Foreign direct investments play a major role in
Africas 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
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. 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
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, 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 dIvoire. 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
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 Egypts 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
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.