Africa Foreign Investor Survey 2005 - unido

wages and low capital is once again subject to scrutiny.
The considerable growth rates exhibited by this group
indicate that, at least in the immediate term, the conditions
are already favourable and demonstrating this fact
could be sufficient inducement for attracting new
arrivals. However more detailed information may indicate
a more nuanced policy is appropriate, especially if
there is some prospect of increasing investment per
worker or the use of local resources.
While older subsidiaries of large, North-based TNCs
may be reluctant or simply unable to expand their operations
in Sub-Saharan Africa, this does not mean that
they are not interested in improving profit margins. One
way to do this is through supply chain development with
local firms who, with some technical assistance, project
financing and a long term supply contract from the TNC
can achieve economies of scale supplying inputs that
were hitherto imported by the TNC. Financial and
investment markets are generally underdeveloped in
Sub-Saharan Africa, yet paradoxically, the current
upsurge of interest in emerging markets from private
equity funds means that there is a failure of intermediation
rather than of the supply of investable funds. This
suggests that there is a need for brokering supply chain
development projects with domestic firms and private
equity and venture capital funds. An active brokerage
role for IPAs implies that domestic firms get assistance
for more effective TNC collaboration. UNIDO’s ITPO
network can also be called upon in promoting partnerships
for technology transfer with domestic companies
taking on component supply contracts from TNCs.
If African governments respond constructively to the
many issues discussed in this report, the implications for
the machinery of government go well beyond the activities
of IPAs. For example, there is likely to be consequences
for the division of responsibility for foreign
investor relations between the different departments of
government. Institutional restructuring and capacity
building to support inward investment promotion and
help investors overcome bureaucratic obstacles is critical
to the task of winning a greater share of the world’s foreign
direct investment for Africa.
A synopsis of the performance characteristics of the six
investor groups, their economic impact, their perception
of their investment location and implications for investment
promotion activities is presented in Table 9.1.
The UNIDO 2005 survey does not investigate the
interactive relationship between domestic and foreign
investors. Policy makers require evidence as to the
response and impact of FDI on domestic firms in order
to be able to prioritise policy interventions and assign
mandates to IPAs. This evidence is also important for
building a consensus amongst national stakeholders
(government, private sector and civil society organizations),
about why pro-active FDI promotion is desirable,
what types of investor should be actively pursued and
what are the likely benefits associated with different kinds
of investors.
Existing research has produced ambiguous findings on
the spillover benefits and linkage effects (externalities)
associated with FDI. Alfaro et al. (2003) conclude that it
is difficult to find evidence from the research literature of
positive externalities for local firms operating in the same
sector as foreign firms. However, many studies find evidence
of positive linkage benefits for local firms from
TNC activity upstream, through the supply chain and the
increase in demand for inputs this entails. In Sub-Saharan
Africa, the potential benefits from producing intermediate
goods locally can be substantial because transportation
costs are in general disproportionately large
and the possibilities of specialisation and increased scale
yield additional benefits for local firms.
Knowledge spillovers through employees leaving
TNCs, the establishment of spin-offs by ex-employees
and the demonstration effects of innovations introduced
by TNCs and diffused through interactions amongst people
working for similar local firms are all examples of
externalities or transfers from foreign investors to domestic
producers. The accurate measurement of the economic
benefits of linkages and evaluation of the “softer”
spillovers from FDI into the domestic economies of
Africa clearly requires the addition of a carefully chosen
sample of domestic firms in the next UNIDO survey of
foreign investors in 2007/2008. It is proposed that a
sample of domestic firms will be identified from information
provided by foreign investors participating in the
forthcoming survey about their suppliers and business
customers as well as commercial rivals. The survey of
domestic firms in each participating country will require
the design of a different questionnaire from that used
with foreign investors. It will focus on the response and
impact of the operations of foreign-owned firms on
domestic firms, the extent to which they purchase locallyproduced,
unprocessed raw materials to add value and
that part which involves local firms in value added activities
as subcontractors to foreign-owned firms.
Next Steps
The current report analyses aspects of the location choice
of foreign investors, for example, the more positive attitude
of South African and Asian investors compared to
European investors in the region.This analysis needs to
be improved upon if it is to enhance IPAs policy advocacy
work.The World Bank has invested heavily in developing
standardised measures of investment climate as it
affects all investors and, since the first appearance in
2003 of the Bank’s now annual report, Doing Business,
has published comparative national rankings of invest-
9 | Conclusion
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