The Risks of Not Doing Business in Africa
By Felix Ndeloa, Senior Manager, Advisory Services
When eyeing the map for international expansion, American executives have, by and large, long looked right over Africa. They cite two simple reasons: too hard and too risky. But the global business environment is continuously evolving. Today, Africa offers some of the world’s most lucrative opportunities and doing business there keeps getting easier. Increasingly, American executives need to start asking: “Can we risk not doing business in Africa?”
The continent has a lot going in its favor. Africa is more urbanized than India and offers a much larger market for goods and services. It’s also endowed with tremendous natural resource wealth that offers immediate opportunities and, if managed wisely, will finance long-term development. In recent years, several studies and a United Nations report have all found that return on investment in Africa is higher than in any other region — including one study that looked specifically at foreign direct investment by American businesses.
According to Ernst and Young’s Africa Attractiveness Survey, by 2035, the continent will have the world’s largest workforce, with over half of the population currently under the age of 20. Meanwhile, high growth rates of individual economies are set to continue, with the IMF forecasting that 11 of the 20 fastest-growing economies in the world through to 2017 will be in Africa. In fact, twenty-seven African countries have already attained “middle income” status, and at current growth rates, as many as 40 – a full 75% of countries on the continent – could reach that status by 2025.
Still not convinced? Just look to the businessman who arguably knows the market best. In July, Nigerian magnate Aliko Dangote pledged to invest $15 billion in the continent by 2018 at a town hall meeting in South Africa hosted by President Obama. Africa’s richest man said the massive investment plan partially financed by foreign banks was designed to send a message to foreigners “who really don’t understand Africa” and “show them that doing business in Africa is not as bad as what people portray it to be.”
Of course, doing business on the continent is no cakewalk. In a survey of American CFOs and other executives we recently conducted with our partner CFO Magazine, 43 percent of respondents indicated that doing business in Africa is “relatively difficult.” In large part, the difficulty stems from poor infrastructure. But this in itself also identifies infrastructure as area of opportunity. Meanwhile, African countries have been showing the greatest gains on the World Bank’s ease of doing business survey in recent years.
Businesses can mitigate political risks and identify opportunities by developing a more nuanced understanding of the region — which comprises 54 economically, culturally, and politically diverse nations. Egypt, despite being among the wealthiest African nations, is in the midst of instability. The Democratic Republic of Congo, though it possesses enormous natural wealth, continues to be consumed by ongoing conflict that has claimed millions of lives. Ghana, on the other hand, is a business-friendly jurisdiction in the midst of a transition to middle income status. The recent discovery of oil in the country is further propelling an economy that was already very promising. Developing an inside understanding of the varied markets here is key to identifying opportunities and avoiding boondoggles.
Businesses that show flexibility will thrive here. Consumer goods companies have found success offering smaller quantities of products like soap at lower prices. Others have developed non-traditional distribution networks to accommodate informal economies. Nokia offers cheaper handsets in Africa and has set separate profit benchmarks on the continent accordingly.
Finally, developing local relationships is the best way to remain in control of your African ventures. That requires developing trusted relationships both internally and externally. You will want to hire experts with local knowledge to guide your operations and to help you develop strong relationships with important in-country players.
If your business is ignoring opportunities in Africa, it risks falling behind — and ceding that growth to someone else.
With a highly-experienced in-house Africa practice, Radius provides all the back-office support and technical expertise your organization needs to operate efficiently and compliantly in Africa. To learn how Radius can help you expand overseas, click here.