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Economic Development in Africa
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Rethinking the Role of Foreign Direct Investment
Full Report ( 115 Pages, 548.0 KB )

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In recent years, attracting FDI has assumed a prominent place in economic development strategies as a key to financing development in African countries, without adding further to their indebtedness. In addition, expectations have been raised that by creating jobs, transferring new technologies and building linkages with the rest of the economy, FDI will directly address the continents´ poverty challenge. Thus policy reforms aimed at improving the investment climate in African countries have increasingly been centred on attracting FDI without the desired results either in increasing FDI flows in productive sectors or in ensuring more rapid growth and poverty reduction. The continent at present accounts for just 2 to 3 per cent of global flows, down from a peak of 6 per cent in the mid-1970s. Even on a per capita basis, the gap between Africa and other developing regions widened significantly in the 1990s and remains very large.

Africa´s particular combination of geographical, historical and structural features have traditionally attracted FDI into enclaves of export-oriented primary production with limited linkages to the rest of the economy. This situation has not changed much in recent years and has contributed to undermining a self-sustaining and dynamic investment process, in particular as the singular focus on attracting FDI through greater openness and downsizing of the state has drawn attention away from more fundamental determinants of FDI flows to Africa - namely market size and growth, resource endowments and infrastructure development.

In the extractive sectors, competition to attract investment has led to an incentive inflation prompting what some observers describe as "a race to the bottom" not only in the more static sense of forgone fiscal earnings, but also in terms of giving up policy options necessary to organize a more dynamic long-term growth path.

The Report cautions that FDI carries costs as well as benefits for the host country and consequently proceeds from the need to take a more critical approach to evaluating the size, type, and impact of FDI in African countries. It calls for a rethinking of the one-sided emphasis on attracting FDI and its replacement with a more balanced and more strategic approach tailored to African socio-economic conditions and development challenges.

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Economic Development in Africa (UNCTAD/GDS/AFRICA/2005/1)
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