China Agricultural Economic Review

Effects of foreign direct investment in African agriculture

Don Gunasekera Yiyong Cai David Newth
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Don Gunasekera Yiyong Cai David Newth , (2015),"Effects of foreign direct investment in African
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Effects of foreign direct Effects of FDI

in African
investment in African agriculture agriculture
Don Gunasekera
Institute for Supply Chain and Logistics, Victoria University, 167
Melbourne, Australia, and
Yiyong Cai and David Newth Received 15 August 2014
Revised 12 November 2014
Commonwealth Scientific and Industrial Research Organisation, 18 January 2015
Canberra, Australia Accepted 1 February 2015

Abstract
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Purpose – The purpose of this paper is to review the key issues surrounding foreign direct investment
(FDI) in agriculture, and examine the potential impacts of FDI in African agriculture.
Design/methodology/approach – The dynamic Global Trade Analysis Project model (GDyn) is
used to analyse the potential impacts of improvements in land productivity and FDI in Africa.
Findings – The results illustrate that combined efforts to improve land productivity and growth in
FDI could potentially increase Africa’s share in global agricultural output and exports, particularly
with respect to oil seeds, sugar, and cotton.
Originality/value – The authors employ a global economy-wide modelling framework to simulate
the effects of growth in FDI in African agriculture.
Keywords Africa, Agriculture, Productivity, Foreign direct investment, General equilibrium model
Paper type Research paper

1. Introduction
Limited investment in African agriculture is a key constraint on its production
expansion. For most African countries, domestic investment in agriculture is
constrained by the limited availability of domestic savings and by heavy reliance on
aid funding. Most African governments spend less than 10 per cent of their public
budgets on agriculture (Cleaver, 2012). Hence, additional agricultural investment
financing through domestic sources alone is not only difficult but also not strategic
(Brzeska et al., 2012). The worldwide share of agriculture in total bilateral and
multilateral aid declined from a peak of 22 per cent in 1979-1981 to a low of 5 per cent
in 2003-2005, before increasing to 6 per cent in 2009 (Cleaver, 2012). Declining aid
to agriculture and low public investment in agriculture by developing countries
(including those in Africa) in recent decades has resulted in a large public investment
gap between needs and supplies (Benin et al., 2012). Hence, foreign direct investment
(FDI) can play an important role in supplementing the investment requirements in
African agriculture.
FDI in agriculture has received a considerable amount of attention in recent years
(Deininger et al., 2011; Byamugisha, 2013). This interest has been triggered by factors
such as the increasing inflow of foreign investment in food and agricultural sectors in

JEL Classification — F1, F2, Q1, C68 China Agricultural Economic

The authors acknowledge support from the University of Adelaide, based on a Rural Industry Review
Vol. 7 No. 2, 2015
Research and Development Corporation funded project. The authors wish to thank two pp. 167-184
anonymous reviewers for their valuable comments and suggestions. Kym Anderson and Ernesto © Emerald Group Publishing Limited
1756-137X
Valenzuela provided useful comments on earlier drafts of this paper. DOI 10.1108/CAER-08-2014-0080
 CAER Africa (Rakotoarisoa, 2011). Table I presents recent trends in overall FDI flows to
7,2 African regions. Western Africa attracted the largest FDI volumes. FDI flows to central
Africa have remained at around US$8 billion over the past several years. Eastern
Africa attracted modest amounts of FDI flows in recent years (African Economic
Outlook, 2012). In many cases, land acquisitions in Africa have involved long-term
leases of use rights through the public sector, rather than outright purchases or
168 ownership (Deininger et al., 2011). The commodity coverage of land acquisition projects
has included food crops, cash crops, and biofuel feed stock-related crops.
In general, FDI in agriculture is relatively small in comparison with other economic
sectors (United Nations Conference on Trade and Development, 2012). At present, FDI in
agriculture takes several different forms, including investments in land, agribusinesses,
and water entitlements (Moir, 2011; Deininger et al., 2011). Furthermore, FDI in agriculture
can affect different components of the production and marketing chain, from
direct production of food and cash crops to entry of farm input providers (e.g. seeds,
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agro-chemicals) and food distributors (e.g. supermarkets) (Rakotoarisoa, 2011).

Agricultural FDI has grown steadily in recent years, particularly in farmland.
Deininger et al. (2011) identified three key sources of agricultural FDI: food-importing
countries (e.g. China, South Korea, Saudi Arabia); global and regional financial entities
(e.g. pension funds); and large agricultural and agro-industrial firms.
In this paper, we examine the potential impacts of FDI in African agriculture.
There are several reasons to focus on FDI in agriculture in Africa. Firstly, despite the
fact that agricultural FDI accounts for less than 5 per cent of overall FDI in Africa, it
grew by 17 per cent during 2003-2010, with an upward trend (Rakotoarisoa, 2011;
World Bank, 2011). Second, there is scope to expand agriculture into new farmland in
Africa. Comparatively low-cost land in Africa could provide agricultural investors
with considerable investment opportunities (Deininger et al., 2011). Third, there is
considerable opportunity to raise agricultural productivity in currently cultivated
land in Africa. Fourth, there is a need to raise farm incomes in Africa. Individual
agricultural incomes in Africa increased less than 1 per cent per year during 2000-2009.
This rate represents only a third of the non-agricultural sector’s income growth rate.
Hence, rural-urban income inequality in Africa continues (Brzeska et al., 2012).

Year Central Africa Eastern Africa Northern Africa Southern Africa Western Africa

2001 1.5 1.6 4.9 9.9 2

2002 2.2 1.6 3.2 4.8 2.8
2003 2.7 2.5 4 5.7 3.3
2004 2.2 2.8 5.3 3.8 3.2
2005 2.7 4.1 10.7 6.7 6.3
2006 2.7 5.6 19.8 1.8 6.9
2007 5.8 5.4 21.7 9.2 9.5
2008 4 5.3 20.9 15.3 12.4
2009 6.1 4.4 16.4 12.3 13.5
Table I. 2010 9.4 4.5 13.8 3.7 11.7
Foreign direct 2011 8.4 4.8 5.8 7.6 16.1
investment flows to 2012 (e) 8.2 6.6 10.2 9.5 15.1
African regions in 2013 (p) 8.1 7.3 10.8 14.3 16
US$ (billions, Notes: (e), estimates; (p), projections
current) Source: African Economic Outlook (2012)
 Finally, African agriculture could play an important role in the medium-to-long term Effects of FDI
to help meet the growing global food demand. in African
The next section provides some background and highlights several salient features of
FDI in agriculture, with a particular emphasis on the African region, and discusses the role
agriculture
of FDI as a facilitator of agricultural growth. Section 3 presents the methodology for
quantitative analysis of the potential impacts of FDI in African agriculture. The results of
our quantitative analysis are presented in Section 4. In Section 5 we discuss implications 169
for China as a key trading partner of the African region. The final section provides
concluding remarks.

2. Background
2.1 Contribution of foreign direct investment to agriculture: a conceptual framework
The early literature on FDI (see, e.g. Dunning, 1993; Caves 1996) highlights the rationale
for an investor country firm to invest in a recipient country market through affiliate
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production, using not only capital but intangible assets specific to the firm including
technologies, production know-how, managerial skills, marketing information, and
expertise (Blonigen, 2005). Furthermore, the early FDI literature (see Dunning, 1993)
found that market size, market growth, barriers to trade, wages, production,
transportation and other costs, political stability, and recipient government’s trade and
taxation regulations affected the location decisions of FDI investors (see Sethi et al.,
2003). The literature on the conceptual or theoretical aspects FDI is substantial. In the
following discussion we attempt to highlight those conceptual aspects of FDI relating
to agriculture.
In general, FDI is considered as a composite of capital stock and technology that can
expand the existing stock of knowledge in the recipient country through, for example,
labour training, skill acquisition and diffusion, and the injection of new managerial
practices and organisational arrangements (De Mello, 1999; Almfraji and Almsafir,
2014). Conceptually, FDI is assumed to contribute to productivity growth through
capital accumulation and the incorporation of new inputs and foreign technologies in
the production function of the recipient country industries. In the case of agriculture,
FDI could have a number of potential implications. First, FDI could help raise
agricultural land and labour productivity through: better access to farm inputs
(e.g. seeds (including those of improved crop varieties), fertiliser and capital); adoption
of better farming techniques and improved agricultural technologies that raise crop
yields and reduce post-harvest losses; and farmer training and education (Almfraji and
Almsafir, 2014; Görgen et al., 2009). Second, specific FDI on irrigation infrastructure
could help improve marginal arable land which can lead to their efficient use. Third, FDI
could influence a recipient country’s exports as a result of the investors taking
advantage of that country’s relative factor endowments (such as agricultural land) and
relatively low cost of production of goods (such as farm products). In such situations,
the investor country firm may allocate FDI in the recipient country resources
(e.g. agricultural land) and embark on farm exports to markets in other countries or for
the domestic market of the recipient country (see Demekas et al., 2007). Furthermore,
recipient country farmers’ access to domestic and international markets could also be
enhanced through FDI in storage, transport, and communication infrastructure, which
could help to increase agricultural exports and farm incomes (Görgen et al., 2009).
In the medium-to-long term, the recipient countries of FDI can be expected to benefit
further as a result of the spillovers of technology and knowledge from the investing
countries, and its extent is likely to be influenced by the complementarity and
 CAER substitution between FDI and domestic investment (Borensztein et al., 1998; De Mello,
7,2 1999). Furthermore, according to Görgen et al. (2009), FDI in agriculture can lead to spill
over impacts associated with a transfer of agricultural know-how and better integration of
the local economy into added value chains. Additionally, positive effects can occur by spill
over impacts for the local economy. On-farm and off-farm business may offer additional
revenues, and hence stimulate economic activity in the recipient country of FDI. Increased
170 commodity production for exports generates foreign currencies and additional taxes and
may expand the scope of recipient countries to invest in projects that improve living
conditions and reduce poverty (Görgen et al., 2009).
It is also important to recognise that in some instances FDI in agriculture could have
negative effects. For example, if FDI in agriculture is predominately focused on export
crops or to replace existing food crops with industrial crops, food security in the
recipient country may be adversely affected. Biased distribution of benefits of FDI in
favour of the investor or just some parts of the local population may not help to reduce
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poverty in a poor recipient country and instead might result in social unrest and
conflicts. These adverse impacts may intensify if the administrative, regulatory,
and governance arrangements associated with FDI are ineffective, non-transparent and
less accountable in the recipient country (see Görgen et al., 2009).

2.2 Agricultural foreign direct investment: salient features

Several factors drive agricultural FDI growth. Some are “push factors”, and others are
“pull factors”. The “push factors” include the increasing demand for food and feed in
major importing countries; the need to secure adequate food supplies internationally;
the growing demand for biofuel feed-stock; and concerns about potential vulnerability
to volatility in global food markets. The “pull factors” include agro-ecological suitability of
FDI-recipient countries; relocation of food production in regions where land is relatively
cheaper and the scope for agricultural productivity growth is higher; prospects for secure
returns from land-based investments; and greater scope for expansion in large-scale
agro-processing and agro-industrial operations with forward and backward links
(Arezki et al., 2011; Deininger et al., 2011; United Nations Conference on Trade and
Development, 2009).
2.2.1 Potential benefits. FDI offers many benefits to developing countries, including
those in Africa. FDI is a key channel through which improved technology and best
practice expertise can be transferred to developing economies. For example, poorer,
land-abundant countries can gain access to better technology and expertise, which
results in productivity improvements, favourable growth and development, and
positive employment and income effects. In this regard, there is scope for technology
transfer and best-practice agricultural expertise. An example of this is Chinese FDI
providers and African recipients (see Deininger et al., 2011). The extent to which Asia’s
rice-farming technologies are directly transferable to Africa is location specific.
However, Larson et al. (2010) argue that the scope for transfer is large. The scope for
altering Asian agricultural practices to suit African conditions is larger still.
In recent years, China has become a major investor in Africa. According to Mlachila
and Takebe (2011), China is the largest investor among the major emerging economies
of Brazil, Russia, India, and China. According to their analysis, some investment by
state-owned companies, particularly those in China, has shifted focus from mining and
resource industries to agriculture, manufacturing, and service industries. For example,
recent Chinese FDI in African agriculture has included poultry in Ghana, coffee in
 Kenya, sugar in Madagascar, and cotton in Mali, Uganda, and Zambia. The China-Africa Effects of FDI
Development Fund (which encourages Chinese private enterprises to make direct in African
investment in Africa) has been increasingly facilitating equity financing in priority
areas, including agriculture in Africa, in recent years (Mlachila and Takebe, 2011).
agriculture
Another important role of FDI is the formation of infrastructure, including roads, port
facilities, and irrigation dams. For example, the recent FDI in the Ethiopian sugar industry
involved dam construction for irrigation and energy supply (Rakotoarisoa, 2011). 171
The benefits of FDI are likely to be greatly enhanced if the recipient country has
a better stock of human capital. FDI tends to stimulate or crowd-in domestic investment
in recipient developing economies. It can supplement low domestic savings and add to
the capital stock, which in turn raises productive capacity (especially if accompanied by
improvements in infrastructure, as is often the case with FDI from China). FDI can also
lead to export expansion (see Sun, 2009; Anwar and Nguyen, 2011; Sun, 2012).
For example, FDI in fruit and vegetable production in eastern Africa has been aimed at
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diversifying export revenues (see Rakotoarisoa, 2011). Sound macroeconomic policies

and institutional stability are necessary for FDI-triggered growth (Makki and
Somwaru, 2004; Mlachila and Takebe, 2011).
FDI could play a critical role in at least two specific areas of African agriculture.
The first involves improving productivity in currently cultivated land. This could
involve investment strategies to reduce the “yield gap” between current yields and
potentially viable yields of specific crops. Such investment strategies would
particularly benefit countries with relatively little or no availability of cultivable land
(e.g. Burundi, Egypt, Malawi, and Rwanda). Furthermore, African countries that are of
most interest to investors (e.g. Mozambique, Zambia, Sudan, and Madagascar) achieve
only 25-30 per cent of the potential crop yields on currently cultivated areas (Deininger
et al., 2011). These yield gaps are due to several factors, including deficiencies in
technology, capital markets, infrastructure, public institutions, and property rights.
The second area where FDI could play a critical role involves helping to develop
suitable land in regions where it is currently available but not efficiently cultivated
(e.g. Mozambique, Sudan, and Zambia). This will involve area expansion, which could
create opportunities for outside investors. Robust institutions, improved infrastructure,
and better information on business models and contractual arrangement are required
to maximise the spill over benefits and local socio-economic multipliers of potential FDI
in such situations.
2.2.2 Some challenges. Those who are less favourable towards agricultural FDI
argue that such investment could result in projects that are socially, technically,
environmentally, and financially unviable without any appreciable local benefits
(Deininger et al., 2011). Regions with weak institutions, governance arrangements,
regulatory regimes, and ill-defined land and water property rights are at particular risk.
Recent cross-country empirical analysis has shown that governance of the land sector
and long-term tenure security in the recipient countries has been less of a concern for
investors (Arezki et al., 2011). Nevertheless, there is a growing need for improvement in
land governance and transparency and monitoring in many of the FDI-recipient
developing countries.
A major constraint on investment projects in Africa has been the lack of appropriate
infrastructure. Many countries in Africa lag behind other developing regions on most
key indicators of infrastructure, including paved roads, railways, electricity supply,
and communications. Annual infrastructure expenditure requirements in Sub-Saharan
 CAER Africa amount to US$90 billion, of which only two-thirds are met (Mlachila and Takebe,
7,2 2011). To overcome these infrastructure deficiencies in many parts of Africa, recent
Chinese FDI in Africa has involved “packaged investment projects”. Examples of these
projects include both mining (equity financed by Chinese entities) and related
infrastructure (debt financed by Chinese EXIM Bank) (Mlachila and Takebe, 2011).
Mlachila and Takebe (2011) highlight several advantages of “packaged investment
172 projects” from a political economy point of view. First, such arrangements are more
appealing to recipient African countries. Inadequate infrastructure has been a key
impediment to attracting FDI, and these packages could foster domestic economic
growth. Second, such arrangements give China a competitive edge, which is helped by
its infrastructure/construction sector. Third, the “packaged investment projects” enable
China to demonstrate its dedication to the recipient countries. Fourth, for strategic
commodities, such as minerals, energy resources, and food, China benefits from secure
and stable supply routes. Given this background, Chinese “packaged investment
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projects” in African agriculture could help alleviate the major infrastructure constraints
in recipient countries with beneficial flow-on effects.
In the context of the business models for FDI, it is important to consider the potential
roles of smallholder farms and medium-to-large farms in African agriculture. Collier
and Dercon (2009) argue for a more open-minded approach to farm production modes in
Africa. According to them, global economics and climate change suggest that more
flexible organisational models, in which both small and large farms can operate, are
required. Large farms could interact with small farms using institutional frameworks
that encourage vertical integration and scale economies in processing and marketing
(Collier and Dercon, 2009). In relation to different modes of farm production, Collier and
Dercon (2009) have highlighted strategies from Latin America and Asia that may be
useful in African agriculture. Specifically, they mention large-scale mechanised production
of soybean and rice in the Brazilian Cerrado region and cassava and rice production in
northeast Thailand. Northern Thai farms are relatively small, but with plot consolidation,
vast area expansion, and mechanisation, they have become commercial enterprises
(Collier and Dercon, 2009).
Several other factors may increase the importance of agricultural FDI in Africa.
These include the emergence of export-oriented commercial farms growing
horticultural and floricultural products in some African countries and the spread of
African supermarkets that are vertically integrated with commercial farms (Collier and
Dercon, 2009).

2.3 Foreign direct investment: facilitator of agricultural growth

In assessing the potential benefits of FDI, it is important to recognise key sources of
growth in agricultural production, including arable land development, cropping
intensity, and yield. It is estimated that yield increases, arable land expansion, and
increases in cropping intensity in the African region could contribute 69, 25, and 6 per cent,
respectively, to future growth in crop production in Africa during 2005/2007-2050
(Bruinsma, 2009). Ratios of current yields to estimated potential yields (i.e. yield gaps)
for maize, oil palm, soybean, and sugarcane in Sub-Saharan Africa are 0.20, 0.32, 0.32,
and 0.54, respectively (see Deininger et al., 2011). Mueller et al. (2012) point out that
considerable “low-hanging” opportunities exist for crop intensification in major cereals,
such as maize, in Sub-Saharan Africa. Their recent analysis indicates that Sub-Saharan
Africa could have large production gains if crop yields increased to 50 per cent of
 attainable yields. Information on key commodities of interest, yield gaps, and productivity Effects of FDI
gaps can provide useful insights into the options available to different African countries. in African
This information may offer opportunities to take advantage of investor interest and to
promote agricultural FDI.
agriculture
2.3.1 Key commodities of interest. According to Deininger et al. (2011), production of
maize, oil palm, soybean, and sugarcane have recently attracted investor interest as
potential areas to raise productivity and output of previously cultivated areas and 173
to create new farmland in several key African countries. For example, Angola, the
Democratic Republic of Congo, Ethiopia, Kenya, Mozambique and Tanzania each
cultivate more than 1million hectares of maize at present, but with low yields
(Deininger et al., 2011).
Soybean also has considerable potential for expansion in Africa, according to World
Bank agro-ecological assessments (Deininger et al., 2011). There is also potential for
expansion in sugarcane cultivation in parts of Africa, particularly in the Democratic
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Republic of Congo and Madagascar (Deininger et al., 2011). Key constraints are the
considerable yield gaps and poor infrastructure, which require additional investment
(Deininger et al., 2011). Oil palm is another crop that has the potential to expand in parts
of Africa, given the growing demand for palm oil globally (Deininger et al., 2011).
Sugarcane and jatropha have received considerable foreign attention as biofuel
feedstock-crops for producing ethanol and biodiesel (Arndt et al., 2010). By 2009, the
government of Mozambique had received requests from foreign companies (through
FDI) for land-use rights covering more than 12 m ha to be used for these crops
(Arndt et al., 2010). This is more than double the amount of land currently cultivated for
non-biofuel crops in Mozambique. Proposals to develop more than 0.5 m ha of land for
biofuel production in Mozambique were approved in 2009 (Thurlow, 2012). Most requests
for land for sugarcane include a plantation approach for producing feedstock. Given
Mozambique’s abundance of favourable land, it is reasonable to expect that all biofuel
feedstock could be produced on currently uncultivated lands (Thurlow, 2012).
2.3.2 Yield gaps. According to Mueller et al. (2012), yield gaps are caused by
deficiencies in the biophysical crop-growth environment, which are not addressed
by farm-management practices. Their recent analysis has shown that spatial patterns
of climate, fertiliser application, and irrigated areas explain 60-80 per cent of global
yield variability for most major crops. The factors that limit increasing crop yields to
within 75 per cent of their attainable yields vary by crop and region. For example,
the west African region stands out as a hotspot of nutrient limitation for maize. On the
other hand, combined limits on fertilisers and water are observed across eastern Africa
for maize (Mueller et al., 2012). The analysis of Mueller et al. (2012) has shown that
closing maize yield gaps in Sub-Saharan Africa to 50 per cent (approximately 2.5 t/ha)
requires addressing fertiliser deficiencies. Furthermore, closing maize yield gaps to
75 per cent of attainable yields (approximately 3.6 t/ha) requires increases in both
irrigated areas and fertiliser applications over most of Sub-Saharan Africa. Recent
cross-country empirical analysis has shown that agro-ecological suitability and yield
gaps are critical determinants of demand for agricultural FDI (Arezki et al., 2011).
However, new technologies and farm management practices that close the yield gaps
require complementary investments in infrastructure and support services.
2.3.3 Productivity gaps. Between 1975 and 2007, annual total factor productivity
(TFP) growth in Sub-Saharan agriculture was about 0.9 per cent. This compares with
annual TFP growth rates of 2.1 per cent for China, 1.4 per cent for the rest of Asia,
 CAER 1.4 per cent for economies in transition, and 1 per cent for Latin America. A 10 per cent
7,2 increase in public-sector expenditure on agriculture is estimated to raise a country’s
agricultural TFP by 0.34 per cent, all other things being equal (von Cramon-Taubadel
et al., 2009). FDI is also expected to have a positive impact on agricultural TFP in the
presence of adequate institutions, infrastructure, and governance.
FDI in agriculture could help introduce new crop varieties, better farming systems,
174 and investment in agricultural processing and marketing. A combination of better
institutional arrangements and agricultural research, development, technology, and
infrastructure could provide mutually beneficial arrangements for land and resource
transfer and use between FDI recipients and providers (Deininger et al., 2011).

3. Methodology
In this paper, we use the dynamic Global Trade Analysis Project model, GDyn (see
Ianchovichina and McDougall, 2012), to analyse the potential impacts of FDI and
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land productivity in African agriculture. GDyn is a recursively dynamic, applied,

general-equilibrium model of the world economy. It extends the standard Global
Trade Analysis Project model (Hertel, 1997) to incorporate international capital mobility
and accumulation by using an adaptive-expectations theory of investment. The GDyn
version of the model used in this paper is applied to a seven-region by 16-sector
aggregation of the Global Trade Analysis Project database, version 8 (Narayanan et al.,
2012). Tables II and III provide a list of these regions and sectors.
We quantify the effects of improvements in land productivity and FDI in Africa by
using the GDyn model, and undertake the following illustrative scenarios:
(1) Reference case (baseline) scenario: land productivity and FDI in the five African
regions (see Table II) are assumed to increase at an average annual rate of
0.8 and 3.0 per cent, respectively, based on recent trends (based on Ludena
et al., 2007; Rakotoarisoa, 2011; Valenzuela and Anderson, 2011; Breisinger et al.,
2012; Diao et al., 2012;) over the simulation period of 2007-2030. The increase in
FDI is spread across all sectors including the agricultural sectors of the five
African regions.
(2) Land productivity-growth scenario: land productivity in the five African
regions is assumed to increase at an annual average rate of 1.2 per cent over the
simulation period of 2007-2030. The assumed annual average growth rate of 1.2
per cent is illustrative only. Our premise here is that, given the recent trend of
annual average growth rate of 0.8 per cent in land productivity (as explained
earlier), it is plausible to assume that this will increase to 1.2 per cent over the
2007-2030 period. Also, in this scenario, FDI is assumed to increase at an annual
average growth rate of 3 per cent.
(3) FDI growth scenario: FDI in the five African regions is assumed to increase at
an annual average rate of 10 per cent over the simulation period of 2007-2030.
The assumed annual average growth rate of 10 per cent is illustrative only.
Our premise here is that, given the recent trend of annual average growth rate
of 3 per cent in FDI (as explained earlier), it is plausible to assume that this
will increase to 10 per cent over the 2007-2030 period. Also, in this scenario,
land productivity is assumed to increase at an annual average growth rate
of 1.8 per cent.
(4) Combined scenario: This scenario combines scenarios 2 and 3.
 Region Name Global trade analysis project regions
Effects of FDI
in African
Developed Developed Albania, Australia, Austria, Belarus, Belgium, Bulgaria, Canada, agriculture
economies Croatia, Cyprus, Czech Republic, Denmark, Estonia, Finland,
France, Germany, Greece, Hungary, Ireland, Italy, Japan, Korea,
Latvia, Lithuania, Luxembourg, Malta, The Netherlands, New
Zealand, Norway, Poland, Portugal, rest of European Free Trade
Association, Romania, Russian Federation, Slovakia, Slovenia, 175
Spain, Sweden, Switzerland, Ukraine, UK, USA, rest of developed,
rest of eastern developed
Developing Developing Argentina, Armenia, Azerbaijan, Bahrain, Bangladesh, Bolivia,
economies Brazil, Cambodia, Caribbean, Chile, China, Colombia, Costa Rica,
Ecuador, El Salvador, Georgia, Guatemala, Honduras, Hong Kong,
India, Indonesia, Islamic Republic of Iran, Israel, Kazakhstan,
Kuwait, Kyrgyzstan, Lao People’s Democratic Republic, Malaysia,
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Mexico, Mongolia, Nepal, Nicaragua, Oman, Pakistan, Panama,

Paraguay, Peru, Philippines, Qatar, rest of Central America, rest of
eastern Asia, rest of former Soviet Union, rest of North America,
rest of Oceania, rest of South America, rest of southern Asia, rest of
southeast Asia, rest of world, rest of western Asia, Saudi Arabia,
Singapore, Sri Lanka, Taiwan, Thailand, Turkey, United Arab
Emirates, Uruguay, Venezuela, Vietnam
WAfrica Western Africa Cameroon, Cote d’Ivoire, Ghana, Nigeria, Senegal, rest of western
Africa
CAfrica Central Africa Central Africa, southern-central Africa
EAfrica Eastern Africa Ethiopia, Kenya, Madagascar, Malawi, Mauritius, Mozambique,
rest of eastern Africa, Tanzania, Uganda, Zambia, Zimbabwe
NAfrica Northern Africa Egypt, Morocco, rest of northern Africa, Tunisia Table II.
SAfrica Southern Africa Botswana, Namibia, South Africa, rest of southern African Regional aggregation
Customs Union countries of GDyn model

The inflow of FDI is expected to be a “push factor”, which could make additional capital
available for African agricultural growth and development (scenario 3). It is expected that
increased FDI could transfer technology and managerial skills to a host country or region,
thereby enhancing productivity. Such a process could be particularly useful, given the
large gaps between current and potential crop yields in many African countries.
Achieving productivity-led agricultural growth requires a significant increase in
investments in agriculture, rural infrastructure, and marketing. This could enable
African countries to close the existing yield gaps and achieve favourable productivity
growth over time. In the combined land productivity and FDI growth scenario
(scenario 4), it is assumed that additional growth in productivity improvements will
result from increasing yields to achieve a reasonable reduction in the gap between
current and potential yields over the simulation period.
Analysis of the potential impacts of raising land productivity in currently cultivated
African farmland with the help of FDI involves comparing the baseline scenario
(scenario 1) with land productivity, FDI, and the combined-policy scenarios described
previously. In reality, climate variability causes inconsistency in annual growth rates of
land productivity. Land-productivity growth rates assumed in our analysis represent
average annual growth rates.
In the GDyn model, domestic and foreign households own regional capital via
a “global trust”. This relationship is described as V ¼ VH +VF. V is the equity value of
 CAER Sector code Description Contents
7,2
beefsheep Beef and sheep Bovine cattle, sheep, goats, horses, wool, silk-worm cocoons, sheep
and goat meat products
c_grain Coarse grain Cereal grains not elsewhere classified (nec)
cotton Cotton and fibre Plant-based fibres
dairy Milk and milk Raw milk, dairy products
176 products
forestry Forestry Forestry
fru_veg Vegetable and Vegetables, fruit, nuts
fruit
mine Mining Coal, oil, gas, minerals nec
mnfc Manufacturing Chemical, rubber, plastic products, electronic equipment, ferrous
metals, leather products, machinery and equipment nec,
manufactures nec, metal products, metals nec, mineral products
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nec, motor vehicles and parts, paper products, publishing,

petroleum, coal products, textiles, transport equipment nec,
apparel, wood products
oilseed Oil seeds Oil seeds
othercrop Other crops Crops nec
p_food Processed food Beverages and tobacco products, food products nec, fishing,
vegetable oils, and fats
porkchick Pork and poultry Animal products nec, meat products
rice Rice Paddy rice, processed rice
serv Services Air transport, business services nec, communication, construction,
electricity, financial services nec, gas manufacturing and
distribution, insurance, ownership of dwellings, public admin. and
defence, education, health, recreational and other services, trade,
transport nec, water, water transport
Table III. sugar Sugar, Sugarcane, sugar beet, sugar
Sectoral aggregation sugarcane, beets
of GDyn model wheat Wheat Wheat

firms in a given country or region. VH and VF are domestic and foreign components
of V, respectively.
Based on the current standard structure of the GDyn model, we simulated region-specific
homogenous FDI increases across all sectors. We have chosen this option in terms of
transparency and parameter determinations, rather than endogenously mimicking
changes in investment by sectors, using initial shocks to productivity in agricultural
sectors. Hence, the simulation results in this study should be interpreted as an upper
bound limit effects, as not all FDI may necessarily flow to agricultural sectors.
In our modelling of FDI, we iteratively reduced the risk premium that the “global
trust” imposes on capital investment in Africa, so that the annual average growth rate
of VF increases from the baseline case of 3 per cent to the FDI-growth scenario case of
10 per cent during the simulation period. With our GDyn model closure, the increased
FDI in Africa comes from the rest of the world, so there is an equi-proportional
investment pull from all other countries. The reduction of temporary local investment
in all other countries is compensated by the increase of future returns from their
investment in Africa. The GDyn model endogenously estimates the resultant
reallocation of global capital investment and return flows to meet the requirements
imposed in our policy scenarios.
 Figure 1 shows the simulated increases in capital use across different African Effects of FDI
regions and by key agricultural sectors. These increases are caused by the assumed in African
increase in FDI under the combined scenario (scenario 4). The simulated changes in
capital use tend to be considerable for commodities such as sugarcane, coarse grains, and
agriculture
cotton. The actual and potential relative comparative advantages for these commodities
across key African regions are strong. It is important to recognise that the estimated
increases in capital use in African agriculture reported in Figure 1 are from a low base 177
(see Table I). Nevertheless, our analysis of simulated increases in capital use across
different African regions helps us to provide some insights into the potential impacts of
such changes. In Global Trade Analysis Project notation, these estimated increases in
capital use refer to q fe(i, j, r), which is the quantity of endowment commodity i (capital)
demanded by firms in sector j of region r (see Ianchovichina and McDougall, 2012).
The modelling analysis described in this section does not explicitly consider how
increased land productivity and FDI growth can be achieved or what the cost might be
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in terms of actual levels of investments. However, this approach provides broad

insights into how investments in agricultural research, development, and infrastructure
are likely to generate beneficial outcomes in the medium term.

4. Discussion of the simulation results

It is important to recognise that only the direct impacts of FDI are explicitly modelled in
this study. The indirect impacts of FDI such as knowledge spillovers on agricultural
productivity are not explicitly modelled here. Therefore, the simulation results capture
the direct effects of FDI and the inter-sectoral flow-on effects within the economy-wide
modelling framework used here.
Figures 2 and 3 present the key simulation results from the GDyn scenario modelling
analysis for 2030. Several observations can be made from these simulation results.
First, relative to the reference case, scenario 2 is estimated to generate hardly any
additional impacts on both output and exports across regions and crops. This implies
that the simulated rise in land productivity alone in scenario 2 is not large enough to
boost additional agricultural supply. It highlights the need for additional investment in the
agricultural sector via, for example, growth in FDI to boost output and hence exports.
Second, the impacts of this additional investment via growth in FDI are illustrated in
scenario 3 (and in scenario 4). Under scenarios 3 and 4, growth in FDI tends to have
large output and export growth impacts, highlighting the enhanced favourable effects
of investment in agriculture. For example, cotton and sugar outputs in central and

400%
350%
300%
250%
200%
150% Figure 1.
100% Simulated increase
in capital use under
50%
scenario 3 relative
0% to the reference
Coarse Grain Veg/Fruit Oil Seeds Sugar Cotton case, 2030
Central Africa Eastern Africa North Africa Southern Africa Western Africa
 CAER 180
160
7,2 140
120
100
80
60
40
178 20
0
–20
Scenario 2

Scenario 3

Scenario 4

Scenario 2

Scenario 3

Scenario 4

Scenario 2

Scenario 3

Scenario 4

Scenario 2

Scenario 3

Scenario 4

Scenario 2

Scenario 3

Scenario 4
Figure 2.
Percentage change in
output relative to Coarse Grain Veg/Fruit Oil Seeds Sugar Cotton
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reference case, 2030

Central Africa Eastern Africa North Africa Southern Africa Western Africa

400
350
300
250
200
150
100
50
0
–50
Scenario 2

Scenario 3

Scenario 4
Scenario 2

Scenario 3

Scenario 4

Scenario 2

Scenario 3

Scenario 4

Scenario 2

Scenario 3

Scenario 4

Scenario 2

Scenario 3

Scenario 4
Figure 3.
Percentage change in
exports relative to Coarse Grain Veg/Fruit Oil Seeds Sugar Cotton
reference case, 2030
Central Africa Eastern Africa North Africa Southern Africa Western Africa

northern African regions are estimated to increase considerably in 2030 under scenario
4 (where the combined effects of improvements in land productivity and growth in FDI
are simulated together), relative to the baseline scenario. Additionally, the estimated
increases in coarse grain and oil seed outputs in 2030 in the northern African region are
high under scenario 4, compared to the baseline scenario.
Third, it is noteworthy that the simulated impacts under scenarios 3 and 4 are very
similar. This again highlights the overriding effect of the assumed growth in FDI
(relative to the assumed rise in land productivity growth). In other words, the
domineering force which boosts crop output and exports in scenarios 3 and 4 is
the assumed growth in FDI.
Fourth, relative to the baseline scenario, the estimated increases in potential exports
of cotton and sugar are high in 2030 in central and northern African regions under
scenarios 3 and 4, reflecting the positive impacts of improvements in land productivity
and FDI growth in these regions. Similarly, potential coarse grain and oil seed exports
from the northern African regions are estimated to be substantial in 2030, under
scenarios 3 and 4, relative to the baseline scenario.
 Fifth, the estimated increases in output and trade under the policy scenarios are Effects of FDI
from lower base levels at the reference case for many African countries. Sixth, the in African
simulated combined effects of land productivity enhancement and FDI growth tend be
larger than the individual effects.
agriculture
Seventh, over the simulation period, improvements in land productivity and FDI
growth lead to estimated increases in crop output and exports in the different
African regions, although the rates of increase are different across regions and crops. 179
The heterogeneous nature of these impacts has important policy implications.
For example, even small improvements in land productivity and FDI can have substantial
favourable implications over a reasonable time period in certain sectors such as
sugarcane which are already large. Furthermore, some smaller sectors such as the
oilseeds sector may have higher growth potential with enhanced improvements of land
productivity and FDI. Some sectors such as coarse grains, and vegetables and fruits
provide products that are important for households’ nutritional status and may require
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further improvements in land productivity and FDI to boost domestic output.

Finally, as illustrated in Figures 2 and 3, the dynamics of, for example, the estimated
sugar production and exports in the central African region under scenario 4 is
noteworthy. The sugar production in this region is estimated to increase by 60 and
160 per cent over the 2007-2020 and 2021-2030 period, respectively (relative to the
reference case). Furthermore, the estimated sugar exports in this region demonstrate
a similarly dynamic growth resulting in 85 and 340 per cent increase over the
2007-2020 and 2021-2030 period, respectively (relative to the reference case).
Our simulation analysis has also shown that, under the combined scenario (scenario 4),
in which the combined effects of improvements in land productivity and growth in FDI
are simulated, the shares of Africa as a whole are estimated to increase in global
agricultural output and exports, particularly with respect to oil seeds, sugar, and
cotton. For example, Africa’s shares in global outputs of cotton, sugar, and oil seed
sectors are estimated to be around 16.7, 8.7, and 6.4 per cent, respectively, in 2030,
under our baseline scenario. Under scenario 4, these shares are estimated to increase to
20.5, 10.3, and 7.3 per cent, respectively, because of the combined effects of simulated
improvements in land productivity and growth in FDI. Furthermore, the global export
shares of Africa in cotton, sugar, and oil seeds in 2030 are estimated to increase from
48.2, 7.0, and 5.8 per cent (under the baseline scenario) to 56.4, 10.8, and 7.8 per cent
(under scenario 4), respectively. It is likely that part of this potential increase in African
exports of cotton, oil seeds and sugar will be destined for key trading partner countries
such as China.

5. Implications for China

China’s net imports of oil seeds (e.g. soybeans, rapeseed, and groundnuts) have been
increasing rapidly over the past several decades triggered by rising incomes and
population. The imports of sugar into China have also risen sharply over the past
decade to meet the growing domestic demand mainly from industrial food processing.
China is a major exporter of cotton textile and partly relies on imported cotton for
processing. Therefore, Chinese imports of cotton have increased considerably in the
recent past and will continue into the future (Zhou et al., 2012). Over the past decade,
African exports of, particularly cotton and oil seeds to China have increased as a part of
the growing trade links between the two regions (Chaponniere et al., 2010). If the current
trend of agricultural FDI in Africa continues, our simulation analysis suggests that
African exports of cotton, sugar and oil seeds to China in 2030 will be 50-150 per cent
 CAER higher under scenario 4 relative to the baseline scenario, making China a major trading
7,2 partner of Africa.
China is also a major investor in Africa. The Chinese investment and technological
spillovers will improve Africa’s agricultural productivity and stimulate the region’s
economic development. Furthermore, the increase of African exports of cotton, sugar,
and oil seeds can to a large extent help meet China’s continuously growing demand for
180 these products. The strengthening of finance and trade links between China and Africa
will be a win-win outcome.

6. Conclusions
Several factors may influence the aspiration of African countries to improve their
agricultural sector. These include substantial domestic public expenditure programs
for agriculture, adequate aid allocations for the sector, growth in FDI in agriculture,
good policy regimes, adequate governance, and improved infrastructure. Available
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data over the past several decades suggest that good policies and high investment in
agricultural programs by African countries, such as Mozambique, Tanzania, Ethiopia,
Mali, and Niger, have helped them to achieve high agricultural growth (more than
4 per cent per year) (Cleaver, 2012).
Hence, it is clear that FDI could play an important role over the coming decades.
Growing interest in agricultural FDI presents potential opportunities and benefits to
many African countries with large agricultural sectors, gaps in crop yields and farm
productivity, and abundant arable land. In recent years, foreign investors have shown
interest in African countries that have two important characteristics: considerable
amounts of currently uncultivated, but suitable, land and substantial gaps between
potential and actual crop yields. Furthermore, there is considerable scope for enhancing
the overall productivity of currently cultivated land areas in many of these countries
(Deininger et al., 2011).
Several factors influence the effectiveness of agricultural FDI in developing
countries, particularly in Africa. These include investing in agricultural technology;
fostering local comparative advantage; assessing technical and socio-economic
feasibility of proposed FDI arrangements in a transparent and robust manner;
improving weak institutional frameworks for land governance; enhancing smallholder
competiveness; and fostering market access in a non-distortionary manner (Deininger
et al., 2011). An important risk to expansion in agricultural production in Africa is the
impact of climate change. According to Hertel et al. (2010), a relative global warming of
one degree Celsius by 2030, relative to what it would be otherwise, could have adverse
effects, particularly on maize and other coarse grains in the sub-Saharan Africa region.
Any future growth in African agricultural production triggered by FDI could also
have several important implications for global trade. The global trade effects will be
influenced by the extent to which FDI-recipient markets are linked to their trading
partners: the stronger the links, the larger the impacts. If agricultural FDI consists of
producing food for export to other regions, then the direct effect will be an increase in
the food supply in the destination regions. This could put downward pressure on food
prices and raise consumption (Rakotoarisoa, 2011). Depending on the size and nature of
the expansion in African agricultural production, for example, their grain imports could
fall and exports could rise in the medium-to-long term, particularly because of the high
substitutability of all major grains (e.g. wheat, rice, maize) in the global markets for
calories. Such changes in African trade patterns for grains could impact global grain
trade and thus affect other major grain exporters. Furthermore, global bio-energy
 markets could also be affected if there is a considerable expansion in biofuel feed-stocks Effects of FDI
(e.g. sugarcane, oil palm) in some African countries. in African
There are also important trade implications for Africa’s key trading partners such
as China of any future growth in African agricultural production triggered by FDI.
agriculture
For example, the estimated rise in Africa’s share in global output and exports in oil seeds,
sugar, and cotton (due to the combined effects of improvements in land productivity and
growth in FDI) simulated in this study could potentially help meet China’s growing import 181
demand for these products.

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 CAER About the authors
7,2 Dr Don Gunasekera is an Industry Researcher with the Institute for Supply Chain and Logistics
at the Victoria University. Prior to that he was a Senior Economist with the Commonwealth
Scientific and Industrial Research Organisation (CSIRO). He was a former Chief Economist with
the Australian Bureau of Agricultural and Resources Economics in Canberra. He has a PhD in
economics from the Australian National University.
Dr Yiyong Cai is a Research Scientist with the CSIRO. He has a PhD in economics from the
184 Australian National University. He specializes in economic and policy analysis using computable
general equilibrium (CGE) models and mathematical economics. Dr Yiyong Cai is the
corresponding author and can be contacted at: yiyong.cai@csiro.au
Dr David Newth is a Senior Research Scientist with the CSIRO. He was a Research Group
Leader in the Integrated Assessment and Global Change Modelling at the CSIRO. He has a PhD in
computer science from the Charles Sturt University.
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