There is a resounding voice echoing to the world, with a call pointing to Africa as the next frontier market which must not be overlooked by any emerging market investor. Should we consider this call substantial, or a form of façade coated with wishful thinking? Are foreign investors really interested in Africa or they seem to be soothing their conscience with the droplets that seems sufficient?

Developing economies in Africa consider Foreign Direct Investment (FDI) a crucial part in their sustainable development and economic growth because FDI brings in the needed capital and investments, creates jobs for locals, provides a medium to share technology and knowledge, and facilitates a nation's involvement in the global value chain.

In recent years, the inflows of FDI globally have been on the decline, but the situation was further worsened by the insurgence of the COVID-19 pandemic, causing Africa to experience a fall in foreign investment by 16%. The pandemic restrictions, coupled with the drop in commodity and energy prices, lower demand, and supply-side constraints, were key factors that contributed to the decline. 

However, in 2021, Global FDI rebounded strongly by 64% according to the World Investment Report 2022, UNCTAD (United Nations Conference on Trade and Development). The rebound was driven by international project finance deals and cross border M&As deals. The report also indicated that FDI in Africa reached $83 billion in 2021, up by 113% from 2020.

It is however of great interest to note that, Africa continues to attract the least amount of FDI inflows globally, an average of 3% over the past two decades, although Africa is endowed with abundant natural resources and favorable demographics.                            

Africa’s share in the global FDI pie                                  

If we consider Africa as the world’s next frontier market, why does it receive the least inflows among global FDI? Africa’s highest FDI inflows ever recorded was in 2021 which was 5%, which was largely due to the influence of a single transaction in South Africa.

Since 2000, the continent’s share of the global FDI pie has been and continues to be the least. Meanwhile, during the same period, at least half of the world’s fastest-growing economies have been in Africa, so why do western investors hold back in investing in Africa?

Is it so difficult to combine the immense potential of Africa and the capital of the western world? 

Many experts have pinned the blame on corruption and extortion, inadequate infrastructure and logistics, uncertain and complex business environment, operational challenges, along with, weak institutions, as reasons that dampens the continent’s prospects for FDI’s.

However, we see Chinese businesses and investors getting more attracted to Africa because of the affordability of labor, friendly government regulations, growing markets, youthful population, and duty exemptions for trade. China has become Africa’s most essential economic partner in trade, investment, and infrastructure financing in the last two decades. The Harvard business review pointed out that privately owned Chinese Companies are making more than 150 investments a year in manufacturing sector in Africa.

The western investor

The uncertainties in the minds of western investors towards Africa could be due to the nature and structure of the African business market. The great potentials of the continent are mixed with risks and structures that require understanding. The quest therefore is in finding what model works best in Africa.

It is noble to admit that often, Africa appears at the deals table unprepared and therefore not well packaged to attract investors.

According to Kearney’s FDI confidence index 2022, foreign investors focus on certain key drivers in deciding where to invest:

·        Transparency of government regulations and low corruptions.

·        Technological and innovation capabilities.

·        Tax rates and ease of tax payment.

·        Ease of moving capital into and out of the country.

·        Strength of investors and property rights.

·        Efficiency of legal and regulatory processes.

·        General security environment.

·        Government incentives for investors.

·        Talent/skill level of labour pool.

·        The Country’s participation in regional/bilateral trade agreements.

 Africa’s magic wand 

The implementation of the African Continental Free Trade Agreement is aimed to be the panacea to unleash foreign investment flows to Africa and draw the needed attention for Africa’s economic growth.

Governments and investment promotion agency across the continent have over the years introduced investment policy reforms and regulations to attract foreign investment. The Continental Free Trade agreement, which is the latest collective arrangement in their toolkits, might be the magic wand that will open wide the capital flow into the continent.

The AfCFTA pact will link over 1.3 billion people across the Africa, eliminate over three fourths of tariffs, cut red tape, simplify customs procedures, and create a single market with free movement of goods and services.

The agreement, when successfully implemented, could generate a combined consumer and business spending of $6.7 trillion by 2030 and $16.12 by 2050 according to Mo Ibrahim Foundation. AfCFTA is expected to raise intra-Africa trade by 40 percent according to Economic Commission for Africa and can boost foreign investment in infrastructure and sector from transportation, energy, and ICT.

Other sectors that could generate the most value in Africa through careful implementation of the trade agreement include food and beverages, education, real estate, consumer goods, hospitality and tourism, healthcare, financial services, and telecommunications.

Are we going to see Africa’s governments quickly implement the necessary AfCFTA protocols and build the required infrastructure? Will the western investor respond positively? The answers to these questions will determine whether Africa is indeed the next world's frontier market in the medium to long term.