To my knowledge this study undertakes the first comprehensive and systematic empirical test of the hypothesis that while returns to invested capital in Sub-Saharan Africa are high compared to select Asian and South American markets, investment rates are low. I investigate three sources: detailed World Bank surveys of 6,500 manufacturing firms, a new panel constructed from financial statements of 6,900 quoted industrials and performance indicators of emerging stock markets. I find returns to be high throughout. Micro-evidence and sectoral FDI data confirm that investment remains low outside the mining industry and that the link between past profitability and current investment is weak in Africa. Low investment despite high returns poses a puzzle and I evaluate several possible explanations under assumptions of both symmetric and asymmetric information. After allowing for risk premia and other factors, my findings suggest that we observe a temporary disequilibrium, largely due to an information deficit on African markets.
