Doing Business in Sub-Saharan Africa: Risks vs. Opportunities
Africa is generally regarded as a high-risk environment for trade and investment. Truly, doing business in Africa has inherent risks just as anywhere else—Latin America, Middle East, Asia, Europe and North America.
However, sub-Saharan Africa has been afflicted with an exaggerated risk perception over the years while there is limited understanding of its realistic trade and investment prospects.
To put this in perspective, many managers of U.S. multinational companies see China as an ideal business destination, but according to Harry Broadman, director of Johns Hopkins’ Council on Global Enterprise and Emerging Markets who worked for twenty years in China, “the investment environment in China is far more complex than most investors appreciate. It is a place where the on-the-ground investment risks are understated.”
A new report from the United Nations Conference on Trade and Development shows that foreign direct investment (FDI) flows to Africa in 2015 dropped by 7.2 per cent to a total of $54 billion and sub-Saharan Africa in particular suffered a significant decrease in FDI inflow.
Africa’s share of world FDI is still relatively low, about 3 per cent, but there’s a growing trend from other emerging economies such as Asia and the Middle East while many potential investors continue to view Africa as a high-risk zone.
Based on the 2014 Ernst and Young survey on “Africa Attractiveness,” the risks identified as major barriers to increased investment in this market are unstable political environment, corruption and weak security.
These challenges exist but things are changing, the situation is improving and it is possible to manage the risks associated with doing business in sub-Saharan Africa through awareness, understanding and open-mindedness. Even though corruption remains a critical challenge, whether African countries are more corrupt than other emerging markets is debatable.
Democracy in Africa is rising, there is a profound change in the political orientation, and many countries have experienced non-violent transfer of power from one political party to the opposition party in the ongoing political liberalization.
Also, many African economies have embarked on structural reforms over the last couple of years thereby creating a more conducive environment for business and investment, according to a most recent World Bank report. The World Bank survey which is seen as a standard for measuring the world’s business environment, reported that sub-Saharan Africa account for about 30 per cent of the regulatory reforms in 2014/15 identifying five countries in the region among the ten top reformers.
Adjustments in domestic policies in these countries—Uganda, Kenya, Mauritania, Senegal, and Benin—reduced the complexity and cost of regulatory processes while Mozambique, Ethiopia, Rwanda, Kenya, and Tanzania have pushed for more strategic liberalization measures as some now permit 100 per cent foreign ownership of listed companies.
Although these reforms do not guarantee sound economic policies or growth, it reflects willingness and commitment of these governments to attract foreign investment and boost trade.
The reality about the high-potential and diverse sub-Saharan Africa market is that it continues to offer numerous opportunities in three major groupings: infrastructure, natural-resources, and consumer goods. The region is deficient in infrastructure—power, transportation systems, healthcare, and housing—which are often seen as obstacles to trade and investment, but this situation actually present unique opportunities for long-term investments.
The huge population, urbanization and growing middle class supports high demand for consumer products and the continent’s rich natural resources can fuel development and growth opportunities in mining and agriculture.
These opportunities outweigh the risks and foreign investors need to recognize that Africa offers relatively high returns on investment possibly due to its high risk and low competition environment. A recent World Bank report shows that the overall rate of return on FDI in Africa has been above nine percent since 2006, higher than the world average of 7.5 per cent and developing country average of 8.1 per cent. Specifically, sub-Saharan Africa has a risk/reward balance profile, and profitability in manufacturing is generally even higher compared to other sectors.
Some of the actual and perceived risks can be mitigated. One fundamental fact about all business environments is an understanding of local market peculiarities regardless of whether foreign firms are looking to negotiate with suppliers, navigate bureaucratic government channels or reach out to new customers.
A key success factor is the investor’s determination to do business in sub-Saharan Africa with compassionate view and genuine commitment to the development of the region. The current excess industrial capacity in China creates an opportunity for investors to begin to consider Africa.
Potential investors should focus on opportunity and design strategies to tackle the risks. These could include adopting a risk-sharing business model with locals by building strong partnerships across government, the private sector, and communities which will encourage strong support, adopting long-term perspectives in planning, and flexibility in implementing those plans. Investors should also look at embracing Africa’s diversity and developing its human talents.
If all you focus on in Africa are risks and challenges, you will never see the opportunities. The biggest risk is not any of the identified ones, it is ignoring the sub-Saharan Africa markets.
Kemi Arosanyin is a trade development specialist for Africa at the World Trade Center Miami.