The Asia connection.

Foreign direct investment in Africa by developing Asian economies is on the rise and has the potential to reach much higher levels, according to a joint report by Unctad and the United Nations Development Programme (UNDP) titled: Asian Foreign Direct Investment in Africa: Towards a New Era of Cooperation among Developing Countries.

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Most such investment is now targeted at African natural resources, but the report contends that if appropriate policies are adopted more may be channelled into industry and manufacturing.

China, specifically, has shown an appetite for beneficiation in Africa with an offer to build an oil refinery in Nigeria, and the possibility of others in the future.

In Zimbabwe, Zambia and Mozambique, Chinese agri-companies are investing in farming enterprises, while Indian and Chinese investors are becoming active owners of coal mines and oil concessions.

The report notes that Africa-bound FDI is still a small percentage of the rapidly climbing foreign investments being made by Asian TNCs. East and South-East Asia are now home to almost four-fifths of the top 100 TNCs from developing countries.

Outward Asian FDI has expanded rapidly, reaching a record $90bn in 2006. During 2002-2004, FDI outflows from developing Asia averaged $46bn, of which flows to Africa made up only $1.2bn annually. Most of the total goes to other Asian economies; that directed from Asia to Africa nonetheless makes up the largest inter-regional FDI flow in the developing world.

There is rising interest in Africa as an investment location, in part because of the complementary nature of economic development between Asian and African countries.

Traditionally, FDI flows from developing Asia to Africa were mainly from the Asian newly industrialising economies (Hong Kong, Republic of Korea, Singapore, and Taiwan). But recently, China and India have emerged as significant sources.

Singapore, India and Malaysia currently are the top Asian originators of FDI in Africa, with investment stocks of $3.5bn (cumulative approved flows from 1996 to 2004), $2bn and $1.9bn through 2004 respectively, followed by China, the Republic of Korea, and Taiwan.

Over the past few years, China has become one of Africa's important partners for trade and economic cooperation. Trade (exports and imports) between Africa and China increased from $11bn in 2000 to $56bn in 2006. China's FDI stock in Africa had reached $1.6bn by 2005, with Chinese companies present in 48 African countries, although Africa still accounts for only 3% of China's outward FDI. A few African countries have attracted the bulk of China's FDI in Africa: Sudan is the largest recipient (and the 9th largest recipient of Chinese FDI worldwide), followed by Algeria (18th) and Zambia (19th).

How trade becomes investment

Over the past 15 years, trade flows between Africa and Asia have increased rapidly, the hallmark of the recent growth of south-south trade and the consequent development of investment.

During 1990-95, Africa's exports to Asia grew by 15% and, over the past five years, by 20%, with Africa's export growth to Asia surpassing that to all other regions (Chart 1).

Asia is now Africa's third most important export destination after the EU and the US. Africa's imports from Asia have also grown, but less rapidly than exports (Chart 2).

Manufactured products account for only 20% of Africa's total exports, and the pattern of Africa's exports to Asia is consistent with this global trend. Commodities account for 86% of SSA's exports to Asia, and 80% of SSA's imports from Asia are manufactured goods.

But the dynamics at work suggest growing synergy between the continents. African countries could supply processed materials to Asian countries, linked to industrial and consumer growth.

The expanding populations in China and India with higher incomes are spurring purchases from Africa. At the same time, Africa is importing Asian manufactured products for consumption by households and for use as capital goods in the manufacturing sector, in which growth is taking off. China and India have doubled their annual growth rates of Africa's exports and imports between 1990-94 and 1999-2004 (Charts 3 and 4).

Africa exports mainly petroleum and raw materials to China and non-oil minerals to India, although this will change in the next few years as Asian investment in manufacturing capacity in Africa begins to roll out goods. Africa's exports of oil and natural gas to China account for more than 62% of its total exports to that country, followed by ores and metals (17%) and agricultural raw materials (7%). Africa's exports to India are also dominated by resource-based products, with ore and metals accounting for 61% and agricultural raw materials for 19%.

From China and India, Africa imports more value-added commodities--mainly textiles and apparel, electric machinery and equipment and such consumer products as medicine, cosmetics, and batteries. Manufactured products account for 87% of imports from China.

A potential investment magnet

Africa has the potential to become an important investment location for Asian companies in particular. The rapid economic growth in Asia can be expected to lead to increased Asian investments in Africa, in both natural resources and manufacturing.

In particular, the rapid industrial upgrading taking place in Asia provides ample opportunities for Africa to attract efficiency-seeking and export-oriented FDI from Asian economies.

To reap the potential of expanding Asian interest, African governments could draw on important lessons from many Asian countries now showing high economic growth and upgraded industrial activity. Those countries made strategic investments in education and infrastructure that were crucial not only for promoting economic development in general, but for attracting and benefiting from efficiency-seeking and export-oriented FDI.

African countries need to make substantial efforts to enhance their productive capacities in a variety of industries, the report, Asian Foreign Direct Investment in Africa: Towards a New Era of Cooperation among Developing Countries, says.

Sector-neutral and passive policies should be replaced by flexible, well-targeted efforts to spur FDI that leads to broad-based growth. An important objective for African countries where FDI is concentrated in extractive industries should be to add value to existing investments and to promote investment in other sectors.

African governments need to pay attention to attracting manufacturing projects and to building the domestic capabilities necessary for such activities. They should also strive to enhance "backward" linkages between foreign affiliates and domestic firms, especially small and medium-sized enterprises.

RELATED ARTICLE: Asia dominates

Africa's exports to all destinations have increased, with Asia accounting for the strongest growth.

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China         40%
India         9%
Rest of Asis  51%

African exports to Asia, 2004

Note: Table made from pie chart.