[ Posted On: 2009-01-07 ]

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1. Introduction

Foreign direct investment (FDI) refers to investment in domestic structures, equipment and organization by foreign private sector or government. FDI does not include foreign portfolio investment in a domestic economy. The latter refers to investment in equity of domestic companies by foreign economic agents.

FDI inflows contribute to the economic performance of a host country in a number of ways: First, the FDI inflows represent additional resources which can be used to build additional physical capital and create more employment. Second, by increasing the size of capital stock, FDI increases country’s output and productivity by encouraging more efficient use of existing resources. Finally the inflows of FDI can improve the local skills and promotes technological knowhow thereby enhancing the overall economic growth and development.

The global FDI has shown persistent growth since 2004. The continued rise in FDI largely reflects high economic growth and strong economic performance in many parts of the world.

Such growth has occurred in both developed and developing countries. Increased corporate profits (and resulting higher stock prices) have boosted the value of the cross-border mergers and acquisitions (M&As) that constitute a large share of FDI flows. Continued liberalization of investment policies and trade regimes added further stimulus, although in some countries in Africa and Latin America there were some notable changes in economic policy towards a greater role for the state, as well as changes in policies that directly concern foreign investors or industries, in particular the natural resources industry (UNCTAD, 2007).

The rest of the paper is organized as follows: section 2 reviews the trends of global FDI flows. Section 3 is concerned with trends of FDI inflows and the associated opportunities and challenges faced by the African countries while section 4 concludes.

2. Global FDI Trends

Since 2004, the global FDI has shown consistent growth. In 2004, the world FDI was $717.7 billion. In 2007, it reached $1,833.3 billion indicating a 155 per cent growth rate during the four year period. The annual growth of world FDI in 2007 was 30% and the size of global FDI during this year surpassed the previous all-time high set in 2000 (UNCTAD, 2008).

In spite of the global financial and credit crises which began in the second half of 2007, FDI inflows continued to rise during the year into developed countries, developing countries and transition economies of South-East Europe and the common wealth of Independent States. As stated earlier, the increase in FDI largely reflected relatively high economic growth and strong corporate performance in many parts of the world (UNCTAD, 2008).

Developed countires receive most of the FDI inflows. In 2007, 68.1 percent or $ 1,248 billion of the FDI went to the developed economies. The Uninted States is the largest recipient of FDI followed by United Kingdom, France, Canada, and the Netherlands while the EU region attracted almost two thirds of the total FDI inflows to the developed countries (UNCTAD, 2008).

FDI in the US is believed to offer a higher risk-adjusted return than many other countries. Apart from higher returns, the US has a comparative advantage in attracting FDI due to a large pool of skilled and experienced human resources.

In 2007, FDI inflows into developing countries reached their highest level ever, i.e. about $500 billion. Of this, $319.3 billion or 64 percent went to Asia, while Latin America and the Caribbean received $126.3 billion or 25 percent. Africa attracted the smallest share of FDI inflows into the developing countries. In 2007, Africa’s share was $53 billion or 10.6 percent of the FDI inflows into the developing countries. On the other hand, among developing economies, China alone attracted $83.5 billion or 18 percent of the developing country FDI inflows.

The 49 Least Developed Countries (LDCs) of the World, 33 of whom are in sub- Saharan Africa, together received, $13 billion worth of FDI in 2007 which is also an all-time high for these poor countries.

Cross boarder mergers and acquisitions (M&As) contributed substantially to the global rise in FDI. According to UNCTAD (2008) the value of such transactions amounted to $1,637 billion, 21 percent higher than the previous record in 2000. UNCTAD states further that the financial crisis fueld by the sub-prime mortgage crisis in the United States did not have a visible dampening effect on the inflows of FDIs in 2007.

However, the impact of financial crisis was largely confined to the United States during 2007. The crisis began to hit the global economies harder only during 2008. Thus, whether this did infact dampen the inflows of FDI during the year or not will only be revealed later in 2009.

During this period of financial and economic crisis, FDI becomes even more critical component of capital investment and job creation to many developing as well as developed economies. The challenge for the world economies is to develop highly competitive and a flexible business environment to attract investment while at the same time ensuring adequate regulatory framework is put in place.

3. FDI in Africa

3.1 Trends of FDI in Africa

As stated earlier, Africa has attracted smaller FDI inflows compared to the other developing regions. However, the recent trends in FDI inflows into the continent are very much encouraging. In 2002, FDI inflows to Africa were only $14.6 billion. However, the FDI inflows into the continent have shown tremendous improvements over the past 6 years and reached $53 billion in 2007. This indicates an impressive FDI inflows growth rate of over 263 percent during the six year period.

There were both economic and political conditions that enhanced Africa’s ability to attract more FDI since 2002. On the economic front, Africa’s economy has grown over 5 percent per annum on the average since 2001, for the first time in the history of the continent. This was anchored by high prices and buoyant global demand for commodities, particularly in the oil industry, which attracted investment not only from developed countries but also from some developing countries such as China.

Cross-border M&As in the extraction and related service industries of Africa tripled in the first half of 2006, as compared to the same period in 2005. However, the regional FDI picture is not uniformly bright across sectors, countries and sub regions. Most of the inflows are concentrated in the West, North and Central African sub regions. And inflows will continue to be small in low-income economies lacking natural resources (UNCTAD, 2007).

For instance, in 2006, FDI inflows into Africa were dominated by Nigeria, Egypt, South Africa and Morocco which received 5.4%. 5.3%, 3.7% and 2.3% of the FDI inflows to the African continent respectively (UNCTAD, 2007).

On the political front, the new millennium witnessed a rapid decline in civil wars and conflicts while over 20 countries have embarked on democratic transitions in the continent. However, the recent deterioration in democratic processes particularly repeated non-free and non-fair elections and the refusal of several African leaders to relinquish power after such elections coupled with resurgence of conflicts in some regions have seriously damaged the image of the continent once again. During this period of stiff global competition to attract FDIs, the current situation in Africa clearly puts the continent at a disadvantage.

3.2 Opportunities and challenges for FDI in Africa

Africa is endowed with vast natural resources. Nigeria is the World’s 8th largest producer of oil. Angola is bound to become the largest oil producer in Africa and take over Nigeria’s position in global oil supply. Libya, Algeria and Egypt are the other three top oil procedures in the continent while oil is also discovered in Gabon, Congo, Cameron, Equatorial Guinea, DRC, Cote d’Ivoire, Sudan and recently in Ghana. Africa supplied 12.5% of daily oil output to the global market in 2007.

A large reserve of gas is discovered in Tanzania and Mozambique while gas is also discovered in Ethiopia’s Ogadeni region, the current political hot spot in the country.

Zambia is a major producer of copper and cobalt. Zambia is ranked as the world’s seventh largest producer of copper, and worlds’ second largest producer of cobalt.

South Africa is rich in various mineral resources. The country is a leading producer of precious metals such as gold and platinum and is the world’s fourth-largest producer of diamonds while a northern neighbor of South Africa, Botswana, is the world’s top diamond producer.

Africa’s abundant natural resources offer tremendous opportunities to attract FDIs. Apart from this non risk adjusted returns on investments in Africa are very high.

However, there are also several challenges. Political and macroeconomic instability, weak infrastructure, poor governance, and in appropriate regulatory environment (for instance, see Dupasquier and Osakwe, 2005) pose serious challenges to the continents’ ability to stay competitive in attracting FDI.

At the end of 2007, political instability and conflicts were limited to few countries in Africa, viz. Sudan, Somalia, Zimbabwe and Ethiopia. In 2008, the disputed elections in Kenya that threatened to derail the country’s democratic process, disputed elections in Nigeria, the coup de tat in Mauritania, and recently in Guinea, disputed elections in Angola and Zambia all undermined the image of the continent and its competitiveness in attracting FDI.

Although Ghana redeemed Africa by carrying out the first free and fair election in 2008, which led to a narrow victory by the opposition, Africa needs to do much more to overhaul its tainted images regarding the process of democratic transition and transfer of political powers.

At present, when the global economy is under severe recession caused by credit fueled financial meltdown, the competition among countries and regions of the world to attract any foreign resources will be very serious. Falling commodity prices have already put pressure on the budgets of the African countries that rely on commodity exports. Therefore, the continent can not be expected to radically improve its poor infrastructure in the immediate future. Changes in regulatory environment are closely associated with the political trends. Therefore, unless Africa swiftly addresses the current political malaise in many countries of the continent, its position as one of the favoured destinations of FDI can be seriously undermined.

In August 2008, The Economist praised Africa as “An Unexpected Bright Spot in the Global Economy”. The peoples and the countries of the continent must work hard not to slide back into the Dark Continent stereotype once again.

4. Concluding remark

The global FDI has shown consistent growth for the four year period between 2004 and 2007. Its total value in 2007 surpassed an all-time high FDI inflows set in 2000. The developing world receives most of the global FDI while the EU region receives two thirds of the FDI inflows to the developed region.

The inflows to the developing countries also reached its peak in 2007. Asia is the most preferred destination among the developing regions followed by Latin America and the Caribbean while Africa follows as a distant third. Among the developing economies, China alone receives nearly one fifth of the entire developing country FDI inflows compared to the Africa’s share of one tenth.

FDI inflows to Africa showed an impressive growth during the period 2002-2007. This period was characterized by high and sustained average annual economic growth anchored by commodity price boom, marked decline in political instability and conflicts, increased global demand, and increased mergers and acquisitions.

The continent offers huge potential for FDI. However, serious challenges also remain. These include political instability, poor infrastructure, and inappropriate regulatory environment among others. The recent political trends are particularly worrying. The countries of the continent must work hard to ensure that the current trend of FDI inflows in to the continent is not jeopardized by such negative images.

References

• Dupasquier C. and Osakwe, P. 2005. Foreign Direct Investment in Africa: Performance, Challenges and Responsibilities. African Trade Policy Center. Work In Progress No.21 Economic Commission for Africa.

• UNCTAD. 2007. Foreign Direct Investment Rose by 34% in 2006. UNCTAD/PRESS/PR/2007/001. www.UNCTAD.org/

• UNCTAD. World Investment Report 2008. Transnational Corporations and the Infrastructure Challenge. Overview. United Nations, New York and Geneva, 2008.

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