Germany's FDI to Africa: still low

Deutsche Bundesbank has recently presented its latest inventory of foreign direct investments (FDI)[1]. The publication contains data on German gross assets from active direct investment and, corrected for associated liabilities, also net assets. The key figures of the German companies investing in the target countries are also informative, i.e. number of firms, number of employees and turnover. Table 1 summarises Africa's role in German FDI for the last observation year 2017.

Table 1: German FDI in Africa, stocks 2017

	bn Euro/number	Share Africa/World, %
Gross claims, € billion	9.2	0.6
Net claims, € billion	8.4	0.8
Number of companies	849	2.2
Staff, thousand	201	2.6
Annual turnover, € billion	30.8	1.0

Source: Deutsche Bundesbank (2019)

At the end of 2017, gross claims of German companies from active direct investments amounted to €1,568 billion worldwide; Africa's share amounted to €9.2 billion, or 0.6 per cent. In terms of net claims, Africa's share was slightly higher, 0.8 per cent. Explanation: Direct investments can be hedged against exchange rate risks by borrowing in the host country, which is why worldwide net claims amount to only two thirds of Germany's gross receivables. In Africa, however, local financial markets are less developed than in the rest of the world, which is why FDI made there is relatively less hedged by offsetting loans.

Africa's share of the worldwide turnover of German companies with active direct investments was just one percent. Companies investing in Africa were relatively more numerous with a share of 2.2 percent. The proportion of people employed in Africa was relatively even more important, at 2.6 per cent of those employed in German companies worldwide. These numbers indicate that the German companies invested in Africa are smaller and more labour-intensive than elsewhere in the world. This means that their developmental contribution in Africa is likely to be relatively more significant than their percentage share of world investment stocks would suggest.

The importance of even Africa as a whole for German direct investment is very low; however, it tends towards zero if North Africa, South Africa and the tax haven Mauritius (keyword Mauritiusleak) are excluded. German companies traditionally concentrate almost exclusively on North Africa (especially Egypt) and South Africa. Germany´s development bank KfW recently stated: "There are hardly any German companies between Cairo and Johannesburg. The companies of the other major industrial nations, France, Great Britain and the USA, have a broader regional base. The common language and the cultural proximity due to the African diaspora are important reasons for this"[2].

Table 2: Geographical distribution of German FDI in Africa 2016, $ billion

	Germany	France	Italy	UK	USA
North Africa	3.7	16.2	18.2	16.3	28.4
Subsahara	1.8	30.1	2.0	30.1	23.9
South Africa	5.2	2.0	1.6	19.7	5.0
Total	10.7	48.3	21.8	66.1	57.3

Source: Tim Heinemann, KfW

The focus of German companies outside the OECD area, on the other hand, is on Asia and Eastern Europe. The level of direct investment in these regions is more than ten times higher than in Africa. In Eastern Europe, low-cost production was available close to the European sales markets. So far, Asia has attracted with a higher degree of industrialization and a larger middle class. Of course, the Maghreb is geographically close and Africa's middle class is growing - so an increase in German FDI in Africa can certainly be expected in the future. However, Africa's high unit labour costs act as a brake on direct investment in industrial manufacturing[3].

As part of the ´G20 Compact with Africa´ (CwA), the German government has been trying since 2017 to boost German direct investment in twelve selected African partner countries. These include three promising emerging countries in North Africa (Egypt, Morocco, Tunisia), but also nine poorest countries south of the Sahara (Ethiopia, Benin, Burkina Faso, Côte d´Ivoire, Ghana, Guinea, Rwanda, Senegal, Togo). Companies can participate in the implementation of the measures within the framework of the current tendering and award procedures of bilateral development cooperation. Germany is now trying to develop further instruments and incentives of ´de-risking´ to complement the CwA, beyond  her 25(!) measures^[4] (funding instruments, programs and other initiatives) already in existence meant to foster private investment.

Table 3: German net FDI in Africa, 2016-18, € million

Transaction values according to balance of payments statistics

	2016	2017	2018
North Africa - CwA	1.198 1.037	418 -4	1.445 1.325
Subsahara -CwA	82 23	145 8	66 15
South Africa	445	553	429
Total -CwA	1.725 1.060	1.116 4	1.940 1.340

Source: Deutsche Bundesbank, Balance of payments statistics, Xcel file, 14. August 2018

Note: Transaction values may be negative; the positions listed are netted.

Unpublished flow data[5] provided by the Deutsche Bundesbank record German FDI in individual African countries up to 2018. Morocco as an outlier received € 1,199 million in German net FDI in 2018, presumably due to construction investments for the Ouarzazate solar power plant[6], which had been initiated long before the CwA. Apart from the individual case of Morocco (and Ethiopia), the African CwA partners received less German FDI on balance over the past two years. So now we have it officially. So far the CwA ressembles a Potemkin village, with colourful displays in the form of declarations of intent and of many conferences.

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[1] Deutsche Bundesbank (2019), Bestandserhebung über Direktinvestitionen 2019, Statistische Sonderveröffentlichung 10, 30. April.

[2] Tim Heinemann (2018), „Warum halten sich deutsche Unternehmen mit Investitionen in Afrika zurück?“, KfW Research Nr. 171, 27. December. 

[3] Robert Kappel (2018), „Afrika braucht einen anderen Entwicklungsweg“, MAKRONOM, 29. May.

[4] Deutscher Bundestag (2019), Bundestagsdrucksache 19/10272, 21.5.2019.

[5] Deutsche Bundesbank (2019), Inländische Netto-Direktinvestitionen im Ausland, Transaktionswerte lt. Zahlungsbilanzstatistik, Xcel-Datei, 14. August.

[6] Individual details are not published by the Bundesbank for reasons of confidentiality.