Who is the investment big daddy in Africa?

African investment is growing. The latest figures on FDI flows show that in a year when FDI shrank throughout the rest of the world, only Africa managed to grow as an investment destination.

That is an important statistic: FDI is by far the most important investment measure, comprising as it does all investment outside of national stock markets – FDI represents new money coming into existing businesses, as well as investment in entirely new business projects, so-called ‘greenfield’ investments. Effectively, FDI measures global confidence in both countries and regions.

While the global total of FDI shrank from $1.65 trillion to $1.35 trillion, a fall of almost one fifth, African FDI grew to $50bn, up from $48bn the year before, and $44bn the year before that. So Africa is bucking the trend, which is for FDI to lag behind other economic indicators (which were largely in positive territory during 2012–2013).

In fact, most of the recent fall in global investment flows was concentrated in the developed economies: FDI fell by a third in what the UN defines as the developed world, back down to the levels of 10 years ago, while developing economies registered a fall of only 4%. Perhaps that is not too surprising, given that growth prospects are so much lower in the rich economies.

What may be more surprising is that investment in Africa remains so low. An annual FDI flow of $50bn is tiny compared to the global total of $1.35 trillion, a mere 3.7% of all the investment flows in the world.

Developing economies now receive more than half of all global FDI, but almost 20% of that total goes to South America, and over 30% goes to Asia. Africa may seem like the flavour of the month when measured by column inches devoted to the African economic renaissance, but the figures tell us that interest in Africa has yet to be translated into hard investment cash.

Nevertheless, Africa is unique in that inward FDI is growing. The space may be small, but many would agree that the best is yet to come, as Africa looks set to record the world’s fastest economic growth rate this year and for some years to come (for example, Ernst & Young, a consultancy, recently forecast GDP growth of around 5% over the next 10 years; Standard Chartered Bank believes the region’s GDP growth could by closer to 7% over two decades). So who are the big investors in the continent of the future, and what are they investing in?

Many assume that foreign investors are primarily interested in African resources, and particularly in energy and mineral mining. Yet it turns out that this is not the case. According to data from UNCTAD, the proportion of greenfield investment going into resources has declined steadily throughout the world over the last 10 years, and has never been above 18%.

In the last recorded year, resources accounted for only 4% of all new global investment projects. Comparable falls have also been seen in Africa: in the last recorded year the value of greenfield services investments in Africa was around $18.6bn, while manufacturing investments were worth $20.8bn, compared to only $7.4bn in resources.

Outside of greenfield projects the African resources sector did even worse, and in 2012, investment flows were actually negative – that is, more money was pulled out of Africa than came in. So whatever foreign investors are looking for in Africa, it doesn’t seem to be primarily resources.

And who are the investors themselves? The answer depends on which figures you look at. Annual FDI flows do not tell the whole story when it comes to foreign participation in African economies, because one large investment can easily skew the figures and make one country or even one company seem more significant than it really is.

Historical figures on the total FDI stock (that is, investment built up over the years) give the best picture of long-term investment relations, while annual FDI flows give an idea of the way these relationships are changing.

India quietly buying its way into Africa
Collectively, the region that generates more global foreign direct investment than any other is Asia, irrespective of whether you measure annual FDI flows or historical FDI stock. Asia is the source of three quarters of all developing-country annual FDI flows, and in historical FDI stock terms the list of the biggest Asian suppliers of capital to Africa may come as a surprise.

Malaysia, for example, has a larger historical investment stock in Africa than does China – Malaysia’s stake was worth $19bn in 2011 (the most recent year for total investment stock figures). Another surprise is that the total investment stocks held by China and India are very similar, even though Chinese investments tend to attract far more attention. China’s Africa investments totalled $16bn in 2011, while India had invested $14bn.

China’s investment interest in Africa is well known, but what about India? In many ways the growing importance of India as an investment partner is one of the most interesting developments in the continent.

With every month that passes, India is getting more interested in Africa. Telecoms, consumer manufacturing, automotive and resources companies have all been targets in India’s drive to expand into the African economy. Long seen as the junior partner when it comes to Asian investment into Africa, India has in fact been quietly buying its way into every sector of the African economy.

Perhaps the Indian deal to gain most attention has been the acquisition of mobile phone businesses throughout the continent by Bharti Airtel, India’s biggest mobile network. In 2010 Airtel paid $10.2bn for the sub-Saharan and North African networks owned by Zain, and added to the portfolio last year by buying mobile businesses from Warid in Uganda and in DR Congo.

More gradually, Indian manufacturing companies like Tata, India’s leading automotive company, have been gradually building up their presence in the region – Tata is now manufacturing in 11 African countries.

These kinds of investments help confirm the perception that while China is mainly interested in using investment to capture resources, Indian investors are focused on value-added investments in manufacturing and services.

But as so often, the perception is not quite accurate: India is, in fact, heavily involved in the African resources sector. For example, India’s leading oil and gas company ONGC Videsh owns 25% stakes in the main production facilities in both Sudan and South Sudan, and in 2008 invested $200m in building an oil pipeline from Khartoum to the Red Sea, as well as having exploration investments in Nigeria.

Like China, India is largely dependent on imported energy, and India is consequently just as interested in African resources as its Asian rival.

Does this mean that India is overtaking China as Africa’s biggest provider of annual FDI flows? Some certainly think so: last year fDi Markets released figures that claimed that India had already taken top spot, in a piece beginning ‘India’s investment into Africa remains ahead of China’s’.

However, a closer look at the figures suggests the story is not quite so clear-cut.

But there is no doubt that the value of India’s investment into Africa is close to that of China – the figures on historical FDI stock provide much stronger evidence of that – and it also seems likely that the Indian share of investment will grow. After all, from an Indian perspective, Africa is the neighbour across the Indian Ocean, and trade and investment links go back to the 16th century.

Whether India’s growing engagement with Africa will ever deliver on Mahatma Gandhi’s promise is another matter. Gandhi lived in South Africa for 21 years, and once said “the commerce between India and Africa will be of ideas and services, not of manufactured goods against raw materials after the fashion of Western exploiters”.

So far, oil and diamonds and coal and steel have all proved to be just as attractive to Indian investors as ideas and services.

- written by african business magazine