Doing Business in Africa

African governments continued to show commitment to promoting investment-friendly policy environments. However, this is from a very low base. The challenges remain daunting, often going beyond regulatory policy and extending to basic infrastructures, rule of law and human resource availability.

On the other hand, greater stability and the desire to capitalise on higher commodity prices have provided serious incentives to attract foreign capital to many African countries. Cross-border mergers and acquisitions (M&A) rose sharply in the first half of 2008, before the fall in commodity prices and the onset of the global financial crisis.

Nevertheless, cross-border M&A reached USD 21 billion in 2008, its highest level. Preliminary figures for 2009 indicate that cross-border M&A in Africa fell by a precipitous 73%, to USD 5.7 billion. This echoes a global fall in mergers and acquisitions of 66%. M&A activity in Egypt dropped by 90% and in South Africa by 37% in 2009.

There is a realisation that the rapid growth of China and India is rebalancing the economic power in the world, giving more clout to the South. South-South partnership can definitely build on this new development thrust, on the fact that Asia and Latin America are major drivers of global GDP growth and that Africa's economy also is expanding faster than world GDP.
Already China constitutes a significant source of foreign direct investment (FDI) to developing countries. Here in Mauritius we are seeing the impact of that South-South dynamic, particularly in FDI. China is investing some $700m in a special economic zone in Mauritius mainly to access the African market.
In recent years, Indian investments in Mauritius have soared, amounting to Rsl.3bn ($51.34m equivalent) during the past five years, in contrast to a mere Rs58m ($2.29m at today's exchange rate) for the preceding five years--a 22-fold increase.
These Indian investments also have an eye on the larger regional market of Africa, the more so that Mauritius is a member of SADC, Comesa and has access to a market of around half a billion people. But for developing countries to take full advantage of this unfolding South-South partnership it is important that they further open up, continue to eschew protectionism and embrace globalisation and free trade.
West Africa continue to benefit from the region’s oil industry, for example, with new finds boosting development in Ghana and Guinea and raising Nigeria’s FDI flows by 63%. Nearly 80% of total West African investment came through the oil industry, mostly reflecting industry expansion projects.
Central African inflows remained stable at USD 6 billion, with DRC the leading destination with USD 2.6 billion. East Africa also remained stable at USD 4 billion, and is still the lowest recipient of FDI on the continent.
 In southern Africa, Angola attracted USD 15.5 billion in 2008, an increase of over 50% from the previous year. South Africa, the continent’s most diversified economy, also registered strong growth in inflows.
South Africa’s stock of FDI at work in the country remains the highest on the continent by far at USD 119 billion, nearly a quarter of total FDI stock in Africa (standing at USD 510.5 billion at the end of 2008).
Attracting FDI into diversified and higher value-added sectors remains the ongoing challenge for Africa’s economies. The primary sector consistently remains the main focus of foreign investment.
Nevertheless, sectors such as banking, communications and infrastructure were dynamic up to the global crisis and will hopefully return to their prior dynamism once the effects of the crisis subside.
Service-sector investment rose in North Africa but remained negligible in sub-Saharan Africa, barring financial institution buy-ins. While still restricted to certain emitting countries (notably South Africa and Nigeria), African transnational companies (TNC) are growing to become major investors, even though intra-African FDI still only accounts for a small portion of total foreign investment.
The level of FDI from Africa to small African economies may well be understated in official FDI data, as a significant proportion of such investment goes to the informal sector, which is not included in government statistics. Overall, estimates measured the total stock of intra-African investment at USD 73 billion in 2007 (out of a total FDI stock of USD 424 billion; that is, 17% of total FDI stock in the region).
Other African investors include Libya’s Sovereign Wealth Fund, the Libyan Africa Portfolio Fund for Investment (LAP), which has over USD 5 billion in capital. LAP invests, both directly and through its subsidiaries, in a wide range of sectors in many African countries. Egypt’s Orascom also has a broad portfolio of investments throughout Africa, notably in telecommunications and construction.