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Foreign Investment in Africa: A Blessing or a Curse?

On my most recent trip to east Africa, I noted plenty of new growth in the city where I grew up and in the communities where many Harkiss artisans live. Railroads are expanding, housing and office buildings are under construction, and more people are getting connected than ever before.

An influx of investors, including private equity groups based the U.S. and Europe, are turning to Africa as their next big opportunity. In recent years, superpowers like China have poured billions into Africa’s economy in the interest of pulling out sizeable profits. Despite the physical and economic risks, including social unrest, disease and corruption, the global investment community seems to see Africa as a huge ATM, just waiting to be cashed out.

What Sectors Receive the Most Funding?

Some of the hottest target industries include manufacturing, food services and convenience stores. According to the article “Foreign Investors in Africa,” published by economist.com, private equity funds invested more than $2 billion in African nations in 2014. Most of the funding enriched the financial markets, while consumer services, consumer goods, industrials, and oil and gas were not far behind. Additionally, foreign funding is gradually finding its way into education and healthcare institutions, providing a welcome boost for much-needed development.

What are the Benefits to African Citizens?

Surges of new capital certainly create trickle-down benefits, including:

  • New employment opportunities
  • Vocational training
  • Updated technology

What are the Disadvantages of Foreign Investment?

From Africa’s perspective, however, the flow of foreign capital is not all gravy. In fact, it floods developing communities with a new set of problems:

  • Often, companies establishing new factories or headquarters in Africa staff them with their own people, so only entry-level jobs, if any, are available to locals.
  • Some emigrating employees leave their home countries for the wrong reasons, in some cases to escape criminal prosecution, and they continue their illegal activities, such as sex trafficking, in African countries with more lenient laws.
  • Most investment firms take advantage of government tax incentives to establish and do business in Africa, so they do not initially contribute to the tax base, which funds services and infrastructure.
  • Real estate prices in countries like Uganda, which has few restrictions on ownership, have gone through the roof. Locals are being displaced from their homes by real estate investors seeking to get rich quickly.

In the next few installments, we’ll look in more detail at particular pros and cons of foreign investment in Africa and explore solutions to the problems that result.

 

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