South-south trade fuels investment growth.

The world in 2006/07 was a significantly kinder and more prosperous place than it was in the preceding couple of decades. And that was mostly because of a more settled global economic environment that expanded at an admittedly tentative 3%.

[ILLUSTRATION OMITTED]

Nonetheless, it was a smoother ride than the world's investors have enjoyed for some time and it encouraged them to spend $1.3 trillion in foreign direct investment (FDI) and mergers and acquisitions.

The story was even brighter for the developing world. Emerging countries continued to demonstrate not only that their economic coming of age was sustainable; it was happening more quickly than was generally realised.

In an unprecedented development, emerging countries began investing in one another because they had most of what was needed to nurture hungry bilateral economic growth.

Two phenomena remove last year's FDI performance from what has become ordinary investment practice. The first is the development of astonishingly robust south-to-south trade and investment, that is, economic activity between emerging countries; and the second is the depth of outward direct investment by countries still classified as 'developing'. Together they have reshaped the world's investment landscape and it is doubtful it will ever again be the way it was just half a decade ago.

[ILLUSTRATION OMITTED]

FDI into Africa doubled between 2004 and 2006 to a record $39bn spurred by the search for primary resources and increased profits and by a generally improved business climate, according to a survey of investment trends by the United Nations Conference on Trade and Development (Unctad).

The report, World Investment Report 2007: Transnational Corporations, Extractive Industries and Development, says that the value of crossborder mergers and acquisitions (M & A) in Africa also reached a record level of $18bn in 2006. About half of those M & As were accounted for by transnational corporations (TNCs) from developing Asia. Greenfield and expansion investments also grew significantly in the African region.

Despite these increases, Africa's share of global FDI declined to 2.7% in 2006 from 3.1% in 2005. Africa's portion of global FDI remains small when compared with South, East and South-East Asia.

African FDI outflows also reached a record level in 2006 of $8bn, up from $2bn in 2005, with South African firms being the main investors from the region. (See Box, right)

However, says the report, prospects for FDI into Africa continue to be positive because of high global commodity prices as transnational corporations, particularly from Asia, take advantage of good returns on investment. But some moderation was forecast for the next years or so due to a pause in large FDI inflows into the oil industries of some countries.

While Africa consumed just a tiny fragment of global investment flow, the encouraging news was that its share in monetary terms grows substantially each year.

"Foreign direct investment in Africa today, although rising, amounts to only 1% of global flows," notes William Easterly, professor of economics at New York University. "That's because the environment for private business in Africa is still hostile. There are some industry and country success stories in Africa, but not enough."

Easterly's views of international business's perceptions of Africa are less accurate today than they might have been five years ago. Risk assessment of the continent is generally less severe, borne out by the number of investors, especially in the venture-sensitive financial sector, that have put down roots in various parts of the continent. Most are reporting returns on investment that eclipse performance in developed countries. Reasons for the continent's turnaround economic performance include Africa not seeming as war-crazy as it was not long ago, dictators being fewer on the ground and a real effort being made by an increasing number of countries at transparency and governance.

In addition, the Organisation for Economic Co-operation and Development (OECD) says the region's annual GDP should hit 6.7% this year spurred on by resource-hungry China and India and oil finds that promise to ratchet Africa to major producer status in quick time.

China has pledged to more than double its aid to the region from the current $40bn to $100bn in the next 10 or 15 years.

"The more optimistic say Africa is the next big thing with the risk profile not the ogre it once was," observes London's Investment Week magazine. "Although some funds caution Africa is only for those with an appetite for high risk, an increasing number of foreign investors are taking the plunge."

A consequence of this realignment in world capital flows means emerging markets will escape, to some extent, the rough economic waters rising for developed states. But the next few years to 2010 will not be as easy sailing. A significant trend was the jump in FDI from developing and transitional economies. Many of these investments ended up in other developing nations and contributed to south-south economic growth.

"There's not a more fascinating story," says Georg Kell, executive director of the United Nations Global Compact (UNGC), "than how commerce and investment are reshaping the relationships between countries. It is an enormous opportunity for development."

The UN report showed that total south-south flows, excluding offshore financial centres, shot up from $2bn in 1985 to $60bn in 2004. "Overall, a global structural change is in full swing," says Kell. "The fact that more and more investment is coming from the south is a most welcome development."

High commodity prices were a factor behind this growth in south-south investment. West Asia logged the highest increase as FDI flows soared by 85% and high oil prices drew dollars to nations such as the United Arab Emirates ($12bn) and Saudi Arabia ($4.6bn). Flows to the giant region of South, East and South-East Asia jumped by 19% to $165bn, with China on top at $72bn. Hong Kong and India were also favourites for foreign investors.

But the special story of 2005 was the emerging role of corporations from the south as investors. In 1990, developing nation firms were responsible for $5bn of outflows and that had jumped to $133bn in 2005. "All indications are that it will be higher for 2006," Kell says, adding that these companies were increasingly active participants in the global marketplace."

Continental GDP growth beats the odds

Africa's risk profile has improved significantly with the demonstration that the upward trend of its economic growth was sustainable. GDP performance improved from 3.5% in 1997 to 6% in 2007 with a span of steady 5.5%-6% growth over the past four years.

Nothing engenders long-term investment more than positive and enduring economic performance and Africa is now giving solid evidence that it is capable of both.

Although economic diversification has become more apparent in recent years, Africa still needs more manufacturing activity based on the beneficiation of its abundant raw materials. The extraction industries still heavily distort the continent's economic performance picture.

But there are signs that the pace of industrial manufacture, already on an upswing thanks to Indian, Chinese and German investment, will continue to pick up for a variety of reasons. In terms of cost efficiency, proximity to raw materials needed for manufacture may outweigh the benefits of cheaper labour, encouraging more companies to emulate Daimler Chrysler South Africa, which will be rolling out new Mercedes C class models from its East London plant in the very near future.