A Nuanced View of Doing Business In Sub-Sahara Africa: Assessing The Risks and Rewards
The mainstream view of Africa as a monolithic continent masks potential business opportunities for growth. Sub-Saharan Africa has shown higher growth rates – according to the International Monetary Fund (IMF), the GDP growth on the continent was higher than that of the global average between 2000 and 2010. Although foreign direct investment (FDI) within Africa is primarily concentrated in Southern Africa, other areas of Africa are emerging as key recipients of Foreign Direct Investment (FDI). The entire continent continues to receive increased FDI despite a slow global economy1.
At the same time, the economies of the regions are not all equally attractive. The attractiveness of the top 20 countries is ranked by Ernest & Young (Fig. 1).
Assessing these opportunities requires an understanding of the reputational, political, and cultural risks, as well as the business environment, within this complex continent. In a place, as multi-faceted as Africa, risk management should go beyond mathematical calculations and assumptions of likelihood or potential impacts. Risk strategies that take into consideration the local population’s culture, norms and external events play a critical, but often underestimated, role in the risk profile of any one country or continent like Africa.
Figure 1: EY’s Africa Attractiveness Index (AAI) country ranking:
Source: FDI Markets and EY AAI
Section 1: Reputational Risk
Per Warren Buffet, ” it takes 20 years to build a reputation but only 5 minutes to lose it.”
Foreign companies operating in Africa have additional sets of reputational threats. Their activities and operations must be in harmony with the needs of the local population. Companies operating in Africa must manage their CSR (Corporate Social Responsibility) seriously. If a company is perceived as an
oppressor, or fails to demonstrate its social responsibility to the local communities in Africa, its reputation and brand would likely suffer both locally and globally.
In Togo, a Chinese company, CAG (Chinese Airport Group), was hired to build the new airport of Lomé. CAG’s treatment of the local workers was perceived negatively in the country, thereby affecting its reputation in Togo. Thus, other Chinese companies and even Chinese products are suffering from a “reputational deficit” (defined as a lack of trust due to perceived bad reputation) in Togo.
In Nigeria, Shell Oil Company has had a damaging environmental and social responsibility record for years. The local communities ultimately took legal action against the company in London. Regardless of the outcomes of the case, Shell’s brand will suffer. Like everywhere in the world, companies operating in Africa, are better served by managing their reputations as well as they manage their balance sheets.
One of the main dangers of reputational risk, is the organization’s reputational capital is affected every time it does something bad or is simply accused of doing something bad.
Reputational risk is costing Africa potential business. Missed business opportunities means
less revenue and potential for growth. Since many African nations are struggling young economies, business opportunities and investments are often based on misinformation about the countries’ reputation. For example, when our U.S. clients are presented with business opportunities in Sub-Saharan Africa, some prefer Ghana over Nigeria, solely based on reputation. Despite being one of the richest and largest economies in Africa, Nigeria is overshadowed by doubts concerning its reputation as a country that is unsafe and risky to do business with. This is unfortunate as there are many reputable and trustworthy Nigerian companies and business men and women doing business everyday around the world. Unfortunately, the successful business deals with Nigeria or Nigerians are not publicized, while negative experiences with Nigeria receive much media attention. For instance, Aliko Dangote, President /CEO of the Dangote Group is a Nigerian business man who is changing lives in Africa and making major strategic and visionary investments on the continent.
This type of analysis is counterintuitive because Nigeria has more resources than Ghana and a much larger potential market. They both are attractive investment destinations. Some Investors explain that Nigeria’s poor reputation does not lend itself to a promising business environment. Yet Nigeria is not alone; reputation deficit plagues many African countries. Despite this “bad press”, the reality is that many African nations are gifted with vast and valuable natural resources (e.g. a vibrant human capital, untapped energy sources and other natural resources).
One side effect of reputation risk is that many global businesses that are investing, trading, and financing these Africa’s natural resources, are often bypassing African banks to do so. Thus, African banks do not get the opportunity to participate in major trade financing involving their continent’s own resources. According to a study published by AFDB (the African Development Bank) in December 2014 the majority (55%) of trade finance on the continent is handled by majority privately-owned non-national (foreign) entities. This is a huge opportunity cost to the continent.
TRADE FINANCE IN AFRICA – DISTRIBUTION BY BANK TYPE (OWNERSHIP STRUCTURE) BY REGION
Source: African Development Bank
Despite these challenges sub-Saharan Africa has shown higher growth rates – according to the IMF, the GDP growth on the continent averaged 5.5% between 2000 and 2010, compared with the global average of 4.4%2.
Effectively managing reputational risk and addressing reputational deficit means African countries and institutions must adjust the way they do business by:
Fighting corruption which has become a financial gangrene eating away at Africa’s development.
Becoming well-managed and establishing robust corporate governance structures.
Managing stakeholder expectations and following the rule of law.
Having foreign organizations develop better market and cultural intelligence and understanding of the local communities’ needs in order to avoid faux pas.
Section 2: Political Risk
The collapse of colonialism in many African nations in the mid-20th century ushered in the promise of democratically free, modern, and politically and economically open countries. Nearly three dozen African, as well as Asian nations, gained political autonomy between 1945 and 19603.Equally transformative were the economic reforms in those countries, as governments embraced open markets and privatization across major industries. However, from the 1960s to the 1990s, several African nations have shifted those democratic ambitions to a semi-authoritative state with questionable political leaders causing political and civil unrests. Africa had then established a reputation of political instability.
Historically, Africa has been considered a politically unstable region, and the notion of political risks was closely tied to the African continent. This is no longer the case, as many African countries are starting to become more democratic. Many of these nations are now embracing smoother transitions of power between political parties, and even between incumbent presidents defeated by opposition leaders (like those in Nigeria and Ghana). The latest episode of potential political election-related unrest in Africa was resolved peacefully in Gambia. The dictator who was ruling that tiny African country for 22 years lost the election to an unknown opposition candidate. The outgoing dictator president first accepted defeat, then later refused to relinquish power to the newly elected president. Under pressure from the coalition troops from the regional ECOWAS countries, he was forced into exile, thereby returning peace and tranquility to the region.
To be sure, some African governments are slow to move toward removing the threats of political unrest from the continent, and more importantly, from negatively impacting business and investors.
However, overall, threats of political risk are less critical now in Africa than previously, but Africa is still viewed as one of the most politically risky places on earth. Yet political risks are no longer an issue for African countries or emerging economies alone. Places like Russia, the European Union (plagued by Brexit), and even the United States, are now perceived as experiencing significant political uncertainty and risk.
There is a view that the United States holds itself as a beacon of democracy throughout the world therefore of political stability. However, after the 2016 U.S. presidential election did not conclude as predicted by the mainstream media, there were calls for recounts and demonstrations in the streets of major cities against the democratically-elected president.
One cannot help but point out the impact of the election of president Donald Trump on the U.S. economy. Mr. Trump’s elevation to presidency has a good initial impact on the markets and Wall Street, and helped strengthen the U.S. dollar. At the same time, the outcome has also created unrest in some industries as well. For instance, trade with China is now an area where there is no clear direction from the new administration. The healthcare industry is on edge with the possibility of a repeal of Obama-care. Finally, the president-elect’s comments about the cost of the new Air Force One being too high, sent Boeing’s (the company responsible for building the plane) shares spirally downward before subsequently recovering.
At the same time, across the Atlantic a smooth transition between President Mahama and President Nana Akufo Addo on January 7,2017 in Ghana reassured the business community of Ghana’s political stability.
The bottom line: Businesses do not like uncertainty, and political leaders’ actions and comments do matter whether coming from Africa or America.
To effectively manage political risk, while doing business in Africa:
Local companies, as well as international organizations, are best served by remaining neutral and apolitical.
Remaining neutral to political parties or leaders allows organizations to adapt and adjust to the changing political climate.
Being beholden to powerful political figures is less important than supporting the emergence of strong institutions in Africa.
Business leaders need to avoid corruption, crony capitalism and nepotism.
Section 3: Cultural Risk
In recent years, foreign direct investment (FDI) through private enterprises and non-governmental organizations (NGOs) have emerged as an increasingly important player in public policy initiatives and world affairs. Historically, individual nations have set their own agendas for addressing humanitarian issues or crises. National and state governments prioritize the needs of their populations, generally based on the political leadership of that nation. Although no international government exists in a world of sovereign nation states4, FDI has become a conduit for local populations to receive direct assistance during a crisis, or more broadly, receive support for development initiatives. Many nations need support in addressing basic population needs (e.g., medical, literacy, poverty). Toward this end, FDI is particularly important for economic growth and development within emerging markets.
One of the biggest challenges businesses and investors face in FDI are cultural risks. Africa is not a homogeneous place; it has over 50 countries with a myriad of distinct cultures. This diverse environment presents investors with significant challenges when adjusting their management style to fit the realities of the local market. In many cases, the failure to adjust is due to the lack of adaptability to local market. According to Culture Plus Consulting, between 15 to 30 percent of businesses fail in some regions5, and in some areas the failure rate is high as 70 percent.
Culture is what makes Africa unique. The richness in cultural and spiritual beliefs cannot be ignored when doing business on the continent. The lack of understanding of these values can make or break a business venture. For instance, in almost every region in Africa, traditional authorities are central and must be well respected by all, including foreign investors and expatriates. Understanding such subtle cultural practices could go a long way in Africa while keeping one out of legal trouble back home.
To address these challenges and achieve business success, it is important to be mindful of the following:
Cultural training and integration as a business strategy are required before venturing into a target country.
Cultural risk cannot be managed with formula-based risk assumption and probability.
Limiting cultural risk requires human, emotional, and culturally-sensitive approaches and solutions.
In recent years, Africa’s most populous nation – Nigeria – was identified as a major emerging growth market. Dubbed one of the “next eleven” by Goldman Sachs, Nigeria is part of a group of secondary nations that could impact the global economy, after the well-established BRIC nations. The sheer size of Nigeria’s population and natural energy resources are two factors that could help propel and sustain the
country’s future economic growth. However, there are risks and complications that could hinder that growth. Nigeria faces significant challenges in the health and education of its population, difficulties in starting and running businesses, and common problems that plague emerging markets, such as the lack of infrastructure.
Nigeria’s complicated political history started with British control through the 19th century to independence in 19606. It wasn’t until 1999 that an institutionalized democracy emerged. However, the transition to a fully formed democratic nation has been erratic, as Nigeria continued to face ethnic tensions and government mismanagement. In recent years, Nigeria is on a relatively steadier path towards continued economic growth. To successfully invest in Nigeria or any other Sub Saharan African economies with the hope of double digits returns, one must understand the local cultural landscape.
Case Study: Cultural “Faux Pas”
As the following first person account illustrates, underlying cultural risks pose a threat if mishandled:
In 2005, as a Mission Director, I led a team of American, Christian-humanitarian workers to a mountainous village in West Africa. Upon our arrival, we found a newly constructed concrete building on the hillside which was overgrown by weeds while most villagers were still living in mud houses. Even their church services were held in an old mud building. When I asked why the new building was not being used, nobody wanted to explain the reason except that it was built as a gift to the village by an European volunteer team in the 90s.After careful investigation, we uncovered the root cause.
The reason this building was not in use was because it was built on an abandoned burial ground. In African culture, burial grounds, no matter how old, are sacred. Building on
that land was not a culturally sensitive decision. This mistake could have been avoided by doing the following things simple things:
1. Include the local beneficiaries, rather than politically appointed bureaucrats, on the design and implementation team of the project; and most importantly.
2. Include their input and recommendations in the decision-making process.
Africa’s complex historical, political, and economic climate, makes business investments challenging. Different countries have significant, differing challenges in terms of basic population needs and an institutional environment that still requires improvements in business practices, regulations and overall efficiencies. For example, Nigeria’s reliance on oil remains a challenge to the vast population7; and religious strife also remains an ongoing concern8. However, in Nigeria and Sub-Saharan African, a rapidly expanding urban class, a large potential market share with respect to the creativity and ingenuity of a young and vibrant population, offer good investment opportunities.
Below is a summary of key insights and recommendations to effectively manage business risk:
1) Reputational Risk:
o Fight corruption.
o Establish robust corporate governance structures.
o Manage stakeholder expectations and follow the rule of law.
o For Foreign entities:
Develop better market and cultural intelligence
Understand the needs of the local communities and include local and traditional leaders in your CSR initiatives if necessary.
2) Political risk:
o Maintain corporate political neutrality.
o Remain apolitical.
o Avoid corruption, crony capitalism, and nepotism.
3) Cultural Risk:
o Have real cultural training
o Do not rely on formula-based assumptions alone
o Take a human, emotional, and culturally sensitive approach
Broadly speaking, Africa is a stable and attractive business destination for the savvy investors. Looking at specific risks and challenges as outlined above will help create a more business-friendly environment and generate higher ROI (Return On Investment) in Sub Saharan Africa.
To learn more about investment opportunities and risk management In Africa, contact us @:
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+8562441649 (USA office)
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