Growth of middle class and FDI inflow in Africa

In Africa due lack of capital and technology, FDIs is critical to development needs of the region. Foreign firms and investors in African cities are playing an important role in the region’s development.

 African economy is diversifying and expanding with growing middle class population. Over past decade African continent has registered growth of consumption and change in consumption pattern. Due to expansion of market demand and growth of urbanisation in Africa, many foreign countries are attracted to invest in Africa. Ethiopia, Uganda, Rwanda, Mozambique, Nigeria and Egypt are among some of the economies attracting significant FDIs.

Recently, at the annual Investment Meeting (AIM) conference in Dubai, United Arab Emirates, Rwanda Development Board was awarded as the second best investment promotion agency in the East African region in attracting transformational projects. In Rwanda major sectors attracting FDIs are Finance, construction, telecommunication.

According to a UN Human Settlements Programme (UN-Habitat) report, African governments must connect FDIs to sustainable urbanisation by strengthening their urban policies, planning, financial and legal systems.

According to the report, Africa’s FDIs growth rate is the second highest in the world. The major source of FDIs for North Africa are Europe and the Middle East, for Eastern Africa FDIs mostly come from Asia, especially China. Again the report identifies Cairo, Lagos, Johannesburg and Nairobi as Africa’s main FDIs centres.

Attractions for FDIs in Africa

Africa’s growing middle class, with its recently acquired purchasing power, is the main reason behind the new FDI trend in the continent. Based on research, the number of Africans who can afford to buy more than the necessities of daily life is rising rapidly. A report by McKinsey, a US-based multinational consulting firm, estimates that the continent is home to around 50 million middle-class households.

Africa has the fastest-growing middle class in the world. Some 313 million people, 34 per cent of Africa’s population, spend USD 2.20 a day, a 100 per cent rise in less than 20 years, according to the African Development Bank.

As economies and middle classes grow, demand grows that provides attractive market for investors. It can also lead to competition so much that they are buying up global rivals. South African Breweries has bought the US’ Miller to become SAB Miller, the world’s second-largest brewer. The US’ retail giant Walmart, the world’s biggest retailer, has invested USD 2.4 billion acquiring a majority stake in South African grocery retailer Massmart so it can springboard across Africa, starting in Nigeria.

Middle class growth has led to expansion of market and return on investment making Africa an important destination for FDIs. Analysts say the rate of return on foreign investment in Africa is higher than in any other developing region. Over the last decade, six of the world’s 10 fastest-growing countries were African. In eight of the last 10 years, Africa’s lion states have grown faster than the Asian tigers. This includes Ghana, followed by Ethiopia and Côte d’Ivoire, with Senegal and Tanzania occupying the fifth and sixth spots in high growth, respectively. Africa has six of the world’s ten fastest growing economies this year, according to the World Bank. Rwanda is among top ten fastest growing economies in Africa.

Changing direction of FDIs

FDIs, which used to concentrate in the extractive sector in Africa, is now changing direction and it is spreading across manufacturing and services sectors. This change has occurred due to growth in demand coming from middle class growth and urbanisation. The services sector accounted for about three quarters of the greenfield FDIs projects in 2016, while manufacturing accounted for about one fifth.  In Africa, FDIs is becoming a major source of financing economic diversification.

In Ethiopia, the focus of greenfield FDIs in 2016 was manufacturing and infrastructure projects. FDIs helped Mauritius to diversify its economy from sugar into textiles and tourism, and recently into luxury real estate, offshore banking and medical tourism.

Thus, FDIs is an important tool of economic growth for developing economies. Foreign investment is bridging the technology and capital gap, thereby enhancing competitiveness of developing countries.  With growth of middle class due to expansion of market and urbanisation African countries are becoming an important centre of FDIs destination.

The writer is a Kigali based economist and consultant.

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