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AFRICA: Investment Growth Benefiting Only Some Poor States

Isolda Agazzi

GENEVA, May 7 2011 (IPS) - While foreign direct investment in least developed countries (LDCs) in Africa has risen sharply over the past decade, most of it went to resource-rich economies and had little impact on employment creation.

UNCTAD's James Zhan: Emergent powers such as China and Brazil provide LDCs with more opportunities to attract investment. Credit: Isolda Agazzi/IPS

UNCTAD's James Zhan: Emergent powers such as China and Brazil provide LDCs with more opportunities to attract investment. Credit: Isolda Agazzi/IPS

On the eve of the fourth United Nations’ conference on LDCs, UNCTAD has launched a study on the developmental effects of foreign direct investment (FDI), adopted at the 2001 LDCs conference as one of the tools to foster development in poor countries.

The study, called “FDI in LDCs: Lessons learned from the decade 2001 – 2010”, shows the results are at best mixed.

In terms of capital formation, figures are encouraging: despite an abrupt interruption in 2009 due to the economic crisis, FDI flows to LDCs grew at a rate of 15 percent during the last decade to reach 24 billion dollars in 2010.

This is significant when compared to the 7,1 billion dollars of FDI inflows in 2001. In international comparison, LDCs’ share of FDI in global flows almost doubled, going from 0,9 percent to more than two percent over the same period of time.

“FDI from developing and transition economies is increasing. (Emergent economies) provide LDCs with more opportunities to attract investment,” James Zhan, director of UNCTAD’s division on investment and enterprise, says.

The EU is still the largest investor but transnational corporations (TNCs) from emerging economies – particularly Brazil, China, India and South Africa – are becoming increasingly important, especially to many African LDCs. Nearly half of total inflows came from these economies in 2010, compared with one quarter in 2003, Zhan points out.

FDI inflows have trumped bilateral official development aid (ODA) from 2006 onwards. But there was a fall in FDI by 12 percent in 2009 and 14 percent in 2010. For UNCTAD, “this is a matter of grave concern, particularly when taking into account the global increase in FDI”, Zhan remarks.

Despite the overall growth, foreign investment has not lived up to the high expectations in terms of development that were set up 10 years ago. With over 80 percent of FDI flows in value going to resource-rich economies in Africa, the effects on job creation have been weaker than expected and the transfer of technology and skills limited.

“As a result, LDCs remain at the margin of the global value chain. The predominance of FDI has reinforced the commodity dependence of some LDCs and worsened their vulnerability to external shocks,” Zhan warns.

Also, the geographic concentration of FDI flows has increased, contributing to further divergences in economic performance.

However, the picture is not entirely negative and many LDCs have also succeeded in attracting more diverse forms of investment in value-adding activities, like telecommunications, banking, tourism, commerce, food and beverage and agriculture.

Poor physical infrastructure hinders the development of productive capacities that are key to sustainable development.

Therefore, UNCTAD proposes a plan of action that foresees the careful liberalisation of the infrastructure sector while, at the same time, establishing a regulatory framework – in particular in electricity, telecoms, transport and water.

Concretely, it suggests establishing an LDCs infrastructure development fund to support public-private partnerships and grant risk insurance to private investors.

Another idea is to boost aid for productive capacity. “The key bottleneck preventing benefits from trade is not just the rules but the capacity to produce,” comments Zhan. “Therefore, we suggest creating a productive capacities fund to increase investment in vocational training, among others.”

The third measure seeks to enable firms of all sizes (and not just TNCs) to capture investment opportunities in LDCs.

“Big firms may see LDCs markets as limited but others may see opportunities in sectors like solar energy. Solar energy does not require network infrastructure and the price of solar energy equipment has dropped. It is not high tech anymore but a mature energy,” Zhan explains.

“We need new ideas for TNCs. How can we change business mentality? Usually companies look at GDP (gross domestic product) rates and the size of markets. But we see business opportunities even in the bottom of the pyramid. There are more and more social entrepreneurs but we need to educate them on the concept of sustainable investment.”

UNCTAD wants to tap into the rising pool of “impact investors”. Masataka Fujita, head of the investment trends and issues branch of UNCTAD, explains that the concept of “impact investment” appears to have emerged from a variety of sources, but mostly from the investor community itself.

“These sources and initiatives are now converging to better define the concept, and perhaps even move towards some sort of regulatory framework. The U.S. department of state has bought into the concept and is now seeking to advance it through partnerships,” he explains.

The Global Impact Investing Network is a U.S.-based initiative aiming to provide a framework for “impact investment”, including through the impact reporting and investment standards (IRIS) initiative, an attempt to elaborate a set of tools to measure social and environmental impacts.

“The network has a strong U.S. focus but it looks like they are seeking to expand globally view,” he adds.

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