International business strate

Ph.D. 610: Assignment 8

Olusola Ogunbowale
Solingen, Germany

13th August ,2023

Strategic Considerations of Doing Business in Africa

Introduction

Africa my Africa, Africa of proud warriors in ancestral Savannahs

Africa of whom my grandmother sings, On the banks of the distant river

I have never known you, But your blood flows in my veins

The blood of your sweat, The sweat of your work,

The work of your slavery, The slavery of your children

Africa!, tell me, Africa, Is this your back that is bent?

This back that breaks under the weight of humiliation, trembling with red scars

And saying yes to the whip under the midday sun? But a grave voice answers me

Impetuous child - that tree, young and strong! That tree over there!

Splendidly alone amidst white and faded flowers, That is your Africa springing up anew

springing up patiently, obstinately Whose fruit bit by bit acquires

The bitter taste of liberty – A poem by David Diop.

The above poem from David Diop captures the sad tale of slavery, resilience, and the

resurgence of mother Africa and its children. Africa is home to one-third of the world’s

population and half of the young people ( Eurasia, 2023). Sub-Saharan Africa is a 54-nation

continent with over 1.2 billion people - most of them below 25 years old by 2050 ( World Bank,

2023). This enormous land of my birth is filled with largely untapped potential mostly due to the

state of violence orchestrated by different actors ( mostly external) for the rape of its land,

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natural and human resources. 22 out of the 54 member states are in a state of conflict ( World

Bank,2023). Most African countries are blessed with excellent weather all year round and are

economically dependent on agriculture, tourism, and natural resources (oil, gas, and minerals).

Nevertheless, the continent is characterized by a high unemployment rate and remains the

poverty capital of the world – with 330 million people living below two dollars per day ( World

Bank, 2023).

Despite these challenges, Africa is posed to rival Asia in terms of economic growth and

development. Six of the ten world fastest growing economies between 2001 and 2010 are in

Africa – Angola and Nigeria worthy of mention on the list have their economy bolstered by oil

exportation. Africa is the last frontier of prosperity for the global economy. The drive for rapid

urbanization, strides in democratic governance, and better economic management are helping in

the economic rebirth of the continent. This is evidenced by the continuous rise in foreign direct

investment in the continent as the fruit of economic globalization slowly ripens on the continent.

Historically, Sub Sahara Africa’s economy has profited from low rates of inflation, stable

exchange rates, and average regional growth of about 6% (Kenyatta, 2013). Economic growth is

projected to hover around 3-4 percent through 2025 ( World Bank, 2023), the lowest in over a

decade. The growth trend in the last two years is due to subdued global growth, covid, global

inflation, and the tightening of financial conditions from the war in Ukraine. Even at that, 22 of

the 53 nations are expected to have a growth rate above 5 percent by 2024 ( ADB, 2023). Kenya,

Cote d’Ivoire, and the Democratic Republic of Congo (DRC) economic growth is above the

continental average in 2023 ( World Bank, 2023).

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Sub-Regional Overview

A good approach to understanding Africa is to take each of the sub-region as one market.

Each of the sub-regions is doing substantial work in integrating the countries, harmonizing tariffs

and standards across the member states.

West Africa, Nigeria, and ECOWAS

The West African sub-region is economically integrated with freedom of movement of

goods and people across the 16 states region with a combined GDP of over 700 billion dollars.

The economy of this subregion is driven majorly by Nigeria, Ghana, Cote de Ivoire, and Senegal.

The effect of colonialism is still felt especially in the French-speaking part of West Africa.

Nigeria, located right in the heart of the continent, is a co-founder of the African Union, a

member of the UN, OPEC, the British Commonwealth, the Economic Community of West

African States ( ECOWAS), and the Organization of Islamic Cooperation (Eurasia, 2023).

Nigeria is Africa’s most populous ( 220m) and largest economy – a sleeping giant that is

gradually awakening and potentially positioned to be a superpower due to its huge population

and economic resources ( Eurasia, 2023). Nigeria is the most influential of the ECOWAS states

and the most favored country to change the narrative of the continent.

East Africa

East Africa subregion has a large market of over 400 million inhabitants and a rich history of

tourism and agriculture. East Africa is the fastest-growing economic region on the continent

driven mostly by internal demand ( Soumaré, 2021). East Africa countries are mostly tourism

and commodity-dependent economies which are generally grouped as the least diversified on the

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continent ( Soumaré,2021). Ethiopia, DRC, Tanzania, and Kenya are the most attractive location

in terms of FDI in a subregion that is also the least industrialized ( Soumaré, 2021).

Southern Africa

South African development community ( SADC) which consist of 16 member state in the

region generally needs modernization, competitiveness, and diversification of products to

promote trade( GIZ,2023). Mauritius and South Africa are the most advanced economies in this

region. South Africa is the biggest in this region with a 400 billion dollar economy – second only

to Nigeria in Sub-Saharan Africa. South Africa, once the shining star of the black continent is

currently with weak structural growth. The hopes and promises of the anti-apartheid movement

were not met despite the vibrant private sector and civil society in South Africa. The country

currently struggles with one of the highest inequality rates in the world. The economic growth of

the southern African sub-region is weakened by South Africa’s declining fortunes, energy crisis,

and rising public debt concerns ( World Bank, 2023).

Central Africa

The Economic and Monetary Community of Central Africa (CEMAC) comprising 37 million

people in 6 countries - Cameroun, Chad, Central African Republic, Guinea, Gabon and the

Republic of Congo have the weakest economic performance on the continent. Growth is

expected to decline in this sub-region which consists mostly of commodity exporters.

Fluctuations in global commodity prices are risks associated with commodity export-dependent

nations. Nevertheless, these economies also offer opportunities in their economic diversification

agenda.

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Strategic Considerations in Expansion to Africa

The African Continental Free Trade Area (AfCFTA) identified four sectors ( automotive;

agriculture and agro-processing; pharmaceuticals and logistics as high-demand priority areas that

offer opportunity in manufacturing. At the moment, the focus have been on the extraction of

natural resources on the continent.

Risks Perception

Doing business in Africa calls for cautious optimism in view of the downside risks to its growth

prospects. Africa generally has a poor perception problem globally. It is seen as a land of wars,

poverty, corruption, and disease. Poor public financing, the increasing cost of debt financing,

and the risk of debt distress from financially constrained countries on the continent ( ADB, 2023)

are putting African businesses under constraint. The number of African countries at high risk of

external debt distress or already in debt distress stands at 22 ( World Bank, 2023). The risk

premium for doing business in Africa is high. The high-risk perception leads to a poor credit

rating and high borrowing costs for businesses on the continent. New entrants should consider

risk insurance as they strategize with their African market agenda.

Security

High levels of corruption, poverty, inequality, a young population, and political instability are

major drivers of insecurity and violence on the continent. Perception of the growth of extremist

elements such as Boko Haram in the Sahel to the coups in Mali, Burkina Faso, and Niger is a

worrying concern for strategic investment in these areas. Companies planning to invest in the

region will have to take security preparations seriously. They should make arrangements for

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private security networks for their expatriates and follow the guidelines of the home country

consulate closely.

Infrastructure Deficit

Africa has a huge deficit in infrastructure. This makes the cost of doing business on the

continent to be high. The gains from cheap labor are easily eroded by the lack of energy, roads,

rails, and airports. The cost of logistics on the continent is one of the highest in the world due to

the absence of roads and rails to link rural areas to major markets. There is also a huge energy

challenge on the continent. 600 million people or almost half of the continent lack access to

electricity ( World Bank, 2023).

Green energy investments especially in the abundant gas reserve and off-grid solutions are

being leveraged to address the power deficit. This can reduce poverty by unlocking opportunities

for manufacturing, job creation, and value addition. Africa is set to rival China if and when the

infrastructure challenges are addressed. Until then, it is advisable for the entry strategist to

develop short-, medium- and long-term plans for bridging the hard and soft infrastructure gaps.

Human Capital

The education, skills, and health of Africans are below the global average ( World Bank, 2020) .

Therefore sourcing highly skilled employees and managerial staff may be a challenge. New

entrants should plan ahead for intensive training of the personnel to upgrade their skills.

Partnership with local NGOs and Universities to nurture their talent pipeline has been proven to

be successful with a number of organizations on the continent. Alternatively, companies can

source their employees from the high number of Africans in the diaspora. For example, roughly

5 million Nigerians are in the diaspora ( Eurasia, 2023). They constitute the most educated

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immigrants in the United States. Remittances from the diaspora to Nigeria alone are in excess of

40 billion dollars ( Eurasia, 2023).

In general, the trajectory is on the rise in access to basic healthcare, primary education, and

technical skills. This is bolstered by the number of highly skilled diasporans of African origin

trying to make a difference back home.

On the upside, Africa has one of the lowest labor costs in the world. This also means the

market has a low purchasing power and is highly price sensitive. This has strategic implications

on the choice of low-cost product strategy or highly differentiated products for new market

entrants.

Regulatory

The landscape of Africa is dotted with below-par regulatory systems and weak institutional

capital. The judiciary is mostly independent of the political actors in most Sub-Saharan African

countries. They are handicapped in fully enforcing intellectual property rights and regulatory

standards. Enforcing contracts, registering new property, getting regulatory permits, and

protecting investment could therefore be a challenge in a number of territories in Africa. The

road to Justice in this part of the world is long, rough, and tough.

Alternative approaches to dispute resolution outside of the courts and the use of private

networks should be part of the business plan. New entrants must factor this in in their business

negotiation and put it in an exit strategy right from the beginning, To overcome some of these

regulatory, judicial, and market challenges – partnership with multilateral institutions,

international NGOs, and developmental institutions is advisable where possible.

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Choice of Location

Africa has a high operational cost due to the absence of infrastructure. The terrain also

varies from the rainforest, savannah to the desert. South Africa is strategic in terms of good

infrastructure. In the case of extractive industries, the choice of location has to be close to the

source of raw materials but the high level of corruption in these economies must also be put into

consideration. A number of countries in Africa are enacting local content laws and policies

which make it mandatory for investors to work with local partners. The choice of partner must be

done after the necessary due diligence.

Other factors like trade promotion, simplicity of the custom process, and security of

investment favor countries like Ghana, and Mauritius and isolate nations like DRC, Angola,

Niger, Mali etc. Apart from free trade zones already located in a number of countries in Africa,

the ACFTA and its ratification by almost all the African Union countries ( except Eritrea) will

remove tariffs and promote intra-African trade.

Cultural Considerations for African Markets

Africa is the most diverse continent - it has over 3,000 ethnic groups and 2000 languages

( People of Africa, 2023). Like the middle east, the importance of personal relationships and

local partnerships cannot be overemphasized. Strong local relationships are important for the

successful integration of a new business and growth on the continent. Power distance is also very

high in this region. This must be taken into consideration in recruitment and business meetings.

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Conclusion

Africa remains weak in terms of intraregional and international trade. Things are gradually

changing with the enactment of the ACFTA ( Africa continental free trade area). The real

changes are driven by its young labor force, rapid urbanization, increasing technology adoption,

and an expanding middle class. Its dynamics will still need to change from an agricultural

orientation or a point of resource extraction to value addition through industrialization. Africa is

the last market that needs to be opened up and filled with enormous potential. However,

patience, passion, and alternative course of action are critical for business success on the black

continent.

PS – Kindly note that Assignment 4 was not yet graded.

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References

Africa Development Bank: Africa Economic Outlook 2023. Retrieved online with the link :

https://www.afdb.org/en/documents/african-economic-outlook-2023

Eurasia Review ( 2023) . Nigeria: The Political And Economic Superpower Of The Future

Analysis. Retrieved on 10th August 2023 with the link:

https://www.eurasiareview.com/09032023-nigeria-the-political-and-economic-superpower-of-

the-future-analysis/#:~:text=Nigeria%20is%20a%20country%20with,and%20manufacturing

%20industries%20and%20agriculture.

GIZ ( Deutsche Gesellschaft fur internationales zusamenarbeit GmbH),2023. Promoting regional

trade, industrialisation and peace and security in Southern Africa. Retrieved online on 13 th

August with the link : https://www.giz.de/en/worldwide/121295.html

International Monetary Fund: Regional Economic Outlook ( May, 2023). Retrieved from

https://www.imf.org/en/Publications/REO#:~:text=April%202023&text=Description%3A

%20Growth%20in%20sub%2DSaharan,significant%20variation%20across%20the%20region.

Issouf Soumaré ( 2021). Investing in Eastern Africa: Opportunities and challenges. Retrieved

online on 19th August under the link -

https://www.uneca.org/sites/default/files/SROs/Presentation%20Study%20on%20UNECA

%20ICSOE%202021%20Investing%20in%20Eastern%20Africa.pdf

Kenyatta, U. (2013). Ready for economic take off : President Uhuru

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Kenyatta's speech. Retrieved online on 10th August from : https://www.youtube.com/watch?

v=RrpglJcNOLU

People of Africa. (2023). Retrieved online on 10th August from africanholocaust.net:

http://www.africanholocaust.net/peopleofafrica.htm

World Bank ( 2023) – The World Bank In Africa. Retrieved online on 8th August under the link:

https://www.worldbank.org/en/region/afr/overview

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