Africa’s share of global FDI increases

7 May 2013

Africa’s share of global foreign direct investment (FDI) has grown over the past five years, highlighting the growing interest in the continent from foreign investors, according to Ernst & Young’s third Africa Attractiveness Survey.

The report, released on Monday, combines an analysis of international investment into Africa over the past five years with a 2013 survey of over 500 global business leaders about their views on the potential of the African market.

Those business leaders with an established presence on the continent ranked Africa as the second most attractive regional investment destination in the world after Asia, with 86% of them saying they believed Africa’s attractiveness as a place to do business would continue to improve.

Positive growth outlook

The continent’s global share of FDI grew from 3.2% in 2007 to 5.6% in 2012, the report found, despite a fall in FDI project numbers from 867 in 2011 to 764 in 2012, in line with the global trend.

The report noted that, despite the impact of the ongoing global economic situation, the size of the African economy had more than tripled since 2000. It added that the continent’s growth outlook appeared positive, with African gross domestic product (GDP) as a whole expected to grow by 4% in 2013 and 4.6% in 2014, and a number of African economies predicted to remain among the fastest growing in the world for the foreseeable future.

Mark Otty, Ernst & Young’s managing partner for Europe, the Middle East, India and Africa, said the platform for this growth had been provided by “a process of democratization that has taken root across much of the continent, ongoing improvements to the business environment, exponential growth in trade and investment, and substantial improvements in the quality of human life”.

Ernst & Young said the 2013 Africa Attractiveness Survey showed some progress in terms of investor perceptions since the first survey in 2011, with the majority of respondents bering positive about the progress made and the outlook for Africa.

Africa had also gained ground relative to other global regions: while the continent was only ranked ahead of two other regions in the 2011 survey, this year it ranked ahead of five other regions for investment attractiveness, beating the former Soviet states, Eastern Europe, Western Europe, the Middle East and Central America.

Perception versus reality

“However, there still remains a stark perception gap between those respondents who are already doing business in Africa versus those that have not yet invested in the continent,” Ernst & Young said.

“Those with an established business in Africa were overwhelmingly positive. They understand the real rather than perceived operational risks, have experienced the progress made and see the opportunities for future growth.”

Those business leaders with an established presence on the continent ranked Africa as the second most attractive regional investment destination in the world after Asia, with 86% of them saying they believed Africa’s attractiveness as a place to do business would continue to improve.

In contrast, those business leaders with no business presence in Africa ranked the continent as the least attractive investment destination in the world, with only 47% of them saying they believed Africa’s attractiveness as a place to do business would improve over the next three years.

Tackling constraints to growth

The two fundamental challenges for those already invested or those looking to invest in Africa, the survey found, were transport/logistics and electricity infrastructure on the one hand, and the prevalence of bribery and corruption on the other.

“However, moves are being made on both accounts to help allay fears of investors,” Ernst & Young said.

At the same time, the fact that strong growth had been occurring despite these constraints indicated the continent’s potential not only to sustain growth, but to accelerate growth as these challenges were overcome.

“Our analysis indicates that in 2012 there were over 800 active infrastructure projects across different sectors in Africa, with a combined value in excess of US$700-billion,” Ernst & Young said, adding that the majority of these projects related to power (37%) and transport (41%).

Moving away from extractive industries

The survey also found that, despite perceptions to the contrary, less than one-third of Africa’s growth was coming from natural resources.

The continent’s trend towards growing diversification was continuing, with an increasing emphasis on services, manufacturing and infrastructure-related activities – a positive sign given the volatile nature of commodity prices and the growth risks associated with over-dependency on a few key sectors.

In 2007, according to the survey, extractive industries represented 8% of FDI projects and 26% of capital invested in Africa; in 2012, it was a mere 2% of projects and 12% of capital. In comparison, services accounted for 70% of Africa’s FDI projects in 2012 (up from 45% in 2007), while manufacturing activities accounted for 43% of capital invested in 2012 (up from 22% in 2007).

Mining and metals were still perceived by survey respondents as the sector with the highest growth potential in Africa, but the number of respondents who believed this (26%) was down from 38% in 2012 and 44% in 2011.

In contrast, interest in African infrastructure projects is clearly increasing, with 21% of respondents identifying this as a growth sector versus 14% in 2012 and only 4% in 2011.

Other sectors where there has been a noticeable shift include ICT (14%, up from 8% in 2012), financial services (13%, up from 6% in 2012), and education (which came from virtually nowhere to register 10% this year).

According to Otty, these changing perceptions of relative sector attractiveness in Africa “reflect the changing fundamentals of many Africa economies – the diversification of both sources of growth (for example, the increasing contribution of services and the growing consumer class), and of the actual FDI flowing into these economies”.

Ajen Sita, Ernst & Young’s managing partner for Africa, said Ernst & Young was confident that the continent was on a sustainable upward trajectory.

“A critical mass of African economies will continue on this journey,” Sita said, adding that there was “a strong probability that a number of these economies will follow the same development paths that some of the Asian and other rapid-growth markets have over the past 30 years.

“By the 2040s, we have no doubt that the likes of Nigeria, Ghana, Angola, Egypt, Kenya, Ethiopia and South Africa will be considered among the growth powerhouses of the global economy.”

SAinfo reporter