Moving Beyond the Bi-Polar View of Doing Business in Africa

New buildings in Gabarone, the capital of Botswana -- one of the most developed and fastest-growing economies in sub-Saharan Africa.
Gabarone is the capital of Botswana — one of the most developed and fastest-growing economies in sub-Saharan Africa.

By Naledi Modisaatsone

Economic improvements and a wealth of opportunities for business in Africa have led to an increased focus on the continent. Over the past three years Ernst & Young’s Africa attractiveness reports have highlighted the continent’s steady rise. Their research provides some quantitative substance to the growing perception that African markets offer an exciting growth and investment opportunity.

Africa’s growth prospects differ not only country by country but also sector by sector. For example, agriculture is Africa’s largest economic sector, representing 15 percent of the continent’s total GDP, or more than $100 billion annually. It is highly concentrated, with Egypt and Nigeria alone accounting for one-third of total agricultural output and the top ten countries generating 75 percent.

Africa’s banking sector has also grown rapidly in the last decade. Sub-Saharan Africa has become a substantial player in emerging-market banking, with total 2008 assets of $669 billion, while North Africa’s asset base has grown substantially, to $497 billion. Africa’s banking assets thus compare favorably with those in other emerging markets, such as Russia (with $995 billion).

However, the Ernst & Young reports also highlight a lingering perception gap between companies already doing business on the continent and those with no business presence there. The respondents with an established business presence in Africa are more positive about the continent’s prospects and rank Africa as the most attractive regional investment destination in the world today. They view it as an exciting, dynamic, high-growth market. In stark contrast, respondents that have not yet invested are negative and rank Africa as the least attractive regional investment destination in the world.

The African business community should spend some time on this issue at the US-Africa Business Forum. It is their responsibility to debunk the myths that some external investors have about operating a successful business in Africa. These business leaders are successfully embracing Africa’s uncertainty, complexity and volatility, understanding that these are common challenges across most emerging markets.

They are actively balancing the three tensions that all companies face in doing business in emerging markets: long-term versus short-term focus, profit-taking versus sustainable growth, and managing the whole versus optimizing the parts. Most importantly, their companies are establishing strong competitive positions in key markets and are poised to benefit from the continued growth anticipated over the next decade.

The fundamentals to succeed in business are in place in many countries. Performance is better now than over the last three decades. Already, the continent is seeing results, with several nations joining the ranks of the top ten fastest growing global economies. By 2050, the continent is predicted to have the world’s second largest population, after Asia, which leaders are hoping to leverage on the global trade stage in manufacturing, services, agriculture, and technology.

Sub-Saharan Africa already offers a consumer base of more than 900 million people. While more than half of Africa is estimated to live on a dollar or less per day, the other half does not, and they are hungry for products and services.

Even among the poor, there are surprising opportunities. Telecom revenues have increased at a compound annual growth rate (CAGR) of 40 percent, and the number of subscribers has rapidly exceeded 400 million. To meet the increased demand, investment in telecom infrastructure — about $15 billion a year — has also grown massively, with a 33 percent CAGR from 2003 to 2008. The rapid expansion of telecommunications is a prime example of the premise of C. K. Prahalad’s groundbreaking book, The Fortune at the Bottom of the Pyramid. Incremental profits may be low, but vast numbers of potential consumers can result in high overall profits.

The risks of investing in Africa remain high, just as they are for most emerging markets. But as noted by Kim Jaycox, CEO of Emerging Markets Partnership’s Africa Fund, the perceived risk is much greater than the real risk.  And once the risk goes down, the returns won’t be as good. The key is the management of that risk. Risk equals uncertainty. If a risk is foreseen and understood, it is not a “risk” but rather a “factor” and as such can be taken into account when considering the projects viability.

Unforeseen issues such as regime change can be ameliorated by a number of mechanisms, one of the most efficient being political risk insurance coverage. Political risk insurance has been crucial in supporting large and complex projects in countries such as Mozambique and the Democratic Republic of Congo, where there has been prolonged conflict.

There is a window of opportunity to act before others wake up to the African opportunity. That window is now narrowing, and the cost of entering African markets is already beginning to rise. Companies with an already established presence continue to expand and entrench their advantages. It is clear: the risk of missing this window is likely to be far greater than any of the risks one will encounter in actually doing business in Africa.

Naledi Modisaatsone of the Botswana Institute for Development Policy Analysis, is a Think Tank LINKS fellow at the Urban Institute. Find out more about the the Think Tank LINKS program here.