This chapter provides an overview of recent foreign direct investment (FDI) trends in the EAC, including an assessment of its contribution to sustainable development.
Sustainable Investment Policy Perspectives of the East African Community
Abstract
The EAC is a very diverse and dynamic regional economic community (REC) composed of eight Partner States.1 While the region offers diverse investment opportunities, in part due to its large potential market, vast natural resources and rapid economic expansion, it still lags world averages regarding the attraction of FDI. In most Partner States, the investment rate is below 25% of total GDP, with most of it being driven by domestic investors (UNECA, 2021[1]). In recent years, however, Partner States have taken steps towards improving their investment ecosystem to become a more attractive location for investors. At the same time, like much of Africa, the EAC faces difficulties in attracting FDI, yet such investment is crucial to meeting sustainable development objectives in the region.
According to the African Regional Integration Index, the EAC has the highest level of regional integration among all eight African RECs.2 The EAC has also been at the forefront of regional investment policy making in Africa, with the EAC Model Investment Code developed in 2006, the EAC Model Investment Treaty in 2016 and, more recently, the EAC Investment Policy (2019-2024) in 2019. The latter has been developed to address the challenges needed to improve the investment climate of the region, attract investments and promote the region as a single investment destination. Partner States have also worked to implement these frameworks at the country level and improve their respective investment environments with numerous national initiatives.
The Community is now working on developing the EAC Investment Strategy, to support the implementation of the EAC Investment Policy, and revising the EAC Model Investment Treaty to adapt it to the AfCFTA and its related Investment Protocol. The latter will offer both greater investment opportunities for the EAC Partner States within an integrated continental market as well as increased competition for footloose investment. This will require a greater need to focus on raising the competitiveness of the region for investment and on improving the sustainable outcomes from investment.
This report introduces newly developed OECD tools and analysis to the EAC region. It is designed as a baseline diagnostic to explore ways to reinvigorate the reform of the EAC investment climate to prepare the region for the AfCFTA, while also providing a greater focus on improving sustainable outcomes from investment.
1.2.1. FDI in the EAC is growing, albeit modestly, and diversifying beyond natural resources
FDI inflows to the EAC have been steadily increasing over the last 20 years but with strong fluctuations driven by global and regional shocks (Figure 1.2). Following a peak in 2008, FDI plunged in 2009 due to the global financial crisis, as in the rest of the developing economies. Recovery was rapid, however, and FDI reached a new peak in 2012 following the discovery of gas reserves in Tanzania and oil fields in Uganda and the expansion of a large copper and cobalt mine in the Democratic Republic of the Congo (DRC) (UNCTAD, 2013[2]). FDI has been on an upward trend since 2016 which was interrupted only in 2020 by the COVID-19 pandemic from which it rapidly recovered.
FDI inflows to the EAC are unevenly distributed among its members, with three distinct groups. Since 2017 the most resource-rich countries – the DRC, Uganda and Tanzania – have collectively received 79% of total FDI inflows, while Kenya and Rwanda 20%, and Burundi and South Sudan only 1%. Differences also exist in FDI trends over time. While there was an overall upward trend over the last five years, FDI in Kenya declined.
FDI net inflows (BoP, current USD billions, % of GDP)
Source: OECD elaboration based on Based on International Monetary Fund (2023[3]), Balance of Payments Statistics.
FDI in the EAC relative to the size of the economy is comparatively similar to that of other regional economic communities (RECs) in Africa (Figure 1.2). During 2017-2022, on average, it represented 1.7% of the bloc’s gross domestic product (GDP), higher than in the Economic Community of Western African States (ECOWAS) (1.4%) but just below the Southern African Development Community (SADC) (1.8%) (IMF, 2023[3]). Opportunities for FDI growth in the EAC are significant. Despite representing one-fifth of Africa's population, the seven Partner States have only contributed an average of 10% of the continent's GDP and attracted a mere 11% of FDI inflows to the continent over the past five years (IMF, 2023[3]; IMF, 2023[4]; World Bank, 2023[5]; United Nations, 2022[6]).
FDI net inflows (BoP, % of GDP)
Note: The surge in inflows in 2021 is driven by one large inter-firm transaction in South Africa.
Source: OECD elaboration based on Based on International Monetary Fund (2023[3]), Balance of Payments Statistics.
FDI stock in the EAC generally correlates with the economic size of its Partner States, except for Kenya, the largest economy (Figure 1.3). Yet, when adjusting for the size of the economy, Rwanda is the third most attractive country, with its FDI stock representing 18% of its GDP, after the DRC (31%) and Uganda (25%). The economic importance of FDI stock relative to GDP in the whole region is low, however, averaging 26%. This contrasts sharply with the 70% in SADC – a region with greater natural resources – and the 38% in Africa, yet closely aligns with ECOWAS, which stands at 27% (OECD, 2024[7]; UNCTAD, 2023[8]).
Inward FDI Stock, 2022
Mauritius and South Africa are the leading investors, jointly contributing to 35% of the region's FDI stock in 2022 (Figure 1.4). They are followed by the European Union, which accounts for 25%, followed by China and India (23% combined). The United States, Canada, and the United Kingdom account for 10% collectively and the rest of the world – including notable contributions from Switzerland, Togo, and Nigeria – 9% (IMF, 2023[10]). These results are skewed towards Mauritius because of their high-level of Special Purpose Entities (SPEs) (see note in Figure 1.4). Official EAC data on FDI stock shows Europe as the leading investor, but it only covers Kenya, Tanzania, Rwanda, and Uganda (EAC Data Portal, 2023[9]). For FDI inflows, China and India were the primary investors in the EAC in 2022 (EAC Secretariat, 2023[11]).
The distribution of investments from these principal source economies presents significant variations across the region. Notably, China and India, along with the European Union, allocate approximately 70% of their EAC FDI stocks to the DRC and Kenya. In contrast, the United States, Canada, and the United Kingdom hold a smaller share of 33% in those two countries and allocate 52% of their EAC FDI stock to Tanzania.
FDI Stock by source and host economy in 2022
Note: The Figure is built from outward FDI stocks reported by selected source economies. Direct data was used for Rwanda and Uganda. IMF CDIS data includes Special Purpose Entities (SPEs), which have high levels of pass-through capital—funds that flow through them but originate elsewhere. Excluding FDI associated with these entities would provide a clearer picture of the outward FDI (Angulo and Hierro, 2017[12]).
Source: OECD based on IMF CDIS (2023[10]).
Over the last two decades, greenfield FDI – comprising new FDI projects or expansions of existing FDI – has oscillated between USD 0.5 and 9 billion (Figure 1.5, Panel A). These investment projects have created between 1 000 and 3 000 jobs per year in the region, except in 2019. The recent surge in greenfield FDI flows in 2022 did not result in a proportional increase in job creation, indicating that the new projects are relatively more capital-intensive. The vast majority of the stock of greenfield FDI projects between 2003 and 2022 were in capital-intensive sectors such as electricity and gas (34%), metals (17%), and construction (8%), and related to the region’s rich mineral resources and oil and gas reserves (Ministry of Planning DRC, 2020[13]; World Bank, 2023[14]).
Greenfield FDI inflows 2003-2022
Source: OECD elaboration based on Financial Times fDi Markets (2023[15]).
While the region remains strongly dependent on its natural resources, there is a gradual shift in FDI towards less natural resource intensive sectors, suggesting a move towards more diversification (Figure 1.5, Panel B). Investments in transport, information technology, chemicals, and business services have surged over the past decade (2013-22), while those in electricity, gas, and metals have declined compared to the ten years prior. The extent and direction of this diversification process differs across EAC countries (Figure 1.6). Partner States such as Kenya, Rwanda and Tanzania aligned with the overall trend of diversification. Uganda shifted its greenfield investment focus from energy to services, and South Sudan transitioned towards manufacturing, highlighting a more specialised approach in certain countries.
Greenfield FDI by broad sector, %
Note: Data includes all open and announced projects between 2003 and 2022.
Source: OECD elaboration based on Financial Times fDi Markets (2023[15]).
1.2.2. FDI in the EAC could further support job creation and sustainable development
FDI has the potential to advance sustainable development, but its impact is not automatic and can vary across countries (OECD, 2022[16]). Greenfield investments created 2.2 jobs per USD million invested in the EAC region, below the world’s average of 3 (OECD, 2022[16]). Furthermore, disparities among Partner States persist in this domain. Kenya leads with an average of 3.1 jobs created, followed by Rwanda with 2.8, which is more than double the number in South Sudan, suggesting their higher diversification influences their performance (Figure 1.7).
Manufacturing exhibits the highest job intensity at 1.1 jobs per million, while energy has the lowest at 0.1, reflecting their respective labour and capital-intensive natures. Greenfield FDI in construction and services yield only half as many jobs per million USD as in manufacturing. In Rwanda and Kenya, manufacturing FDI is notably significantly more labour-intensive than elsewhere in EAC. Despite DRC receiving 70% of greenfield investments in manufacturing, job intensity remains low due to 90% of these investments being concentrated in metals. In Uganda and South Sudan, where greenfield FDI in the energy sector is significant, primarily in coal, oil and gas (over 80%), job intensity is the lowest.3 Typically, FDI in natural resource extraction results in fewer direct jobs (OECD, 2022[16]).
Greenfield FDI-induced job creation and sectoral distribution
Note: Data includes all open and announced projects between 2003 and 2022.
Source: OECD elaboration based on Financial Times fDi Markets (2023[15]).
Beyond job creation, FDI has the potential to enhance living standards, foster innovation, promote gender equality, and support environmental objectives (OECD, 2022[16]). In the EAC, the levels of wages and training provision underscore the significant role that FDI plays in improving living standards.
Foreign firms are generally more productive than domestic ones (OECD, 2019), a trend observed across the EAC apart from Burundi. On average, foreign firms are three times as productive as domestic ones, with the DRC and Kenya leading in this regard (Figure 1.8, Panel A). Despite this productivity advantage, foreign firms typically pay only 40% higher wages on average. This suggests that the performance premium of foreign firms does not fully translate into wage benefits for workers. Furthermore, foreign firms are offering more training opportunities for their employees, contributing to on-the-job skill development within the region (Figure 1.8, Panel B).
Note: Panel A shows wage and productivity premia of foreign firms in EAC economies. Wage and productivity premia of foreign firms are computed by dividing average wages (productivity) of foreign firms by average wages of domestic firms. Premia above zero imply that foreign firms pay higher wages (are more productive) than domestic firms.
Source: OECD elaboration based on World Bank Enterprise Surveys (2023[17]).
A larger proportion of foreign firms in the EAC introduce new products or services than their domestic counterparts (Figure 1.9, Panel A). Additionally, a higher percentage of foreign firms invest in research and development (R&D) (Figure 1.9, Panel B). These trends suggest a greater innovation capacity among foreign firms, thus offering the potential for knowledge and technology transfer to local businesses.
Source: OECD elaboration based on World Bank Enterprise Surveys (2023[17]).
Conversely, the impact of FDI on improving gender equality appears less predominant. Foreign firms in Rwanda and Uganda present a higher proportion of female workers than domestic ones, whereas the gap is negligible in other countries (Figure 1.10, Panel A). Only in Burundi, and minimally in South Sudan, do foreign firms have a higher percentage of female top managers than domestic firms (Figure 1.10, Panel B), yet the gap is not significant, except in Tanzania and Uganda. It is thus not clearcut whether foreign firms are providing more career advancement opportunities for women in the EAC. Similarly, fewer foreign firms have female ownership in the majority of EAC Partner States (Figure 1.10, Panel C).
Source: OECD elaboration based on World Bank Enterprise Surveys (2023[17]).
Foreign investors can support a transition to a greener economy through various means. For example, they can bring improvements to the host country in energy efficiency as a result of cleaner or energy-saving technologies (OECD, 2019[18]). In the EAC, manufacturing foreign firms appear to be more energy efficient than domestic firms only in Rwanda and to a lesser extent in Tanzania and Uganda (Figure 1.11).
Are foreign firms more energy efficient than their domestic peers? (yes if value > 0; no if value < 0)
Note: The Figure shows a Type 1 FDI Qualities indicator and corresponding 95% confidence interval. Energy efficiency: sales over electricity and fuel cost.
Source: OECD elaboration based on World Bank Enterprise Surveys (2023[17]).
FDI can also make a significant contribution to the energy transition by increasing renewable energy capacity (OECD, 2022[16]). FDI in renewable energy has gained importance in the EAC, while investment in fossil fuels has declined overall, a trend found in other RECs such as SADC and (OECD, 2023[19]; OECD, 2024[7]). Nevertheless, in East Africa renewable energy accounted for only 4% of greenfield FDI, compared to 17% for Africa as a whole (AUC/OECD, 2023[20]). Despite the higher absolute investment observed in coal, oil, and gas compared to renewable energy, FDI in renewable energy within the region increased substantially by 48% from the period 2003-2012 to 2013-2022, while investment in coal, oil, and gas decreased by 37% over the same period (Figure 1.12, Panel A).
For several EAC nations, FDI in fossil fuels dominates the energy sector, while investments in renewable energies constitute only a small fraction (Figure 1.12, Panel B). Although economies such as Uganda and Tanzania primarily attract FDI in fossil fuels, they have also garnered the majority of FDI in renewables within the region, alongside Kenya, collectively representing 92% of total investment in this sector. This illustrates the current concentration of the sector in a handful of economies.
Note: Data includes all open and announced projects between 2003 and 2022.
Source: OECD elaboration based on Financial Times fDi Markets (2023[15]).
References
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← 1. The EAC Partner States are the Democratic Republic of the Congo, the Federal Republic of Somalia, the Republic of Burundi, the Republic of Kenya, the Republic of Rwanda, the Republic of South Sudan, the Republic of Uganda, and the United Republic of Tanzania. Somalia is not included in the analysis in this report as it had not yet formally joined the EAC when the report was being prepared.
← 2. The African Regional Integration Index was jointly developed by the African Union, the African Development Bank and the United Nations Economic Commission for Africa. See: https://www.integrate-africa.org/.
← 3. These results use FDI Markets data from 2003-2022. According to the EAC Trade and Investment Report 2022, FDI in energy, including mining, quarrying, and utilities, accounted for only 14% of the total in Uganda from 2017 to 2022, reflecting a shift towards services (EAC Secretariat, 2023[11]). Data on South Sudan was not available.