Why foreign direct investment is key to Africa's sustainable recovery

Aug 19, 2021

The National Smallholder Farmers’ Association of Malawi manages both farms and agricultural processing. At their processing plant at the Kanengo Industrial Site, rice and groundnuts are bagged for export. Image: Ollivier Girard/EIF.

Sosten Gwengwe

MP, Minister of Trade, Government of Malawi

Ratnakar Adhikari

Executive Director, Enhanced Integrated Framework (EIF)

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Long-Term Investing, Infrastructure and Development

The COVID-19 pandemic has reduced foreign direct investment flows, with substantial costs to African economies.
Diverse sectors in Africa have the potential to attract new investments and contribute to economic recovery.
Support is needed to help Africa in investment promotion and facilitation.

The global economic downturn following COVID-19 coupled with measures employed by African governments to curb the spread of the pandemic have resulted in substantial declines in foreign direct investment (FDI) and deep economic contractions.

According to the World Investment Report, global FDI collapsed in 2020, falling by 35%. This decline was concentrated in developed countries, where FDI flows fell by 58%. The decline in developing countries was relatively measured at -8%, thanks to robust flows to Asia. The distribution was uneven across regions, with Africa witnessing a reduction of 16%.

The continuing and uncertain effects of the COVID-19 pandemic have clouded the outlook for FDI in Africa. Greenfield announcements fell by 62% to $29 billion in 2020 from $77 billion in 2019, and international project finance for large infrastructure projects fell by 74% to $32 billion. These developments are concerning, as these types of investment are crucial for productive capacity and infrastructure development, which will be vital for a sustainable recovery.

According to the African Economic Outlook, economic growth of the continent shrank by 2.1% in 2020 and is expected to resume at a moderate pace of 3.4% in 2021. This will be underpinned by a rebound in FDI and commodity prices, which has already seen an uptick, coupled with a resumption of tourism and a rollback of pandemic-induced restrictions and widespread rollout of COVID-19 vaccinations.

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Africa as a good destination for FDI

FDI flows to Africa have evolved over the past decades as new sources of investment have opened up and emerging sectors have expanded. A closer look at the opportunities this evolution presents should be a priority for African governments and investors looking to invest on the continent.

The African Continental Free Trade Area (AfCFTA) has provided much‑needed stimulus and predictability for trade and investment on the continent. It is likely to foster intra-African greenfield investment via its positive effect on intra-African trade. The expected adoption of the Sustainable Investment Protocol of the AfCFTA could further bolster FDI flows to and within Africa in the long-term.

From a historical concentration in the extractives sector, FDI to Africa has been increasingly diversifying into the manufacturing and services sectors. Between 2006 and 2010, resource extraction, petroleum and coal processing projects made up more than half of the estimated $236 billion greenfield FDI projects announced in Africa, yet between 2016 and 2020, new projects in these sectors accounted for less than a quarter of the total. Other sectors that have continued to attract significant new investment on the continent include logistics, communications and IT services and renewable energy. Therefore, Africa needs to capitalize on these trends going forward.

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Financing Sustainable Development

The world’s economies are already absorbing the costs of climate change and a “business as usual” approach that is obsolete. Both scientific evidence and the dislocation of people are highlighting the urgent need to create a sustainable, inclusive and climate-resilient future.

This will require no less than a transformation of our current economic model into one that generates long-term value by balancing natural, social, human and financial conditions. Cooperation between different stakeholders will be vital to developing the innovative strategies, partnerships and markets that will drive this transformation and allow us to raise the trillions of dollars in investments that are needed.

To tackle these challenges, Financing Sustainable Development is one of the four focus areas at the World Economic Forum's 2019 Sustainable Development Impact summit. A range of sessions will spotlight the innovative financial models, pioneering solutions and scalable best practices that can mobilize capital for the the world's sustainable development goals. It will focus on the conditions that both public and private institutions should create to enable large-scale financing of sustainable development. It will also explore the role that governments, corporations, investors, philanthropists and consumers could play to deliver new ways of financing sustainable development.

FDI opportunities for a sustainable economic recovery

Investment into the African continent over the coming years should ideally focus on the key sectors and opportunities that will define the continent's growth in the short and long-term. A few of these are worth highlighting:

Renewable energy capacity in Africa could reach 310GW by 2030, which would put the continent at the forefront of renewable energy generation globally. There is significant scope for Africa to build a climate-resilient and low carbon continent with attractive investment opportunities on renewable energy.
E-commerce and logistics. With the expected bolstering of economic activity on the continent through the implementation of the AfCFTA, progress in mobile and internet penetration is likely to stand at 50% in 2025, and growing consumer spending is expected to reach $2.1 trillion in 2025. Despite this, companies have largely failed to tap into Sub-Saharan Africa's e-commerce potential, owing to infrastructure and logistical challenges, which represent an excellent opportunity for foreign investment.
Sustainable tourism. In 2019, the tourism industry accounted for about 7% of Africa’s GDP and contributed $169 billion to its economy. The International Monetary Fund predicted that real GDP among African countries dependent on tourism would shrink by 12% in 2020. However, here again opportunities lie. A growing middle class and the launch of the AfCFTA is expected to increase travel within and into the continent. There is immense value in looking to sustainable tourism, including eco-tourism, which can ensure a long-term future for African tourism.
Circular economy. The sharing, reusing, repairing, recycling and regenerating of materials to generate economic value and promote environmental sustainability, offers tremendous potential for FDI in Africa. Of the five thematic areas identified by the African Circular Economy Alliance and the World Economic Forum, i.e. food systems, packaging, the built environment, electronics, and fashion and textiles, circular food systems alone can help create a trillion-dollar industry by 2030 while generating millions of inclusive green jobs.

Support needed to promote FDI in Africa

The COVID-19 pandemic has created a unique opportunity to reframe investor engagement with the African continent. While improving the business climate for attracting FDI is important, building the capacity of investment promotion agencies on FDI promotion and facilitation would go a long way in helping the continent build back better, more so for the 33 least developed countries (LDCs) within the continent.

To this end, the Enhanced Integrated Framework and the World Association for Investment Promotion Agencies have established a targeted programme aimed at actively assisting investment promotion agencies from the LDCs (15 of which are in Africa). The programme improves the capacity of investment and trade professionals in the LDCs, considering the diverse needs of the various LDCs with respect to FDI attraction and facilitation during this unprecedented COVID-19 crisis.

FDI to Africa faces strong headwinds in the short-term with significant downside risks. Now more than ever, the opportunities abound for illustrating that private investment can lead to broad‑based sustainable development, while also providing significant returns to investors.

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