Investment flows back into Africa

Over the past 10 years, foreign direct investment (FDI) has helped boost sustainable economic growth in many African countries.

In theory, FDI can assist to accentuate productive capacity, employment and exports. When properly managed, it can also bring secondary benefits in the form of transfers of technology, management expertise and marketing skills.

With continued liberalisation and globalisation of markets, African countries are beginning to turn toward FDI as a source of capital inflows rather than relying on official development assistance (ODA).

According to the African Development Bank, annual FDI represented 15.9% of gross fixed capital formation during 2000-2010, compared to 7.2% during the 1990s. In fact, the annual average FDI inflows to Africa over the period 2005-2010 totalled $45.4 billion – almost three times higher than in the previous five years.

The sub-regions that benefited most were in North and West Africa. The latter attracting around 25% of the total annual FDI inflows to the continent.

Added to this, emerging economies such as China and South Korea gained ground as key investors in the continent. Particularly in the extractive sectors.

Within the African region, a country’s level of natural resources endowment (gas, oil, ores etc) is a key criterion for FDI. Data released by the UN Conference on Trade and Development (UNCTAD) in July 2012 reveal that Africa accounted on average for just 3.2% of total global annual FDI flows over the period 2005-2010, falling to a mere 2.8% in 2011.

In stark contrast with the previous year, which saw a strong recovery in Central Africa and a sharp decline in Southern Africa, large annual swings were recorded for a number of major FDI recipients, including South Africa, Nigeria, and Morocco.

The decline in FDI to Africa in 2011 reflected reduced inflows to North Africa, largely as a result of the political and social instability in Tunisia, Egypt, and Libya. North Africa posted a drop of 57.9% in 2011, while Central Africa registered a 10.9% decline for the same period.

In contrast, inflows to sub-Saharan Africa grew robustly in 2011, reaching an estimated $34.8 billion, a rise of 28.1% over the previous year. This partly reflected a rebound in investment to South Africa, as well as new natural gas development opportunities in Mozambique.

Apart from Southern Africa, the other major sub-region to benefit from FDI was West Africa, which witnessed a sharp 37.1% increase in inflows compared to the previous year, to reach $16.1 billion. The principal beneficiary countries were Nigeria and Ghana, which jointly attracted about three-quarters of the sub-region’s total FDI inflows. For East Africa, inflows increased by 7.2% compared to 2.1% in the previous year.

The primary sector — mainly the extractive industries — remains the traditional principal beneficiary of foreign direct investments.

The continents FDI prospects for 2012 are promising, according to the latest UNCTAD World Investment Report.

Africa’s robust economic growth, combined with high commodity prices and on-going economic reforms, have improved investor perceptions of the continent.

However, the outlook is tempered by on-going fragility in the global economy which could have transmission effects in Africa. As reported by the World Bank, external shocks are already impacting negatively on net private capital flows to developing countries in general, especially FDI flows.