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Digital Subscriptions > Cities Today > The State of African Cities 2018 > Chapter 1 The Economic Geography of African Foreign Direct Investment

Chapter 1 The Economic Geography of African Foreign Direct Investment

Solar panels in the Salmonsdam Nature Reserve, South Africa. The huge potential for renewable energy has yet to be exploited leaving 645 million Africans with no access to electricity

1. Introduction

Improving the quality of life of Africans through the creation of millions of jobs was one of five key objectives announced by Akinwumi Adesina, President of the African Development Bank, in his inaugural address in 2015
©AfDB Group

1.1. Africa’s development agenda and the need for foreign investment

Over the past two decades, most African economies have grown rapidly and, continent-wide, extreme poverty declined from 56% in 1990 to roughly 42% in 2015. Huge improvements in economic policies, advancing political stability and enhanced business environments have all made Africa increasingly attractive to foreign direct investment (FDI), which amounted to USD56.5 billion in 2016 (African Development Bank (AfDB) 2016).

However, despite these achievements, poverty remains a major challenge, especially given the continent’s rapid population growth. In 2015, an estimated 400 million Africans were still living in poverty. Income inequality is escalating, youth unemployment is intensifying, and gender inequality persists. Africa’s development performance clearly remains highly vulnerable to the impact of changes in the global economy, such as the recent world recession, Brexit, political turmoil in the USA and economic changes in China.

The State of African Cities

Africa’s strong development potential has not yet been utilized in most sectors. For instance, despite a massive agricultural potential, many African countries remain highly food insecure, spending billions of dollars on the import of food while, at the same time, large amounts of agricultural products are being produced and exported by foreign firms through international land outsourcing arrangements to feed people elsewhere in the world. Having said that, Africa holds 65% of the world’s arable land, could generously meet its own food requirements and, under the right policy interventions, could possibly feed the entire planet by 2050.

Likewise with energy. Approximately 645 million Africans have no access to electricity because the continent’s enormous renewable energy potential remains essentially unexploited. Industrialization efforts have not been very successful, mainly due to poor policies and ineffective financial and support services. Policies to harness the private sector and domestic and foreign direct investment (FDI) could facilitate access to finance for innovative enterprises, incentivize entrepreneurship and provide more conducive business environments to stimulate industrial impetus.

In the context of the above, improvement of the quality of life for people in Africa is one of the new five key targets for 2025 of the African Development Bank. This includes the creation of millions of new jobs to help lift a majority out of extreme poverty. This aim is said to require various forms of financial intervention with the attraction of FDI as one of the key actions. New and additional FDI will be critical because inadequate public funding in many African countries is not able to kick-start industrialization processes. Foreign firms and investors could, in future, play a catalytic role in African development, if guided by truly sustainable policies. This type of development would be in accordance with the 2013- 2022 strategy of the African Development Bank (AfDB) which emphasizes, on the one hand, the promotion of inclusive growth and, on the other, the transition to green growth. FDI into renewable energy can be used to achieve this target because besides producing clean energy, it generates a lot of employment. A key aspect of the AfDB’s strategy is development of financing from the private sector, including FDI.

The African Union (AU Agenda 2063) holds similar aspirations, as expressed in its first target: “Prosperous, inclusive and sustainable development for Africa”. Both these organizations’ aims are fully compliant with the first UN Sustainable Development Goal: reduction of poverty.

According to the Economic Report on Africa (UNECA, 2017) the need for finance to support Africa’s transformation “agenda is enormous”. Just to close Africa’s financing gap in infrastructure, some USD94 billion in annual investment is required over a ten-year period (WEF, 2015). Furthermore, Africa’s total debt has increased steadily and is forecast to reach 32.4% of continental GDP by 2017, which raises concerns for Africa’s long-term debt sustainability.

Various African, continental, regional and national strategies, e.g. the Plan of Action for the Accelerated Industrial Development for Africa (AIDA) in 2008 and the AU’s Agenda 2063 have stated the importance of industrialization and attracting FDI, especially for manufacturing, to bring essential capital, technology and expertise to the continent. Because of the inadequate resources in many African countries to finance industrial development, attracting FDI is vital to igniting industrialization and bolstering industrial diversification, via knowledge and technology transfers, and for stimulating productivity and export performance (African Development Bank Group, 2017; UNECA, 2016). Because Africa is experiencing some of the highest urbanization rates in the world (UN-Habitat 2008 and 2014) and because FDI into Africa is rapidly growing in secondary and tertiary sectors, it implies that FDI into Africa must increasingly be located in cities where such sectors typically thrive.

Because of the inadequate resources in many African countries to finance industrial development, attracting FDI is vital to igniting industrialization and bolstering industrial diversification, via knowledge and technology transfers, and for stimulating productivity and export performance

The century from 1950 to 2050 is ‘the global century of urbanization’ during which, broadly speaking, the global population will transform from a 70% rural to a 70% urban population majority. This is an accelerating process in the two global regions that are relative late entrants in this transformation: Asia and Africa. Various studies e.g. UN-Habitat’s State of African Cities 2008, 2010 and 2014 reports, show that African urbanization rates far exceed initial expectations. Others (e.g. Global Cities Institute, 2014) project that several African cities could become some of the largest in the world. The high rates of urbanization are today not merely attributable to largescale rural-urban migration but, as urban populations grow, natural growth plays an increasingly important role in Africa’s urbanization.

Rapid urbanization in Africa often results in the urbanization of poverty and manifests itself in mushrooming urban informal settlements (slums) (UN-Habitat’s State of African Cities 2014). In this light, the World Bank’s 2017 Africa’s Cities report identified three features of African cities that restrict urban development. Firstly, African cities are crowded but not economically dense, meaning that physical, industrial and commercial structures have not developed in parallel with the fast-growing populations. In short, African urban population growth is significantly outpacing urban economic growth.

Secondly, African cities are generally internally fragmented and composed of small and disconnected neighbourhoods. Such cities typically lack efficient transport networks, which limits access to job opportunities and reduces the productivity of firms, as they are unable to fully reap the benefits of economies of scale and urban agglomerations (Lall et al., 2017; UNECA, 2017b).

Thirdly, African cities are expensive to investors, particularly regional and international investment, due to high transaction costs associated with inefficient urban form e.g. urban sprawl and underdeveloped transport networks. (Lall et al., 2017). Therefore, steering African urbanization along more sustainable paths is not only a challenge for Africa, but also requires international cooperation to ensure that resource utilization is well managed and that African cities develop sustainable and inclusive economies, societies and environments.

Nowadays, cities account for roughly 70% of global GDP (World Bank, 2009) which affirms the profound role that urbanization plays in unleashing the economic potential of cities, In Africa, primary cities like Johannesburg already account for a considerable share of national GDP. The African Union’s Agenda 2063 undisputedly acknowledges that urban centres substantially contribute to African GDP, generate employment, reduce poverty and can be considered a major driving force in the continent’s transformation (African Union, 2015). Similarly, the United Nations has recognized in its Sustainable Development Goal on Urbanization that cities are productivity hubs driving growth and development. (World Bank, 2010).

UN-Habitat’s New Urban Agenda (2016), endorsed by the UN General Assembly, stresses the role of cities in economic growth and views cities as vehicles for inclusive and sustainable economic growth. It leverages urbanization for structural transformation, higher productivity, inclusive growth, economic diversification, value-added activities and resource efficiency, while supporting the sustainable transition of informal to formal economies. Yet, significant gaps remain in the availability of data and the empirical understanding of African urban economies. This frequently inhibits the formulation of evidence-based policies and opens the door to less efficient or even inappropriate policies. Therefore, the availability of data and suitable methods for measuring the actual contribution of African cities to their economies is vital for future effective development, planning and good urban management.

In Africa, primary cities like Johannesburg already account for a considerable share of national GDP
©Kaido Rummel

Rapid urbanization in Africa often results in the urbanization of poverty and manifests itself in mushrooming urban informal settlements (slums)

The current chapter explores several key research questions posited by UN-Habitat regarding the economic geography of FDI into Africa. These questions concern: (1) the geographic structure of global FDI into African cities and countries; (2) the trends in global FDI in African regions and countries; (3) the forecasts for global FDI in African regions and countries; (4) the competitiveness and economic diversification of African cities within the global FDI network; (5) the factors and impact of FDI in African cities and countries; (6) the derivation of the report’s four city case studies (Abidjan, Cairo, Johannesburg and Kigali); (7) the social, environmental and economic factors of FDI clusters in Johannesburg; and (8) the derivation of FDI sectors that can be beneficial to African cities in term of employment generation.

These generic studies form the departure point for the examination of Chinese investment into Africa (Part A), the thematic studies (Part B) and the four city case studies (Part C). Prior to discussing the answers to UN-Habitat’s questions, a theoretical overview is provided here to explain foreign direct investment and its concepts from the field of economic geography that support the various chapters of this report.

1.2. Global economic integration

Globalization continues to shape our world, particularly through trade, financial integration and knowledge dissemination. The flow of capital across national borders, such as portfolio (equity) investment, debt finance and foreign direct investment is an indication of global financial integration. FDI is considered a key factor in global economic integration (OECD, 2009; Pazienza, 2014). Although economic integration dynamics can be identified in various historic eras, it was the advent of the Industrial Revolution in Europe around 1760 that initiated the modern era of global integration. Initially dominated by colonial economic relationships, it was only after World War II that the integration dynamics broadened and deepened and that true globalization gained momentum. Trade liberalization and increased capital mobility - facilitated by the rapid spread of ICT from the 1980s onwards - accelerated economic integration which, in turn, intensified competition for markets, trade, investment, knowledge and skills. This process implies increasingly complex interactions between firms, cities, countries and regions in competitive strategies to attract FDI (Narula and Dunning, 2000) with the common objective of improving economic performance (Begg, 1999; Kresl, 2013).

The Industrial Revolution in Europe in the mid-18th century initiated the modern era of global integration
©Anna Regeniter | Dreamstime

Today, both national and municipal governments concentrate on policies to enhance their global and regional competitiveness (Kresl, 2013) as an important factor in their pursuit of economic success (Kitson, 2016). Urban economic competitiveness can be defined as ‘the ability of an economy to improve market shares in an activity, while providing increasingly better standards of living’ (Storper, 1997). This is determined by a variety of factors including the skills of the population (labour capital); accessibility and connectivity (infrastructural capital); the output capacity of firms (productive capital); institutions and their networks (institutional capital); available knowledge and technology (creative capital); and the attractiveness of a place (cultural capital).

The United Nations (2013) has predicted that 64.1% of developing and 85.9% of advanced economies will have urban population majorities by 2050. Much of the associated urban population growth will be absorbed by secondary and tertiary cities but the world’s largest existing urban agglomerations will contribute a major proportion of global GDP (Dobbs et al., 2011).

The United Nations (2013) has predicted that 64.1% of developing and 85.9% of advanced economies will have urban population majorities by 2050

Fundamental to this growth is the rapid accumulation of people, capital and knowledge. This process involves flows between cities at different spatial scales (Jacobs, 1969; Castells, 1996) and has the potential to transform the uneven spatial relations that exist between advanced and developing economies (Harvey, 1982; Friedman, 1986; Shannon, 1989; Arrighi, 1999).

Despite their functional and spatial differences, both global networks and local clusters have the common characteristic that they exist due to their likelihood of interaction. According to Bathelt et al. (2004) these interactions are between “global pipelines” of information, technology and knowledge that are maintained for control, interaction and cooperation within the corporate network, and the “local buzz” of tacit knowledge and information spill-overs. Similarly, The State of African Cities 2014 highlighted three important aspects for sustainable development in Africa. Firstly, economic development should be to a large degree self-driven through domestic exploration and improvement of technology. Secondly, trade and investment flows within Africa, as well as between Africa and other continents needs to be increased. Thirdly, improved urban governance is conditional for sustainable economic development (UN-Habitat, 2014).

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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.