The rising stakes of foreign investment in Africa
With labour’s contribution to economic growth steadily growing, Africa must focus on improving inward financial flows.
Published on 02 September 2025 in
ISS Today
By
In the early stages of development, economic growth is largely driven by the contribution of labour. After that, capital and eventually technology increase in relative importance. This happened with the Asian Tigers and China when they were poor, reflecting the progression in growth drivers as countries move towards prosperity.
For its 2025/26 financial year, the World Bank considers 22 African countries to be low-income, with a gross national income (GNI) per person equivalent to or below US$1 145. Economic growth in these countries essentially comes from their better-educated, healthier and employed labour force.
Then, as countries develop and enter middle-income status, the availability and role of capital to boost manufacturing begin dominating, eventually becoming more important for economic growth than labour or technology. That generally applies to the 23 African countries the World Bank considers lower-middle-income.
Fast forward, as countries settle into upper-middle-income status (Africa has eight) and try to achieve sufficient velocity to become high-income. At this stage, the role of technology in enhancing high-value service output starts dominating.
Only Seychelles has escaped Africa’s notorious middle-income trap. Inadequate access to capital for manufacturing and technology advancement largely explains lower-middle- and upper-middle-income countries’ inability to escape the trap.
Escaping Africa’s notorious middle-income trap requires capital for manufacturing and technology advancement
Access to capital is vital for development. It enables countries to invest in health, infrastructure and education, diversify from commodities, and pursue a manufacturing-led growth path for sustained and rapid growth.
So, attracting foreign direct investment (FDI) at scale becomes crucial. To this end, governments compete with one another on tax incentives, Special Economic Zones, regulatory incentives, infrastructure development and governance reforms.
With above-average FDI, countries like Senegal, Uganda, Rwanda, Niger, Djibouti, Togo, Ethiopia, Benin and Côte d’Ivoire are projected to grow at rates exceeding 6% – above global averages. In 2025, these are among the world’s fastest-growing economies.
Nigeria, Africa’s largest economy, is however expected to grow at only 3.2% in 2025. With an annual population increase of 2.6%, its income per capita remains stagnant. In addition to poor governance and insecurity, its notorious low levels of FDI (around 0.5% of GDP) are an important driver of lacklustre growth.
Other African countries are struggling, including Equatorial Guinea, South Africa, Tunisia, Lesotho, Gabon, Angola, and the Central African Republic. All are growing slowly, and except for Gabon, have low or negative FDI inflows. Gabon attracts modest investment to its oil and gas sector despite the 2023 coup and subsequent instability.
Gabon reflects the history of most FDI to Africa, which has been in oil and gas, such as in Mozambique, Tanzania, Uganda and Namibia. These inflows have limited forward and backward linkages to other sectors like agriculture and manufacturing.
Once fossil fuels investments are excluded, it’s clear that most FDI flows to upper-middle-income African countries, which is why development-oriented aid is so important for low- and lower-middle-income Africa. USAID provided around 26% of aid to Africa, and its dissolution has increased the significance of FDI, remittances and better domestic revenue mobilisation.
Much can be done to improve domestic revenue generation, particularly through technology. Yet, Africa’s average tax-to-GDP ratio is only 16% (with a large spread when comparing rates per country), compared to 19.1% in Asia-Pacific, 21.5% in Latin America and the Caribbean, and 34% across Organisation for Economic Co-operation and Development nations.
Using the International Futures forecasting platform, African Futures’ updated Financial Flows theme examines the effect on Africa of increased FDI, remittances and aid in a post-Donald Trump world, compared to a business-as-usual forecast.
In 2023, FDI inflows represented 3% of gross domestic product (GDP). The business-as-usual forecast shows a modest increase to 3.6% of GDP by 2043 as Africa’s population and market growth steadily attract more investment. Under the Financial Flows scenario, inward FDI is modelled to increase more aggressively to 5.3% of GDP (US$351 billion vs US$230 billion).
Although inflows in the Financial Flows scenario are much larger, Africa’s stock of FDI in 2043 is still significantly below that of South America in absolute terms, and slightly less than half if expressed as a percentage of GDP.
In this scenario, Africa’s GDP would be US$243.5 billion larger in 2043 than the business-as-usual forecast. Average GDP per capita would increase by US$160, with Seychelles and several upper-middle- and lower-middle-income countries doing exceptionally well.
Among the types of inward financial flows modelled, FDI outperforms aid and remittances in improving productivity, especially in countries with skilled labour, strong institutions and deeper financial markets. Because FDI generally advantages skilled labour, its impact on extreme poverty in the Financial Flows scenario is limited to a one percentage point decline below the business-as-usual forecast.
Of the inward financial flows modelled, FDI outperforms aid and remittances in improving productivity
Upper-middle-income countries simply gain more from FDI than poorer African countries. Furthermore, most FDI in Africa still goes to extractives such as minerals, gas and oil, although that is changing.
However, the African Continental Free Trade Area’s (AfCFTA) full implementation generally does best when comparing the various sectors modelled on the African Futures website. Except for aid, positive signs on larger inward financial flows abound.
Intra-African investment is rising, especially from Kenya, Nigeria and South Africa, in areas such as IT, finance and manufacturing. This trend will likely accelerate with the AfCFTA’s implementation, which the World Bank suggests could boost FDI by up to 120%, with intra-African investment also rising by about 85%.
Emerging economies like China, the Gulf states and India are all growing their investments in Africa’s energy, infrastructure and logistics, reshaping the continent’s economic and geopolitical landscape.
As global competition intensifies, African countries can increasingly negotiate investment terms that serve their long-term goals. Investment in agro-processing, renewable energies, manufacturing and digital infrastructure tends to enable technology transfer, generate more jobs and build economic resilience.
African governments must improve conditions to absorb and retain capital by offering a favourable investment climate, policy stability, and ease of doing business. Investments should align with national priorities and structural transformation goals, following the East Asian example of leveraging FDI for technological upgrading and industrialisation. Countries like Egypt, Senegal, Morocco, Ethiopia, and Zambia are doing well, but many are still struggling.
FDI can be a powerful tool when managed strategically and in tandem with robust domestic reform.
Africa’s development trajectory is both promising and precarious. With the contribution of labour to economic growth steadily improving, Africans should mobilise more inward financial flows, particularly FDI. At the same time, they should reduce the costs of remittances and lobby for aid to poor countries, which typically struggle to attract FDI.
This article was first published in Africa Tomorrow, the blog of the ISS’ African Futures and Innovation programme.
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