African economies will struggle to attract foreign direct investment in the next three years as investors exercise more caution over the continent’s political risks and governance and transparency issues.
A new survey by the US-based advisory firm A.T. Kearney warns that investors are now concerned with the operating environment in emerging markets.
This comes after FDI flows to the continent slumped by 21 per cent to $42 billion last year, largely due to weak oil prices, with East Africa — the fastest-growing region on the continent — receiving $7.6 billion in FDI in 2017, a three per cent decline from the previous year.
Ethiopia absorbed nearly half of these inflows ($3.6 billion) and is now the second largest recipient of FDI in Africa after Egypt.
The A.T. Kearney FDI Confidence Index is an annual survey of global business executives that ranks markets that are likely to attract the most investment in the next three years.
According to the report released last week, three of the four factors that investors consider in their FDI decisions relate to regulations and governance.
“Given the high-profile corruption scandals in major emerging markets, it is not surprising that investors are concerned about this issue. Investors also continue to place a strong emphasis on the security environment perhaps in part because of their perception of a high likelihood of escalating geopolitical tensions,” the report says.
Largest FDI stock
Multinational corporations from developed economies such as the United States, United Kingdom and France still hold the largest FDI stock in Africa.
In addition, developing-economy investors from China and South Africa, followed by Singapore, India and Hong Kong, are among the top 10 investors in Africa.
However, the A.T. Kearney notes that investors now prefer putting money into the US, largely due to the country’s large domestic market, improving economic performance and new, lower corporate tax rate.
The Trump administration’s protectionist policies may also be motivating some companies to invest in the United States to maintain market access.
“In contrast, investors have mixed views on the outlook for the Middle East and North Africa and are somewhat pessimistic on sub-Saharan Africa,” the report says.
According to the report, investors view the likelihood of a political crisis in an emerging market as higher than last year.
This year, the US topped the A.T. Kearney FDI Confidence Index for the sixth year in a row, largely due to the fact that the country’s economy is the largest market in the world and because the country’s economy is on a pronounced up swing.
“Investors may be reaching in part to the government’s recent protectionist stances. FDI remains a crucial means for them to maintain access to this globally important market,” reads the report.
Other preferred FDI destination are Canada, Germany, UK and China. The reported added that investors have least confidence in Africa, Brazil, Austria, Norway, Portugal and Belgium.
According to the report European markets have attracted significant investor attention while developed markets have reasserted their dominance as FDI destinations.