Africa is a continent with vast potential for growth. The region’s GDP is set to nearly double by 2050 and rise from $2 trillion today to an estimated $3 trillion. This growth will be driven by major infrastructure projects that have already been launched and others that are underway in key sectors such as transportation, energy and telecommunications.
In this article, we explore some of the emerging trends for FDI in Africa and share insights on some of the sectors with the most potential for FDI in Africa.
Emerging trends for FDI in Africa
There are a number of emerging trends that are shaping the future of foreign direct investment in Africa.
The continent has seen a steady increase in foreign direct investment over the years, with 2016 being a watershed year when total FDI reached $72 billion. This represents an increase of 15% compared to 2015 and is expected to grow even further in the coming years. 2021 for example, saw an FDI of $83 billion in Africa despite the impact of the pandemic.
Some of the key emerging trends are:
- Rise of the middle class: The rise of a middle-class population represents an opportunity for FDI as it increases spending power, but also challenges businesses to meet rising consumer expectations. Africa’s growing middle class is driving demand for consumer goods and services across many industries including retailing, hospitality and media/communications. This is creating opportunities for foreign investors looking to enter these sectors through mergers & acquisitions (M&A), joint ventures or greenfield projects.
- Digitalisation: Africa’s digital economy is expected to top $712 billion and create million jobs by 2050. However, there are challenges such as inadequate infrastructure and skill gaps which need addressing if Africa is going to benefit from this digital revolution.
- African Continental Free Trade Agreement (AfCTFA): a free trade area encompassing most of Africa, established in 2018 with the first phase of implementation commencing in 2021, presents unprecedented opportunities for trade liberalisation and seamless market access for global investors seeking to access the African market at scale. The agreement seeks to eliminate trade barriers between African countries which would boost economic growth and enhance inclusive development across Africa. According to the World bank, with the implementation of AfCFTA, trade facilitation measures that cut red tape and simplify custom procedures would drive $292 billion of the $450 billion in potential income gains.
- Increased competition between African countries for investment: Foreign investors are increasingly attracted to Africa because it is a big market that has been growing rapidly. But at the same time, African countries are competing for the same foreign direct investment (FDI) projects. That is forcing them to offer better incentives and lower taxes than their rivals, thus creating opportunities for savvy investors to access such markets on favourable terms.
- 5. The rise of Chinese investment in Africa: China has become one of Africa’s largest sources of FDI over the past decade, accounting for about 18% of all FDI into sub-Saharan Africa in 2016 — up from only 4% in 2006. Chinese companies have invested heavily in infrastructure projects such as railroads, highways and ports around the continent, but they have also started investing more heavily in manufacturing sectors such as textiles and electronics manufacturing — which had previously been dominated by European countries and the United States.
On the backdrop of these trends, we now explore the profile of some of the key sectors attracting the most FDI across Africa.
Agriculture
Agriculture is the largest and the most lucrative sector for FDI followed by retail and energy. The sector has also shown growth in terms of FDI inflows, which have increased from $3.3 billion to $5 billion during the past decade. This can be attributed to the continent’s growing population, rising incomes, urbanisation and climate change affecting agriculture production especially in semi-arid areas across Africa.
Aside from agricultural production, agribusinesses are also investing in value addition through processing facilities such as flour mills and breweries that are increasingly being set up across various African countries including Nigeria, Kenya and South Africa among others.
Agriculture will continue to attract investments into Africa in the coming years given its high potential for growth and profitability as a result of favourable climatic conditions (tropical climates suitable for crop cultivation), availability of labour at low cost compared with other regions such as Southeast Asia or Latin America where these activities could not thrive due to unfavourable climate conditions coupled with high cost of labour.
Education
Education is the second largest sector in Africa and one of the most lucrative. The number of students in tertiary institutions across the continent grew by an average of 6% per year between 2000 and 2016, with a current enrolment rate at about 11%. While this rate is still significantly lower than those seen in other regions (such as Asia), it is growing rapidly – if sustained, this trajectory could lead to substantial increases in overall education spending over time.
Education also offers high returns for investors: research shows that every dollar spent on primary education yields up to $17 in economic value over time because it improves future productivity and earnings potentials. Other benefits include reduced child mortality rates, increased productivity, better political governance and improved gender equity among others. These factors make education seem like an attractive investment opportunity; however, there are challenges which must be overcome before Africa becomes a major player on this front.
Healthcare
The healthcare sector is the second most lucrative sector in Africa, and it is expected to be the second biggest in the world by 2022. Africa’s healthcare sector is increasingly attractive for investment because the sector’s growth across multiple countries has enabled providers to become more sophisticated.
While some would argue that investing in healthcare seems like an oxymoron because of all its risks and uncertainties, there are still ways one can make good returns on such investments if they know how to do it right. In fact, even though investing in healthcare can be risky at times, it pays off handsomely when done right by working with experts in the space to identify gaps in delivery and adopt models that are adapted for the target market.
Energy – Power, Oil & Gas, Renewable Energy
In the energy sector, investors can look forward to lucrative returns and plenty of opportunities. However, it’s important to note that this asset class is highly regulated and competitive.
The most lucrative investments in the energy sector are in power, oil & gas and renewable energy.
Retail
Retail is an important sector in Africa. In fact, it is the fastest growing sector in Africa and also one of the biggest employers. Retail has become so popular that more than half of all jobs created in sub-Saharan Africa are linked to retailing.
Retailers have been a big source of revenue for governments as well as corporations who pay high taxes on imported goods sold by retailers.
In Africa, Agriculture is the most lucrative sector followed by retail and the energy sector while Education and Healthcare rank low on FDI.
- Agriculture is the most lucrative sector followed by retail and the energy sector while education and healthcare rank low on FDI.
- In Africa, agriculture is the most lucrative sector from a FDI perspective. This is closely followed by retail and then energy, according to data from UNCTAD’s World Investment Report 2018 publication. By comparison, education and healthcare rank low on FDI attractiveness in Africa.
Conclusion
It is clear that the future of FDI in Africa is bright. As more companies enter the market and explore new ways to grow their business, the continent will become an increasingly lucrative place for foreign investors.
Understanding the business landscape and regulatory framework to tap into investment opportunities across Africa can be daunting, this is where we come in. With decades of experience in advisory, deal facilitation and execution of projects across key African countries, our team of experts at Emerging Africa can help access FDI opportunities in Africa seamlessly. One of our success stories is advisory engagement for one of South Africa’s largest development finance institutions on a USD 60 million line of credit facility to an upcoming financial institution.