Michael Lalor is lead partner at multinational assurance, tax, transactions and advisory services firm Ernst & Young, responsible for the firm’s Africa Business Centre, based in Johannesburg, South Africa. He tells African Business that Africa’s rise is real and how firms can get down to business in Africa.
Over the past three years, Ernst & Young’s Africa Attractiveness reports have highlighted the continent’s steady rise. Our research, which includes investor surveys and analysis of greenfield foreign direct investment (FDI) and broader socio-economic trends, has helped to provide some quantitative substance to the growing perception that African markets offer an exciting growth and investment opportunity.
While sceptics still abound, and there are people who still seek to debate the point, the evidence of the continent’s clear progress over the past decade is irrefutable. The reality is that a diverse range of African countries have now experienced consistent and robust growth for over a decade – certainly the longest period of sustained growth since most countries attained independence in the early 1960s. In the period since 2002, the size of the overall African economy has more than trebled (and grown at twice the population growth rate). Over this period, the size of the sub-Saharan African (SSA) economy has grown well over 3½ times.
What makes this economic performance all the more remarkable is that half of that decade has been marked by a deeply troubled global economy. Although many African economies have been negatively impacted by the situation in key trading partners in Europe and North America, most have remained remarkably resilient. A diverse group, including the likes of Angola, Ghana, Ethiopia, Tanzania, Mozambique, Nigeria and Zambia, are among the fastest growing in the world, with growth of 7%+ over a sustained period.
At the same time, many of the companies that have pursued a longer-term Africa growth strategy are generating excellent returns from their investments. In fact, empirical analysis reveals that ROI from investments in Africa have consistently been among the highest (if not the highest) in the world since the 1990s.
For companies seeking to grow and investors seeking higher returns, the African growth story should therefore stand out. While most developed economies continue to struggle, Africa clearly offers an exciting opportunity for investment and growth, and an alternative to the ultra-competitive Asian and other rapid growth markets. It is little surprise therefore that investor interest in Africa has been on the increase. Our 2013 Africa Attractiveness report shows that FDI projects into sub-Saharan Africa grew at a compound rate of 22.3% between 2007 and 2012.
However, in spite of the positive growth trends, our research also shows that the entire continent of Africa only attracted 5.6% of global FDI projects last year. Although this reflects a steady increase from 3.2%% in 2007, it is still lower than India’s proportion and substantially lower than China’s. In fact, overall since 2003, the entire African continent has only attracted 4.3% of global FDI projects, compared to India’s 6% and China’s 10.5%.
Our view is that this does not fully reflect the attractiveness of a region that not only has one of the world’s highest long-term economic growth rates, but is also making strong progress towards political reform, macroeconomic stability and social development.
Why the FDI lag
One key factor in this apparent lag in FDI is a perception gap between negative prior-held beliefs about the continent and the positive reality of the African growth story over the past decade. As a result, many potential investors still seem to approach the continent with greater caution than they do other emerging market regions.
Our 2013 Africa Attractiveness Survey shows that some progress has been made in terms of investor perceptions since our inaugural survey in 2011. The majority of respondents are positive about the progress made in, and the outlook for, Africa. Africa has also gained ground relative to other global regions: whereas in 2011 it was only ranked ahead of two other regions, this year it was ranked ahead of five other regions, (the former Soviet states, Eastern Europe, Western Europe, the Middle East and Central America).
However, the big take away for us from this year’s survey is the stark and enduring perception gap between those respondents who are already doing business in Africa versus those that have not yet invested in the continent. Those with an established business, who understand the real rather than perceived risks of operating in Africa, who have experienced the progress made and see the opportunities for growth, are overwhelmingly positive. Some 86% of these business leaders believe that Africa’s attractiveness as a place to do business will continue to improve, and they rank Africa as the second most attractive regional investment destination in the world after Asia.
In contrast, those with no business presence in Africa are far more negative about Africa’s progress and prospects. Only 47% of these respondents believe Africa’s attractiveness will improve over the next three years, and they rank Africa as the least-attractive investment destination in the world – many of these potential investors continue to base their perceptions on an image of Africa fixed in a time and space 20 or 30 years ago.
Our own analysis and experience indicates that many African countries benchmark well on key risk-related factors relative to emerging markets in other regions. We are actually seeing a very positive risk/reward relationship in Africa, particularly for companies with robust systems of risk management that enable opportunity taking.
Fact-based decision making
A key contributor to lingering negative perceptions is that much thinking on Africa generally and on specific markets continues to be based on ill-informed opinion – either unduly pessimistic or overly optimistic – that is divorced from current realities. We therefore stress the importance of rational, fact-based analysis as a basis for decision-making rather than anecdotes and conjecture.
We do sometimes hear complaints about the paucity of reliable and accurate data pertaining to African markets. This can be a challenge, but, in our view, sufficient macro data is available to conduct robust cross-comparative analysis of different markets and regions. Although this data is often fragmented across various sources, we have overcome this obstacle by combining numerous diverse data points together into a single database with a map-based interactive interface. This kind of tool – which we have named Growing Beyond Borders™ – demonstrates a fast-improving ability to make sense of Africa’s data deficits and produce workable, fact-based analysis for the purposes of strategic planning.
At the same time, however, we recommend not overinvesting in a process of this nature. Assessing markets and developing strategies for growth in Africa is a complex exercise, and too much time and energy is sometimes spent looking for definitive answers in a spreadsheet; doing business in Africa means learning to deal with uncertainty and complexity on an ongoing basis. The numbers should instead be an aid to help more clearly define growth priorities, risk appetite, investment criteria, and to enable informed strategic dialogue and decision-making.
Getting down to business
For anyone serious about growth opportunities in Africa, the sooner the shift is made from analysis to getting feet on the ground in key markets the better; ultimately, there is no substitute for spending time on the ground, in-market, experiencing the people and culture, reading newspapers, buying things in local shops, visiting a bank or post office, meeting and talking to potential customers, suppliers, business advisors, partners, government officials and so on, to get a feel for how things look and work behind the scenes.
There are also lessons that can be learned from organisations that have been operating and growing successfully in different parts of Africa. Based on our own experience and of engaging with numerous private and public sector clients developing and executing strategies for growth in Africa, we have distilled five critical success factors most consistently evident in strategies that have been successfully (and sustainably) executed over time in Africa.
1. Perspective: assuming a glass half-full perspective that focuses first on opportunity and only then on the risks that need to be managed.
2. Partnerships: investing in building strong collaborative partnerships across government, business and communities. Relationships matter, perhaps more so in Africa than in any other region
3. Planning: While it is often said that rewards go to the bold, in African investing it is also true that patience is a virtue (and pays). Experienced foreign investors repeatedly note that nowhere else is there such a direct correlation between careful planning (and flexibility about plans once formed) and a successful outcome.
4. Places: Africa’s hallmark is diversity. The barriers to creating bigger and deeper common markets and trade areas are considerable, but are arguably receding. Strategy-making around African growth opportunities involves positioning oneself at key hubs; executing such strategies then involves thinking in less conventional ways, both below the country level (African opportunity as turning on various key cities) and beyond the country level (African opportunity framed in terms of regions and other potential groupings).
5. People: Strategies are not self-executing. Firms that are serious about seeing through their African investment in the longer term have found – and will continue to find – that genuinely investing in people can bring significant rewards. Sustainable success in Africa will increasingly turn on the ability to put human resource development at the heart of strategy execution. For most sectors, identifying, nurturing and retaining talented and committed local staff will be particularly crucial.