Power First, Investment Second: Rethinking Africa’s FDI Strategy

Foreign direct investment (FDI) has long been treated as one of the fastest routes to economic transformation in developing economies, but in Sub-Saharan Africa, the arrival of foreign capital does not automatically translate into stronger long-term development. A new study argues that the decisive question is not simply how much investment a country attracts, but whether its domestic systems are capable of turning that investment into lasting wealth.

Published in Energies, the study "Foreign Direct Investment and Energy Infrastructure in Sub-Saharan Africa: Does Energy Infrastructure Condition the Sustainable Development Effects of FDI?" by Patricia Lindelwa Makoni and Jude Igyo Ali of the University of South Africa examines the relationship between FDI, energy infrastructure and sustainable development across Sub-Saharan Africa. It concludes that foreign investment can be associated with weaker sustainable-development outcomes where energy infrastructure is poor, but becomes increasingly beneficial as energy systems strengthen.

Using data covering 35 countries between 2000 and 2024, the researchers measure sustainable development through adjusted net savings, an indicator that goes beyond GDP by accounting for physical capital depreciation, human-capital investment, natural-resource depletion and environmental damage. The analysis combines several econometric approaches to test whether the effect of foreign investment changes as energy infrastructure and institutional conditions improve.

Investment Is Not the Problem, Absorptive Capacity Is

FDI can bring capital, technology, management expertise and access to international markets, but those benefits depend on whether domestic firms, workers and institutions can absorb them. In economies with weak infrastructure and limited productive capacity, investment can remain concentrated in enclaves without generating broad spillovers.

It is particularly relevant in Sub-Saharan Africa, where energy shortages remain a major structural constraint. The study notes that almost 600 million people in the region lack access to electricity, while more than 900 million rely on traditional biomass fuels for cooking. Weak energy systems therefore represent not only a welfare problem, but also a constraint on labour productivity, technology diffusion and the productive integration of foreign investment.

The regional averages reinforce that argument. Southern Africa combines the strongest average energy infrastructure with the highest adjusted net savings in the study, while Central Africa records the weakest institutional-quality score and sharply negative adjusted net savings. West Africa, meanwhile, records the highest average FDI relative to GDP despite weak energy infrastructure and institutional conditions, illustrating why investment volumes alone may reveal little about development quality.

For governments, success cannot be measured simply by the value of FDI announcements or inflows. The more meaningful question is whether foreign capital creates productive linkages, supports technology transfer and contributes to national wealth after resource depletion and environmental costs are taken into account.

Energy Infrastructure Changes the FDI Equation

The study analyses how FDI performs at different levels of energy infrastructure. At low infrastructure levels, the estimated marginal effect of FDI on adjusted net savings is significantly negative. At the sample average, the effect turns positive, while at high infrastructure levels it becomes substantially stronger.

The direction of that shift suggests that energy infrastructure does not merely accompany investment-led development; it changes the development return generated by foreign capital. Reliable electricity, greater generation capacity and better transmission systems can make it easier for investment to support production, diffusion of technology and wider economic linkages.

The study's broader statistical results require some caution. The positive interaction between FDI and energy infrastructure is strong in the baseline model and remains positive across the distributional analysis, but some alternative estimators produce less precise results. In the dynamic model, for example, the interaction remains positive but is not statistically significant, while FDI itself is negative at the sample-average level of energy infrastructure.

The variation does not invalidate the paper's argument; it makes it more nuanced. The evidence does not support a simple claim that FDI is always beneficial once electricity improves. Rather, it indicates that the development impact of foreign capital is conditional, heterogeneous and closely tied to domestic economic structures.

Governance Is the Multiplier Foreign Capital Cannot Replace

If energy infrastructure provides the productive foundation for investment, institutional quality appears to determine how effectively that foundation is used. Across the study's distributional estimates, institutional quality remains positive, substantial and statistically significant at every level of adjusted net savings examined.

Governments can build power plants and attract multinational firms, but weak regulation, poor resource allocation, corruption risks and policy instability can still prevent those assets from producing broad development gains. Institutions shape whether investment encourages competition, domestic linkages, technology diffusion and productive reinvestment.

The finding also challenges a common tendency to treat governance reform and infrastructure spending as separate policy agendas. In practice, they reinforce each other. Energy projects require credible regulation, predictable rules and competent institutions, while foreign investors depend on functioning public systems if infrastructure improvements are to translate into productive activity.

The study positions governance as a key transmission mechanism connecting capital, infrastructure and development outcomes. Its analysis argues that countries with stronger institutions are better placed to reduce transaction costs, strengthen investor confidence and allocate economic resources more effectively, increasing the likelihood that FDI contributes to long-term wealth rather than simply boosting headline investment statistics.

Africa's FDI Strategy Must Shift From Volume to Capability

The study suggests that governments should move away from strategies focused narrowly on attracting larger volumes of FDI and toward policies designed to improve the quality and domestic impact of investment. That means linking investment promotion with energy planning, industrial development, regulatory reform and local productive capacity.

The authors specifically call for greater emphasis on FDI that supports technology transfer, renewable energy, local value addition and stronger domestic linkages, while expanding electricity generation, transmission and distribution. They also point to a role for regional cooperation, including through the African Union and the African Continental Free Trade Area, in supporting coordinated infrastructure development and stronger investment governance.

• For development banks and international institutions, the findings suggest that infrastructure finance may have a multiplier effect beyond the projects being funded. Investments in energy systems can potentially raise the productivity of other capital already entering an economy, increasing the development return on both domestic and foreign investment.
• For private investors, better infrastructure and stronger institutions can also reduce operational risk and expand opportunities beyond extractive or enclave industries.

It is important to note that the study's macroeconomic design cannot identify exactly which sectors or firms benefit most from stronger energy infrastructure, and missing data reduce the main estimation sample. The authors also acknowledge the need for future research using firm- and sector-level data, identifying possible infrastructure thresholds, distinguishing renewable from non-renewable energy systems, and incorporating digital infrastructure, innovation, financial development and human capital.

Sub-Saharan Africa's development challenge is not simply a shortage of capital; it is a shortage of the complementary systems that allow capital to generate durable economic transformation. Foreign investors can bring money, technology and market access, but they cannot substitute for reliable electricity, effective institutions and domestic productive capacity.