Global foreign direct investment (FDI) flows continued their slides in 2018, falling by 13 percent to 1.3 trillion USD. The decline for three consecutive years in FDI was mainly due to large scale repatriations of accumulated foreign earnings by United States multinational enterprises in the first quarters of 2018, following tax reforms introduced in that country at the end of 2017.
On the other hand, the recently launched United Nations Conference on Trade and Development’s (UNCTAD) 2019 World Investment Report indicated that FDI flows to developing countries remained stable rising by two percent. As a result of increase and the anomalous fall in FDI in developed countries, the share of the developing countries in global FDI increased to a record 54 percent.
According to UNCTAD report, FDI flows to Africa rose by 11 percent to 46 billion USD, after successive declines in 2016/17, despite declines in many of largest recipient countries. The increase was supported by continued resources seeking inflows, some diversified investments and a recovery in South Africa after several years of low level inflows, the report stated.
Reduced FDI flows to some major economies of the continent including Ethiopia, Nigeria and Egypt, were offset by large increases in others, most significantly South Africa. Growing demand for and prices of some commodities as well as sustained non-resource-seeking investments in few countries were largely responsible for the higher FDI flows to the continent.
However, lower than expected global economic growth, rising trade tensions and tepid economic growth in Sub-Saharan Africa limited the extent of this increase. Multinational enterprises from developing economies were increasingly active in Africa, although investors from developed countries remained the major players.
The report forecasts that a number of factors could support additional FDI flows to Africa in 2019. Commodity prices are projected to remain stable, moderately higher prices are forecasted for some minerals that Africa is a major producer of oil and gas. This encourages further investment in number of countries on the continent.
In 2018, FDI flows to Landlocked Developing Countries increased by nine percent. Moreover, FDI flows to East Africa were largely unchanged at 9 billion USD. Inflows to Ethiopia contracted by 17 percent to 3.3 billion USD. Yet the country continued to be the biggest FDI recipient in East Africa with investments in petroleum refining, mineral extraction, real estate, manufacturing and renewable energy.
As to the report, prospects remain positive due to economic liberalization, investment facilitation measures and the presence of investment ready special economic zones. Recently, the Korean Hyundai Motor Company opened a manufacturing plant in the country, the first in East Africa with planned capacity of ten thousand vehicles per year.
The Act created the International Development Finance Corporation, which is authorized to make equity investments and is anticipated to manage an annual budget of 60 billion USD. It is expected to help the United States take a more active role in Africa among other developing regions by mitigating the risk to private United States companies of investing in a large scale projects as well as providing technical assistance and administration special funds.
Moreover, the ratification of the African Continent Free Trade Area Agreement could also have a positive effect on FDI, especially in the manufacturing and services sectors. The elimination of tariffs under the agreement will support market-seeking FDI as foreign investors venture to tap into a market of 1.2 billion people with combined GDP of more than 2.2 trillion USD.
In addition, regional integration could also encourage foreign investment that targets value addition to local commodities, natural resources and increased intra-African investment as major economies on the continent seek a first-mover advantage.
According to experts, Special Economic Zones have major economic impact in attracting FDI, creating direct and indirect employment, export generation and diversification as well as overall economic growth. Public expenditures on industrial parks or special economic zones could be the highest where the governments develop and manage especially if they provide subsides, as it is the case of Ethiopia. However, the investment and operating costs of the zones can be recovered through rent income and service charges.
The dynamic effect of zones is technology, skill development and the spillover effects on the broader economy are especially important to industrial development and upgrading. Many zones have raised concerns about their dependence on low skill, low technology, assembly –type operations and the concentration in one sector. But there are zones that have promoted industrial upgrading and economic diversification.
The Ethiopian Herald June 20/2019
BY TSEGAYE TILAHUN
