The Potential of Investment Partnerships for Mutual Benefit
Research paper
Published 31 October 2019
Updated 11 December 2020
ISBN: 978 1 78413 345 0
Trade between Central and Eastern Europe and sub-Saharan Africa has increased significantly in the last decade and a half. There is a strong case to be made for greater economic re-engagement, especially in terms of investment, that has the potential to support inclusive growth in both regions.
As EU member states and signatories to the 2017 AU–EU Abidjan summit declarations, Central and Eastern European states have committed themselves to increase private-sector investment in those areas of the African economy that have the potential for sustainable job creation, in order to meet current and future demand for jobs, given that the continent’s population is expected to double by 2050.28 However, there are further shared interests in enhancing investment between the two regions.
Central and Eastern European economies have, on the whole, recorded strong growth rates since the fundamental transformations of the early 1990s, giving rise to the use of labels such as ‘Tatra Tiger’ (in the case of Slovakia), ‘Baltic Tigers’ and ‘Eastern Tigers’ in the media and academic literature.29 But maintaining strong growth in increasingly saturated markets – both domestically and in the EU – is challenging. Aside from innovation policies, there is a need to pursue foreign expansion of both trade and investment.30
Reliance on too few sources of foreign investment might present an obstacle for developing countries in the event of external shocks.
Sub-Saharan African countries are in need of inward investment to transform their economies. The AU’s Agenda 2063 Framework Document emphasized the need for an economic development path focused on industrialization and value addition, to move away from dependence on the export of raw materials and vulnerability to commodity price fluctuations.31 This type of development will strongly depend on the region’s ability to attract capital, especially in sectors such as agriculture, where most of Africa’s employment opportunities lie, but also in sectors such as infrastructure, pharmaceuticals, energy and ICT. Not all types of investment will provide the desired growth and, especially, the desired levels and quality of job creation. Employment creation strategies should revolve around attracting market-seeking and efficiency-seeking FDI, especially greenfield investments. Aside from capital, skills and technology transfer are also of paramount importance. While trade – especially in its current arrangement, where the export of primary raw materials from Africa to Europe dominates – has helped to generate strong growth, it has not created shared prosperity or inclusive growth.
Moreover, both sub-Saharan Africa and Central and Eastern Europe need new partners. Central and Eastern European states need to ‘untie’ their economies from larger EU member states such as Germany, as too much of their economic growth is dependent on the economic performance of these states. Likewise, the benefit for sub-Saharan Africa of attracting Central and Eastern European companies as investment partners lies first in diversification. Reliance on too few sources of foreign investment might present an obstacle for developing countries in the event of external shocks. For African countries to reach their ambitious investment targets, a broader base of investors is required, and as such it is important to cater to non-traditional investors, including the countries of Central and Eastern Europe.
Several factors present important considerations for companies making the ultimate decision to invest in a foreign country. There are different motivations at play. In theoretical literature, companies undertake outward FDI in markets abroad for the following reasons:
The destinations of investment are usually – but not exclusively – countries with a stable political and institutional environment, with a high degree of investor protection, tax incentives (such as concessions and exemptions), quality infrastructure (roads, electricity, communal services) and so on. The World Bank’s annual Ease of Doing Business rankings provide an insight into the desirability of a country as an investment destination in terms of business-related regulation. The cases of Nigeria and Angola provide notable exceptions: high returns on investment are prioritized over high political risk, security and other factors.
However, even after taking these factors into account, the decision-making process is not clear cut for a company considering investment in Africa. Any investment decision also depends on the institutional support in place within the investing company’s home country. A network of institutions ensures, collectively, that companies have access to all the necessary services to enable them to venture out abroad. Among these institutions are those providing information and matchmaking services (CCs, business councils, investment promotion agencies); financial support (national development financial institutions); and diplomatic support (embassies and consulates). The presence of diplomatic missions in the destination country is an important factor, since they usually facilitate the investment process by means of arranging first contacts, country visits, business missions, investor conferences, etc.
According to the World Bank’s Global Investment Competitiveness Report 2017/2018,33 developing countries benefit from FDI through acquiring technical know-how, enhancing the skills of the local workforce, increasing productivity, generating business for domestic firms, and creating better-paying jobs. Market-seeking and efficiency-seeking FDI are particularly important for developing countries, as these types of investment have been shown to create much-needed jobs and growth – provided the recipient country puts measures in place to reap the benefits.
Striking new partnerships with countries whose companies might have a greater chance of succeeding in the specific context of sub-Saharan Africa is imperative. Central and Eastern European enterprises might share some of the distinct advantages of other emerging market investors in Africa, while offering benefits that are usually found in enterprises in developed economies. Central and Eastern European enterprises might be adept – and more flexible – in their navigation of difficult markets. Their experience in the 1990s of developing not only their own domestic markets, but also the wider Central and Eastern European regional market (which includes Ukraine, Belarus, the Western Balkans, etc.), demonstrates that they are able to succeed in volatile business environments characterized by rapidly changing regulations and legal frameworks,34 such as can feature in some sub-Saharan African economies. In addition, according to a 2015 World Bank study, there is some evidence that emerging market MNEs understand local contexts better than their counterparts in developed markets; they may be better equipped to mitigate economic and political risks; and they may have developed mechanisms allowing them to better navigate informality.35 The same study concluded that enterprises from emerging markets might be better at building South–South value chains. It became clear from the research for this paper, however, that Central and Eastern European companies would benefit from better data and information regarding sub-Saharan African markets, to develop a more nuanced understanding of the different contexts and opportunities.
After years of facing stiff competition in the European market, Central and Eastern European companies have built up the appropriate levels of transferable technology that sub-Saharan Africa needs. This especially pertains to sectors such as food processing, ICT and pharmaceuticals. In many cases, this competitive push and the associated need for constant innovation have resulted in products that match the quality and functionality of Western European products, but with a reduced price tag.36
Moreover, since private-sector enterprises in Central and Eastern Europe tend to be smaller in size than at least some of the MNEs in the traditional investment destinations (in other words, they are themselves SMEs rather than MNEs), they might offer certain advantages to developing markets. A 1998 study by UNCTAD found that SMEs were more likely to look for joint-venture partners, rather than establish wholly owned affiliates; have more flexible local arrangements; and contribute more to the local economy by making use of subcontracting.37
Last but not least, in some sub-Saharan African countries, both political elites and business professionals have established ties to Central and Eastern Europe through the scholarship programmes of the socialist period. Hungary, for instance, concluded cultural agreements (which included education-related provisions) with some 18 sub-Saharan African countries between 1957 and 1993; between 1970 and 1978, 315 African students were enrolled in postgraduate education in Hungary.38 While some of the ‘social capital’ based on old relationships has been eroded, and while younger generations may lack an understanding of the previous relationships and positive role played by Central and Eastern Europe in sub-Saharan Africa’s development,39 individuals who are sympathetic to the Central and Eastern European region continue to hold key positions in both business and government in sub-Saharan Africa.
This is not to say that sub-Saharan African countries will necessarily abandon their efforts to attract investment from traditional partners with more highly developed economies; while investments should undoubtedly be pursued on all fronts, a more comprehensive and strategic orientation towards Central and Eastern European economies could enhance a wider inward-investment strategy.
