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Foreign Direct Investment in Greater Horn of East Africa

Many economists are leaning towards Foreign Direct Investment as the next stepping stone in development due to the increased employment, investment, and transfer of technology and skills that are associated with FDI. The Greater Horn of East Africa (Somalia, Sudan Ethiopia, Burundi, Kenya, Tanzania, Uganda, Rwanda, Eritrea, Djibouti, Democratic Republic of Congo), is seeing some worrying asymmetries in FDI.

According to The Society for International Development, “foreign direct investment flows into the GHEA countries expanded from US $ 1.1 billion in 1999, peaked at just under US$ 7.0 billion in 2007 and declined to US$ 6.0 billion in 2009. Just four countries – Sudan, DR Congo, Uganda and Tanzania accounted for 90% of the FDI inflows in 2009, with Sudan alone attracting 51% of the $6.0 billion inflow in that year. The four countries saw their share of FDI inflows expand from 80% in 2007, a year in which Sudan accounted for 35% of the $7.0 billion that came to the region. These countries are all rich in mineral resources: oil in Sudan, and Uganda following the recent discovery, and valuable metals in DR Congo and Tanzania.

“These same four countries accounted for 53% of the region’s labour force in 2010. Ethiopia, which has a 25% share of the region’s labour force, attracted just 2% of the foreign investment in 2009. Clearly, job creation is a by- product rather than the primary motivation for FDI to flow into GHEA.”

Implications from Society for International Development:

Given the pattern described above of foreign investment into GHEA chasing the region’s extractive resources, it will likely be very capital-intensive, and create few new jobs for the benefit of the poor and vulnerable.”

Implications from Institute for the Future:

According to economist G. D. A. MacDougall from research in the 1960s FDI investment can become harmful to host countries when price distortions of unreasonable levels are applied. Meaning, if a host country provides too many tax benefits, or perhaps lacks proper infrastructure to make sure enough of the economic benefits of FDI stay within their borders, or suffer from corrupt governments that pocket associated profits, FDI can become harmful.

As noted by Society for International Development, most of the FDI associated with GHEA is based in extractive services in countries with weak governments except perhaps Tanzania. Uganda has been run by a dictator for almost 30 years, DRC and Sudan have been suffering from civil war for decades. In the case of these countries, FDI may in the end make poor communities relatively poorer compared to the profiteering of corrupt officials and the economic gains achieved by the foreign company or government.

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Sources:

Society for International Development, July 2010 pg. 6
http://newsletters.clearsignals.org/SID_July2010.pdf#page=6

MacDougall on FDI:
MacDougall, G. D. A. (1960), THE BENEFITS and COSTS OF PRIVATE INVESTMENT FROM ABROAD: A THEORETICAL APPROACH. Economic Record, 36: 13–35. doi: 10.1111/j.1475-4932.1960.tb00491.x

Image source:
From Society for International Development July 2010 Newsletter