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Abstracts from “FDI from Developing and Transition Economies: Implications for Development”
Published by UNCTAD, October 16, 2006

Analysis by Alex Hess

The United Nations Conference on Trade & Development (UNCTAD) recently issued its World Investment Report for 2006 entitled “FDI from Developing and Transition Economies: Implications for Development.” The annual report analyzes investment flows amongst countries and discusses regional and global trends in foreign direct investment (FDI). This year’s study confirmed what many economists suspected: FDI flows have been proliferating though they remain concentrated in the developed countries.

“Growth in 2005 was broad based geographically as in the previous year, but higher in developed than in developing countries. Thus, despite record inflows into developing countries, the share of developing countries in world FDI inflows fell slightly (to 36 percent), thereby increasing the gap in FDI inflows between developed and developing countries to over $200 billion in 2005.”

FDI in developing nations tends to be directed to a few specific areas such as natural resource extraction, infrastructure, finance and real estate because these are highly capital-intensive sectors. This trend makes sense if one thinks of inward FDI as importation of capital by the recipient country as opposed to a speculative investment by the financier. This clustering effect is especially pronounced in Africa, where FDI inflows in 2005 “were, once again, tilted towards primary production (mainly oil), even though significant increases also occurred in the services sector, particularly in banking.”

Overall, Africa receives very little FDI relative to other regions. In addition, most of this capital is directed into just a handful of countries.

“In Africa, FDI inflows shot up from $17 billion in 2004 to an unprecedented $31 billion in 2005. Nonetheless, the region’s share in global FDI continued to be low, at just over 3%. South Africa was the leading recipient, with about 21% ($6.4 billion) of the region’s total inflows... Egypt was the second largest recipient, followed by Nigeria.”

It’s no coincidence that two of the top three countries are oil producers. Investments in petroleum alone account for nearly half of the continent’s investment inflows. “Total FDI into six African oil producing countries – Algeria, Chad, Egypt, Equatorial Guinea, Nigeria and Sudan – amounted to $15 billion, representing about 48% of inflows into the region in 2005.”

In 2005, the petroleum sector made up 37 percent of Egypt’s inward FDI. For the same period it accounted for 55 percent of Algeria’s FDI and a staggering 80 percent and 90 percent in Nigeria and Sudan respectively. The report, however, noted that Egypt is one of the more diversified economies in Africa with a successful privatization program that has attracted investors.

“Barring a few countries such as Egypt and South Africa, most African countries lack linkages between foreign TNCs (trans-national companies) and local enterprises, and their efforts to promote regional integration have been too limited to allow economies of scale. As a result, they are unable to participate competitively in the international production networks of TNCs.”

One point the report picked up on is that despite of, or perhaps because of, the increase in capital flows around the world there has been a growing discontent with FDI. It is not universally accepted, especially in the developing world, that FDI is beneficial to both the investor and the host country. “The year 2005 saw intense discussions in many parts of the world on the merits of liberalization versus the need for economic protectionism.”

Some fear that foreign companies are removing resources from countries without giving enough back. For example, militants in Nigeria are ostensibly fighting to increase Nigerian control over that country’s vast oil resources. In a less extreme case, protectionism is re-emerging in countries such as Bolivia, which recently nationalized its oil and gas industry.

“Most countries continued to liberalize their investment environment but others took steps to protect their economies from foreign competition or to increase state influence in certain industries.”

However, the report praises Egypt for its tax reform and acknowledges its cautious steps towards privatization. “Egypt has pursued a policy aimed at opening up its markets in activities where it has a clear advantage (e.g. tourism) as well as in some manufacturing.”

The report highlights Egypt’s National Suppliers Development Program as an example of how a country can attract FDI without risking the extinction of local producers. The government program assists local manufacturers to improve quality and lower production costs in order to be competitive in the globalized market. Without this type of program, the report says, “Egyptian producers, like many other African producers, risk becoming marginalized even in their own markets.”

The program works with TNCs and local exporters to increase domestic producers’ access to finance in order to grow their businesses. “The NSD program has started to yield some results... The government of Egypt hopes that the NSD program will also make Egypt attractive to more TNCs. Indeed, leading private-equity firms are considering investing in Egyptian suppliers that benefit from the program.”

Overall, Africa is beginning to receive a larger share of global capital and Egypt is a leader in terms of attracting FDI. As energy prices continue soar, capital inflow can only be expected to increase, which it is hoped will be directed into a broader range of sectors. “Prospects for growth in FDI inflows into Africa in 2006 are good… Rapidly rising global commodity prices will once again be pivotal to this increase, particularly in the oil industry.”

The full copy of this report is available online at www.unctad.org

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