If guided wisely, foreign direct investment (FDI) can provide credible solutions to inequality, and alleviate urban poverty and unemployment, the United Nations Human Settlements Programme (UN-Habitat) argues in its newly released ‘State of the African Cities 2018’ report.

Drawing on a database of FDI flows between roughly 1 200 cities, the report covers the period 2003 to 2017.

University of the Witwatersrand (Wits)professor Ronald Wall explained that the study was aimed at contributing to policies that can turn African cities into more attractive, competitive and resilient FDI destinations.

The study also considers how countries could use investment to improve economic development.

Wall initiated the research and is also the chief researcher and author of the report.

He explained that cities shaped the economic performance of entire countries and regions and should therefore be viewed as constituent parts of regional economies of scale.

“In advancing the economic development of the African continent, while addressing high levels of income inequality, unemployment and poverty, the five major African regions, within the responsibility of their respective regional institutions and the African Union, should closely collaborate to target different sources of FDI worldwide,” the study suggests.

According to Wall, attracting global FDI was a highly competitive endeavour and therefore regional cooperation was critical to amplifying individual cities’ and nations’ negotiation strength.

Using geographic information systems, network analysis and econometric techniques, Wall and fellow researchers tracked and mapped some 200 000 investments from city to city around the world.

The report notes thatAfrica’s weak attachment to the backbone of the world economy is clear, with North–North investments still reigning supreme, while North–South investments involving the Brazil, Russia, India, China and South Africa (Brics) countries and even direct investments between Brics countires lag far behind in terms of the flow of capital.

Further, the study shows that Africa attracts just 5% of global FDI, despite being home to 15% of the global population.

While recent FDI growth in Africa is the second-highest in the world, the study indicates that Western Europe is still the biggest investor into Africa, followed by Asia, North America and Africa.

Exploring four industrial sectors, the report shows that the high-tech sector has the highest FDI growth rate, although still on a small scale, and in limited locations, with Cairo and Johannesburg taking the lead as Africa’s most competitive cities for innovative industries.

Corporate Gateway
A case study on Johannesburg, researched and written by Wits School of Economic and Business Sciences professors Umakrishnan Kollamparambil and Rubina Jogee, explores how Johannesburg is not only the economic powerhouse of South Africa but also the gateway to Africa for multinationals and corporate investments.

According to the results of the case study, Johannesburg and Gauteng serve as a financial hub for the entire African continent, while the data reveals the city dominates as a destination for FDI in industrial activities such as technical support centres, sales and marketing, information and communication technology, education and logistics, as well as being the headquarters of multinationals.

It also notes that Johannesburg is Africa’s dominant Internet centre, ranking twenty-third in the world in terms of telecommunications, while foreign firms cite lower labour costs as giving Johannesburg a competitive edge over advanced economies.

Meanwhile, the UK is the single largest source of FDI into Johannesburg, accounting for a quarter of all FDI between 2003 and 2015, followed by the US and Australia.

Out of Asia, it is China and India that figure as prominent investors in the city, while many foreign firms choose to locate their headquarters in Johannesburg, owing to the city’s connectivity with the rest of the African continent and the world.

Meanwhile, Wits stresses in a release that government actions are very important for attracting FDI.

“In an age of globalisation and the emerging Fourth Industrial Revolution, the role of African cities and urbanisation must reverberate the long-term economic, spatial and demographic planning of the continent,” Wall explained.

He elaborated that, in other parts of the world, greater investment contributed to a decrease in inequality, but, in Africa, it could lead to an increase in inequality.

One of the reasons for this, he noted, was a lack of ‘absorptive capacity’, adding that governments needed to ensure that the number of graduates met global companies’ demands, otherwise multinationals could not employ a local workforce.

“From the results, it is clear that government policies play an important role. The more a government invests in higher education, the better students can be educated to match the demand in the investment world and multinationals can therefore find local talent instead of importing skilled workers.”

Going forward, the report warns that food security will, in the near future, be one of Africa’s biggest challenges.

Africa has huge food-producing potential, with highly arable land and 60% unemployed youth.

Wall said the continent still needed an “agricultural revolution”, which could go hand in hand with its rapid urbanisation in terms of medium-tech and high-tech forms of farming, and particularly periurban farming.

The current negative stigma of poverty and subsistence agriculture needed to be changed into one of medium- and high-technology food production, he suggested.