We look at how businesses and local governments in Africa can minimise the risks involved in doing business in the region, while simultaneously maximising the potential.
By Jayde Alexander
Africa presents itself as a place for both new and expanding businesses to flourish
The African continent is as vast as it is diverse, but one thing’s for sure, its home to millions of potential customers. So, the possibilities for businesses are seemingly endless. However, before you begin dreaming about setting up shop, there are some things to consider.
The past decade has witnessed a dramatic shift away from a generally negative view of Africa to one that acknowledges the immense potential of the region as a key player in the international political economy. A recent study conducted by the McKinsey Global Institute found the collective Gross Domestic Product for Africa, which in 2008 stood at $1.6bn, was equal to that of emerging economies such as Russia and Brazil. However, as a result of increased access to international capital and experiencing the highest rate of return of foreign investment in the developing world, Africa presents itself as a place for both new and expanding businesses to flourish.
ON THE UP AND UP
The vast potential Africa holds for the future of business – both local and global – lies in its resource capacities, which remain largely unexploited, as well as in untapped consumer markets. The global population is rapidly increasing, placing pressure on agricultural resources and oil reserves. The exponential growth of global capitalism and a general decline in political unrest and instability, has generated higher growth rates. Greater access to international capital and increased foreign capital flows has seen accelerated growth in the resource, finance, retail, agriculture, transportation and telecommunication sectors. This has resulted in greater purchasing power for African consumers, as well as the creation of a burgeoning middle-class – creating a demand for the goods and services so widely available in the developed world.
Spurred on by rapid urbanisation and improved access to global markets, the rise of the African consumer and their greater purchasing power can also be expected to fuel long-term growth, presenting a more stable environment for future business. The relatively untapped markets in Africa provide companies with exciting new avenues for their goods and services – with a large growing consumer base now in a position to buy these products. Early entry into the African market economy provides opportunities for businesses to construct markets, establish brands, shape and mould industry structures, and influence customer preferences.
Despite these exciting opportunities, the potentially positive experience of doing business in Africa is restricted by several challenges. Business on the continent is threatened by indirect costs, through factors such as corruption, uncompetitive tax rates, and restrictive bureaucratic protocols; as well as direct costs, resulting from poor governance and the socio-political environment. While corruption places out-of-pocket costs on businesses, in the face of restrictive economic policies and slow bureaucratic processes, it does provide an alternative avenue to enable easier and quicker transactions. Poor public services and infrastructure, in terms of transport, roads, telecommunication and financial services, introduce direct costs by placing a competitive burden for manufacturing and other firms in poor African countries.
The lack of economic and sector diversification, accompanied by little or no protective mechanisms, has meant that most African countries remain vulnerable to price shocks on international markets, with direct negative effects on business within the region. The uncertainty created by the violence and instability, as well as poor governance resulting in mismanagement and poor public policy and a lack of enforceable legal contracts, has resulted in high transaction costs placed on the firms themselves. This uncertainty increases transaction costs for businesses, as well as places a limit on potential future business. Lastly, the lack of sufficient skills and necessary training in key sectors such as manufacturing, finance and information technology, serve to limit the overall success and profit-making potential for businesses in the region. While the solution will be costly, a lack of solution will be more so.
FIRST THINGS FIRST
African governments play a determining role in the fate of business in the region – so success depends on their willingness to cooperate and fully support business. But despite this, African governments need business for the continued growth of their economies and therefore need to endeavour to create a suitable environment with enabling conditions for successful business. A stable socio-political environment is required to encourage foreign direct investors and for global corporations pursuing African markets. African governments need to formulate clear public and economic policy to eliminate uncertainty and enable easy low-cost transactions. Meaningful efforts need to be made to improve derelict infrastructure and public services to ensure the ease and maximum productivity of manufacturing and other key industries. Lastly, local governments need to steer investment into key sectors, enabling greater access to international capital – through banking, telecommunication and information technology. Poor services in these sectors currently limit the ability of African economies to take full advantage of international markets and capital.
The immense power held by African governments over their economies should not, however, lead to the underestimation of the capacity of global corporations moving into African markets. Large corporations provide the capital essential to keep an economy running smoothly and their entry into any country should be thoroughly encouraged. Both international and local businesses operating within Africa can encourage economic growth through the use and development of local suppliers, rather than cheap imported alternatives, and should endeavour to develop local management capacities. Human capital requires large investment and should be of great concern to business as their success depends on their people. In light of this, businesses need to invest in skills training and development in all levels and sectors. While this takes time, long-term commitment to developing the skills training and development is absolutely critical to achieving sustained growth. Subsequently, corporations should embark on social investment programmes in areas where local governments have failed to deliver, specifically directed in education and health care. Both of these serve in the interest of business long and short term – better health and education increases productivity and quality of work.
PUSH ON THROUGH
Despite the risks which hamper the potential success of doing business in Africa, the region remains an exciting place for both global and local businesses. In a world defined by scarcity, Africa’s position in the international political economy will continue to rise, as it holds the resources and people that global capitalism requires to sustain itself. African governments and African businesses need to cooperate in such a way to maximise the advantages and ensure that economic and social development occur simultaneously to minimise the current risks working against successfully doing business in Africa.