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Executive Summary

In recent years, especially after the 2008/9 financial crisis, there has been a steady increase in foreign direct investment (FDI) towards the Global South. This has been a welcome trend for Africa, not only because of its developmental challenges but also because of the generally limited availability and cost of domestic financing, which has persistently hampered African business. Nonetheless, despite a growing FDI influx, Africa’s share of total world FDI volume remains small, at roughly 5%. This compares poorly to the continent’s 15% share of global population and over 30% of world poverty. The current GDP per capita gap, relative to other world regions, is likely to widen if ‘business as usual’ is to continue.

There is a clear and pressing need for increasing foreign investment in Africa. Financial and policy interventions are needed that support Africa’s emerging transformations and strengthen its already unfolding shift from FDI in the primary sector (resources), towards secondary and tertiary sectors (manufacturing, services and hi-tech). Such interventions would facilitate structural economic transformation and generate higher valueadded economic activities. FDI is a key resource to expedite Africa’s growth potential, since it promises to bring not only financial resources but also new technologies, knowledge and expertise. Investment promotes employment, productivity and competitiveness through entrepreneurship in investment destinations. Substantial private capital injections can, for instance, help close Africa’s huge gap in physical infrastructure, improve the quality of the built environment, and make the continent a more attractive destination for global FDI.

Key findings

Cities perform a quintessential role in Africa’s evolving structural transformation because urban environments facilitate growth in critical economic sectors. Cities can accommodate industries that have already demonstrated sustained economic growth from 2003 to 2016, a trend which is anticipated to continue. African cities can boost their economies by positioning themselves as desirable destinations for multinational firms’ headquarters, sub-offices and other activities, and thereby become important nodes in corporate strategies. However, it is pertinent that, as potential FDI destinations, cities should understand the rationales of investors to expand business to foreign countries. In the age of globalization and the emerging fourth industrial revolution, the role of African cities and urbanization must reverberate in the long-term economic, spatial and demographic planning of the continent. This role of cities is expressed in Agenda 2063 of the African Union, the United Nations’ New Urban Agenda, UN-Habitat’s State of African Cities reports and the World Bank’s Africa’s Cities report, among others.

Under conditions of rapid urbanization, African cities bring both problems and solutions in respect of the incidence of urban poverty. In the absence of commensurate economic growth, in urban and rural economies alike, urban poverty has become proportional to the rate of urban-rural migration and natural urban growth. Conversely, urban economic development can lift millions out of poverty, as it has done in East Asia over the past three decades, with African cities becoming hubs of productivity that accelerate economic growth and general well-being. For this to happen, African cities need to seize a more prominent position in the world economy, by enhancing their accessibility, connectivity, markets and urban attractiveness. They also need to rapidly build workers’ skills and productive capacity, available knowledge and technology levels, as well as inclusive institutional and business capacity. FDI can serve as an important means to kick-start this.

African cities need to seize a more prominent position in the world economy, by enhancing their accessibility, connectivity, markets and urban attractiveness

Despite its relatively low ability to attract FDI in comparison to other continents, the recent rate of FDI growth into Africa is the second highest in the world. While this is partly explained by the low investment base from which the continent started, it does demonstrate a growing interaction between Africa and the global economy. Indeed, FDI is now an important source of finance, and represents roughly a third of foreign financial sources flowing into the continent.

Key aims of stimulating investment into Africa are to decrease the proliferation of informal settlements and secure urban food, water and energy supplies
©John Wollwerth
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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.