africa

Africa at a Fork in the Road: Taking Off or Disappointment Once Again?
This paper has two objectives. First, it analyzes the effect of the increase in oil
production in SSA on flows of foreign direct investment to the region. Second, it
examines the potential impact of the recent FDI flows on host economies in SSA.
The impact of FDI on host economies depends on the type of FDI that the country
receives, whether investment in extractive industry, manufacturing, or services
(Asiedu, 2004; Axarloglou and Pournarakis, 2007). Thus an issue that comes to
bear is whether or not the recent increase in extractive-industry FDI will enhance
economic growth and reduce poverty in SSA countries. We make two assertions.
First, we argue that employment by MNCs is one of the most effective ways by
which FDI can facilitate poverty reduction and economic growth in host countries.
However, extractive industry FDI generates very limited local employment. This point
is noted in UNCTAD (2007: 92): “mineral extraction is primarily an export-oriented
activity, with significant revenue creation, but limited opportunities for employment
creation and local linkages.” The second assertion is that natural resources
in host countries can crowd out FDI in non-extractive industries—in particular, in
manufacturing (Asiedu and others, 2011). 6 One reason is that natural resources
cause the host country’s currency to appreciate, and this has an adverse effect on
firms in tradable industries. In addition, natural resources are associated with weak
institutions (Auty, 2001), civil wars (Collier and Hoeffler, 1998) and low investments
in physical capital and human capital (Gylfason and Zoega, 2006). However, a
country’s institutions, physical capital, and human capital are extremely relevant
for the success of FDI in non-extractive industries (we expound on this in Section
1.5 below). Thus, a continual increase in oil production in SSA implies that more
countries in the region will be susceptible to the “FDI-natural resource curse” 7 —i.e.,
the crowding out of manufacturing FDI as a result of an increase in natural resources
in the host country (Asiedu and others, 2011). 8 We discuss policies that will help
countries elude this curse, attract FDI in manufacturing, and thereby benefit from
the positive spillovers generated by FDI.
The paper is organized as follows. Section 1.2 outlines reasons why FDI is important
to SSA, Section 1.3 describes trends in oil production and FDI flows to the region,
and Section 1.4 focuses on the employment effect of FDI. Section 1.5 discusses
397