FDI in Africa : the transformation

On Friday, 2 March 2012, Reuters stated that “capital flows into Africa are seen growing significantly in 2012 as investors seeking higher returns out of Europe, look at the continent for better opportunities in infrastructure projects, a World Bank's senior official said.” The question is that why have FDI developed strongly in Africa in recent years? What are the reasons make foreign investors ignore Africa as a location for investment?

Why FDI is an importance for Africa? FDI is seen as the solution for Africa economics problem overall. There are some main keys reasons why Africa wants to attract FDI.

·      Lack of capital sources. FDI is considered as a large inflow of capital when Africa capital base is low. Is is actually right? Although FDI provide fixed physical assets, profit from investment is mobile. Foreign investors can take profit away and reinvest outside countries. Especially, in service industry, the investment in physical infrastructures is low, the mobile portfolio capital flows is highly important. Profits may be higher than the initial investment value and FDI may thus contribute to capital export.       

·      Lack of technology. FDI is expected as one of the methods bringing new technology to Africa. Foreign companies will use their home technologies, then the technologies will be transferred and adapted by local firms.

·      Lack of skills. It is the same as technology innovation. FDI is expected to bring new skills from foreign countries, transfer those skills to local employers and employees.

·      Employment development. FDI is seem as create job opportunities for local people. However, job creation is seem to be domestic benefits in Africa countries. Its means FDI in Africa will reduce people’s job opportunities in other countries.    

·      Competitive motivation. When Africa encourages FDI, the local enterprises will face the higher level of competition. It forced the firms work harder to survive and develop. It is also potential threats for domestic competition. Transnational companies can be harmful host economies by inhibiting entrepreneurship in the country. They will use their competitive advantages such as knowledge, skills, brand image and a variety of support services needed to beat the local competitors and prevent the emergence of local small-scale enterprises.          

Why Africa does not attract FDI much? Even through the location of Africa, the central world location, is one of its advantages, helps foreign investors take transportation advantage, there is a need to take consideration when making FDI decision in Africa. The main reasons are the Africa image does not favourable. Thinking about Africa, people think about unstable political area, starvation, social and help problems and economic disorder. Furthermore, there is a number of reasons that prevent FDI into African countries including market size, lack of policies, lack of profit opportunities, inconsistent setup, negative perceptions, shortage of skills, labour regulations, poor infrastructure and corruption (Consumer Unity Trust Society, 2002). It required high up-front cost and long time preparation when starting investment in Africa. It is indicated that extortion, bribery, and the lack of access to global markets are also some of the factors that discourage FDI in Africa.

So what African governments have done in order to encourage FDI? Africa countries improved their policies and regulatory framework to attract foreign investors, namely, incentives, investment treaties, and investment promotion. Since the 1980s, all SADC governments have comfortable regulations for foreign investors easy to entry:

·      By relaxing the ability to borrow locally although it implies a constraint on a country’s foreign currency reserves,

·      Relaxation of land and mining concession ownership,

·      By forming new kinds of partnerships with the private sector (public private partnerships) in areas, which were previously the responsibility of the government e.g. water distribution. (Mwilima, 2003)

Those regulations can be classified into three main fiscal, financial and rule or regulatory-based (Consumer Unity Trust Society, 2001):

·      Fiscal Incentives

·      Reduced tax rates

·      Tax holidays,

·      Double tax treaties

·      Subsidies,

·      Exemptions from import duties

·      Accelerated depreciation allowances

·      Investment and reinvestment allowances

·      Specific deductions from gross earnings for national income tax purposes

·      Deductions from social security contributions

·      Financial Incentives

·      Grants

·      Loan and loan guarantees

·      Rules-based incentives

·      Modifying rules on worker’s rights

·      Modifying environmental standards

·      Greater protection for intellectual property rights

Besides, Africa countries have entered investment treaties, both bilateral investment treaties and multilateral ones to encourage foreign investors (Consumer Unity Trust Society, 2001) 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

·      Fair and equitable treatment for foreign investors in terms of applications for investment approval and setting up their businesses

·      Specific provisions on expropriation and non-commercial losses and compensation for the same, and

·      Dispute or conflict settlement mechanism

Last but not least activities which Africa country have done in order to attract FDI is investment promotion. many African countries suffer from a negative image. To overcome the drawback, most African countries have established investment promotion agencies (IPA) whose role is conducting marketing activities to attract FDI  and take care of foreign firms once they operating in the countries (Mwilima, 2003):

·      By acting as a one stop for investors to deal with regulatory and administrative requirements, and

·      By changing or modifying investor perception of the country by attending and organizing investor fairs and by distributing materials.

·      Investment promotion covers a range of activities, including investment generation, investment facilitation, aftercare services, and policy advocacy to enhance the competitiveness of a location.

React to the offers made by African government, in recent years, the trend of FDI in Africa in increasing. Foreign companies are more willing to invest in Africa such as royal Ducth Shell, Vodafone, Unilever, Nestle, etc. For example, Hans Kuropatwa, director of Vodafone Group International state: "Private investors rather than governments are developing mobile telecommunications in Africa. The market is promising, as cellular services are an excellent alternative to the overstretched fixed networks that are in place in many countries. Vodafone places great emphasis on political stability in making investment decisions and is currently concentrating on developing its mobile telecoms businesses in Egypt, Uganda and South Africa."  Changing image of Africa countries, stable political situation is more stable and potential growth opportunities have attracted foreign investment.  

However, all those intensives and actions are extremely favour to foreign investors? Foreign investors might use their economic power to overpower the government policies in order to get their own benefits and damage countries’ social benefits. They are able to take advantages in the form of excessive protection, tax reduction, investment allowances, specific provision, and employee’s right. Accidentally, African governments threat their society.  

In conclusion, FDI is significance to African economics however it potentially contains some drawbacks. Africa’s policies might be useful in the decade, but it might be against the economics in long-term. Thus, African governments need to carefully look at real situations, give right decisions.