NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

Recently, I was asked to present the business perspectives in Africa to students of one of the top business schools in the US. When I asked the students at the beginning of my presentation if they would be interested in doing business in Africa, the great majority didn’t raise their hands. When I asked the few who raised their hands what type of business they would engage in Africa, their answer was working for an NGO or a microfinance organization. While this sample is not statistically valid, I think it represents the general perception of Africa in the U.S. as a region where there are no businesses in which to invest, except for philanthropy. For many, Africa is a region of famine, wars, poverty, and sickness. This stereotype is reinforced by the news media in the rare Africa news they chose to broadcast. In addition, most Americans never visited Africa and most likely will not. Therefore, any information that is received about Africa is taken for granted.

But in the last decade, things have been changing. Better governance, investments by Eastern countries, the end of wars, and the resolution of the debt crisis have all resulted in significant progress in supporting businesses and the resulting maturation of the business climate.

You will find more than 9 million search results from Google by typing “investing in Africa.” But beyond interesting anectdotes many noteworthy papers and books have been published on the subject of “investing in Africa” in the recent years, including:

• Paul Collier, author of the influential book, “The Bottom Billion,” published “Now’s the Time to Invest in Africa” in Harvard Business Review in 2009.
• The McKinsey report Lions on the Move notes: “Today the rate of return on foreign investment in Africa is higher than in any other developing region”.
• The annual flow of foreign direct investment (FDI) into Africa in 2008 increased to $62 billion, from $9 billion in 2000.
• Wal-Mart Stores announced a cash offer of over 2 billion USD for a majority stake in the South African retail company Massmart Holdings, one of South Africa’s biggest retailers.
• The CEO of the Rwanda Development Board makes the case for Rwanda in the Independent, a local media: Rwanda is now open for business.
• My friend Ryan Allis, CEO of iContact, speaks about Why invest In Africa? in his Dare Mighty Things blog and provides good links for investments in Africa.
• An interesting interactive graphic “The New Gold Rush” recently published by The Wall Street Journal shows how the rise of a new consumer class is shifting the balance in Africa.

So how much more information does one need to be convinced that Africa is a worthy investment? Obviously, the continent is a complex grouping of 53 independent countries and clearly the business environment required for investments is not homogeneous. The growth of individual countries across the continent will differ greatly.

The risks of investing in Africa remain high, just as they are for most emerging markets. But the perceived risk is much greater than the real risk. And once the risk goes down, the returns won’t be as good.

It is therefore important to carefully select the countries where to invest.

The McKenzie report cited above provides good economical information on the African market. The report provides a ranking of countries in 4 categories:

1) Diversified economies: Africa’s growth engines: South Africa, Egypt, Morocco and Tunisia.

2) Oil exporters: They have the continent highest GDP per capita but the least diversified economies: the three largest producers are Algeria, Angola and Nigeria.

3) Transition economies: Rapid growing economies but agriculture and resources sectors account for as much as 35 percent of GDP and two-thirds of exports: Ghana, Kenya, Senegal

4) Pre-transition economies: Their economies are very poor, with annual GDP per capita of just 353 USD: RDC, Ethiopia, Mali

A recent book “Emerging Africa: How 17 Countries Are Leading the Way” by Steven Radelet published by the Center for Global Development (Read the NextBillion post on this book here) provides a more in depth view of the success of some countries called Emerging Countries: “These countries are putting behind them the conflict, stagnation, and dictatorships of the past and replacing them with steady economic growth, deepening democracy, improved governance, and decreased poverty. Five fundamental changes are at work: (1) more democratic and accountable governments; (2) more sensible economic policies; (3) the end of the debt crisis and changing relationships with donors; (4) the spread of new technologies; and (5) the emergence of a new generation of policymakers, activists, and business leaders.”

The 17 Emerging Countries are: Botswana, Burkina Faso, Cape Verde, Ethiopia, Ghana, Lesotho, Mali, Mauritius, Mozambique, Namibia, Rwanda, Sao Tome & Principe, Seychelles, South Africa, Tanzania, Uganda, and Zambia.

You may be surprised not to find oil exporting countries like Nigeria, Angola in the list of performing countries. That is because the book is evaluating more than just the GDP growth. It analyzes important indicators of development like average income per capita, agricultural production, investments, productivity, trade (imports plus exports), infant mortality, political rights and civil liberties, strength of democratic institutions, governance (rule of law, regulatory quality, government effectiveness, control of corruption, accountability, political stability), cost of starting business. In all these indicators without any exception, the Emerging Countries are outperforming the rest on the continent, including the oil exporters.

Micheal Lalor, a director at Ernst & Young SA, explains what the key considerations for investors should be in the face of the upcoming polls; plus where to start if you are planning an African foray.

So, about one third of the countries are moving in the right direction, but they are facing many remaining challenges to stay true to that course. Here are some of them:

Demography

Africa has 14 percent of the world’s population, over one billion people. It is estimated that by 2050 it will increase to almost 20 percent up from 7 percent in 1950. By 2040, Africa’s labor force is projected to reach 1.1 billion, overtaking China’s or India’s. About 44 percent of the African population is under 15 years old, making it the youngest population in the world.

Education and infrastructure

Demography will have significant implications on the need for productivity and growth to create new and diversified economic opportunities for this growing workforce and provide employment to all these people. Africa has the potential to become an important resource for labor-intensive industries, but this requires major investments in appropriate education to develop a skilled workforce that can compete in a global economy. It also requires major investments in infrastructures to support the economical development. The ICT infrastructure in particular is critical as it will be a key engine for the development of the private sector (see my post in NextBillion).

Healthcare

Only 9 of the 53 African countries for which the WHO shows data have life expectancies of 50 years and over while the world average is 67.2 years. The figures reflect the quality of healthcare in these countries as well as other factors including ongoing wars and HIV/AIDS infections, particularly in sub-Saharan Africa with adult prevalence rates ranging from 10 to 38.8 percent.
Governance

While much progress has been accomplished, African countries are still below average in world rankings of governance. Strengthening of the progress is needed to further improve the business climate.

Adapting to climate change

Everyone understand how agriculture is depending on the climate. But weather variability has even more impact in Africa. African farmers know too well how weather changes may affect their crops. But there are other weather changes: the increasingly erratic weather patterns due to the climate change in the world, that also impact Africa. I address that challenge in my posting of August 26, 2010 in my Africa Oye blog.

In summary, Africa is open for business, but as any smart business man or woman, you need to do your homework first to figure out where to invest for better return at lower risk.

But probably the greatest challenge resides in the U.S. and the Western world. That challenge is to change the perception of Africa and encourage young entrepreneurs and investors to look at Africa as a place to do business. Business is probably a better way out of poverty than philanthropy. And I can’t wait for Business Schools to lead the way by developing curriculums on business in Africa.