West Africa Review (2001)
ISSN: 1525-4488
CAN AFRICA INCREASE ITS GLOBAL SHARE OF FOREIGN DIRECT INVESTMENT (FDI)?
West Africa Review (2001)ISSN: 1525-4488CAN AFRICA INCREASE ITS GLOBAL SHARE OF FOREIGN DIRECT INVESTMENT (FDI)? |
|
Foreign Direct Investment (FDI) has increased much in both relative and absolute terms in the past two decades or so. The literature on FDI has received great attention in the recent past. To the best of my knowledge none of the studies that have been made on FDI has tried to examine whether Africa can increase its global share of FDI inflow. In this work, I address this question because I think that it has great relevance to, and importance for the continent and its people. A desire to identify the potential roles of FDI is one of the driving forces behind this work. After the introduction, I present some definitions of FDI. This is followed by a description of Africa’s current share of global FDI inflow. Then I examine the potential roles of FDI in host economies or recipient countries. After a consideration of the determinants of FDI, I discuss the issue of whether or not Africa can increase its global share of FDI inflow. This will lead to a section on opportunities and potentials for Africa in respect of its capacity for increasing its share of global FDI inflows. I end with a summary and conclusion.
There are several definitions of FDI in the literature. Rutherford (1992: 178; 1995: 178-179) defines FDI as investment in businesses of another country which often takes the form of setting up of local production facilities or the purchase of existing businesses. He contrasts FDI with portfolio investment which is the acquisition of securities. In various press releases by the United Nations Conference on Trade and Development (UNCTAD),1 FDI is defined as an investment involving management control of a resident entity in one economy by an enterprise resident in another economy. FDI involves long-term relationship reflecting an investor’s lasting interest in a foreign entity. FDI definitions differ greatly across countries. It is my opinion that the differences are likely to be based on the criterion of the percentage of ownership of shares (i.e. control) between foreigners and citizens in a country’s firms.2
FDIs have been flowing to different regions of the world and countries in different proportions. The United States of America, the European Union and Japan, have been the main FDI sources and destinations over time. The African continent has been receiving the lowest share of global FDI inflows over time. According to Bjorvatn (2000: 1), the whole of Africa receives less FDI than Singapore! This is in spite of the fact that FDI is welcome and actively sought by virtually all African countries. The expected surge of FDI into the continent as a whole has not occurred. The continent did not benefit from the FDI boom that began in the mid- 1980s. Since 1970, FDI inflows into Africa have increased only modestly, from an annual average of almost $1.9 billion in 1983-1987 to $3.1 billion in 1988-1992, and $6 billion in 1993- 1997. For comparison purposes it should be noted that the global FDI flows in 1998 reached a record $644 billion (UNCTAD Press Release, 22 June 1999). The figure says much about Africa’s share when we compare it with, say, the $6 billion inflow to the region between 1993 and 1997. The inflow to Western Europe in 1997 was $114,857 million and to North America the figure for the same year was $98,994 million. FDI inflows into developing countries as a group almost quadrupled from less than $20 billion in 1981-1995 to $75 billion in 1991-1995. Inflows to Africa in that period merely doubled. It is not an exaggeration to say that Africa’s share in total inflows of FDI to developing countries dropped significantly from more that 11% in 1976-1980 to 9% in 1981-1985, 5% in 1991-1995 and to 4% in 1996-1997. Its share of total outflows from the United States of America, the European Union, and Japan, the most important source regions for FDI, was even lower during 1987-1997 period as other developing regions such as Asia, Latin America and the former communist states of Eastern and Central Europe, became more attractive as FDI receptacles. The share never exceeded 2% until 1996. It increased to 2.4% in 1997.
Africa’s global FDI share is also reflected in the ration of FDI to Gross Domestic Product (GDP). In 1970, the region attracted more FDI per $1000 of GDP than Asia, Latin America and the Caribbean. The FDI in dollars per $1000 of GDP in 1970 was 7.9, 6.7 and 2.7 for Africa; Latin America and the Caribbean; and South, East and South-East Asia respectively. The corresponding figures for 1996 are 13.6, 24.8 and 25.7. For 1997, the figures are 14.7, 33.8 and 28.3 respectively. By 1990, Africa had fallen behind other developing areas in terms of its value of FDI inflows and the FDI/GDP ratio, and has stayed behind since then. In the 1990s, the gap increased widely when the worldwide surge in FDI flows into developing world largely bypassed the region.
At this juncture, it should be mentioned that the share of FDI flowing into Africa has not been even in all countries. Egypt and Nigeria have received a lion’s share of FDIs flowing into the region in terms of absolute size. The share has however declined from more than 67% in 1983-1987 to 54% in 1988-1992, and 38% in 1993-1997. Looking at the figures for FDI inflow into Africa as a whole it is clear that its global share is by all standards very low. This share needs to be increased given the potential positive roles3 that FDI can play in the continent’s development. However, Africa’s ability to increase its share is questionable. It is doubtful whether the continent has enough of the FDI determinants required to attract more of the global FDI outflows.
This work assumes that FDI is good and necessary for the development of Africa.4 FDI continues to be a driving force in the globalization process that characterizes the modern world economy. The process has diminished the importance of territorial boundaries and every part of the world is in one way or another involved in the process. The continent should therefore increase its global share of FDI. The assumption is based on the potentially positive roles that FDI can play in the development of the continent. This justifies the concern about the need for and ability of the continent to increase its global share of FDI inflows. Here are some of the potential roles that FDI can play in host economies.
It is a fact that Africa, like many other developing regions of the world, needs a substantial inflow of external resources in order to fill the saving and foreign exchange gaps associated with a rapid rate of capital accumulation and growth needed to overcome widespread poverty and to lift living standards to acceptable levels. The need for external financing is nowhere more pressing than in Africa, where income levels are too low to generate adequate domestic resources for the attainment of even modest rates of investment and growth. I would like to argue that FDI is currently the best alternative source of external capital for the development of Africa. Let me try to explain why this is so.
Through the 1960s and 1970s, countries were encouraged to borrow on the international markets and finance their own investments. Among the alternative means of financing these investments was FDI. It was argued that this alternative was one of the most expensive ways to finance capital accumulation. Many countries borrowed instead. As a result of this latter strategy, many developing countries, including those in Africa, accumulated huge debts. No thanks to these huge debts, they have less accessibility to international capital. According to UNCTAD (2000: 4), long-term bank lending has completely disappeared in Africa since the mid-1980s. Private inflows of capital into the region have mainly consisted of FDI and short- term bank lending. It is now widely recognized that FDI can play a useful role in development. The usefulness of FDI is not only due to its financial contribution; rather, it is important because of other characteristics of FDI when it forms part of a package investment options. I provide reasons for this contention in the next section.
FDIs can (1) create employment in host economies; (2) be vehicles of transfer of technology; (3) provide superior skills and management techniques to host economies; (4) help in the capital formation process; (5) facilitate local firms’ access to international markets; (6) use local resources more efficiently and productively; (7) increase product diversity; (8) use environmentally clean technology; (9) observe human and labor rights and; (10) create a lot of linkage-effects in the economy, both forward and backward. Generally speaking, then, it can be said that FDI can be an engine of economic growth in a host economy. Such investments can sustain and improve economic development in a country or a region for that matter. Given the economic conditions in Africa and its level of development,5 the need for FDI in the region cannot be overemphasized. The continent needs to increase its share of global FDI inflows as one of the most likely ways to increase the needed external capital for its development.
This section focuses on a review of FDI determinants. These are the factors that determine FDI inflows into a given geographical location, say, a country or a region. They give investors the confidence needed to invest in foreign markets. The list of these determinants may be very long, but not all determinants are equally important to every investor in every location at all times.
Some determinants may be more important to a given investor in a given location at a given time than to another investor. A given determinant may be a necessary and satisfactory factor by itself for FDI inflow in one location but not in another. For the most part, they form a complementary set. What interests us in this section is to find out the factors that would motivate or attract a multinational enterprise (MNE)6 to invest in a particular destination after making the decision to go multinational. These are the factors that give the investors the confidence to commit their normally massive, expensive and scarce resources in a given foreign destination. It is difficult to determine the exact quantity and quality of FDI determinants that should be present in a location for it to attract a given level of FDI inflows. What is clear is that every location must possess a certain critical minimum of these determinants before FDI inflows begin to take place. UNCTAD’s 1998 World Investment Report presents some host country determinants of FDI. These include:
UNCTAD (1998) lists the principal economic determinants in host countries. It matches types of FDI by motives of the firms with those principal economic determinants. Where we have a market-seeking type of FDI, it looks for criteria concerning market size and per capita income; market growth; access to regional and global markets; country-specific consumer preferences and; structure of markets. In the case of FDI of a resource/asset- seeking type, the focus would turn on raw materials, low-cost unskilled labor as well as skilled labor, technological, innovative and other created assets (like brand names), and physical infrastructure (ports, roads, power, telecommunications). There is another type of FDI: one that is directed at ensuring efficiency.
This type looks for favorable balances in the costs of resources and assets listed above, adjusted for labor productivity as well as in other input costs, such as transport and communications costs to/from and within the host economy. Finally, it is interested in whether or not the host economy is part of a regional integration agreement that may be conducive to the establishment of regional corporate networks.
Finally, given that FDI is increasingly geared to technologically intensive activities, technological assets are becoming more and more important for TNCs to maintain and enhance their competitiveness. A destination’s possession of a strong indigenous technology base is vital for attracting high-technology FDI and for research and development (R&D) investments by TNCs.7 A would-be host country, in order to attract scarce FDI, must be able to provide the requisite inputs for modern production systems. For example, efficiency-seeking FDI will tend to be located in those destinations that are able to supply a skilled and disciplined workforce and good technical and physical infrastructure. Bjorvatn (1999) says that firms will locate their industrial activities in countries with superior quality of national infrastructure. A good quantity and quality of infrastructure in a location is among the factors that facilitate business operations. Physical infrastructure includes roads, railways, ports and telecommunication facilities. The latter include traditional postal services and modern communication facilities such as the network Internet.
Regional Trading Blocks (RTBs) are essential determinants of FDI. These represent various forms of economic integration among countries. They are designed to promote cross-or inter- country trade and mobility of factor services from within member countries by fostering a more market-oriented pattern of intra-regional resource allocation. They have the potential to increase the size of a unified market. Common external tariffs imposed by RTBs are likely to force non- members to enter the market through FDI rather than through trade. This is one of the ways in which RTBs may be among the essential FDI determinants. No wonder then that the European Union as a group attracts so much FDI.8 The importance of regional groupings as a factor in attracting FDI has also been advocated by the UNCTAD. The organization argues that countries stand to reap some economies of scale in regional groupings and that it develops complimentarity of interests between land-locked and coastal countries.9 In the African context, such economic groupings as the Economic Community of West African States (ECOWAS) and the Southern African Development Corporation (SADC) may be counted as RTBs.10
Language and business culture are also determinants of FDI inflows. In a destination where a language like English is commonly spoken by the majority of the population, one would expect more FDI inflows than if the case were otherwise. Of course, we have cases where there has been more FDI inflow to destinations where language is on the surface a barrier, e.g., South Korea, Indonesia, Taiwan and China than to where language seems to be an advantage as in most African countries like Nigeria, Kenya, Tanzania and Ghana where English is widely spoken. It may be difficult to account for such observations without further research. Generally it can be assumed that the former group of countries possesses more of the other FDI determinants than the latter. For example, the huge market that China represents is likely to overshadow the language problem there. In that case language, like many other determinants, seems to be an important but not a necessary and satisfactory factor by itself.
Tax exemptions, tax holidays or tax reduction for foreign investors, and similar incentives would play a positive role in attracting FDIs into a given destination. Some other types of incentives that may play similar roles include guarantees against arbitrary treatment in case of nationalization; government provision of such utilities as water, power and communication at subsidized prices or free of cost; tariffs or quotas set for competing imports; reductions/elimination of import duties on inputs; interest rate subsidies; guarantees for loans and coverage for exchange rate risks; wage subsidies; training grants and relaxation of legal obligation towards employees. But the costs of these incentives to the host economy must be compared to the potential benefits that FDI may bring.11 If, and only if, the benefits of the FDI projects more than offset the costs should host economies offer any incentives.
Labor availability and relatively low labor costs, high skills and efficiency are important factors determining FDI inflow into a given destination. For example, the region covered by the fifteen former communist states of Central and Eastern Europe is seen by some MNEs such as Daewoo, as a low-cost production base that can be used as an export platform to service West European markets. Relatively lower wage costs have also been used to account for increased FDIs in Asia especially in the Tigers of Asia.12 The labor force has to be non- militant. There should be generally good labor relation, low rate of industrial disputes, strikes and lockouts and a high level of employee loyalty in a given destination for FDIs to flow there in a substantial amount.
Investors may also be attracted by other factors such as low cost but high quality inputs and minimal transaction costs in their interaction with the government and other bureaucracies. The extent to which unnecessary, distorting and wasteful business costs are reduced will most likely contribute positively to FDI inflow into a given destination.
The strength of a currency also may determine FDI inflow. A relatively weak currency would be more likely to attract FDIs than a relatively strong one. Realizing potential losses inherent in converting weak currency to hard ones, many foreign investors may simply plow back into the host economy their profits and other remittances. Currency devaluation may lead to cheap assets. Cheap assets, on the other hand, are expected to attract more FDIs especially through Mergers and Acquisitions (M&As).
Economic and structural reforms in a country are very important in winning foreign investors’ confidence to take their investment funds there. Such reforms can be very wide and far-reaching. The various reform measures may overlap with each other. Reforms, whether social, political or economic, should aim at creating, maintaining and/or improving the environment for business, both local and foreign. Some of the important reforms can involve the relaxation of entry restrictions in various sectors, deregulation in various industries, abolition of price controls, easing of controls over mergers and acquisitions and trade practices, removal of government monopoly, privatization, independence of the Central Bank, elimination of import licensing, removal of foreign-exchange, exchange rate and interest rate controls. Such reforms are likely to create a business-friendly environment that is likely to attract more FDI. But the reforms may be expensive to a nation and its people. For these reforms to be justified, they must take into consideration the impact on the populace of the country concerned. Investors are more likely to choose those locations that make it easier to do business. These are likely to be found in countries with solid economic fundamentals. The 1997 figure for developed countries’ share of global FDI inflow (72%) most likely reflects the presence of the solid economic fundamentals in the United States and some European countries.
It has been argued that the attractiveness of developing countries for foreign capital depends on the capabilities of these countries to apply existing technologies and not on their role in producing new one. That is, FDI inflow to such countries in the first place will depend on, among other things, the existence of this capability. We may then list the ability to use the existing technology as yet another factor that can determine FDI inflow into a specific destination.
Non-discriminatory treatment of investors, consistency and predictability in government policies are also among the FDI determinants. Investors need to be in a position where they can plan their activities efficiently within the policy environment of the government. Those government policies that directly or indirectly affect investments should be reliable, accessible, up to date and widely publicized. Government credibility is essential if more FDI is to flow to a destination. In this connection, the system of processing and approving new investments may be a crucial determinant for further FDI inflow into the same destination. A long, bureaucratic, non- transparent and corrupt process is likely to scare away potential investors. What is needed is a relatively short, transparent and non-corrupt process undertaken in, if possible, a one-stop-shop. Some other FDI determinants include a positive economic growth in a given destination.
Economic growth in turn determines market prospects. It is more likely that FDI will flow more to destinations with promising economic growth both in the short and long run. Other FDI determinants mentioned in the literature include low indirect social costs like bribery or its absence; availability of risk capital; synergy between public and private research and development programs; low rate or absence of criminality, alcohol and narcotic abuse as these affect the security of personnel and the quality of the labor force as a whole. The values, norms and culture of the population in the host economy must be ready to support the principle of free competition. Authorities must be able to adjust policy to reflect new economic, social and political realities of the time. Prevailing views on environmental issues and the occurrence of activism, while important, must not be fanatical and detrimental to business operation. They must be reasonable. Countries’ health services, recreation possibilities and overall quality of life, too, influence FDI inflow.
A country’s membership in a binding multinational investment agreement and institutions concerning FDI can reduce the perceived risk of investing there. When the risk of investing in a location is reduced, we expect to see an increase in investments there. Such agreements include several bilateral investment treaties and double taxation treaties. Among the organizations that have an impact on the flow of FDI are the World Intellectual Property Organization (WIPO); the convention establishing the Multinational Investment Guarantee Agency (MIGA); the Convention on the recognition and enforcement of foreign arbitral awards; the Convention on the settlement of investment disputes between states and nationals of other states.
The presence of investment opportunities in a country, needless to say, is another important FDI determinant. The opportunities should be made known to potential investors through effective promotion which includes marketing a country and coordinating the supply of a country’s immobile assets with the specific needs of targeted investors. One cannot always expect that investors will take the trouble of finding out the available opportunities in every country. Countries must reach out to investors.
Where the world’s largest TNCs invest is sometimes determined by access to technology and innovative capacity in particular countries. These factors, in contrast to natural resources, are called “created assets”. These include communication infrastructure marketing networks, knowledge—which can be used as a proxy for skills, attitudes to wealth creation and business culture, technological, managerial and innovative capabilities, competence at organizing income-generating assets productively, as well as relationships (such as between firms and contracts with governments) and the stock of information, and, finally, trade marks or goodwill. Possessing the assets just adumbrated is critical for competitiveness in a liberalizing and globalizing world economy. However, the traditional factors such as access to markets, natural and other resources like low-cost labor are still key FDI determinants especially for many firms that have not yet developed large-scale international operations.
As mentioned at the beginning of this section one can see that some of the determinants overlap. It is almost impossible to give a threshold of the determinants that should exist in a location before a given amount of FDI begins to flow there. But it is clear that a certain critical minimum of the determinants should exist before the inflows start to take place. A location that possesses an optimal quantity and quality of the determinants can be said to be an attractive destination for FDI. For a destination to attract or increase its FDI share it should possess this critical minimum of the determinants.
This section presents an analysis and discussion of whether Africa can increase its global share of FDI inflow. This is likely to be a complex and provocative question. The discussion is based on some of the FDI determinants presented in the previous section. The extent to which the determinants are present in the region is identified. I do not pretend to address all the issues facing Africa as regards its ability to increase FDI inflow. However, I expect that the issues discussed will be considered representative.
It is assumed that when a given location does not have adequate quantity and quality of FDI determinants, it can be very difficult for it to increase FDI inflows in a substantial way. In what follows, I discuss the presence of FDI determinants in Africa and the possibility of increasing its global share of FDI.
Among the features that negatively affect the flow of FDI into Africa is its image.13 The image of the continent as a location for FDI has not been favorable. Too often potential investors discount the continent as a location for investment because a negative image of the region as a whole conceals the complex diversity of economic performance and the existence of investment opportunities in individual countries. In a foreword for (UNCTAD 1999b: 1), the Secretary-General of the United Nations, Kofi Annan, puts it this way: “For many people in other parts of the world, the mention of Africa evokes images of civil unrest, war, poverty, disease and mounting social problems. Unfortunately, these images are not just fiction. They reflect the dire reality in some African countries—though certainly not in all.”
When investors perceive the continent as a home for wars, poverty, diseases and a generally unfriendly investment destination, the result is the diversion of these investments to other regions.14 It may then become very difficult for the continent to increase its global share of FDI if its current negative image continues to prevail. What is needed is for both the African continent and the international community as a whole to eliminate those negative factors that give the continent its poor image. The media should not exaggerate the reality. Instead it should give a more balanced and positive picture of the continent. War in Somalia should be reported as war in Somalia and not as war in Africa, the way war in Yugoslavia is reported as war in Yugoslavia and not war in Europe.
The promotion of peace, economic prosperity and sustainable development for Africa’s people, is still a big challenge. There are many symbols of failure, despair, brutality and people who are physically and psychologically scarred by many years of dreadful warfare across the continent. Examples include Sierra Leone, Liberia, Somalia, Rwanda, Algeria, Angola, and Mozambique.
The investment climate in such locations is not likely to attract a substantial quantity and quality of investments.15 To the extent that dreadful warfare persists in Africa it can be very difficult for the continent to increase its global share of FDI inflow in any appreciable number. The Economist (May 13 th 2000:17), under the heading “Hopeless Africa”,16 points out that, “. since Sierra Leone seemed to epitomize so much of the rest of Africa, it began to look as though the world might just give up on the entire continent”. The country is an extreme, but not untypical, example of a state with all the epiphenomenona and none of the institutions of government. The situation in Sierra Leone and other war-torn territories in Africa unfortunately have negative effects on the prospects of FDI inflow into other countries. As pointed out earlier and evidenced in the article referred to above, unrest in Sierra Leone is reported as unrest in Africa. Alongside Sierra Leone, one can mention the seven- year civil war in Burundi which has claimed at least 100,000 lives. One can also point to the “curtain of fire” stretching from Eritrea, through Ethiopia, Sudan and Congo to Angola. Currently there are at least 14 conflicts that rage across the continent. A Norwegian Newspaper, VàrtLand (17 th June 2000), reports that every fifth African is living in a conflict-prone zone. It is a fact that few investors, if any, would like to operate in conflict-prone zones. This is clearly not good news if the region is to increase its global share of FDI. Parties involved in such conflicts should give peace a chance if FDI is to increase in any appreciable number not only in the countries ravaged by war but also in the whole of Africa.17
Conflicts are a barrier to efforts at increasing a location’s share of global FDI.18 In World Bank (2000: 59), some costs of conflict in Africa are outlined. These include social and economic costs where it occurs and in neighboring countries by generating flows of refugees, increasing military spending,19 impeding key communication routes and reducing trade and investment (domestic and foreign). Conflicts divert resources from development uses. It is estimated that a total of $1 billion is used on conflict yearly in Central Africa. The figure amounts to more than $800 million in West Africa. On top of this comes the cost of refugee assistance, estimated at more than $500 million for Central Africa alone.
Crime and violence have many direct economic and human costs that may hinder FDI inflow directly or indirectly. They inhibit development in many ways. For example, some factories may not operate more than one shift because employees cannot commute safely to work. FDI projects depending on operating several shifts may therefore not be able to do so. This may mean that they lose their profitability and competitiveness. They are therefore likely to be scared away from investing in Africa.
Other factors that may hinder more FDI inflow to Africa include the AIDS epidemic and tropical diseases like malaria. From CNN In-Depth Specials (July 19 th 2000), we learn that of the 33.6 million people infected with the HIV virus worldwide, 23.5 million (about 70%) are Africans. The United Nations estimates that the number of AIDS orphans will reach 13 million by 2001. The continent has already lost 13.8 million people to AIDS, and nearly 10,500 new cases are diagnosed daily. AIDS may hinder FDI inflow in that it decimates the already scarce skilled manpower. According to Vàrt Land (17 th June 2000), the International Labor Organization (ILO) estimates that the labor force in Africa will fall by 20% in the near future due to the AIDS epidemic. The availability of a healthy labor force is a very important FDI determinant. FDI will likely be scared away from Africa if the continent’s already scarce labour force is further depleted by this epidemic. Besides reducing the badly needed labor force in Africa the AIDS epidemic makes it necessary for authorities and individuals to divert scarce and very valuable pecuniary and non-pecuniary resources like time and personnel to AIDS and AIDS-related issues. These resources could have been used to create a more enabling environment for business in the continent. They could, for example, be invested in infrastructure and education. The latter steps would in turn facilitate the efforts to increase FDI inflow. The global share of FDI inflow to Africa would most likely increase by a substantial amount if it were not for the impact of the AIDS epidemic. AIDS then threatens the economic future of the continent.20
There are numerous other factors that militate against the inflow of FDI into Africa. These will include Malaria and other tropical diseases, forces of nature such as floods and drought, and, on occasion, government-sponsored thuggery, not to talk of corruption.
The refugee problem adds to the bad image of Africa. The continent is home to more than half of the world’s refugee population—about 12 million, including those internally displaced. Life as a refugee is not the best one can wish for. One can suffer some psychological and emotional torture that makes one unable to work productively. That is to say, it can be difficult for most refugees to supply their labour force for productive work. The problem of refugees contributes to the shortage of the needed labour force in Africa. Refugees are a cost to host governments and organizations, e.g., the United Nations that finance them. Resources expended on refugees could have been used in creating a more competitive environment for investments.
So far we have discussed factors that are internal to Africa. Some factors that are external to Africa play a part in making it difficult for the continent to increase its global share of FDI. In this connection, we can cite such factors as the legacy of colonial rule, cold war rivalry, the debt crisis, exploitative trading relations and too strict demands for economic reform from the International Money Fund and the World Bank. Some of these factors are elaborated below.
The colonization of Africa by Europe led to the current artificial division of the continent. The division has been one of the major sources of war in Africa. Countries fight with each other mainly for the purpose of controlling resources found on the other side of boundaries. We already discussed the consequences of war on the prospect of FDI in the continent. The economic foundations laid by the colonial masters in Africa aimed at serving themselves. Africa was made to be a supplier of raw materials, primarily from the primary sector producing agricultural outputs and minerals. The continent was made to be a market for finished products. Such economic bases are among the factors that contribute to the current poverty level in Africa. This poverty makes it difficult for the continent to create an investment- friendly environment.
The exploitative trading relations between the North and South partially account for problems in Africa. In the current trading relation, the North dictates the price of commodities in its favor and against the South. Most African countries find themselves on the losing side. They mostly experience deficits in their import-export performance. This leads to, among other things, the difficulty using domestic sources to finance their development projects. As a result, most development projects, for example, infrastructure development, are likely to be abandoned. Poor infrastructure, in turn, becomes a barrier to FDI inflow.
External borrowing may offer an alternative to financing development projects by using domestic sources. This alternative is not without potential problems for the borrowing countries. When debts are accumulated, the payment of accruing interests may oblige the borrowing countries to divert resources to the service of debt repayment instead of investing in the country in order thereby to create a more attractive business environment for investments. Meanwhile, when they fail to repay, they fall into debt crisis and this makes it even harder for them to borrow more. In this way, the debt crisis in Africa is a barrier to the continent increasing its global share of FDI.
The presence and emergence of other developing regions of the world (Asia, Latin America, Caribbean and the former socialist states of Eastern and Central Europe) as more attractive investment locations adds to the challenges that Africa must encounter before it can add to its global share of FDI. Several regions of the world are competing for limited investments. Only those locations with adequate FDI determinants are likely to be able to increase their global share of FDI in an appreciable manner.
However much external factors may contribute to Africa’s inability to attract FDI, we must ultimately focus on internal factors that militate against Africa’s participation in the global economy. We conclude this section with a discussion of some additional internal features in Africa that can have negative effects on its efforts to increase FDI. These include the region’s very low gross domestic product (GDP). According to World Bank (2000) the combined GDP for the region is smaller than that of Belgium and is divided among 48 countries with a median gross domestic product of just over $2 billion, which is the output of a town of 60,000 in a rich country. Africa accounts for barely 1% of global GDP and only 2% of world trade. Its share of global manufactured exports is almost zero.
In the World Bank report referred to above, it is indicated that Africa is regressing. Many countries are worse off today than they were at independence in the 1960s. Although the region’s population of about 600 million could potentially represent a huge market, low levels of incomes in the region erode this potential. Mozambique, for example, had a per head income of $80 in 1998. The region as a whole had an annual GDP per capita of $800 in the same year. The low-income level in Africa, which translates to limited purchasing power, then is a barrier to market-seeking FDI.
With its rapidly growing population the continent needs to grow by at least 5% per annum just to maintain current poverty levels. In 1997, much of Africa had a GDP growth rate of 3% and for the period 1997-2006, the growth is estimated to be 4.1%. With population growing at a faster rate than the GDP there is a danger of growth in poverty in Africa. This does not present a promising environment for a substantial increase in FDI.
Africa has poor “hard” physical infrastructure like telecommunications, power, transportation, water and sanitation. These are very crucial for development and for a location’s ability to attract and keep FDI.21 Low population density, small national markets, and a high number of small and landlocked countries, make it difficult to develop infrastructure in the continent. For example, small national markets limit economies of scale, reduce competitiveness and increase risk.
World Bank (2000) points out that Poland has more roads than the whole of Africa! With 10 million telephone lines in the continent—fewer than in Brazil, and with half of them in South Africa—most Africans live two hours away from the nearest electronic communication. The continent contains just 2% of the world’s telephone main lines. According to The Economist,22 thirty-four countries in Africa have less than ten telephone lines per 1,000 people, compared to the average of 500 lines to 1,000 in rich countries. Nigeria’s 120 million inhabitants have only four lines per 1000 people. I observe in Tanzania that the introduction and rapid spread of mobile phones is likely to change the situation there for the better. This seems to be the situation in some other African countries, e.g., Nigeria and Ghana, where mobile phones are available at a rapidly increasing rate. Other infrastructural facilities such as paved roads, railways, ports and telecommunications are equally inadequate and, in some cases, nonexistent.
Another issue of concern about infrastructure in Africa is its cost. From World Bank (2000) we learn that the continent has the highest transport cost of any region. The continent is isolated from major maritime and air routes and is served by peripheral, high cost routes. Freight costs for imports are 70% higher in East and West Africa than in developing Asia. For land-locked Africa the cost is more than twice as high as in Asia. Internal transport in Africa is also costlier. For example, in the mid-1990s, road transport costs in Ivory Coast were two to three times those in Southeast Asia. These high costs are attributed to, among other things, lower road quality, higher fuel taxes, higher imported vehicle costs and costly bureaucratic procedures. The cost of telephone calls among African countries can be fifty to one hundred times the cost of calls within North America.
No doubt, physical infrastructure is among the very important FDI determinants. Its value lies in its consumption, not its production. It is an input that is crucial to all other production. Its poor quality results in low competitiveness because cost, quality and access are important determinants of competitiveness. Poor infrastructure leads to weak market integration and slower growth. From the above, it should be clear that Africa’s prospects of increasing its global share of FDI inflow are not bright.
Modern communication and information technology infrastructure like the Internet is yet to be common in the region. The gap created by the digital divide between Africa and the developed world is extremely huge. This is a negative in terms of the ability to increase FDI in the region, especially in this e-commerce age. Ample resources will be required if this infrastructure is to be provided at acceptable standards. There must be exponential increases in access to electricity for more Africans, for instance. UNCTAD (2000b) correctly points out that the African continent has many challenges to overcome before it can more fully exploit the advantages of e-commerce. These include the low level of economic development and small per capita incomes, the limited skill base with which to build the e-commerce services, the number of Internet users needed to build a critical mass of online consumers and the lack of familiarity with even the traditional forms of electronic commerce such as telephone sales and use of credit cards. Remedying the above depends on the provision of adequate telecommunications facilities in most areas of the continent.23
Despite the problems that make it difficult for Africa to increase its global share of FDI and discussed in the last section, the region still has some opportunities and potentials to increase the share if decisive actions are taken. A more complex and encouraging picture is slowly emerging in Africa. In what follows, we present some of the factors that give rise to optimism that Africa may be on the right track to create an FDI-friendly environment. It should be mentioned that the presence of these factors alone does not automatically guarantee an increased FDI inflow. The factors must be optimally balanced. Additional actions geared to proper promotion of investment opportunities in the region should be taken. Those encouraging factors that create an enabling environment for FDI should be made known to potential investors. This is because the investors have been mainly hearing about the negative factors presented in the previous section and may not be aware of these new realities. We discuss below some of these encouraging factors.
Most African countries have embarked on reform programs intended to regain macroeconomic balance, improve resource allocation and restore growth. Privatization is opening the door to foreign and domestic business and better services. It should be noted that privatization is essential for FDIs that choose Merger and Acquisition (M&A) as their entry mode. Currently there are new windows of opportunities opening up for Africa. If the continent exploits these opportunities properly, its chance of increasing its global share of FDI inflows is likely to brighten.
The first window is the current greater political opening in the continent. There is a sharp rise in political participation in the continent today. This opens up spaces for greater public accountability and pressure from civil society for better management of public resources. There is more focus on proper management of the economy today among African leaders than in the past. They seem to have the maturity to address the weaknesses of past policies.
The second window is the end of the Cold War. After the Second World War, Africa became a strategic and ideological battlefield where external powers sought reliable allies rather than effective development partners. The end of the cold war signaled a reduction in external support for peacekeeping and aid flows due to waning geopolitical competition. But it also opened a window for donors and recipients to attend to issues pertaining to the effectiveness of different development strategies.
The third window is globalization and new technology. This offers greater opportunities for Africa. World markets are far more open now than ever before. The pool of capital seeking diversified international investment is growing rapidly; partly due to the demographic transition in industrial countries. Advances in the area of information technology offer huge potentials for Africa
The region has several economic groupings or integration that may represent different continuum of RTBs. These include The Economic Community of West African States (ECOWAS), Common Market for Eastern and Southern Africa (COMESA), and Southern African Development Community (SADC). If these groupings are properly arranged and the potentials that they represent are properly exploited, they can attract more market-seeking FDI.
Some African countries have signed several international agreements on investments. Thirty-seven African States were members of the Convention Establishing the Multilateral Investment Guarantee Agency and seven were in the process of fulfilling their membership obligations by the end of 1999. Forty-two African countries are signatories to the Convention on Investment Disputes between States and Nationals of other States, and twenty-six to the Convention on Recognition and Enforcement of Foreign Arbitral Awards. Forty-one African countries have signed double taxation treaties with sundry other countries.
As of 1 st January 1999, fifty African countries had concluded bilateral investment treaties (BITs) with other countries which aim at protecting and promoting FDI. They also clarify the terms to guide FDI between partner countries. By 1 st January 1999, African countries had concluded 335 BITs, the majority of which had been signed since the beginning of the 1990s. UNCTAD (1999b: 45) figures show that Africa had concluded the following number of BITs with the following countries and regions as of 1 st January 1999: France (18), Germany (39), United Kingdom (18), United States (7), Japan (1), Developed countries total (198), Developing countries total (136), Africa (56), World total (369). It is also worth mentioning that over 40 African countries are now members of the World Trade Organization (WTO), and more are in the process of joining. Membership in the WTO is expected to have similar effects on the security of FDI as do BITs. Membership in these organizations increases investors’ confidence in the countries concerned. This increased confidence is likely to enhance FDI inflow into the region.
The fact that at least 17 countries had broad-based privatization programs in place by the end of 1999, adds to the possibility of Africa increasing its global share of FDI. The privatization of state owned enterprises signal increased investment opportunities. In most cases, the privatized enterprises are sold to foreign investors due to lack of capital on the part of the local population. The case of Tanzania where most of the privatized enterprises are sold to foreign investors may be a good example. In this connection it needs be pointed out that it has been shown that Africa has the highest rates of return for capital investments in some cases UNCTAD (1999b).
Profitability is of prime interest to foreign investors. What may be the least known fact about FDI in Africa is the high rate of profitability for investments there and that in recent years it has been higher than in most other regions. UNCTAD (1999b: iv) reports that “from the viewpoint of foreign companies, investment in Africa seems to be highly profitable, more than in most other regions.” For example, Japanese TNCs had the following percentage of profitability in the following regions in 1995: West Asia (12.6%), Latin America and the Caribbean (7.7%), Africa (5.6%), South-East Asia (2.9%), Pacific (1.9%), North America (1.1%) and Europe (0.8%).24
One can find a similar trend when one looks at the rates of return on United States FDI in Africa, not including South Africa. For example, for 1997, the rate was 25.3% compared to 16.2% for Asia and the Pacific. The figure for Latin America and the Caribbean for the same year was 12.5%. For the developing countries and all countries, the rate of return was 14% and 12.3% respectively. In fact, between 1983 and 1997, it was only in 1996 that the rate of return in Africa for United States FDI, was below 10%.25 Since 1990, the rate of return in Africa has averaged 29%. Since 1991, it has been higher than in any other region, in many years by a factor of two or more. The net income from British direct investment in Africa (not including Nigeria) increased by 60% between 1989 and 1995.
When looking at these relatively very attractive rates of return and profitability in Africa it becomes a paradox that the continent has not witnessed a proportional FDI inflow. Ordinarily, one would expect that investments would flow to Africa in great numbers so as to benefit from these high rates of return. But the opposite is the case. It seems that the logic of capital is preempted in Africa. Capital does not seem to flow to Africa despite the continent’s promise of relatively high rates of return. Among the possible explanations of this paradox may be the assumption that these rates of return for capital investment are not widely known among the investor community. Where the rates are known, they may reflect the risks of investing in the continent due to the absence of some other FDI determinant. It is possible that the high rates of return, from the point of view of potential investors, do not sufficiently offset the risks of investing in the continent. This may make investors look away from Africa as a profitable investment destination. If the high rates of return for capital investment in Africa are made widely known among the investor community and other risks of investing in the continent are substantially reduced, one can expect to see an increased FDI flow to Africa.
Africa has enormous untapped potential and hidden growth reserves. For example, the continent is home to the world’s largest reserves of a number of strategic minerals, including gold, diamond, platinum, cobalt and chromium. The mining and petroleum sectors have, for this reason, great potential for attracting more FDI into the region if appropriate steps are taken. It is worth noting that contrary to common perception, FDI in Africa is no longer concentrated in natural resources. Services and manufacturing are key sectors for FDI. In Nigeria, manufacturing attracted almost fifty percent and services close to twenty percent of the total FDI stock in the country at the beginning of the 1990s. Mauritius has been attractive as a location for manufacturing plant, including plants for electronic equipment, since the 1980s. All these give cause for optimism about Africa’s ability to increase its global share of FDI.
We have reason to believe that the perception of Africa among investors may be changing for the better. When one peruses “Corporate view of Africa 1999” as presented in Focus on the new Africa booklet,26 one finds that the view of Africa held by corporate leaders of such MNEs as Barclays Africa, Citibank, Coca-Cola Africa, Nestle, Norvatis Agro AG, Shell, Standard Chartered Bank, Unilever and Vodafone Group International includes an acknowledgment of the impressive rates of economic growth in some key African economies, growing political stability and financial prudence, great opportunities to market products to over 600million consumers, long- term perspective and sustained efforts by TNCs and great confidence in the underlying potential of Africa. To the extent that such positive corporate views of Africa will be widely shared by the investment community, it can be a good sign for more FDI inflow to Africa.
The international community has made some efforts to promote FDI into Africa. Such efforts include measures to accelerate foreign debt relief as a means to support economic growth in the region. Official development assistance (ODA) has a significant role in helping the building of infrastructure and support domestic development generally. UNCTAD undertakes investment policy reviews in Africa and in collaboration with the International Chamber of Commerce (ICC), it has launched a project on investment guides and capacity building. The Multilateral Investment Guarantee Agency (MIGA) carries out assessments of institutional capacity for a large number of Investment Promotion Agencies (IPAs) and assists them to formulate effective strategies for attracting FDI, primarily through its Promote Africa field functions. All these seem to be opportunities that, if well exploited, can help the continent to substantially increase its global share of FDI inflow.
In this paper, I have tried to find out whether Africa can increase its global share of FDI inflows. I have argued that, for the most part, FDI bodes well for Africa. Among other things, such investments create employment, increase government revenue, and increase efficiency and competitiveness in the economy. It has also been contended that Africa’s share of global FDI inflows is insignificant. Compared with the rest of the world, the continent does not receive an adequate level of FDI. Given the potential roles that FDI can play in the social and economic development of the continent, the need for it to increase its global share of FDI inflows cannot be overemphasized. But given the fact that Africa lacks most of the FDI determinants that would attract more FDI into the region, I would like to conclude that the continent has a long way to go before it can increase FDI in any substantial manner. Some of the issues that make Africa less attractive for FDI compared to other regions of the world have been presented and discussed in the paper. These issues include, but are not limited to the bad image of the continent in the external world, poor and costly physical infrastructure and a low level of economic development.
We have suggested that despite the problems that hinder substantial inflow of FDI into the continent, Africa possesses the potential to increase its global share of FDI. The potential is traceable to increasing political participation and major economic reforms in the continent, the existence of some regional integration efforts, relatively high rates of return for capital investment in Africa, and positive views about investing in Africa from some corporate leaders. While these represent welcome developments, they are not enough. Those responsible for decision-making in firms, investments advisers of MNEs, and others must be made to see the changing social, political and economic realities in Africa. They must adopt a more balanced, not biased, view of the continent. It should be treated like any other continent or region in the world. It should not be written off as a profitable investment location. The tendency to lump all African countries together in a single negative stereotype should stop. The continent should be looked at closely, country by country, industry by industry and opportunity by opportunity. The image of Africa should be changed. Decisive actions are needed in many areas. Those areas include resolving conflicts and improving governance to guide political and economic development; greater equity and more investment in African people; increasing competitiveness and diversifying in economies and in support from the international community.
Afriyie, K. (1998). “ Foreign Direct Investment in Ghana’s Emerging Market”, in Globalization, Trade and Foreign Direct Investment, Dunning, J. H. (ed.). Elsevier Amsterdam: 217-236.
Bjorvatn, K. (1999). Infrastructure and Industrial Location in LDCs. Discussion Paper 11/99, Norwegian School of Economics and Business Administration.
Bjorvatn, K. (2000). FDI in LDCs: Facts, Theory and Empirical Evidence. Manuscript, Norwegian School of Economics and Business Administration.
Castello, S. (1998). “ Outward Direct Investment Orientation, Structural Adaptability and Economic Revival: A Case Study of New Zealand” in Globalization, Trade and Foreign Direct Investment , Dunning, J. H. (ed.). Elsevier Amsterdam: 130-149.
Collins, P. (1998). “Regional Trading Blocks and Foreign Direct Investment”, in Globalization, Trade and Foreign Direct Investment, Dunning, J. H. (ed.). Elsevier Amsterdam: 28-48.
European Publishing Ltd. (1999). Africa South of the Sahara 1999; 28 th Edition. London.
Gray, H. P. (1998). “International Trade and Foreign Direct Investment: The Interface”, in Globalization, Trade and Foreign Direct Investment, Dunning, J. H. (ed.). Elsevier Amsterdam: 19-27.
Haaland, J. I. And Wooton, I. (1998). International Competition for Multinational Investment. Discussion Paper No. 1937, Center for Economic Policy Research, London. http://www.ippmedia.com/ft/2000/12/13/ft1.asp
Kreinin, M. E. et al (1998). “Determinants of Inter- Asian Direct Investment Flows”, in Globalization, Trade and Foreign Direct investment, Dunning, J. H. (ed.). Elsevier Amsterdam: 194-203.
Marjit, S. et al (1999). “Resolving the Credibility Problem of an Honest Government: A Case for Foreign Investment Subsidy”, in Review of International Economics, Volume 7. No. 4: 625-631.
Markus, R. T. and Venables, J. I. (1998). Foreign Direct Investment as a Catalyst for Industrial Development.
NHO, (1985). Internasjonalisering av norsknæringliv: Tiltak for à fremme Utenlandske Investeringer. GPG Sats og Trykk as.
OECD, (1993). Promoting Foreign Direct Investment in Developing Countries. Paris, France.
Pan African News Agency, September 21 st 1998.
Pearce, R. D. (1992). The Determinants of Foreign Direct Investment: A Survey of the Evidence. United Nations, New York.
Rutherford, D. R. (1995). Dictionary of Economics. London.
---------------- (1992). Dictionary of Economics. London.
The Economist, May 13 th 2000.
----------------, April 22 nd 2000.
UNCTAD, (2000a). Capital Flows and Growth in Africa. United Nations, Washington and Geneva.
UNCTAD, (2000b). Building Confidence: Electronic Commerce and Development. United Nations, Washington and Geneva.
UNCTAD, (1999a). World Investment Report 1999: Foreign Direct Investment and the Challenge of Development. United Nations, Washington and Geneva.
UNCTAD, (1999b). Foreign Direct Investment in Africa: Performance and Potential. United Nations, Washington and Geneva.
UNCTAD, Various Press Releases at: www.unctad.org.
Vàrt Land, 17 th June 2000.
Walden Publishing Ltd. (1998). Africa Review 1998; 21 st Edition. Singapore.
World Bank et al, (2000). Can Africa Claim the 21 st Century?. Washington D.C.
1. See at www.unctad.org.
2. For example an investment may be categorized as FDI if foreigners own the majority share.
3. The author is aware of the fact that FDI can also have some negative impacts to the host economies. In this work it is assumed that the positive impacts more than compensate the negative ones, and therefore FDI is desirable for Africa.
4. FDI continues to be a driving force of the globalization process that characterizes the modern world economy. The process has diminished the importance of territorial boundaries and every part of the world is in one way or another involved in the process.
5. See for example various World Development Reports by the World Bank and IMF.
6. MNEs are also known as Transnational Corporations (TNCs), Multinational Corporations (MNCs) or simply Multinationals. All these terminologies may be used in this work to mean one and the same thing unless otherwise specified.
7. [Source: UNCTAD, World Investment Report 1998: Trends and Determinants, Table 1V.1 p.91.] Some more FDI determinants are discussed in detail below. Most of them are closely related to the ones mentioned above. This close relationship justifies the omission of detailed discussion of the above determinants.
8. See for example UNCTAD 1998 for figures.
9. UNCTAD, press release, 5 July 1999.
10. The existence of ECOWAS and SADC may have helped to increased FDI flows to their respective areas. Since to the best knowledge of the author no work has been done to find out how these RTBs help to increase FDI flows to their areas, the RTBs are seen as a potential factor that represents opportunities for Africa.
11. It might however be very difficult to compare costs of incentives and benefits of the incoming FDI . Some costs and benefits may be not be easy to quantify and may be long term in nature.
12. The Tigers of Asia may have been noted for low wages but that is no longer the case. The inflow to them however has not abated. This can be accounted for by the fact that there are many more FDI determinants than low wages that attract investors. Without further research it may be improper to categorically say which determinant has replaced the hitherto low wages in this region that keep FDI inflows continuing.
13. In most cases the Western media presents a negative image of the beautiful African continent. War, hunger, diseases, inter alia, dominate in most coverage on Africa by western media. Rarely if at all the glory and beauty of mother Africa is presented sufficiently.
14. Due to the current wave of globalization almost every region or country for that matter potentially and/or actually competes with each other as a destination for the limited FDI outflows.
15. But some MNEs seem to be so much attracted by mineral deposits in some of these countries that they give a blind eye to the unrests there. This may be the case in Angola and Mozambique. The observation strengthens my earlier point that different investors may give different emphasis to one and the same determinants in different time and location.
16. This article may in fact be one of the examples in which the media epitomizes the whole continent on account of events in some few countries. Unfortunately most of public being informed by these media , including potential investors, take it to be a fact that the whole of Africa is in war! This may scare FDI away from the continent.
17. It is worth noting that the purpose of giving peace a chance anywhere should not first and foremost be to increase FDI but peace for the sake of peace. What follows after restoration of peace should be of secondary importance.
18. Conflict may be good to the armament industry as markets for weapons are ensured, but the industry never locate near its consumers because, among other things, conflict in the production location increases profitability uncertainty .
19. For example Sudan’s military spending is more than three times the African average. This may have caused investment to fall by 16% of GDP. Its civil war may have reduced growth by up to 8%. (World Bank : 2000).
20. Some examples of how AIDS/HIV can threaten the economic future of Africa can be drawn from Tanzania. Statistics from The Brooke Bond (T) Limited, a giant tea company in Southern Tanzania, show that it has been highly affected by the high incidence of HIV infection amongst its workforce, and the concomitant high costs associated with absenteeism, and health care. Statistics from 1992 to September 2000 show a HIV positive rate of 70% among a sample of sick company employees who were tested. In 1992, about 65% of tested patients were HIV positive. In 1998, out of 154 patients tested, 133 or 86.4% were HIV positive. In 2000, the figure was 81%. The statistics are silent on the actual cost of the epidemic at Brooke Bond. The costs are however likely to be high. Apart from Brooke Bond, several other companies are facing similar HIV-connected problems in Tanzania. The companies include Tanzania Electrical Supply Company (TANESCO), National Insurance Company (NIC), and Tanzania Housing Corporation (THC). In 1995, 1.5 million adults were estimated to be infected with HIV. Most infections occur among the most economically active group of adults, in the age group 15 – 45 years. HIV/AIDS then becomes not only a health problem but also a developmental one with great impact on life expectancy and the economy at large. (Source: http://www.ippmedia.com/ft/2000/12/13/ft1.asp.)
21. The discussion on infrastructure draws much from World Bank (2000). Unless otherwise specified all facts are derived from this source.
22. In an article on poor telephone infrastructure in Africa titled “Call Africa, and wait and wait.” November 25th, 2000, p. 68.
23. For more discussion see World Bank (2000).
24. See UNCTAD: 1999b,19 for details.
25. See UNCTAD 1999b:18 for rates of return year by year from 1983 to 1997.
26. This is a booklet that accompanies the 1999 United Nation’s report titled: FOREIGN DIRECT INVESTMENT IN AFRICA: Performance and Potential.
Copyright 2001 Africa Resource Center, Inc.
Citation Format
Ngowi, Honest Prosper (2001). CAN AFRICA INCREASE ITS GLOBAL SHARE OF FOREIGN DIRECT INVESTMENT (FDI)?. West Africa Review: 2, 2 [iuicode: http://www.icaap.org/iuicode?101.2.2.1]