By Dr. Ayodele Odusola,
The inflow of foreign direct investment (FDI) in Africa presents a paradox. Conventionally, capital is supposed to go from low-yielding to high-yielding countries. Over the 2006-2011 period, the region recorded the highest rate of return on FDI at 11.4 percent, compared to 9.1 percent in Asia and 8.9 percent in Latin America and the Caribbean. The world average was 7.1%.
However, the share of global net FDI allocated to Africa has been very low during the last decade of illustration, the share of sub-Saharan Africa in global net FDI between 2010 and 2016 was 1.87%, against 30.34% for Europe, 26.45% for East Asia and the Pacific, 17.334% for North Africa, and 13.25% for Latin America and the Caribbean.
FDI inflows (4.3% on average between 2010 and 2016) declined from US $ 71 billion in 2014 to US $ 59 billion in 2016, and are expected to increase to US $ 65 billion in 2017, compare around US $ 1.7 trillion worldwide. Low commodity prices and declining consumer demand in Europe largely explain this downward trend. In 2016, Angola, Egypt, Nigeria, Ethiopia and Ghana were the destinations that attracted the most FDI.
Previously concentrated in the extractive industries sector, FDI now extends to the manufacturing and services sectors. The latter, for example, accounted for about three-quarters of FDI projects in all-new sectors in 2016, while the manufacturing sector accounted for about one-fifth of these projects. In fact, FDI is becoming a major source of financing for economic diversification.
In Ethiopia, the newest sectors targeted for FDI in 2016 were manufacturing (including leather products, pesticides, fertilizers and other agricultural chemicals) and infrastructure; FDI has also helped Mauritius diversify its economy, which, in addition to sugar, is now also based on textiles, tourism and, more recently, luxury real estate, offshore banking and medical tourism.
The drivers of FDI inflows into Africa include business opportunities in the extractive sector (including oil and gas, gold, diamonds, cobalt and copper). ), the transfer of light industry from emerging countries such as China, the establishment of special economic zones (for example, in Mauritius and Senegal) and the improvement of investment regimes (including the promotion of investment in Egypt, and tax incentives in Tunisia and Zimbabwe).
Why this paradox of FDI in Africa? Africa’s wealth of labor and natural resources is not enough to attract financial capital. Indeed, other elements come into play. This is, for the most part, the low level of public investment (eg lack of infrastructure such as energy, roads, railways and airports); lack of human capital (eg, lack of skilled, educated and healthy workforce); and insufficient institutional capital (for example, inefficient security and justice systems, weak property rights protection, a weak regulatory framework and standards). Improving the quality of investments in these elements improves the productivity of physical and financial capital and reduces the costs of commercial transactions. When these elements are provided directly by the investors, they take the place of taxes levied on the return on the invested capital.
Other factors that explain the paradox of FDI include fragmented investment policies; asymmetry of information (limited access of foreign investors to investment opportunities); and the high level of sovereign risks (eg, low absorptive capacity, high level of corruption, political instability, weak ability to manage shocks). All of this undermines the ability of governments to maximize the social return on investments that could complement and catalyze financial capital.
Financial intermediation costs (including high brokerage fees, loan and agency fees, and contract enforcement), of which domestic lending rates are an indicator (up to 60%) in Madagascar and 44% in Malawi) constitute a brake on the influx of FDI. To end the paradox of FDI in Africa, it is essential to tackle the obstacles to public, human and institutional capital, as well as to reduce sovereign risks and intermediation costs and harmonize investment policies between countries. from the continent.