. Similarly, while 34 percent of greenfield investment in Africa in 2011 went towards services industries, over a third of this was accounted for by electricity, gas and water services.
The overall picture gleaned from the WIR suggests that Africa has indeed become a more attractive destination for FDI in recent years, but that much of this investment is still being channelled towards extractive and related industries. There is nothing inherently wrong with attracting FDI in mining and oil and gas industries, and for the most part such FDI should be welcomed if it brings tangible gains for the host countries. Nevertheless, increased investment in these industries should not obscure the fact that African countries could possibly be doing more to attract (and benefit from) FDI in manufacturing industries, and particularly the kind of FDI that enhances the skills and technological base of countries on the continent.
UNCTAD. 2012. World Investment Report 2012: Towards a New Generation of Investment Policies. Available online at: http://unctad.org/en/Pages/DIAE/World%20Investment%20Report/WIR2012_WebFlyer.aspx