Strengthening linkages between domestic and foreign direct investment in Africa

Investment is an important driver of growth in both developed and developing countries. There has been a significant increase in domestic investment in Africa over the past two decades. However, despite consistent growth and international support through overseas development assistance (ODA), most countries on the continent still see a wide gap between investment requirements and domestic resource availability. Foreign direct investment (FDI) can play an important role in bridging this gap. But Africa accounts for a very low share of global FDI flows (2.8 per cent) and, more importantly, FDI flows to the continent are concentrated in a few countries and largely in the extractive sector. The latter has reinforced Africa’s dependence on commodity exports and the vulnerability of African countries to external demand and speculation-driven commodity price movements. Moreover, to date, there is no evidence to indicate that FDI in Africa is contributing to economic diversification through backward and forward linkages. Under such circumstances, the tendency of FDI to reinforce enclave-type development – with external integration gaining more importance over the internal integration of the local economy – is a real concern. Against this background, this note questions the automatic efficiency gain assumptions implicit in the design of FDI policies in many African countries. It is misleading to assume that attracting FDI per se will automatically generate opportunities for technology transfer, linkages with domestic enterprises and opportunities for diversification into more dynamic activities. Experience from successful countries show that the contribution of FDI to host country development tends to be greater in countries where the domestic enterprise sector is dynamic and well developed. In this respect, therefore, FDI is a lag rather than a leading variable in the development process. As a result, policies towards FDI should be designed as a complementary component of a wider and more integrated development strategy needed to raise growth, create jobs, build productive capacity and foster a dynamic and vibrant domestic private sector. United Nations TD/B/EX(57)/3