Without investment by foreign companies (foreign direct investment, or FDI) there is a real danger that countries in sub-Saharan Africa (SSA) will fail to become internationally competitive, and will remain at the margins of the world economy. Only a few countries in sub-Saharan Africa have been successful in attracting foreign investment. Researchers at the Institute of Development Studies probed reasons why foreign companies have been so reluctant to invest. Their report assesses prospects for attracting more investment in the future. It concludes that foreign investment could increase significantly during the next 5 to 10 years, as economic and political conditions improve in many countries of the region.

Investment by foreign companies is vital to the future economic development of sub-Saharan Africa. Many countries in the region lack domestic resources for investment. Foreign companies would also bring with them new technologies and related skills, which can help in the development of domestic enterprises. But African countries have long attracted only very low levels of foreign investment. During the period 1983 through 1988, average annual investment in all 45 SSA economies by companies based in the wealthy OECD club of nations, was only US$323 million. In addition, SSA accounted for only a very small proportion of total FDI worldwide. For example, investment by British companies in SSA amounted to a mere 0.5 percent of UK foreign investment.

During 1989 through 1994 most African economies adopted economic reform (structural adjustment) programmes that hinged on pushing down exchange rates, inflation and government spending. Following this, average investment in SSA countries by companies based in OECD countries rose to $1.34 billion a year. But this investment was concentrated in only a few countries, and foreign investment is still significantly less than foreign aid. In fact the number of foreign enterprises involved in SSA fell, owing to the testing business environment and problems such as poor infrastructure, corruption and foreign exchange shortages.

Factors held responsible for the low level of investment by foreign companies in the SSA region, include:

• A perceived gap between policy and practice on the part of SSA governments. Though many claim to be ready to encourage foreign investment, many companies adopt a 'wait and see' attitude.
• Poor recent economic performance in SSA countries (negative growth rates, low demand and declining export markets).
• Low levels of domestic investment, accompanied by high levels of risk and high interest rates.
• The rapid pace of economic reform, which has damaged manufacturing subsidiaries of multinational companies in SSA.
• The slow pace of privatisation and economic liberalisation.
• Conflict, domestic political crises and high levels of corruption, which foster an atmosphere of political instability.

Economic and political improvements that should significantly increase foreign investment in the future, include:

• demonstrating firmer government commitment to economic reform
• creating fully functional market economies to assure foreign investors that there is a future for the private sector
• rapidly and effectively developing the private sector
• maintaining a rapid pace of privatisation
• focusing on industries based on processing natural resources, a sector where SSA economies have strong advantages
• nurturing a political and bureaucratic environment that will encourage foreign investment, by putting an end to civil wars and military conflicts, establishing multi-party democracy and introducing efficacious public sector reforms.

Source(s):
Foreign Direct Investment in Africa: Rhetoric and Reality. SAIS Review, Summer-Fall issue, by P. Bennell (1997)

id21 Research Highlight: 1998-May-21

Further Information:
Paul Bennell
C/o Institute of Development Studies
at the University of Sussex
Brighton
BN1 9RE
UK

Tel: +44 (0) 1273 606261
Fax: +44 (0) 1273 621202
Contact the contributor: ids@sussex.ac.uk

Institute of Development Studies (IDS), UK