Foreign Divestment: Africa needs to prepare itself

In the wake of COVID-19, a new strategy to understand and try to reverse this growing trend is urgently needed. Foreign divestment is steadily becoming more likely and requires greater attention from policymakers, especially in Africa. The term refers to sales or liquidations of foreign affiliates by multinational enterprises in a host economy.

Divestment is the opposite of foreign direct investment and is increasingly coming to the fore as many firms react to geopolitical uncertainties such as Brexit and competition between China and the United States. Their aim is to minimise the risk of disruptions of global value chains that straddle borders with much of manufacturing occurring in Asia.

Little information and data are available about this phenomenon despite its importance. This makes it difficult to get a clear picture of trends in foreign divestments in developing countries in general and Africa in particular.

A 2019 study by Ernst & Young found that about 84% of surveyed firms were planning to divest at least some of their operations within the next two years, which is a global average of 85% American, 82% Asia-Pacific, and 84% of Europe, Middle East and Africa.

Little is known about foreign divestment trends in developing countries and Africa in particular And according to the United Nations Conference on Trade and Development (UNCTAD), the investment stocks held by the US in Africa, the largest foreign investor on the continent, declined by 15% in 2018 due to divestments.

International divestment can affect the performance of the divested firms as well as the domestic economy. For example a recent study by the Organisation for Economic Co-operation and Development (OECD) examined 62 000 foreign-owned affiliates from 41 OECD and G20 countries. It revealed that divested foreign affiliates experience on average 28% lower sales, 24% lower value added and 13% lower employment compared to firms that remain under foreign ownership. The impact of liquidations or business closures would no doubt be even more severe in the domestic economy. This means that increasing foreign divestments may undermine growth and employment prospects in the economies in which they occur.

COVID-19 is likely to intensify international divestments. Measures taken around the world to limit the spread of the pandemic have caused major disruptions in the global value chains. This may lead some multinationals to insulate themselves from future shocks by shortening their supply chains. Others may opt for a diversification of their supplier networks to reduce vulnerability to location-specific shocks.

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