Deliverance or Damnation? The Fortunes and Fairytales Found Through Foreign Direct Investment for East Africa’s Economic Development

Given the economic potential of developing economies, foreign direct investment (FDI) is regarded as the private capital inflow of choice, as free capital flows seek the highest return on investment. East Africa is an attractive location for foreign capital inflows as international investors seek new opportunities and markets. The abundance of natural resources, the growing size of consumer markets and the improvement in business infrastructure are key reasons why East African countries like Tanzania attracted $1.3 billion in FDI in 2023 as investor confidence in the country’s economic prospects grew. Similarly, despite domestic turmoil, Ethiopia is home to the second fastest-growing economy in Africa, with a growth rate of 6.2%. Investment in infrastructure, agriculture and education has been key to driving this, leading to a 7.9% growth in the services sector as Ethiopia becomes an increasingly attractive destination for foreign capital. has been key to driving this, leading to a 7.9% growth in the services sector as Ethiopia becomes an increasingly attractive destination for foreign capital. 

This article examines foreign direct investment structures in East Africa, focusing on Ethiopia, Uganda and Tanzania, the top three destinations of FDI in East Africa since the pandemic. It also evaluates the long-term effects of leveraging foreign capital to drive regional economic development. 

Figure 1: FDI inflows by region and economy, 1990 to 2022. Source

Ethiopia 

After 2014, Ethiopia overtook all other East African economies, attracting the most inflows of foreign capital. How has Ethiopia managed to attract more international capital than Kenya, $759 million, Uganda $1.52 billion, and Tanzania, $1.1 billion, combined in 2022 after lagging behind them all a decade prior? 

The Ethiopian government decided to step away from funding infrastructure projects and has encouraged private sector development through the privatisation of telecommunications, power and logistics. The market liberalisation seen through privatisation created attractive conditions for foreign investment. China has been the most prominent source, accounting for 60% of all greenfield infrastructure in Ethiopia between 2018 and 2022, primarily concentrated in the manufacturing and service sectors. 

China and Ethiopia’s Textile Industry 

An abundance in the labour force, their low costs, and government initiatives like the Growth and Transformation Plan (GTPIII), has encouraged growth of the textiles industry. Coupled with export taxes imposed on certain Chinese sectors, Chinese investment has fuelled this expansion. 

Copying Chinese model of special economic zones (SEZs), the Ethiopian government has developed several industrial parks around the country, like Hawassa Industrial Park (HIP), about 280 miles south of the capital. The HIP is a greenfield structure built by China Civil Engineering Corporation in 2016 with 52 factory sheds rented out to different investors from China, South Africa, India and France, to name a few. HIP is the largest textiles and apparel industrial park in Africa. 

Through Chinese investment and the construction of HIP, the Ethiopian government aims to create 60,000 jobs and $1 billion in export revenues – a third of Ethiopia’s current annual foreign earnings from goods. As of November 2023, the total jobs created were 24,000, with 80% of the workforce being women. While the project intends to serve as an avenue to increase employment and export revenue within a growing textiles industry, employees complain about inequality in the treatment between foreign and domestic labourers.  

Additionally, the tension in Ethiopia creates uncertainty regarding the security of international financing. The conflict in the Tigray region saw the USA withdraw Ethiopia’s participation in the African Growth and Opportunities Act (AGOA). The benefits of participation in AGOA include exports to the USA without tariffs, thus facilitating access to the US market (the single largest importer of textiles and apparel). Withdrawal of AGOA privileges led to an exodus of American apparel firms, resulting in the loss of 11,000 jobs. 

This highlights a key long-term impact of the use of foreign capital for development. Should political conditions negatively impact the feasibility of a project, a sudden pull in investment or withdrawal of employment opportunities will have detrimental consequences for employment. The vulnerability of foreign investment to political instability means that overseas investment is potentially an unreliable driver of sustainable economic development within the region. 

Uganda and Tanzania 

Uganda saw a 79.2% increase in FDI to $2.9 billion in 2023, driven largely by oil-related infrastructure projects. The abundance of natural resources coupled with its young, expanding population makes the country an attractive destination for foreign investment. This is an opportunity realised by the Netherlands and UK, contributing 38% and 37% to FDI in 2022 respectively. A 100% tax reduction on mineral exploration costs, plus a 10-year tax holiday for investors engaged in export-oriented production, provides avenues for foreign involvement in extractive industries such as the production of the US$5 billion East African Crude Oil Pipeline and the $6.5 billion Lake Albert Oil Field. 

In Tanzania, the number of greenfield projects, new projects beginning from scratch on undeveloped land, surged by 60% as the mining, manufacturing and energy sectors aided in attracting $1.3 billion in FDI in 2023. Somewhat unsurprisingly, the largest inflow of foreign investment comes from China. In addition to the EACOP, China has financed the construction of the $320 Sino-Tan Industrial Park, which aims to create 100,000 jobs. 

Caution from the Bujagali Hydropower Plant, Uganda 

Drawing hydropower generation capabilities from the Nile, the Bujagli Hydropower station with up to 250MW capacity was constructed to address Uganda’s chronic electricity shortages. After 18 years of controversy that delayed the construction of the dam, the plant itself covers 45% of the countries annual electricity generation, offering concrete growth possibilities and a reduced environmental impact through the generation of clean energy. In 2005, the project was split into two separately funded but connected projects. First, the Bujagali Hydropower Project (BHP), commissioned Bujagali Energy Limited (BEL) to construct the dam and powerplant. Secondly, the Bujagali Interconnection Project (BIP) under the responsibility of the Ugandan Electricity Transmission Company Ltd. (UETCL) – a state-owned enterprise.  

Complexities arose as the two projects had their own funding arrangements. The African Development Bank (AfDB), World Bank, European Investment Bank (EIB) and other private lenders finance the BHP, while the African Development Fund and Japanese Bank for International Cooperation financed the BIP. The cost of the project was initially projected to be $580 million but ended up being $902 million upon completion. Furthermore, independent investigations put the dam’s actual cost at $1.3 billion, or $5.2 million per MW. This included fraudulent approvals of cost overruns, resulting in an additional $438 million bill to taxpayers alongside the revelation that the dam is only capable of producing 70% of its projected generation. 

The biggest financer was the World Bank, with a $275 million commitment, which was crucial in the BEL’s development, providing crucial expertise and financial support. The BEL itself needed to be backed by over US$600 million in loans and guarantees from the World Bank, AfDB and EIB. 

Through the project’s reliance on international financing, the dam has been criticised for being a questionable investment due to its expense. With the project being more than twice as expensive as initially planned, the electricity costs 80% higher than the globally acceptable cost for hydro projects. 

This instant displayed the significant financial burdens that, while instrumental in driving infrastructure development, was ultimately borne by the public. In the case of the Bujagali Hydropower Project, the high loans secured to finance the project have been passed on to consumers through elevated electricity tariffs, making power unaffordable for many Ugandans. Additionally, the Ugandan government provided sovereign guarantees in an attempt to refinance unachievable loans, increasing the national debt obligation. In this case, foreign capital failed to translate into economic growth, as financial shortcoming were offloaded onto the population.  

Conclusion 

While cross-border investment has the potential to drive economic development through job creation, infrastructure growth, and increased trade, it also carries risks, including sensitivity to political instability, and the potential for economic dependency. Ultimately, the benefits of international capital depend largely on the ability of governments to implement effective policies that channel investments into sectors that promote long-term, sustainable growth. Equally important is whether these economies can leverage the initial momentum provided by FDI to build resilient, diversified economies capable of sustaining development even after the foreign capital is withdrawn. Without a clear answer, the success of FDI in Africa hinges on strategic planning and governance while prioritising sustainable economic outcomes.