Foreign Direct Investment; Development strategy for Africa

If Africa is to step into the elite group of developed world, its economic affairs should not be seen to be conducted in a manner suggesting that it is business as usual. A different approach is needed judging from the slow and sometimes retrogressive growth in its economies half a century after most of its nations attained independence. What Africa needs is more of Foreign Direct Investment and less of foreign investment in its equities and bonds markets. Foreign Direct Investment (FDI) is essentially the investment of foreign assets into domestic structures, equipment, and organizations. Such assets exist in the form of capital, manpower and technology.

FDI is largely responsible for catapulting the likes of Brazil, Russia, India, China and South Africa (BRICS) into a select group of emerging economies. Today these countries are considered the best investor destinations according to United Nations Conference on Trade and Development (UNCTAD) in a report on world investment prospects titled, 'World Investment Prospects Survey 2009-2012'. As a result the world is lining up to invest in them at the first opportunity.

That said why is FDI such an enormous impetus agent propelling the BRICS from the low economic status they were in not more than two decades ago? Additionally, could the replication of the same formula make Africa be perceived as the investment paradise, much the same way BRICS are seen today? Following are some of the benefits that a hosting country accrues by encouraging foreign direct investment.

For starters, foreign direct investment permits the transfer of technologies. This is done basically in the way of provision of capital inputs (a measure of the flow of services available for production from the stock of tangible assets). For Instance thanks to FDI India is today renowned for its economic production of computer microchips. This is after India encouraged leading electronics producers such as Japan to set up factories in the country. The effect has been that the indigenous population has over time acquired the technological know how and set up more factories.

Secondly, recipients of FDI often gain employee training in the course of operating the new businesses, which contributes to human capital development in the host country. This is perhaps the best option available to Africa to bridge the embarrassing technological and human capital gap between her and the developed world. Moreover, the profits that are generated by the foreign direct investments that are made in the host country can be used for the purpose of making contributions to the revenues of corporate taxes.

Thirdly, foreign direct investment helps in the creation of new jobs in a particular country. It also helps in increasing the salaries of the workers. This enables them to get access to a better lifestyle and more facilities in life. It has normally been observed that foreign direct investment allows for the development of the manufacturing sector of the recipient country. Foreign direct investment can also bring in advanced technology and skill set in a country.

Overall, foreign direct investment helps in the economic development of the particular country where the investment is being made. This is especially applicable for the economically developing countries. An example of this could be seen in some countries of the East Asian region, India included. It was observed during the financial problems of 1997-98 that the amount of foreign direct investment made in these countries was pretty steady giving them a cushion effect.  

However even as the immense benefits of FDI continue to be seen in play in the elite groups of emerging economies, economic analysts warn that nations run the risk of being perceived as weak economies when overinvestment in FDI occurs. To counter this it has been advocated that nations should concentrate on strengthening their economic systems and creating an investor friendly environment. The challenge is therefore on African governments to rise up to the challenge and do what it takes to add more African countries to the BRICS list.

 Leonard Mutinda

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