Thursday, May 21, 2009

Increasing American investments into Africa - US study

American corporations are becoming increasingly interested in investing in Africa, with some regarding it as the last big growth market, but they are often deterred by Africa's negative image, a new study shows.

The study, released on 19 May 2009 in Washington, identified the technology sector as an important US investment opportunity outside of Africa's traditional natural resources and agricultural sectors. It also highlighted education as one of the major improvements US executives believe would make Africa a more attractive investment destination.

However, Africa needs to market itself much more aggressively as well as making internal improvements. While Chinese and, to a lesser extent, European corporations are increasing their African investment, US executives often see other geographical areas as offering better returns or less risk.

The study was conducted by the Africa Business Initiative of the US Chamber of Commerce in Washington DC, and Baird's CMC, an international communication management consultancy which conducted all of the interviews.

The conclusions and recommendations are based on in-depth interviews with executives from 30 US multi-national corporations, of which half are Fortune 100 companies. The objective was to identify the factors affecting US corporations' investment decisions in Africa and what US executives believe would make Africa more attractive to them.

A second part of the study will encompass the response by African leaders to these corporate investment attitudes.

"The study aims to contribute to the economic ties between the USA and Africa," said Fran├žois Baird, Baird's CMC co-chairman.

"We want to tap in to the 'conversation behind closed doors', both in US boardrooms and in African cabinet discussions. We hope that these frank viewpoints by US business leaders and African policy-makers will help increase American investment into Africa."

According to economist Christo Luus, Africa's share of foreign investment has declined since the 1970s, when it attracted 5.4% of global foreign investment, only slightly less than Asia's 6.4% despite Asia's larger population and economic activity. Since the 1980s, foreign investment flows to Africa have averaged only 2.2% of the global total, while Asia's share increased to 17.3% of global foreign investments.

Africa's poor reputation among US businesses, bolstered by a flow of negative news from the continent, is the primary reason that US investment goes to other continents. Africa is often compared unfavourably to the BRIC countries - Brazil, Russia, India and China.

There is a perception that investing in Africa requires too much trouble for too little return, and that other destinations offer similar or better returns with far less risk.

Hence the study's recommendation that Africa promote itself to investors on a regional basis and seek to overcome the continent's image problem by attracting small investments and ensuring a positive experience for the company concerned. Larger investments would follow.

"The most powerful investment incentive seems to be a positive experience for the executive or company. When the experience is good, they go back for more. Of course, the opposite is also true."

The study highlighted the five most common questions US executives ask when considering investment in a foreign country. They are:

  • Is there stability and order as I know it?
  • Is the opportunity large enough to justify the investment?
  • What is the trade-off between risk and reward?
  • Does the country have an efficient business framework?
  • Does the country really want the investment?

"Africa does not yet answer these questions satisfactorily," Baird said.

"Unfortunately there is a strong consensus among the respondents that the image of Africa suggests that the rule of law may not prevail to the degree required to make Africa an attractive investment destination."

The perception of corruption, seen as applying to the whole continent, is a major factor in US considerations, with one executive noting that US business is "terrified" of contravening the US Foreign Corrupt Practices Act.

"The image of lawlessness, corruption, unstable governments, inadequate infrastructure, uneducated or undertrained manpower and an unwelcoming attitude towards business deters US businesses from investing in Africa," the report said.

There is also a view that Africa does not yet offer a large middle class of consumers, nor does it show consistent economic growth that would promise a future market. On the positive side are Africa's enormous natural resources, which do attract investors.

Illustrating the issue of a country actively seeking investment, Baird recounted the comments of an American executive about Nigeria, where the Nigerian president regularly hosts meetings with companies and his cabinet ministers.

"We discuss problems and cabinet ministers must explain immediately what can be done. At the next meeting the president wants to know if it happened to our satisfaction. Things happen. It shows us that Nigeria really wants foreign investors," the US executive said.

The study concluded that the main reasons why Africa has not yet become a top investment priority for corporate America are that US executives do not believe the risks involved are commensurate with the promised return, that other countries and regions offer better investment options and that US executives see Africa as needing too much effort to be attractive at the moment.

Nevertheless, Africa is the second largest and second most populous continent after Asia, with 20% of the world's land area and 14% of global population.

US business see pockets of great potential in Africa, and top executives generally have an understanding of the continent and its different regions. They are seriously examining African investment opportunities.

US companies in some sectors, particularly technology companies, now regard Africa as "the last frontier for growth". It has a market of one billion people, mobile telephone networks have been successful, and other countries, particularly China, are increasing their African investment thrust.

Corporate America would be more interested in the countries that are seriously trying to attract investment if these countries - preferably as regions - acted on the key requirements," the study concluded. These requirements are:

  • An educated and healthy populace
  • A stable political environment
  • Reduced corruption
  • A fair, conducive business environment
  • Improved infrastructure

Commenting that attracting US investment is "a long haul", the study recommended that African countries and regions sell themselves aggressively to corporate America which needs "a strong and specific pull from Africa".

It also noted the suggestion that perhaps one major entity needs to take on the cause of selling Africa to the developed world.