Why investing in Africa is sound business and a sustainable corporate strategy

August 16, 2018

Governments and private sector should leverage profitable, emerging investment opportunities that Africa offers,. says Odusola Photo: UNDP/Mozambique

By Ayodele Odusola, Chief Economist, UNDP Regional Bureau for Africa

The best time to invest in Africa is now. Bringing foreign investors into Africa has not moved as quickly as expected, however, because foreign investment decisions are often methodically over-structured. One of the major factors cited is too much risk. But risks and profits are inseparable twins: high-risk ventures are frequently associated with higher profits.

Africa is the most profitable region in the world. Evidence from an UNCTAD report shows that between 2006 and 2011, Africa had the highest rate of return on inflows of Foreign Direct Investment: 11.4%.  This is compared to 9.1% in Asia, 8.9% in Latin America and the Caribbean – and 7.1% globally.  Examples of companies benefiting from bountiful profits in Africa abound: Sonatrach’s turnover from oil and gas alone was $33.2 billion; MTN Group turnover was about $10 billion; and Dangote Group’s turnover was $4.1 billion – all in 2017. A variety of factors continue to drive up Africa’s profit prospects, making it an even higher imperative for European, North American, Asian, and Latin American businesses to invest, adding value on the continent.

Africa’s growth prospects are one of the world’s brightest. Six of the world’s 12 fastest-growing countries are in Africa (Ethiopia, Democratic Republic of the Congo, Côte d’Ivoire, Mozambique, Tanzania, and Rwanda). Further, between 2018 and 2023, Africa’s growth prospects are among the highest in the world according to the IMF. Good news: foreign companies’ areas of comparative advantage (banking, telecommunications, and infrastructure) are among the same drivers of this economic growth in Africa – creating clear investment opportunities for foreign businesses.  

Africa’s growing, youthful population, in the context of an aging population across most other regions of the world, constitutes a formidable market. Africa’s population is predicted to quadruple from 1.19 billion in 2015 to 4.39 billion in 2100.  In 2015 alone, 200 million Africans entered the consumer goods market. Maximizing this bourgeoning market size calls for actively engaging Africa’s structural economic transformation.

Africa’s youthful population contributes to an abundancy of labour, which is one of the region’s highest potentials for labor-intensive industrialization and lower costs of production, where the benefits far outweigh the cost of doing business on the continent. The hourly wage in Africa is less than 50 cents (e.g. $0.27 in Mozambique, $0.34 in Nigeria, and $1.62 in Morocco) compared to $10.49 in UK, $7.25 in the USA, and $6.57 in Japan. The engagement of more foreign companies will not only help raise wage rates in Africa towards the global level and improve labour market efficiency but will also generate additional resources for those left behind on the age ladder.  

Africa’s large deposits of natural resources promise a bright future for developing value chains. Agriculture and the extractive sectors are linchpins of national, regional, and global value chains. Africa hosts 60% of the world’s uncultivated arable land. In 2015, the continent produced 13% of global oil, up from 9% in 1998. The growing trend of oil and natural gas production between 1980 and 2012 is amazing: from 53.4 billion barrels to 130.3 billion barrels for oil; for natural gas, from six trillion cubic meters in 1980 to 14.5 trillion cubic meters in 2012.  As of 2012, Africa also controlled 53.9% of the world’s diamond resources.  In 2017, the Democratic Republic of the Congo alone accounted for 58% of the world’s cobalt (an input for electronics production) while South Africa accounted for 69.6 % of the world’s platinum production in 2016 (an input for catalytic converters, among a large variety of other goods). Actively investing in adding value to these commodities, among other extractive activities, will shape global economic activities over the next five decades.

Finally, emerging domestic developments lend credence to actively engaging Africa’s economic transformation agenda. Some of these developments include improvements in macroeconomic prudence and overall governance. For instance, evidence from the 2017 Mo Ibrahim Index of African Governance shows Africa’s overall governance index improved at an annual rate of 1.4% since 2007, an improvement of more than 5% in at least 12 countries (e.g. Côte d’Ivoire, Tunisia, Rwanda, and Ethiopia). This improvement helps to reduce perceived risks for many investors on the continent.

African governments should build on this positive trend to maximize foreign investments. This includes eliminating corruption; improving safety and security; strengthening macroeconomic environment investing in quality education and skill development as well as in science, technology and innovation;  and avoiding a ‘race to the bottom syndrome’ – giving unnecessary tax holidays and waivers to foreign companies.

Investing in Africa is good business and a sustainable corporate strategy for the foreign private sector. Advanced and emerging countries’ governments and private sector should leverage these profitable, emerging investment opportunities. Using ODA to leverage and de-risk the investment climate in Africa is a helpful, key component. Japan’s Nippon Export and Investment Insurance (NEXI) initiative to insure a facility in Ghana is such an effort that is laudable and should be scaled-up and supported by other actors.

Implementing the Sustainable Development Goals (SDGs) in Africa also offers investment opportunities to foreign companies. Good examples abound: the Sumitomo Chemical’s insect-proofing mosquito nets technology is helping to fight malaria; the Sonatrach, JGC, and Hitachi’s desalinating seawater technology is accelerating access to clean water; and the Commodity Risk Management Group and the Sompo Japan Niponkoa’s weather index insurance is helping to mitigate climate change.  In Africa, each Sustainable Development Goal offers business solutions and investment opportunities to foreign companies.

UNDP is working with African governments and private sector actors to de-risk and improve the investment climate. Developing industrial strategies and clusters, promoting special economic zones, improving energy access, facilitating innovative funding, advocating for value chain development across countries, and supporting investment promotion through the International Conference on the Emergence of Africa are some of UNDP’s efforts to improve investment climate on the continent.  

The best time to invest in Africa is now.

This blog was originally publushied in Financial Afrik.