Investors contemplating Africa could easily give up if they were to reminisce about the past history of the continent. The history of Africa has been plague by political instability, coups, economic underdevelopment and high incidences of poverty. However, emerging trends suggest a phenomenon that investors might not want to ignore. Asia’s economic rise is a remarkable and well-known story. China today – for example – is practically unrecognisable from two decades ago. If Asia is today’s economic headliner, then tomorrow’s growth story could well be Africa.

With a population over one billion – second only to Asia – and increased political stability, as well as many of its countries experiencing an average growth rate of over 4% in the last decade, Africa is a region that no major international company can afford to ignore. The time to understand, enter and invest in Africa is now.  

The promise of Africa

There are several inexorable forces that are setting the foundation for greater economic stability and prospects.

First is the increasing political stability in the continent. More than ever before, African countries are now ruled by democratically elected governments, with many experiencing a smooth transition from one government to the other. Already the moderate political stability attained so far has begun to yield dividends, in that billions of dollars of investment are beginning to find their way back into African infrastructure and telecommunications. This can only make the continent a very desirable investment destination in the years ahead.

Second, Africa is primed to experience a powerful demographic dividend. According to a UN report, the median age for Africa in 2012 is 19.7. This is in contrast to the global median figure of 30.7. With wage inflation affecting many parts of Asia, Africa’s young population – subject to good education and training – represents an attractive source of affordable labor. Just as importantly, Africa’s young and increasing savvy population can be an important customer base. There are also signs that the middle class population is growing in many countries that will further strengthen the already growing market base.

Third, there is increasingly greater regional integration in Africa. African countries are making significant progress toward regional economic and financial integration. While the goal of an African wide monetary union by 2026 remains highly ambitious, efforts at economic integration at the regional level are making great strides in facilitating free movements of people and goods and services. Remarkable progress has been made in regional blocs, such as the Economic Communities of West African States (ECOWAS), the Southern African Development Community (SADC), the East African Community (EAC) and the Common Market for Eastern and Southern Africa (COMESA). Regional bodies have encouraged the sharing of best practices between governments while fostering healthy competition for foreign investments.

The continent’s abundant natural resources are engines that will propel the continent to greater heights in the near future. While the exploration and management of the wealth arising from rich natural resources has in the past made the continent a veritable breeding ground for corruption, violence and infighting, the situation is gradually changing.

In particular, the recent discovery of vast oil reserves in many African countries has raised the number of oil producing countries to about 20. With breakthroughs in technology new discoveries are expected to be made. Investment in oil exploration, production and refining will prove highly profitable on the continent.

Lastly, the growing influence of China offers an exciting opportunity for the African continent. The two-way trade between China and Africa is now estimated to be more than US$150 billion dollars, and includes diverse sectors like infrastructure, banking and energy.

According to an IMF report in 2010, China is now Africa’s number one trading partner – not just as an importer of African resources – but also an exporter of Chinese goods and services. From building airports to developing wind farms, investments in infrastructure are a long-term game. The growing influence of China has also become a force for greater competition among multinational corporations on the continent.

Because of increased interest in Africa, investors from all corners of the world are encouraging political and economic stability, as well as rule of law. Moreover, the region’s governments are responding positively.  

Remaining challenges

Significant challenges persist in Africa. First, education systems in Africa are largely inadequate. There is a strong need for more technical and skill-based education to ensure Africa’s young and burgeoning population to be an employable one.

Second, the existing infrastructure in Africa is not strong enough. There is a big need for better transport and power infrastructure if Africa is to achieve its economic potential. In 2009, the UN estimated that only one in three rural Africans have access to all-season roads. Moreover, only 30% of the entire African road network is paved, which contributes to the high cost of transportation. In addition, numerous roadblocks and checkpoints on some highways delay the delivery of goods, raise transportation costs and limit the free movement of commodities, persons, and investments. 

Third, while there is increased political stability in Africa, corruption and government inefficiencies are still major problems. Legal systems and the institution of property rights are still largely underdeveloped, which sometimes makes the enforcement of contracts difficult.  

Tips for success

Companies that understand the huge potential of Africa and that are able to navigate its challenges will stand to benefit most. Like many emerging markets – doing business in Africa is a high-risk high-return proposition. Asian companies who can manage the dynamic environments and cater to the “bottom of the pyramid” are well positioned to succeed.

Like Asia, Africa is not a homogeneous entity. Vast diversity exists across and within nations.To succeed in Africa, it helps to do a few things. First, consider setting up in regional hubs, for example Kenya in East Africa, South Africa for Southern Africa, and Nigeria for West Africa. These hubs can serve as a base for foreign companies to access regional markets.

Second, it is worth investing in institutions that provide technical education and skills. This is a viable investment, given the current state of the continent-wide educational system. Technical skills and qualified craftsmen at the mid stage of their career are generally in short supply.

In addition, local companies must leverage African talent better, by providing relevant training and skill development programmes for the local people. Companies that invest in community development such as the building of schools for communities will not only help develop a pipeline of skilled labor, they will also engender loyalty and good will from communities throughout Africa.

Third, as much as possible, target African consumers directly. Identify industries that cater directly to the need of individuals (such as consumer goods, education and training), as there is latent demand for consumption.

In conclusion, what has been often described as “the dark continent” has a bright future indeed. It’s time to turn the spotlight on Africa.  

This article was first published in HQ Asia (Print) Issue 04 (2012).