Foreign direct investment (FDI) flows to Africa are moving into service industries, particularly in the finance and insurance sectors, and manufacturing, leaving behind a traditional concentration on the region´s primary commodities, a new report from UNCTAD reveals.
The World Investment Directory on Africa(1), released today, is the most complete and authoritative source of data on investment trends and statistics in existence. The 462-page report surveys 53 African countries(2), covering data available up to March 1996.
Meanwhile, the liberalization of investment and trade regimes are responsible for a new phenomenon: the emergence of the African transnational corporation, or TNC. African TNCs are based, among other countries, in South Africa, Morocco and Zambia.
Although still modest in absolute terms (US$4.5 billion in 1996), FDI flows to Africa are responsible for a significant share of gross domestic capital formation and gross domestic product. FDI represents 4.8 percent of capital formation -- approaching levels recorded in Asia and Western Europe -- and 10 percent of GDP, compared with about 13 percent in other parts of the world.
The importance of FDI inflows is heightened for small economies such as Equatorial Guinea, Namibia, the Gambia and Swaziland (see annex 1). In seven African countries the share of FDI in capital formation is higher than that in the United Kingdom and in eight it outperformed France.
However, compared with other parts of the world, overall volumes of FDI for Africa remain low, and thus a source of concern. Between 1991 and 1995, Africa attracted only 5 per cent of total FDI flows to developing countries and 2 per cent of world FDI flows. Moreover, FDI in Africa remains concentrated in only a handful of countries. Nigeria and Egypt accounted for over half of FDI into Africa during the first half of the 1990s (see annex 2). Morocco was the third largest recipient during the same period, with average annual inflows of US$0.5 billion.
African least developed countries (LDCs) are even worse off. They received less than one fifth of total inflows to the continent during the last two decades; and, two-thirds of this went to Angola - for the oil industry - and Liberia, for shipping.
Western European investors still dominate FDI in Africa. Firms from France and the United Kingdom, for instance, account for more than four-fifths of the Western European stock in Africa. The United States accounts for approximately 20 per cent of inflows from developed countries, while the very small investments originating in Japan are concentrated in Liberia.
New investors into new sectors
A noteworthy development is that South East Asian countries have begun to show interest in the continent, mainly for South Africa. In 1996, Petronas, the Malaysian state-owned company, announced that it would spend US$436 million to purchase a controlling stake in Engen, a large South African oil refinery, while Telekom Malaysia has formed a consortium with SBC International (United States) which acquired a 30 per cent stake (about US$1.3 billion) in the privatized South African Telekom. Altogether, FDI from Malaysia accounted for about half of total inflows to South Africa in 1995. Asian investors have also shown an interest in South Africa´s neighbouring countries (e.g. Botswana), from where they can produce at low costs and export to South Africa.
Except for a few countries such as Botswana and Zimbabwe, where diamonds and tobacco are respectively important recipients of FDI, FDI in Africa is no longer concentrated in the primary sector. A sectoral breakdown of FDI stock in selected African countries illustrates that, for several of the largest recipients (e.g. Egypt and South Africa), the services sector now accounts for the largest share of inward FDI stock, followed by manufacturing (see annex 3).
African firms crossing borders
Perhaps most interestingly, firms from Africa are themselves becoming TNCs i.e. they are emerging as outward investors (see annex 4). Although African TNCs remain relatively rare and small in size (with an outward FDI stock of US$25 billion in 1994), this shows that there are firms in Africa that can be competitive internationally, not only through trade but also through production in foreign markets. Firms from South Africa lead, followed by those from Nigeria. Together they accounted for two thirds of FDI from the region in the 1990s.
Expansion abroad tends to take place initially in neighbouring countries at similar or lower levels of development. However, the sectoral composition of FDI from African firms is disparate. It includes retailing, banking, brewing, satellite television and tourism. Notable examples are investments by South African Breweries in Botswana, Lesotho, Swaziland, United Republic of Tanzania and Zambia; and investments by Pepkor, South Africa´s biggest retailer, in Zambia and Mozambique. Intra-regional investment is also taking place among the North African countries, encouraged and facilitated by several economic agreements, most notably the Mahgreb (in 1989) between Algeria, the Libyan Arab Jamahiriya, Morocco, Mauritania and Tunisia.
African TNCs include: Anglo American Industrial Corp. Ltd. (South Africa), the largest in the region; Barlow Rand Ltd., a conglomerate in South Africa; Conserverie Chérifiennes, a food TNC in Morocco; and Zambia´s Consolidated Copper Mines Ltd (see annex 5).
Boosted by continuous liberalization
African countries have opted over the past decade for a favourable investment climate. Countries that have traditionally been relatively open to FDI, such as Kenya and Zimbabwe, have liberalized their regulatory frameworks further to attract more investment. During the 1990s, even countries with traditionally unfavourable attitudes towards FDI, such as Ethiopia, Guinea and Mozambique, introduced new legislation offering a wide range of guarantees and opportunities for foreign investors.
In addition, an increasing number of countries are concluding bilateral investment treaties, a necessary prerequisite for further FDI. As of June 1996, about 260 such treaties had been signed by African countries. Today, the continent accounts for one fifth of the total number of treaties in the world.