Profiling the determinants of Indian foreign direct investment in Africa
Cloete, Susanna Elizabeth
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India is fast becoming one of the largest economies worldwide, with expectations of becoming the second largest economy by 2050. The growth this country is demonstrating is accompanied by integration with other economies with active engagement in trade and investment in the world economy. Analysts and researchers strive to understand the possible effects of the rise of India on the global economy. The influence of India’s rise on Africa is an arguable topic. The Indo-Africa relationship has a strong political and socio-economic history. This relationship has undergone some changes since 1990 when India started a new approach that included internationalisation. In the modern economy the trade and investment from India to Africa have illustrated fast growth rates. It is claimed that India’s main interest in Africa is to gain access to Africa’s abundant resources with the intention of supporting its economic growth. This creates some concern on the nature of India’s involvement in Africa; whether or not it will increase the development and whether it will put pressure on Africa’s control of its resources. This study focuses on understanding the extent of Indian FDI in Africa and the factors that determine this involvement. Africa is known as the poorest continent worldwide; hence the development should be managed and controlled in order to sustain the growth. The flows of FDI to this continent can provide some advantages that include growth and development, while FDI can also prompt some disadvantages such as resource extraction. Profiling the determinants of Indian FDI in Africa provides an understanding of the influence India may have on Africa. Profiling the determinants of Indian FDI in Africa is done by means of a literature study that identifies the determinants that are applicable to African FDI. These determinants include natural resources, market size, political instability, macro-economic instability, weak policies, inflation, good governance, investment, GDP, growth, openness and oil production. Following the literature study an analysis is done on the trend of FDI worldwide and especially between India and Africa. The overall amount of FDI flows illustrates large increases globally and developed regions account for the majority of FDI flows. The trends of flows illustrate some changes that highlight the prominent role developing countries are starting to play. Africa is classified as a developing region that accounts for a fairly small amount of the total flows to the developing regions. It is noted that Africa’s share is steadily increasing and is expected to keep on rising. Indian FDI to Africa has demonstrated some staggering increases, while India claims to further increase its involvement. India’s FDI mainly flows to the resource sectors such as oil, coal and gas. India also states to expand its FDI involvement into African sectors such as the infrastructure, information technology, computer software, services and telecommunication. Identifying the specific determinants of Indian FDI in Africa is established by estimating models using the Structural Equation Method (SEMs). A combination of a factor analysis and regression analysis is estimated. The specific determinants that influence Indian FDI in Africa include government effectiveness, control of corruption, crude oil price, school enrolment and exports. The level or value of the investments is influenced by the government effectiveness and rule of law. This study concludes that India’s involvement in Africa is increasing. India demonstrates high levels of interest in Africa’s resources, but this is prone to expand across different sectors.
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