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Economic Development in Africa 2005

Rethinking the Role of Foreign Direct Investment

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Africa’s particular combination of geographical, historical and structural features has traditionally attracted Foreign Direct Investment into enclaves of export-oriented primary production with limited linkages to the rest of the economy. This situation has not changed much in recent years and has contributed to undermining a self-sustaining and dynamic investment process. This Report calls for a rethinking of the one-sided emphasis on attracting FDI and its replacement with a more balanced and more strategic approach tailored to African socio-economic conditions and development challenges.

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Rethinking the FDI policy framework for Africa

According to conventional wisdom, the low level of FDI flows to Africa is symptomatic of the region’s failure to integrate into the global economy and a principal reason why its growth performance labours under a narrow export base and low productivity levels. High production costs and distorted investment incentives, which discourage the entry of foreign firms (even where profitable opportunities are available) and bias those that come towards less productive activities, have been attributed to a history of misguided policies and listless reforms. Accordingly, African policy makers are encouraged to redouble efforts to establish a competitive investment climate by integrating more closely into the global economy and becoming more transparent and inclusive in their reform efforts. These reforms promise to attract foreign firms, although heightened competition for FDI also leads to calls for more vigorous, and on some counts better-targeted, promotion measures, as well as the fashioning of laws and policies on intellectual property, tariffs, corporate governance, taxes, labour relations, and technological and sectoral development to match the needs of foreign investors. One recent review of the evolving picture of policy towards FDI recognized that this marks a return to the policy environment of the 1950s (Safarian, 1999). This was a period when much of Africa (and the developing world) was poised to challenge its distorted pattern of insertion into the international economy.

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