Good news: private investment in Africa increasing

Stephen Thomsen at Chatham House has published an interesting paper, "Foreign direct investment in Africa: the private-sector response to improved governance" (pdf) which says that:

  • Private capital flows to Africa in the form of foreign direct investment (FDI) are growing. While in the past much of this investment was limited to the raw materials sector, the current wave involves firms from more countries and sectors than ever before.
  • Foreign investors, including from within Africa itself, invested almost $50 billion in Africa during 2000–03. While this represents only a small share of global flows, the more relevant comparison iswith the size of the African economy. By this measure sub-Saharan Africa attracts almost as much FDI as Southeast Asia.
  • Although Europe remains the principal source of investment, a rising share is coming both from Asia and from within Africa itself.
  • Investors have been influenced by improvements in governance, most notably with respect to the business climate, where the desire to attract foreign investors can provide a strong incentive for African governments to reform their policies and practices. Although much remains to be done, some countries have nevertheless made great progress in areas such as political and economic stabilization, privatization and simplification of cumbersome regulations.
  • This foreign investment also has implications for patterns of trade and integration. Many African exports are channelled through multinational enterprises, helping to integrate African countries both with one another and with the global economy.

As the paper argues, this is a tribute to the huge improvements in governance across the continent over the last few years.  I was also interested to see the conclusion that aid flows and foreign direct investment are complementary:

Not only can public donors encourage private investors and vice versa, but together they can also make a greater contribution to development than either by itself. This can be seen most clearly with respect to infrastructure where neither the large aid-financed projects of the 1950s and 1960s nor the largely private projects of the 1990s have yielded the expected private and social returns in many cases. In this light, any increase in aid to Africa such as through debt relief agreed at the G8 meeting is likely to foster greater flows of foreign investment in the future. When allied with improvements in governance on the continent, the combined impact of increased aid and FDI might well yield positive results on a far greater scale than has previously been seen.

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