Africa has lagged behind in industrialization;
the lack of industrial development has been
partially related to the challenge of attracting
sufficient foreign direct investment (FDI). In
2013, the average share of manufacturing value added
in GDP in Sub-Saharan Africa was 11 percent, almost
unchanged from the 1990s. At the same time, the
share of the worldwide FDI flows into SSA has been
rather low during the same period. In the Action Plan
for the Accelerated Industrial Development of Africa
(AIDA) that were adopted by all the member governments
of the African Union in January 2008, the
importance of manufacturing development was reiterated
and attracting foreign investment was identified
as the major priority for the acceleration of Africa’s
industrialization.
Compared to the past, FDI into Africa
is relatively high and more diverse than ever
before. FDI flows into SSA have expanded almost
six-fold since 2000, reaching a record US$45 billion
and leading to a significantly higher FDI stock
(US$474 billion) in 2013. Still, FDI into Africa
is only a fraction of world FDI flows. The more
diversified nature manifests in several dimensions:
First, FDI into Africa is slowly shifting from extractive
sectors to services and manufacturing sectors.
Second, FDI reached a larger geographic scope over
the past five years, with increasing shares received
by Southern and Eastern Africa. Third, there is a
significant increase of South-South FDI, including
that from new partners led by China, India,
and Brazil, and intraregional partners led by South
Africa. Manufacturing FDI reflects similar diversification
patterns and some African countries such as
Ethiopia are building up their manufacturing bases
by attracting FDI from new partners.
FDI has proven useful in the past to advance
economic development and foster structural change
in host countries. Recent literature and empirical
evidence suggests due consideration is needed from
policy makers to maximize benefits of FDI, such as
skills and technological transfer, and foster overall
spillover effects to the domestic economy. These
arguments are strongly supported by the practical
experiences of East Asian Tigers and of China, where
FDI contributed significantly to the upgrading and
diversification of its industrial structure. A wide variety
of polices to maintain macroeconomic stability,
increase trade openness, and accelerate the growth of
advanced industries were implemented. The evaluation
is assumed to vary depending on country, sector,
and the actual drivers of FDI.
Manufacturing FDI in SSA is primarily market-seeking.
There are three main types—resourceseeking,
market-seeking and efficiency-seeking—when
looking at FDI in Africa. In reality there are overlaps
in these three types. Manufacturing FDI in SSA is
mainly market-seeking and its main determinants
are market size and market potential. In addition,
political and economic stability are important factors
considered by foreign manufacturers when they
choose the investment location. On the other hand,
efficiency-seeking FDI, observed at firm level, is the
smaller part of manufacturing FDI in Africa since
only a handful of foreign companies are able to take
advantage of lower production cost in some manufacturing
areas only, such as textile and clothing, and
leather and footwear.
Manufacturing FDI in Africa remains relatively
undiversified, focusing on raw material
(food) processing or end-product assembly, which
are characterized by low value addition, even in those countries that manage to attract significant
inflows. In addition, some manufacturing production
areas are more successful in attracting foreign investors
than others. Those areas differ by host countries. For
example, in the last decade, some emerging subsectors
included textile and clothing, and leather and footwear
in Ethiopia; non-metallic mineral products and motor
vehicles and other transport equipment in Kenya;
metal products and non-metallic mineral products
in Tanzania; metal products and non-metallic mineral
products in Uganda; and non-metallic mineral
products and publishing and printing in Rwanda.
In addition, FDI is traditionally concentrated in the
food and beverage subsector in most of the countries.
This concentration in low value addition activities
may be appropriate in the short run, however, as it
is likely to be a first step for economies to integrate
into Global Value Chains (GVCs) through exploiting
their comparative advantages.
Non-traditional sources dominate FDI in
Africa. New partners and African partners have been
the main sources of manufacturing FDI. Traditional
sources of manufacturing FDI are shrinking but still
account for large stocks. The share of investment from
China and India increased rapidly, gradually taking
over the proportion of investment originating from
the EU and the U.S. Intraregional investment continued
to soar and largely contributed to the rebound
of Africa FDI to the pre-crisis level.
While FDI into Africa generally tends to have
relatively high returns of investments, likely reflecting
the high risk and low competition environment,
profitability in manufacturing is generally even
higher compared to other sectors. Recent evidence
shows that the overall rate of return of FDI in Africa
has been above 9 percent since 2006, higher than the
world average of 7.5 percent and developing country
average of 8.1 (data for 2011). On the other hand, in
Rwanda, manufacturing realized an average return to
equity of 24 percent in 2013. This result also partly
explains what drives manufacturing FDI from new
partners into SSA. Investors from emerging countries
are more accustomed to less supportive institutional
environments, and many are more adapted entrepreneurs
in high-risk environments.
Manufacturing FDI creates more jobs than FDI
in any other sector. Manufacturing has led in job
creation among sectors in the reviewed SSA countries
such as Tanzania, Uganda, and Ethiopia. According
to the most recent FDI data (2013/14), the manufacturing
sector in Tanzania accounted for 43 percent of
total jobs created, three times more than jobs created
in agriculture. Manufacturing FDI also achieved the
largest job creation in Uganda in 2012, amounting to
30 percent of the total FDI-driven jobs. Similar patterns
are also recognizable in Ethiopia, especially in terms of
permanent employment creation. A significant portion
of employment opportunities in manufacturing is
attributed to non-traditional investors. However, formal
training remains insufficient in manufacturing firms.
Unstable supply of inputs and uncertainty
of time required for transport and logistics build
a binding constraint for manufacturing FDI in
Africa. Drawing from empirical evidence and investors’
perception, some binding constraints are identified
as critical to further improve the performance of
manufacturing FDI. The dependence on imported
production inputs, erratic electricity supply, and poor
trade logistics drive the cost up and pose the threat to
the sustainability of FDI. These bottlenecks also lead
to production inefficiencies that constrains Africa’s
integration into the global value chain.
The Ethiopian and Rwandan case studies suggest
that the regulatory business climate is attractive
for FDI and contributes to the rate of project
operationalization. For many manufacturers who are
increasingly looking for new destinations to maintain
lower cost for their labor-intensive industries, the registration
and preparation process is often an experiment
to find the most suitable location in which to
invest. As such, the low rate of conversion to operability
in Ethiopia from the registered projects suggests
that some discouraged investors had likely withdrawn
after initial setbacks, indicating that improving investor
care in some priority sectors is an urgent task to
support FDI.