Foreign Direct Investment Key to Africa’s Urban Development, UN-Habitat Report Finds
Photo by IISD/ENB | Kiara Worth
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The report titled, ‘The State of African Cities 2018: The Geography of African Investment,’ explores how Africa can help finance its development by attracting FDI to cities.

According to the study, FDI can help alleviate urban poverty and unemployment by supporting Africa’s transition towards growth led by manufacturing and knowledge-intensive industries.

The report finds that Africa is increasingly attractive to FDI due to economic growth, a reduction in extreme poverty, improvements in economic policies, increased political stability and better business environments.

21 June 2018: Foreign firms and investors in African cities can play a critical role in the region’s development, according to a UN Human Settlements Programme (UN-Habitat) report that examines the impact of foreign direct investment (FDI) in Africa’s cities.

The report titled, ‘The State of African Cities 2018: The Geography of African Investment,’ explores how Africa can help finance its development by attracting FDI to cities, and notes that SDG 11 (sustainable cities and communities) recognizes cities’ role as productivity hubs that drive growth and development, and attract investment. In her foreword to the report, UN-Habitat Executive Director Maimunah Mohd Sharif states that African governments must connect FDI to sustainable urbanization by strengthening their urban policies and planning, and financial and legal systems.

Speaking during the report’s launch on 21 June 2018, Aisa Kirabo Kacyira, UN-Habitat, highlighted the “groundbreaking” nature of the study due to its focus on FDI rather than on urbanization itself. She noted that, by 2030, half of Africa’s population will live in cities, exacerbating unplanned urbanization, informal settlements, poverty, inequality, unemployment, humanitarian crises and conflict.

The report focuses on four industrial sectors: manufacturing, services, high-tech and primary resources. It contends that, if “guided wisely” and with the appropriate financial and policy interventions, FDI can help alleviate urban poverty and unemployment by supporting Africa’s transition towards growth led by manufacturing and knowledge-intensive industries, such as services and high-tech, rather than by primary resource sectors. According to the report, high-tech has the highest FDI growth rate in Africa, while manufacturing FDI has the largest share of investment and is the most important in terms of employment generation, with both sectors reducing income inequality if local skills are used.

The report explains that, while 15% of the world’s population resides in Africa, only 5% of global FDI goes to the continent. However, Africa’s FDI growth rate is the second highest in the world, with FDI comprising a third of foreign financial resources flowing to Africa. North Africa receives most of its FDI from Europe and the Middle East, while Eastern Africa’s FDI mostly comes from Asia, especially China. The report identifies Africa’s main FDI centers as Cairo, Egypt; Lagos, Nigeria; Johannesburg, South Africa; and Nairobi, Kenya. It suggests that these and other major African urban hubs diversify their economies to better complement one another.

UN-Habitat Executive Director Maimunah Mohd Sharif urged African governments to connect FDI to sustainable urbanization by strengthening their urban policies and planning, and financial and legal systems.

As far as attracting FDI is concerned, the report analyzes, inter alia, domestic market size, trustworthiness of public authorities, access to local credit, institutional safeguarding of investor interests such as enforcing property rights, and mature democracies. It argues that FDI holds the promise of technologies, knowledge and expertise in addition to financial resources, and that Africa is increasingly attractive to FDI due to economic growth, a reduction in extreme poverty, improvements in economic policies, increased political stability and better business environments.

Among factors that could further attract FDI, the study highlights, inter alia: a skilled workforce; regional integration; enhancing accessibility through air, land and sea links, connectivity, energy supply and urban attractiveness of African cities; developing strategies for cities to become nodes for production, services and knowledge in the global marketplace; decreasing the proliferation of urban slums; and securing urban food, water and energy supplies.

The report also warns against potential negative impacts of FDI, including: its potential for crowding-out local businesses; its tendency to be consumption-, not production-driven; its focus on production for non-African markets; and its adverse effect on wage equality and the development of indigenous skills in certain sectors.

The report makes city-level, country-level, regional-level, continental-level and global-level recommendations, calling for, inter alia:

  • increased diversity of FDI sectors and intra-sectoral specialization to enable greater economic competitiveness and more urban economic resilience;
  • autonomy of cities to shape their investment environments by, for example, accommodating location preferences of multinational firms;
  • urban planners to create technological hubs for high-tech firms to gain economy of scale benefits and to increase absorptive capacity of foreign technology;
  • the promotion of gender parity in the labor market;
  • local authorities to build on sectors where they already have a comparative advantages;
  • linking cities, countries and regions through road and rail transportation to expand market size, especially for landlocked countries to connect with port cities;
  • targeting investment in renewable energy;
  • formulating policies that attract food firms focused on local markets; and
  • African continental, regional, national and municipal institutions to invest in and support accessible high-level data collection, as well as stimulate advanced analytical methods and technologies.

Globally, the report calls for international organizations to, inter alia: expedite investments in Africa by financing regional infrastructure to improve the flow of goods, finance and labor; prioritize urban food security; and help promote governance to attract multinational firms in the food sector.

The report was published by UN-Habitat and the Institute for Housing and Urban Development Studies (IHS) of Erasmus University Rotterdam, the Netherlands. [Publication: The State of African Cities 2018: The Geography of African Investment] [UN-Habitat Press Release]

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