Investing in Africa – Competition for Foreign Direct Investment (FDI)

By Emmanuel Allottey

COVID-19 has sparked inForeign direct investment (FDI) is a key strategic lever for developing countries to meet their national development goals. Africa is home to the highest number of developing and underdeveloped countries in the world, creating stiff competition in attracting investors. COVID-19 has decimated the economic conditions in nations and increased pressure on governments to introduce mitigants to prevent economic collapse. Securing FDI will be critical to the achievement of economic growth in African nations.

According to reports from the U.N. Conference for Trade and Development (UNCTAD), Global foreign direct investment (FDI) flows fell 49% in the first half of 2020 compared to 2019, due to the economic fallout from COVID-19. FDI flows to developing economies decreased 16%, with sharper drop of 28% for developing countries in Africa. African nations are actively seeking to attract the foreign direct investment which is vital to strengthening the ability of their economies to compete globally.

Competition for FDI is global with other developing countries in the world seeking to attract investors. Specific industries carry intense competition for particular investment projects. The competition for long term FDI has both positive and negative effects. Escalating global competition among governments to attract FDI has its advantages. African nations looking to attract FDI are required to meet the fundamentals of good governance. Governments must strengthen their economic fundamentals by pursuing policies that enhance the supply of modern infrastructure, appropriately trained workers, and political stability. The implementing long-term economic growth initiatives will translate to domestic economic development, almost independent of direct FDI flows.

Governments seeking to attract FDI compete by offering investment subsidies, tax rebates and other incentives to secure investment. This type of competition may lead to excessive concessions that may jeopardise workers rights and labour standards and other governance oversight ideals. Other challenges with FDI include, the entry of foreign companies may lead to the displacement of local businesses and the repatriation of profits outside the country, if the firms do not reinvest profits back into the host country. This will lead to large capital outflows from the host country.

FDI remains the most important source of external finance for developing countries in Africa. Competition for investment will be exacerbated by the prolonged duration of the COVID-19 pandemic. The effectiveness of policy interventions to mitigate the economic effects of the pandemic will improve the ability to attract foreign investment in the future.

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