Rwanda and Ethiopia look to challenge Africa's FDI giants

It is no surprise that foreign investors are attracted to the more stable and diverse economics in Africa over smaller markets. But the rise of viable market niches, driven by government incentives, the introduction of investment zones and improved regulatory frameworks in countries such as Rwanda and Ethiopia, are creating new opportunities for investors.

These relatively small or up-and-coming African countries may not be able to compete with the likes of Nigeria and South Africa in vying for huge FDI opportunities across a number of sectors, but by focusing on their strengths, many are experiencing joy when it comes to attracting sector-specific FDI projects.

Rwanda’s renewal 

Rwanda has transformed its economy since the devastating genocide that killed 800,000 people more than two decades ago. Thanks partly to the country's adherence to long-term development goals in its 'Vision 2020', solid economic growth and status as the second easiest place to do business in sub-Saharan Africa according to the World Bank's Doing Business report, the country is working hard to eliminate major non-tariff barriers. 

A 2016 survey by TradeMark East Africa shows that of 112 previously identified non-tariff barriers in Rwanda, 87 have been removed, resulting in import and export times being reduced significantly. After an uncertain few years, partly due to the knock-on effects of an outbreak of the Ebola virus in many African countries and falling commodity prices, Rwanda is well positioned to benefit from its safe business environment, low corruption levels and the ability of investors to purchase government stakes in several sectors. 

“Rwanda’s ability to ease business procedures, provide reliable and low-cost infrastructure and utilities, and facilitate goods and services trade will continue to be important,” says Sarah Logan, economist at the London-based research organisation the International Growth Centre. “Crucially, as a member of the East African Community, Rwanda offers investors access to a much larger consumer market [than what it can offer domestically].”

IT hub hopes

Rwanda is pushing to become an African IT hub, having introduced major initiatives in this area since 2000 aimed at creating the right environment for both tech start-ups and established players. From the National Information Communications Infrastructure, which set out four five-year plans to develop the technological infrastructure, to the launch of a $100m fund to support emerging IT firms in 2016, the landlocked country is committing significant resources to construct a viable tech hub. But Rwanda is not the only African country with these tech ambitions.  

“There are a lot of countries trying this approach – Kenya has been doing it for a while, with various tech hubs established over the past few years around Nairobi,” says Schalk Barnard, Africa markets and business development director at EY. “Success is going to be dependent on getting critical infrastructure in place that is affordable and speedy. One of the biggest issues in Africa relating to data is the cost, reliability and speed. Whoever wins this race is likely to position themselves favourably for future investment.”

About 4500 kilometres of fibre optic cable has been laid in the country, making Rwandan households more connected than ever before. The $150m Kigali Innovation City, located within the Kigali Special Economic Zone and soon-to-be home to a number of leading tech companies, will further bolster the country's IT credentials. A number of educational institutions are setting up in the city too, with Carnegie Mellon University Africa on course to relocate in 2018 to meet the need for a highly skilled labour force.

Key incentives encouraging FDI into Rwanda include a seven-year corporate tax holiday to firms investing at least $50m and lower business taxes across the board. Such offers should enhance Rwanda’s investment prospects.

Ethiopia's rapid rise

Ethiopia’s position as one of Africa’s fastest growing economies, with GDP growth expected to reach 8.1% in 2018, is clearly enticing multinational companies to invest there. Africa’s oldest independent country attracted $3.2bn of FDI in 2016, an increase of 46% over the previous year that contrasts favourably with an Africa-wide FDI decrease of 3%.

The Chinese-funded, textile and apparel-focused Hawassa Industrial Park (HIP) is one example of the government’s long-term plan to make Ethiopia a manufacturing hub, to complement its agricultural base. Opened in mid-June 2017, HIP is on track to be fully operational within two years and generate export revenue of about $1bn, as well as employ 60,000 Ethiopians. Major international clothing brands have already set up operations in HIP, including PVH, which owns brands such as Tommy Hilfiger and Calvin Klein. 

“Ethiopia is the obvious case for successful FDI-building campaigns and government initiatives to improve FDI. A major part of its attraction is the large and cheap labour force, which promises a consistent supply of affordable labour for some time,” says Ben Longman, managing director of African market intelligence company Trendtype. “The population of Ethiopia is more than 100 million. By 2050 it will be about 187 million, most of them young and active consumers.”

Stability issues?

Ethiopia may have many of the characteristics investors look for, but recent anti-government protests in the country that caused physical damage to foreign-owned businesses, alongside the accompanying state of emergency and crackdown on human rights, have caused some companies to review its reputation for being politically stable.

“Ethiopia clearly has unresolved political problems, not least in Oromia, its largest region,” says Mr Longman. “Under a picture of apparent stability, security experts consistently rate it as being at high risk of political violence.”

The major FDI hubs of South Africa, Morocco, Egypt, Nigeria and Kenya collectively accounted for 58% of Africa’s total FDI projects in 2016, according to EY’s Africa Attractiveness May 2017 report. Major economies will likely continue to disproportionately attract FDI projects moving forward, increasing the importance for smaller countries to focus on specific industries.

“Smaller countries can rarely compete on supplying affordable labour long term. The key is value creation, so the choice of what to become a hub for matters: tech, learning, finance, air traffic, R&D and specialist manufacturing are all options,” says Mr Longman.