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  • WHAT ARE CHINESE AND INDIAN FIRMS DOING IN AFRICA

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    What are Chinese and Indian firms doing in Africa?

     

     
     
    International Trade Forum - Issue 2/2010

    The sustained rapid growth of many African economies over the past decade and a half, bolstered by resilience during the recent global economic crisis, has been appreciated more by the countries of the South than those of the North, the traditional source of much foreign investment in Africa.

    Multinational corporations in China and India, in particular, have moved to capitalize on the opportunities unlocked by this development and, although they bring different approaches to market entry and operations, these investors - as well as Africans - are likely to substantially benefit in the longer term as they refine their strategies to manage risks and tap into the rewards. Investment from the North will continue to be an important contributor, but unless their firms recognize the extent of the opportunities that Africa presents, their strategy will be marked by a more cautious and less profitable approach.

    Continent of economic misperceptions

    Sub-Saharan Africa has become the 'continent of economic misperceptions'. Over the past decade and a half, much of the region's economic landscape has fundamentally changed. For the first time in Africa's modern economic history, a large portion of the continent has registered not only high, but also uninterrupted growth. Indeed, even among non-oil producing countries - where 40% of Africans live - gross domestic product (GDP) grew in real terms at an annual average rate of 5.6% from 1998 to 2008. Throughout the 2009 global economic crisis, many African economies proved to be among the most resilient in the world, taking into account initial conditions. It is no longer an overstatement to say that there are bona fide African economic success stories. Yet, surprisingly, among many of the most sophisticated international businesses and investors from the North, there is scant recognition of this unprecedented and unanticipated turn of events.

    But for businesses in the South, this is hardly news. Southern multinational corporations, most notably those based in China and India, have been far quicker to appreciate - indeed to capitalize on - these changes than have their counterparts from the North. In fact, not only have Chinese and Indian firms begun to substantially increase their investments in Africa over the past decade, but Brazilian, Middle Eastern and Russian businesses have also recently begun to do so. These investments - some of which have the scale and sophistication of a United States Fortune 500 firm's investment in Europe - are all occurring despite the fact that there is a deeply held perception that Africa is a highly risky, if not a dangerous, place to do business.

    Sub-Saharan Africa is a difficult place to do business. But so are many countries in the former Soviet Union, Latin America and Asia. On the contrary, there are several countries in sub-Saharan Africa - and not just the middle-income countries - where the risks of doing business are actually much lower than in comparable parts of the world. To wit, it is a misnomer to even refer to 'Africa' as a unit. Sub-Saharan Africa is not a single, monolithic country, but a heterogeneous continent comprised of 47 very different countries.1


    Risks worth taking

    Even if the investment risks in Africa are high, so too are the rewards. Indeed, unlike virtually any other region of the world, sub-Saharan Africa is arguably the one location where true investment 'first mover advantages' can still be found - with commensurately high profits to be earned. And they can be found across a number of different sectors and in varying locales.

    Some of the largest European and United States multinationals - Africa's traditional investors - are beginning to step up their existing investments or start up new ones on the continent. And there is a burgeoning cluster of small European and United States private equity funds actively investing in Africa. But there's little question that compared to investors from the South, the vast majority of Northern investors are taking a 'wait and see' approach.

    Still, more than 90% of the cumulative stock of foreign direct investment (FDI) in Africa originates from the North, especially the European Union and the United States of America. This fact is surprising to virtually all observers of Africa, who believe that Chinese (and Indian) firms now 'rule' Africa. The confusion arises because it is the growth rate of inflows of FDI in recent years that has been dominated by Chinese and Indian multinationals. Press accounts rarely, if ever, make these distinctions, yet it is the latter dimension which propels the headlines.

    Conventional wisdom also has it that the Southern investors in Africa - China and India, the most prominent among them - are exclusively involved in the natural resources sectors, especially oil and minerals. In many cases investing in natural resources has been a normal point of entry, in light of both Africa's resource availability and China's and India's growing needs, and indeed for certain Chinese and Indian businesses in Africa today, natural resources remain their sole line of business. But the on-the-ground reality shows a more nuanced picture. New firm-level data on the business operations of Chinese and Indian multinational companies in Africa indicate their investments are starting to diversify into other sectors beyond oil and minerals, such as telecommunications, financial services, food processing, infrastructure and tourism, among others. Although natural resource-based investments may still dominate Southern multinationals' African FDI portfolios in value terms, the number of FDI projects outside that sector is beginning to increase rapidly and in time so will the value of those investments.


    Different business strategies

    Owing to fundamental differences between China's and India's cultures, political systems and approaches to economic development, there are significant differences in the business strategies of Chinese and Indian firms operating in Africa. The vast majority of Chinese businesses in Africa are large or medium state-owned (or state-controlled) enterprises. The typical Indian company in Africa is of much more varying size and most often privately owned (sometimes family held) or occasionally of mixed private-public ownership.

    As a result, in their African operations Chinese and Indian firms perceive risks differently, and this colours their strategies on the continent in several ways. The average Chinese firm in Africa tends to enter new markets by building de novo facilities, is highly vertically integrated (buying large portions of inputs or selling large portions of outputs internally through corporate affiliates), sources a significant fraction of inputs from China (rather than in local markets), rarely encourages the integration of its management and workers into the African socio-economic fabric, conducts the vast majority of its sales in Africa with government entities and, as it knows that it can avail itself of its home government's deep pockets, is influenced by its ability to out-compete other bidders for African government procurement contracts.

    The average Indian firm in Africa, on the other hand, enters new markets most often through acquiring established businesses, is much less vertically integrated (sometimes preferring to procure inputs directly on the African market), sources much fewer inputs from Indian suppliers in the home market (and increasingly purchases them in international third markets), facilitates (indeed sometimes encourages) the integration of management and workers into the African socio-economic network (either through informal ethnic networks or more formally by participating in local political activities) and engages in far greater local sales with private entities than with government agencies.

    In the case of both China and India, however, their investments in Africa reflect a rational response by businesses to respond to evolving market opportunities in Africa. This epitomizes, in many respects, the significant rise more generally of South-South commerce that has been altering the face of global trade and investment over the past few decades.



    1Different institutions employ varying definitions of 'sub-Saharan Africa', which leads to variations in the count of countries. The World Bank/International Monetary Fund definition of sub-Saharan Africa, which encompasses 47 countries, is used here.

    AFRICA'S SILK ROAD

    China and India's New Economic Frontier

    The recent increase in South-South trade and investment by China and India in Africa presents a significant opportunity for Africa's economic growth and development, provided certain policy reforms on both continents are implemented.

    Africa's Silk Road draws on original firm-level data based on a survey of 450 firms, including Chinese and Indian companies, operating in four African countries (South Africa, United Republic of Tanzania, Ghana and Senegal) and in-depth business case studies in the field of an additional 16 Chinese and Indian firms in Africa.

    Harry G. Broadman, World Bank, 2007.

     

    For over 28 years, economist, global consultant and author Mr Broadman has worked on emerging markets in a variety of positions, including Senior World Bank official; Assistant United States Trade Representative; Chief of Staff of the President's Council of Economic Advisers; Chief Economist of the US Senate Committee on Governmental Affairs; on the faculties of Harvard and Johns Hopkins Universities; Assistant Director at Resources for the Future, Inc.; consultant at the RAND Corporation and Research Fellow at the Brookings Institution.