Why African Countries Rely on Foreign Direct Investment

Foreign Direct Investment (FDI) refers to investment made to acquire a lasting management interest and acquiring at least 10% of equity share in an enterprise operating in a country other than the investors home country. FDI can take the form of either “Greenfield” investment or merger and acquisitions (M&A), depending on whether the investment involves mainly newly created assets or a mere transfer from local to foreign firms.

FDI contributes to economic growth in a substantial manner as it presents a more stable option to other forms of capital flows. It provides much needed capital for investment, increases competition in the host country industries, and aids local firms to become more productive as it allows them to adopt more efficient technology or to invest in human capital. These benefits have made it the center of attention for policy makers in Africa who have put in place various measures  to ensure that resources are directed to key areas and sectors that if improved can help to eliminate poverty and other developmental problems.

Case studies from Kenya, Tanzania and Uganda show that foreign firms make a substantial contribution to local development. They report a higher percentage of revenue for tax purposes, employ substantially more workers, report higher value added per worker, invest more in infrastructure, are nearly twice as likely to have a formal training program and much more likely to provide health insurance or on-site medical care, export more of their output and are able to purchase imports although they still rely on domestic suppliers for nearly half of their inputs.

Other studies however, point out that the translation of FDI into growth is not automatic. A country’s ability to take advantage of the positive effects of FDI might be limited by local conditions such as the development of the local financial markets, or the educational level of the country.

The fact that the FDI-growth linkage is not automatic implies that the right policies must be designed by various countries to ensure that FDI is directed to areas and sectors where it will have the greatest impact. Second, whether there is a positive FDI-growth linkage depends on the country and sectors of the economy. There is need for specific country and sector studied to meaningfully assess the link between FDI and growth.  The positive impacts of FDI can be achieved but with the right policies. It can therefore be rightly said that whether FDI contributes to development depends on macroeconomic and structural conditions in host countries.

Featured image | Design, development and testing foreign direct investment projects flowing to and from developing regions : UNESCO Science Report, Towards 2030 | wikimedia commons

The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of The Best of Africa.

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