Investment is a very important part of growth for an economy because it provides the resources to produce goods and services more effectively. Countries in Africa have recently been attracting larger amounts of investment from foreign companies (known as FDI). Let’s explore what it is that helps investors make decisions on where to invest.
WHY IS AFRICA ATTRACTIVE FOR INVESTORS
1. Lack of capital compared to large population
One major reason is that African countries currently have a lack of capital resources such as factories, communications networks and roads while they have large populations. This means that there is a lot of people who do not have the machinery to work very productively. Giving machinery to a lot of people in Africa leads to very high increases in output. Since investors want high returns and profits from their investment, Africa is a very favourable place to invest.
The World Bank believes that there is much more that can be invested in Africa to increase productivity. They argue that around $93 billion a year would give Africa the infrastructure it needs for a highly effective economy.
2. Many small thriving businesses
There are also many small businesses in Africa who can make simple changes to increase efficiency. There is a growing market for retail, selling goods, as the African people are becoming richer and buying more. This means that there are many investment opportunities for small businesses.
For example, the Nairobi Java House is a chain of cafes in Kenya. In 2012, an investment from Euro Car Parts means that they could expand and build Planet Yogurt, a chain of frozen yogurt cafes.
3. Large natural resource base in many countries
Many countries in Africa also have a lot of natural resources. For example, the Democratic Republic of the Congo has a lot of copper in the Katanga Province. Copper is essential for a lot of technology. There is also a lot of oil in countries like Sudan and Nigeria.
These natural resources mean that there is a large supply of materials ready to be processed to produce higher value items to generate profit.
WHAT ARE THE REASONS FOR NOT INVESTING?
The reasons above show that there is high reward in investing in Africa but there are also concerns that there may be risks. When investors and banks make decisions, they must balance risk and potential profit. These are some of the factors that affect their decision:
1. Property rights
Investors need to feel safe knowing that what they have invested in will not be taken away. For example, if they have funded a factory, they must be sure that they will be able to own the rights to it, so they can profit from it.
This is also important for “intellectual property.” This means that if someone has come up with a new idea to increase output, they are the only one with the right to that idea for some time so others do not just copy them. This ensures innovation so new ideas to grow the economy are generated.
2. Political stability
The political situation of a country also affects their decision. If investors fear that there may be many protests or a war, their investment will not bring any profit and they might fear that they will lose their property rights. A stable government, with free citizens who choose to support it, is important to lower the risk of investment.
Therefore, Africa is a continent with plenty of exciting opportunities with a thriving economy and lots of chances to invest to boost the economy. Governments in Africa that increase property rights and stability are the most likely to see large amounts of foreign investment.