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Political stability and larger countries in Africa attract FDI – Paper

Foreign Direct Investment (FDI) is a very important stimulant for economic development and growth anywhere.

FDI has been a factor in development in many African countries.

A paper has sought to show why larger African countries attract more FDI and how political stability contributes to rise in FDI in Africa.

The World Bank has estimated that $31 billion in FDI flows are expected in Africa this year, 2012, and this, the Bank says will happen despite the difficult global economic conditions.

Mr.  Abdoul’ Ganiou Mijiyawa of the African Center for Economic Transformation , based in Accra, Ghana, who wrote the paper argues that there is “absolute progress” but “relative decline” of  Africa as far as FDI attractiveness is concerned.

“In 1970, the total  amount of Foreign Direct Investments inflows in Africa was $1.26 billion, and it rose to $55.04 billion in 2010.

“However, during the same period, “Africa’s share in the global FDI  inflows which was 9.5% in 1970 dropped to 4.4% in 2010. Likewise, the  share of Africa in developing countries’ FDI inflows which was 32.8% in  1970 dropped to 9.6% in 2010”, says the paper, titled, ‘What Drives Foreign Direct Investments in Africa’.

According to Mijiyawa, “African  countries that offer higher returns to investment attract more FDI. In  that sense, Africa is not different from the rest of the world. Indeed,  regardless of the world’s region, investments are supposed to rise where  they are profitable”, he states.

The paper also explains that variables such as lagged FDI inflows, trade  openness, political stability, market size, and the return on investment do positively and significantly affect FDI inflows in Africa.

“Political stability has a similar effect as trade openness on FDI inflows  in Africa. This suggests that in their efforts to attract FDI, African  governments should give the same weight to political stability as they  give to trade openness” he argues.

The author however advises African governments to treat existing investors right, especially with the arrival of the Chinese.

“African countries should avoid mistreating traditional western foreign investors because of the arrival of new potential investors from China or other southern emerging countries”, he wrote.

In the author’s view regional integration can also  boost FDI flows. He therefore highlights the need to strengthen regional integration in Africa because it can boost some of the factors that contribute to the development of FDI on the continent.

According to the paper, there is also the need to improve the return on investment in Africa.

By doing so, African countries can attract more FDI, even though it is an established fact that “the return to investment is higher in Africa” than in many other regions of the world,” he wrote.

He also argues further that FDI is an important aspect of Africa’s strategy for transformation because it can stimulate domestic investment, facilitate technology transfer, create employment, promote exports and generate economic growth.

By Emmanuel K. Dogbevi

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