To accelerate the pace of structural transformation, countries should target FDI in the manufacturing sector. High value-added tradable services, agro-industrial activities and services that directly impact the productivity of modern firms, such as financial services, telecommunications and infrastructure should also be considered.
To attract FDI to Africa, policies must be put in place to address constraints in three key areas: infrastructure, institutions and incentives.
On infrastructure, policies should focus on improving access to and reliability of competitively priced electric power, and upgrading the transportation system and ports, as well as improving policies to promote the efficient use of existing infrastructure.
On institutions, policies should focus on improving investment promotion agencies; export promotion agencies; standards bodies; border control authorities; and customs.
On incentives, policies should focus on reducing anti-export bias in tariffs and nontariff barriers, on maintaining competitive real exchange rates, and on the potential role for SEZs.
To harness the benefits of FDI, attention must be given to enhancing the potential for spillovers through backward linkages. The evidence on FDI spillovers shows that the main benefits flow through the domestic supply chains of MNEs (‘vertical linkages’). Thus, encouraging the creation of Local Content Units may be helpful, especially in the case of extractives. Also, efforts to improve backbone network services and financial services can be crucial to further growth in manufacturing.