Companies in developing countries, particularly in Africa, are stepping up investment and driving FDI in emerging markets.
While the majority of the world’s developing countries are in Africa, the uptick among African investors in recent years reflects a wider South-to-South investment trend: In 2016 around 28% of all new foreign direct investment (FDI) came from companies in emerging markets, up from 8% in 2000. Nearly all developing countries have expanded overseas, and most of their outbound investment goes to the West. However, in two-fifths of developing countries, at least half of incoming FDI is from the developing world. In Africa, the top 10 foreign investors in 2015-16, by number of new projects, included China, India, Kenya and South Africa.
These investors have a slightly different profile from those in the West. The World Bank conducted a survey of more than 750 companies with FDI in developing countries, and found that those from developing countries were “more willing to set up shop in smaller and higher-risk countries”, The Economist reports. “And they were just as likely as rich-country firms to reinvest profits in their foreign affiliates.” Peter Kusek, co-manager of the World Bank Group’s Investing Across Borders project, points out that it is typical for globally ambitious firms to launch affiliates in neighbouring countries first, in relatively familiar foreign markets, before going farther afield.
South-to-South investment is especially beneficial to the poorest countries. However, in various ways government intervention is restricting just how much benefit FDI can bring to these countries. According to the World Bank, difficulties with reporting requirements, foreign-exchange controls and caps on certain destinations or industries curb outward FDI in 60% of poor countries. Inward FDI is also constrained, with limitations on the number of branches or types of businesses foreign companies can set up.
There are signs that emerging markets may become more accommodating towards investors. Kevin Ibeh of Birkbeck University in London points to the rise of African multinationals. The biggest of these employ thousands of workers, positioning them to lobby for changes such as better regulations and infrastructure. Ibeh sees this as a sign that private enterprise is maturing in the region, and could lead to better implementation of regional trade agreements.