FOREIGN DIRECT INVESTMENT INFLOWS TO AFRICA HIT HISTORIC HIGH

Africa received record high foreign direct investment (FDI) inflows in 2005 of US$31 billion (figure 1), but this was mostly concentrated in a few countries and industries, says UNCTAD´s World Investment Report 2006, FDI from Developing and Transition Economies: Implications for Development (1) . A sharp rise in corporate profitability and high commodity prices over the past two years helped produce a growth rate of 78% in FDI inflows to the region. Prospects are good for another increase in 2006 given high project commitments, large numbers of investors eager to gain access to resources, and a generally favourable policy stance for FDI in the region. FDI continued to be a major source of investment for Africa as its share in gross fixed capital formation increased to 19% in 2005. However, the region´s share of global FDI remained low at about 3% in 2005. In the manufacturing sector, a number of transnational corporations (TNCs) in the textile industry pulled out of Africa because quota advantages for African countries declined after the end of the Multi-fibre Arrangement (MFA) in 2005.

South Africa was the largest FDI recipient in the region in 2005, experiencing a sharp jump in inflows to US$6.4 billion from only US$0.8 billion in 2004. South Africa accounted for about 21% of the region´s total. This was mainly due to the acquisition of Amalgamated Bank of South Africa by Barclays Bank (United Kingdom) for US$5.5 billion. Africa´s top ten recipient countries - South Africa, Egypt, Nigeria, Morocco, Sudan, Equatorial Guinea, the Democratic Republic of Congo, Algeria, Tunisia and Chad, in that order - accounted for close to 86% of the regional FDI total (figure 2). In eight of these countries, FDI inflows exceeded US$1 billion (more than US$3 billion for Egypt, Nigeria and South Africa in particular). Inflows to South Africa were also the most diversified: investment was channelled into energy, machinery and mining, as well as into banking, which received the largest share.

At the other extreme, FDI inflows remained below US$100 million in 34 African countries. These are mostly least developed countries (LDCs), including oil-producing Angola, which witnessed a drastic decline in FDI receipts in 2005. Many of the low FDI recipients in the region have limited natural resources; lack the capacity to engage in significant manufacturing, and, as a result, are among the least integrated into the global production system. Some countries have also experienced political instability or civil war in the recent past, which destroyed much of their already limited production capacity.

FDI inflows to the region were concentrated in a few industries, such as oil, gas, and mining. Six oil producing countries (Algeria, Chad, Egypt, Equatorial Guinea, Nigeria and Sudan, in descending order of the value of FDI) accounted for about 48% of inflows to the region. Although countries such as Kenya, Mauritius, Lesotho, Swaziland and Uganda had begun to receive FDI for their textile and apparel industries due to the African Growth and Opportunity Act (AGOA), the trend changed following the end of the MFA in 2005. In Mauritius there was a 30% contraction in the volume of garments manufactured in 2005 following the departure of Hong Kong (China)-owned companies. In Lesotho, six textile TNCs closed, with a loss of 6,650 jobs. The setback demonstrates that the impact of trade-related initiatives can be short-lived in Africa, where domestic capabilities are inadequate for quickly absorbing and continuing production processes. It also underscores the fact that Africa´s industrial progress requires competitive production capacity, in addition to better market access and more welcoming regulatory frameworks. The persistence of the critical capacity problem may continue to hamper the region´s ability to attract and retain FDI in the manufacturing sector.

FDI outflows from Africa in 2005 remained small and originated from a few countries. Six home countries -- Egypt, Liberia, Libyan Arab Jamahiriya, Morocco, Nigeria and South Africa -- accounted for over 80% of total outflows. The largest African TNCs are also from a small number of countries. In 2004, nine of the top 10 non-financial African TNCs ranked by foreign assets (table 1) were South African, although Orascom Construction (Egypt) also made it onto the list.

ANNEX

Tables and figures

Figure 1. Africa: FDI inflows and their share in gross fixed capital formation, 1995-2005


Source: UNCTAD, World Investment Report 2006

Figure 2. Africa: FDI inflows, top 10 economies, a 2004-2005 (Billions of dollars)


Source: UNCTAD, World Investment Report 2006

Note: a - Ranked on the basis of the magnitude of the 2005 FDI flows

Table 1. The 10 largest non-financial TNCs from Africa, ranked by foreign assets, 2004 (Millions of dollars)


Source: UNCTAD, World Investment Report 2006