Africa is experiencing interesting times in an ever-changing and challenging global investment landscape

Global investment flows increased rapidly, from approximately $200 billion at the beginning of the 1990s to $1.43 trillion in 2017. The United Nations Conference on Trade and Development (UNCTAD) projected those flows to increase by 6 per cent, to $1.51 trillion, in 2018.

Notwithstanding efforts to attract greater investment by African countries, foreign direct investment (FDI) flows to the continent continued to decline in 2017, falling to $42 billion from $61 billion in 2015 amid low commodity prices. African countries therefore accounted for an estimated value of 3.2 per cent of global FDI in 2017, compared with approximately 5 per cent during the period 2012-2014. Equally, Africa held 11.4 per cent of the worldwide FDI capital flows in 2016, making the continent the second fastest-growing destination, signaling scope for greater opportunities in investment diversification within the continent, which may support the structural transformation initiatives.

Moreover, the level of FDI inflows in Africa varies highly throughout countries. For example, FDI inflows remain unequally distributed throughout the continent. In 2016, only five countries (Angola, Egypt, Ethiopia, Ghana and Nigeria) received nearly 57 per cent of the continent’s total inflows. This high level of heterogeneity observed at the national, sub regional and regional levels typically underlie a series of factors that need to be well understood. More fundamentally, this calls for a deeper analysis of what determines such flows to counter the root causes of decreasing investment and unlock its full potential in the continent.

Against this backdrop, the Economic Commission for Africa (ECA) has undertaken the present study on appropriate drivers for boosting intra-African investment towards Africa’s transformation. This study responds to the outcomes of the continental investment dialogue of the African Union, which was initiated in 2013, and which includes a recent request to undertake further research on intra-African investment flows and mechanisms to promote intra-African investment (African Union, 2013 and 2016). The present study attempts to respond to the call of the African Union Conference of Ministers of Trade and inform the debate on how Africa may better harness intra-African investment for its structural transformation.

Policy recommendations

The study provides evidence of the complementarities between trade and investment in Africa. Given the trade potential of the African Continental Free Trade Area and its likely implications for boosting intra-African trade and investment, there is a need for African countries to harness the area as a platform to boost intra-investment. Boosting intra-African trade through the area is instrumental in increasing productivity, enhancing competitiveness and supporting economic growth. This needs to be accompanied, however, by investment regulation and policies that unlock the associated joint benefits of trade and investment growth. It is therefore relevant to develop common rules on investment in the context of the area to lock in the expected dynamic and static effects of trade and investment flows on the continent.

Moreover, there is strong evidence supporting the notion that greater industrial trade on the continent may further attract investment, thereby promoting opportunities for vertical integration and value addition, which, in turn, may address the binding supply side constraints that are impeding Africa’s efforts to better integrate into regional and global value chains. The study corroborates that FDI openness promotes backward and forward integration. Boosting intra-African investment could also bolster the regional integration agenda at the regional economic community level and provide opportunities for alignment with the continental integration agenda. In this context, the African Continental Free Trade Area could resolve the challenges of multiple and overlapping regional economic community memberships.

The findings also point to the importance of a conducive business environment and trade logistics to attract greater intra-African investment. In addition, the study also confirms that boosting intraAfrican investment, especially in the industrial sector, could promote economic transformation and diversification. African countries wishing to promote economic growth by raising their total factor productivity must therefore pursue policies that improve the business environment and logistics performance.

Equally important is improving the quality of and access to education, given that doing so will raise the attractiveness of African economies, boost intra-African investment flows and promote associated technology and knowledge transfer. In this regard, it is critical to encourage the participation of women and men in the formal labour market to maximize the expected effects of intra-African investment through targeted and comprehensive strategies for young people and their employment, including at the regional level. In the context of the continental free trade area, this would also allow for greater flexibility and better planning of factor market mobility, an element that could also be incorporated into the negotiations on the movement of business persons to ensure that Africa generates jobs for the growing population of young people.

African Governments must further ensure that their investment laws are designed to spur national and regional investment. For example, investment laws should list priority investment sectors, including manufacturing and industrial ones. These sectors, rather than commodities, offer greater opportunities for regional integration and more strategic entry points at the higher levels of regional and global value chains.

The continent should also try to take advantage of transboundary investment opportunities, which benefit the subregions and regional economic communities. For example, if regulatory reforms are complemented by policies for public-private partnerships and blended finance that target investment for technology and innovation at the transboundary level, African countries could have much to gain from the spillover effects of intra-African investment.

Intra-African investment also has the potential to better integrate the continent’s regional value chains by relocating labour-intensive activities to Africa, including in manufacturing. Further integration, trade openness and regulatory predictability would send a powerful message to the African business community to invest in such activities, given that such measured would ease African investors’ entry into the continent and allow them to tap a larger good, services and factor market, while contributing to industrial transformation.

Lastly, promoting the private sector is also a key challenge to sustaining and enhancing the attractiveness and competitiveness of African markets, and its contribution to economic growth and employment is crucial. The financial sector therefore has a key role to play in supporting the private sector. There is a need to develop proactive financial sector policies that can help to channel investment to small and medium-sized enterprises. The African Continental Free Trade Area can constitute a vehicle to achieve these goals, provided that common rules for financial services actively support small and medium-sized enterprise development on the continent.

The present study was prepared under the overall leadership of Vera Songwe, Executive Secretary of the Economic Commission for Africa (ECA). The study was coordinated by Stephen N. Karingi, Director of the Capacity Development Division and Officer-in-Charge of the Regional Integration and Trade Division.