Key message 1 – FDI can catalyse industrialisation and structural transformation, creating new jobs in Africa

By combining long term investment with control, FDI can facilitate the transfer of capability (technology and management know-how), and provide access to regional and global value chains (Prasad et al., 2003). FDI can thus generate productivity gains not only in the firm itself but in the industry as a whole. By increasing within-sector competition, FDI forces domestic firms to increase efficiency and drives out the least efficient firms, thereby improving overall productivity. Second, the technology and know-how of the foreign company can be transferred to domestic firms in the same sector (horizontal spillover) or along the supply chain (vertical spillovers) through the movement of people and goods. Increased productivity leads, in turn, to more decent jobs and a structural shift towards higher value-added activities (Farole & Winkler, 2014).

In the aftermath of the commodity boom, with many countries in Africa stuck with low productivity jobs and a lagging manufacturing sector, FDI can catalyse the structural transformation needed to underpin growth going forward (Sutton & Kellow, 2010). Investment-based strategies that encourage adoption and imitation, rather than innovation, are particularly important for policy approaches in countries at earlier stages of development (Acemoglu, et al., 2006). The East Asian experience over the last three decades has shown how, in a globalising world, FDI can help upgrade and diversify industrial structures of host countries (Chen et al., 2015).

Three observations illustrate the potentially transformative role of FDI in Africa. First, around half the biggest export companies operating in African countries that have successfully gone from low to high industrialisation began as FDI ventures. Second, in the African countries that currently show the greatest prospects for industrialisation, around one fourth of their leading industrial companies are companies of foreign origin. Third, in sub-Saharan African economies as in East Asia, FDI has broadened the scale of activity across existing industries and the range of industrial activities (Sutton & Zhang, in progress).

With the rise of global value chains, Africa has an unprecedented opportunity to attract investment in higher value-added, export-led manufacturing. This has shifted the focus from achieving comparative advantage along the whole production chain in favour of advantages in specific niches (UNECA, 2013). Segmented value chains create opportunities for developing countries to specialise, with FDI productivity spillovers helping them move progressively into higher value-added tasks, over time.

Figure 1: Share of world FDI flows