Foreign Direct Investment (FDI) into Sub-Saharan Africa economies has continued to under perform relative to other regions of the world. According to the World Bank data, the East Asia Pacific region accumulated US$4.7-trillion of foreign-owned assets from 2006 to 2015.
Its FDI flow grew by 100% to US$6-billion by 2015. By 2014 the region’s FDI flows surpassed Europe and Central Asia. Europe and Central Asia?s FDI flow stock demonstrate that this region had historically been the top investment destination. In 2007 the region attracted investment worth US$1.8-trillion. Though it reclaimed its position as the top investment destination in 2015, it has been unable to surpass its 2007 record since the 2008 financial crisis.
Despite its reputation as the top FDI destination, companies are now jumping ship from Europe and Central Asia, which resulted in the region only posting 28% growth of FDI flow in the same period. Other regions, including Sub-Saharan Africa were the only underperformers averaging 20% growth in FDIs flows.
Sub-Saharan under performance
The under-performance is a result of macroeconomic and socio-political conditions. The outlook also looks deem as sentiments towards the region is negative. According to AT Kearney management survey, 15% of the major global multi-national corporation (MNCs) intend to invest in Africa against 30% that intend to invest in developed economies and almost 20% which intend to invest in developing Asia and Latin and Caribbean countries. Efforts of the governments in this region have been rewarded albeit the investments flows are negligible in the global context.
The types of FDIs active in the region are a mix bag. Some are market-seeking consumer FDIs, mainly in the telecommunications sector in countries such as Nigeria and Ethiopia. Others have been resource-seeking FDIs vying for mineral resources and oil extraction licenses particularly in South Africa, Ghana, Nigeria, Mozambique, the Democratic Republic of Congo and Congo Brazzaville.
These natural resources exporters have lost ground due to weak commodity prices such as oil. However, expected recovery in commodity prices, particularly oil, will fuel FDI flows towards this region in the short-term. Efficiency seeking FDIs, expecting a high rate of return due to lower labour costs, have increased their activity in the region. Thus the upward momentum in FDI flows to countries such as Ethiopia will persist in the short-term.
The horn is shaking the tree
East Africa is fast becoming attractive to FDIs in textile manufacturing compared to other parts of the continent. Ethiopia was once among the poorest countries on the continent ravaged by natural disasters. Severe drought had devastated the economy, leaving its people in famine. Today it is building from that deficit. With the country facing competition from the likes of Kenya, Mauritius and Madagascar, the Ethiopian government is aggressively and actively opening up a conducive environment to FDIs.
The government has set aside $1-billion to build 15 industrial parks by 2020, with some already opened and more being rolled out. The state bank provides up to 60% of factory expansion costs for companies that sell 70% of their products overseas, as well as a 10-year tax exemption and low-interest loans. Ethiopia also offers companies lower power costs than most of its continental rivals, thanks to its hydroelectric dams. Electricity costs were $0.06 per kilowatt-hour in Ethiopia, compared to $0.24 in Kenya on 2017, Reuters reported. And the country invested heavily on infrastructure, opening the final stretch of a 700km electric railway to Djibouti?s coast.
According to the Ethiopian Investment Commission, a government agency, there has been progress albeit the country?s FDIs having fallen by 10% in 2018, foreign investment in the textile industry has risen from 4.5-billion birr ($166.5-million) in 2013/14 to 36.8-billion birr in 2016/17.
All these government interventions have attracted luxury consumer goods, US fashion supplier PHV (Calvin Klein and Tommy Hilfiger), Dubai-based Velocity Apparels Companies (Levi?s, Zara, and Under Amour), and China?s Jiangsu Sunshine Group (Giorgio Armani and Hugo Boss) which set up their own factories in Ethiopia in 2017. Several of these companies are located in Ethiopia?s flagship Hawassa Industrial Park. These companies intend to use their facilities to serve the export markets. French retailer Decathlon and more than 150 companies from China and India will begin sourcing goods from Ethiopia soon, said the investment commission.
Lessons from Latin America and the Caribbean
It is common in developing countries endowed with high natural resources to experience capital flight as bad governance and corrupt politicians loot state coffers and hide the funds in tax havens at the expense of their own people.
When developing strategies to attract FDIs to the Sub-Saharan Africa, the governments through their Investment Promotion Agencies (IPAs) should learn from Latin America and Caribbean regions. Their experiences show how FDIs are accelerating capital flight. When developing strategies to attract FDIs to the Sub-Saharan Africa, the governments through their Investment Promotion Agencies (IPAs) should learn from Latin America and Caribbean regions. Their experiences show how the FDIs are accelerating capital flight.
In Latin America and Caribbean regions a large number of FDIs has resulted in high capital flight due to income repatriation. The repatriation of subsidiary profits creates havoc for host country income accounts when investors are market seeking and the share of FDI stock owned by host country companies is small. This means that their national income accounts are debited more than being credited. Thus when the accounts are balanced they sum up to a deficit.
This scenario has prompted the Columbia Centre on Sustainable Investment to put up a warning to the deficit prone Latin American and the Caribbean countries that FDI is now the largest external liability in these countries and also the largest contributor to debits in their income accounts. The Latin America and Caribbean experience illustrates the poor FDI policy.
Most governments have policies that restrict portfolio investment capital outflows but hardly have measures that restrict capital outflows that arise from FDI income repatriations. Those that have done so have relied on informal mechanisms.
The case of Nigeria and South Africa
Nigeria is the highest recipient of FDI in Africa. Most of these FDIs, including MTN South Africa, are market-seeking investments. In 2015 the Nigerian Communication Commission (NCC) fined MTN $5.2-billion for allegedly not disconnecting unregistered cellphone sim cards.
This coincided with the 2015 trade deficit suggesting that the Nigerian government was under pressure of restricting capital outflows. Historically, Nigeria had run negative net primary income, which represents earning outflows and inflows of foreign subsidiaries.
The balance of payment table shows that debits generated from net primary income are equivalent and sometimes higher than trade in services. Furthermore, FDI outflows in the same year were higher than portfolio and other investment income, which was $4.3-trillion. This means that the activities of multinational cooperation in the country no longer support the balance of payment current account as they did in the past. Since they are a liability to the Nigerian government, they have the potential of contributing towards balance of payment crisis as loans and portfolio flows have in the past.