Investment Climate and Foreign Direct Investment in Africa: The Role of Ease of Doing Business

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...

This paper compares the patterns of the US and Chinese outward foreign direct investment (FDI) in Africa. The main objective of the paper is to examine if the motives for FDI for these two countries differ. This is done first with a descriptive analysis and then with empirical research. It reveals that Africa attracts only a small fraction of FDI from both the US and China. However, compared to the US, China’s FDI outflow to Africa is rising rapidly. It was only 8% of the US outward FDI in 2006, but is about 20% in 2010. Based on the standard FDI literature, the paper then investigates the determinants of FDI for both the US and China empirically. Hypotheses are developed and tested using ordinary least squares regression methods. Data are annual averages for the period 2003-2010. They are gathered from various standard sources such as the World Bank, The United Nations Conference on Trade and Development (UNCTAD), and the Chinese government. The paper finds expected result for market size, resource endowment, corruption, and openness. Chinese investment in Africa is often viewed as their desire to control natural resources, but the paper finds that the US investment is no different in this regard. The paper’s finding contradicts with the popular perception that Chinese outward FDI ignores corruption or attracted to countries with higher level of corruption. With respect to political risk, the paper finds that Chinese FDI flow is not significantly different from the US FDI flow.

Exploring the causality links between financial markets and foreign direct investment in Africa

This paper analyzes factors that drive foreign direct investment (FDI) in Africa. To do so, for the first time in the literature, the paper uses 5‐year panel data and the system‐GMM technique over the period 1970–2009. The main results are as follows: (a) larger countries attract more FDI; (b) regardless of their size, however, more open countries, politically stable countries, and countries offering higher return to investment also attract FDI; (c) FDI inflows are persistent in Africa. This suggests that countries that manage to attract FDI today are likely to attract more FDI in the future.

Africa has not succeeded in attracting much foreign direct investment in the past few decades. When countries did attract multinational companies, it was principally because of their (abundant) natural resources and the size of their domestic market. Angola, Cote d'Ivoire, Nigeria, and South Africa have traditionally been the main recipients of foreign direct investment in Sub-Saharan Africa. But the author shows that a few Sub-Saharan countries have generated interest among international investors by improving their business environment. In the 1990s, Mali, Mozambique, Namibia, and Senegal attracted substantial foreign direct investment--more so than countries with bigger domestic markets (Cameroon, Republic of Congo, and Kenya) and greater natural resources (Republic of Congo and Zimbabwe). Mali and Mozambique, which improved their business climate spectacularly in the 1990s, did so with a few strategic actions: liberalizing trade, launching an attractive privatization program, modernizing mining and investment codes, adopting international agreements on foreign direct investment, developing a few priority projects that had multiplier effects on other investment projects, and mounting an image-building effort in which political figures such as the nation's president participated. These actions are similar to those associated with the success of other small countries with limited natural resources, such as Ireland and Singapore about 20 years ago.

Foreign direct investment (FDI) flows are expected to be influenced by political risk factors. However, studies that evaluate the relationship between political risk and FDI flows in sub-Saharan Africa (SSA) are scarce. This study examines the impact of political risk on FDI flows in an SSA context using the 12 political risk components published as the International Country Risk Guide (ICRG) by the Political Risk Services (PRS) Group with the Nigerian telecommunications sector as a case study. The study finds that political risk has a significant influence on the inflow of FDI into developing economies in SSA such as Nigeria and that the 12 components affect FDI in different ways. Irrespective of the political risk rating, a consistent improvement in composite political risk enhances FDI inflow. Among the 12 components, corruption, law and order, democratic accountability, and investment profile were found to have significant influences on FDI inflow into the Nigerian telecommunications sector. Corruption, in particular, explains nearly two-thirds of the FDI inflow. © 2015 Wiley Periodicals, Inc.

The rise of China’s outward foreign direct investment (OFDI) in Africa has promoted the continent’s economic growth but generated controversy in the West. What drives Chinese investment in the continent with abundant natural resources but poor institutions/governance? While the topic is important, studies on the issue in the literature have been limited. This paper attempts to close the gap by testing hypotheses of the role of resources and institutions with panel data in 2003–2013. Estimates suggest that the Chinese investment is not biased toward resource-rich and institution-poor countries but similar to Western investment, and China’s OFDI is largely profit-driven, just like investors from other countries. Institutional supports from the Chinese government, however, seems to be important to China’s OFDI in Africa.

Studies have been conducted on the determinants of foreign direct investment (FDI) destinations. However, there seem to be few studies on determinants in African countries. This paper evaluates the determinants of FDI inflows, by examining specific relationships between the determinants (policy and non-policy factors) and FDI inflows to Africa, using a panel dataset from 1980 to 2016. Ordinary Least Squares (OLS) and Generalized Method of Moments (GMM) were used as the estimation techniques. The dependent variable, FDI inflows, was represented by the ratio of FDI flows to GDP, while the independent variables were agglomeration effects, trade openness, fiscal balance-macroeconomic condition, market size, economic instability, exchange rate, foreign aid, human capital development, corporate tax, and natural resource endowment. First-year lag of FDI (agglomeration effects), trade openness, market size, economic instability, foreign aid, human capital development, and natural resources (oil and metals) endowment have positive and significant effects on FDI inflows to Africa, while there is a negative relationship between FDI inflows to the continent and fiscal balance (public debt), exchange rate, and corporate tax. Consequently, government policies and non-policy factors played significant roles in facilitating FDI inflow into Africa during the study period. The p-value of the estimation (0.0001) further attests to the statistical significance of the results. Consequently, African countries must improve their regulatory framework to be able to attract more inflow of FDI. Efforts should also be made to reform and improve macroeconomic policies, institutional quality, and natural comparative advantages.

Abstract: In this article, it will undertake a comprehensive examination of "patient capital" within the context of China's foreign direct investment (FDI) in Africa, introducing the concept and its distinctive characteristics. This analysis is framed against the backdrop of China's evolving economic and trade relationships with other nations. Firstly, it will provide a brief literature review outlining the essence of patient capital and its application in China's FDI strategies. Subsequently, this paper will delve into the historical trajectory of China's direct investment in Africa, examining shifts from state-owned enterprises (SOEs) to private enterprises and their subsequent impacts on African economies. This section underscores the emergence of long-term oriented "patient capital" approaches, challenging perceptions of China's investments as purely altruistic. Furthermore, it will analyze the structural composition of China's investments in Africa, emphasizing the strategic focus on long-term gains and relationship-building. This analysis sheds light on the transformational nature of China's engagement in Africa, fostering sustainable development and enhancing African countries' autonomous production capacities. To contextualize China's approach, this paper will compare it with that of the United States, exploring differences in investment strategies, motivations, and their respective outcomes on African nations. Utilizing case studies, it will assess the multi-faceted impacts of these investments on African economies and their contributions to China's domestic economic advancement. This comparative analysis underscores the practical significance of China-Africa cooperation, highlighting a historical opportunity for mutual benefit and win-win outcomes. By emphasizing sustainable development and capacity-building, China's FDI in Africa presents a compelling narrative of shared prosperity and growth.

Chinese provincial firms are a major and growing source of foreign direct investment (FDI) in Africa, yet there has thus far been little systematic analysis of their motives and behaviour. Based on statistical analysis of a panel of mainland China’s 31 provinces from 2000 to 2015 and a study of three diverse provincial cases, and modifying the classic Organization-Location-Internalization theory of FDI, this article uncovers a three-stage ‘inverted-U’ shaped pathway linking home province internationalization and investment in Africa. Firms from provinces with very low levels of integration in the global economy lack the experience needed to invest in Africa, while those in highly globalized provinces face fewer push factors driving them to (comparatively risky) countries of the developing world. These findings suggest that Chinese provincial FDI in Africa may be driven by a ‘logic of escapism’ alongside conventional FDI motives.

This article analyzes the motives of Chinese foreign direct investment (FDI) in Africa and the impact of the institutional quality of the host country for the period between 2003 and 2022 from both static and dynamic perspectives by using the OLS, PPML, and GMM methods. The results show that: China has obvious market-, and efficiency-seeking motives, but weak resource- and strategic asset-seeking motives. There is a tipping point for market- and efficiency-seeking motives. Good institutional quality of the host country (region) facilitates FDI expansion. Investment inertia and factor endowments affect long-term FDI. We also examine the moderating effects of institutional quality and the Belt and Road Initiative (BRI) and found that: the host country's (region's) institutional environment optimization makes market size more attractive and labor costs less attractive. The BRI itself has no obvious influence on Chinese investment in Africa, while the impact of market size and labor costs became more significant after 2013. Hence, when selecting investment locations, Chinese enterprises should prioritize the host country's (region's) market size, labor costs, and institutional quality. Additionally, they should utilize the moderating effect of institutional quality to mitigate the disadvantages associated with higher labor costs.

Foreign direct investment in Africa: Performance, challenges, and responsibilities

The study investigated the impact of intellectual property rights on foreign direct investment (FDI) in selected African countries (Burkina Faso, Ivory Coast, Nigeria, Cameroon, Mali, Kenya, Burundi, Central African Republic, Rwanda, Senegal, Zimbabwe, and Tanzania). The purpose of the study is to develop property rights policies that encourages FDI in African countries. How FDI is influenced by the combination of trade openness and intellectual property rights was also examined using the same data set and econometric methods such as the dynamic generalized method of moments (GMM), fixed effects, and pooled ordinary least squares (OLS). Panel data ranging from 2005 to 2019 were used for the purposes of this study. A 1% increase in intellectual property rights led to a 22.73% increase in FDI inflows under the dynamic GMM and a 45.55% increase in FDI inflows under the random effects. These results show that intellectual property rights significantly enhanced FDI under the random effects and dynamic GMM. FDI was insignificantly enhanced by intellectual property rights under the pooled OLS and fixed effects methods. A 1% increase in complementarity between intellectual property rights and trade openness (complementarity term) pushed up FDI inflows by 17.78% under the dynamic GMM, whilst a 1% increase in the complementarity term increased FDI inflows by 16.72% under the fixed effects. In other words, dynamic GMM and fixed effects approaches show that the complementarity component significantly improved FDI inflows. The paper recommends implementing the best property rights strategies to improve FDI inflows into African countries. AcknowledgmentThe author appreciates the moral support from the University of South Africa, his employer.

This article uses a cross-country econometric approach to identify the determinants for foreign direct investment (FDI) in Africa. The contribution is 3-fold. Firstly, we recognize that the estimation techniques used elsewhere, such as ordinary least squares, may be flawed. We therefore use a dynamic one-step generalized method of moments (GMM) estimator due to Arellano and Bond (1991). The GMM-estimates identified a number of robust determinants of FDI, namely government consumption, inflation rate, investment, governance (political stability, accountability, regulatory burden, rule of law) and initial literacy. It is concluded that geography does not seem to have a direct influence on FDI flows to Africa. Neither market-seeking nor re-exporting motives of FDI seem to dominate, with different policy instruments being significant in the different specifications. This does not discount the importance of good policies, but probably indicates the importance of good policies made by good institutions. Institutions, in the form of political stability showed up as a significant determinant of FDI.

Despite economic and institutional reform in Africa during the past decade, the flow of Foreign Direct Investment (FDI) to the region continues to be disappointing and uneven. In this study we use the fixed and random effects models to explore whether the stylized determinants of FDI affect FDI flows to Africa in conventional ways. Based on a panel dataset for 29 African countries over the period 1975 to 1999, the paper identifies the following factors as significant for FDI flows to Africa: economic growth, inflation, openness of the economy, international reserves, and natural resource availability. Contrary to conventional wisdom, political rights and infrastructures were found to be unimportant for FDI flows to Africa. The significance of a variable for FDI flows to Africa was found to be dependent on whether country- and time-specific effects are fixed or stochastic.