Although it is true that the overall economic performance in Africa was unfavourable for a long time...

The image of Africa as a location for foreign direct investment (FDI) has not been favourable. Too often Africa has been associated only with pictures of civil unrest, starvation, deadly diseases and economic disorder, and this has given many investors a negative picture of Africa as a whole. While this picture is not based on fiction, and in some countries these unfortunate conditions prevail, it is not a true picture of the majority of African countries.

In the economic area, the continent as a whole has not fared as well as other developing regions in the past 20 years or so. Economic growth in Africa has been low, as real gross domestic product (GDP) per capita increased by an average of only 1.5 per cent a year during the 1980s and by 0.4 per cent a year between 1990 and 1994 (UNCTAD, 1997a, p. 288).¹ Growth for the whole of Africa has lagged behind that for other developing regions, with economic stagnation or even decline of output characterizing the experience of a number of African countries; from 1990 to 1994, for example, 15 African countries had negative average rates of growth. Since, 1994, however, this trend has been reversed; per capita income rose for several consecutive years, including in sub-Saharan Africa.²

...and Africa did not benefit from the FDI boom that began in the mid-1980s, ...

Weak economic performance over a long period of time was also reflected in the poor record of the continent as regards foreign direct investment inflows. Despite a certain stabilization of inflows since 1994 at a higher level than at the beginning of the 1990s (figure 1), the continent is still struggling to make up for the ground it lost during much of the 1970s and the 1980s.

Figure 1. FDI flows into Africa, 1970-1997

(Billions of dollars)

Source: UNCTAD, FDI/TNC database.

For most of the time since 1970, FDI inflows into Africa have increased only modestly (figure 2), from an annual average of almost $1.9 billion in 1983-1987 to $3.1 billion in 1988-1992 and $6.0 billion in 1993-1997.³ While inflows to developing countries as a group almost quadrupled, from less than $20 billion in 1981-1985 to an average of $75 billion in the years 1991-1995, inflows into Africa only two folded during that period. As a result, Africa's share in total inflows to developing countries dropped significantly (figure 3): from more than 11 per cent in 1976-1980 to 9 per cent in 1981-1985, 5 per cent in 1991-1995 and to 4 per cent in 1996-1997.⁴ Its share in total outflows from the European Union, Japan and the United States the so-called "Triad", the most important source regions for FDI flows -- was even lower during 1987-1997 period (annex table 1) as other developing regions became more attractive as investment locations: until 1996 it never exceeded 2 per cent, increasing to 2.4 per cent in 1997.

The deterioration of Africa's position is also reflected in the ratio of FDI to GDP. In 1970, Africa had attracted more FDI per $1,000 of GDP than developing countries in Asia and Latin America and the Caribbean (table 1). Although both the value of its FDI inflows and the FDI/GDP ratio grew for most of the time between 1975 and 1997, by 1990, Africa had fallen behind other developing regions and has stayed behind since then.⁵ The gap became even more pronounced during the 1990s, when the worldwide surge in FDI flows into developing countries largely bypassed the region.

Figure 2. FDI flows into Africa, developing countries and selected regions, 1970-1997

(Billions of dollars)

Source: UNCTAD, FDI/TNC database.

Figure 3. The share of Africa in total FDI flows into developing countries, 1970-1997

(Per cent)

Source: UNCTAD, FDI/TNC database.

 

Table 1. The relative importance of FDI inflows: Africa, Latin America and the Caribbean,
and South, East and South-East Asia, 1970-1997

(FDI in dollars per $1,000 of GDP)

...there are a number of positive but little-known facts about Africa, such as the considerable improvement by African countries of their FDI policy frameworks, ...

As much as it is true that some African countries have been characterized by economic depression, military conflicts, unstable political regimes and mounting social and health problems, it is also true that there have been some positive developments in Africa that are highly relevant for foreign direct investors but that are seldom reported and not widely known.

Like any other region in the world, Africa deserves to be looked at in a differentiated way. Too often it is forgotten that Africa is a continent consisting of over 50 countries -- around a quarter of the nation States of the world -- which differ in terms of their political systems, economic and human development and, last but not least, their attractiveness as locations for FDI. There is, then, a need to take a closer and differentiated look at the conditions and opportunities for FDI in Africa.

A number of African countries have initiated economic reforms aimed at increasing the role of the private sector, for example by privatizing State-owned enterprises. In addition, they have taken steps to restore and maintain macroeconomic stability through the devaluation of overvalued national currencies and the reduction of inflation rates and budget deficits (UNCTAD, 1998a, p. 124).

As part of these reforms, African countries have also improved their regulatory frameworks for FDI, making them far more open, permitting profit repatriation and providing tax and other incentives to attract investment. For example, 26 of the 32 least developed countries in Africa covered in a 1997 survey had a liberal or relatively liberal regime for the repatriation of dividends and capital (UNCTAD, 1997b). Progress has also been made in other areas that are important for the FDI climate, such as trade liberalization, the strengthening of the rule of law, and improvements in legal and other institutions as well as in telecommunications and transport infrastructure (World Economic Forum, 1998, p. 20).

Improvements in the regulatory framework for FDI have been buttressed in many countries by the conclusion of, or accession to, international agreements dealing with FDI issues. Most African countries (50) had concluded bilateral investment treaties (BITs) with other countries which aim at protecting and promoting FDI and which clarify the terms under which FDI can take place between partner countries. Egypt, for instance, had signed 58 BITs by 1 January 1999 (annex table 2), more than any other developing country (the Republic of Korea had signed 49 and Argentina 44 BITs). As at 1 January 1999, African countries had concluded 335 BITs, the majority of which had been signed since the beginning of the 1990s (figure 4). The treaties contribute to the creation of a more secure environment for foreign investors in the continent.

Figure 4. Bilateral investment treaties and double taxation treaties concluded by African countries, 1980-1998

(Cumulative number of treaties concluded by African countries since 1980)

Source: UNCTAD, FDI/TNC database.

African countries have also accelerated the conclusion of double taxation treaties (DTTs) in the 1990s (figure 4). DTTs can make it more attractive for foreign investors to invest in a country by helping them to avoid paying taxes twice on the same transaction. African DTTs are, however, concentrated in a few countries such as Egypt, Mauritius, South Africa and Tunisia, most of which already have a long track record of receiving considerable amounts of FDI (annex table 3). Nevertheless, other countries that only recently have become attractive destinations for FDI have become more active in this area: Uganda, for instance, concluded four such treaties in 1997 alone, three of which were with neighbouring Kenya, South Africa and the United Republic of Tanzania (Uganda Investment Authority, 1998, p. 6).

Finally, the majority of African countries have signed multilateral agreements dealing with the protection of FDI, such as the Convention establishing the Multilateral Investment Guarantee Agency (MIGA) and the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (table 2).

With all these improvements, the policy framework for FDI of many African countries has become similar to that of most other developing countries. However, realizing that, because of the negative image of Africa as a whole, it may not be sufficient to improve the investment climate and have economic determinants in place to catch investors' attention, many African countries have established investment promotion agencies to change this image as well as to facilitate investment. In the Southern African Development Community (SADC), for example, all 14 member States have established such agencies, seven of which were set up only in the 1990s (Mwinga et al., 1997). Since 1995, investment promotion agencies from 25 African countries have also joined the World Association of Investment Promotion Agencies (WAIPA) in order to benefit from an exchange of information on best practices in investment promotion. Some African agencies, such as the Uganda Investment Authority, are widely respected as successful agencies that adopt state-of-the-art practices in all areas of promotion (Tillett, 1996).

Table 2. FDI framework of African countries: membership in international agreements and institutions concerning FDI,
as of 1 January 1999 Year of accession

...investment opportunities discovered by firms in new home countries, ...

Traditionally, most of the FDI in Africa originated in a few countries of Western Europe and in the United States: France, Germany, the United Kingdom and the United States accounted for the lion's share of total inflows from the member countries of the Organisation for Economic Co-operation and Development (OECD) to Africa in 1983-1987 (annex table 4). The situation was similar with regard to FDI stock, with the difference that Japan took the place of Germany. In 1992, four countries accounted for three-quarters of FDI stock (UNCTAD, 1995, p. 32). Although traditional home countries as a group have significantly increased their FDI in Africa since 1983-1987 (annex table 4), these increases have not been sufficient to sustain Africa's share in total FDI flows into developing countries, which, as shown earlier, has fallen. Had it not been for increased inflows from other, non-traditional investor countries, the fall would have been even steeper. It is to be hoped that these new investors, who have recently discovered the investment opportunities the continent has to offer, will become sustainable sources of FDI in Africa.

Within the group of OECD countries, new investors include countries such as Canada, Italy and the Netherlands, and to some extent also Norway, Portugal and Spain. They have emerged as important sources of FDI in Africa over the past 10 years (annex table 4). Between 1988-1992 and 1993-1997, these six countries increased their share in African inflows from some 8 per cent to more than 22 per cent, making up for the declining share of some traditional home countries such as Japan and the United Kingdom. In this connection it is also interesting to note that, in 1983-1987, there were only six countries for which accumulated flows to Africa for that period exceeded $100 million, while nine countries exceeded this amount in 1988-1992 and eleven in 1993-1997.

Investors from other developing-country regions, particularly South-East Asia, have also emerged as new actors on the African FDI screen. Although many of the big investment projects are undertaken in South Africa -- as illustrated by the example of Telekom Malaysia, which has formed a consortium with SBC International of the United States to invest $1.2 billion in the privatized South African Telkom -- South-East Asian investors have also shown interest in other African countries. Thus, investors from Asia have also contributed to the recent FDI boom in Morocco, with transnational corporations (TNCs) from the Republic of Korea being at the forefront of that development (box 1). While the recent economic turmoil in Asia might have a temporary slowing-down effect on its FDI in Africa, developing countries from that continent, and especially the newly industrialized economies, will remain a new source of inward FDI for Africa in the long run.

Box 1. Morocco: sustained increase in FDI inflows

Following the example of developing Asia, where FDI from developing countries of the region accounted for a significant share of the rapid growth of inward FDI, some African firms, particularly but not only from South Africa, are becoming TNCs and are investing in other African countries (annex table 6). Although African TNCs remain relatively small in both number and size (their total outward FDI stock was almost $43 billion in 1997, representing 13 per cent of total outward stocks of all developing countries in that year), they have become important regional and subregional players, demonstrating that there are firms in Africa that can compete internationally, not only through trade but also through production in foreign markets. There is a small but growing number of mergers and acquisitions between firms from South Africa and firms from other African countries, leading to the emergence of new TNCs or an increase in the size of existing ones (UNCTAD, 1997c). Among the continent's biggest TNCs are the Anglo American Industrial Corporation Ltd. and Barlow Rand Ltd. (both based in South Africa), Conserverie Chérifiennes, a Moroccan firm in the food business and Consolidated Copper Mines of Zambia (UNCTAD, 1997d).⁶

Box 2. South Africa: an emerging growth pole for southern Africa?

...significant investment in the services and manufacturing sectors...

Contrary to common perception, FDI in Africa is no longer concentrated in the primary sector. Even in oil-exporting countries, services and manufacturing are key sectors for FDI. For example, the primary sector accounted for only a little over 30 per cent of the total FDI stock in Nigeria in 1992, while manufacturing accounted for almost 50 per cent and services close to 20 per cent. Almost half of the FDI inflows into Egypt (48 per cent) went into services in 1995, with a further 47 per cent going into manufacturing and a mere 4 per cent into the primary sector (UNCTAD, 1997d). Mauritius is another example of an African country that has managed, particularly since the beginning of the 1980s, to increase significantly the amount of FDI going into manufacturing industries such as textiles and electronic equipment (UNCTAD, 1998b, p. 168).⁷

This new (and rather unexpected) picture is confirmed by the data for the most important home countries for FDI into Africa in the 1990s (figure 5). FDI from Germany is going increasingly into manufacturing and away from the primary sector, while more than 60 per cent of the British FDI stock in Africa are in the manufacturing and services sector. Also in French and -- to a lesser extent -- in United States FDI stocks manufacturing and services account for significant shares.⁸ The importance of non-traditional sectors for FDI from some of the major home countries is illustrated by FDI outflow figures for the United States as well, which show that FDI in manufacturing was almost as important in 1996 as the traditionally most important sector, petroleum. Among industries, food and kindred products, primary and fabricated metals and other manufactures have been primarily responsible for the significant upward trend in FDI in manufacturing (United States, Department of Commerce, various years).

Figure 5. The sectoral composition of FDI stock in Africa of selected major home countries, 1989/1990 and 1995/1996/1997

(Per cent)

France             Germany             United Kingdom             United States

Source: UNCTAD, FDI/TNC database.

Note: "Unallocated" includes holdings.

France was the only major home country for which the share of FDI stock in the primary sector in total FDI stock in Africa increased significantly in the 1990s. However, it should be noted that in 1990-1995 this share was fluctuating significantly, and although the share of services declined in relative terms, FDI stock in both manufacturing and services increased in absolute terms.

... and in particular the high profitability of FDI in Africa. ...

The profitability of investments is, of course, of prime interest to foreign investors. The least known fact about FDI in Africa is that the profitability of foreign affiliates of TNCs in Africa has been high, and that in recent years it has been consistently higher than in most other host regions of the world.⁹

• In the case of United States FDI (table 3), it is noteworthy that between 1983 and 1997 there was only one year (1986) in which the rate of return in Africa was below 10 per cent;
• Since 1990, the rate of return in Africa has averaged 29 per cent; since 1991, it has been higher that in any other region, including developed countries as a group, in many years by a factor of two or more;
• Net income from British direct investment in sub-Saharan Africa (not including Nigeria) was reported to have increased by 60 per cent between 1989 and 1995 (Bennell, 1997a, p. 132);
• In 1995, Japanese affiliates in Africa were more profitable (after taxes) than in the early 1990s, and were even more profitable than Japanese affiliates in any other region except for Latin America and the Caribbean and West Asia (figure 6).

Earlier studies (UNCTAD, 1995) confirm the high rate of return of foreign affiliates of TNCs in Africa.

Table 3. Rates of return on United States FDI in Africa and selected regions, 1983-1997 ^a

(Per cent)

Figure 6. The profitability of foreign affiliates of Japanese TNCs, by selected host region, 1995^a

(Per cent)

Source: UNCTAD, based on Japan, Ministry of International Trade and Industry, 1998.

^a Current income divided by sales.