Africa should target FDI from emerging markets

Often, when the term Foreign Direct Investment (FDI) is mentioned in Africa, images of investors from Europe and North America come to mind.

And this is with reason: according to the United Nations Conference on Trade and Development (Unctad), the top three sources of FDI for Africa are the US, the UK and France.

China holds the fourth largest stock of FDI in Africa followed by South Africa, Italy, Singapore, India, Hong Kong and Switzerland.

And while FDI flows to Africa slumped to $42 billion (Sh4.2 trillion) in 2017, a 21 percent decline from 2016, Unctad forecast that the inflows would increase by about 20 percent in 2018 to $50 billion (Sh5 trillion).

It notes that while companies from developed economies still hold the largest FDI stock, developing economy investors from China, South Africa, Singapore, India and Hong Kong are among the top 10 investors in Africa.

Clearly African governments want more FDI and there is an opportunity to diversify strategies from targeting just Europe and the US. While it is important to retain the interest of the top investors, there is room to better consider the requirements of investors from developing economies such as China, India, South Africa as well as other African countries such as Nigeria.

Thus, while the anchor investors from the US and Europe are crucial, it is also important that Africa leverage at least two unique advantages that investors from developing economies bring with them.

The first advantage is that they understand the reality of investing in countries with governments that are not very transparent. The reality is that it is difficult to find an African government where investors will not, at some point, have to contend with rent-seeking behaviour of some government officials.

Often the perception of corrupt governments can put off traditional investors, but when one comes from a country where that is also a visible reality, this factor is less of a deterrent.

This is not to say that corrupt requests from governments should be entertained but rather, the fact that this reality is faced in their own countries means that such will not serve as a shock and limit interest.

Secondly, Africa’s private sector is highly informal, a reality that is also reflected in Asia and other regions with developing economies. According to the International Labour Organisation, the workforce employed in the informal economy is over 85 percent in Africa; this figure is 68.8 percent in Arab states, 68.2 percent in the Asia-Pacific, and about 55 percent in Latin America.

This is an advantage because it means investors from these regions understand the challenges that come from investing in a country where most of the private sector labour functions outside formal structures.

Used to negotiating contracts and performance expectations in a culture dominated by informality, investors from developing economies are used to planning for unforeseen events linked to informality and may possibly have a higher appetite for risk because informality is a part of the reality in their own economies and thus not an unusual risk factor.

In short, the multi-polarity of FDI sources targeting Africa is likely to grow as developing economies expand their capacity to invest outside their economies.

Thus, Africa has to develop its capacity to meet the investor requirements of an increasingly diversified source of investment and leverage the unique advantage each brings to the table.