Africa: Africa Direct investment flows

Measured in shares of global FDI, inflows to African countries have been rising steadily over the last decade, from 0.7% in 2000 to 5.3% in 2009. However, Africa’s shares of global FDI dipped slightly in 2010, to 4.5%. This drop in Africa’s share is largely due to a quicker recovery of FDI flows from the financial crisis elsewhere in the world.

In terms of sectors, the services sector, led by the telecommunications industry, became the dominant FDI recipient in 2009 and attracted the largest share of cross-border mergers and acquisitions (M&As) in Africa (UNCTAD, 2010b). The primary sector, in turn, experienced pressure from low commodity prices and lack of credit. Nevertheless, FDI in Africa continues to be concentrated in a few countries and sectors, pointing to a further need for diversification. As Figure 2.2 shows, between 2000 and 2009, about 75% of FDI to Africa flowed to oil-exporting countries. For FDI from OECD member countries, this %age is even higher: 85%.

From 2008 to 2009, net cross-border mergers and acquisitions (M&As) fell much more sharply than overall FDI, by 75% from an all-time high of USD 21 billion in 2008 to USD 5 billion in 2009. However, these cross-border M&As rebounded by 50% in 2010 to USD 8 billion, compared with a global rebound of only 37% (UNCTAD, 2010b). The biggest M&A deal related to Africa was Indian telecom Bharti Airtel's USD 10.7 billion acquisition of the African assets of Kuwait's Zain. This deal is not included in the preceding numbers, however, as it does not involve any financial flows to Africa but only a change of ownership of African assets between foreigners. In contrast, Japan's Nippon Telegraph and Telephone’s USD 3 billion purchase of the South African IT firm Dimension Data Holdings brought significant financial flows to Africa. Major equity market deals included miner African Barrick Gold's nearly USD 900 million London IPO, while the top debt market issuance was nearly USD 2 billion South African sovereign bonds (ThomsonReuters, 2010).

A number of factors influence the possibilities for FDI to Africa in 2011. On the positive side, the global economy continues to recover from the financial crisis, especially the emerging economies that play an increasingly important role in Africa. In combination with rising commodity prices, this economic recovery makes for a favourable scenario for resource-exporting countries that can expect increasing FDI flows. As investors, especially from emerging partners, become more comfortable with the overall African business environment, the global upswing will also likely increase investment in other sectors. 

However, negative factors also influence the 2011 possibilities for FDI to Africa. Specifically, the political developments in North Africa and the Middle East since the beginning of 2011 will likely have a negative effect on FDI and portfolio flows to Africa in the near future through two channels. North Africa has been important as both a destination of FDI inflows from outside of Africa and as a source of intra-African FDI. Owing to the current political uncertainty, foreign investors will likely hold off on the region, and North African investors will be much less active in the rest of Africa. To a lesser extent, a similar assessment holds true for the Middle East, which has been a key source of investment in Africa. A larger negative effect of North Africa on FDI to Africa is conceivable if investors interpret recent events in North Africa as a sign of increasing political instability across the continent.