Ethiopian Business Review

Africa: Engaging with the Emerging South

Africa’s share of the global Foreign Direct Investment (FDI) flow is extremely low. Despite the fact that it evolved from an annual inflow of USD two billion in 1983-1987 to USD 55 billion in 2011, it represented a mere four pct of the global FDI and about 10 pct of FDI flow to the developing countries in 2010-2011. There is also a significant variation across regions and countries in Africa. Nigeria, Egypt, Morocco, Tunisia, South Africa, Algeria, Angola, Ghana and Cote d’Ivoire, accounting for a hefty two thirds of the FDI flow to Africa.

Developed nations are still the major sources of FDI flow; Organization for Economic Co-operation and Development (OECD) countries commanded over 72 pct of the flows in the years from 2000-2008 and 90 pct of the stock in 2008. France, the UK, Germany and the US are the most prominent. During the years between 2007 and 2009, 60 pct of OECD investments were made just in three countries (South Africa, Egypt and Nigeria). Investments in the extractive sector like oil, gas and metals, were the most common investments.

In general, during 2005-2010, the combined BRICX (Brazil, Russia, India, China and X representing other emerging nations from the South) share in FDI flows to Africa was only about 6.5 pct. (China made up half of this amount at 3.5 pct; India followed with 1.8 pct). Developed countries are still the dominant partners of Africa in terms of both FDI flows and stocks. FDI flows from these emerging economies are growing rapidly but in terms of relative magnitude they are not that large. In addition, the level of FDI from BRICX such as China and India is not only very small but the amount of money that would be considered significant is invested in a small number of nations. In terms of its geographic distribution, Chinese FDI in Africa is concentrated in South Africa, Nigeria, Zambia, Algeria, DR Congo, Sudan and Angola, in order of importance. These countries account for about 70 pct of the USD 13 billion stock of Chinese FDI in the continent during 2010.

The pattern of trade and FDI indicates that China’s principal focus is in natural resources. Thus, in terms of motives, empirical studies show that a host African country’s natural resources influence how much China will invest in that nation, largely because China is the top consumer of the kind of natural resources found in many African countries. Econometric studies reveal that relative market size, the existence of mining activity and the historical pattern of FDI are the main determinants of FDI flows to Africa.

The share of Indian FDI to Africa, which is about 1.8 pct of the total FDI flow to the continent, is predominantly concentrated in Mauritius, the Sudan, Egypt and Nigeria. If Mauritius is excluded, India’s share of the African total FDI will drop to about 0.6 pct. Sustained increase in commodity prices coupled with increasing demand for energy and raw materials in the Indian economy is the major driving force motivating Indian companies to engage in Africa. Other BRICX nations behave in a similar manner but their level of engagement is even smaller than India.

Notwithstanding this, data on the Emerging South’s investment in Africa is problematic as other forms of investment related flows; such as credit from (Export-Import) EXIM banks of the BRICX (which we may refer to as ‘development financing’) plays a much more significant role. Thus, the official FDI figure leads to a significant understatement of BRICX investment in Africa. In addition to the ‘other emerging South’ noted above, there is also an increasing level of intra-Africa FDI flows.

FDI flows and investment from the emerging South usually have similar characteristics. They are seeking to obtain natural resources like oil, gas and minerals. This usually leads them to invest more in infrastructure projects in the nation they are working with. The investment usually leads to the proliferation of small and medium size firms that are often part of Trans National Corporations (TNCs) from the BRICX. Such flows to Africa do not seem to be deterred by fragility or the way a country is governed. The FDI flows are also interwoven with the provision of infrastructure, the possibility of providing tied concessional development financing, aid or trade with no political and policy conditionality attached to them.

The investment engagement of BRICX’s TNCs in various projects through the provision of development financing, in particular using their EXIM banks and special funds designed for Africa (such as the China Africa fund) are found to be more important than the official FDI from these countries. Such projects and their financing are so significant that their exclusion from BRICX investment data must have caused the BRICX investment engagement in Africa to be underestimated.

Such investments are not FDI in the conventional sense of the term. However, they would not have been carried out had it not been for BRICX’s financing. Hence, we may refer to them as Quasi-FDI. Understanding such projects and the financing schemes by the Exim banks of the BRICX towards such projects is crucial to understanding the nature and magnitude of the BRICX’s investment engagement in the continent. The role of China’s Exim bank in this regard is the most significant one.

The China’s Exim Bank Annual report doesn’t offer a geographically disaggregate picture of its credit flows. However, according to Fitch Ratings (2012), a UK-based rating company, EXIM Bank of China extended about USD 67.2 billion to sub-Saharan Africa between 2001 and 2010. The World Bank by comparison provided USD 54.7 billion to the region during the same period. The majority of the Chinese loans are infrastructure related. This means that in addition to lending money for the roads, bridges and trains, they are also building them.

In principle the Exim Bank of China has a concession window which is intended to help the developing countries in the spirit of South-South cooperation. However, the concessional nature of such lending is not transparent. This makes it difficult to gauge operations in its African portfolio. However, according to Brautigam (2012), this window in China is a small part of their Exim bank’s total portfolio. Quoting, Standard & Poor’s credit rating review of the China Exim bank in 2005 she noted the concessional loan portfolio was made up only three pct of Exim bank’s assets. In addition, the loan was not “low-interest” but was made at LIBOR (London Interbank Offered Rate) in addition to a margin of 1.5 pct, which is actually a higher rate than some Western commercial banks. In fact, a closer investigation of individual country loans shows that the level of concessionality is not significant. This modality of finance is an important instrument for bundling aid, trade and the FDI interest of China through the operation of Chinese TNCs in Africa.

Source: World bank Compilation by EBR
Country Population GDP in USD Per Capita in USD Global GDP Rank Export (pct of GDP) Import (pct of GDP) FDI (pct of GDP)
Brazil 196,655,014 2,476,652,189,880 12,594 7 12 13 2.90
Russia 142,960,000 1,857,769,676,144 12,995 8 31 22 2.80
India 1,241,491,960 1,872,840,247,709 1,509 10 24 30 1.70
China 1,344,130,000 7,318,499,269,769 5,445 2 31 27 3.00
South Africa 50,586,757 408,236,752,340 8,070 28 65 29 1.40

Similarly, with the help of the Indian government, the Exim Bank of India is facilitating the bundling of Indian aid, FDI and trade in Africa. As of March 31, 2012, the Indian Exim Bank had in place 157 LOCs (letter of credit) covering 75 countries in the world with credit commitments aggregating USD 8.16 billion. Of these, nearly 50 pct, USD 4.3 billion, went to Africa. Like China, India’s engagement in the continent through this modality is much larger than the official FDI flows of India. Indian average annual FDI flow to Africa was about USD 1.2 billion (and only USD 376 million excluding Mauritius), between 2002 and2010. On the other hand the Exim bank of India’s line of credit for Africa in 2012, for instance, is a staggering USD 4.3 billion.

It is difficult to consider Chinese and Indian Exim bank credit for Africa to be aid either. Based on AERC’s (African Economic Research Consortium’s) study on 22 African countries (see Ajakaiye et al, 2008), comparing BRICX aid with Aid from OECD countries and IFIs (International Financial Institutions) is difficult because aid from the BRICX does not adhere to the standard definition of aid (such as the 25 pct grant element contained in the OECD’s definition). If the pure grant (aid) from the BRICX is compared to the ODA (Official Development Assistance) of OECD countries, however, its magnitude is negligible - in Ethiopia and Madagascar, for instance, Chinese grant aid is less than one per cent of total ODA to these countries. Secondly, as we noted above the terms of financing and its level of concessionality is not usually transparent. The regular use of barter trade (such as oil for finance) and the tied nature of the financing make things even more confusing. Finally, it is bundled with BRICX’s trade and FDI engagement in Africa using the operation of BRICX’s TNCs (i.e., it is tied to be carried by BRICX firms and usually focused on infrastructure projects). However, it is not tied to political and policy conditionality like flows from the OECD countries and IFIs are.

In sum, through bundling trade, aid-cum-project financing and FDI as well as spending the finance largely in infrastructure development, the BRICX TNCs engagement accomplishes both the provision of infrastructure and facilitates the exploitation of African natural resources which is the collateral for the finance secured. To the extent that the quality of the infrastructure and economy-wide benefits of the infrastructure offers value for money, this could be a beneficial engagement for both parties. On the other hand, if it makes the resource sector an enclave to the rest of the economy and contributes less to future diversification and the sustainable growth aspiration of the host country, its long term benefit might be detrimental, as has been the case with Africa’s historic engagement with its traditional (Northern) partners. The salient question is whether Africa has the required institutions (governance) and human capital (expert base) to carry out such an evaluation and see to it this phenomenon is unfolding in its own interest.

For more information you can look up the study on the Afrexim Bank website at EBR

Alemayehu Geda (Prof.)

Alemayehu Geda did his PhD in Development Economics at the Institute of Social Studies, the Netherlands, in 1998. After that he had been teaching at the University of London, School of Oriental and African Studies. He was also a research fellow at the University of Oxford. Prior to that he was at the World Bank in Washington on a special appointment to work on Global Model Building and the Place of Developing Countries in the World Economy. He is currently Professor of Economics at Addis Ababa University. Comments can be sent to

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