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Chapter 4 Determinants of Foreign Direct Investment into Africa’s Knowledgebased Industries

Tungsten mining in Rwanda for the electronics industry. The challenge is to ensure that the exploitation of resources leads to a fair national distribution of wealth
©Harold Bonacquist
Countries like Korea, China and Malaysia have successfully transitioned from agrarian to knowledge-based economies
©Hupeng

Historically, FDI into Africa has neither lifted African populations out of poverty nor has it addressed the growing gap between the more innovative and technologically lagging countries (Liefner, 2009). Economies that rely on a single or a few sectors of economic activity are very vulnerable to price shocks in those sectors. To help address the lack of economic diversification and technological gaps, this study explores the relationship between location factors and the attraction of knowledge-based FDI (KFDI). In turn, it is expected that KFDI in Africa would help to better diversify products and services, generate innovation, and allow for socio-economic inclusion. To these ends, the objective of this research is to identify the locational factors that help attract KFDI to African countries and cities.

It is clear that a digitalized transformation has permeated daily life around the world. This has affected the ways in which people work, consume and spend their leisure time, which are drastically different from how these had evolved up to a century ago. Digitalization has sped up globalization and made the world a much smaller place, where products and ideas are transferred and adopted at a staggering and sometimes even crippling pace (Dickens, 2011).

Historically and geographically, the knowledge economy is mostly located in advanced economies. However, this is no longer an exclusive given, as developing economies increasingly strive to also compete in this arena. In recent decades, Asian countries such as China, Korea, Malaysia and Singapore, as well as South American countries like Costa Rica, Argentina, Chile and Puerto Rico (OECD 2012), have transitioned from agrarian and primary industries to knowledge-based economies. These economies have leapfrogged previous industrialization trajectories, showing that development and growth are not necessarily linear and path-dependent processes (Redding, 2001). However, the current development structure in many African countries looks very different from these Asian and Latin American countries.

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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.