Growth brief: Harnessing FDI for job creation and industrialisation in Africa

During the last decade and a half, African economies grew at nearly double the rate of the 1990s. However, the commodity boom obscured a key weakness in African economic performance – slow manufacturing growth.

Productivity increases in Africa, after 2000, happened without the deep structural change that shifts labour from low to high productivity jobs (McMillan et al., 2014). Moreover, the recent wave of trade globalisation and FDI in manufacturing has largely passed Africa by. In a period when most developing countries’ shares of global manufactured exports have more than doubled, Africa’s has stagnated in the low single digits.

Increasing FDI can enable Africa to raise productivity and expand high value-added activities. Recent studies show that FDI can generate productivity spillovers, which in turn could create decent jobs and a sustained impact on growth and development in Africa. Making it easier and more attractive for foreign firms to invest in African manufacturing and high-value added services should therefore be a priority for governments and international donors.

The growing importance of global value chains and trade in “tasks” (intermediate goods and services) create new opportunities for FDI in Africa. To exploit these opportunities and attract FDI, the main constraints that need to be addressed are the poor quality of institutions, inadequate infrastructure, and policy-distorting price incentives. These actions must be accompanied by policies to increase FDI spillovers and backward linkages to support structural transformation and growth.