During the last decade and a half, African economies grew at nearly double the rate of the 1990s. However, the commodity boom obscured a key weakness in African economic performance – slow manufacturing growth.

Productivity increases in Africa, after 2000, happened without the deep structural change that shifts labour from low to high productivity jobs. Moreover, the recent wave of trade globalisation and FDI in manufacturing has largely passed Africa by. In a period when most developing countries’ shares of global manufactured exports have more than doubled, Africa’s has stagnated in the low single digits.

Increasing FDI can enable Africa to raise productivity and expand high value-added activities. Recent studies show that FDI can generate productivity spillovers, which in turn could create decent jobs and a sustained impact on growth and development in Africa. Making it easier and more attractive for foreign firms to invest in African manufacturing and high-value added services should therefore be a priority for governments and international donors.

The growing importance of global value chains and trade in “tasks” (intermediate goods and services) create new opportunities for FDI in Africa. To exploit these opportunities and attract FDI, the main constraints that need to be addressed are the poor quality of institutions, inadequate infrastructure, and policy-distorting price incentives. These actions must be accompanied by policies to increase FDI spillovers and backward linkages to support structural transformation and growth.

Key messages

1. FDI can catalyse industrialisation and structural transformation, creating new jobs in Africa.

By increasing firm capabilities and generating important productivity spillovers, through technology and know-how transfers, FDI can help engineer a structural shift to higher productivity jobs and high-value added industry niches.

2. Infrastructure, institutions, and incentives must be addressed to attract more FDI.

Improved infrastructure, especially in power and transport; stronger institutions, from border controls to investment promotion agencies; and reductions in price-distorting trade policies are needed to attract FDI.

3. Policies to promote FDI must also seek to get more out of FDI.

The broader benefits of FDI are not automatic. Policies to facilitate spillovers and backward linkages are crucial to ensuring that FDI contributes to structural transformation and growth.

Policy recommendations

1. To accelerate the pace of structural transformation, countries should target FDI in the manufacturing sector.

High value-added tradable services, agro-industrial activities and services that directly impact the productivity of modern firms, such as financial services, telecommunications and infrastructure should also be considered.

2. To attract FDI to Africa, policies must be put in place to address constraints in three key areas: infrastructure, institutions and incentives.

• On infrastructure, policies should focus on improving access to and reliability of competitively priced electric power, and upgrading the transportation system and ports, as well as improving policies to promote the efficient use of existing infrastructure.

• On institutions, policies should focus on improving investment promotion agencies; export promotion agencies; standards bodies; border control authorities; and customs.

• On incentives, policies should focus on reducing anti-export bias in tariffs and non-tariff barriers, on maintaining competitive real exchange rates, and on the potential role for SEZs.

3. To harness the benefits of FDI, attention must be given to enhancing the potential for spillovers through backward linkages.

The evidence on FDI spillovers shows that the main benefits flow through the domestic supply chains of MNEs (‘vertical linkages’). Thus, encouraging the creation of Local Content Units may be helpful, especially in the case of extractives. Also, efforts to improve backbone network services and financial services can be crucial to further growth in manufacturing