Foreign Direct Investment in Sub Saharan Africa

Introduction 

Poverty and low levels of social and economic development are among the main features that have characterized Sub Saharan Africa for decades (Fosu 2014; Vermeire & Bruton 2016). Violent conflict and poor governance have received much of the blame for the hardships that the region’s citizens endure. However, over the last few decades, Sub Saharan Africa has witnessed encouraging social, political and economic progress. More and more countries are reforming their political systems as they experience economic booms. Foreign direct investment (FDI) is one of the forces that are behind the growth that is being witnessed in Sub Saharan Africa. The purpose of this report is to offer an overview of the literature that sheds light on the impact of FDI on Sub Saharan Africa. The literature reveals that the effects of FDI have been mixed. While it has allowed the region to become modernized, it has also created a culture of dependency. To set the stage, the paper begins with an overview of the modernization and the dependency theories before proceeding to present the main themes emerging from the literature review.

Relevant Theories 

Modernization Theory 

The modernization theory is among the frameworks that can be used to examine the influence of FDI on Sub Saharan Africa. Cheibub and Vreeland (2018) are among the scholars who have explored this theory in their work. According to this duo, the modernization theory posits that the adoption of such western values and principles as democracy and liberty hold the key to economic transformation. Another aspect of the modernization theory is that abandoning traditional economic and social systems and embracing new and modern approaches hold the key to progress (Lewis 2018). Basically, this theory makes it clear that in order to achieve modernization, a society needs to strive for high levels of industrialization and the adoption of complex modern technologies. That there is a standard model of economic development is yet another defining feature of the modernization theory (Gilman 2018). According to this theory, there are no multiple paths to modernization. Instead, by embracing industrialization and technology, societies are able to become modern. That internal changes are the primary drivers of economic progress is yet another assumption that underlies the modernization theory (Delgado et al. 2016)

Now that the basic elements of the modernization theory have been addressed, the stage is set for an examination of its implication for development in sub-Saharan Africa. Simon (2018) is one of the scholars who have employed this theory in their quest to understand the development process in sub-Saharan Africa. Working with the example of South Africa, he notes that this country’s economic and political development have been driven by social and cultural changes. Essentially, Simon makes it clear that cultural shifts must occur for a nation to experience modernization, as conceptualized by the modernization theory.

Dependency Theory 

Dependency theory is another model that allows one to gain deeper insights into the effect that FDI continues to have on Sub-Saharan nations. The basic premise of this theory is that wealthy nations exploit poorer countries for resources, hampering the development of the latter (Delgado et al. 2016). Essentially, according to the dependency theory, in exchange for aid, wealthy nations raid poorer countries and plunder their resources. Power dynamics and the role that they play in the development process are another issue that the dependency theory attempts to address. Monterrubio, Osorio and Benitez (2018) authored an article in which they contend that the dependency theory can explain the power imbalance in Mexico. They blame this imbalance on the growth of the tourism sector which has failed to deliver significant benefits for the country.

It is important to note that there have been efforts by scholars to determine if the dependency theory can explain the economic, social and political situation in Africa. Agbebi and Virtanen (2017) are some of the scholars who have applied this theory. They set out to determine if China’s investments in Africa are in line with the provisions of the dependency theory. Their observation led them to conclude that given China’s efforts to establish inter-dependent partnerships with African states, the dependency theory does not explain its involvement in Africa. However, the validity of the theory cannot be dismissed since it allows one to recognize that FDI can deliver gains for wealthy countries at the expense of sustainable and significant development in poor nations.

Empirical Evidence 

The two models discussed above serve as theoretical frameworks which facilitate the discussion on the role that FDI has played in sub-Saharan Africa. To gain an even better understanding, it is necessary to scour through available empirical evidence. In this section, some of this evidence is presented.

Positive Effects 

The development of the agricultural industry is among the gains that sub-Saharan Africa has witnessed thanks to FDI. According to such scholars as Dike (2018) agriculture is the mainstay of the economies of most sub-Saharan countries and FDI allows for capital to be dedicated to this industry. In addition to contributing to economic development, the investment in agriculture also bolsters food security in the region. Gunasekera, Cai and Newth (2015) confirm that in the years that it has received FDI, sub-Saharan Africa has experienced tremendous growth in its agricultural sector. While it is true that famine and drought continue to rock the region, the FDI has played a critical role in dampening the devastating effects that these severe conditions can have on food security.

The positive impacts of FDI extend beyond boosting food security in sub-Saharan Africa. It has also made contributions to knowledge transfer. This is according to Managi and Bwalya (2010) who in their text observe that sub-Saharan African countries have benefited from the advanced technologies and knowledge introduced by investors. This view is shared by Mohamed and Isak (2017) who agree that thanks to FDI, the region has acquired new knowledge that the countries employ to build their economies. The technology and knowledge transfer is most significant and has the most dramatic impact when it is driven by successful firms who recognize the tremendous potential that sub-Saharan countries hold. Osabutey and Jin (2016) confirm that by allowing western firms to establish operations in their markets, sub-Saharan African countries expose their firms and workers to the expertise and technology that the foreign companies bring.

In the previous section, it was noted that the main principle that underlies the modernization theory is that economic growth goes hand in hand with democratic governance. Research appears to confirm this relationship. According to Asiedu and Lien (2011), there is a direct relationship between the two factors. Investors prefer markets where democracy has flourished, political stability is assured and rules are followed. Malikane and Chitambara (2017) also confirm that FDI inspires the strengthening of democratic institutions and governance.

Adverse Outcomes 

There is no doubt that the net effect of FDI is positive. However, as various researchers have cautioned, sub-Saharan African has also witnessed negative outcomes due to FDI. The creation of a culture of dependency is among these negative consequences (Adegboye, 2017). The nations in this region are essentially looking to external investors for support instead of seeking to achieve self-sufficiency. Basically, the region is at the mercy of investors who may exploit its massive resource reserve. Another negative effect of increased FDI is that foreign companies may exert strain on sub-Saharan Africa’s limited resources. For example, Bartels, Eicher, Bachtrog and Rezonja (2009) found that many firms that had invested in the region encountered difficulty finding qualified and competent employees. This observation shows that the firms that set up operations in the region also experience some negative outcomes. Before they establish a presence in the African market, firms should understand that the workforce in this region may not possess the skills and competencies needed to ensure seamless function.

The unfair exploitation of Africa’s resources is yet another negative effect of FDI. Bokpin, Mensah and Asamoah (2015) raise the alarm over the practices of some firms that have set up plants in Africa. They lament that these firms are engaged in the unsustainable and deeply unfair exploitation of such resources as oil. Given their heavy dependence on FDI, the sub-Saharan African countries simply lack the political power to push for better agreements that guarantee fairness. Chen, Dollar and Tang (2015) echo the concerns raised by Bokpin and his colleagues. They single out China as among the countries that have invested heavily in Africa in exchange for the continent’s vast natural resources. While it is true that the region has experienced growth and democratization, these gains have occurred at the cost of sovereignty and control over its natural resources. If they are truly dedicated to helping Africa grow, foreign firms and countries should ensure that agreements with African nations are fair.

Conclusion 

Africa remains one of the largest recipients of FDI. Every year, private companies, governments and such international institutions as the World Bank and the International Monetary Fund invest huge amounts in the continent. For the most part, the impact of the FDI has been positive. It has stimulated the economies of the countries in the region, leading to higher levels of employment and economic growth. Furthermore, FDI has allowed the region to invest in such industries as agriculture. Consequently, the sub-Saharan African countries have gained an improved competence to feed their people. Since FDI is usually accompanied by demands for political, social and economic reforms, the sub-Saharan nations have also witnessed an improvement in their political spaces. An increasing number of these countries are holding open elections as part of their efforts to attract more investment. FDI has also opened up the region and made it more accessible to investors who wish to contribute to the region’s development. The positive outcomes underscore the need for sub-Saharan Africa’s partners to remain committed to the region’s growth.

There is no doubt that Africa has registered drastic improvements thanks to FDI. However, the region has also suffered serious challenges and hardships as a result of FDI. The establishment of an exploitative culture of dependency is among the adverse outcomes that have resulted from FDI. The sub-Saharan nations are becoming increasingly dependent on FDI instead of exploiting internal sources of revenue that can be used to stimulate growth. Moreover, these countries are forced to comply with conditions which may not be in line with their interests. As the countries continue to partner with investors, they should also explore avenues for gaining greater autonomy and reducing their level of dependency. Both the modernization and the dependency theory capture the reality in Africa. However, since the positive impacts of FDI outweigh the negative effects, the modernization theory best represents the changes that sub-Saharan Africa is undergoing.

References

Adegboye, F B 2017, foreign direct investment and economic development in Africa, Journal of Internet Banking and Commerce, 22 (1), 1-15.

Agbebi, M & Virtanen, P 2017, dependency theory- a conceptual lens to understand China’s presence in Africa? Forum for Development Studies, 44 (3), 429-51.

Asiedu, E & Lien, D 2011, Democracy, foreign direct investment and natural resources, Journal of International Economics, 84 (1), 99-111.

Bartels, F L, Eicher, M, Bachtrog, C & Rezonja, G 2009, Foreign direct investment in sub-Saharan Africa: changing location-specific advantages as signals of competitiveness, The Developing Economies, 47 (3), 244-78.

Bokpin, C A , Mensah, L & Asamoah, M E 2015, Foreign direct investment and natural resources in Africa, Journal of Economics Studies, 42 (4), 608-21.

Cheibub, J A & Vreeland, J R 2018, ‘Modernization theory: does economic development cause democratization? In the Oxford handbook of the politics of development, Oxford, Oxford UP.

Chen, W, Dollar, D, & Tang, H 2015, China’s direct investment in Africa: reality versus myth, Brookings Institution, viewed March 10, 2019 from https://www.brookings.edu/blog/africa-in-focus/2015/09/03/chinas-direct-investment-in-africa-reality-versus-myth/

Delgado, A, Hurlimann, P, Marquardt, G, Rufer, N & Schleier, R 2016, the dependency theory: a case of Brazilian development strategy, in Kimakowitz, E, the evolution of development thinking, theories, policies, implementation , Humanistic Management Center.

Dike, C 2018, Effects of foreign direct investment in sub-Saharan Africa economic growth: evidence from panel data analysis, International Journal of Economics and Financial Issues, 8 (2), 255-261.

Fosu, A K 2014, Growth, inequality and poverty in sub-Saharan Africa: recent progress in a global context, Oxford Development Studies, 43 (1), 44-59.

Gilman, N 2018, Modernization theory never dies, History of Political Economy, 50 (S1), 133-151.

Gunasekera, D, Cai, Y & Newth, D 2015, Effects of foreign direct investment in African agriculture, China Agriculture Economic Review, 7 (2), doi: 10.1108/CAER-08-2014-0080

Lewis, P 2018, Africa, dilemmas of development and change, London, Routledge.

Malikane, C & Chitambara, P 2017, Foreign direct investment, democracy and economic growth in Southern Africa, African Development Review, 29 (1), 92-102.

Managi, S & Bwalya, S M 2010, Foreign direct investment and technology spillovers in sub-Saharan Africa, Applied Economics Letters, 17 (6), 605-8.

Mohamed, M M & Isak, N N 2017, The impact of foreign direct investment on economic growth in Somalia, International Journal of Economics and Management Studies, 4 (8), 25-33.

Monterrubio, C, Osorio, M & Benitez, J 2018, Comparing enclave tourism's socioeconomic impacts: A dependency theory approach to three state-planned resorts in Mexico, Journal of Destination Marketing & Management, 8, 412-22.

Osabutey, E L C & Jin, Z 2016, Factors influencing technology and knowledge transfer: Configurational recipes for Sub-Saharan Africa, Journal of Business Research, 69 (11), 5390-95.

Simon, D 2018, Conceptualizing South African local economic development within current development debates: the international setting, in Rogerson, C, Local economic development in the changing world , Taylor & Francis.

Vermeire, J A L & Bruton, G D 2016, Entrepreneurial opportunities and poverty in Sub-Saharan Africa: a review and agenda for the future, Africa Journal of Management, 2 (3), 258-80.