Moving from the ‘why’ of investing in Africa toward the ‘how’ of driving private sector growth

Africa’s rise over the past decade has been very real. While sceptics still abound, and there are people who still seek to debate the point, the evidence of the continent’s clear progress over the past decade is irrefutable. The reality is that a diverse range of African countries have now experienced consistent and robust growth for over a decade – certainly the longest period of sustained growth since most countries attained independence in the early 1960s. In the period since 2002, the size of the overall African economy has more than trebled, and grown at twice the population growth rate – over this period, the size of the sub-Saharan African economy has grown well over 3.5 times.

Michael Lalor is director of Ernst & Young’s Africa Business Centre

Michael Lalor is director of Ernst & Young’s Africa Business Centre

What makes this economic performance all the more remarkable is that half of that decade has been marked by a deeply troubled global economy. Although many African economies have been negatively impacted by the situation in key trading partners in Europe and North America, most have remained remarkably resilient. The immediate outlook also appears positive, with many parts of the region forecast to continue experiencing relatively high growth rates and a number of African economies predicted to remain among the fastest growing in the world for the foreseeable future.

There is therefore good reason to pause and celebrate the progress that Africa has made. At the same time, though, individual countries and the region as a whole still need to address significant challenges in order to sustain this progress, and to emulate the kind of developmental path we have seen in places like south east Asia over the past 30-40 years.

We believe that foreign direct investment (FDI) can play a critical role in supporting the sustainability and even acceleration of the growth and development we have seen across Africa over the past decade. As we look ahead to the ongoing challenges of job creation, skills development and, ultimately significant reduction in poverty and inequality, foreign investment can play a critical direct and indirect role. Besides being a source of longer term capital, as well as tax revenues, arguably more important is the broader impact of these investments across African economies. The specific category of FDI that we analyse – new greenfield investments and significant expansions of existing projects, all of which must create direct jobs – is particularly relevant in the context of Africa:

  • Greenfield FDI has created almost 1.5 million new direct jobs in Africa over the past decade; this does not count the many indirect jobs that would be created as a result of this employment.
  • Foreign multinationals are increasingly playing a proactive role in the development of local suppliers, with local sourcing policies helping to create extended supply chains of domestic providers.
  • Systematic local skills development and transfer are integral to the longer term approach of an increasing number of multinationals doing the business on the continent. Besides being a responsible approach to doing business, local skills development is actually a business imperative for these companies, because the cost of staffing with expatriates is simply unsustainable.
  • Over the longer term, it is not only the skills but also the technologies and innovations that foreign companies introduce into local economies that act as catalysts for development of local capabilities in transformative sectors such as manufacturing and value-adding services.

A key point is that FDI is not only an important contributor to growth and development in and of itself, but that it will continue to be a driver of broader private sector development across the continent. This is critical, because it is the private sector, including foreign and – increasingly – domestic enterprises, that will ultimately lead the structural transformation required to sustain and accelerate Africa’s growth. It is the private sector that will invest in transformative sectors like agri-processing, manufacturing, ICT and tradable services, such as tourism, business process outsourcing and off-shoring of certain business functions. It is ultimately the private sector that will drive accelerated economic expansion and sustainable job creation.