Africa's Hunt for Investments: The Massive Increase in Global Foreign Direct Investment (FDI) Is Credited with Creating Unsurpassed Prosperity in Some Areas of the World and in Making Globalisation Possible in the First Place. Where Does Africa Stand on the World FDI Map?

By Versi, Anver | African Business, December 2003 | Go to article overview

Africa's Hunt for Investments: The Massive Increase in Global Foreign Direct Investment (FDI) Is Credited with Creating Unsurpassed Prosperity in Some Areas of the World and in Making Globalisation Possible in the First Place. Where Does Africa Stand on the World FDI Map?


Versi, Anver, African Business


Hardly a week goes by without news of African delegations, often led by heads of state, visiting foreign countries to persuade investors to put their money and expertise in their country. For the past decade, the 'foreign investment' fever has been raging all over Africa with no self-respecting country, no matter how investment-unfriendly it might be, wishing to be left out of the bandwagon.

What is behind this flurry of investment related activity? Why is foreign investment so important? Indeed is it important at all? What are the benefits of foreign investment? What are the drawbacks? What is investment and how many types of investment are there?

The UN's World Investment Report, 2003, provides answers to these and other questions and paints a fascinating picture of the global investment landscape and Africa's place within it. To talk about investments into Africa in isolation can present a distorted image as the flow of investments is part of the global pattern of capital movement and transnational production, distribution and consumption that has been termed 'globalisation'.

To those still not quite clear what globalisation is all about, the UN report gives some unmistakable pointers. The world's foreign direct investment (FDI) stock is worth $7.1 trillion. This is the basis of international production by some 64,000 transnational corporations (TNCs) controlling 870,000 foreign affiliates and employing over 53m people world-wide. Sales generated by foreign affiliates are worth around $18 trillion compared to total world exports of only $8 trillion. What is more, nearly 33% of world exports of goods and non-factor services take place within the framework of foreign affiliates.

The FDI stock of $7.1 trillion is more than ten times the stock in 1980. It explains the relentless growth of global trade and why so many countries are enjoying unprecedented levels of prosperity. The rule of thumb seems to be: The more FDI, the greater the prosperity; little or no FDI equates to lack of growth and often, poverty. No wonder African countries are pulling out all the stops in their efforts to attract FDI.

THE MAGIC OF FDI

What is it about FDI that is propelling everybody to search for it so frantically? The answer lies in simple economics. All national (just as private, individual) growth can only come about through savings. If you spend all the money you earn, you cannot increase your wealth, for example, buy a fridge or a computer. In order to do so, you must save something each month until you have enough. Or you can borrow from someone else who can lend you what he or she has saved. This is oversimplifying the situation but in essence, growth needs savings in the form of capital which, when combined with labour and other resources results in more goods or services.

All modern countries have some quantity of domestic savings which can be used to create more wealth although in some cases, for example, when inflation is very high, the savings can be eaten up in merely trying to maintain the status quo and savings can go into minus.

So, in theory at least, national growth is limited to the amount of domestic savings that can be used to create new wealth. If, in this case, foreign investment enters the picture, the scenario changes. The foreign investment adds to the pool of capital and even more new wealth can be created.

What is more, foreign direct investment (FDI) is investment made by transnational corporations on a long term basis. It involves setting up production infrastructure such as factories, transferring technologies and skills, creating connections to international markets, setting up supply chains which are often local and creating jobs. At its best, FDI accelerates growth beyond a country's natural capacity.

While developed countries look to FDI to maintain and increase growth, the developing world sees FDI as a means to catapult themselves out of poverty. …

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