What the reorientation of foreign investment means for Africa’s recovery

  • Foreign direct investment (FDI) is essential to help Africa recover quickly from COVID-19.
  • FDI is beneficial for host countries as it helps improve firm productivity and integrate domestic firms into global markets.
  • In 2000, Africa attracted only 1% of global FDI inflows.
  • COVID-19 has disrupted FDI to Africa, with new announcements in 2020 down 56% from 2019, with declines in almost all major sectors.

The flow of foreign direct investment (FDI) to Africa has changed over the past decade, as new sources of investment have emerged and new sectors have developed. As the COVID-19 crisis has clouded prospects for future investments, capitalizing on longer-term trends presents a compelling opportunity for African policymakers looking to revive the economy.

Weak foreign investment has hampered Africa’s participation in global value chains (GVCs). FDI is beneficial to host countries as it helps improve firm productivity and integrate domestic firms into global markets, as illustrated by the rapid development of newly industrialized Asian economies in recent decades. Unfortunately, FDI inflows and participation in GVCs are low in the Africa region (Figure 1.1 and Figure 1.2).

In 2000, Africa attracted only 1% of global FDI inflows and increased it to 3% in 2018. Yet its share of global GVC participation has remained constant during this period at 2%. In contrast, developing countries in the Asia-Pacific region increased their global share of FDI from 10% to 31% and their share of GVC participation from 11% to 17% during this period. Therefore, compared to other regions, Africa’s FDI and GVC integration are still underdeveloped.

Total share of global FDI inflows.

Image: Authors’ calculations using FDI statistics from UNCTAD and EORA.

FDI inflows and participation in GVCs

Total share of global participation in GVCs.

Image: Authors’ calculations using FDI statistics from UNCTAD and EORA.

There has been a steady increase in FDI from Asia and Africa. Historically, Europe has been Africa’s main source of FDI, accounting for two-thirds of its FDI stock until 2005. While its absolute value has increased, its share has since fallen to less than 50 % in 2018 (Figure 2.1 and Figure 2.2). In its place, FDI from Asia increased, the share of which rose from 5% in 2002 to 23% in 2018. A main driver is China, whose FDI accounts for almost half of Asian FDI in the region. region. Recent evidence highlights the impact of these Chinese FDIs on Africa’s economic growth. Intra-African FDI also increased from 9% in 2002 to 13% in 2017.

FDI in stock by region of origin

Authors’ calculations using the World Bank Group harmonized bilateral FDI database.

Image: World Bank

There have also been major changes in the destinations of FDI. Southern Africa (especially South Africa) has historically been the main destination for FDI, hosting over 70% of all FDI in the region in 2004 (Chart 3.1). However, in 2018, it represented only 30% of FDI stocks in 2018. Indeed, FDI in other parts of the continent increased, notably in West Africa (with Nigeria in the lead), where the stock of FDI increased from 15% in 2002 to 36%. % in 2018. East Africa also experienced an increase in FDI (Chart 3.2).

FDI in stock by region of origin

Share of total FDI stock in SSA.

Image: World Bank

New investments are increasingly diversifying from raw materials to manufacturing and services. Between 2006 and 2010, resource extraction, petroleum and coal processing projects accounted for more than half of all-new FDI projects, estimated at $ 236 billion, announced in Africa (Chart 4.1). However, between 2016 and 2020, new projects in these sectors represented less than a quarter of the total (Chart 4.2). Sectors that have attracted significant new investment in recent times include logistics, communications and IT services, chemicals, and renewables (which account for more than half of investment in utilities, up from around 20 % in the previous period).

With elections to be held in over 20 African countries in 2019, the world’s youngest continent faces a new era.

Under the theme “Shaping Inclusive Growth and a Shared Future in the Fourth Industrial Revolution”, the 28th World Economic Forum on Africa will bring together more than 1,000 regional and global leaders from governments, businesses, civil society and from academia.

The event (held September 4-6, 2019) will explore new regional partnerships and entrepreneurial and agile leadership to create pathways to shared prosperity and drive a sustainable future.

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Learn more about the Forum’s impact in Africa and our launch of a new growth platform for Africa to scale start-ups in the region to success.

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Completely New FDI Projects Announced in Sub-Saharan Africa, by Sector (US $ billion)

Announcement of new FDI projects in sub-Saharan Africa, by sector (billion US dollars) 2006-2010.

Image: World Bank

Completely New FDI Projects Announced in Sub-Saharan Africa, by Sector (US $ billion)

Completely new FDI projects announced in sub-Saharan Africa, by sector (billion US dollars) 2016-2020.

Image: World Bank

Unfortunately, COVID-19 has significantly disrupted FDI to Africa. FDI flows around the world were already declining when the pandemic hit. Greenfield FDI announcements declined rapidly in the second and third quarters, before rebounding slightly in the fourth quarter of 2020 (Figure 5). Overall, new announcements in 2020 were down 56% from 2019. Such declines have occurred in almost every major industry.

covid has a big impact on foreign investments in africa

Impact of COVID-19 on new FDI announcements in sub-Saharan Africa

Image: World Bank

FDI has a key role to play in helping Africa recover quickly from COVID-19. For this to happen, Africa needs to attract more foreign investment and ensure that it occurs in more employment-intensive, export-oriented or green sectors. The continent has seen promising new developments on both fronts ahead of the pandemic and is expected to continue to improve its domestic investment climate, adapt to possible new policy and investment promotion priorities, and strengthen regional collaboration. (as through the African Continental Free Trade Agreement).

About Mallory Brown

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