Foreign Direct Investment in Africa - Literature review Example

FDI in Africa Literature Review Introduction: Foreign direct investment (FDI) is one of the fields that are harshly affected by economic globalization. Studies show that FDI in developed countries is increasing on a rapid rate as a result of globalization. For instance, total inflow of FDI was $349 billion in 1996, and total outflow was $347 billion. On the other hand, the number of inflows and outflows have been changed dramatically as the result of the process of globalization of economy. In 1996, for instance, inward FDI stock was $3.2 trillion and outward stock $2.8 trillion. (United Nations Conference on Trade and Development (UNCTAD) World Investment Report 1997) The aim of this research is to critically evaluate the impact of FDI in Africa assessing the relationship between FDI and economic growth and the objective is to review literature concerning this topic. FDI is highly welcomed and actively pursued by almost all African countries as it highly contributes towards economic development and helps bring Africa into a recognizable position to be recognized in the world economy “United Nations Conference on Trade and Development. (1999)”. Studies show that FDI in developed countries is increasing on a rapid rate as a result of globalization. For instance, total inflow of FDI was $349 billion in 1996, and total outflow was $347 billion. On the other hand, the numbers of inflows and outflows have been changed dramatically as the result of the process of globalization of economy. In 1996, for instance, inward FDI stock was $3.2 trillion and outward stock $2.8 trillion (Diaz-Bonilla and Robinson, 2001). The rationale for choosing this topic is to get a broader understanding of FDI implications and impact in Africa with the objective of critically assessing FDI in Africa. FDI has contributed hugely in the development of the developed world most recently in China and Japan. The rationale is to highlight how the African continent can emulate this and eventually benefit significantly from foreign direct investment. The scope of the research will include books, articles, e-resources and internet sources. Similarly, developing countries have witnessed an increase in direct foreign investment as a result of globalization. For example, inflows into developing countries in 1996 rose by 34%, reaching $129 billion. At the same time, inflows into developed countries increased only slightly, rising to $208 billion. In addition, outflows from developing countries have also increased recently. This is shown by the fact that in 1996, developing countries accounted for 15% of all FDI outflows. To visualize the difference between developed and developing countries concerning foreign direct investment, it is important to know that, in 1996, for example, outflows from developing countries rose to $51 billion and from developed countries to $295 billion (Morans, 2006). Realizing the potential of FDI in the development of Africa, the African leaders formed an organization called NEPAD which is the New Partnership for Africa’s Development used as a strategic framework for pan-African socio-economic development in which one of its main aims is to attract FDI to the continent (http://www.nepad.org/about). The definition of FDI has been altered over time and has a lot of characteristic depending on the country the actual investment it is taking place. The business dictionary defined foreign direct investment as “Private capital investment by firms of one country into those of another.” (http://www.businessdictionary.com/definition /foreign-investment.html) “Foreign direct investment, in its classic definition, is defined as a company from one country making a physical investment into building a factory in another country” (Going Global, 2004). The United Nations Conference on Trade and Development (2002) defined foreign direct investment as “an investment made to acquire lasting interest in enterprises operating outside of the economy of the investor.” Furthermore, Moosa (2002) defines FDI “as the process whereby residents of one country (the source country) acquire ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country (the host country). Literature Review The literature that is reviewed here about the flow of FDI to African countries can be divided into two groups: one group assesses the volume of FDI that is introduced to African countries; the second group analyzes the role of FDI in promoting economic growth in some African countries, such as South Africa and Egypt. In this context, most literature points out that the overall volume of FDI to African countries remains low, compared with other parts of the world. This, of course, should raise our concern, since globalization should mainly direct its benefits to the poorest countries of the world; while the reality is the complete opposite of that. Analytical studies show that Africa attracted less than 5% of total FDI flows to developing countries, between 1991 and 1996. Western European investors still dominate FDI in Africa, and the greatest share goes for firms from France and the United Kingdom, accounting for more than 80% of the Western European FDI stock. In addition, it has to be mentioned that the US accounts for approximately 20% of inflows from developed countries to Africa. (World Bank, Global Development Finance 1997 and UNCTAD, African Investment - New Signs of Vitality 1997) Moving to the first group of literature, (Hill, 2006) Highlighted that there are two types of Foreign Direct Investment: Green-field investment which involves the introduction of a new operation in a foreign country which is more prominent in Africa due to cheap labour and raw materials and the other is acquiring or merging with an existing firm in a foreign country which is mostly prominent in developed countries like the united kingdom and united states and also getting increasingly popular in Africa. Stonehouse et al., (2004) also mentioned that foreign direct investment production can be divided into three types: market oriented, supply oriented and cost oriented. Due to the developing nature of the African continent, cost oriented production is the type that is widely used due to the cheap labour and raw materials in Africa. African countries are now especially in the last decade trying to create a more business friendly environment for foreign direct investment in terms of law reforms and political stability pursuing democratic leadership methods. There has not been much evidence linking foreign direct investment and economic growth of Africa and it is still questionable. There are several features that African countries need to have to obtain to reap the prospective benefits of Foreign direct investment. A lot of African countries are not reaping the full benefits of FDI due to the lack of favourable laws, property rights, democratic political system that is free from corruption, bribery and high level of technology (Fortanie, 2007). Technology transfer is one of the big impacts of FDI in Africa, technology diffusion has benefited Africa in many ways in the technological advancement of Africa. Africa’s economic crisis alongside the poverty level, high level of unemployment and high international debt, endorsing and facilitating technology transfer through foreign direct investment will be key in bridging the gap of technology and resources between developed countries and Africa. Communications of the IBIMA (2008) in their literature reviewing Nigeria’s economic growth using FDI for technology transfer concluded that FDI can enable economic growth by technological spillovers to local firms, inspiring innovation and technological modernization thus tolerating technological adoption and developing human capital. Furthermore, Ikiara (2003) explained that technology transfer can come about two ways directly through joint venture with the multinational corporations increasing the efficiency and productivity of local firms or indirectly though technological spillovers benefiting unaffiliated local firms. In contrast the low level of education has made it difficult for Africa to secure the full benefit of technology brought by foreign direct investment, the knowledge developed in developed countries will be more useful to Africa and will have a huge impact if the level of education in Africa was high and up to standard. To be able to utilize this FDI benefit, Africa needs to concentrate more on education as it is the grass root.(Samuel Adams, 2009) Hurmes and Lensink (2002) in their literature emphasized the fact that for FDI to make a significant contribution and impact on economic growth, there has to be a strong financial system in place. The article investigates the role of developing a strong financial service inorder for FDI to positively impact economic growth, the results differ from the widely accepted view of encouraging more FDI inorder to impact economic growth, it shows that this can be true only if African countries improve their domestic financial service. As an impact a lot of African countries are now trying to develop strong financial services in order to procure the full benefit of FDI. In contrast S. Ibi Ajayi cited that Foreign direct investment has a massive influence in economic growth as it is the most stable form of capital flow. Benefits of FDI include serving as a source of capital, creating employment for locals, creating new markets for Africans hence generating more profit and bringing in foreign income into African countries. Foreign direct investment facilitates bringing African countries into the global economy encouraging trade between countries. Foreign direct investment is the “key driver of economic growth and development. FDI not only boosts capital formation but also enhances the quality of capital stock” Moving to the second group of literature in regard to the examples of African countries, which receive FDI flows, studies show that FDI inflows concentrate in three main Middle Eastern countries: Egypt, Morocco and Tunisia (Hanna, 2004). These three countries receive 80% of the regions net foreign direct investment. Many of the other countries in the region had net inflows of less than $100 million (Hanna, 2004). There is no doubt that globalization, nowadays, is the dominant issue everywhere in the world. In its basic sense, globalization can be defined as a process of growing interaction between all people of the globe. That is, globalization is linking people together economically, socially, and culturally by various means, such as trade, investments and governance. Yet, it is still the globalization of economy, which bears much of the controversy about the whole issue of globalization (Hanna, 2004). Actually, the Egyptian government tried to create a better economic environment by issuing new economic laws and privatizing many state-owned enterprises. The process of privatization means the transformation from state-owned projects and companies into privately owned ones. In other words, individuals, not the government, own the big projects and companies in Egypt (Hanna, 2004). Although the pace of privatization has been slower than expected, the improvement in the Egyptian economy can still be felt. The process of privatization in Egypt included companies in a variety of sectors, including agricultural, pharmaceuticals, industrial, milling, cement, chemicals, real estates, engineering, retail, textiles, housing, tourism and telecommunications (Hanna, 2004). The structural and financial changes introduced in the country since 1991 have set it on a path towards reform. The aim of the changes has been to forge Egypt into a market-based, liberal economy driven by the private sector, such that it can fulfill its rightful role in the global economy and rival the most developed countries in the standard of living it provides for its people (Hanna, 2004). Another example of an African country that would benefit greatly from FDI is South Africa. Allen (2008) argues that FDI would improve and revive the economies of developing countries, such as that of South Africa. Studies show that FDI in developed countries is increasing on a rapid rate as a result of globalization. For instance, total inflow of FDI was $349 billion in 1996, and total outflow was $347 billion. Similarly, developing countries have witnessed an increase in direct foreign investment as a result of globalization. For example, inflows into developing countries in 1996 rose by 34%, reaching $129 billion. At the same time, inflows into developed countries increased only slightly, rising to $208 billion. Turning to Africa, a region that has most of the poorest countries of the world, it can be said that the overall volume of FDI to African countries remains low, compared with other parts of the world. This, of course, should rise our concern, since globalization should mainly direct its benefits to the poorest countries of the world; while the reality is the complete opposite of that (Allen, 2008). According to Maharaj (1999), FDI will play an important role in developing the economy of South Africa for the coming years. In an attempt to predict the economic status of South Africa in 2030, one can argue that investing in South Africa would be a good opportunity for foreign countries due to the cheap labor and availability of resources at cheap prices. Actually, analytical studies show that Africa attracted less than 5% of total FDI flows to developing countries, between 1991 and 1996 (Maharaj, 1999). Western European investors still dominate FDI in Africa, and the greatest share goes for firms from France and the United Kingdom, accounting for more than 80% of the Western European FDI stock. In addition, it has to be mentioned that the US accounts for approximately 20% of inflows from developed countries to Africa (Maharaj, 1999). Conclusion: “Foreign Direct Investment (FDI) is the single most important instrument for the globalization of the international economy” (Herman, Chishol&leavell, 2004, P15). The impact it has had in Africa is immense and thus can be credited to a lot of development and technological ideas present in Africa now. In Africa, a region that has most of the poorest countries of the world, it can be said that the overall volume of FDI to African countries remains low, compared with other parts of the world. This, of course, should rise our concern, since globalization should mainly direct its benefits to the poorest countries of the world; while the reality is the complete opposite of that. Analytical studies show that Africa attracted less than 5% of total FDI flows to developing countries, between 1991 and 1996. Western European investors still dominate FDI in Africa, and the greatest share goes for firms from France and the United Kingdom, accounting for more than 80% of the Western European FDI stock. In addition, it has to be mentioned that the US accounts for approximately 20% of inflows from developed countries to Africa (Lindsey, 2004). Finally, from the above review of available literature about FDI in Africa, it is recognized that the poor and developing countries are not compensated equally for their role in increasing the accumulated capital of the rich countries. To illustrate, private capital flows to poor and developing countries, through the globalization process, are highly uneven. Figures show that the low and middle-income countries as a whole, for instance, received US$95 billion of foreign direct investment (FDI) in 1995. Those countries, which suffered the most in favor of the rich, are receiving the least amount of compensation by the rich countries. Again, this is another evidence for the assumption about the relationship between the core and periphery countries (Kornegay, 2000). References Allen, T. (2008). “More than 40 BN Euro of Goods Traded with South Africa in 2007.” Euro Stat News Release. 27 Mar. 2012. < http://www.eds-destatis.de/en/press/download/08_07/107-2008-07-24.pdf>. Diaz-Bonilla E. and Robinson, S. (2008). “Shaping Globalization for Poverty Alleviation and Food Security." 26 Mar. 2012. . Hanna, D. (2009). “Egypt: FX policy key to Attracting Foreign Investment.” Middle East Business Opportunities Journal. 28 Mar. 2012. . Kornegay, E. (2010). "South Africas National Policy Framework for Womens Empowerment and Gender Equality." The Office on the Status of Women. 8 Mar. 2012. < http://www.info.gov.za/otherdocs/2000/gender.pdf>. Lindsey, U. (2009). "Unemployment in Egypt Rising Fast." The Daily Star. 27 Mar. 2012. . Maharaj, Z. (2009). "Gender Inequality and the Economy: Empowering Women in the new South Africa." 28 Mar. 2012. . Morna, C. (2007). "South Africa Sets Pace for Regional Gender Equality." 05 Jun. 2009. . Morans, T. (2006). Harnessing Foreign Direct Investment for Development: Policies for Developed and Developing Countries. Center for Global Development. Washington D.C. Printing House. USA. First Edition. Read More