Foreign direct investment (FDI)(1) flows to Africa(2) last year rose to $10 billion from $8 billion, in line with the faster growth rate generally experienced by the continent during the 1990s, as numerous governments sought to create a more business-friendly environment after the turbulent 1970s and 1980s. However, investments by transnational corporations (TNCs)(3) into Africa still represent only 1.2% of global FDI flows and just 5% of total FDI into all developing countries, according to the World Investment Report 2000: Cross-border Mergers and Acquisitions and Development (4), published today by the United Nations Conference on Trade and Development (UNCTAD).
WIR2000 stresses that: "The real challenge for the continent lies ahead: integration into the global economy, including integration into the regional or global production networks of TNCs. Only then will the continent become a more prominent player in the world market and benefit more from FDI".
About 70% of total 1999 FDI into Africa was concentrated in just five countries - Angola, Egypt, Nigeria, South Africa and Morocco. Investments in natural resources continue to be the main focus of foreign investor interest in most African countries, but there are also significant flows into manufacturing and services. The great majority of the poorest African nations, however, remain marginalized in terms of the absolute amount of foreign investment they receive.
However, when measured in terms of gross domestic capital formation, FDI to a number of small African countries appears much more sizeable than the absolute FDI figures would suggest. Angola, Equatorial Guinea, Lesotho and Zambia rank first according to that yardstick.
Telecommunications, mining sectors targeted by privatization
Privatization played a greater role in the attraction of FDI to Africa during the 1990s than in previous decades. The lion´s share of privatizations between 1990 and 1998 went to South Africa ($1.4 billion), Ghana ($769 million), Nigeria ($500 million), Zambia ($420 million) and Côte d´Ivoire ($373 million). And most of those privatizations (including projects with both domestic and foreign participation) took place in telecommunications (with a total volume of $2.5 billion) and mining ($1.4 billion).
WIR2000 notes that: "Although there has been a slowdown in privatization-related FDI in 1999 as compared to the mid-1990s mainly due to fewer privatization projects being offered, this trend is likely to be reversed in the near future. Some countries in sub-Saharan Africa, such as Kenya, Nigeria, Lesotho and South Africa, are preparing for major privatizations in the next few years, offering opportunities for FDI in the power, telecommunications and transport industries".
Last year, North Africa attracted 29% of total FDI in the continent, with Egypt boosting its inflows by more than $400 million to a total of $1.5 billion, mainly on account of deregulation and privatization. In sub-Saharan Africa last year Angola, thanks to petroleum investment, was particularly successful in attracting FDI, gaining between $700 million and $1.8 billion. Meanwhile, an increasing number of corporations from Western Europe and North America are now investing, with United States and French firms investing relatively more in natural resources, United Kingdom firms in services, and Dutch, German and Swiss TNCs in manufacturing.
Future investment prospects good, say TNCs
Results of a joint UNCTAD- International Chamber of Commerce (ICC) survey of leading TNCs suggest that the increased level of FDI flows into Africa in recent years may well be sustained in the future. The survey, conducted at the beginning of this year, indicates that one third of the 65 respondents intend to increase investment in Africa in the next three to five years, and more than half expect their investment to remain stable. More than 43% expect that Africa´s overall prospects for attracting FDI will improve in the next three to five years, but another 46% expect no change.
South Africa and Egypt are viewed as the most attractive African locations. In general, the more developed countries in the region rank higher than those at the bottom of the ladder, but a few least developed countries (LDCs) - Mozambique, Uganda, the United Republic of Tanzania, and Ethiopia - were also considered attractive FDI destinations.
Tourism, natural resource industries, or industries for which the domestic market is important - such as telecommunications - were considered the most promising in their potential to attract FDI. Textile and clothing industries for which the international market is important ranked low. The companies surveyed found also that an overly negative external image of Africa persists and acts as a disincentive for foreign investors. But they also underline the need to differentiate among the countries of the continent.
The survey´s findings are broadly in line with those of an earlier UNCTAD survey of African investment promotion agencies conducted in 1999. Nonetheless, there are some interesting differences as regards the determinants of FDI decisions. TNCs ranked the size of domestic markets high and access to international markets low, while it was the belief of investment promotion agencies that TNCs placed more emphasis on access to global markets, regulatory frameworks and incentives. Both TNCs and investment promotion agencies, however, recognized that bribery, high costs of doing business, poor physical infrastructure and difficulties in accessing capital will continue to be obstacles to attracting FDI for the foreseeable future.
To strengthen investment interest by TNCs in Africa, UNCTAD has recently worked with the ICC, the Multilateral Investment Guarantee Agency (MIGA) of the World Bank and the United Nations Development Programme (UNDP) to produce a fact sheet on FDI in Africa, based on UNCTAD´s 1999 publication FDI in Africa: Performance and Potential. Also jointly with the ICC, UNCTAD is putting together investment guides and capacity-building programmes for LDCs. Guides to Bangladesh, Ethiopia and Mali have already been produced or are close to publication, with others to follow. WIR2000 states that these efforts need to be complemented by efforts on the part of developed countries to liberalize access to their markets for African products.
FDI outflows from South Africa in 1999 fell to $1.1 billion from $1.7 billion in 1998, while FDI outflows from all other African countries rose to $935 million from $648 million the previous year. About $250 million was accounted for by Libya, while Uganda exceptionally emerged as a prominent source of outward FDI as Starlight Communications acquired Vistana of the United States in a transaction valued at $406 million.
Only three African corporations, all from South Africa, appear on UNCTAD´s list of the 50 largest TNCs in developing countries, based on 1998 foreign assets. They are Sappi Ltd., engaged in pulp and paper production; Barlow Ltd., which is active in diversified industries; and the food and beverage company South African Breweries.