Expert says larger countries attract more FDI and suggests policy options for Africa

Kigali,  Rwanda, 1 November 2012  –   A key document circulated at the 7th African Economic Conference in Kigali explains how larger African countries tend to attract more foreign direct investments (FDI) than the smaller ones and says why political stability and high returns on investments are also key determinants.

What Drives Foreign Direct Investments in Africa, a research paper by Mr. Abdoul’ Ganiou Mijiyawa of the African Center for Economic Transformation (Accra, Ghana),  concludes that countries that manage to attract FDI today are likely to attract more FDI in the future.

It paints a grim picture of the nature and trends in foreign direct investment in Africa, according to ECA’s Information and Communication Service.

The paper says there is “absolute progress” but “relative decline” of Africa as far as FDI attractiveness is concerned. “In 1970, the total amount of Foreign Direct Investments inflows in Africa was US$1.26 billion, and it rose to US$55.04 billion in 2010.

“However, during the same period, “Africa’s share in the global FDI inflows which was 9.5% in 1970 dropped to 4.4% in 2010. Likewise, the share of Africa in developing countries’ FDI inflows which was 32.8% in 1970 dropped to 9.6% in 2010”, says the paper.

The key question that policymakers at the conference expected economists to answer is why African countries do not attract more FDI compared to the rest of the world, given the important role that FDI can play in the process of the continent’s development.

To do that, it is important to go through some of the factors that drive or deter FDI in Africa, as proposed by Mijiyawa. For example, experts agree with the paper’s assertion that more politically stable African countries would tend to attract more FDI.

“Political stability has a similar effect as trade openness on FDI inflows in Africa. This suggests that in their efforts to attract FDI, African governments should give the same weight to political stability as they give to trade openness” says the research paper.

The author agrees with earlier analyses which conclude that “African countries that offer higher returns to investment attract more FDI”.  “In that sense, Africa is not different from the rest of the world. Indeed, regardless of the world’s region, investments are supposed to rise where they are profitable”, he states.

The paper also explains that variables such as lagged FDI inflows, trade openness, political stability, market size, and the return on investment do positively and significantly affect FDI inflows in Africa.

Based on the findings of the paper, participants exchanged views on three policy stances for African policy makers to consider to improve the continent’s attractiveness to FDI.

Firstly, because the presence of FDI today in a country will attract more FDI to that country in the future, African governments need to collaborate with existing foreign investors in their countries in order to promote their countries to other potential investors.  In this regard, “African countries should avoid mistreating traditional western foreign investors because of the arrival of new potential investors from China or other southern emerging countries”, it suggests.

The paper highlights the need to strengthen regional integration in Africa because it can boost some of the factors that contribute to the development of FDI on the continent. Indeed, it suggests, as do several reports by the Economic Commission for Africa, that “African countries can use regional integration to attract FDI because regional integration can increase trade openness, enlarge the size of domestic markets, and generate more political stability”.

Finally, the paper underscores the need to improve the return on investment in Africa. By doing so, African countries can attract more FDI, even though it an established fact that “the return to investment is higher in Africa” than in many other regions of the world.

Foreign direct investment is an important aspect of Africa’s strategy for transformation because it can stimulate domestic investment, facilitate technology transfer, create employment, promote exports and generate economic growth, the paper argues.

Moreover, experts agree that it can fill the annual financings gap of US$64 billion, or 12% of GDP that the continent needs to achieve the objective of halving poverty by 2015. This is essential in the current financial environment marked by a continuous decline in official development assistance, following the recent global economic crisis of 2008/2009.

The African Economic Conference is convened annually by the Economic Commission for Africa, (ECA) in collaboration with the African Development Bank, (AFDB) and the United Nations Development Programme (UNDP).
The theme for the 7th session which ends in Kigali on Friday 2 November 2012 is Inclusive and Sustainable Development in an Age of Economic Uncertainty.