Unlocking Sustainable Development: How Foreign Direct Investment Shapes Africa’s Future

Introduction

Foreign direct investment (FDI) is a critical method of shaping economic growth and development for developing countries.[1] But while instances of cross-border capital flow aim to foster improvement, it is becoming increasingly apparent that FDI is not the significant beneficiary of sustainable development it was originally believed to be.[2] The United Nations’ 2030 Agenda of Sustainable Development Goals (SDGs) are nowhere near their desired or planned standings.[3]

This article critically examines the current state of FDI and its effects on Africa’s developing economy, uncovers the challenges foreign investment is facing and searches for potential steps forward in achieving sustainability goals.

Conceptual and Theoretical Frameworks

Foreign Direct Investment

FDI is an investment from one country to another, in the private or public sector, to create lasting connections and trade.[4] There are multiple methods to FDI, including mergers and acquisitions, foreign joint ventures, and subsidiary openings. A key distinguishing aspect of FDI is the degree of control it offers foreign investors; they maintain the authority to effectively manage and operate their firm’s operations in the recipient nation. Capital investments, a form of FDI, differ as they refer to purely financial investments, like buying stakes in foreign companies, while FDI can refer to all investments i.e. financial, human capital and technology.[5]

Sustainable Development

Sustainable development is the foundation of international cooperation where the needs of the present can be achieved without compromising future goals.[6] The United Nations describes this concept as trying to juggle three different balls: economic growth, social inclusion, and environmental protection.[7] The goal is to create sustainable development where access to work, healthcare and education is not scarce, and the planet is protected through avoiding pollution and other harmful damages to the environment.

2030 Agenda of Sustainable Development (2030 Agenda)

The United Nations released the 2030 Agenda in 2015, it’s a global plan to secure and protect global well-being while maintaining a thriving and sustainable planet.[8] This document is a roadmap for protecting the planet, reducing inequalities and fighting poverty. The 2030 Agenda also notes 17 Sustainable Development Goals (SDGs), which offer steps forward to tackling human rights abuses, climate change, and environmental degradation[9].

Agenda 2063

Similar to the 2030 Agenda, Agenda 2063 was created by the African Union as a strategic framework for accomplishing the continent’s sustainable development goals. Published in 2013, this 50-year plan aims to tackle a variety of structural transformations, including reducing the number of conflicts, spurring economic growth, creating social progress and forming a unified and sustainable Africa[10].

African Continental Free Trade Area (AfCFTA)

In terms of greatest participation by independent nations, the AfCFTA is the largest trade agreement in the world.[11] Its goal is to uplift African economies through increased job opportunities and poverty eradication. The agreement outlines various trade regulations including reduced tariffs, established sanitary standards, and combating technical barriers.[12]

Where FDI Stands Today

Who is investing, how much, and where?

As of 2023, the United States is the largest investor in Africa, contributing 13% to the continent’s total FDI inflow with 733 total projects.[13] However, the UAE leads in capital investment, surpassing the US by $49.9 billion, France by $26.5 billion, and India by $22.2 billion.[14] South Africa and Egypt are the biggest regional beneficiaries of FDI, with Morocco and Nigeria as the smallest.[15]

While individual foreign investors fluctuate in their degree of involvement in the region, overall, the African continent continues to see continued FDI inflows. The UAE, for example, is boosting its presence as a foreign investor, leading Africa’s capital inflows with over $40 billion and creating over 18,000 jobs.[16] Additionally, India’s investment is rising, now the third largest capital contributor after the UAE and China. Many Indian companies are drawn in because of natural resource-rich nations like Nigeria and Ghana and sectors like agribusiness, pharmaceuticals, and communication technology that seem economically promising.[17] China’s FDI involvement, however, fell 8% from 2018 to 2022. But, from 2016 to 2022, China was fourth in project involvement and second in capital investment.[18] Despite major investments in infrastructure, many African nations are facing a debt burden, lowering construction demands; thus, investors like China are also shifting to less risky investments with higher-yielding results.

Why are FDI levels changing?

A variety of economic and social factors can lead to fluctuating levels in FDI. Specific macroeconomic factors including a nation’s trade and transportation abilities, comparative economic strength, and interest rates have all been shown to have a significant correlation with FDI levels[19]. For example, trade ability has a positive relationship with FDI, where increases in one lead to increases in the other. On the other hand, interest rates significantly negatively impact FDI where high interest rates discourage investors and stability draws them in. Additionally, social factors like political instability and terrorism deter foreign investment. Given the developing nature of many African nations, the combination of social and economic imbalance discourages FDI.[20]

Does FDI contribute positively to sustainable development goals?

The purpose of FDI is to bolster economic and sustainable development, but the desired goals are not always the reality. There are significant risks that host countries face with FDI involvement that could result in a declining movement towards sustainability goals. For example, FDI has the potential to enhance socio-economic inequalities by overpowering local investments, straining foreign exchange reserves and degrading environmental quality.[21]

A recent study aimed at uncovering the link between FDI and sustainable development, measured a combination of a nation’s net change in wealth against several economic, social and ecological components.[22] Analyzing data from 48 different African countries over a thirty year period, the results showed a negative relationship between FDI and sustainable development across the countries studied.[23] Furthermore, the severity of this causality was comparatibely more pronounced in low-income nations.

The University of Innsbruck and the Lisbon School of Economics & Management published a study that revealed that although there is evidence that FDI positively contributes towards sustainable development within some sectors, i.e. infrastructure, clean water, sanitation and renewable energy, in a few cases, generally there are more negative consequences of such investments.[24] The analysis of 44 African countries, their respective SDG scores and the presence of foreign investors shows that the comprehensive relationship between FDI and the likelihood of accomplishing the 2030 Agenda is negative.

The relationship between FDI and SDGs is intensely complex with various positives and negatives to the situation. While research shows that there is a negative relationship between the two, in their current form, and the desired sustainability goals are not likely to be achieved, not all impacts are inherently negative. For future progress, alterations in policies and economic initiatives are needed to turn the negative relationship positive.

Moving Forward

What Attracts FDI

In general, domestic policies which advocate for open markets and financial liberation are positively correlated with FDI inflows.[25] However, while such policies aim to better African economies, the beneficial effects of trade openness and liberation can be marginal for sub-Saharan countries as investors believe such changes could be temporary.[26] Additionally, in lieu of increasing foreign investment incentives African governments’ focus on mitigating drastic policy changes and ensuring enforcement of existing legislation may be a more beneficial strategy to reach sustainable development targets.[27] Economic analysis by the USDA demonstrated that policy changes that seem temporary to investors, i.e. have a high risk of reversal, act as FDI taxes on investment — deterring private investors from buying in.[28]

Aside from investment policy developments, reducing civil conflict and political instability is critical to improving African economies.[29] In 2022, the World Bank found 14 African countries to be facing medium-high intensity conflicts, while further correlating such instabilities with negative impacts on economic functions such as market access, labor markets, and banking services.[30]

What Can Be Improved

AfCFTA and Agenda 2063 provide significant opportunities to improve and grow African economies through trade liberalization and increased market opportunities.[31] Smaller, more domestic policies, like the Kenya Investment Policy and Mauritius’ Double Taxation Avoidance Agreements also aim to attract foreign investment while creating stable regulatory frameworks.[32] While these policies and frameworks are steps in the right direction, the following concepts can further enhance growth prospects:

1. Focus on specific sectors of FDI → Since FDI benefits can be harmed by socio-ecological costs, focusing investments on sectors like technology, core infrastructure, and human capital which aim to protect natural resources and decrease air pollution.[33]
2. FDI flows to manufacturing sectors also boost productivity of financial services, telecommunications and infrastructure.[34]
3. Enhancing Information and Data Availability → Improves transparency between home nations and foreign investors on a nation’s credit rating, allowing for better due diligence and project risk assessment.[35]
4. Stabilize institutions and infrastructures → Balanced government systems, electric and transportation infrastructures, and trade agencies create low-risk circumstances likely to draw investors in.[36]

In all, FDI has positive and negative effects on African economies, but to enhance the benefits and reduce the drawbacks, the current models require change. By implementing the recommendations it might lead to the positive consequences FDI hopes to achieve for African nations seeking sustainable development.

[1] Loungani, P, and A Razin, ‘How Beneficial Is Foreign Direct Investment for Developing Countries?’, International Monetary Fund, Jun 2001.

<https://www.imf.org/external/pubs/ft/fandd/2001/06/loungani.htm#:~:text=FDI%20allows%20the%20transfer%20of,in%20the%20domestic%20input%20market >

[2] Benedict, A et al., ‘Unlocking Africa’s Potential: The Transformative Power of Foreign Direct Investment for Sustainable Development’, Heliyon, 10/5, published online 28 Feb. 2024,

<https://doi.org/10.1016/j.heliyon.2024.e26507 >, E26507.

[3] Butler, C., ‘The Sdgs Are Not on Track: Here is what the World Should Do’, Council of Foreign Relations [website], 10 October 2023, <https://www.cfr.org/councilofcouncils/global-memos/sdgs-are-not-track-here-what-world-should-do >

[4] ‘Foreign Direct Investment (FDI)’ Corporate Finance Institute [website],

< https://corporatefinanceinstitute.com/resources/economics/foreign-direct-investment-fdi/ >

[5] Hayes, A., ‘Foreign Direct Investment (FDI): What It Is, Types, and Examples’, Investopedia [website], 6 June 2024, < https://www.investopedia.com/terms/f/fdi.asp >

[6] ‘Sustainable Development’ International Institute for Sustainable Development [website],

< https://www.iisd.org/mission-and-goals/sustainable-development >

[7] ‘Fast Facts — What is Sustainable Development? — United Nations Sustainable Development’ United Nations Sustainable Development [website], 08 Aug. 2023, United Nations

<https://www.un.org/sustainabledevelopment/blog/2023/08/what-is-sustainable-development/ >

[8] As above. .

[9] ‘The Sustainable Development Agenda’ United Nations Sustainable Development [website], 2023, United Nations < https://www.un.org/sustainabledevelopment/development-agenda/ >

[10] ‘Agenda 2063: The Africa We Want’ African Union [website] The African Union Commission < https://au.int/en/agenda2063/overview >

[11] Maliszewska, M et al., ‘The African Continental Free Trade Area’, World Bank [website], 27 July 2020, The World Bank

<https://www.worldbank.org/en/topic/trade/publication/the-african-continental-free-trade-area >

[12] As Above.

[13] ‘Africa Attractiveness Report 2023’ EY [website], 2023, EYGM Limited < https://www.ey.com/en_za/attractiveness/21/africa-attractiveness-report- >

[14] As Above.

[15] ‘Africa Attractiveness Report 2023’ (n 13).

[16] ‘Africa Attractiveness Report 2023’ (n 13).

[17] ‘Africa Attractiveness Report 2023’ (n 13).

[18] ‘Africa Attractiveness Report 2023’ (n 13).

[19] Rathnayake, S et al., ‘Macroeconomic Factors Affecting Fdi in the African Region’, PLoS One. 18/1, published online 23 Jan. 2023, < https://doi.org/10.1371/journal.pone.0280843 > E0280843.

[20] As Above.

[21] Benedict (n 2).

[22] Benedict (n 2).

[23] Benedict (n 2).

[24] Aust, V, A. I. Morais., and I. Pinto, ‘How Does Foreign Direct Investment Contribute to Sustainable Development Goals? Evidence from African Countries’, Journal of Cleaner Production, 245, published online 15 October 2019, < https://doi.org/10.1016/j.jclepro.2019.118823 >, 118823.

[25]Morgan, S, J. Farris, and M. E. Johnson, Foreign Direct Investment in Africa: Recent Trends Leading Up to the African Continental Free Trade Area (AfCFTA) [PDF], 2022, U.S. Department of Agriculture < https://www.ers.usda.gov/webdocs/publications/104996/eib-242.pdf?v=3027.7 >

[26] As above.

[27] Morgan (n 25).

[28] Morgan (n 25).

[29] Morgan (n 25).

[30] Morgan (n 25).

[31] Morgan (n 25).

[32] ‘2023 Investment Climate Statements: Mauritius’ U.S. Department of State [website] < https://www.state.gov/reports/2023-investment-climate-statements/mauritius/ >

[33]Benedict (n 2).

[34] Sutton, J et al., Harnessing FDI for Job Creation and Industrialisation in Africa [PDF], 2016, International Growth Center <https://www.theigc.org/sites/default/files/2016/05/GrowthBrief_FDI-in-Africa-FINAL_WEB.pdf >

[35]’Africa’s Development Dynamics 2023: Investing in Sustainable Development’ Africa’s Development Dynamics [PDF], 7 July 2023, African Union Commission and OECD

<https://doi.org/10.1787/3269532b-en >

[36] Morgan (n 25); Sutton (n 35).