The Role of Fdi in Africa

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1.0 Introduction2
1.1 What is FDI?2
1.2 The background of Foreign Direct Investment in Africa3 2.0 Motives for FDI in Africa6
2.1The importance of foreign direct investment:6
3.0 The Costs And Benefits Of FDI11
4.0 Factors Influencing Investor Decisions12
4.1 Reasons for low FDI in Africa14
5.0 Initiatives taken by African countries to attract FDI16 5.1 Incentives17
5.2 Investment treaties18
5.3 Investment Promotion19
6.0 Policy Related Challenges of FDI20
7. Efforts to Promote FDI in Africa28
7.1 Conclusions33
7.2 Recommendations35

1.0 Introduction
1.1 What is FDI?
Foreign Direct Investment (FDI) is defined as international interest in which a resident in one country obtains a lasting interest in an enterprise resident in another. It is a situation where a foreign country creates a subsidiary to provide goods and services. Thus a firm undertakes FDI in a foreign market if it possessed an ownership advantage over the local competitors. The ownership of the foreign investment usually remains in the investing (home) country. FDI represents the primary means of transfer of private capital (i.e. physical or financial), technology, personnel and access to brand names and marketing advantage.

In most countries, FDI serves as one of the engines of successful transition. To a certain degree, counter-intuitively, most FDI are market-seeking and efficiency seeking motives

In most countries, FDI serves as one of the engines of successful transition. To a certain degree, counter-intuitively, most FDI are market-seeking and efficiency seeking motives.

United Nations Conference on Trade and Development (UNCTAD.1999) findings, reveal that FDI continues to increase at a global level as Multinational Corporations (MNCs) integrate their business operations throughout the world. The report confirms that the FDI transfer technology as well as firm specific assets to host countries. The foreign investors, e.g. USA, Japan and EU (i.e. Triad), and other countries penetrate global markets through FDI. Despite the dominance of market-seeking motives, foreign entities or foreign affiliates turn out to be more export-oriented than local firms. These investors have better access to internal production and distribution networks.

Primary problem to African regions deters foreign investors just as they do others. Limited market size and growth potential (i.e. in terms of per capita income), skill shortage and poor infrastructure are some of basic primary problems affecting foreign direct investment.

FDI is an investment that crosses national borders. Dahl (2002) regards FDI as an investment that have the following three characteristics:

Equity capital – the foreign direct investor’s purchase of shares an enterprise in a country other than its own.

Reinvested earnings – the investor’s share of earnings not distributed as dividends by affiliates. Intra-company loans or intra-company debt transactions – this is the short- or long-term borrowing and lending of funds between direct investors and affiliate enterprises. 1.2 The background of Foreign Direct Investment in Africa

. After gaining political independence in the 1960s, African countries––like most developing nations––were very sceptical about the virtues of free trade and investment. Consequently, in the 1970s and 1980s several countries in the region imposed trade restrictions and capital controls as part of a policy of import substitution industrialization aimed at protecting domestic industries and conserving scarce foreign exchange reserves. There is now substantial evidence that this inward-looking development strategy discouraged trade as well as foreign direct investment (FDI) and had deleterious effects on economic growth and living conditions in the region. From 1980s to current African countries have opened their doors for investors from all over...
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