​Foreign direct investment (FDI) flows to Africa slumped to $42 billion in 2017, a 21% decline from 2016, according to UNCTAD’s World Investment Report 2018. 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 interregional 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 said.

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.

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.

In Southern Africa, FDI declined by 66% to $3.8 billion. FDI to South Africa fell 41% to $1.3 billion, due to an underperforming 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.

FDI inflows to Africa are forecast to increase by about 20% in 2018 to $50 billion. The projection is underpinned by the expectations of a continued modest recovery in commodity prices and strengthened interregional economic cooperation. Yet Africa’s commodity dependence will cause FDI to remain cyclical.

Figure 1: African FDI inflows, by subregion, 2010-2017
(Billions of dollars)    

Source: UNCTAD, World Investment Report 2018.

Figure 2: The top investor economies in Africa, 2011 and 2016
(Billions of dollars)    

Source: UNCTAD, World Investment Report 2018.
Note: Numbers presented in this figure are based on the FDI stock data of partner countries.

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Global foreign direct investment flows fell sharply in 2017

Global foreign direct investment (FDI) flows fell by 23% in 2017, to $1.43 trillion from $1.87 trillion in 2016, according to UNCTAD’s World Investment Report 2018. The decline is in stark contrast to other macroeconomic variables, which saw substantial improvement in 2017.

“Downward pressure on FDI and the slowdown in global value chains are a major concern for policymakers worldwide, and especially in developing countries,” UNCTAD Secretary-General Mukhisa Kituyi said.

“Investment in productive assets will be needed to achieve sustainable development in the poorest countries.”

The global fall was caused in part by a 22% decrease in the value of cross-border mergers and acquisitions (M&As). But even discounting the large one-off deals and corporate reconfigurations that inflated FDI in 2016, the 2017 decline remained significant. The value of announced greenfield investment – an indicator of future trends – also fell by 14%, to $720 billion.

Investment downturn

Prospects for 2018 are therefore muted. Global flows are forecast to increase marginally but remain well below the average over the past 10 years. An escalation and broadening of trade tensions could negatively affect investment in global value chains (GVCs). Tax reforms in the United States are likely to significantly affect global investment patterns.

UNCTAD observed that the negative FDI trend is caused in large part by a decrease in rates of return. The global average return on foreign investment is now at 6.7%, down from 8.1% in 2012. Return on investment is in decline across all regions, with the sharpest drops in Africa and in Latin America and the Caribbean. The lower returns on foreign assets also affect longer-term FDI prospects.

As a result of the investment downturn, the rate of expansion of international production is slowing down. The modalities of international production and of cross-border exchanges of factors of production are shifting from tangible to intangible forms. Sales of foreign affiliates continue to grow (up 6 per cent in 2017) but productive assets and employees are increasing at a slower rate. This could negatively affect the prospects for developing countries to attract investment in productive capacity.

Chain reaction

Growth of GVCs has also stagnated. GVC trade peaked in 2010-2012 after two decades of continuous increases. UNCTAD’s data shows foreign value added in trade (the key GVC indicator) down 1 percentage point to 30% of trade in 2017. The GVC slowdown shows a clear correlation with the FDI trend and confirms the impact of the FDI trend on global trade patterns.

FDI remains the largest external source of finance for developing economies. It makes up 39% of total incoming finance in developing economies as a group. It now accounts for less than a quarter in the least developed countries (LDCs), with a declining trend since 2012.

Meanwhile, the report shows, industrial policies have become ubiquitous. Over the past 10 years, at least 101 economies across the developed and developing world (accounting for more than 90% of global GDP) have adopted formal industrial development strategies. The last five years have seen an acceleration in the formulation of new strategies.

New industrial revolution

UNCTAD’s survey shows that modern industrial policies are increasingly diverse and complex, addressing new imperatives, such as GVC integration and upgrading, the knowledge economy, build-up of sectors linked to the Sustainable Development Goals and competitive positioning for the new industrial revolution.

“The new industrial revolution is already affecting cross-border investment patterns. Investment policies must adapt as part of new industrial development strategies,” Dr. Kituyi said.

Some 40% of industrial development strategies contain vertical policies for the build-up of specific industries. Just over a third focus on horizontal competitiveness-enhancing policies designed to catch up to the productivity frontier. And a quarter focus on positioning for the new industrial revolution.

About 90% of modern industrial policies stipulate detailed investment policy tools, mainly incentives and performance requirements, special economic zones (SEZs), investment promotion and facilitation and, increasingly, investment screening mechanisms.

Modern industrial policies are a key driver of investment policy trends. More than 80% of investment policy measures recorded by UNCTAD since 2010 are directed at the industrial system (manufacturing, complementary services and industrial infrastructure), and about half of these clearly serve an industrial policy purpose.

The report suggests that the new industrial revolution requires a strategic review of investment policies for industrial development. It advises policymakers to keep investment policy instruments up-to-date by re-orienting investment incentives, modernizing SEZs, retooling investment promotion and facilitation, and developing smart mechanisms for screening foreign investment.