Growing Confidence for Investments in Africa

Workers at a South African car plant
Workers at a South African car plant

Growing optimism and confidence among international and local investors has led to significant inward investment into the continent over the last decade, according to professional services firm, Ernst & Young’s second African Attractiveness Survey.

The number of new foreign direct investment (FDI) projects in Africa grew in 2011, with project numbers almost up to levels last seen in 2008. In the last decade, Africa has seen an increase in inward investment from 339 new projects in 2003 to 857 in 2011 (an increase of 153%). Investment has come from both developed and emerging markets, as well as intra-African investment.

India has led the way as the fourth largest FDI investor by number of projects since 2003 with annual compound growth of 46% since 2007. China and the UAE remain prominent too, but there is high growth in investment from an increasingly diverse range of other rapid growth markets, with South Korea, Saudi Arabia and Turkey among those at the forefront.

Says Mark Otty, area managing partner for Europe, Middle East, India and Africa at Ernst & Young: “With rapid-growth markets not only dominating investor attention and capital flows, but also playing an increasingly strategic role in defining the global economic agenda, the competition for global FDI is intensifying. African countries must position themselves appropriately in this shifting landscape to attract a greater proportion of the investment that will accelerate growth and development.”

The African Attractiveness Survey report combines an annual analysis of investment into Africa since 2003, with a survey of 505 global executives on their views about how and where investment will take place in the next decade.

Perception versus reality

The 2012 survey paints a positive picture, reflecting growing confidence in Africa’s prospects. 60% of survey respondents say that their perception of Africa as a place to do business has improved over the past three years. Looking forward, 73% of respondents anticipate that Africa’s attractiveness will improve over the next three years, while only 4% believe it will deteriorate.

Of those who believe that Africa’s growth prospects in the near term are significantly positive, half have a dedicated Africa strategy in place, and 92% have an active business presence on the continent.

However, the survey results also highlight that there is stark difference in perception between those who are already operating in Africa, and those who do not. This is manifested in the low percentage (at 5.5%) of global FDI projects that Africa attracted in 2011. While this is up from 4.5% in 2010 and is, in fact, the highest proportion of global FDI that Africa has ever received, reservations remain amongst those who have not yet invested into the continent.

“Despite high optimism, high growth and high returns, the perception gap still exists and the African continent as a whole still attracts fewer FDI projects than India and far fewer than China. There is still clearly work to be done by Africans – government and private sector alike – to better articulate and “sell” the growth story and investment opportunity for foreign investors,” says Ajen Sita, managing partner for Africa at Ernst & Young.

Intra-African investment leads the way

A key theme highlighted in the report is the growing confidence, self-belief and commitment by Africans to move Africa forward, reflected in the substantial growth of intra-African investment. Between 2003 and 2011, there has been 23% annual compound growth in intra-African investment into new FDI projects. This growth has been accelerating, with the growth rate up by 42% since 2007.

Over a period in which the annual number of FDI projects into Africa has more than doubled – from 339 in 2003 to 857 in 2011 – intra-African investment has grown exponentially with project numbers increasing from 27 in 2003 to 145 in 2011. As a result, in 2011, intra-African investment accounted for 17% of all new FDI projects on the continent.

The growth in intra-African investment is led by Kenya, Nigeria and South Africa. The three countries are ranked among the top 20 investors on the continent between 2003 and 2011. Since 2007, the growth rate in investment from Kenya, Nigeria and South Africa has been 78%, 73% and 65% respectively.

“There has been a radical shift in mindset and positioning over the last decade, with Africans themselves increasingly leading from the front by providing African solutions to Africa’s challenges. Clearly work still remains to be done, but pushing ahead with key initiatives such as regional integration and investment in infrastructure will ensure that Africa remains on a sustainable growth curve,” says Sita.

Moving beyond dependence on commodities

The 2011 African Attractiveness Survey highlighted the growing diversification of FDI as a key trend. This has continued, with even greater levels of investment into less capital-intensive sectors, which has resulted in increased flows into manufacturing, business services and sales, and marketing and support industries. There is a definite shift from the traditional extractive industries.

Looking ahead

Africa remains high on the agenda of those looking to invest in foreign markets but despite the growth and progress, a perception gap remains. However, significant improvements in trade agreements, regional integration and an increased investment in infrastructure will push Africa into the top league of investment destinations.

Says Sita: “In the midst of a global economy that is being reshaped, with growth and capital flows shifting from north to south and west to east, Africans have a unique opportunity to break the structural constraints that have marginalised the continent for decades, if not centuries.”