Africa has moved from third-last to become the second-most attractive investment destination in just four years from 2011 to this year, according to EY’s Africa Attractiveness Survey for 2014.

The continent’s share of global foreign direct investment (FDI) projects has reached a record high of 5.7 percent and the total value of FDI projects in Africa increased by 12.9 percent last year. The focus has been on sub-Saharan Africa, which now claims 83 percent of all FDI coming into the continent.

South Africa attracts the lion’s share of FDI, accounting for 24 percent of all FDI projects in Africa between 2007 and last year. Nigeria, Angola and Kenya were next best, attracting 9 percent, 8 percent and 7 percent, respectively.

The study shows that investors are moving away from the traditional extractive industries, such as oil and gas, and towards consumer-facing industries.

The industries that showed the highest growth in attracting FDI for last year were technology, media and telecoms; retail and consumer products; financial services; and business services.

The impact of this trend is more than simply a shift in investor attention. FDI in extractive-based industries, including mining, has traditionally created a situation where foreign companies invest money into African economies in order to build the infrastructure necessary to extract primary resources and export them in their raw form.

The best outcome is that jobs are created, adequate taxes are charged and appropriately distributed throughout the economy, and the new infrastructure has spin-off benefits for other industries.

The best-case scenario is rarely seen but even where it is, the lack of value added from such a process gives the host nation poor returns on the investment money coming into the country.

Adding value

In consumer-facing industries such as retail and banking, the foreign investor needs to add value to its investment within the host nation before it is able to take profits out. In the case of FDI into consumer-facing industries, foreign investors are attracted to Africa’s growing consumer base rather than its resources.

The impact of such investment is more positive for Africa as the bulk of the investor’s money remains within and is circulated around the host nation’s economy. The value chain is extended, resulting in greater consumer choice, increased skills development, and higher opportunity for subsidiary services to be provided by local or foreign firms.

The study also shows that there has been a significant increase in intra-African FDI, primarily driven by South African, Kenyan and Nigerian multinational corporations expanding into other African economies.

The compound annual growth rate of intra-African FDI projects between 2007 and 2013 was 31.5 percent – almost double the rate of the next highest FDI source, the Asia-Pacific region at 16.6 percent.

The two trends are very much related. African companies have better knowledge of African markets, more resources deployed locally, and more years of experience operating in African economies.

They are better able to mitigate risk than investors from outside of Africa and generally perceive there to be less political and economic risk in Africa than non-African investors do.

They are more willing to expand into non-traditional and non-extractive industries where local economic conditions will have a significant impact on the returns on investment.

In extractive industries where resources are exported in their raw form, local economic growth has little impact on the foreign investor’s returns.

The infrastructure, value chains and regional integration developed by intra-African FDI will lay the groundwork for the rest of the world to see the potential in African growth.

As investment hubs are expanded in Lagos and Nairobi, smaller, more marginalised African economies will be brought into the continental economy and trade within Africa will increase significantly.

Pierre Heistein is the convener of UCT’s Applied Economics for Smart Decision Making course.