25 June 2014

Africa: Foreign Investment Growth in Africa Patchy

Foreign direct investment in Africa has risen over the last few years, though rather more modestly than elsewhere. A number of revealing details are to be found in UNCTAD's 2014 World Investment Report.

Textile workers in Ethiopia. The country on the Horn of Africa registered a sharp increase in FDI in 2013

"First came the Chinese, then the Turks and the Indians. Now more and more investors are arriving. Europeans and Americans are investing here because they recognize our potential," said Mulu Solomon, speaking in the Ethiopian capital Addis Ababa. Solomon watches the activities of foreign investors in her country very closely. Until recently, she was head of the Ethiopian Chamber of Commerce. In this capacity, she had urged the Ethiopian government to make it easier for foreign investors to do business in the country by removing complicated, bureaucratic rules and regulations. The advantages of foreign investment are obvious. "Jobs are created and the country is included in the value chain," Solomon said. She mentioned the textile industry by way of example. "There is one company here with a workforce of 10,000. Another firm has 8,000 employees. This is a great opportunity for our labor market," she said.

Robert Kappel says Africa's infrastructure needs improving. The continent is primarily of interest to long-term investors

More investment in southern Africa, less in the north

Foreign direct investment (FDI) in Ethiopia in 2013 rose sharply over 2012. Direct investment is the term which refers to foreign investors who do not merely transfer capital abroad, but are also active in the target country in an entrepreneurial sense. This can include acquiring a holding in a company in another country, or opening a new branch or subsidiary there

According to the World Investment Report published by the UN economic think tank UNCTAD on Tuesday (24.06.2014), FDI in East Africa climbed by 15 percent in 2013, the greater part of which went to Ethiopia and Kenya. Looking at the whole of Africa, the southern part of the continent registered the highest increase in FDI in 2013, it was double the figure for 2014. Investors' pet projects were infrastructure in South Africa and Mozambique.

Bomb blasts, such as this one at at a FIFA World Cup viewing site in northern Nigeria, signal instability and insecurity and make investors nervous

But not all of Africa is succeeding in attracting more foreign investment. The other subregions received less FDI in 2013 than the year before. UNCTAD said this was largely due to political crises and instability. Unrest in North Africa has had an impact, so has the insecurity in Nigeria and the civil war in the Central African Republic.

Investors seek stability

Masataka Fujitia, chief of the Investment Trends Section at UNCTAD, said the decline in FDI in North Africa contributed to the continent's mediocre performance in global rankings. Globally, corporate and infrastructure investment rose by nine percent; Africa managed only four percent. "There is a specific reason for this. North Africa is still suffering from the effects of its geopolitical crisis," Fujita said.

Robert Kappel from the German Institute of Global and Area Studies (GIGA) reaches similar conclusions. "Investors avoid countries where there is civil war or political instability. They go instead to places that are stable. If you're a short-term investor, you don't go to Africa," he said. Long-term investors are looking for long-term stability. Some countries, such as Rwanda and Uganda, have made quite a lot of headway in this direction. Even authoritarian regimes, such as Ethiopia and Angola, have succeeded in attracting foreign investors with their stability policies. They include investors in the industrial sector.

Makata Fujita finds the increase in FDI in manufacturing and service sectors in Africa encouraging

Manufacturing and service sectors moving forward

FDI is gaining increasing significance in Africa's manufacturing and service sectors. Investment in raw materials is declining, Fujita said. In 2004 the primary sector - the production or extraction of natural resources - accounted for half of all African investment. In this latest UNCTAD report, it has now fallen to 10 percent. "That is very encouraging," said Fujita. "Manufacturing and the service sector create jobs and let countries join the value chain - to a far greater extent than involvement in the primary sector" he said.

Another trend spotted by UNCTAD is that African nations are investing more in countries on their own continent. Leading cross border African investors are South Africa, Angola and Nigeria. Despite such successes the continent cannot afford to become complacent. Kappel said roads, communications networks, education and training need improvement in many places. This would lay the foundations for sustained future investment. "Local African firms have to invest more in their own countries. Once that starts happening, additional foreign investment activity will start picking up as well," he said.

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