November 21, 2017

Trading up: creating a new narrative for African expansion

This year, even some of the more risk averse multinational corporations have started to include African countries in their emerging market portfolios – signalling their intention to cross borders and do business. However, many companies are not making the most of the African opportunity because of various misconceptions about what it takes to succeed in the region. Professor of Project Management & Project Procurement Systems at Unisa’s School of Business Leadership (SBL), Professor Pantaleo Rwelamila maintains that there are vast opportunities on the continent waiting to be realised. As such, executives need to challenge and demystify any misperceptions about doing business in Africa in order to access these opportunities.

The mention of Africa conjures images of impressive diversity, but also images of scarcity and inequality. Yet, despite its current status as home to the world’s most underdeveloped countries, the past few years have seen remarkable changes on the continent.

The last decade has seen an increase in growth and direct foreign investment into Africa based on the continent’s potential. From a market perspective, Africa is home to the second largest population in the world and is also rich in natural resources. “There are many factors behind Africa’s growth spurt,” explains Rwelamila. “Chief amongst these includes robust commodity prices, improved economic management, substantial debt relief and increased private capital flows.”

What makes this economic performance all the more remarkable is that half of the decade has been marked by a deeply troubled global economy. The previous decade was very positive for Africa, removing some of the downsides. While the global recession has caused some damage, it may however prove beneficial for Africa, in the sense that investors are more favourably inclined towards emerging markets given the weak outlook in global markets. Given the continent’s growing young, urbanising population, Africa presents very attractive infrastructure, agribusiness and IT investments, among others.

Unlike earlier short-lived booms, there are additional engines of growth that were largely absent before which are now underpinning output which need to be noted in the current context. The first driving force is the lack of access to electricity and modern energy sources which profoundly limits economic development, constrains people’s life chances and traps millions in extreme poverty.

According to Rwelamila, overcoming this barrier will be one of the biggest challenges for all African countries over the coming decades; however, it will also be one of the biggest opportunities to finally alleviate extreme poverty on the continent.

The second driving force is the increasing pace of urbanisation and “consumerisation” in Africa. “As Africans flock to cities and their disposable incomes rise, demand for modern goods and services has accelerated global businesses.”

While there are and will always be short-term impediments that are present in the African business environment, he maintains that these can be overcome by attitude, policy and institutional reforms. As a point of departure, the dynamics of entry into Africa should be taken into greater consideration.

“Companies keen to invest in Africa need to decide on their method of entry. This includes going into the market as an ‘encapsulator’: choosing to withdraw into a bubble, and having little or no contact with the local people and foreign work force.” Encapsulators have little regard for the market dynamics. They are driven solely by their own strategy and end goal.

“The second option would be to enter the market as an ‘absconder’. Absconders usually elect to avoid understanding the dynamics of the market, rather becoming ‘native’ and totally involved in the local society, sometimes at the cost of losing their own identity.”

“The final method which has proven to be the most successful for any market entry is to go in as a ‘cosmopolitan’. Cosmopolitans remain flexible; ‘keeping a foot in both camps’ and adjusting to both the expatriate lifestyle and the local society.”

Companies need to choose which approach will best suit them – given their strategic objectives, as well as the dynamics of the society and market they will be immersing themselves into.

With the story of Africa’s ongoing growth and development taking shape, the emphasis of current conversations is shifting from “why” Africa, to “where” and “how.” As long-term growth and development opportunities on the continent continue attracting global investment and multinational companies,  business needs to find a non-intrusive, complementary point of entry – ensuring that cross-border expansion is beneficial for both parties and that greater economic and societal prosperity is a mutually shared and attainable goal.

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