Given this, it should not be surprising that a more differentiated analysis reveals a number of countries that have been successful in attracting FDI...

Aggregate FDI inflow data for Africa conceal a diverse picture. In particular, they conceal that a number of African countries have been quite successful, especially when flows are standardized in relation to the size of recipient economies or when recent growth rates are taken into account.

Traditionally, two large economies, Egypt and Nigeria, have received significant inflows in terms of absolute size (though these have fluctuated from year to year); these two countries have always accounted for a high share of total inflows into Africa, though this share has declined from more than 67 per cent in 1983-1987 to 54 per cent in 1988-1992 and 38 per cent in 1993-1997 (annex table 5). In 1997, Nigeria -- primarily owing to its oil reserves -- topped the list of the largest FDI recipients in the continent with estimated inflows of $1.5 billion, followed by Egypt with nearly $891 million, although the best performances of these countries took place earlier, when these flows reached $2.0 billion (1994) and $1.3 billion (1994), respectively.

The relatively small figures for FDI inflows into other African countries have to be seen in perspective, because many of these countries are small or very small. When FDI inflows are standardized to take into account the size of the domestic market, by measuring them in terms of inflows per capita or per $1,000 of GDP, several African countries fare considerably better than the average for the developing countries as a group. In the early 1990s, notable examples included Angola, Botswana, Equatorial Guinea and Seychelles (UNCTAD, 1995, p. 26).¹⁰ By another relative measure -- inward FDI flows as a percentage of gross fixed capital formation -- Africa's performance was comparable to that of the developing countries as a group: for 1991-1997, this percentage was 5.6 per cent for Africa (6.7 per cent for sub-Saharan Africa) as compared to 7.5 per cent for all developing countries (annex table 7). This relatively high percentage reflects partly the small size of many African economies, as well as inadequate domestic savings and investment, but it also means that FDI was not deterred and that the same amount of FDI may have a much larger developmental impact than in other parts of the developing world.

More recently, a group of African countries including Botswana, Equatorial Guinea, Ghana, Mozambique, Namibia, Tunisia and Uganda have attracted rapidly increasing FDI inflows, reaching absolute levels never attained before and comparable to those of other well performing developing countries. It should be underlined that, in all cases, inflows increased gradually, so that the high levels they reached did not result from an one-off jump related to, say, a few large projects in one year (which may happen in small countries attracting FDI to capital-intensive projects in natural resources). Among the countries that have emerged as "recent frontrunners" (see below) are some least developed countries (box 3). This demonstrates that countries with a very low income level can become attractive to foreign investors.

Box 3. Recent FDI frontrunner countries in Africa

Success with respect to FDI inflows in Africa, where there is not only minimal FDI in many countries but also prolonged divestment in some, can also be measured in other ways. It can include countries whose inflows do not grow but stay at a consistently high level over a number of years (e.g. Swaziland), or countries that received substantial FDI in the past and, after a period during which their inflows declined, are again receiving high levels of inflows (e.g. Mozambique). And last but not least, success can refer to countries that have been able to reverse a negative FDI trend, characterized by years of negative flows. For example, the United Republic of Tanzania, which experienced four years of negative flows between 1984 and 1990, has seen consistently positive and continuously increasing inflows since 1991. Though these flows were until recently not enormous in absolute size, the reversal of the negative trend may be a precursor of future FDI growth. More generally, in 1997, only five African countries experienced negative FDI flows while, as recently as in 1992, the number of countries with negative flows was nine.

... and shows that Africa -- as any other continent -- offers attractive investment opportunities...

The principal message of this booklet is that Africa should not be considered a continent with poor investment opportunities. Grouping together more than 50 countries and projecting the same image onto all of them conceals not only a complex diversity of economic performance, including FDI performance, but also conceals factors determining FDI, which are in many cases similar to those in other developing countries, but not accompanied by adequate FDI inflows. A study of principal economic determinants of FDI flows in 1991-1993 -- level of development, market size, market growth and natural resource endowments -- concluded that, in as many as 19 African countries, the full potential for FDI, as measured by inflows per $1,000 of GDP, remained unexploited (UNCTAD, 1995, pp. 64-70). The study focused on showing that, in spite of common perceptions, a potential for more FDI does exist in Africa. But the study did not look into reasons why the potential was unexploited: whether it was because of the extension of the overall negative image of Africa to the countries with potential or because other necessary determinants of FDI were lacking in these countries, e.g. a proper enabling framework. Given the recent revival of economic growth in Africa, new countries with potential may have emerged.

As for a sectoral perspective, the same study identified FDI potential in Africa not only in the primary sector, as one would expect, but also in the services sector, especially in tourism and infrastructural services, and in the manufacturing sector (UNCTAD, 1995, pp. 71-73). A new factor that has emerged after the study was done has been the privatization process which started comparatively late in Africa. Now some African countries have large privatization programmes underway which can be expected to prompt further FDI inflows into the region in the near future. In over 15 countries of sub-Saharan Africa -- among them countries embarking seriously on privatization for the first time -- major new privatization programmes have been launched or re-activated (Bennell, 1997b, p.1801). Furthermore, governments are initiating the privatization of the largest State-owned enterprises that account for the lion's share of public assets in most countries of sub-Saharan Africa. As regards telecommunications, for example, more than 25 countries in sub-Saharan Africa are currently transferring all or part of their telecommunication monopolies from the state to the private sector (World Bank, 1998, p. 249). Privatization programmes are expected to enhance investment opportunities in African countries.

Also, there is evidence that in some of the more advanced African countries possibilities for research and development (R&D) related FDI are emerging. For example, a number of TNCs in the pharmaceuticals industry (such as Novartis or Eli Lilly) have implemented or are considering plans to conduct clinical testing and trials as well as related R&D for pharmaceutical products in Egypt, taking advantage of the highly skilled local personnel at comparatively low costs (UNCTAD, 1999, p. 63).

... which can be enhanced by host countries, ...

The exploitation of that potential will also depend on African host country policies, home country initiatives and the international community. To realize the potential for increased FDI flows, more needs to be done by African governments. The measures to be taken are country-specific and depend on an individual country's political as well as economic situation and on the progress it has made in the improvement of its investment climate, in the liberalization of its FDI policies and in its promotion activities:

• Some countries will have to make every effort to create the basic conditions of a favourable investment climate, such as ensuring political and economic stability. These measures should be followed or accompanied by efforts to promote private-sector development and public-private sector dialogue to ensure the proper functioning of markets and complementarily between states and markets and to engage in more prudent macroeconomic management.

• Countries that have put these conditions in place will have to focus on the further improvement of the FDI climate, for example, on the simplifying of administrative procedures and learning from best practices elsewhere. Countries that want to do away with "red tape" might wish to follow the example of Mozambique, which commissioned a study by the International Finance Corporation (IFC) in 1996 to identify and provide an overview of the existing bureaucratic impediments (IFC, 1996). In order to further improve their regulatory environment for FDI, African countries might also consider the initiation of Investment Policy Reviews (IPRs) in collaboration with UNCTAD. Currently, six African countries (Egypt, Ethiopia, Mauritius, Uganda, the United Republic of Tanzania and Zimbabwe) are undertaking -- at various stages -- such IPRs together with UNCTAD (box 4).

Box 4. UNCTAD's Investment Policy Reviews: the case of Egypt

• Other countries that have FDI potential but receive FDI far below what they may be able to attract might also need to focus on improving promotional efforts and look at ways of attracting FDI to particular industries or projects. Those countries that have already established promotion agencies need to review the effectiveness of their work. Unexploited investment potential on the part of new home countries should be identified and targeted in promotional efforts. This refers in particular to investors from Asia as well as to TNCs from some smaller OECD countries. It is important to note that -- as the examples of successful investment promotion agencies in Europe and Asia have shown -- it is crucial to concentrate promotional efforts on a limited number of home countries and industries.

• Since investment promotion activities are costly and most countries suffer from the same negative perception that most investors have of Africa as an investment location, African countries should consider joint efforts to attract FDI. This would include joint activities to promote the entire region as an investment location. The agencies of all SADC countries have recently started to move in this direction: at a meeting in Centurion, South Africa, in June 1998, they took the initiative to form a SADC Committee of Investment Promotion Agencies; a meeting of the SADC ministers of finance in July 1998 approved the establishment of the committee. One of the committee's tasks is supposed to be the provision of input into the SADC Finance and Investment Protocol, to bring the region in line with global provisions in investment agreements and to facilitate cross-border investment.

• As market size is one of the most important FDI determinants, effective efforts to enlarge markets through the creation of regional markets could make the continent more attractive, especially for market-seeking FDI projects. There are already some encouraging initiatives in this area: for example, the 14 member states of SADC signed a trade protocol in August 1996, which aims at creating a free trade area within eight years. East and West Africa have also made considerable progress in advancing sub-regional integration aimed at facilitating trade and investment, for example, in the framework of the Common Market for Eastern and Southern Africa (COMESA). In North Africa, too, initiatives to integrate markets are under way. Egypt and Morocco, for instance, have recently signed a bilateral free trade agreement and there are plans to create a free trade area including the Maghreb countries.

• Countries that attract sufficient amounts of FDI relative to their size, should perhaps pay more attention to the quality of FDI they receive, and take steps to enhance the developmental impact of FDI. In fact, their investment promotion agencies could increasingly become development agencies as well.

...and supported by home countries and international initiatives.

Home countries and the international community can also contribute much to improve Africa's prospects as a viable and attractive location for FDI and should therefore support measures that are taken in the individual host countries in Africa. Existing and planned measures are discussed in box 5. Other measures that could be taken include the following:

Box 5. Home country measures to promote FDI into Africa

• Helping reduce external debt remains a top priority. High external debt constitutes a serious impediment to the creation of a more favourable climate for domestic and foreign investors alike. External debt and FDI are linked, among other things, through balance-of-payments difficulties which in turn make it difficult to ease foreign-exchange and profit-remittance regulations -- both of which are important ingredients of a good investment climate. More importantly, debt-servicing deprives countries of badly needed savings for domestic investment to improve the physical and human infrastructure. Debt reduction should thus be a cornerstone of the international community's efforts to improve Africa's growth prospects in general and its attractiveness for FDI in particular. In this context, the heavily-indebted-poor-country initiative launched by the IMF and the World Bank in 1996 was initially welcomed as a major step towards addressing the debt problems of the poorest countries in a comprehensive way. However, more has to be done to increase the impact of this initiative as it is often viewed as slow, cumbersome and overcomplicated, and only one African country -- Uganda -- has so far benefited from debt reduction, while seven other African countries (Burkina Faso, Côte d'Ivoire, Guinea-Bissau, Ethiopia, Mali, Mauritania and Mozambique) are scheduled to receive debt reduction in the next three years. Also, while sustainable levels of debt should be repaid, the definition of what is sustainable should be relaxed, to ensure that the levels set are realistic (United Nations Executive Committee on Economic and Social Affairs, forthcoming).¹¹ In this connection, the United Nations welcome additional measures by creditors, including individual countries and multilateral institutions, aimed at a swift relieve of the debt burden of the poorest countries.¹²
• Increasing technical assistance to leverage FDI. In many countries weak infrastructure and insufficient skills are major bottlenecks for investment. Increased technical assistance could aim at overcoming some of these shortcomings. Assistance geared to improving the human and physical infrastructure, especially in those areas and sectors that are potentially of interest to foreign investors, may help to attract FDI flows. Technical assistance aimed at establishing or further improving a national regulatory framework conducive to FDI can also be important. Given the growing interrelationship between trade and investment, such a framework must increasingly take national trade policies into account as they affect FDI, in order to ensure the policy coherence that will allow countries to maximize benefits from FDI liberalization.

• Facilitating access to developed countries' markets for African products. Cheap labour -- which many African countries have in abundance -- can be a locational determinant of efficiency-seeking FDI (UNCTAD, 1998b). Typically, however, it has to be accompanied by additional conditions, among which access to international markets has played a prominent role. Increased access to developed countries' markets for non-traditional, labour-intensive goods, can therefore help to attract FDI into Africa, and especially into African LDCs. The recent initiative by the United States (box 5) that includes tariff reductions for certain products such as textiles or apparel and foresees the creation of free trade zones between African countries and the United States represents a step in this direction. It is presumed that a number of African countries -- including Botswana, Cameroon, Côte d'Ivoire, Ghana, Malawi, Mozambique, Nigeria, United Republic of Tanzania and Zambia -- could develop textile and apparel industries that would be able to export to the United States' market if they had quota-free and duty-free access to it (Sachs and Sievers, 1998, p. 41). Obviously, liberalized access to developed countries' markets can lead to additional FDI only if other impediments to foreign and local investment such as the lack of business support services are reduced.¹³

• Disseminating information on investment opportunities. As mentioned earlier, potential investors are often unaware of investment opportunities in African countries, simply because relevant information is not available. A survey by UNCTAD showed that, when preparing investment guides on individual countries, the four biggest international consultancy firms have paid little attention to African countries, especially to the least developed among them (table 4). To help fill this gap, efforts by the international community are needed. For this reason, UNCTAD and the International Chamber of Commerce (ICC) have launched a project on "Investment guides and capacity-building in least developed countries".

  Table 4. Investment guides available from major international consultancy firms, 1999

  Firm	Total number of guides	LDC guides
  Arthur Andersen	82	2
  Ernst & Young	65	1
  KPMG	35	0
  PricewaterhouseCoopers	76	0
  Total	261	3
  Source: Compiled by UNCTAD on the basis of information received from the companies involved.

In a pilot phase, UNCTAD and the ICC, in co-operation with the investment promotion agencies of six LDCs (of which five are from Africa), are producing investment guides that provide an objective and up-to-date overview of investment conditions and opportunities in these countries and which also serve as an opportunity to launch a policy dialogue between policy makers and investors in the six LDCs. At the same time, the project intends to familiarize investment promotion agencies with best practices in investment promotion activities. Investment-promotion efforts by other multilateral and regional institutions can also help to draw attention to investment opportunities. The project was launched in Ethiopia (box 6) and Mali.

Box 6. Investment guides and capacity building in Ethiopia

* * *

Changing the negative and stereotypical picture of Africa -- which still prevails among large parts of the business community and the wider public outside the continent -- is crucial to attract more FDI to Africa. This booklet -- a follow up to a more comprehensive publication by UNCTAD (UNCTAD, 1995) -- is only a first attempt in this direction and only one small component of a larger Africa initiative by the United Nations to assist Africa in the integration into the global economy by contributing to an improvement in the business climate as well as by providing additional information on the real conditions and opportunities for doing business in Africa. Further FDI into Africa can only be stimulated when it becomes clear to a large number of investors that Africa -- as any other continent -- offers many attractive investment opportunities and that it is worthwhile to take a different look at Africa -- country by country, industry by industry and opportunity by opportunity.

Notes