Since the 2008/9 financial crisis, there has been a steady increase in Foreign Direct Investment (FDI) to Africa.
This is a welcome trend for Africa especially due to the generally limited availability and cost of domestic financing, which has persistently hampered African business.
Despite this growing FDI influx, Africa’s share of total world FDI volume remains small, at roughly 5 per cent.
According to a report launched recently by UN-Habitat titled The State of African Cities 2018: The geography of African Investment, this FDI inflow to Africa compares poorly to the continent’s 15 per cent share of global population and over 30 per cent of world poverty.
The report says that the current GDP per capita gap, relative to other world regions, is likely to widen if ‘business as usual’ continues proposing that financial and policy interventions are needed that support Africa’s emerging transformations and strengthen its already unfolding shift from FDI in the primary resources sector towards secondary and tertiary sectors in manufacturing, services and hi-tech).
“Despite its relatively low ability to attract FDI in comparison to other continents, the recent rate of FDI growth into Africa is the second highest in the world,” says the report.
While this is partly explained by the low investment base from which the continent started, it does demonstrate that African cities “need to seize a more prominent position in the world economy, by enhancing their accessibility, connectivity, markets and urban attractiveness a growing interaction between Africa and the global economy.”
This is despite the fact that Africa’s trade internationally is imbalanced with the continent having to pay a staggering 219 per cent tariff on international trade.
FDI represents roughly a third of foreign financial sources flowing into the continent.
Western Europe is the largest investor in Africa, followed by Asia and then North America.
“Geographic proximity is an important locational preference for multinational firms in Africa, most likely because of cultural and language similarities, and because proximity lowers the transaction costs,” adds the report.
Key aims of stimulating investment in Africa are to decrease the proliferation of informal settlements and secure urban food, water and energy supplies costs of foreign ventures.
There are four major urban FDI destinations in Africa: Cairo in Northern Africa, Lagos in Western Africa, Johannesburg in Southern Africa and Nairobi in Eastern Africa.
Central Africa lags behind the other regions in terms of FDI, although Kigali–situated in Eastern Africa, but bordering the central region–shows strong upward growth in attracting FDI.
Only a few African cities like Cairo, Lagos and Johannesburg, hold the financial power to also be sources of FDI (outward investors). This means that there are firms with headquarters in these cities that invest abroad, either within or beyond Africa.
These cities, therefore, function as key global FDI gateways within the African continent.
Furthermore, these cities can attract foreign investors and offer them a more diversified business climate, including infrastructure, larger stocks of human capital and consumer markets.
Furthermore, the better a city is globally and regionally connected to businesses and cities around the world, the more FDI it will attract in future.
Cities have stronger economies when they facilitate international trade and connect to diverse economic clusters in the world, thereby boosting their own local markets and industries.
African cities should develop strategies to become key nodes for production, services and knowledge in the global marketplace.
Spatial policies such as industrial zoning are conducive to this because this help create opportunities to tie often peripheral parts of the city to the rest. These policies also stimulate the development of physical infrastructure and social capital, while ICT promotion supports improved urban accessibility and connectivity.
Key aims should be to facilitate urban employment and poverty reduction, to decrease the proliferation of urban informal settlements (slums) and to secure critical urban food, water and energy supplies.
Furthermore, in the context of food security, Africa’s urban revolution will arguably have to run parallel to an agricultural revolution.
However, FDI is neither a panacea nor the ultimate answer to Africa’s development, since it has both positive and less helpful effects. Commonly recognised negative aspects of FDI in developing economies are its potential for crowding-out local businesses; its tendency to be consumed and not production driven; the fact that itis generally directed towards production for non-African markets; and its adverse effect on wage inequality and the development of indigenous skills in certain sectors.
“Therefore, careful choices should be made by cities in their pursuit of new and additional FDI, towards inclusive economic growth,” cautions the report.
There is a positive outlook with the overall FDI growth in African countries and regions likely to continue over the next few years. Questions abound, however, whether this growth will be sustainable.
“Possibly because of the ‘lock-in’ of public investment in resources, FDI diversification is held back and more urban-oriented sectors are being frustrated. Therefore, attracting FDI in manufacturing, service, hi-tech and knowledge industries should complement and enhance investments in agriculture and extractive industries,” the report says.
This means investing in cities that promote investment growth sectors like ICT, food, real estate and healthcare, which have done particularly well.
Western and Eastern Africa are likely to experience sustained investment growth. In Western Africa, manufacturing and hi-tech are experiencing the highest growth rates and, indeed, FDI has already reduced wage inequality in this region.
Manufacturing will attract the most FDI in the coming years. Nigeria and Côte d’Ivoire will particularly see growth.
In Eastern Africa, service investments will see the highest growth rates.
Here too, manufacturing investments will grow well, and Kenya is set to experience high growth.
Northern Africa can expect stability of inward FDI. Services will replace manufacturing as the most important activity for attracting FDI in this region. Egypt and Morocco will keep their frontline position in attracting investment and regional economic growth.
The economic development of Central Africa remains modest in the foreseeable future.
Inward FDI in manufacturing and services is projected to remain at current levels, while inward FDI in resources will continue to decline.
Rwanda, straddling Central and Eastern Africa, is projected to experience rapid growth and is an example of best practice in the region.