The Globalization of Foreign Investment in Africa

The Role of Europe, China, and India

Adams Bodomo

• Publisher: Emerald Publishing Limited
• Year: 2017
• Print ISBN: 9781787433588
• eBook ISBN: 9781787434554
• Topic: Business
• Subtopic: Business General
• Index: Business

The 21^st century era of globalization has opened up many investment alternatives for Africa. There is now a rush by governments and private companies to expand in the rapidly growing region, to the extent that we can begin to talk of a process of world-wide investment. Both traditionally powerful economies in the West and emerging powers such as China and India have contributed to a vast proliferation of investment, raising questions of what intense competition will mean for Africa's economic development.

The Globalization of Foreign Investment in Africa: The Role of Europe, China, and India compares the differing approaches between Asian and European players in Africa, with a particular focus on the role of foreign direct investment (FDI) in the socio-economic, socio-political, and socio-cultural development of the region. First documenting the historical context of Western dominance from European colonial powers, the book follows the paradigm shift that occurred with China's 21^st century foray into Africa in search of oil and other raw materials to fuel its own rapidly rising economy. Using an interdisciplinary approach, the author proposes that Africa will only get maximum benefits from high-level investment activities if it succeeds in evolving an Africa-driven foreign investment policy. This strategy presents the best scenario for an African economic renaissance in the 21^st century.

An important contribution to research on contemporary Afro-Asian dynamics, this book will be of interest to students and academics of African Studies, Asian Studies, globalization, and economics, as well as potential investors and investing agencies.  

CHAPTER 1

INTRODUCTION: GLOBALIZING FOREIGN INVESTMENT IN AFRICA

The 21st century era of globalization has suddenly opened up many investment alternatives for Africa. There is now a rush by many government and private companies to invest in Africa to the extent that we can begin to talk of a process of worldwide investment. At the turn of the Millennium, foreign investment in Africa was only worth about USD10 billion. By 2014, the number had climbed to USD54 billion according to the United Nations Commission on Trade and Development (UNCTAD) 2015 report. Indeed, in order to emphasize this intensified process, we may talk of the globalization of investment in Africa. The use of the term globalization of investment in this book aims thus to describe this vast proliferation of investment from all corners of the globe into Africa. To understand this globalization of investment, we need to put the term globalization itself in context. There are many definitions and theoretical view points on globalization from works such as Meyer (1980), Meyer et al. (1997), Robertson (1992), Steger (2009), Wellerstein (1998) and James (2014). In this book, we advance the following definition of the term globalization:

Globalization is a process which involves an increasing interaction of people of different cultures, languages, and identities as more and more efficient transportation and communications technologies facilitate the movement of peoples, goods, and services across vast expanses of the world.

This definition is closely in line with Thomas Friedman’s idea of globalization as follows: ‘The simple definition of globalization is the interweaving of markets, technology, information systems and telecommunications systems in a way that is shrinking the world from a size medium to a size small, and enabling each of us to reach around the world farther, faster, deeper, and cheaper than ever before, and enabling the world to reach into each of us farther, faster, deeper, cheaper than ever before. That’s what globalization is.’ (http://www.bricklin.com/albums/fpawlf2000/friedman.htm: accessed December 5, 2016). In several works (Friedman, 2005, 2008, 2016), Thomas Friedman has described many aspects of globalization that are closely in sync with many of the theoretical approaches we examine in this book.

There are many theoretical dimensions to this definition and conceptualization of globalization, including the socio-political, socio-economic and socio-cultural and we shall be looking closely in this book at how this global flow of capital investments into Africa affects African lives politically, economically and culturally. Some of the major theories of globalization include the following.

1.1. SOCIO-ECONOMIC THEORIES

Works like Wellerstein (1998) theorize globalization in terms of the spread of the capitalist world system across the entire globe. The globalization of investment in Africa and elsewhere would then be one of the processes licensed by this theoretical view of globalization since foreign investment is an essential part of the capitalist world system.

1.2. SOCIO-POLITICAL THEORIES

Works like Meyer et al. (1997) often theorize globalization in terms of polities (systems that create value through the collective conferral of authority) and tend to show how nation states are governed or controlled by some universal cultural values. ‘Instead of a central actor, the culture of world society allocates responsible and authoritative actorhood to nation-states’ (Meyer, 1980, p. 112).

1.3. SOCIO-CULTURAL THEORIES

Works like Robertson (1992) theorize globalization (known as world culture theory) which focuses on the way in which participants in the process become conscious of and give meaning to living in the world as a single place. For instance, Robertson defines globalization as the compression of the world and the intensification of consciousness of the world as a whole.

These and other major theories of globalization are well summarized on a useful website for the study of globalization, called ‘The Globalization Website’: http://www.sociology.emory.edu/globalization/ (last accessed December 5, 2016).

Foreign investment is an integral component of some of these goods and services mentioned in the various definitions of globalization, including the one we have advanced in this book. We may indeed define the Globalization of Investment in Africa as a process which involves the transformation of the socio-economic, socio-political and socio-cultural lives of Africans as more and more foreign investors and the foreign investments they bring from across all parts of the world move into the African continent. The term as defined here is different from the term investment globalization, which is defined by some economists (e.g. Chase Dunn, 1989) as the proportion of all invested capital in the world that is owned by non-nationals.

Some of the questions we may ask include the following: can Africa manage this scenario of the globalization of investment well enough to boost its socio-economic development? How would this affect African lives politically, economically and culturally? This book examines the role of foreign direct investment (FDI) in Africa’s socio-economic, socio-political and socio-cultural development with particular reference to Europe and Asia’s two biggest emerging economic powers, China and India. This book begins with a focus on conceptualizations of FDI in Chapter 2 and then develops a debate about its benefits or otherwise to the economic development and political sovereignty of the recipient country. It then turns to a historical overview of FDI in Africa since the second half of the 20th century, with particular reference to Europe’s investment in Africa in Chapter 3. It documents a scenario of Western dominance from mainly European colonial powers and the United States. Following from this historical overview, it is argued in Chapter 4 that a paradigm shift occurred with China’s 21st century intensified foray into Africa in search of oil and other raw materials to fuel its rapidly rising economy. In Chapter 5, the argument about a paradigm shift is further developed with the idea that even though India was in Africa long before China, it was basically a sleeping giant that has had to wake up to challenge the sudden rise in Chinese investment in Africa, beginning with its ‘Focus – Africa’ investment programme. Apart from highlighting the prominent roles played by Europe, China and India, a brief overview of new emerging players in the African investment stratosphere is provided in Chapter 6, with particular reference to other ‘BRICS’ countries such as Brazil and Russia. Finally, in Chapter 7, we look into the future and defend the hypothesis that Africa will only get maximum benefits for its natural resources if it succeeds in evolving an Africa-driven foreign investment policy to regulate all foreign investors on a bilateral basis as opposed to entering into multilateral investment relations. This book concludes with the idea that maintaining clear investment alternatives in Africa’s investment stratosphere (a metaphor we use throughout this book to signal these high-level investment activities by different actors in Africa) presents the best scenario for an African economic renaissance in the 21st century.

CHAPTER 2

CONCEPTUAL GROUNDINGS: THE ROLE OF FDI IN NATIONAL DEVELOPMENT

2.1. INTRODUCTION

In their book on the role of foreign investment on national economic and political development, the authors, Theodore Moran, Edward Graham and Magnus Blomstrom, ask the poignant question: does foreign direct investment (FDI) promote development? (Moran, Grahamand, & Blomstrom, 2005). This first chapter of my own book on Foreign Investment in Africa focuses, first, on conceptualizations of the specific notion of FDI (which underlies the general notion of foreign investment) and, then, on the debate about its benefits or otherwise to the economic development and political sovereignty of any recipient country, with regard to, not just only African countries, but all countries, in general. This discussion is expected to provide the conceptual groundings of the topic of FDI. This is necessary for discussing the roles of various foreign investors in Africa from Europe through China to India in later chapters.

2.2. FDI: DEFINITIONS AND CONCEPTUALIZATIONS

The term, FDI, constitutes a rather technical economic notion that is conceptualized in slightly different ways by various economic institutions, prominent among which is the Organization for Economic Co-operation and Development (OECD). The term has, however, become more popularized with its increasing use in the media in an era characterized by massive global investment flows to mean basically the commitment by one country or firm or individual, X, to put substantial resources in another country, Y, for the purpose of running a business in one sector or other of the recipient country.

In this book we will follow closely the conceptual definition of FDI adopted by the OECD as follows: ‘Foreign direct investment reflects the objective of obtaining a lasting interest by a resident entity in one economy (“direct investor”) in an entity resident in an economy other than that of the investor (“direct investment enterprise”)’ (OECD, 1996, p. 7). The OECD goes further to specify that the lasting interest implies some kind of long-term relationship between the two parties and a significant degree of influence on the management of the enterprise. The direct investment would involve initial business transactions and subsequent capital transactions between the parties. This definition is quite broad; it emphasizes long-term investment but does not attempt to tease apart different types of capital flows including short-term capital inflows like bonds and stocks. This broad definition that emphasizes long-term investment flows like equipment and infrastructure building is sufficient for the scope of this book.¹

Who or what then is a foreign direct investor? The OECD clearly identifies this as ‘… an individual, an incorporated or unincorporated public or private enterprise, a government, a group of related individuals, or a group of related incorporated and/or unincorporated enterprises which has a direct investment enterprise – that is, a subsidiary, associate or branch – operating in a country other than the country or countries of residence of the foreign direct investor or investors’ (OECD, 1996, p. 8).

And what then is a direct investment enterprise? Again the OECD has a recommendation that a ‘…direct investment enterprise be defined as an incorporated or unincorporated enterprise in which a foreign investor owns 10 per cent or more of the ordinary shares or voting power of an incorporated enterprise or the equivalent of an unincorporated enterprise’ (OECD, 1996, p. 8).

From the above conceptual definitions and specifications we can see that the issue of ‘foreign’ in the term foreign investment with regard to individuals is not strictly about citizenship but about residency. An individual is involved in foreign investment if the individual is permanently resident in one polity, A, and puts money into a business in another polity, B, where he is not a permanent resident. The citizenship here is not an issue.

For our purposes then, in this book we define FDI as follows:

Foreign Direct Investment is a transaction in which an individual or an organization located in one polity commits financial resources to the long-term development of a business in any economic sector of another polity to the tune of at least 10% of the value of the beneficiary business.

As a further clarification of the working definition we have come up with in this book, ‘foreign’ here does not involve citizenship but residency, as already mentioned above. Second, ‘direct’ here implies that entity A must not be dealing with entity B through a third party, entity C, such that entity A is invisible; entity A must be directly involved in the financial transfer and other financial dealings from polity A to polity B. Third, ‘Investment’ here does not involve spending money in buying and selling goods and services (in which case we talk of trade) but must actually be spending resources in growing a business in polity B. In this book we will use the term foreign investment as a short form of FDI so there is no real difference between the two terms, and they will be used interchangeably throughout the book.

Given these conceptual groundings we will now proceed to evaluate the role of foreign investment. The role foreign investment plays in the socio-economic, socio-political and socio-cultural life of a recipient country is the topic of one of the most intense intellectual debates of our time, especially with particular reference to Africa, where more and more foreign enterprises and individuals are beginning to invest to the extent that we can now say that Africa is attracting investors from most parts of the globe. As many countries develop their economies they will need two important elements which Africa has in abundance: natural resources and a large population. Countries growing their economies would need to fuel their industries with natural resources such as oil and other hydrocarbons. They will need minerals such as gold, diamond, bauxite and manganese as raw materials. Africa has them in abundance, mostly untapped. They will also need a market to sell their products, and Africa is now a continent of more than one billion people with a rising middle class whose purchasing power is getting stronger and stronger (Mahajan, 2009). What are the arguments for and against this massive FDI inflow into Africa in terms of the sustainable development of the continent?

2.3. ARGUMENTS FOR FDI

The first issue to note in terms of justifying the need for FDI in a country is that there is virtually no country in the world in this age of globalization that does not encourage foreign investment in the country, in one way or the other. There must therefore be a globally implicit understanding that foreign investment is necessary to spur development.

There are many socio-economic arguments for FDI. First, it is impossible to grow an economy without capital investment, and local investments alone cannot accomplish economic growth. Capital investments by foreign investors is one of the most effective ways to construct much needed infrastructure, such as roads, railways, ports and dams, in a country.

Second, foreign investors and the foreign business investments they set up in a country need labour to operate. So FDI inflows in most cases provide employment opportunities for the citizens of the country, opportunities that would not otherwise be available.

Third, foreign investments can lead to knowledge transfer and skills development within a country. As investors set up businesses they will have to share some high level skills in terms of high technology management of heavy equipment and precision technologies with local engineers and other professionals in order to successfully operate in the country. This can have a trickle-down effect in terms of knowledge transfer from the foreign experts to local experts and even down to some unskilled workers within the country.

Socio-politically, there are also justifications for foreign investments. First, FDI in most cases leads to the payment of taxes by these foreign companies. This means that the political economy in question will have substantial tax revenue on hand to plan a national budget that can further spur growth and bring about national development and prosperity.

Second, foreign investors, like all other business people, are usually attracted to political systems that are stable and have fairly robust rule of law that can protect the investments foreign investors pour into the country. This means that the need to attract foreign investors would be enough impetus for political reform towards democracy, freedom of speech and rule of law.

Third, in terms of international political relations, the more foreign investments a country has the more it is connected to other countries, thus enabling the country in question to become a global player in the league of nations, rather than one that is isolated and inward-looking.

From the socio-cultural perspectives, one can point to a number of advantages to be derived from a massive inflow of FDI. First, the vast majority of foreign investment firms have very robust corporate social responsibility programmes in place wherever they invest in. This means that socio-cultural organizations such as clubs, town and village development committees, and even non-governmental organizations in charge of vulnerable groups can apply to these foreign companies for revenue to put in place programmes that can go to promote the social and cultural welfares of the societies that host these foreign invested businesses.

Second, foreign invested businesses can serve as catalysts for the growth of local cottage industries in their localities. The presence of foreign workers at an industry located in a rural area, for instance, can spur local tourism and the need for citizens of the district to provide goods and services to the workers and company bosses of these companies.

Third, the foreign investments and their workers who come from a different cultural set-up can create cross-cultural spaces that can only go a long way to benefit the local cultures of the districts in which they are located. The interaction of people from different cultures, if well-managed, can only nourish cultural understandings, which can go a long way to creating lasting friendships and cross-cultural understandings.

The last point is stressed with a caveat, if well-managed. Most often than not, foreign investment situations are not well-managed and this can lead to a lot of problems and prevent the realization of the many arguments we have advanced in favour of foreign investments. In the next section we will explore arguments against FDI inflows into a country.

2.4. ARGUMENTS AGAINST FDI

Despite the vast inflow of foreign investment in a country, the...

Table of contents

• Cover
• Title Page
• Chapter 1 Introduction: Globalizing Foreign Investment in Africa
• Chapter 2 Conceptual Groundings: The Role of FDI in National Development
• Chapter 3 Looking Back into History: European Investment in Africa
• Chapter 4 In Comes the Dragon: Chinese Investment in Africa
• Chapter 5 The Elephant Stands Up to the Dragon: India’s 21st Century Investment Initiatives as a Reaction to China in Africa
• Chapter 6 Newer Alternative Foreign Investment Sources in the 21st Century
• Chapter 7 The Lion Must Roar: Towards an Africa-Driven Investment Policy in an Era of Globalization
• References
• About the Author
• Index