Foreign Direct Investments (FDI) In Africa, Case Study Example

Abstract

This paper will analyze factors that drive Foreign Direct Investments (FDI) in Africa in the form of case study research, with the argument that is against FDI in Africa. The question is why African countries fail to attract more FDI compared to the rest of the world. Besides, it is vital to find out factors that drive or deter FDI in Africa. This is where this case study seeks to make a contribution because FDI plays a fundamental role in the process of the continent’s development. Apparently, FDI can stimulate domestic investment, facilitate technology transfer, create employment, promote exports, and generate economic growth. Also, the role of FDI as a source of capital is significant to Africa because it can bridge the annual financial gaps as a result of budget deficits by contributing a significantly towards GDP growth that the continent needs to achieve the objective of halving poverty by 2020.

Furthermore, just as Western models of development and governance have influenced Africa, the region is also a beneficiary of Foreign Direct Investment (FDI). Yet as the West’s geopolitical influence continues to be challenged by emerging powers such as China, African nations theoretically have even seen greater access to funding for infrastructural projects that seek to enhance economic development and social advancements.

FDI in Africa

In building the case that Africa has failed to attract FDI from other countries, let’s first take a glance at their FDI index. The incursion of Africa’s foreign direct investment (FDI) accumulated to a total of $57 billion USD in 2013, about a 4 percent increase from 2012. This growth was impelled by the infrastructure, international, and regional investments pursuing market power in the developing country. This level of Africa’s FDI was the highest it has increased in nearly ten years. Now these numbers might contradict the claim that Africa fails to attract FDI, but they can be misleading when the historical trends are not taken into consideration as this case study will analyze as we go deeper.

Despite reaching such a significant increase in their FDI, this flow of incurrence became gradually stagnant through 2014. Africa’s 2014 alone incursion of FDI was about $29 billion. This was about $3 billion short of the $32 billion that was incurred in 2013 alone. (Young, 2014) Based on these declining amounts, we can argue the case that there are factors limiting the attraction of other countries to contribute to Africa’s FDI.

Although FDI is an important fundamental factor in the development of a growing country, African countries have shown a trend of failing to attract the necessary FDI for such development. This is especially true for countries located in the South African region. The differences in levels of FDI throughout the African countries are significantly staggered. The FDI per capita throughout Africa can range from anywhere from single digit amounts to over $150 in countries such as Malawi, Mozambique, and Botswana. This data on Africa’s FDI show positive correlation in average incomes with FDI per capita. It is not likely that dependence on FDI as a source to provide a jump start for poor countries will actualize anytime soon. (Chuhan, 2014) As the evidence shows, FDI is too risky for other countries to invest in due to unexpected fluctuations.

Predictions for preserved growth in the economy and population are continuing to attract market power seeking FDI into industries that are more consumer-oriented throughout Africa. Intra-regional investments are actually increasing. Most of the FDI outflows were aimed towards other countries in Africa, providing room for more regional integration compelled by investments. The inflow of FDI into the North African region decreased to about $15.5 billion in 2014, about a 7 percent drop. However, the comprehensive levels of FDI in the North African region persist to be relatively high, and investors seem to be more confident in returning their investments to North Africa. As FDI inflows in Egypt dropped by nearly 19 percent, inflows in North Africa remained at the highest levels at $5.6 billion. (Arnett, 2014) (Chuhan, 2014)

In West Africa, FDI inflows decreased to $14.2 billion, about a 14 percent drop. Much of this drop is cause from decreasing inflows to Nigeria. Conversely, Ghana, Gabon and Côte d’Ivoire began a production of oil in 2013. This attracted a considerable amount of investments from other foreign transnational corporations (TNC). Central Africa generated $8.2 billion worth of FDI in 2013. This was a drop of about 18 percent from 2012’s FDI. (Chuhan, 2014)

Incurrences of FDI in East Africa grew to $6.2 billion in 2014, about a 15% increase. This incurrence of FDI was likely driven by increasing flows into Ethiopia and Kenya. Kenya is continuing to develop as a favorable business hub, not only for the gas and oil exploration throughout its sub-region, but also for their industrial productions and transportation services. Ethiopia’s industrial tactic is geared towards attracting Asian capital in order to further develop its base of manufacturing. In the Southern African region, FDI inflows nearly doubled to $13 billion. This was primarily due to the record-high inflows of FDI into Mozambique and South Africa. In both Mozambique and South Africa, the primary attractions for investment were the infrastructure. Investments in the gas sector were also a significant factor in Mozambique. (Chuhan, 2014)

The intra-African investments are continuing to increase. Such investments are led by TNCs in the countries of South Africa, Kenya, and Nigeria. From 2009 through 2013, the shares of disclosed cross border Greenfield investment plans deriving from Africa increased to 18 percent of the total FDI. This was from less than the 10 percent between 2003 and 2008. For the many other smaller countries in Africa that are land-locked or don’t have the capabilities of exporting oil, intra-regional FDI acts as a significant source for foreign capital. (Arnett, 2014) (Chuhan, 2014)

Intra-African FDI projects are more focused on manufacturing and services. Intraregional FDI investments may subsidize the accumulation of regional value chains. Continuing intra-African FDI is parallel with leaders’ plans towards more in depth regional integration. However, for most of the sub-regional groups, intragroup FDI accounts for only a small part of the total intra-African inflows. Only in two of the regional economic cooperation (REC) enterprises does intragroup FDI account for a substantial part of the intra-African investments; in the East African Community (EAC), with nearly half, and then the South African Development Community (SADC) with over 90 percent. This was primarily because of the investments in surrounding countries by the prevalent exterior investing economies within these RECs, Kenya and South Africa respectively. (Young, 2014)

Investors may expect that FDI might be a positive factor in local economic development, but this is not a solidified conclusion. Multi-national corporations might hardly acquire rents and establish new jobs at the expense of already existing jobs. Furthermore, spillovers in technology might not emerge but rather foreign firms could plunder domestic markets from national firms. Any potential gains from FDI may also differ transversely throughout economic contexts. The effects of horizontal spillovers have a tendency of being obscure. Of course, insignificant or sometimes negative effects from horizontal spillovers can occur. These effects are sometimes referred to as the “market stealing” effect. The effects of vertical spillovers attribute to the potential benefits of initiating suppliers or clients of foreign businesses. Some of these benefits include offering technological assistance and secure quality control. Because there are no existing conflicts of interests with the foreign firms and their clients and suppliers in technology, effects from vertical spillovers have a greater probability of occurrence than horizontal spillovers. The concept of the spillover effects is even more complicated considering the fact that the effects of policies usually differ across economic contexts due to contrasting characteristics in integral institutions, regulatory surroundings, and even the level of skill sets among local employees. (Young, 2014) (Chuhan, 2014)

Up until recently, this composition had not addressed such issues to the southern African economies. This is partly because of a lack of decisive and comparable micro-economic data. Such data however, is now available to economists and investors. The World Bank’s investment setting surveys in the African region offers comparable data capable of cross country and firm level analysis. Such information allows investors to associate foreign ownership to the performance of businesses in thirteen economics throughout southern Africa. Foreign firms have a tendency to perform better in terms of growth in sales rates as well as total factor productivity due to FDI. This is also true for African economies, but there are obstacles that appear to drive investors away from initiating in FDI with Africa. (Arnett, 2014)

The composition on FDI aims on a relatively simplified set of variables that seem to be correlated with the success of FDI. Prospective multinational firms are viewed as having capabilities based on information and firm specific criteria. These multinational firms could profitably apply to foreign countries. Of course, these capabilities allow the multinational firms to overcome the challenges of being a foreign entity in order to generate returns which can justify the initial investment. (Chuhan, 2014)

Problems within agencies, skewed information, and issues with property rights protection that relinquish information based assets unavailable limits these firms from leasing or selling such capabilities to their foreign counterparts. In order to increase profitably and apply their profound capabilities to countries abroad, multinationals gear to enact managed foreign operations to commission in FDI projects. Even so, FDI is still a form of an investment with the ultimate goal of generating profits. (Chuhan, 2014)

The net present value of any given corporate investment project is dependent on a varying array of factors. The first factor is the size of the market, which increases the expected present value of investments with increasingly correspondent fixed costs. With everything else equating, FDI flows seek substantial markets. Everything else is not always equal however. Potential profits are dependent on the local products and factor in market development as well as growth potential. They are negatively affected through market risks and any costs associated with conducting business, including taxes, infrastructure, and labor costs relative to levels of productivity. All these factors impose challenges on an Africa’s institutional environment. (Young, 2014)

Foreign investments in Africa have historically been centering on a minimal number of target jurisdictions, with Nigeria and South Africa being the primary destinations. South Africa brought in almost a quarter of Africa’s FDI into the continent over the course of the past seven years, generating investments of US$10.3 billion in 2013 alone. It is ranked number 13th on the global 2014 A.T. Kearney Foreign Direct Investment Confidence Index. However, new FDI hot spots are surfacing. Mozambique, another country considered a primary investment destination, attracted nearly $7.1 billion in 2013, a 30% jump from 2012, as a result of the expansion in the country’s gas and coal markets. Other countries which have generated substantial amounts of FDI include Ghana, Zambia and Uganda. (Young, 2014)

Trends in FDI differentiate significantly between Northern Africa and sub-Saharan Africa. As a result of continuing political uncertainty within the region, FDI projects in North Africa decreased by nearly 30 percent as a whole entity for the reported year up to 2014. Other major African economies have also experienced a fall in investments. FDI inflows to Nigeria have fallen by nearly 20 percent to $5.5 billion. This is mainly due to the sales of petroleum assets from international oil companies such as Shell and Chevron. This is most likely to be even further affected due to the decline in the crude oil prices as well as uncertainty around national elections. (Chuhan, 2014)

Although investors have regularly favored natural resource assets such as oil and gas, there has been a pivotal shift away from the extraction industries and the continent of Africa is experiencing growing investments in other sectors. The top three sectors beyond natural resources are technology, media and telecommunications. These sectors account for more than 50 percent of FDI projects as reported in 2014. The same period also presented consumers and retail products take over financial services to become the second most investment attractive sector in Africa. FDI projects in real estate, hospitality and construction have continued to grow while the metal and mining industries have fallen outside of the top ten sectors when computed from FDI project numbers. In terms of futuristic trends, investors are focusing on the agricultural sector for possessing the greatest potential for growth in the next couple of years following 2014. Infrastructure is also regarded as another sector for growth in addition to that of consumer services, consumer products, and the telecommunications sectors. (Chuhan, 2014)

Given the analysis on this case study of Africa’s FDI so far, it is clear that Africa has failed to attract the FDI to be considered comparable to other nations with higher FDI indexes. The entire continent continues to suffer substantially from poverty. If Africa wishes to reduce their poverty by half by the year 2020, more countries will need to contribute to their FDI, but is not recommended due to various risk factors in losing investments.

Africa has continued to benefit from substantial FDI inflows from China. It is estimated that over $16 billion of China’s global FDI portfolio is based in Africa, with an increase in FDI from $392 million in 2005 to over $2.5 billion in 2012. However, China still continues to invest more significantly in Hong Kong, Singapore, and Taiwan as well as the United States and Western Europe in comparison. (Leung, 2014)

Of course FDI is over shadowed by the bi-lateral trades between Africa and China, which is projected to have exceeded $200 billion in 2014. It is estimated that China has more than 20 African countries with over $1 billion in trades. China has signed deals with many African governments with the agenda to facilitate investment co-operation and speed up the inflows of FDI into Africa. Consider that in May of 2014, China and Nigeria signed a memorandum of agreements which focused on influencing and supporting Chinese enterprises to invest in Nigeria through promotional investment events and announcing clients of the China-Africa Development Fund to new opportunities in Nigeria. Such agreements like this have already resulted in major FDI projects throughout Africa. For example, Chinese FDI inflows into Tanzania are forecasted to grow by 50 percent to $3 billion, with the primary focus on the sectors of energy and mining. China’s FDI in African countries have also been emphasized on the infrastructure and mining sectors. As a result of these investments, Tanzania seeks to become a net exporter of liquid natural gases (LNG), agricultural produce, natural minerals, as well as manufactured industrial products. China has also arranged plans to build a new rail-way system in East Africa by providing the necessary financing of approximately $3.8 billion for the first phase of the project. In November 2014, China Rail-way Construction Corporation agreed to construct a 1,400 km rail-way in Nigeria. This accounts for China’s greatest FDI deal ever made outside of the extraction industries. (Leung, 2014) (Young, 2014)

It is concluded in this case study of Africa’s FDI that the continent shows a trend of lacking the attraction from other countries in contributing to the FDI, so other countries should not contribute FDI to them. Economic developments that are strategically planned and conform to effective practices can be beneficial to local populations and does not necessarily put a significant burden in the environment. However, such developments have specific requirements, including over-sight by regulatory entities in the recipient and lending countries, disclosed regulations, cooperation among the investors, investment countries, and local actors, transparency of operations and decisions, and consultation with the stakeholders. It requires that both investor and investee integrate measures to predict, identify, and mitigate any possible threats. As China continues forward with their African FDIs, it will compensate itself, the investments, and the recipient countries to gain from past experiences and emerge as risk-mitigating investors that follow effective strategies. Solid environmental and social policies, as well as objectives concerning the development, environmental safeguards, and the protection of any vulnerable populations are the key factors to strong FDIs in Africa. (Leung, 2014) (Chuhan, 2014)

The bottom line, FDI lacks attraction comparable to other countries. With such resources that interest countries such as China, Africa may very well be on their way to progressing FDI, but other countries should hold off until they consider investments. As the evidence shows, China’s investments in Africa do yield benefits to the continent, but this is not significant enough to accelerate development. Expansion to compete with other countries in terms of FDI and development however, will take time.

References

Arnett, G. (2014, June 24). Foreign direct investment: which countries get the most? Retrieved from The Guardian: http://www.theguardian.com/news/datablog/2014/jun/24/foreign-direct-investment-which-countries-get-the-most

Chuhan, P. (2014, April). Africa’s Pulse. Retrieved from World Bank: http://www.worldbank.org/content/dam/Worldbank/document/Africa/Report/Africas-Pulse-brochure_Vol9.pdf.

Leung, D. (2014, May 15). Where Are Chinese Investments in Africa Headed? Retrieved from World Resources Institute: http://www.wri.org/blog/2014/05/where-are-chinese-investments-africa-headed

Young, E. &. (2014). Africa 2014: Executive Growth. Retrieved from Ernst & Young: http://www.ey.com/Publication/vwLUAssets/EY-attractiveness-africa-2014/$FILE/EY-attractiveness-africa-2014.pdf