FDI, Export-led industrialization and the private market African Economic Development Renata Serra – March 1 st 2007

Why may FDI be so important? Role of export-led industrialization Lack of domestic saving and capital FDI accelerates technology import Possible impacts on employment and poverty

FDI – trends FDI increased a lot on a global level but only marginally to SSA Dramatic decline in relative FDI to Africa  FDI share decline reflects declining shares in world output, trade, investment and incomes  Low FDI means increasing debt

FDI and policies Attempts to attract FDI included:  : liberalization and privatization  1992-on: transparency, accountability, credibility Why has FDI largely eschewed SSA?  Risk perception and poor investment climate  Poor infrastructures  Inadequate policies (trade and macro)  Weak governance

Nature of FDI to Africa High concentration  ¾ of FDI goes to oil- and mineral-rich economies Exceptions are Mauritius, Morocco and Uganda  High concentration of FDI in 5-10 countries  Most FDI comes from UK, France and US Enclave sectors: Country’s GDP higher than its GNP High ratio of export earnings to value added “Footlose”: increased importance of M&A over greenfield investment

Possible cons of FDI Enclave sectors  Capital intensive  More volatile than manufacture Footloose investment does not benefit local economies Limited positive spillovers Bargaining power is in foreign company’s hands  Conflicts between governments’ and TNCs’ goals  Environmental and other costs are to be considered

Why is FDI to Africa low? Abundant natural resource by itself will not do Many point the finger to weak governance, yet:  Business environment is improving  High rates of EPZs creation  Low inflation and low corporate taxes Are TNCs really after good governance? More likely obstacles:  Low education, skills, and know-how  Lack of “technological effort” and absorptive capacity  Low K accumulation and economic structural changes