The relationship between foreign direct investment (FDI) and political stability should be intuitively obvious. Conventional wisdom suggests that FDI will flow towards stable, democratic nations with strong institutions and rule of law.
Yet, for some African nations, conditions of socio-political risk may not be as uniformly anathema to international private investments as one would imagine. For instance, in 2003-2009, the Central African Republic, Chad, Burundi, and Eritrea exhibited a positive correlation between FDI and insecurity.
For Africa, it seems that it is possible to decouple socio-political and economic conditions when following FDI around the continent. Governments can, in order to attract FDI, use policies and incentives to compensate for systemic problems they may be either unwilling or unable to address.
Egypt and Nigeria are compelling points of comparison. As two of the largest FDI recipients in Africa, they suffer from different sources of instability. Moreover, their political systems are disparate. Nigeria underwent elections in 2015 where incumbent President Goodluck Jonathan conceded defeat to Muhammadu Buhari. Egypt, on the other hand, experienced a coup d’état in 2013, where the democratically elected Mohamed Morsi was toppled and later succeeded by current President, Abdel Fattah el-Sisi.
However, these socio-political circumstances do not have obvious implications for FDI.
FDI in Egypt has been on the upswing. In 2014-15, net FDI inflows amounted to USD2.7bn , largely due to greenfield and oil sector investments, the latter comprising 70.1% of total FDI inflows. The country has also recently been lauded for a series of economic and regulatory reforms to encourage private investments. The Presidential Decree 17 of 2015, for example, offers several amendments to Investment Law 8 of 1997, as well as other laws pertaining to Egypt’s investment climate.
FDI is arriving in the midst of both social and political tumult. Egypt scores high on both political and social risk on Control Risks’ 2016 Risk Map. Counter-insurgency operations against the IS-affiliated Sinai Province combined with protests against the crackdown on Islamists is fuelling a charged security situation. The status of human rights and civil liberties is also questionable, as the recent tragedy concerning the murder of Italian student, Giulio Regeni, suggests.
Egypt today exhibits a significant degree of socio-political risk, but continues to attract FDI with the promise of reforms, incentives, and profits. The current government may be considered stable, but stability through repression can result in new sources of volatility. Although the state has so far proved to be capable of affecting economic change to entice international investors, the limits of its control are manifesting in other, more dangerous forms.
Nigeria’s case is equally contradictory. Although the oil crisis has hit Nigeria, and Nigeria witnessed a 16% decline in FDI in 2014, this can partially be explained by a bid to diversify into non-oil sectors. In 2007-13, 23.9% of FDI projects targeted the telecommunications sector, with other major recipients including financial services, consumer goods, tourism, and business services. FDI inflows into Nigeria may have slowed, with its stock index down by 14%, but this current slump may be transitional.
In 2016 alone, the Nigerian Investment Promotion Commission (NIPC) has engaged China, Indonesia, Japan, Finland, the UK, the USA, UAE, etc. to facilitate investments into agriculture, energy, manufacturing, and infrastructure. Despite structural problems, the Nigerian state remains an active actor in FDI engagements.
The 2016 Risk Map labels Nigeria as a high risk zone. Although Nigeria experienced a peaceful democratic transition in 2015, Nigeria is still considered politically unstable, as Buhari’s government remains a relatively uncertain entity. Meanwhile, Boko Haram was active even when FDI inflows were at their peak. The insurgency is, as in the case of Egypt, a test of the government’s sphere of influence. However, it has not deterred FDI significantly due to being relatively contained geographically and also given the region’s low contribution to overall GDP. In fact, policy issues, such as currency restrictions, appear to be a stronger determinant for FDI.
Nigeria exemplifies the difficulty in tracing correlations between regime type, socio-political risk, and FDI. A successful democratic election does not translate into (perceived) political stability. A terrorist threat to a portion of the country can have a limited impact on the economy. Lagging oil prices resulting in sluggish FDI may obfuscate a simultaneous diversification into other sectors. This multifaceted and sometimes contradictory relationship between socio-political and economic systems makes it tough to predict FDI flows to African nations. Furthermore, systemic deficiencies may not always be an accurate or sufficient gauge of a state’s (in)ability to solicit FDI.
Rethinking FDI in Africa
The African continent confounds dichotomous and linear understandings of the determinants of FDI flows. As the cases of Nigeria and Egypt reveal, countries can continue to attract FDI even in the midst of political and social risk. While these issues may be manifestations of the limits of state control – although, it remains to be determined if this stems from an unwillingness or an inability to rectify problems – such perceived shortcomings do not necessarily constitute an accurate barometer of a government’s ability to attract FDI. Further, it may be worthwhile to ask how purveyors of FDI influence the internal dynamics of various regimes in Africa by rewarding some characteristics and punishing others. And how, in turn, does this interact with the state’s own motivations for soliciting FDI, perhaps in lieu, or even to the detriment of other national concerns?
Isaac Kwaku Fokuo Jr is CEO of the African Leadership Network. Aparupa Chakravarti is government relations specialist at ALU Education.
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