Foreign Direct Investment in Africa

By: EconomyWatch   Date: 30 June 2010

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Foreign direct investment as a means of economic growth has been welcomed by most African nations in the recent times. Considerable liberalization of the prevalent investment regulations has been undertaken to facilitate the smooth flow of FDI into these economies. Foreign investors have been granted substantial incentives for investment in the African nations. The region has witnessed improved economic performance since the middle of the 1990s. Off late FDI flow into Africa has diversified from the natural resource sector to the manufacturing sector and services industry as well. Africa it seems is slowly but steadily approaching the path of long run growth and development.

On 2nd April 2008 UNCTAD released the “World Investment Directory: Africa” in Ghana. As per the data released by UNCTAD, Africa has recorded a robust growth in FDI flow in the recent times. The FDI inflows to Africa stood at US$36 billion in the year 2006 from a meager $2.4 billion in the year 1985. The FDI flow was projected to stay at around US$36 billion for 2007.

FDI inflows into Africa for the year 2006 were equal to around one-fifth of the area's formation of gross fixed capital. Inward FDI in Africa climbed to US$315 billion in the year 2006 from $42 billion in the year 1985.

The surge in FDI inflows for the African subcontinent in the time period from 2001 to 2007 can be explained by the twin factors of upwardly mobile commodity prices and a favorable investment climate. The African nations backed FDI investment efforts by policy reforms along with amendments in the laws on natural resource exploitation.

International communities have pledged an increased aid for many African nations. International donors are keen to support Africa's regional development initiatives, provide increased market access to it and further its infrastructure development initiatives among other things. All these are components of FDI.

It is interesting to note that the increasing FDI flows into Africa in the recent times have not however led to any increment in Africa's share of world FDI.

African FDI inflows stagnated at around 3% in the period from 2000 to 2006. In particular it was 2.7% for the year 2006. As per data available in 2006 the lion's share of the FDI flow were accounted for by Africa's biggest natural resource producers like Angola, South Africa and Nigeria and the sub region of North Africa.

Nigeria and South Africa together roped in 37% of Inward FDI flow for the African subcontinent in 2006. The interesting phenomenon was that both the countries witnessed an increasing share of inward FDI inflow in the primary sector coupled with a declining share of FDI in their manufacturing sector. Most of the African nations in this period were characterized by this trend. Only a handful of African countries witnessed an increased FDI inflow into manufacturing sector in the same reference period.

Most of the FDI flows into Africa over the years have come from developed countries. In recent times developing nations have also pitched in with FDIs. However, as of now they constitute a small portion of the total FDI inflow into Africa. In this regard particular mention may be made of transnational corporations originating from Africa and Asia.

In 2006 United Arab Emirates accounted for 70% of the inflow of FDI into Tunisia.

As observed by UNCTAD, the incidence of policy changes for promulgating a favorable FDI environment in the African region has substantially increased since the beginning of the 1990s. UNCTAD observed 57 such changes in 2006 out of which 49 were customized to favor inward FDI.

At the global level African nations signed double taxation treaties as well as bilateral investment treaties to promote a conducive, transparent investment climate. In 2006 African nations had signed 438 double taxation treaties and 687 bilateral investment treaties to this effect. More than 70 % of these deals were struck with developed nations.


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