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Digital Subscriptions > Cities Today > The State of African Cities 2018 > Chapter 3 Do Sub-Saharan Cities with Lower Labour Costs Attract Greater FDI Inflows?

Chapter 3 Do Sub-Saharan Cities with Lower Labour Costs Attract Greater FDI Inflows?

Dakar, like many capital cities, receives the greatest proportionate share of national FDI inflows
The highest wage rates are in Port Elizabeth, South Africa (above) as well as Johannesburg and Cape Town
©Kierran Allen

Attracting FDI has become a standard component of the economic policy toolkit, both in developing and advanced economies (Gorg and Strobl, 2005; Corzet et al, 2004). In developing economies, FDI is expected to contribute to economic development by filling in the gap between domestic savings and investment requirements (Anyanwu, 2012). This is expected to contribute to economic growth by expanding productive potential, by creating employment opportunities, and through the transfer of technological and managerial know-how from foreign to domestic firms. Since multinational corporations (MNCs) produce, own, and control most of the world’s advanced technology, some of their know-how can spill over to domestic firms through formal means such as technology licensing or informally through employee transfers and other forms of spill over (Gorg and Strobl, 2005). Countries in Africa and elsewhere, therefore, pursue diverse policies to attract multinationals to invest in their countries. A wide array of policies including tax incentives and favourable regulatory provisions are often provided to attract multinationals (Gorg and Strobl, 2005). More importantly, developing economies aspire to exploit their locational advantages that make them attractive to efficiency-seeking multinationals (Dunning, 2009). Labour costs in many African countries are relatively low since a large share of the population works in the informal sector and/or is underemployed. Leveraging these low labour costs is an important imperative in FDI policy making in lowwage economies.

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About Cities Today

The State of African Cities 2018 is published by IHS-Erasmus University Rotterdam and UN-Habitat in partnership with the African Development Bank. The aim of the report is to contribute to development policies that can turn African cities into more attractive, competitive and resilient foreign direct investment (FDI) destinations. Attracting global FDI is highly competitive and crosses various geographic scales, therefore regional cooperation by cities and nations is critical. But FDI is not a panacea since it has both positive and negative effects and careful choices need to be made by cities in their pursuit of FDI, if it is to lead to inclusive economic growth. This report aims to provide guidance on these choices and to facilitate understanding of the complexity of global investment in Africa.