Articles

Africa on the Move: Ignore Continent at Your Own Risk

Thunderbird Professor Olufemi Babarinde

By Olufemi A. Babarinde, Ph.D.

For decades African countries have been off the radar screen of many non-African corporations with global operations. Companies in the energy, mining, and other extractive sectors needing access to the continent’s relatively cheap innumerable resources have been the exception to this norm. While several factors may account for the marginalization of Africa by the global business community, perhaps the most critical is the image of the continent carried in the media. Stories of famine in Ethiopia, genocide in Rwanda, civil war in Liberia, and HIV/AIDS devastation across the continent offer some examples.

The common impression left is that nothing positive is happening in Africa and that the continent is closed for business. Global corporations that bypass Africa, however, are missing tremendous business and investment opportunities. Admittedly, doing business in Africa is not for the faint of heart. But with creative thinking, due diligence and tenacity, investors will find the relatively untapped African business environment a reservoir of profitable ventures. In fact, some observers describe the continent as the “next business frontier” because of its high potential for success.

Open for business

Beginning in earnest in the early 1990s, there was a noticeable shift in the management of the economy and society across Africa, which improved the business environment. The end of the Cold War halted many internal and external conflicts, and many African countries are now pluralist democracies. A new generation of African leaders is interested in home-grown solutions to the continent’s challenges within the broad context of the global economy.

The African Union (AU) seeks a departure from the “business as usual” mindset of the past, also noting the urgent need for deeper economic integration in order to avoid further marginalization of Africa in an increasingly globalized economy. In essence, there is a bottom-up strategy to enable viable business ventures across national frontiers, thus allowing African and non-African businesses to achieve economies of scale. This is intended to encourage increased investment and stimulate economic growth and development.

Under the IMF and the World Bank, African governments began implementing strong economic reforms that removed price controls in order to encourage competition; they promoted small- medium- and micro-enterprises (SMMEs); streamlined bureaucratic red tape; reduced corruption; adopted new business and investment codes; and strengthened financial, legal, and related institutions.

The dramatic change in Africa’s economic climate, due to sustained diligent reforms, is being rewarded by foreign and local investors and businesses alike. The African continent seems to be getting unprecedented attention from the global business and investment communities and appears to be the place to go for business and investment opportunities.

A 2009 World Bank report noted that four of the top 10 reformers in 2008 were African, and 28 African countries implemented 58 reforms the same year. Western media outlets now see some hope in Africa. Business activities have been thriving, particularly with the surge in capital inflows and Africa’s increased trade with the rest of the world due to the robust global demand for its abundant commodities.

China and India are the most visible and aggressive nations in their quest for better access to Africa’s cheaper energy and raw materials. They are interested in Africa also as an outlet for their accumulated foreign reserves. Foreign direct investment (FDI) has increased, accelerating between 2004 and 2006. According to OPIC and the UN Conference on Trade and Development (UNCTAD), the return on FDI in Africa is the highest of any region in the world because the associated risks are higher than elsewhere. While price surges and rising demand for energy products have been the driving force behind those returns, other sectors offer impressive growth.

Bursting with opportunity

Business never really quit the continent. Major Western corporations not only did business there, but lately, have intensified or expanded their operations. For example, many veteran non-African businesses remained engaged in Africa, among them Credit Lyonnais, Cadbury, Colgate-Palmolive and Caterpillar. Procter & Gamble entered Kenya and Nigeria in the early 1990s, earning billions in revenue. Microsoft and McDonald’s entered Africa through South Africa, while others, such as Coca-Cola, John Deere, Hewlett Packard, and 3M returned once apartheid ended.

African firms also have been growing into conglomerates in their own right. The largest 200 private-sector firms in Africa commanded market values ranging between $677 million and $72 billion. In fact, each of Africa’s top 162 companies had market values of at least $1 billion and some earned as much as $60 billion. Paradoxically, some of the risks in Africa constitute advantages for business. The lack of infrastructure, for example, creates tremendous opportunities. After all, the missing infrastructure has to be provided or upgraded by economic actors if the region is to sustain its economic growth. In short, business difficulties could well be turned into business ventures.

African countries not only have the opportunity to leapfrog and leverage technological advancements for their own development needs, but they can avail themselves of cutting-edge technology to be more environmentally friendly. For example, any company, African or otherwise, whose business niche and strategy coincides with the Mauritian government strategy to create an environmentally friendly business environment should seriously consider pitching its tent in the tiny island nation.

To be sure, doing business in Africa carries risk. However, with creative thinking, due diligence, and tenacity, risks can be managed and mitigated. Africa offers a vast and diverse landscape comprised of thousands of cultures, managers and corporations, so businesses must tread carefully in order to mitigate the chance of failing. But if a business wants a new investment venue, it should investigate Africa, create a business plan, and knock on opportunity’s door.

Olufemi A. Babarinde, Ph.D., is the academic director of the full-time MBA in global management program and an associate professor of global studies at Thunderbird School of Global Management in Glendale, Ariz. Babarinde received his bachelor of arts in economics from Wittenberg University (1983), and his master’s degrees in economics (1985) and political science (1988) and his doctorate in political science (1991) from Miami University.