Ethiopia’s rising role in drawing FDI to Africa
Bereket Gebru
The past quarter of a century witnessed the rise of trade relations between states and powerful non-state actors. Cross-border investments have become the order of the day in which private interests are provided with packages of incentives such as tax breaks to start their businesses in countries that scramble to have themselves favored.
A 2012 study presented by the International Journal of Financial Research indicated that FDI has expanded strongly over the past three decades. The study cites UNCTAD as saying that the growth in FDI accelerated in the 1990s, rising to $331 billion in 1995 and $1.3 trillion in 2000.
As a result, goes on the study, developing countries experienced a dramatic increase in foreign direct investment with the annual figure soaring from $24 billion in 1990 to $178 billion in 2000. Despite the general rise of FDI coming into the developing world including Africa, the African share of the total FDI flowing to developing countries decreased steadily. The study states that Africa’s share in total FDI flows dropped significantly from 36% in 1970 – 74 to 10% in 1980 – 84 and to 3% in 1995 – 99. A 2007 UNCTAD report indicates that Africa’s share of global FDI inflows decreased from 3.3% in 2003 to 2.7% in 2006.
Various sources on the forces driving FDI identify both policy and non policy factors as drivers of FDI. Policy factors include openness, product – market regulation, labor market arrangements, corporate tax rates, direct FDI restrictions, trade barriers, human development and infrastructure. Non-policy factors include market size of the host country (often measured by the GDP), distance/transport costs, and political and economic stability.
Africa’s negligible share of FDI inflow out of the global bulk is thus a clear indicator of the weak state of policy and non-policy factors that drive FDI into the continent. The poverty that characterizes the continent obviously reflects the shaky state of non-policy factors. The small size of African economies expressed in modest GDPs and weak purchasing power of the people make them less likely destinations for FDI. The volatile political realities of a number of African countries exacerbate the lack of conducive environment for economic development, effectively discouraging investors from coming in. On the other hand, the frail state of infrastructure in the continent has been a barrier to drawing FDI in. The other market liberalization moves also have a relatively short history in the continent.
A major point to note is that the policy and non-policy factors stated above reinforce each other. For instance, better policies on market regulation would augment GDP increase. On the other hand, a stable political and economic condition would lay the ground work towards expanding the policy factor of infrastructure.
The recent invigorated quest for development in the African continent has brought the continent forward as infrastructure and social services such as health and education have all enjoyed a tremendous bask of sunshine. Accordingly, the state of FDI inflows to the continent has gained a positive momentum.
The World Investment Report 2015 by UNCTAD clearly depicts the steady rise in Africa’s share in global FDI inflows to reach 4.4% in 2014. The report shows that despite a 16% global FDI fall in 2014, inflows to Africa remained stable at $54 billion. “North Africa saw its FDI flows decline by 15% to $12 billion, while flows to Sub-Saharan Africa increase by 5% to $42 billion. In Sub-Saharan Africa, FDI flows to West Africa declined by 10% to $13 billion, as Ebola, regional conflicts and falling commodity prices negatively affected several countries. Flows to Southern Africa also fell by 2 per cent to $11 billion. By contrast, Central Africa and East Africa saw their FDI flows increase by 33 per cent and 11 per cent, to $12 billion and $7 billion, respectively.”
The report goes on to state that East Africa saw its FDI flows increasing by 11 per cent, to $6.8 billion and singled out Tanzania and Ethiopia for claiming a considerable stake of the increased inflows. The report’s findings about Ethiopia’s revamped capacity to draw FDI have also been seconded by recent reports in the international media.
The reports about Ethiopia included two on automobile assemblies and the engine manufacturing plant in the country, the Salini Impregilo contract to build the Koysha dam and Ethio-Sudanese agreement to cooperate in various sectors. The two stories on expanding automobile assembly and manufacturing in Ethiopia deal with foreign investment in Ethiopia while the Koysha dam deals with national investment in social services. The Ethio-Sudanese cooperation also involves various forms of investment.
The country’s FDI drawing capacity has grabbed international attention in recent years as it was identified as Africa’s third largest recipient of FDI in 2013 by UNCTAD’s World Investment Report 2014. The report states that the country registered a 240% increase in FDI inflows from the previous year as it shot up from $279 million to $953 million. The report further states that the country has also registered a significant increase in its Foreign Direct Investment (FDI) stock – the amount of investment from aboard held within the economy.
The report goes on to explain that the inflows to Ethiopia and Kenya lifted the region’s FDI by 15pc to 6.2 billion dollars in 2013. It also tipped the Ethiopian industrial strategy to attract Asian capital to develop its manufacturing base. Various media sources indicated that investment in light manufacturing from China, Turkey and India has the major share in the increase of the amount of foreign investment into Ethiopia.
Bruno Casella from UNCTAD, who presented the major findings of the report, was quoted as saying “Ethiopia is closer to FDI than other parts of Africa.” He also said that the robust economic growth and the growing middle class of Ethiopia have contributed to the attractiveness of Ethiopia as a preferred destination of cross boarder investors.
Some of the major factors that have helped Ethiopia’s rising capability to draw FDI in include:
Rapid economic growth: with a double digit growth over the past dozen years, Ethiopia’s economy has expanded considerably. The purchasing power of the people has also received a boost with the middle class expanding steadily.
Infrastructure development: the road networks of the country have slashed the time it takes a rural resident to get to an all weather road. Roads connecting woreda capitals to rural kebeles have been built in the first growth and transformation plan (GTP I) while those connecting rural kebeles together will be pursued in the second GTP. The country is also building a national rail grid. The power generation capacity of the country has drastically changed with huge hydroelectric generation projects commissioned in recent years along with renewable energy generation projects. Telecommunication and water supply have also shore up in recent years.
Political and economic stability: as the most stable country in the horn of Africa, Ethiopia plays a constructive role to peace and security in the entire region. With periodic elections and peaceful environment, Ethiopia provides an ideal climate for business to thrive in. The sustained economic growth over a dozen years also indicates the economic stability.
Abundant land, plant, animal and mineral resources: the abundance of land for agricultural and industrial purposes coupled with other resources that can be used as raw materials makes the country favourable for investment.
Abundant cheap labour resource: with a population of about over 90 million, and with cheap cost of labor, Ethiopia can provide sufficient labor force which can provide the edge in cost-competitiveness. The cost of labour in the Ethiopian market is lower than some Asian and African nations. The nearly universal access to education in the country also means that the labour force has basic skills that can easily be adapted to various sectors.
Support through policy and incentives: The Ethiopian government has been steadily pushing towards market-oriented reform by means of developing the private sector, deregulating rigid control over the economy, liberalizing foreign exchange, lowering tariff rate, etc. Given that export promotion is of paramount importance, the government has issued a series of export incentives. All in all, in terms of macroeconomic policy, the Ethiopian government has created an enabling environment for the development of the manufacturing sector.
Proximity to major international markets: the location of Ethiopia, in the horn of Africa, on the cross-roads of the Asian and European markets provides easy access. Proximity to the Middle East and the Far East along with Europe is essential in cutting transport costs that increase cost competitiveness further in addition to cheap labour force.
As has been depicted above, Ethiopia’s rise to become one of the top destinations of FDI in recent years is a result of its efforts to make the best out of its policy and non-policy determinants. All the above stated factors directly or indirectly need a sound policy to serve their purpose. For instance, the geographic factor of proximity to major international markets may not be exploited without an appropriate policy in place.
Therefore, the growth of FDI flowing into Ethiopia in folds shows that the country has nurtured the factors supporting the inflow. The national policies that led to rapid economic growth, improved infrastructure, political and economic stability and human development have all helped draw in more FDI. That means the increased FDI is a reflection of the sound policies the country has been pursuing for a couple of decades now.