Understanding The Investment Players In Africa

By M. Isi Eromosele

While the US and Europe continue to account for almost 65 percent of foreign direct investment (FDI) in Africa, Asia’s contribution has expanded considerably since 2008.

The changing profile of FDI inflows into Africa is an indication of how major emerging nations, such as China and India have been able to take advantage of their trade partnership with Africa to increase their investments on the continent. Africa’s exports to Asia now equal those to the US or European Union. 

Africa’s natural resources continue to be a huge draw, but businesses from China, India, Brazil and Turkey, among others, are now diversifying into sectors such as telecom, food processing, pharmaceuticals, and tourism.

One of the largest M&A deals worldwide in 2010 was the $9 billion purchase of the telecom operations of Kuwait’s Zain in 15 African countries by the Indian mobile operator Bharti Airtel.

Divergent Approaches

Indian and Chinese companies may have common interests in Africa but their approaches differ greatly.

Most Chinese businesses that have poured investments into Africa are state owned or state controlled. They would typically enter the markets by building their own facilities, remain highly vertically integrated, and mostly sell to government entities. Now, with competition increasing, Chinese companies are now showing keen interest in building partnerships with the local private sector.

Indian companies in Africa are typically privately owned. They tend to enter the market by acquiring existing businesses, and are more integrated into the local society, conducting most of their business with private African entities.

Competitors should pay attention to the unique advantages these investors enjoy. China’s official Africa policy encourages state-owned companies to invest there and Indian private companies are applying lessons learned in their own complex and diverse home market to manage the uncertainties and difficulties that are endemic to Africa.

Recommended Approaches

Carefully select the location for point of entry or expansion. Many countries are competing to become the trade “gateway to Africa,” often by offering significant tax benefits for holding company structures. These holding companies have signed tax treaties with a number of African states to avoid double taxation, which investors can legitimately take advantage of.

Withholding tax legislation varies across countries. For example, Uganda has very different tax agreements with the UK and the Netherlands, while Nigeria’s tax rate for all parties to such treaties is the same.

A word of caution: the reasons for selecting a location should be substantive and not simply about tax benefits. For sustained success, select regional hubs that have infrastructure and skills to support your area of business.

General Electric, for example, sees Kenya as the platform to grow its business in East Africa. Other popular regional hubs for multinationals include Morocco for North Africa, South Africa for Southern Africa, and Nigeria for West Africa.

Comply with local laws and their interpretation. Political risk continues to be a reality, as is clear from the ongoing turmoil in North Africa. Companies can, however, manage such uncertainties by being fully compliant with the laws in every scenario.

This requires understanding the letter of the laws as well as how they are enforced, and thoroughly documenting the process, should questions arise later. A less careful approach could have damaging consequences, such as the inability to repatriate earnings, as many African states have exchange controls in place.

Demonstrate long-term commitment. Wal-Mart is accelerating its expansion across Africa, planning to increase its recently acquired Massmart store numbers by more than 8.6% to 340 outlets in its 2012 financial year.

The company is working closely with its African stakeholders in ensuring the success of this venture. It is keeping all jobs intact for at least two years and honoring existing contracts with labor unions. It has also promised to establish programs to develop local suppliers and boost farmer income.

Clearly, companies that are differentiating between Africa’s attractive growth story and the hard work of true development are reaping rich rewards.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

Copyright Control © 2012 Oseme Group