Intra-African investments prefer services to industry

A just-released report of the Overseas Development Institute (ODI), issued jointly with the AfCFTA Secretariat, SOAS - University of London, and SITA (Supporting Investment and Trade in Africa), provides a comprehensive analysis of the status of foreign direct investment (FDI) in Africa, by comparing the different trends by investors both inside and outside the continent. The main findings of the report are that despite Africa has experienced significant FDI growth since 1990, with inflows reaching $79.6 billion in 2021, Africa's share of global FDI remains relatively small. However, there is also a good news.

Intra-African investments (investments directed from one African country to another) is on the rise, having reached an estimated 5-17% of the total inward FDI that the continent receives. This type of investments are particularly important, as they have a strong potential to promote regional integration and economic diversification, the report notes. But there is unfortunately also a negative side. The quantity of jobs created so far by intra-African investments is still small, and is much lower than jobs created by investors external to the continent. Indeed, the jobs created by intra-African investments represent only 9% of the total jobs created by total FDI attracted by Africa over the past two decades.

This seems to be a paradox. But looking at the sectoral composition of such investments, the answer comes easy. Intra-African investments are mainly directed to services, which are known to create fewer jobs than the manufacturing and industrial sectors, where extra-African investment flows are mainly concentrated.

While extra-African investors seem to prefer to invest in extractive or energy sectors such as coal, oil and gas, and a more recently, renewable energies, African investors prefer communications, finance, business and tourism. For what concerns agriculture, this sector is still neglected by both international and African investors. However, an exception is India, as this country poured more resources than other countries for the development of this sector in Africa.

However, this scenario is expected to change in future, once the AfCFTA Protocol on Investment will be fully implemented. As a matter of fact, this Protocol should promote a greater diversification of intra-African investments, redirecting part of them to agriculture, manufacturing and industrial sectors. Or at least it is hoped so.

Among African States, South Africa emerges as the continent's leading intra-African investor, followed by Mauritius and Côte d’Ivoire. Particularly interesting is the position of Mauritius, which attracts significant FDI from other African countries and at the same time is a major source of outward FDI flows to Africa. The country also tends to be used as an offshore financial hub for channelling FDI into other countries thanks to its solid, reputable and efficient banking system. An example of a not particularly resources-rich country that has turned services (financial services in particular), in one of the main drivers of its growth.