China is set to dominate Africa‘s foreign direct investment (FDI) landscape during the next decade and is in the process of diversifying its investments away from mining and infrastructure to service industries, including scientific research and technology services, transport, warehousing and postal services.
The Covid-19 pandemic had a significant impact on FDI in Africa, as flows to the continent nosedived by 16% to $40bn in 2020, from $47bn in 2019, according to the UN Conference on Trade and Development (UNCTAD). Greenfield project announcements – a measure of investor sentiment and future FDI trends – dropped by 62% to $29bn in 2020, from $77bn in 2019. International project finance announcements – especially relevant for large infrastructure projects – plummeted by 74% to $32bn.
FDI inflows to North Africa contracted by 25% to $10bn during 2020, down from $14bn in 2019, while inflows into sub-Saharan Africa plummeted by 12% to $30bn. Senegal was among the few economies on the continent that received higher inflows in 2020, with a 39% jump to $1.5bn, owing to investments in the energy sector. Foreign investment in Africa directed towards sectors related to the UN’s Sustainable Development Goals fell considerably in almost all sectors in 2020. Renewable energy was an outlier, with international project finance deals surging by 28% to $11bn, up from $9.1bn in 2019. Africa’s share in the FDI inflows of developing economies declined from 6.3% to 5.9% in 2020.
Africa’s FDI inflows are expected to rebound in 2022, but the new Omicron variant of Covid-19 is complicating the recovery. The African Development Bank had to postpone its Africa Investment Forum in Abidjan in Côte d’Ivoire at the start of December – it is the continent’s premier investment conference and $110bn of projects were expected to be discussed. According to a GlobalData forecast, in 2022 South Africa will have the most greenfield FDI projects in Africa at 104 (compared with 107 in 2021), followed by Kenya at 97 (93), Morocco at 78 (81), Egypt at 70 (65) and Nigeria at 65 (60).
In terms of the stock of FDI in Africa, in 2019 the Netherlands was the continent’s biggest investor (with an FDI stock of $67bn), followed by the UK ($66bn), France ($65bn) and China ($44bn), according to UNCTAD. The US was in fifth place at $43bn – in terms of FDI stock, China first became a bigger investor in Africa than the US in 2014.
Since 2003, annual flows of Chinese FDI into Africa have surged from a mere $74.8m in 2003 to $5.4bn in 2018, according to the Statistical Bulletin of China’s Outward Foreign Direct Investment. Inflows to Africa declined to $2.7bn in 2019 but then – despite the Covid-19 pandemic – swung up again to $4.2bn in 2020. China’s FDI stock in Africa rocketed almost a hundred-fold, from $490m in 2003 to $43.4bn in 2020, peaking in 2018 at $46.1bn. Loans from China to Africa were estimated at $153bn between 2000 and 2019. The top ten recipient countries of Chinese FDI – such as the Democratic Republic of Congo (DRC) and South Africa – accounted for 63% of the total Chinese FDI stock in Africa.
China rises to become Africa's biggest trading partner
China has been Africa’s largest trading partner for 12 years, even though bilateral trade declined by 10.5% to $187bn in 2019. In November 2021, at the Forum on China-Africa Cooperation in Dakar, Senegal, China committed $10bn in private FDI to Africa over the next three years.
"Currently, 90% of Chinese companies that invest in Africa are private companies," says Dr Shirley Ze Yu, director of the London School of Economics' China-Africa Initiative. "Private companies will take on different investment characteristics from the state-owned companies. Rather than investing in energy, transportation and infrastructure, they will invest in the sectors that are suitable for an Africa middle class, including agriculture, food processing, entertainment, real estate and finance.
"Sub-Saharan Africa boasts 350 million middle-class members. This size of this middle class is approaching the size of the middle class in China. Chinese companies will increasingly invest in Africa to profit from this rising middle class. Chinese companies will also capitalise on the labour premium in Africa. FDI will tend to flow into countries that have already established the basic infrastructure for its economic take-off, and countries that have the educational foundation to ensure the strong supply of a well-trained labour force. Nigeria, Kenya, Rwanda, South Africa and Egypt will stand to be some of the promising countries."
The construction sector – for example, the building of Chinese-operated special economic zones, or toll roads, or bridges – has been the largest channel for Chinese FDI during the past five years, accounting for 35% of total investment in 2020 (followed by FDI into mining at 21%). For instance, one-third of Africa’s power grid and energy infrastructure has been financed and constructed by state-owned Chinese companies since 2010.
China’s per capita GDP hit $11,000 in 2020, solidly placing it in the upper band of a high middle-income country. Consequently, it no longer has the labour cost efficiency essential for middle to low-end global supply chains. By contrast, sub-Saharan Africa’s GDP per capita was $1,596 in 2019. Considering China’s relatively high labour costs and logistics expenses, it is much more appealing for a Chinese company to produce in Africa for Africa.
China has created 25 economic and trade cooperation zones in 16 African countries. The zones, registered with China’s Ministry of Commerce, had attracted 623 businesses with a total investment of $7.35bn at the end of 2020, according to the China-Africa Economic and Trade Relationship Annual Report 2021. China's overseas economic and trade cooperation zones help boost local industrialisation in a range of sectors, including natural resources, agriculture, manufacturing, and trade and logistics.
Africa's service sector will prove attractive to FDI
Africa's services industries are expected to become a lot more important to foreign investors during the next decade, particularly in digital services, cloud services, e-commerce, fintech, entertainment, financial services, technology services and tourism.
FDI is shifting away from extractive industries in Africa towards more service-based investments, according to EY, the professional services company. The share of FDI into the service sectors in Africa – including business services, telecommunications, media and technology, financial services and consumer – is rising rapidly.
"Service-based sectors remain the major focus for foreign investors," says Sandile Hlophe, EY's Africa government and infrastructure leader. "There are three main reasons why. First, Africa's youthful population is increasingly using digital platforms – not only social media but to view goods and services virtually before purchase. Second, we are seeing service industries emerge around the renewable energy and telecoms sectors – this could be in the installation and servicing of solar panels and telecommunications towers, for example. Third, global investors have a lot more visibility about the markets in Africa and the demographic changes taking place on the continent. Before the pandemic, they had to travel to the region to see the opportunities – now they can just undertake market intelligence or reconnaissance online."
The African Continental Free Trade Area (AfCFTA) – the world's biggest free-trade area measured by the number of countries participating (54), which went live on 1 January 2021 – offers new opportunities for foreign businesses to use Africa as a global platform. Not only can they capitalise on the large African markets, they can also benefit from the advantages – in particular, the low labour costs – the region provides for trading with the rest of the world. Africa could become a platform to manufacture and export to other parts of the globe.
Intra-African investment is an integral part of the Africa Union's Agenda 2063, a blueprint to transform the continent into a global economic powerhouse, according to IBG Nigeria, a consulting company. The implementation of AfCFTA will be a step towards achieving this objective. Bigger economies – such as Nigeria, Egypt, Morocco and South Africa – are expected to push the agenda forward. For example, there could be a rise in pan-African corporations in an array of business sectors, including manufacturing, financial services, telecommunications, retail and hospitality services.
"Africa’s low level of development, mineral endowment and rapidly expanding populations suggest that the continent is an attractive investment destination," says Isaac Matshego, an economist at Nedbank, the South African banking group. "Macroeconomic policies are improving and becoming more aligned with development goals, but the pace of reform remains slow. Liberalisation of services sectors and infrastructure development will help attract investment outside the traditional commodities sectors. Overall, the continent has the potential to attract significant investments, but it will only be unlocked by business-friendly policies.
"Intra-African investment is likely to benefit from the AfCFTA. Still, the slow adoption of its tenets by the large economies, in particular, will inhibit investment from other African countries. For instance, South African companies have withdrawn from Nigeria and Uganda as those economies adopted protectionist, inward-looking policies that have tightened the movement of goods and services across their borders."
Murega Mungai, trading desk manager at AZA Finance, based in Nairobi, says: "Manufacturing and mining will become increasingly attractive to investors and critical to economic growth due to the proximity to raw materials, combined with information technology given the range of untapped markets in the technology space. The service sectors more broadly could also benefit from the increasing technological innovations that are disrupting delivery of services.
"Investment trends are driven first and foremost by the need to see political and macroeconomic stability, as well as improving infrastructure in many African economies."
Africa population boom and what it means for FDI
By 2030, Africa will be home to nearly 1.7 billion people and an estimated $6.7trn-worth of consumer and business spending, according to the book Unlocking Africa’s Business Potential by Landry Signé. By 2050, the region will have an estimated $16.1trn of combined consumer and business spending. Such growth will offer tremendous opportunities for Western companies in household consumption (estimated at $8trn) in sectors including food and beverages, housing, hospitality and recreation, healthcare, financial services, education, transport and consumer goods. There will also be huge opportunities in business-to-business spending.
Africa already has one of the fastest-growing mobile phone markets in the world. In sub-Saharan Africa alone, there were 477 million mobile subscribers in 2019; by 2025, the region will host 614 million mobile phone subscribers and 475 million mobile internet users. The internet is also expected to contribute to at least 5–6% of Africa’s total GDP by 2025.
Sub-regional distribution centres are emerging in a number of important port cities in Africa, including Durban and Cape Town in southern Africa, Mombasa in East Africa, Accra/Tema in West Africa and Tunis in North Africa, according to EY. Goods are brought to these ports from around the world and then transhipped to other areas within the sub-regions.
"Western countries will begin to notice the opportunities in Africa, but within the period leading to 2030, China will remain the dominant investor on the continent," says Ndudi Osakwe, principal consultant at IBG Nigeria. "The truth is that investment from Western countries comes with a baggage of conditions tied with adherence to rule of law, democratic values, civil liberties, sustainability and so on, whereas China often overlooks governance issues in host countries. Therefore, governments in Africa – most of whom are favoured by the Chinese style of doing business – would continue to patronise China in the short to medium-term while watching closely the face-off between China and the West, especially the US with whom there is an economic supremacy war."
Nadia Monteiro, chief executive officer at Montransit Trade & Consulting, a consultancy based in Cabo Verde, says: "Given the low wages across the continent, especially in Cabo Verde (€130 per month) and the fact that Africa houses one of the fastest-growing young populations in the world, the opportunities for outsourcing services such as call centres, offshore data centres and other services complementary to the technology, information and communication sector will become attractive for developed countries."
Africa's massive infrastructure deficit
Africa has a massive infrastructure deficit, which could create huge opportunities for foreign investors. In 2018, the African Development Bank estimated that the region’s infrastructure requirements were between $130bn and $170bn a year, leaving a financing gap of between $68bn and $108bn a year.
In June 2021, the G7 grouping of leading economic nations launched the Build Back Better World (B3W) initiative, an international economic programme designed to provide an alternative to China's Belt and Road Initiative (BRI). Its ambitious goal is to to help narrow the $40trn infrastructure gap of the developing world, including many African countries.
"B3W is meant to counter China’s BRI in Africa," says Ze Yu of the London School for Economics. "However, it is hard to see how the G7 can mobilise the private sector – pension funds, insurance funds and so on – to invest in Africa. Seeking congressional approval for government funding and to mobilise the private sector will become a real constraint for B3W."
Mungai of AZA Finance adds: "Chinese investment tends to be more dominant in infrastructure development projects while Europe and North America lean towards other sectors such as health, manufacturing and mining. However, we are starting to see more diversity among European and North American investors and we would expect this to continue given the public support from the Biden administration and the EU’s overseas infrastructure investment framework – a direct rival to China’s BRI that targets mobilising €300bn in public and private infrastructure investment in the developing world."
During the next decade, a great deal more foreign investment is likely to flow into Africa's services industries and infrastructure sector. Mining, however, will remain an important industry, in particular for so-called 'transition' minerals – metals that are important for the 'green energy' revolution under way around the world. The DRC supplies 70% of the world's cobalt, for example. The DRC and Zambia are among the world's biggest copper-producing countries, while Guinea has the world's largest reserves of bauxite, the ore used to produce aluminium. South Africa is one of the planet's most significant nickel-producing countries and rare earth elements are found in many African countries, including Uganda, Tanzania and Malawi.
Africa’s enormous potential and investment needs will accelerate FDI inflows during the next ten years – especially if the continent's investment climate improves. The AfCFTA should help to reduce the barriers to intra-regional trade. Africa's giant pool of youth is embracing digital technologies, while creating huge opportunities for e-commerce and the mobile economy. More regionalised supply chains in the wake of the Covid-19 pandemic will lead to a lot more manufacturing taking place locally. Furthermore, Africa's low labour costs could lead to many foreign companies opening up factories and plants in the region to produce goods for export to the rest of the world.