Economy

The recently released World Investment Report 2003(WIR) reveals that overall Foreign Direct Investment (FDI) to Africa has declined by 41 percent although 30of the continents 53countries have registered increases and include South Africa, Botswana, Namibia and Kenya. Nevertheless, there is optimism that there will be an FDI recovery in2004.

The WIR looks in detail at what lies behind the downturn in FDI, how various regions and countries have fared, and what their chances are for recovery and growth in FDI at the global and regional levels. The interaction between national and international policies and the implications this has for development is also assessed in the report.

During the official launch of the report in Nairobi, the Executive Director of the Institute of Economic Affairs, Dennis Kabaara, noted that the overall FDI for the rest of the world had also declined by 21 percent, particularly in108 countries. Kabaara identified the key FDI motivations as natural resources, markets, low cost producers and strategic investments such as privatisation of State enterprises. He observed that African countries should concentrate more on export orientation and privatisation.

Kabaara noted that although primary sectors like oil and mining were the most targeted by investors, the slow pace of privatisation and over regulation of these sectors had slackened FDI. The downturn in 2002 can be linked to the absence of company mergers and acquisitions comparable to those that took place in 2001.

Unevenly distributed across the continent, FDI inflows amounted to only8.9 percent of gross fixed capital formation compared to 19.4 percent in 2001. This downturn also reflects drops in outflows from the major home countries of FDI to Africa - the US, France and the United Kingdom. US imports from sub-Saharan Africa declined by more than 16 percent in2002, reducing the interest of trans national companies in Africa.

Africa's total FDI of US$11 billion is a major shortfall from the US$19 billion of 2001. As a result, the region's share in global FDI inflows fell from 2.3 percent in 2001 to 1.7 percent in 2002. Inflows to the region remained highly concentrated, with Algeria, Angola, Chad, Nigeria and Tunisia accounting for half of the total inflows.

Positive forecast

Despite the FDI decline, the report forecasts a positive future for FDI inflows. With bolder efforts to promote trade and investment initiatives by the United States, the EU and Japan, the downturn in FDI flows could be short-lived. Some trans national companies have begun new activities notably in petroleum exploration and extraction.

South Africa, through numerous company mergers and acquisitions, was the highest FDI recipient followed by Angola, Nigeria, Namibia, Chad and Tunisia. Kenya received US$50 million, Uganda US$275 million and TanzaniaUS$240 million. Although Kenya is a leading outward investor in Africa alongside South Africa, Liberia, Lesotho and Botswana, its FDI was 40 percent short of the target, which explains the capital flight from Kenya to neighbouring countries.

As competition for FDI increases, national policies will be the most important consideration in attracting such investment since they are increasingly being affected by rulemaking at the international level. Kabaara was emphatic that multilateral agreements were crucial and asked African countries to prioritise their development needs and not merely have them determined by the lending institutions.

"Countries should define their domestic agenda when going for multilateral agreements... there should be dual commitments between home and host countries", advised Kabaara.

Gaining momentum

Until 2001, FDI was gaining importance as a source of Africa's external development finance. In spite of its downturn, 30 of Africa's 53 countries attracted higher inflows in 2002 than in2001 largely through petroleum (Algeria, Angola, Chad, Equatorial Guinea, Sudan and Tunisia) and to a lesser extent in apparel (Botswana, Kenya, Lesotho and Mauritius). Angola, Nigeria, Algeria, Chad and Tunisia were the top ranking FDI recipients. Chad registered the largest increase from zero in 2001 to more than US$900 million in 2002.

These success stories, however, contrast with experiences of countries that lag behind such as Libya, which ranked the lowest among countries with negative inflows. Other low FDI recipients have relatively limited natural resource endowments. In the war-torn Burundi, Comoros, Liberia and Somalia, there are efforts towards reconstruction and rehabilitation.

There has been growing interest in petroleum exploration in the Gulf of Guinea, off the coast of West Africa and other areas of Africa, particularly in Angola, Chad, Equatorial Guinea and Sudan with TNCs such as Exxon-Mobil(US), TotalFinaElf (France) and Encana(Canada) seeking to diversify their holdings. Sustained peace in Angola could mean a further consolidation of the companies' activities.

In some countries such as South Africa, manufacturing attracted considerably more FDI than natural resources. A case in point is South Africa's automobile industry, which, aided by FDI, employs nearly 300,000people and is the third largest industry.

Almost two-thirds of African countries indicated that they had not experienced a canceling or scaling down of FDI projects or a divestment from existing projects. More than 40percent reported postponed projects, reflecting a 'wait and see' attitude of some investors. About 30 percent of the investors said they need additional incentives. Generally, greater promotion and targeting are the prime responses to the more challenging FDI environment. Aggregate FDI outflows from Africa were US$0.2 billion in 2002, compared with negative US$2.5 billion in 2001.

Investment climate improves

African countries are positively responding to investor concerns by privatising public enterprises and actively promoting investment. In 2002alone, 10 countries introduced 20changes in their investment regimes to bring about a more favourable investment climate.

Previously, many countries had reduced or abolished government participation in business ventures. Nigeria moved away from joint ventures in petroleum and minerals while Ghana expanded the scope for FDI by reducing the number of industries closed to foreign investors. Egypt and Kenya recently speeded up investment approval procedures by developing one-stop investment centres.

Investment-related issues, such as technology transfer, are now subject to less restrictive compliance criteria, and the protection of intellectual property rights has improved in some countries. Nevertheless, progress towards creating free trade and investment areas is slow, although most agreements, mostly sub regional, have been concluded.

AGOA holds some promise for an expansion of trade and investment in the continent. In some of the eligible countries, AGOA has increased exports to the US in textiles, garments and FDI. Much of the investment under the AGOA scheme is by Asian Trans national sin Kenya, Lesotho and Mauritius. In the two years since its inception, AGO helped stimulate FDI of US$12.8 million in Kenya and US$78 million in Mauritius. It also created some 200,000jobs in the apparel industry of the 38beneficiary countries.

Efforts at regional integration continue to be important, given the necessity for increased market size. The New Partnership for African Development (NEPAD) could be a catalyst in this respect, particularly in infrastructure and Energy investment.

Overall, the outlook for FDI flows to Africa in 2003 is promising. Three major factors - expanded exploration and extraction of natural resources (particularly petroleum), continued and enhanced implementation of regional and interregional free trade initiatives and a possible continuation of privatisation programmes - are likely to lead to a moderate increase in total FDI inflows.