Foreign direct investment (FDI) by transnational corporations (TNCs) into Africa is low, but there are signs of rising levels for the future. Growth, economic reform and improvements in the regulatory frameworks of many countries in the continent are being increasingly recognized by both domestic and foreign investors, according to the World Investment Report 1998: Trends and Determinants (WIR98), released today by the United Nations Conference on Trade and Development (UNCTAD).
WIR98 highlights the profitability of investments in Africa. It states that in the case of FDI from the United States, for example, there was only one year (1986) between 1980 and 1997 when the rate of return on investment was below 10 per cent. "Since 1990, the rate of return in Africa has averaged 29 per cent and since 1991 net income from British direct investment in Africa was reported to have increased by 60 per cent between 1989 and 1995."
Excluding South Africa, FDI flows to Africa were just 3 per cent of total flows to developing countries in 1997 with a volume of US$4.7 billion (US$4.8 billion in 1996). Nigeria, Egypt, Morocco, Tunisia and Angola accounted for two-thirds of this total. Inflows of FDI to Africa have to a considerable extent been related to natural resources. For example, Nigeria, Angola, Equatorial Guinea, Botswana, Namibia, and the United Republic of Tanzania, have been beneficiaries.
Major policies influencing African FDI
For a number of countries (despite the downturn in global commodity prices) many of the economic fundamentals are improving and enabling policy frameworks for investment are being put in place. The simultaneous improvement in policy initiatives both externally (such as the Africa initiative of the United States and the least-developed country programmes of a number of international organizations) and internally augurs well for FDI into an increasing number of African countries.
FDI flows to Africa reflect real differentiation between countries that enjoy political stability, are securing growth and enhancing their investment environment and other countries.
The report indicates that investors need to look at the region country by country, and sector by sector, when planning FDI because of very substantial differences.
While the great majority of the FDI into the region went to relatively few countries, a number of Africa´s smaller countries, such as Lesotho and Malawi, have been attracting increasing FDI. They hosted higher FDI stocks per US$1,000 of GDP than many of the larger recipients in 1996. In some of the cases of smaller countries the high FDI inflows are accounted for by the existence of the rich reserves of natural resources they possess. In other cases, countries are seen as relatively competitive investment locations for FDI that is undertaken to service the markets of larger neighbouring countries (for example, Lesotho relative to South Africa).
On the positive side, the report stresses that 1997 was the fourth consecutive year of economic growth for Africa as a whole. GDP growth rates exceeded 5 per cent in several countries. Privatization has become increasingly important for attracting FDI, although it is far from being fully explored by most African countries. In sub-Saharan Africa, US$299 million of a total of US$623 million in privatization sales were accounted for by foreign investors. Ghana topped the list with US$186 million, selling a US$112 million stake in Ashanti Goldfields to foreign investors, followed by Kenya with US$137 million, which included a 26 per cent share in Kenya Airways that was sold to KLM of the Netherlands for US$26 million.
African countries are strengthening efforts to enhance policy frameworks, making them attractive to foreign investors. By 1997, some 47 of the 53 countries in the region had adopted national laws governing FDI. Progress has also been noted in improvements in institutions, openness to trade and strengthening of the telecommunications infrastructure. Investment promotion agencies are proliferating and awareness is rising in African governments of the need to strengthen the overall investment environment by reducing bureaucratic red tape and curbing corruption.
The principal home countries of TNCs investing in Africa in the 1982-96 period were the United Kingdom, France, the United States, Germany, Japan and the Netherlands. In recent years, France overtook the United Kingdom as the largest single country source of African FDI. At the same time FDI flows to Africa from Asia have increased significantly, mainly from TNCs in the Republic of Korea and in Malaysia, as well as from Taiwan, Province of China and China. The Asian financial crisis may impact FDI from that region to Africa in 1998. However, the report indicates that apart from a fall in flows from Korea, so far there is no evidence of significantly reduced FDI flows to Africa from Asia.
African "frontrunners" show the way
WIR98 shows that a number of "frontrunners" in Africa are attracting relatively high and growing levels of FDI. These countries demonstrate that " African countries can become attractive locations for foreign investors, even in a period when reports of political unrest and economic instability prevent many investors from exploring the opportunities that the continent has to offer."
The analysis, using a combination of key indicators relating FDI flows to the size of the economy, relative to gross fixed capital formation, measured in per capita terms, and other factors, showed that the "frontrunners" in Africa are Botswana, Equatorial Guinea, Ghana, Mozambique, Namibia, Tunisia and Uganda.
These countries represent the most dynamic countries in Africa in terms of attracting FDI flows during the 1992-96 period, according to the indicators used in WIR98. They accounted for more than 24 per cent of FDI into Africa in 1996, while representing only 9 per cent of the continent´s population and 8 per cent of its GDP. The group is heterogeneous in terms of the levels of their development, as well as their geographic location.
However, WIR98 points out that large numbers of African countries are still largely bypassed by foreign investors. The governments of Africa must therefore take an array of political and macroeconomic measures to enhance their attractiveness as locations for FDI inflows. At the same time a variety of external measures need to be taken to enhance FDI into Africa, such as securing development assistance to improve investment conditions, such as infrastructure facilities; opening up of developed countries´ markets for African exports; and, of particular importance, the reduction of the heavy external debt burden of many African countries.
South Africa sees sharp gain in FDI inflows and outflows
FDI inflows to South Africa rose last year to US$1.7 billion from US$760 million in 1996, largely reflecting a number of privatizations. These included the 30 per cent sale of Telkom, as well as sales of six radio stations, the domestic airline Sun Air, and a hotel and food group. Over the last four years fully 80 per cent of FDI came from the United States, Malaysia, the United Kingdom, Germany and Japan. Some 60 per cent of the total FDI inflow was in the form of mergers and acquisitions; in 1997, British and Malaysian firms were particularly prominent in M&As.
During the first half of 1998, FDI flows into South Africa continued to be driven mainly by privatization, including the purchase of a 20 per cent share in the Airport Authority by the Italian firm Aeroporti di Roma. Some foreign investment may also have been attracted by the restructuring and "unbundling" of large South African conglomerate companies, states WIR98.
South African TNCs accounted for US$2.3 billion of outward FDI in 1997, after just US$57 million in the previous year. This most recent outflow level is more than double the total FDI outflows by all other African countries. Some of South Africa´s largest TNCs are engaged in mining, finance, paper, glass, beverages and hotels.