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The New Normal of Foreign Direct Investment in Africa

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Foreign direct investments play a major role in Africa’s economic development. The International Monetary Fund (IMF) has figured out that sub-Saharan African countries have seen flows increase six fold since 2000. FDI into Africa grew steadily through to 2008. It declined in 2009 and 2010 because of global economic crisis, but remained relatively strong. Over the coming years, we will see FDI rising again. IMF Chief Economist Olivier Blanchard distinguishes between "good flows" that help economic growth and "bad" short-term flows that can cause volatility.

Investments heavily focus on the extractive sectors. However, an overall trend toward greater diversification can be observed, i.e. into the manufacturing sector. This is especially true for investors from the developed markets. They still bring the bulk of investments into Africa, although the proportional share of investment from emerging countries has grown steadily over the last years.

According to the World Bank, Africa could be on the brink of an economic takeoff, much like China was 30 years ago, and India 20 years ago.[1] More and more companies and consultancy firms begin to realize the outstanding opportunities that can be found in Africa. Last year, the McKinsey report, "Lions on the Move," marked the beginning of a move towards Africa at the Big Five (global consulting firms). This year, Ernst & Young followed suit with their "Africa Attractiveness Survey 2011".

Some investors have started to re-think their perception of Africa since there are more opportunities at higher yields than they expected. However, widespread risk aversion among Western investors, which is correlating with price developments at major international stock markets, hamper capital inflows into African stock markets as well as direct investments into private sector projects.

However, as the debt crises in the United States, some European countries, and Japan are becoming more apparent, risk of doing business and making investments in the developed world is increasing. Consequently, risk/reward profiles of investments in Africa are improving – relatively spoken.

According to the Africa Competitiveness Report 2011[2], competitiveness in African firms (both producers and suppliers) is positively influenced by FDI, mainly through advancing their managerial skills and technological capacities, strengthening the capital stock, and improving total factor productivity. Only through FDI, the productivity gap between African countries and more advanced economies can be reduced.

An important trend that can be observed is the encouragement of regional integration and trade in Africa. It is most likely that this will attract more FDI into rapidly integrating regions like the East African Community (EAC). Kenya, Uganda, Tanzania, Rwanda and Burundi have a combined market size of close to 140 million people.

The top five FDI destinations in Africa (South Africa, Egypt, Morocco, Algeria, Tunisia) account for more than 50% of all foreign investment projects in Africa. Another 20 % of FDI flows into the next five countries: Nigeria, Angola, Kenya, Libya, and Ghana. The top 10 countries are attracting more than 70% of new FDI. All other sub-Saharan countries share the remaining FDI.

Some FDI Players

China, India, and Brazil are already very active in Africa. China is following a strategic long-term master plan. Wholly, or partially, state-owned companies play the major role concerning investments in Africa. Brazilian companies are focusing on Lusophone Africa, mainly Angola and Mozambique, while big Indian companies like Bharti and Tata Steel and family-run enterprises are mainly active in Eastern Africa. Lebanese business people are spread all over Africa, and they control big parts of trading businesses, i.e. more than 50% of trading in Cτte d’Ivoire. However, they are not big investors.

More recently, Japan appears on the scene. Yoshikatsu Nakayama, Vice Minister of Economy, Trade, and Industry, said that Japan is keen to invest "billions of dollars" in minerals and infrastructure in Africa. According to Reuters, Japan is scouting for projects in which to invest, either via its state-owned oil and mining company JOGMEC or via joint ventures between local and Japanese companies. The average size of investments into African projects might be a few hundred million dollars. Although the Japanese are trying to catch up to China, they are lagging far behind.

And yet another region is starting to explore opportunities in sub-Saharan Africa. Companies and investors from the Middle East have already begun to acquire vast areas of agricultural land in the Sudan, Ethiopia, and other East African countries. Portfolio investors want to diversify their holdings, as they fear increasing political risk in the MENA region. Egyptian investors start to look to stock markets south of the Sahara. Qatar wants to position herself as major air hub and connecting link between Asia and Africa. The Kuwait Investment Authority is planning to invest $1 billion in Egypt’s stock market.

Intra-African FDI is clearly on the rise, reflecting a growing sense of self-confidence and belief in the potential of the continent. For example, the Egyptian company, ElSewedy Cables, has heavily invested into a joint venture in Zambia to produce copper cables locally.

Also, Nigerian oil companies are looking for new opportunities in Ghana. Nigerian banks are expanding their businesses in West Africa, as well as Kenyan banks in East Africa. Many South African companies like MTN, Shoprite, and Massmart are heading north, playing a dominant role in sub-Saharan markets.


How sustainable are these surging FDI inflows into Africa? Is it just a temporary phenomenon driven by excess liquidity because of exploding activities of the printing press of paper money, aka quantitative easing? According to Joyce Chang, Global Head of Emerging Markets and Credit Research at JP Morgan, this is not a temporary state of affairs. It has become the new normal. Although it could be a cycle, this cycle could last for 25 to 50 years.[3]

Investors from the developed world are still vastly underexposed to emerging markets, despite their attractiveness in terms of growth perspectives, yields offered, and low correlations to the world stock markets. Although developing economies make up nearly 50% of global GDP, big institutional investors have allocated only very small portions of their funds under management to emerging markets. In the case of U.S. defined contribution pension plans, the figure is just 2.1%, according to JP Morgan.

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