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• FDI in Sub-Saharan Africa has increased by 4.7% in 2013 while it has declined in North Africa
• Intra-African investment on the rise
• Investors shift from extractive industries to consumer-related sectors
• Dramatic improvement in investor perception about the attractiveness of Africa but stubborn perception gap remains between investors already operating on the continent and those who are not

Africas share of global foreign direct investment (FDI) projects has reached the highest level in a decade, according to Executing Growth, EYs 2014 Africa Attractiveness Survey .

The report combines an analysis of international investment into Africa since 2003, with a 2014 survey of over 500 global business leaders about their views on the potential of the African market. The latest data shows that while there has been a decline in FDI project numbers from 774 in 2012 to 750 in 2013, primarily due to ongoing uncertainty in North Africa, they remain easily in excess of the pre-crisis average of 390 projects per year.

There is a noticeable divide between FDI trends in North Africa versus Sub Saharan Africa (SSA). While FDI projects in North Africa declined by nearly 30%, projects in SSA increased by 4.7%, reversing the decline of 2012. This further widened the gap between the two sub regions, with SSAs share of FDI projects exceeding 80% for the first time.

While the UK remains the lead investor into the continent, intra-African investment continues to steadily rise. Investors are also looking beyond the more established markets of South Africa, Nigeria and Kenya to expand their operations, as well as moving into more consumer-related sectors as Africas middle class expands.

Ajen Sita, Chief Executive Officer, EY Africa, comments, Africas share of global FDI projects has grown steadily over the past decade and it is a promising sign that investors are now looking across the continent and to new sectors. Further regional integration and infrastructure development should continue to entice investors to the exciting investment opportunities that Africa can offer.

New FDI hotspots are emerging

There was significant movement in the list of top 10 countries by FDI projects in 2013. Only South Africa and Nigeria retained their first and third positions from 2012 with 142 projects and 58 projects, respectively. However, FDI projects in both these countries witnessed a slight decline. Countries such as Kenya with 68 projects, Ghana with 58 and Mozambique with 33 all moved up the ranks.

Zambia and Uganda were the new entrants in the top 10 list in 2013 with 25 and 21 projects respectively, an increase of more than 20%. In contrast, North African countries such as Morocco, Tunisia (ranked 8th in 2012) and Egypt slipped on the rankings.

In 2013, both West and East Africa surpassed North Africa for the first time, becoming the second and third most attractive sub regions in Africa after Southern Africa.

UK leads investment into the continent

The UK became the clear leader in 2013 with 104 projects, while the US fell from joint first place to second place with 78 projects, a 20% decline from last year. South Africa, the third largest investor, directed 63 investment projects into the rest of Africa, a 16% decline on last year but a significant increase from pre-crisis levels when it registered on average 12 projects. There was a sharp uptake in FDI projects by Spanish and Japanese companies with increases of 52% and 77%, respectively.

Intra-African investment is gaining momentum. African investors nearly tripled their share of FDI projects over the last decade, from 8% in 2003 to 22.8% in 2013. This growth is fuelled by the need for improved regional value chains and strengthening regional integration. Another driver of growth is the African investors understanding of the market and of the potential opportunities and challenges.

Michael Lalor, EYs Lead Partner Africa Business Center, comments, External investors supply long-term capital, skills and technology, and intra-African investment creates a virtuous circle that encourages greater foreign investment.

Significant shift away from extractive industries towards consumer related sectors

The top three sectors technology, media and telecoms (TMT) with 150 projects, retail and consumer products (RCP) with 131 projects and financial services with 112 projects accounted for more than 50% of the total projects in 2013. During the year, RCP overtook financial services to become the second most attractive sector in Africa.

FDI projects in the real estate, hospitality and construction sector increased by 63%, making the sector the fifth most attractive, up three positions from 2012. On the other hand, for the first time ever in 2013, mining and metals exited the top ten sectors when measured by FDI project numbers.

When asked about the three sectors that would offer the highest growth potential for Africa in the next two years, investors highlighted the rising importance of agriculture which ranked only marginally behind mining and metals. Increasingly, infrastructure is also perceived as a key growth sector as well as consumer-facing industries including financial services, telecommunications and consumer products.

Michael comments, Although perceptions indicate that resource driven sectors are expected to remain the industries with the highest potential over the next two years, the actual numbers show that infrastructure and consumer-facing sectors will increase in prominence as the middle class expands and consumer spending on discretionary goods increases.

Dramatic improvement in perceptions of Africa

Africas perceived attractiveness relative to other regions has improved dramatically over the past few years. The overall survey results show that Africa has moved from third last position in 2011, to become the second-most attractive investment destination in the world, behind North America.

Sixty percent of survey respondents said that there had been an improvement in Africas investment attractiveness over the past year, up four percentage points from last years survey.

Ajen comments, The good news in this years survey is that perceptions about the continent seem to be shifting. For the first time, Africa is seen as the second most attractive investment destination in the world. It has strong fundamentals to encourage investment including steady democracy and macroeconomic growth; an improving business environment; rising consumer class; abundant natural resources and infrastructure development.

However, there remains a stubborn perception gap between those already operating on the continent and those who are not yet present. For the first time, this years survey shows that companies with a presence on the continent perceive Africa to be the most attractive investment destination in the world. In stark contrast, those with no business presence in Africa still view the continent as the worlds least attractive investment destination.

Seventy-three percent of those who are already established in the region believe Africas attractiveness has improved over the past year versus 39% who are not established.

Urban centers

Africas cities are now emerging as the hotspots of economic and investment activity on the continent. Nearly 70% of respondents stressed the significance of cities and urban centers in their investment strategy in Africa.

In terms of perception, city attractiveness closely maps country appeal. In SSA, half of the respondents quote Johannesburg as the most attractive city in which to do business, ahead of Cape Town. Nairobi and Lagos are ranked as third and fourth most attractive cities, respectively. In North Africa, Casablanca, Cairo and Tunis are perceived as the top three cities in which to do business.

Investors highlighted that in order to attract greater investments, cities need to focus on the following critical factors: infrastructure (77%), consumer base (73%), local labor cost and productivity (73%) and a skilled workforce (73%).

Looking ahead

Ajen concludes, Africas stronger investment attractiveness is best explained by its own sustained growth rates in the context of slower global growth. Africas growth prospects are likely to remain solid, as an urbanizing and rising middle class drives demand for consumer products and improved services.

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