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Chapter 2 The Impact of Foreign Direct Investment on Employment in Africa

Nine out of ten African workers are part of the informal economy
Agriculture is still the dominant sector for employment in Africa

Over the past decade, the flow of FDI towards African countries has created economic growth opportunities and has positively affected inclusive development. This study explores whether FDI has been effective in creating employment in Africa based on data for 2003- 2014. The study examines to what extent different aspects of overall FDI (greenfield FDI, FDI stock and FDI flows) and different sectors of FDI affect overall employment and sectoral employment (agriculture, services and manufacturing) in Africa.

In recent decades, FDI, as one of the key drivers of globalization, has triggered an increasing number of countries to adopt liberalization policies and stimulate free trade. Although many advanced economies perceive globalization as a threat due to its adverse impacts on traditional jobs and their relocation to other parts of the world, most developing economies see it as a contributor to employment generation and poverty reduction (Jenkins, 2006). However, the debate on the impact of FDI on employment in Africa remains inconclusive.

Africa is home to some of the fastest growing economies in the world (Dicken, 2011; ILO, 2016). With the decrease in foreign aid, FDI is now one of Africa’s key determinants to fill the resource gap, generate growth and alleviate poverty (Asiedu, 2004). Whereas Africa was predominantly engaged in agriculture in the past, globalization and urbanization have started to structurally transform many of its countries’ economies (The World Bank, 2013; Szirmai, 2013). However, notwithstanding economic growth and positive structural change, most African countries experience low wage levels, high unemployment rates and significant dependency on the informal sector. Therefore, it is interesting to explore whether FDI significantly affects overall and different sectors of employment.

In past studies, FDI is said to generate employment in two ways: direct employment within multinational enterprises (MNEs) and indirect employment through backward and forward linkages of MNEs in host countries (Asiedu, 2004). Other studies argue that, although Africa’s growth rate is currently higher than the world average, this is not transformative as it is neither generating enough jobs nor creating adequate infrastructure (UNCTAD, 2014). Consequently, Africa is extremely dependent on informal economic development (Chen, 2012) and, in its low-income countries, the informal economy is responsible for about 50% of national output, about 60% of employment and 90% of new jobs (Benjamin et al., 2015).

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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.