Managerial Finance

Accelerating foreign direct investment flow to Africa: from policy statements to

successful strategies
Jacob W. Musila Simon P. Sigu

Downloaded by GLYNDWR UNIVERSITY At 21:35 12 November 2015 (PT)

Article information:
To cite this document:
Jacob W. Musila Simon P. Sigu, (2006),"Accelerating foreign direct investment flow to Africa: from policy
statements to successful strategies", Managerial Finance, Vol. 32 Iss 7 pp. 577 - 593
Permanent link to this document:
http://dx.doi.org/10.1108/03074350610671575
Downloaded on: 12 November 2015, At: 21:35 (PT)
References: this document contains references to 32 other documents.
To copy this document: permissions@emeraldinsight.com
The fulltext of this document has been downloaded 6416 times since 2006*

Users who downloaded this article also downloaded:

Abdullah Alam, Syed Zulfiqar Ali Shah, (2013),"Determinants of foreign direct investment in OECD
member countries", Journal of Economic Studies, Vol. 40 Iss 4 pp. 515-527 http://dx.doi.org/10.1108/
JES-10-2011-0132
Tim Rogmans, Haico Ebbers, (2013),"The determinants of foreign direct investment in the Middle
East North Africa region", International Journal of Emerging Markets, Vol. 8 Iss 3 pp. 240-257 http://
dx.doi.org/10.1108/17468801311330310
Recai Coskun, (2001),"Determinants of direct foreign investment in Turkey", European Business Review,
Vol. 13 Iss 4 pp. 221-227 http://dx.doi.org/10.1108/EUM0000000005536

Access to this document was granted through an Emerald subscription provided by emerald-srm:499871 []

For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald for
Authors service information about how to choose which publication to write for and submission guidelines
are available for all. Please visit www.emeraldinsight.com/authors for more information.

About Emerald www.emeraldinsight.com

Emerald is a global publisher linking research and practice to the benefit of society. The company
manages a portfolio of more than 290 journals and over 2,350 books and book series volumes, as well as
providing an extensive range of online products and additional customer resources and services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee
on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive
preservation.
*Related content and download information correct at time of download.

The current issue and full text archive of this journal is available at
www.emeraldinsight.com/0307-4358.htm

Accelerating foreign direct

investment flow to Africa:
from policy statements to
successful strategies

Accelerating FDI
flow to Africa

577

Jacob W. Musila and Simon P. Sigue

Downloaded by GLYNDWR UNIVERSITY At 21:35 12 November 2015 (PT)

School of Business, Athabasca University, 1 University Drive Athabasca,

AB, Canada
Abstract
Purpose The growing investment gap and the declining foreign aid in recent years have compelled
many African countries to turn to foreign direct investment (FDI) as a means to avoid development
financing constraints. This article seeks to examine the performance of FDI flow to various regions
and countries in Africa and the implication(s) on FDI of the recently launched new partnership for
Africas Development (NEPAD) programs.
Design/methodology/approach Explores strategies for accelerating the flow of FDI to Africa,
especially the implications of NEPAD programs.
Findings Africas FDI inflows are highly uneven both between regions and between countries
depending on economic and political environment. In addition, if implemented successfully, NEPAD
programs would help spur the flow of FDI to Africa.
Originality/value Besides the socio-economic policy recommendations, suggests marketing
strategies to help increase the flow of FDI to Africa.
Keywords Direct investment, Foreign relations, Marketing strategy, Africa
Paper type Research paper

Introduction
One of the goals of the new partnership for Africas development (NEPAD) is to achieve
and sustain an average gross domestic product (GDP) growth rate of at least 7 per cent
per annum (p.a.) in order to reduce the share of Africans living in poverty by half and,
as well, attain other goals by the year 2015. To reach this goal, however, it would need
huge investment injections in various sectors of Africas economies such as agriculture,
industry, education, and health. For instance, it would require incremental investment
rates of 29 per cent and 25 per cent to be added to the current levels of investment in
agriculture and industry, respectively, for sub-Saharan African economies to catch up
with Malaysia, Indonesia, and Thailand.
Unfortunately, however, investment rates (share of investment in GDP) in Africa
have on average, declined from 28.5 per cent during 1974-1980 to 20.2 per cent during
1991-1996. Domestic savings have also declined over the same period, especially in
poorer countries. The saving rate (i.e. share of domestic savings in GDP) in subSaharan Africa, for example, declined from 10.3 per cent during 1974-1980 to only 5.7
per cent during 1991-1996. Consequently, over the years, the gap between savings and
investment (known as the investment gap) has increased in most countries,
underscoring the serious development financing challenge.
Given that official development assistance, has a downward trend; some of these
African countries will very likely face severe financing challenges in the near future.
The lack of financing will in turn constrain higher investment in the short and medium

Managerial Finance
Vol. 32 No. 7, 2006
pp. 577-593
# Emerald Group Publishing Limited
0307-4358
DOI 10.1108/03074350610671575

MF
32,7

Downloaded by GLYNDWR UNIVERSITY At 21:35 12 November 2015 (PT)

578

terms. Thus, the needed investment rates to attain the target economic growth rate (of
at least 7 per cent p.a.) will initially require measures to either attract foreign savings
both public and private or reduce the unnecessary expenditures that drain away the
national income. We are of the view however that accessing foreign capital at this point
is the way forward since national incomes, domestic savings, and domestic investment
in most African countries are very low.
In the past, Africa attracted foreign direct investment (FDI) as a result of her
abundant natural resources and size of domestic markets. Obviously, judging from
Africas declining share in global FDI, this alone is not working any more. Although
FDI flows to Africa more than doubled in 1999 from $5 billion in 1995, in line with
faster economic growth, this represents only 1.1 per cent of the global FDI (down from
1.5 per cent in 1995) and 5.3 per cent of the FDI flows to all developing countries
(slightly up from 4.5 per cent in 1995). Interestingly, but not surprising, about 63 per
cent of the FDI flow to Africa during 1995-1999 was concentrated in only five
countries Angola, Egypt, Morocco, Nigeria, and South Africa.
This paper explores strategies for accelerating the flow of FDI to Africa. We hope
that by exploring the experience of some of the successful African and strategies
applied in the Asian countries, we would be able to identify areas that need
improvement in order to increase the volume of foreign investment in Africa. Since
NEPAD advocates for market-oriented, export-led growth strategy and private
investment, it would be of interest to examine how it would affect FDI flow to Africa.
To this end, the chapter will examine the implications of NEPAD programs on the FDI
flow to Africa.
The remainder of the paper is organized at follows. The next section discusses the
role of FDI in development. Section 3 presents some stylized facts on the flow of FDI to
Africa and reviews the literature on the determinants of the flow of FDI with a view to
explaining Africas apparent weak performance. Section 4 examines the implications of
NEPAD on the flow of FDI to Africa. Section 5 proposes strategies that could be
employed to lure more foreign investment to Africa. Finally, the concluding
observations are presented in section 6.
The role of FDI in development
The role of FDI (i.e. the purchase of existing firms or the development of new firms in
an economy by foreign investors) in the development of low-income countries is
controversial. On one hand, FDI is viewed as a major stimulus to economic growth (see,
for example, Walden and Rosenfeld, 1990; Chowdhury and Islam, 1993; Rodan, 1997;
Borensztein et al. 1998; Gries, 2002). These authors argue that foreign investors can
provide the capital, technical and marketing know-how needed for growth. On the
other hand, however, FDI is seen not to aid but to undermine the very process of
development (Razin et al., 1999). They argue that FDI can have adverse effects on
employment, income distribution, and national sovereignty and autonomy. FDI can
also have adverse balance-of-payments if inputs need to be imported. Foreign reserves
can also diminish when profits are repatriated. In Africa, the fear of such adverse
effects led to nationalization of foreign-owned corporations in some countries in the
early years of independence and the adoption of import substitution policies. However,
this development strategy has been reversed, since the 1980s and many countries have
now embraced privatization and liberalization as part of structural-adjustment policies
(SAPs).

Downloaded by GLYNDWR UNIVERSITY At 21:35 12 November 2015 (PT)

To help understand the circumstances under which FDI may or may not assist in
the development process, three types of FDI, have been identified. They include
extractive, market seeking, and export-oriented. In the past, Africa attracted FDI as a
result of her abundant natural resources and size of domestic markets. However, it has
been realized that market-seeking FDI can lead to conflict between private benefits and
social benefits, especially if such FDI is protected from competition. It has also been
acknowledged that extractive FDI is likely to be accompanied by high social costs in
the form of exploitation of economic rent, negative externalities in the form of
pollution, and the exacerbation of inequality through dualistic economic structures.
Accordingly, most governments in developing countries, and Africa in particular, have
nowadays been more enthusiastic about attracting export-oriented FDI. It is believed
that export-oriented FDIs are unlikely to cause conflict between the private benefits to
the investor and the social benefits to the country. The preference for export-oriented
FDI has led to intensive competition among developing countries seeking to attract
such investment and to a convergence among policy and promotional environments of
these countries in pursuit of FDI (Wint and Williams, 2002).
Low-income countries are particularly keen to attract export-oriented FDI since
small domestic markets preclude the possibility of attracting market-seeking FDI.
However, despite the enthusiasm for export-oriented FDI, low-income developing
countries are not attracting significant volumes of FDI. Moreover, the flows of FDI to
developing countries are concentrated in a small group of countries with large markets,
high-income levels, and rapid economic growth (UNCTAD, 2002). The problem of
faltering FDI inflows is especially acute in Africa, in contrast to other regions that have
witnessed increase in inflows of FDI. The consequences of this have been catastrophic
on social progress of the region.
For Africa to achieve and sustain an average GDP growth rate of above 7 per cent
p.a., a rate that has been determined to be sufficient to help reduce the share of people
in poverty by half by 2015, it would need huge investment injections in various sectors
such as agriculture, industry, education, and health. It would require, for instance,
incremental investment rates of 29 per cent and 25 per cent p.a. to be added to the
current levels of investment in agriculture and industry, respectively, for sub-Saharan
African economies to catch up with Malaysia, Indonesia, and Thailand (Economic
Commission for Africa, 2001).
However, the possibility of achieving these high rates of investment in Africa looks
very gloomy. In fact, investment rates have on average declined from 28.5 per cent p.a.
during 1974-1980 to 20.2 per cent p.a. during 1991-1996. Domestic savings have also
performed poorly over the same period, especially in poorer countries. For example, the
saving rate in sub-Saharan Africa declined from 10.3 per cent p.a. during 1974-1980 to
only 5.7 per cent p.a. during 1991-1996. Consequently, over the years, the gap between
savings and investment (known as the investment gap) has increased in most
countries, underscoring the serious development financing challenge.
With foreign aid, grants, and borrowing drying up, some of these African countries
will very likely face severe financing challenges in future. The lack of financing will, in
turn, constrain higher investment rates in the short and medium terms. Thus, the
needed investment rates to attain the target economic growth rate (of more than 7 per
cent p.a.) will initially require measures to attract foreign savings both public and
private to complement the shortage of external resources from the more traditional
sources. Of course, another way to solve this problem would be to reduce the
unnecessary expenditures. However, given that national incomes, domestic savings,

Accelerating FDI
flow to Africa

579

MF
32,7

Downloaded by GLYNDWR UNIVERSITY At 21:35 12 November 2015 (PT)

580

and domestic investment are very low in Africa, a mere reduction in expenditure would
not be enough to jump-start rapid and sustainable growth.
Having recognized the important role played by foreign capital in their
economic growth and development, several African countries have adopted new
policies to try to overcome the perception of being a risky location for FDI. Many
countries have opened up their economies and dismantled regulatory barriers to
foreign investment and adopted policies to protect against expropriation of investment.
Capital controls have been relaxed to allow the repatriation of profits, retention of
export proceeds, and liberalization of currency markets. Besides relaxing the
regulatory constraints on foreign investors, some countries also offer various fiscal and
financial incentives. One-stop investment promotion centers have also been created in
several countries.
Many African countries have also sought to enhance the credibility of their investorfriendly policies by becoming signatories to various bilateral and multilateral
investment and trade treaties. They have signed several international agreements that
limit certain actions of governments and serve to assure foreign investors. As by 1998,
41 African countries had signed the multilateral investment guarantee agency, 40 are
signatories of the international convention on the settlement of investment disputes
between states and nationals of other states, and 26 are signatories to the convention
on the recognition and enforcement of foreign arbitral law.
Flow of FDI to Africa
The flow of FDI to Africa increased from less than $1 billion in 1970 to more than $18
billion in 2001. However, the volume of FDI flow to Africa in 2001 represented only 9.0
per cent of the share of FDI flows to less developed countries (LDCs) and 2.3 per cent of
the share of the world FDI (see Figure 1). To compare with an early period, the shares
were 26.8 per cent of the FDI flows to LDCs and 7.2 per cent of the world FDI in 1970.
With such performance, and the fact that the share of FDI flows to LDCs as a group in
world FDI in 2001 (25.4 per cent) is not very different from what it was in 1970 (26.8 per
cent), it is not surprising that there has been a lot of discussion about Africas apparent
lapse in attracting FDI.
Like other parts of LDCs, Africas regional and national FDI inflows are highly
uneven. In 1998, for example, 32 per cent of Africas FDI went to North Africa. Of the
seven North African countries that received FDI, Algeria, Egypt, and Tunisia received
the most. This represented 84 per cent of North Africas FDI and 27 per cent of Africas.
Egypt alone accounted for 41 per cent of FDI flows to the region, which represents 13 per
cent of the FDI flows to Africa. West Africa, with the second highest share, attracted 26
per cent of FDI flows to Africa in 1998. Within this region, Nigeria accounted for 68 per
cent, which is 18 per cent of FDI flows to Africa. Other countries that accounted for
significant shares in FDI flow to Africa include South Africa, Angola, and Morocco,
which accounted for 19 per cent, 10 per cent, and 7 per cent, respectively, over the period
1995-1999. A few other countries (e.g. Lesotho, Mozambique, Uganda, and Tanzania)
have also improved their performance in attracting FDI over the last decade (see
Figure 2). While other countries (e.g. Gabon, Libya, Mauritania, and Somalia) have not
improved at all in attracting FDI (see Figure 3).
Given the importance of FDI in Africas development, one of the areas of interests
for researchers on African economies has been to explain why Africa has fallen behind
other regions in attracting FDI (see, for example, Morisset, 2001; Asiedu, 2002;
Reinhart and Rogoff, 2002). The most popular potential determinants of FDI found by

20000

Accelerating FDI
flow to Africa

45.0
FDI inflows to Africa

18000

40.0

FDI Inflows (million U.S. dollars)

35.0

14000
30.0
12000
25.0
10000
20.0
8000
15.0

581

6000
10.0

4000
2000

5.0

0.0

1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002

Downloaded by GLYNDWR UNIVERSITY At 21:35 12 November 2015 (PT)

16000

Share of Africa to LDC (%)

Africa's share of FDI to

LDC

year

Source: UNCTAD database

these authors include: market size, labor costs, openness, taxes and tariffs, political
instability, corruption, poor infrastructure, and inflation. The conventional wisdom is
that a large market size (or the host countrys real GDP per capita) is necessary for
sufficient utilization of resources and exploitation of economies of scale; thus, as the
market size expands, the volume of FDI inflow will increase. Cheap labor is supposed
to attract FDI since it helps to reduce the cost of production. Given that most
investment projects are directed towards the tradable sector, more open economies to
international trade should attract more FDI. Tariffs and taxes affect the free flow of
goods and therefore would scare away FDI. Similarly, as a measure of a countrys
economic stability, political instability, corruption, and high inflation would deter FDI
inflow. In general, however, the empirical literature on the determinants of FDI is split
over the relative importance of most of the variables (for an extensive survey of the
literature, see Asiedu, 2002; Chakrabarti, 2002; Gastanaga et al., 1998). A brief summary
about the conflict in the empirical results of variables, is highlighted in Table I.
Based of the existing empirical literature, it is revealing to compare what some
countries like Lesotho, Mozambique, Tanzania, and Uganda have done right to attract
FDI with what other countries such as Gabon, Libya, Mauritania, and Somalia have
done wrong. It appears that governments in the former group have established political
stability, stable macroeconomic environment, and have implemented aggressive trade
liberalization and privatization programs. In Tanzania, after a successful reform
process undertaken by the new government in 1996, the FDI increased from around

Figure 1.
Trend of FDI inflows to
Africa, 1970-2002

MF
32,7

Downloaded by GLYNDWR UNIVERSITY At 21:35 12 November 2015 (PT)

582

Figure 2.
Trends in FDI flows to
selected African
countries (good
performers), 1970-2001

$3 million annually at the beginning of the 1990s to over $200 million by the end of that
decade. The elements of the economic reforms included improving macroeconomic
management, liberalizing the exchange rate, reducing the trade barriers, instituting
agricultural reforms, and improving tax and revenue policies.
In Uganda, the government launched a broad economic reform program in 1992
comprising of tighter management of fiscal and monetary policies, more marketoriented approaches to exchange rate management, and liberalized policies toward
coffee production and export. These reforms enabled Uganda to achieve rapid and
sustained growth, low inflation, reduced current account deficits, and increased foreign
exchange reserves. As a result, FDI increased from almost nothing in early 1990s to
more than $200 million by the end of that decade.
In Lesotho, political stability, sound macroeconomic stance, cheap skilled-labor
force, proximity to South African market, and generous tax incentives and strong
investment promotion programs have played important roles in attracting FDI. While,
in Mozambique, political stability, macroeconomic stability, protection of investment
and enforcement of property rights, tax holidays, fiscal and financial incentives,
privatization, and liberal policies on remittances of profits and dividends have been the
main determinants of FDI [1].
In comparison, countries such as Gabon, Libya, Mauritania, and Somalia have had
poor macroeconomic fundamentals, timid trade liberalization and privatization
programs, reputation of high corruption and lack of transparency, or political

Accelerating FDI
flow to Africa

Downloaded by GLYNDWR UNIVERSITY At 21:35 12 November 2015 (PT)

583

Figure 3.
Trends in FDI flows to
selected African countries
(poor performers),
1970-2001

instability and lapse security. Each of these factors works to make these countries a
risky location for FDI.
Implications of NEPAD on the flow of FDI
FDI are central to the success of NEPADs long-term development strategy. The
proponents of NEPAD acknowledge that resource gap exists, which must be filled by
FDI. Accordingly, there are a number of key initiatives in the NEPAD development
program that would increase the flow of FDI in the medium- and long-terms and propel
the continent from underdevelopment to capitalist prosperity. Since sufficient data do
not exist at the moment to evaluate the impact of NEPAD on FDI, this section will only
assess qualitatively whether or not NEPAD programs enhance what is believed in the
literature to be an attractive environment for FDI, namely:
.

market size;

labor costs;

infrastructure quality;

openness;

political instability;

corruption;

macroeconomic instability, e.g., inflation.

Most African countries have relatively small market sizes due to their small populations
and per capita incomes. A small market size deters the inflow of FDI. NEPAD seeks to

MF
32,7

Explanatory
variable
Market size

584
Labor costs

Downloaded by GLYNDWR UNIVERSITY At 21:35 12 November 2015 (PT)

Openness

Taxes and
tariffs

Positive and significant

Billington (1999)
Schneider and Frey (1985)
Tsai (1994)
Chakrabarti (2002)
Wheeler and Mody (1992)

Asiedu (2002)
Edwards (1990)
Gastanaga et al. (1998)
Lunn (1980)

Political
instability

Inflation
Corruption

Table I.
Effects of selected
variables on FDI

Infrastructure
quality

Sign of estimated coefficient

Negative and
significant
Insignificant
Edwards (1990)
Jaspersen et al. (2000)

Loree and
Guisinger (1995)
Wei (2000)

Chakrabarti (2002)
Schneider and
Frey (1985)

Loree and
Guisinger (1995)
Tsai (1994)
Wheeler and
Mody (1992)

Culem (1988)
Gastanaga et al. (1998)
Loree and
Guisinger (1995)
Wei (2000)
Edwards (1990)
Schneider and
Frey (1985)
Loree and
Guisinger (1995)
Reinhart and
Rogoff (2002)
Gastanaga et al. (1998)
Reinhart and
Rogoff (2002)

Jackson and
Markowski (1992)
Wheeler and
Mody (1992)
Asiedu (2002)
Jaspersen et al.
(2000)

Asiedu (2002)

Asiedu (2002)
Loree and Guisinger (1995)
Wheeler and Mody (1992)

enhance and strengthen regional economic integration in order to enlarge the market [2].
In the long run, access to a large regional market should attract FDI to Africa. Also, as
sectoral priority, NEPAD aims to improve productivity in agriculture, which should help
increase purchasing power and therefore the market size.
While NEPAD does not mention the lowering of cost of labor directly, however its
focus on human resources development as a priority and to revamp the education and
health systems can been seen as ways to improve labor efficiency and therefore to
lower the costs of labor. Eventually, as the economic wisdom suggests, efficient labor
should attract FDI. However, still more needs to be done in this area. The heavily
regulated labor markets (such as in South Africa) need to be freed so as to bring down
the cost of labor.
As sectoral priority, NEPAD emphasizes the need to improve access to affordable
and reliable infrastructure services (e.g. transportation, information and
communication technology, and power) for both firms and households. Indeed, as the
literature suggests, improvement in access and quality of infrastructure should help
attract FDI to the region.

Accelerating FDI
flow to Africa

585

60

50
Africa
Advanced Countries

Inflation (%)

40

30

20

10

8
19
80
19
82
19
84
19
86
19
88
19
90
19
92
19
94
19
96
19
98
20
00

19
7

74
19
76

19

19
7

19
70

Downloaded by GLYNDWR UNIVERSITY At 21:35 12 November 2015 (PT)

An obvious and powerful deterrent to FDI flow to Africa has been political instability.
Reinhart and Rogoff (2002) show that 40 per cent of the countries in Africa have had at
least one war during 1960-2001 and 28 per cent had two or more wars. This is three
times more than in the Western Hemisphere (excluding Canada and US) and twice that
of Asia. In recognition of this problem, and that of corruption, NEPAD aims to promote
peace, security, democracy, good governance, and human rights.
In Africa, five countries experienced an average annual inflation rate of over 40 per
cent during 1970-2001 (Reinhart and Rogoff, 2002). Many more countries in the region
also had episodes of inflation rates above 40 per cent especially in the early 1990s.
(Figure 4 compares the trends in inflation in Africa and industrial countries). Up until
the 1980s, inflation in Africa mimicked that of the industrial countries. However,
following the supply shocks of 1970s, inflation rate rose, reaching unprecedented levels
in the early 1990s. Within Africas broad picture, inflation performance has varied
significantly between different countries. For North and CFA Africa, inflation is not a
critical issue. But the problem is with other regions of Africa, where the inflation record
is far worse than that of Asia. In recognition of this, NEPAD aims to promote
throughout the participating countries a set of concrete and time-bound progress
aimed at enhancing the quality of economic and public financial management as well
as corporate governance. All said and done, low inflation resulting from good economic
management should attract FDI.
Finally, NEPAD aims to improve access to foreign markets for African products
through negotiations and agreements with partners and improving the quality of
African processed products to meet required standards in those markets. In addition,
NEPAD seeks to improve procedures for customs, tackle barriers to international

Year
Source: Musila et al. (2003)

Figure 4.
Regional developments in
inflation, 1970-2001

MF
32,7

Downloaded by GLYNDWR UNIVERSITY At 21:35 12 November 2015 (PT)

586

trade, and increase intra-regional trade. All these initiatives would enhance openness
and therefore, attract export-oriented FDI as the existing empirical literature suggests.
We would like, however, to emphasize that NEPAD should lobby hard to make the
global system of trade and finance fairer and more equitable. NEPAD should not seat
back and pretend, that partners or the international community will create fair and just
conditions.
A few final remarks are in order here. First, NEPADs focus is exclusively on the
manufacturing and primary sectors, which together account for more than 80 per cent
of working labor force in some African countries. There is a clear willingness to
vertically integrate primary and manufacturing activities through production
diversification to generate additional local value. The FDI in the manufacturing sector
is expected to produce more jobs, enhance export abroad, and impact locally the
general accumulation of human capital via knowledge spillovers. It is expected to build
on African resources and competitive advantages to connect to the global economy. On
the other hand, it is believed that the service-related FDI does not use the home country
competitive advantage, but builds on the foreign companys competitive advantage.
This, in many cases, reduces the positive spillovers of this type of FDI. Thus, NEPAD
does not explicitly target service-related FDI. Second, and perhaps a glaring weakness,
although NEPAD programs are very similar to SAPs, which unquestionably have
failed to spur the influx of FDI, there is no plan or solution to prevent repeating the
mistakes. We suggest a few solutions/strategies in the next section.
Strategies for attracting FDI
Regardless of the collective initiatives at regional and continental levels to improve the
flow of FDI to Africa, the task of attracting FDI that is consistent with the development
goals of individual countries remains in the hands of the respective governments. As
African countries attempt to offer unique opportunities to foreign investors,
governments face distinct challenges in attracting FDI. Standard policies aimed at
improving the attractiveness of the country through institutional and economic
variables have been proposed and implemented as part of the SAPs. Investment
promotion agencies (IPAs) have been recommended to promote the new institutional
environment to foreign investors. Today, such agencies have been established in over
35 African countries to provide one-stop service to foreign investors. The coverage and
the quality of the services these IPAs provide vary from one country to another. In
general, however, the actions of the majority of African IPAs are limited to organizing
or participating to trade missions, supplying information on investment climate
(specially on FDI-related incentives and regulations), and directing interested investors
to local authorities and facilitating their interactions.
Although, this institutional change is a noticeable positive move, it should be
acknowledged that it is not enough. The requirements of foreign investors vary
according to their incentives to go international. A market-seeking investor and a
resource-seeking investor do not consider the same determinants for choosing a host
country. Similarly, the attractiveness of different countries does not necessarily depend
on the same resources, capabilities, and advantages. Thus, standard programs cannot
be very effective in attracting appropriate FDI. Furthermore, the management of many
African IPAs has been given to government bureaucrats who are unprepared for such
tasks. Although operating budgets of these IPAs are not available, a survey by
UNCTAD (2000) shows that most of them have less than US$ 0.4 million budget
annually, far below the global average of US $1.1 million. Obviously, the lack of

Downloaded by GLYNDWR UNIVERSITY At 21:35 12 November 2015 (PT)

adequate promotional funds, together with lack of marketing expertise, is not helpful
in attracting FDI.
Marketing strategies
Promoting investment opportunities in host countries to potential foreign investors is
part of the general growing field of marketing of places. The ability of marketers to
communicate effectively and efficiently their distinctive advantages and to deliver
the expected value to investors is a critical requirement for success. Therefore, the
marketer of FDI has to adopt a strategic marketing approach, which involves
the understanding of the role of FDI in the development program of the country, the
identification and building of locational advantages, and the formulation and
implementation of adequate marketing strategies. Kotler et al. (2002) identify three
generations of strategic marketing of locations for investment purposes, which have
been extensively used in Asia to attract FDI (see Table II). The first and oldest
generation is characterized by mass marketing of an undifferentiated product. The
objective of this strategy is to create manufacturing employment and to focus on
attracting businesses in the manufacturing sectors that are searching for structural
and organizational efficiency. The main marketing proposition of this generation is
based on operation costs (e.g. land, construction, and labor), subsidies and other
incentives, and simplicity of customs and financial regulations. This marketing
strategy continues to be applied in certain Asian countries that still have low
operational costs.
The second generation of strategic marketing of investment locations is based on
competitive analysis and positioning. The promoters of investment location are aware
that the level of competition between locations is very high and that it is becoming
increasingly difficult to sustain a marketing proposition based solely on operational
costs. To improve, the promoters analyze competing offers, scrutinize the needs of
certain industries, and propose offers that respond competitively to the needs of some
target industries. The target industries are generally in the manufacturing and services
sectors, but also in the construction of infrastructure. The emphasis is put on the
retention of businesses that are already in place and to encourage them to invest even
more. The principles of relationship marketing, already popular in the commercial
domain, are applied throughout in intensifying partnership of the private and public
sectors. The marketing propositions discuss the competitive costs and the
appropriateness between certain industries and the locations concerned. They also
integrate qualitative elements such as the quality of life. That is to say, life is not just
about profits!
The third generation of strategic marketing of investment locations adopts a
prospective approach. With the increase in unemployment in several Asian countries
during the 1990s, many countries began to develop products corresponding to specific
market areas. Local clusters were encouraged. A synergy was created between existing
businesses and new ones; and the exploitation of the potential infrastructure including
roads, railways, airports, and telecommunications. Training and research institutions
are also integrated in the formation of clusters. Businesses were called upon to
contribute to training and research in their domain of interest. The marketing
propositions continue to put forward the competitive costs, but they are supported by
the quality of human resources and the quality of life, which integrates cultural and
intellectual development.

Accelerating FDI
flow to Africa

587

MF
32,7

Downloaded by GLYNDWR UNIVERSITY At 21:35 12 November 2015 (PT)

588

Some lessons from Asia

Africa can learn from the Asian experience in many areas. We discuss three such areas
that we believe are important, namely targeting of appropriate segments of investors,
positioning strategies, and focusing.
Targeting of segments of investors. Targeting is the selection of segments of
investors on which the promoter or the country wants to focus her activities. It requires
knowledge on the existence of the segments, the characteristics and needs of investors.
UNCTADs (2000) survey of the practices of FDI promotional agencies lists five types of
segmentations:
(1) Segmentation by region of origin of the investor: Western Europe, North
America, Asia and Pacific, North Africa and the Middle East, Central Europe
and the East, Latin America, Africa South of the Sahara, the Caribbean.
(2) Segmentation by industry: Basic manufactures (e.g. textile and clothing),
advanced manufactures (e.g. high technology, electronics, biotechnology, and
aerospace), infrastructure (transport and telecommunication), agro-food
industry, services (e.g. call centers and electronic commerce), strategic
investment (e.g. research and development, regional directions, and distribution
centers) and natural resources.
(3) Segmentation by specific investments: High technology, green technologies,
intensive labor investments, training investments, creation of logistic chains,
exploitation of natural resources, health services and alternative energy.
(4) Segmentation by type of investment: Joint-ventures/strategic alliances,
Greenfield investments, location investments or purchases of existing
installations, mergers and acquisitions, and privatization.
(5) Segmentation by investment amounts: Investments less than $50 million,
investments between $50 million and $100 million, etc.
The rationale for the segmentation of foreign investors is that investors of the same
segment react identically, while those belonging to different segments react differently
to some determinants of investment in their choice of a host country. The host country
has first to analyze and identify the investors who may be interested in its locational
advantages and policy designs. Obviously, even if all the segments are interested, it
may be practically impossible to undertake an effective promotional program for all
since resources are limited and not all segments may fit into the host countrys
development goals. The choice of target segments of investors for a promotional
program is therefore imperative and should take into account the following three basic
requirements:
(1) Size and growth of the segment: a sufficient number of potential investors
desiring to invest in the region should exist. For example, using segmentation
by region of origin of the investor shows that it will be a difficult task for an
African country to attract FDI from Latin America.
(2) The relevance of the segment into the host country: here, the marketer should
examine if the segment can help the host country achieving its development
goals. The NEPAD, for example, does not explicitly rely on service-related FDI
in order to tackle Africas development challenges.
(3) Competitive capabilities of the host country in the segment: The marketer should
make sure that the country offers competitive values compared to other

Downloaded by GLYNDWR UNIVERSITY At 21:35 12 November 2015 (PT)

countries competing for the same segment. For example, China is known to be a
favorite destination for efficiency-seeking investors in some industries willing
to export to North American markets. An African country targeting the same
segments should be able to provide more value than China or at least meet the
value provided by china. In this case, it will be difficult for many enslaved
African countries to compete in these segments.

Accelerating FDI
flow to Africa

Note that these three basic requirements explain the changes that have occurred in the
promotional strategies for investment locations in Asia. Several countries, having
realized that they were no longer competitive in their traditional segments or that these
segments no longer fulfilled their developmental objectives, either turned towards
other targets or reformulated their positioning strategies.
Positioning strategy. The decision to approach one or several segments of investors
inevitably leads to questions about how the host country should present itself. The
problem is to find a marketing proposition that meets the expectations of the selected
investors and creates a distinct image of the country or the location. The creation of a
marketing proposition, also called positioning, is the culmination of a long process
which integrates the analysis of the needs of target investors, analysis of competing
offers, and evaluation of strengths/weaknesses of the country concerned, among
others. A good positioning strategy should be able to create a link between the needs of
the investors and what the host country offers.
Marketing propositions can, be found on several factors. For example, several
determinants discussed in the literature can be used depending on the needs of the
target industries and the performance of the country on the factors considered relative
to the direct competition. However, the following two principal positioning strategies
can be used to attract FDI:

589

(1) Functional positioning: marketing propositions of functional nature

demonstrate to foreign investors how the characteristics, institutional,
economic, and industry variables of the host country contribute to the
realization of corporate objectives. Especially, operating costs, grants, financial
and customs incentives, availability of required labor, access to regional
markets, access to natural resources, and availability of complementary
industries are some of the arguments that may be used to sustain a functional
positioning. Following the rationale of strategic marketing, functional
positioning should inspire the design of governmental policies not the reverse.
(2) Experiential positioning: Elements such as quality of life in the host country,
cultural richness, hospitality, and openness to foreigners can be used to sustain
experiential positioning propositions. Generally, countries opting for this kind
of positioning strategies have previous success experience in attracting FDI of
leading transnational corporations and use their testimonies to support their
claims.
The Asian example in Table II shows that functional positioning strategies continue to
be the strong focus of the majority of FDI promoters. Profit being the principal
attraction to investors, it is necessary to prove that the country offers a decent
environment in which targeted industries can be better off. Experiential positioning
strategies are also of importance for investments in some specific industries like
tourism. But, in general, they should be emphasized only after several years of
successful functional positioning. Maintaining a successful positioning strategy is a

MF
32,7

Downloaded by GLYNDWR UNIVERSITY At 21:35 12 November 2015 (PT)

590

Table II.
Three generations of
strategic marketing

Generation

Objectives

Methods

First Generation
(smokestack chasing)
Second generation
(targeting marketing)

Manufacturing jobs

Luring facilities from

other locations
Retention and
expansion of existing
firms
Improving vocational
training
Public/private
partnerships

Third generation
(product development)

Preparing the
community for jobs
of the 1990s and
beyond
Manufacturing and
high-quality service
jobs in target
industries expected to
enjoy continuing
growth into the
future
Selectivity and
sophistication and
key objectives

Manufacturing and
service jobs in target
industries now
enjoying profitable
growth
Improving physical
infrastructure

Retention and
expansion of existing
firms
Spurring local
entrepreneurship and
investment
Selective recruiting of
facilities from other
locations
More intense public/
private partnership
Developing
technology resources
Improving
commercial and
technical education

Underlying marketing
rationale
Low operation costs
Government subsidies
Competitive operating
costs
Suitability of
community for target
industries
Good quality of living
(emphasis on
recreation and
climate)
Prepare for growth in
the contemporary
world-wide economy
Competitive operation
costs
Human and
intellectual resources
adaptable to the
future change
Good quality of life
(emphasis on the
cultural and
intellectual
development)

Source: Kotler et al. (2002)

dynamic process, which evolves with the changes in the offers of competitors, changes
in the situation of the country or in its environment, and the changes in the target
segments.
Focusing. Focusing in this case means that the marketers limit their actions to a
restricted number of segments of investors. While it is necessary that African
governments increase funds for marketing their countries to FDI, it is also obvious that
they are not able to compete with the big players in the market who offer good
investment environments, large assortment of services, and spend several millions in
advertisement. In this context, the experience of Asia has proven that targeting foreign
businesses already operating in the host country can be useful to increase FDI without
necessarily using huge sums to market the country.
Although, we have dwelt with marketing individual African countries to FDI, some
collective actions are possible at the regional and continental levels to address common
challenges and to improve the investment environment in Africa. For example, many
people have argued that the negative image of the continent is one of the major

Downloaded by GLYNDWR UNIVERSITY At 21:35 12 November 2015 (PT)

limitations to attracting FDI. This perception can be addressed collectively through

NEPAD or other institution in order to lure more foreign investors to Africa.
Summary and concluding remarks
Africa will require massive investments in order to extricate herself from poverty. This
follows from the Asian experience in which the countries in that region adopted exportinvestment-led growth strategy and achieved unprecedented economic growth and
prosperity after being at the same level of development with African countries four
decades ago. How can African countries replicate the Asian-type phenomenal growth?
This paper has examined factors that need to be in place in order for Africa to attract
foreign investment. It also examined the implications of NEPAD in attracting FDI and
the specific marketing strategies to help lure FDI to Africa.
While Africa is endowed with rich natural resources (e.g. oil, diamond, uranium,
copper, and forestry and marine resources), it is quite evident that natural resource
abundance is not enough to attract FDI for most countries. Instead, it is evident that in
order to attract a reasonably large volume of FDI, it is necessary to establish and
maintain political and sound macroeconomic stability and a policy environment
conducive to investment. Indeed, African countries that have adopted such policies (e.g.
Uganda, Mozambique, Lesotho, and Tanzania) have fostered growth, stimulated wider
participation of the private sector in economic activity, and secured significant FDI.
Those that have not implemented far-reaching reforms or have no political stability
(e.g. Gabon, Libya, Mauritania, and Somalia) have failed to attract large volumes of
FDI.
According to our assessment, NEPAD programs are in tandem with the conditions
conducive to attracting FDI. By transforming Africa into a construction field where
several continental and regional initiatives are carried out in areas such as
infrastructure, human development, agriculture, environment, culture, and science and
technology, NEPAD generates new opportunities for FDI and complements the reforms
and policies that would be or have been already undertaken at the individual country
level to attract FDI.
The paper also argues that while economic reforms and policies aiming at
improving investment environment in Africa are a basic requirement to stimulate
investments, the attraction of FDI that is consistent with the development goals of each
African country requires more than policy statements and institutional changes. The
myopic strategy of wait and serve that has been routine in several African countries,
offering standards incentives to all soliciting foreign investors, has not achieved the
expected goals. Accordingly, we urge that clear strategic marketing approaches to
target selected FDI and to design sustainable and competitive positioning strategies
able to match the interests of investors in a free market be used. We advocate for
investment promotion centers to be created throughout the continent to help to carry
out this critical task. However, before that, there need to be a change from the wait and
serve blind strategy to a proactive marketing approach, which takes into account the
requirements of investors prior to any change. Investment promotion activities
are costly. Therefore it is necessary to reallocate more resources to this undertaking.
The strategic marketing approach recommended here may also require some
cooperative promotional activities within regional economic blocs or at the continental
level to address some common promotional issues.

Accelerating FDI
flow to Africa

591

MF
32,7

Downloaded by GLYNDWR UNIVERSITY At 21:35 12 November 2015 (PT)

592

Notes
1. For a survey of additional African countries that have been successful in attracting FDI,
see Basu and Srinivasan (2002).
2. However, we would like to caution that NEPAD should assess the successes or failures
of some of the regional economic groupings before relying on them in this development
endeavor. In fact, some researchers find South South regional trading agreements not
improve economic growth or welfare (Vamvakidis, 1999; Spilimbergo, 2000; Musila,
2004).
References
Asiedu, E. (2002), On the determinants of foreign direct investment to developing countries: is
Africa different?, World Development, Vol. 30, pp. 107-19.
Basu, A. and Srinivasan, K. (2002), Foreign direct investment in Africa some case studies,
IMF Working Paper No. 02/61, International Monetary Fund, Washington, DC.
Billington, N. (1999), The location of foreign direct investment: an empirical analysis, Applied
Economics, Vol. 31, pp. 65-76.
Borensztein, E.R., De Gregorio, J. and Lee, J.-W. (1998), How does foreign direct investment affect
economic growth?, Journal of International Economics, Vol. 45, pp. 115-35.
Chakrabarti, A. (2002), The determinants of foreign direct investment: sensitivity analyses of
cross-country regressions, KYKLOS, Vol. 54, pp. 89-113.
Chowdhury, A. and Islam, I. (1993), The Newly Industrializing Economies of East Asia, Routledge,
London.
Culem, C.G. (1988), The locational determinants of US direct investment in the EEC: further
evidence, European Economic Review, Vol. 13, pp. 93-101.
Economic Commission for Africa (2001), Transforming Africas Economies: Overview, Addis
Ababa, Ethiopia.
Edwards, S. (1990), Capital flows, foreign direct investment, and debt-equity swaps in
developing countries, NBER Working Paper No. 3497, National Bureau of Economic
Research, Cambridge, MA.
Gastanaga, V., Nugent, J.B. and Pashamova, B. (1998), Host country reforms and fdi inflows:
how much difference do they make?, World Development, Vol. 26, pp. 1299-314.
Gries, T. (2002), Catching-up, falling-behind and the role of FDI a model of endogenous growth
and development, The South African Journal of Economics, Vol. 70, pp. 588-610.
Jackson, S. and Markowski, S. (1992), The attractiveness of countries to foreign direct
investment, Journal of World Trade, Vol. 29, pp. 159-80.
Jaspersen, F.Z., Aylward, A.H. and Knox, A.D. (2000), The effects of risk on private investment:
Africa compared with other developing areas, in Collier, P. and Pattillo, C. (Eds.)
Investment and Risk in Africa, St Martins Press, New York, NY.
Kotler, P., Hamlin, M.A., Rein, I. and Haider, D.H. (2002). Marketing Asian Places. John Wiley &
Sons (Asia) Pte Ltd, Singapore.
Loree, D.W. and Guisinger, S. (1995), Policy and non-policy determinants of US equity foreign
direct investment, Journal of Business Studies, Vol. 26, pp. 281-99.
Lunn, J. (1980), Determinants of direct investment among industrialized countries, European
Economic Review, Vol. 32, pp. 885-904.
Morisset, J. (2001), Foreign direct investment in Africa: policies also matter, OECD Global
Forum on International Investment: New Horizons and Policy Challenges for Foreign Direct
Investment in the 21st Century, Mexico City, 26-27 November.

Downloaded by GLYNDWR UNIVERSITY At 21:35 12 November 2015 (PT)

Musila, J.W. (2004), The intensity of trade creation and trade diversion in COMESA, ECCAS, and
ECOWAS: a comparative analysis, Journal of African Economies, Vol. 14, pp. 117-41.
Musila, J.W., Sigue, S.P. and Anyangah, J.O. (2003) An assessment of currency depreciation on
inflation in Malawi: simulation results from a macroeconometric model,, The Journal of
African Development, Vol. 6, pp. 78-113.
Razin, A., Sadka, E. and Yuen, C. (1999), Excessive FDI under asymmetric information, NBER
Working Paper No. 7400, National Bureau of Economic Research, Cambridge, MA.
Reinhart, C.M. and Rogoff, K.S. (2002), FDI to Africa: the role of price stability and currency
instability, paper presented at the Annual World Bank Conference on Development
Economics, Washington, D.C. 29-30 April
Rodan, G. (1997), Singapore: economic diversification and social divisions, in Rodan, G.,
Hewison, K. and Robison, R. (Eds.), The Political Economy of Southeast Asia: an
Introduction, Oxford University Press, South Melbourne.
Schneider, F. and Frey, B.S. (1985), Economic and political determinants of foreign direct
investment, World Development, Vol. 13, pp. 161-175.
Spilimbergo, A. (2000), Growth and trade: the north can lose,, Journal of Economic Growth,
Vol. 5, pp. 131-46.
Tsai, P.L. (1994), Determinants of direct foreign investment and its impact on economic growth,
Journal of Economic Development, Vol. 19, pp. 137-63.
UNCTAD (2000), The world of investment promotion at a Glance: a survey of investment
promotion practices, United Nation Advisory Studies, No. 17, United Nations, Geneva
and New York, NY.
UNCTAD (2002), World investment report: transnational corporations and export
competitiveness, United Nations Conference on Trade and Development, Geneva.
Vamvakidis, A. (1999), Regional trade agreements or broad liberalization: which path leads to
faster growth?, IMF Staff Papers, Vol. 46: 42-68.
Walden, B. and Rosenfeld, S. (1990), Dragons in Distress: Asias Miracle Economies in Crisis
Penguin, Harmondsworth.
Wei, S.J. (2000), How taxing is corruption on international investors?, Review of Economics and
Statistics, Vol. 82, pp. 1-11.
Wheeler, D. and Mody, A. (1992), International investment location decisions: the case of
US firms, Journal of International Economics, Vol. 33, pp. 57-76.
Wint, A.G. and Williams, D. (2002), Attracting FDI to developing countries: a changing role for
government, International Journal of Public Sector Management, Vol. 15, pp. 361-74.
Corresponding author
Jacob W. Musila can be contacted at: jacobm@athabascau.ca

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com

Or visit our web site for further details: www.emeraldinsight.com/reprints

Accelerating FDI
flow to Africa

593

Downloaded by GLYNDWR UNIVERSITY At 21:35 12 November 2015 (PT)

This article has been cited by:

1. Daniel Sakyi, Richmond Commodore, Eric Evans Osei Opoku. 2015. Foreign Direct Investment, Trade
Openness and Economic Growth in Ghana: An Empirical Investigation. Journal of African Business 16,
1-15. [CrossRef]
2. James B. Abugre, Richard B. Nyuur. 2015. Organizations commitment to and communication of CSR
activities: insights from Ghana. Social Responsibility Journal 11:1, 161-178. [Abstract] [Full Text] [PDF]
3. Lee Davidson, Mondher Sahli. 2014. Foreign direct investment in tourism, poverty alleviation, and
sustainable development: a review of the Gambian hotel sector. Journal of Sustainable Tourism 1-21.
[CrossRef]
4. Elikplimi Komla Agbloyor, Joshua Yindenaba Abor, Charles Komla Delali Adjasi, Alfred Yawson. 2014.
Private capital flows and economic growth in Africa: The role of domestic financial markets. Journal of
International Financial Markets, Institutions and Money 30, 137-152. [CrossRef]
5. Elikplimi Komla Agbloyor, Joshua Abor, Charles Komla Delali Adjasi, Alfred Yawson. 2013. Exploring the
causality links between financial markets and foreign direct investment in Africa. Research in International
Business and Finance 28, 118-134. [CrossRef]