Friday, December 18, 2009

Now’s the Time to Invest in Africa - Harvard Business School

by Paul Collier and Jean-Louis Warnholz

Over the years many misguided pronouncements have touted the improved economic prospects of Africa, home to a large proportion of the world’s billion poorest people. The late 1990s even saw a slight economic resurgence, dubbed an “African renaissance,” but it fizzled, and a gloomy view of the continent as too unstable for investment other than in mining and oil seemed to settle over corporate boardrooms.

But reliable data show that a number of sub-Saharan nations have emerged from conflict in stable condition and that new macroeconomic forces are poised to have a profound effect – despite the global economic downturn. For example, the International Monetary Fund’s World Economic Outlook, re-leased in October 2008, projected economic growth of 6.3% for sub-Saharan Africa in 2009, with Uganda, Tanzania, and Nigeria exceeding 8% growth. Our research on African companies indicates that the continent offers competitive manufacturing sites, IT outsourcing, and construction services. There is real opportunity on the ground in Africa.

Multinationals and investors should bear these developments in mind:

Stability. The periods of catastrophic government action that slowed growth in past decades have become much less frequent. The failures in Ghana, Uganda, Tanzania, and Nigeria in the 1970s and 1980s were profound learning experiences for those countries, which have joined the list of today’s success stories. Nigeria, for instance, has paid off its external debts, enacted prudent fiscal rules, and cleaned up its banking system.

Policy. The more favorable policies of developed nations have laid the groundwork for growth: Many of Ghana’s exports, for example, qualify for duty-free access to EU and U.S. markets. Policies within African countries have boosted local economies: Rwanda, for instance, has made information and communications technologies the cornerstone of a new growth strategy, setting up the ICT Park in Kigali, its capital.

Profits. Our study of 2002–2007 financial data from all the Africa-based publicly traded companies for which data were available (a total of 954, mostly in manufacturing and services) shows that many of these firms are highly profitable. (For foreign-owned companies we looked only at the performance of the African entities.) In part because of low labor costs and gains in operational efficiency, the average annual return on capital of the companies studied was 65% to 70% higher than that of comparable firms in China, India, Indonesia, and Vietnam. The median profit margin was 11% –better than the comparable figures for Asia and South America. Our analysis of World Bank data on 1,869 African companies confirms these findings.

Opportunity. Construction companies, call centers, and IT services are among the region’s most successful businesses. The engineering services company Gasabo 3D Design, located in Kigali’s ICT Park, uses computer technology to transform drawings into three-dimensional models for customers at a highly competitive hourly rate of US$10.

Years have passed since investors updated their view of Africa’s promise. The time is ripe for multinationals to rethink sub-Saharan opportunities and simultaneously to help the region achieve its promise by contributing much-needed capital, business skills, and global connections.

Paul Collier, author of The Bottom Billion (Oxford, 2007), is a professor of economics and the director of the Centre for the Study of African Economies at the University of Oxford in England. Jean-Louis Warnholz is a researcher at the Centre for the Study of African Economies and a consultant on business development in emerging markets.

Return to the HBR List 2009 table of contents.

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