The Role of Foreign Direct Investment in Africa's Economic Transformation

Despite two decades of economic growth, sub-Saharan African economies continue to exhibit a considerable manufacturing deficit and are characterised by low-productivity firms, low levels of technology and unsophisticated exports. There is empirical evidence indicating that this is, in part, responsible for the slow progress in terms of poverty reduction and employment generation observed in the region. Moreover, research findings suggest that countries which manage to enlarge, diversify and upgrade their manufactured products have greater prospects for sustainable long-term growth. The disappointing development of the manufacturing sectors of most African economies during the investment climate reform period in the past twenty years have brought more active approaches to industrial policy back to the fore. The East Asian experience since the 1980s has shown that foreign direct investment (FDI) can transfer capabilities from foreign to domestic firms as a result of technology and knowledge externalities. Moreover, FDI can increase market competition and provide domestic firms with access to regional and global value chains. Thereby, it can play a key role in shifting economies towards higher value-added activities, manufacturing and thus structural transformation and diversification. Especially rising wages and economic rebalancing away from export-led growth in Asia as well as the emergence of global value chains represent a window of opportunity for African economies. In fact, evidence suggests that FDI to sub-Saharan Africa has diversified the scale of activity across existing industries and widened the range of manufacturing activities.

Policy-makers have identified these opportunities and developing countries spend large sums on specific infrastructure, investment promotion agencies and incentive packages to attract FDI. This raises critical questions about cost-efficiency, especially considering the scarcity of public resources in developing countries. Broadly, my research aims to contribute to a better understanding of the effects of multinational enterprises (MNEs) and FDI on regional innovation, productivity and regional development. It is thus in accordance with the research interests of Professor Riccardo Crescenzi. More precisely, the research analyses the role FDI can play in the structural transformation of sub-Saharan African economies. Researchers and policy-makers have pointed out a need for new research to better understand the dynamics and mechanisms of knowledge and technology spillovers in specific contexts. Therefore, this research analyses the existence, channels and mechanisms of knowledge and technology spillovers in the specific context of poor institutions, weak absorptive capacity and natural resource-abundance. These insights are crucial to inform policy-design on how to maximise benefits of FDI in host regions which is the main motivation and objective of this research