TRENDS IN FOREIGN DIRECT INVESTMENT
4.2 FOREIGN DIRECT INVESTMENT IN AFRICA
4.2.1 Constraints on Foreign Direct Investment to Africa
The main factors motivating FDI into Africa in recent decades appear to have been the availability of natural resources in the host countries (e.g. investment in the oil industries in Nigeria and Angola) and, to a lesser extent, the size of the domestic economy (OECD, 2002)87. The reasons for the lacklustre FDI into most other African countries are most likely the same factors that have contributed to a generally low rate of private investment to GDP across the continent. Studies have attributed this to the fact that, while gr,oss returns on investment can be very high in Africa, the effect is more than counterbalanced by high taxes and a significant risk of capital losses. As for the risk factors, analysts now agree that three of them may be particularly pertinent: macroeconomic instability; loss of assets due to non-enforceability of contracts; and physical destruction caused by anned conflicts (Hernandez-Cata, 2000)88.
85See Note 76.
86See Note 4.
87See Note 11.
88Hernandez-Cata E., 2000,Raising Growth and Investment in Sub-Saharan Africa: What Can Be Done?, IMF Policy
Discussion Paper,PDP/OO/4. .
A report by the Centre for Research into Economics and Finance in Southern Africa (1998)89 identified unstable political and macroeconomic environments in some SADC countries as being the most significant factors in the constraints on FDI to the region. The report stipulates that uncertainty about the future economic environment causes investors to postpone investment decisions, as the irreversible nature of direct investment makes an error extremely costly. This factor was identified by the World Economic Forum in the Africa Competitiveness Report (2000) as the single most damaging problem in attracting investment to Africa. The report found that even stable SADC countries suffer from some contagion effect, so that instability in one country affects all, albeit to a lesser extent.
Investors from within the region can accept a greater degree of instability, both because they are more accustomed to it, and because they know that their future rests within the region. However, for extra-regional investors, these problems are much more profound.
Discussions held by the Association of SADC Chambers of Commerce and Industry (ASCCI) in 19989
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highlighted the serious and dramatic impediment that insecurity of investment can represent for the region's competitiveness to attract FDI and investment in general. A major concern was the more recent incidents in Zimbabwe and the civil unrest in some other countries, which only reinforced the negative perception of the region in terms of insecurity of investment. The Member Chambers of ASCCI highlighted the need to establish and secure a stable and predictable political and macroeconomic environment in the entire region, in an effort to attract both national and non-national sources of investment.Several other factors holding back FDI have been proposed in recent studies, notably the perceived sustainability of national economic policies, poor quality of public services, and closed trade regimes (Dollar and Easterly, 1998)91. Even where the obstacles to FDI do not seem insurmountable, investors may have powerful incentives to adopt a wait-and- see attitude. FDI contains an important irreversible element, so where investors' risk
89See Note 81.
90See Note 68.
91Dollar D. and Easterly W., 1998,The Search for the Key: Aid, Investment and Policies in Africa,World Bank
Working Paper. Washington DC. ,
perception is heightened the inducement would have to be massive to make them undertake FDI as opposed to deferring their decision (Servan, 1996)92. This problem is compounded where a deficit of democracy, or of other kinds of political legitimacy, makes the system of government prone to changes. Finally, a lack of effective regional trade integration efforts has been singled out as a factor (Odenthal, 2001)93.
Removing restrictions on foreign investors may be a necessary condition for attracting private capital flows, but it is not a sufficient condition. The Least Developed Countries Report (2000)94 highlights the reason why economic liberalization does not automatically lead to much larger private capital inflows. As more and more developing countries remove restrictions on private capital, the choices available to foreign firms regarding where to invest and locate each of their activities, increase, and basic economic factors become more important. Economic reforms can certainly act as a device signalling that the government is establishing a business-friendly environment. However, the empirical finding in Africa is that though (foreign) investors see the existence of a programme with the IMF or World Bank as a sign of stability and intent to reform, they do not rank this as an important factor in investment decisions.
In this regard, the reform programmes can even have contrary results. For example, the incentive for some of the earlier FDI inflows into LDCs was based on the existence of protected markets, and thus trade liberalization has in some cases prompted a process of disinvestments (Least Developed Countries Report, 2000)95. Devaluation has also sometimes acted as a disincentive for foreign investment, for even though projects might be highly profitable in local currency terms, foreign exchange profits have considerably diminished. Another crucial area that business people have identified is the availability and quality of infrastructure services, which have often declined with reduction in public expenditure (UNCTAD, 1999)96.
92ServanL., 1996,Irreversibility, Uncertainty and Private Investment: Analytical Issues and Some Lessons for Africa, World Bank Working Paper, Washington DC.
93Odenthal N., 2001,FDI in Sub-Saharan Africa, Technical Paper No. 173, OECD Development Centre.
94See Note 66.
95See Note 66.
96See Note 4.
As developing countries refonn their legal and regulatory framework governing FDI, as well as the tax regime and trade policy, emphasis is now being placed on other aspects of the national policy environment which might be regarded as constraining capital flows.
The Least Developed Countries Report 200097 identifies the main areas of concern. These include:
i) A lack of readily marketable assets or products to buy or sell. Potentially interesting assets can and do exist, but an investment principle is deterred by the costs and related risks required to give them marketable status (Least Developed Countries Report, 1996)98.
ii) Weak financial systems. The weakness of the financial system has important negative effects on private capital flows since foreign investors use the financial system as a source of current infonnation on macroeconomic conditions and company perfonnance.
Insofar as local banks cannot provide this infonnation effectively, foreign investors stay away from a country. The World Bank's Foreign Investment Advisory Service (FIAS) has also found that the availability of domestic financing is a key factor in attracting FDI.
iii) The profitability and risks of individual projec(s depend on investments in other projects. A critical problem for all activities is the high cost and general lack of efficient business services that are essential for competitive pricing and quality standards.
iv) There is underinvestment in all kinds of goods which are necessary for a thriving private sector. Inadequate physical infrastructure, particularly In transport, communications and infonnation technology, is a central problem which has adverse effects on international competitiveness. Other difficulties experienced in LDCs include, crime, disease and inadequate health care, andlow skilled labour forces.
97See Note 66.
98UNCTAD,Least Developed COllntries Repon1996, United Nations Publications, New York and Geneva.