Foreign Direct Investment in Africa: Rhetoric and Reality

Abstract

Foreign Direct Investment In Africa: Rhetoric and Reality Paul Bennell (bio) It is now widely recognized that the future development of sub-Saharan Africa (SSA) depends considerably upon the success of individual economies in attracting relatively large inflows of foreign direct investment (FDI) into high potential growth sectors. This is not only because of the general paucity of investment resources, exacerbated by the debt crisis facing many countries, but also because FDI brings with it the new technologies and related skills essential for sustained export-led economic growth. Without the inflow of FDI, there is a real danger that SSA economies will fail to become internationally competitive and as a result, will remain at the margins of an increasingly integrated global economy. During the 1960s and 1970s, the majority of newly independent African governments adopted socialist or quasi-socialist development strategies. Even in the more pro-capitalist countries, most notably Côte d’Ivoire and Kenya, politicians and senior policymakers were often wary about foreign capital, fearing it might assume a dominant position in strategically important economic sectors. SSA governments nationalized many foreign companies during this period while channeling scarce capital resources into establishing or enlarging state-owned enterprises, particularly in the industrial sector. Multinational corporations were generally regarded as an increasingly dominant and pernicious form of international capitalist exploitation. Consequently, governments imposed a battery of regulations on FDI [End Page 127] which deterred all but the most determined investors. However, once governments started to introduce pro-market and thus pro-private sector ‘structural adjustment’ polices from the early and mid-1980s onward, official attitudes toward FDI also began to change. This change was further encouraged by mounting evidence of the positive role FDI played in the Asian tigers’ economic transformation. Earlier socialist development strategies emphasized national self-reliance. Dependence on foreign capital and international trade was seen as perpetuating ‘underdevelopment.’ By contrast, the now hegemonic neo-liberal, pro-capitalist development paradigm is based on the fundamental proposition that both developed and developing countries can only achieve long run sustainable growth through global economic integration. Increased exports and FDI, therefore, play a vital role in facilitating the integration process. Most African governments are now implementing comprehensive economic reform programs. By the mid-1980s, the need for reform had become overwhelming because of deep-seated and protracted economic crises. Real per capita incomes plummeted in most countries, and export production, still heavily based on primary commodities, was in a parlous state of decline. The first phases of the usual IMF/World Bank-designed structural adjustment programs concentrated on correcting basic macro-economic distortions, namely massively overvalued exchange rates, out of control inflation, and huge budget deficits (typically more than 10 percent of gross domestic product). By the early 1990s, having achieved considerable progress on the macro-economic front, officials began to focus attention on more fundamental structural impediments to growth and poverty alleviation. In particular, most SSA countries now need to downsize and comprehensively restructure the public sector which has largely dominated economic life since political independence. At the same time they must support private sector development. Consequently, privatizing state-owned enterprises, developing local entrepreneurial skills, and injecting foreign capital and skills now top the economic reform agenda. The purpose of this short article is to describe and explain major trends in FDI since the start of economic reform programs in sub-Saharan Africa, and then to consider the short- and medium-term prospects for foreign investment throughout the continent. The following section begins with a summary of the most important [End Page 128] indicators of FDI involvement, namely net investment inflows, net income, and rates of return, and the number of subsidiaries or affiliates and employees of foreign-owned companies in SSA. It subsequently considers the main reasons for the as yet limited increase in FDI. The final section then discusses the key factors that are likely to influence future levels of foreign investment. South Africa has been excluded from the discussion mainly because its economy is so much larger and more sophisticated than any of the other SSA economies. Prospects for FDI in South Africa, a semi-industrial, highly urbanized country, must be considered separately. Any assessment of recent...