Posted in Finance Articles, Total Reads: 907
, Published on 26 February 2016
There has been a new slow yet distinct change in the main FDI donors from the western countries towards the BRICs nations over the last few years. India and China specifically are getting to be major avid players. This changed investment and trade relations has posed challenges as well as created opportunities for the African. An undeveloped continent in measures of economic growth tills the 90s; there have been an accelerated GDP growth for the African Economies from 2000 onwards.
Several factors lead Africa to become a prospective continent for investment. The Sub-Saharan consumer spending is on the rise and by 2020 African consumers are estimated to generate up to $1.4 trillion. 30% of the world’s mineral reserves are expected to be in Africa, with high deposits of diamond, gold, platinum and manganese.
According to Economist 2011-2015 estimate Mozambique, Ghana, Mozambique, Kenya and Nigeria are amongst the world’s top 10 fastest growing economies. And that’s why FDI inflows by region for Africa on 2014 reached $54 billion (Fig. 1).
Fig 1: FDI Inflows by region
Source: UNCTAD, FDI/MNE Database
So it is very normal that both India and China have come up with clearly expressed investment strategy for Africa. Within the last several years, India and China have steadily become key players in Africa, creating considerable changes and opportunities in Africa’s traditional investment and trade relations. A key route of this superior authority has been Foreign Direct Investments (FDI). Infrastructure, Natural resources, information and communication technology (ICT), textiles, social sector and automobiles are some of the chief areas to receive the impetus.
India and China in Africa: Where they stand now
Telecom and ICT
In 2010 India's top private telecom company Bharti Airtel made a $10.7 billion deal to acquire Kuwait's Zain’s African assets and also announced that it had plans to purchase Telecom Seychelles for US$62 million. In Ethiopia the Indian government also initiated the pilot phase of the US$1 billion Pan-African network Project to execute a fibre optics, satellite and wireless network connecting each of the 53 AU member states to India.
The two key Chinese players in this field are equipment manufacturers Huawei Technologies and ZTE. Chinese firms have established e-government networks and national fibre-optic communications networks for more than 20 African countries and built more than 40 third-generation telecom networks in more than 30 African countries.
Oil & energy
The production of crude oil is concentrated in West Africa (Nigeria), Central Africa (Gabon), North Africa (Libya, Algeria and Egypt) and southern Africa (Angola) .India has increased her oil imports from Sudan, Nigeria and Angola. Mittal Steel and Mittal Ispat Steel are scheduling to work in coal sector and working in the Nigerian mines. On 23 July 2005 Mittal steel and Oil & Natural Gas Company (ONGC) have signed a MoU to come together to guarantee India’s energy safety through overseas acquisition mainly in Africa. In countries like Mozambique, Zimbabwe and South Africa, Coal India Limited has started exploring some coking coal mining blocks. ONGC Videsh Ltd (India) has also acquired for $2.6 billion a 10% stake in Rovuma Offshore Area 1.
Sudan is one of the largest and earliest overseas energy projects ($4 billion by now) by China's major energy companies. The China National Petroleum Corp. (CNPC) has a 40% stake in Greater Nile Petroleum that controls Sudan's oilfields. China purchases more than half of Sudan's oil exports. China National Offshore Oil Corp. (CNOOC) had bought 35% of an exploration license in the Niger Delta for $60 million and also purchased a 45% stake in a Nigerian oil-and-gas field for $2.27 billion.
• Over the past few years, the Indian government has constantly encouraged Indian companies and tertiary education institutions to enter emerging African markets.
• For more than five years Ashok Leyland, the Mahindras and Tata Group have been selling vehicles with increasing success. Sales have increased from 5,000 to 20,000 a year.
• EXIM India’s “Focus Africa” and “China’s African Policy” of Beijing had moulded the guidelines to steer future co-operations with the African government.
• 85% of the Africa’s exports to China come from the oil-exporting nations of Nigeria, Angola, the Republic of Congo, Sudan and Equatorial Guinea.
• South Africa alone constitutes for 68% of the region's exports to India, most of which are in precious stones, minerals, chemicals and metals and alloys. Other than South Africa India's diamond-cutting industry imports stones from Namibia, Zimbabwe and Botswana.
• Across Africa new roads, hospitals, railways, airports, stadiums, schools have been built with help from China.
• In South Africa’s solar panel industry Chinese firms has also put in money.
Opportunities for India: New markets
From 2013 slide FDI outflows from India got better in 2014, increasing fivefold to $10 billion because of the resumption of international expansion of large Indian MNEs. During 2008-2012 sectored distribution of outward FDI shows that it has been mainly invested in services and manufacturing sector. Within manufacturing, major sub-sectors which involved outward FDI from India included basic organic chemicals, medicines & allied products, agriculture machineries and equipments, refined petroleum products etc. Similarly, in services sector, a majority of FDI outflow had gone into financial services, business services, engineering and architecture, engine architectural, data processing and other technical consultancy activities.
Source: UNCTAD, FDI/MNE Database
Although in Africa’s inward FDI stock the services share is still lesser than the global and the developing-country averages, in 2012, services accounted for 48 % of the total FDI stock in the region, more than double the share of manufacturing i.e. 21% (Fig. 2). In the primary sector FDI stock was 31% of the total. Services FDI is mainly concentrated in a few countries that include South Africa, Nigeria and Morocco. So keeping up with the existing trends in FDI outflow, India can invest a lot in African manufacturing and growing services sectors and subsectors like Finance and Business Services (Fig. 4)
Other Sectors where India can focus on are:
• Iron and steel: India can target primary and semi-finished iron and steel.
• Yarn and fabrics: Keeping Indian cotton agriculture in mind they can focus on fabrics and man-made yarn.
• Plastic and linoleum products: This sector is having a tough competition with China and East Asian countries, which persuade India to target Africa in domestic and industrial scale.
• Rubber manufactured products: Another important place where India can target are the products like shoes, bathroom footwear, gloves, domestic items, buckets, army purposes, industrial belts and sockets etc.
The quick boost in FDI flows between Asia and Africa, even though much more modest than the increase in trade is noteworthy. Over the past decade majority of this investment has been concentrated in a few countries and in the extractive industries. But in the last few years, Chinese and Indian FDI flows to Africa have started to reach many other sectors including power generation, agro-processing, tourism, apparel, road construction and telecommunications and many more countries. Lastly as in everything else Chinese are playing the game of scale in Africa. For example in 2009, while India put in $2 billion in the continent, the Chinese committed investments of about $8 billion dollars. So in order to respond to China effectively, India needs to extend her bilateral investments across resource rich and resource poor countries to balance the rewards & risks associated bringing in the "Triple A" or "Appropriate, Affordable and Adaptable" technology transfer mode. Thus, in the long run, even though China enjoys a much stronger political financial presence in Africa, there is enough scope for India to surpass the Chinese supremacy.
This article has been authored by Shubharthi Ghosh from SIBM Bangalore
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Kumar, D. S. (2006). India and Africa Energy Trade and Development Sector: Major Challenges and Prospects. India's Energy Security: Major Challenges (Special Issues) , ORF Centre for Resources Management.
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Sachdeva, S. C. (2014). Analysis of FDI Inflows and Outflows in India. Journal of Advanced Management Science .
UNCTAD. (2015). World Investment Report 2015. United Nations Conference on Trade and Development.
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