Multinational companies are rapidly warming to the idea of expanding their businesses into Africa, especially to sub-Saharan markets – despite the considerable challenges common in emerging economies.
In an EY poll of about 500 global business leaders, Africa tied with Asia as the second most attractive investment destination in 2014, up from eighth in 2011. North America topped EY’s list of ten global destinations for foreign direct investment.
About 60% of respondents said Africa became a more attractive place to do business in the past year, and even more (72.7%) were optimistic about the continent’s future attractiveness.
Foreign direct investment into Africa also increased, to $56 billion in 2013 from $44 billion in 2010, according to the United Nations Conference on Trade and Development. Several sub-Saharan economies are garnering large shares of the money going to the continent: Ghana and Nigeria in western Africa; Kenya, Uganda, and Tanzania in eastern Africa; and Zambia, Mozambique, and South Africa in southern Africa.
The steady increase in investment “is a promising sign that investors are now looking across the continent and to new sectors,” Ajen Sita, CEO of EY Africa, said in a statement. “Further regional integration and infrastructure development should continue to entice investors to the exciting investment opportunities that Africa can offer.”
What’s driving the change in attitudes
Economic growth patterns in emerging economies worldwide are contributing to the change in investors’ attitudes. In the past four years, economic growth has slowed in many developing economies in Asia, Eastern Europe, Latin America, and northern Africa but has remained steady at about 5% annually in sub-Saharan Africa, according to International Monetary Fund data.
The steady economic growth is boosting consumption, a development that hasn’t escaped service- and consumer-focused multinationals, according to the EY report.
The three African industry sectors garnering the largest shares of foreign direct investments in the past five years were financial services (17.5%); technology, media, and communications (16.3%); and retail and consumer products (13.9%). Extractive industries, such as mining and oil, that have long been mainstays in African economies are less attractive as investment projects.
Continued economic growth, along with low labour costs and abundant natural resources, bode well for Africa as the next manufacturing hotspot. North African economies such as Tunisia and Morocco have already attracted production plants, and some retailers have begun to source their clothes in East Africa. In sub-Saharan Africa, economic growth is projected to remain steady at 5.5% to 6% annually the next four years, according to IMF data.
The emergence of urban clusters
Investors’ increased attention to Africa is going hand-in-hand with increased urbanisation and the emergence of large urban hubs of economic activity, which mirrors what happened in emerging markets such as China, India, and Brazil.
Already, Africa is urbanising at a faster rate than any other continent, according to Oxford Economics. By 2030, an additional 300 million people are projected to have moved to urban centres such as Lagos, Nigeria; Kinshasa, Democratic Republic of the Congo; Cairo; and Luanda, Angola.
In Lagos, per-capita incomes are projected to increase 50% in the next 15 years. Luanda is projected to see the biggest increase in the number of middle-class households, with annual incomes of more than $20,000. And in Dar Es Salaam, Tanzania, the number of households with incomes of $5,000 to $20,000 is projected to more than triple.
Oxford Economics estimates that the economic output of Africa’s top cities will more than double in the next 15 years.
Five steps toward mastering the challenges
To benefit from Africa’s rapid-growth markets, companies may face multiple challenges. To begin with, Africa encompasses many different cultures and languages and more than 50 sovereign countries. In addition, it packs many of the risks common to developing countries, such as poor infrastructure, political volatility, corruption, and a burdensome bureaucracy.
To minimise the challenges, companies can follow a five-step pattern as they expand into African markets:
- Most companies initially establish a presence in a single market that offers a specific opportunity and has the potential to serve as a platform for further expansions.
- With an established toehold in a single market, companies then begin to explore opportunities in neighbouring markets with comparable tax, legal, and regulatory systems.
- Global multinationals that have been operating in Africa for a while tend to establish operating hubs in certain countries, for example in Nigeria, Kenya, South Africa, or Côte D’Ivoire. From there, they expand into new regions.
- Companies that want to move beyond regional hubs tend to establish pan-African management, infrastructure, and risk management to embed a common culture and values.
- Very few large multinationals have reached the phase where they transition to an integrated global operating model.
Related CGMA Magazine content:
“Finding Your Pace in the Three-Speed World Economy”: The International Monetary Fund forecast a three-speed global recovery starting in 2013: Economies in Asia, sub-Saharan Africa, and Latin America are projected to be in the lead, with the US picking up some speed and Europe lagging.
“How to Pick the Next Emerging Growth Hot Spot”: Brazil, Russia, India, and China are losing some of their attractiveness, and multinational companies have started to look for the next global growth hot spots, a global Ernst & Young survey suggests. Find out how selecting new markets has changed.
“Lack of Experience Flavours Investors’ Perceptions of Africa”: Africa is home to some of the fastest-growing economies in the world. Many of its countries have less corruption, are easier to do business with, and are more democratic than several fast-developing nations in Europe and Asia. But dated perceptions still keep many investors away.
“Job Creation Is Key to Africa’s Economic Future”: To continue to lift millions out of poverty, raise living standards of emerging middle-class consumers, and entrench economic growth, African economies must accelerate the creation of wage-paying jobs.
—Sabine Vollmer (firstname.lastname@example.org) is a CGMA Magazine senior editor.