Insights

This article is part of a series examining Africa in transition.

For more than a century, foreign direct investment (FDI) in Africa was almost exclusively focused on the extraction and export of natural resources. But since the turn of the millennium, the momentum has shifted — and in the past few years the trend has finally flipped. Global investors now come to Africa more often for the promise of its people than for its physical properties.

Petroleum and mining now count for a minority of long-term capital inflows, with more investors focused on telecommunications, retailing and services. The extractive industries have accounted for more than half of FDI just once in the past seven years, according to a database of new investments maintained by the EY professionals.

The trend is even more pronounced in the 46 jurisdictions of sub-Saharan Africa. From 2005 to 2011, extractives in the region accounted for more than half of investment in all but one year — but the reverse was true over the next seven years (ending in 2018, the most recent year for which full and final data is available).

This investment evolution reflects the improvement in governance and stability that began in the 1990s, with the end of the Cold War. Democratic institutions are established and recognized, and fewer people live in extreme poverty.¹ These democratic transitions remain fresh and fragile, with countries progressing at different speeds.

But long-term trends measured over decades instead of years show that African countries are now more attractive investment destinations. All this is happening in the last region of the world offering a demographic dividend: sub-Saharan Africa will soon be the only place with birth rates at replacement level or higher.²

The new value chains now developing are based on telecommunications platforms, agribusiness and energy. But the evolution away from the extractive industries isn’t only a function of improved investment climates in sub-Saharan Africa — for example, extractives make up a smaller share of total investment, but the rate rises and falls in response to oil prices. Countries elsewhere in the Global South have become more developed, with higher labor costs and maturing consumer markets that suggest lower long-term returns there.

Finally, FDI in Africa often comes from state-owned enterprises and international or bilateral institutions that have more than just commercial concerns in mind, especially for large infrastructure projects such as ports and railroads. But even if Africa’s improved investment climate is just one of several factors driving the change, its results are self-reinforcing — because, regardless of the motivation, when one investor builds a port or a road, another one can use it.

“The big building blocks are now in place,” says Rod Wolfenden, EY Africa Markets Leader. “Africans are the beneficiaries, but so are the next wave of investors, who will have an easier time developing their projects.”

In Ethiopia, Prime Minister Abiy Ahmed Ali ended a border conflict with neighboring Eritrea in 2018, which brought him the Nobel Prize for Peace in 2019. The country is opening to investment, has a population of 100 million and the capital city of Addis Ababa opened doors on a new light-rail metro system in 2015.

Côte d’Ivoire attracted the second-most FDI on a per capita basis in 2018.³

And South Africa’s coronavirus stimulus package is notable because it was the only government in the region able to offer one as a fast response, says Larry Eyinla, EY Africa Regional Tax Leader. Despite the country’s political challenges and a struggling electricity utility, South Africa’s capacity to respond to economic shocks remains top in the region.

“South Africa shows that having a broad-based economy that puts people to work gives government more policy options,” Eyinla says.