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03.07.2019 Article

Foreign Direct Investment and Economic Growth in Africa

By Alexander Ayertey Odonkor Ch.E & Emmanuel Amoah-Darkwah Ch.E
Foreign Direct Investment and Economic Growth in Africa
JUL 3, 2019 ARTICLE

The economy of Africa has witnessed an increment in foreign direct investment (FDI) to the continent despite the global economy experiencing a decline in foreign direct investment – according to the World Investment Report 2019, FDI flows in Africa rose to $46 billion in 2018 representing an increase of 11% over 2017. This perceptible growth in FDI has been attributed to the growing demand of some commodities and a corresponding rise in the prices of these commodities together with a growth in non-resource-seeking investment in a few countries on the continent. FDI flows in Africa in 2017 decreased by 21% as compared to 2016, reaching $42 billion - the decline was concentrated in the larger commodity exporters. Even though some large economies on the African continent like Egypt and Nigeria experienced contractions in Foreign Direct Investment, this decline was outbalanced by the surge in FDI flows in other large economies like South Africa that recorded FDI of $5.3 billion – South Africa’s more than double FDI in 2018 is largely attributed to the intracompany transfers by established investors even though new investments in the shape of the $186 million wind farm being built by the Irish company, Mainstream Renewable Energy and the $750 million Beijing Automotive Group plant were noteworthy FDI inflows. Foreign Direct Investment in Africa has undeniable prospects as the African Continental Free Trade Area (AFCFTA), a free trade area that is inscribed in its blueprint, the African Continental Free Trade Agreement - with the highest number of participating states (52 out of 55 AU member states), the free trade area will lighten the trade barriers associated with intra-African trade - African Continental Free Trade Area is considered the largest in the World after the formation of the World Trade Organization. As the implementation of the AFCTA, which went into force in May, 2019 commences its operation after a summit on July 7, 2019, the United Nations Economic Commission for Africa estimates that the AFCTA will enhance intra-African trade by 52% within 4 years.

In 2018, the global flows of foreign direct investment recorded was $1.3 trillion, a decline of 13%, making it the lowest to be recorded after the global financial crisis – highlighting a decline in international investment in the last decade. Glaring strides have been achieved during this period – notable among the accomplishments has been developing Asia regaining its position in 2017 as the largest receiver of foreign direct investment in the world with $476 billion. Foreign direct investment to developing economies was stunted at $671 billion in 2017 after a 10% decline in 2016 but FDI to structurally weak and vulnerable economies has been fragile as flows to least developed economies was $26 billion representing a decrease of 17% in 2017.

Flows to landlocked developing economies was also $23 billion an increase of 3% whiles flows in small Island developing states experienced a growth of 4% representing $4.1 billion in 2017. Other regions like the Latin America and the Caribbean experienced an increment in FDI for the first time in 6 years accounting for $151 billion representing an increase of 8% but the inflows are still less than what was recorded at the time when the commodity market was booming in 2011which was the peak for the region.

According to the African Development Bank, the Gross Domestic Product (GDP) of the economy of Africa is forecasted to accelerate to 4% in 2019 after GDP growth in the continent was estimated at 3.5% in 2018 – making the economy of Africa the second-fastest growing economy after Asia with the combined GDP of Nigeria and South Africa making up almost half of the economy of Africa. In 2018, Nigeria’s foreign direct investment flows was for $1.9 billion – Although Nigeria’s gross domestic product grew by 1.9% in 2018, foreign direct investment declined as compared to the $3.5 billion in 2017 according to UNCTAD. The decline is mainly attributed to a profit repatriated rift between the government of Nigeria and the Telecom giant, MTN – the situation created fertile grounds for HSBC Bank and UBS, an investment bank to close their offices in 2018. This development did not auger well for Nigeria whose main foreign direct investment over the years have come from the United Kingdom, United States, China, France and the Netherlands. Although Nigeria has reported notable green field projects in the oil and gas sector that has the capacity to overturn the decline in FDI in 2019, the situation has made the country unattractive for foreign investors as they switched their attention to Ghana, which was experiencing oil and gas boom at the time.

According to the World Bank, the economy of Ghana accelerated by 8% in 2017 with the growth being attributed to the high output of Gold from the mining sector and gains from the oil sector – this made Ghana the second-fastest economy in Africa after Ethiopia with its largest Greenfield project being spearheaded by the Eni Group. In 2018, Ghana became the most attractive destination for foreign direct investment in West-Africa raking in about $3.5billion as published by the Ghana Investment Promotion Centre (GIPC). Total foreign direct investment in Sub-Saharan Africa in 2018 was $32 billion representing an increase of 13% for the region.

In northern Africa, Egypt’s gross domestic product grew by 5.3% - with investment in renewable energy, food processing, real estate development, oil and gas, Egypt was the economy of Africa’s highest earner of foreign direct investment, accruing $7.9 billion in 2018 representing an increment of 7% in the previous year.

In eastern Africa, Ethiopia was the highest earner of FDI in 2018 with $3.3 billion even though the country suffered a decline of 18% as compared to 2017. Uganda recorded a tremendous increase of 67% in FDI, summing-up to $1.3 billion, the highest ever recorded in the country – the oil and gas sector accounted for the recent surge as Tullow oil, Total among others are the major participants engaged in the sector. Other eastern African countries like Tanzania and Kenya have all witnessed an increase in foreign direct investment in 2018.

For African countries to increase the size of foreign direct investment in their economies it is imperative to integrate all the African countries as a single market devoid of trade tariffs and the hustle associated with moving from one African country to the other.

In Aliko Dangote’s interview with Mo Ibrahim in April this year, the richest man in Africa pointed out the delays his outfit endures in transporting goods to other African countries. He even recounted times he had to apply for VISA to enter an African country even when he had an African Union passport. The effective implementation of the African Continental Free Trade Area (AFCTA) could integrate a market with a population of about 1.2 billion on the African continent with a combined gross domestic product of more than $2.2 trillion.

The realization of the goals of the African Continental Free Trade Area has the capacity to boost the economic growth of Africa countries. Many examples of such trade arrangements have been implemented successfully in other regions in the last few decades – in the early stage of the Association of Southeast Asian Nations (ASEAN) a free trading area that was that had its frame work arraignment signed by 11 heads of state in 2002 saw trade between ASEAN members growing from $59.6 billion to $192.5 billion between 2003 to 2008.

The growth in trade within the region was mainly influenced by the removal of 90% trade tariffs among member states. With the economy of China becoming the second largest economy in the world after the United States, the region has recorded an increase in foreign investments particularly among the network of Chinese business entities (Bamboo Network) operating in the markets of Southeast Asia. The Euro area, the North America Free Trade Agreement (NAFTA) are all viable trade arrangements that have been implemented with member countries reaping the benefits of trade in these regions – the African continent, the second most populous continent in the world according to the World Population Review 2019, can draw lessons from the existing trade arrangements in other regions by effectively integrating all the African countries using the African Continental Free Trade Area (AFCTA).

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