Africa for the Africans may become the new slogan for foreign investors

OVER the past decade Africa has attracted an increasing share of global foreign direct investment (FDI) inflows. China and other emerging markets are usually highlighted as important sources of this increase — and they are. However, perhaps the most significant contributor has been Africa itself.

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In 2008, at the zenith of the global financial crisis, African firms dramatically expanded their Africa-wide presence. Intra-African greenfield FDI projects accounted for just 8% of all such projects in Africa in 2007, but rose to 22% in 2013, making Africa the second-largest source of greenfield FDI projects in Africa in 2013, after Western Europe.

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Its relative contribution by capital expenditure is very similar. Mergers and acquisitions (M&As) by deal volume show that African acquirers have been the primary source of cross-border M&A since 2006.

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At the forefront are South African firms. The share of African countries in SA’s outward FDI assets nearly doubled between 2004 and 2012, to 21%. South African firms accounted for a third of all intra-African greenfield investment projects between January 2003 and January 2014, with the remainder coming from Kenya (14%) and Nigeria (12%), followed by Togo, Egypt, Mauritius, and Tunisia (20% combined).

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The largest recipients of intra-African FDI projects between January 2003 and January 2014 were (in order) Ghana, Uganda, Tanzania, Nigeria, Kenya, Rwanda and Zambia. These seven countries received more than 45% of total intra-African investment projects (more than 400) during this period.

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Moreover, intra-African FDI was the primary source of project inflows for several smaller African economies, including Burundi, Rwanda and South Sudan — even though absolute numbers are modest.

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Intra-African FDI has driven investment in Africa’s service and consumer industries. Local brands with strong growth are at times challenging non-African multinational enterprises.

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Perhaps most visible has been the regional expansion of African retailers, often through M&As. In response, non-African multinational enterprises are increasing investment and expanding product ranges.

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THIS has supported a widespread relative shift away from resource-seeking FDI, which declined from 35% of the number of incoming greenfield projects (and 81% of capital expenditure) in 2003, to 11% of project inflows (and 36% of capital expenditure) in 2013.

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A strong reversal seems unlikely soon, with the Bloomberg commodity (price) index at a five-year low.

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The rise of intra-African FDI has had an effect. African investors are slowly becoming more competitive as they acquire complementary assets, expand scale and enhance brand value.

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Competition in Africa is also increasing, creating a virtuous circle as investments from companies that fear being permanently disadvantaged as late movers, or see their market positions slipping, are sucked in.

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Intra-African FDI can have further benefits for lead firms and local suppliers.

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For suppliers, product and process standards may be easier to meet. For lead firms, regional suppliers can reduce lag and lead times in production (such as for Southern African clothing production).

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However, intra-African FDI is not an unmitigated blessing: existing suppliers of lead firms often largely benefit (at least initially) from the resulting demand increase, while upgrading opportunities for new local suppliers will be strictly governed by the lead firm.

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This is because intra-African FDI is driven by large enterprises (such as Dangote and Shoprite), which confront the same forces of global competition as non-Africans by squeezing suppliers.

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HOW, then, can the benefits be fostered? Governments can help local suppliers become more competitive by developing complementary infrastructure, using targeted cluster policies (including training and innovation strategies), and adopting local content requirements (when possible).

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Essential for integrating smaller suppliers and upgrading producer capabilities is the facilitation of competitive market access to regional as well as global input and output markets.

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The tripartite free-trade agreement negotiations — involving 26 African nations — are important in this respect, despite concerns over the size of its potential market access gains.

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Cross-border investment issues in the agreement, when negotiated, have considerable potential to create uniformity in how FDI is managed and can establish a more sustainable investment framework, provided enforcement institutions are established.

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The harmonisation of labour legislation, already agreed upon by most regional economic communities, needs proper implementation and monitoring to support economic and social upgrading. This is particularly salient as investors from developing countries often have less developed corporate social responsibility standards.

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Investment promotion agencies in African countries need to be better attuned to the prominence and particularities of African FDI.

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Without these and other policies, our concern is that smaller domestic enterprises and producers risk not sharing sufficiently in the gains from intra-African FDI.

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• From Columbia FDI Perspectives, No 139. Reprinted with permission of the Columbia Center on Sustainable Investment.