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.
FDI can catalyse industrialisation and structural transformation, creating new jobs in Africa.
By increasing firm capabilities and generating important productivity spillovers, through technology and know-how transfers, FDI can help engineer a structural shift to higher productivity jobs and high-value added industry niches.
Infrastructure, institutions, and incentives must be addressed to attract more FDI.
Improved infrastructure, especially in power and transport; stronger institutions, from border controls to investment promotion agencies; and reductions in price-distorting trade policies are needed to attract FDI.
Policies to promote FDI must also seek to get more out of FDI.
The broader benefits of FDI are not automatic. Policies to facilitate spillovers and backward linkages are crucial to ensuring that FDI contributes to structural transformation and 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.
Rather than being a leading sector, manufacturing in Africa has been lagging. This has contributed to stagnation in growth potential and job creation in high value-added sectors, hampering economic growth (Ansu et al., 2016).
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.