At ISI, we talk to a lot of American businesses that see the potential in doing business in sub-Saharan Africa but are daunted by the prospect of following through. The reasons are multitude: language barriers, corruption concerns, crime, questions about rule of law, poor infrastructure, and so on. These concerns are valid, but it is worth considering that US firms have been doing business in another “developing” region for decades, one in our own backyard. Latin America—defined for our purposes as Mexico, Central America, and South America, but excluding the Caribbean—has long been a destination for US investment in a host of sectors, a destination wherein firms have made a great deal of money. While having very different characteristics than sub-Saharan Africa, Latin America shows that while perhaps difficult at times, US firms can profitably invest in the non-industrialized world.
Firms with Latin American experience will see a lot of similarities with Africa. Both are geographically enormous—and often underserved in regard to infrastructure. Although the two regions have the world’s highest rates of income inequality, both have rapidly growing populations of urban consumers with increasing purchasing power. Commodity exports, particularly of hydrocarbons and minerals, underpin economic growth, although economies in both regions are making strides toward diversification.
That said, there are key differences that should be kept in mind. Some are challenges. Sub-Saharan Africa is, by nearly every measure, behind Latin America in regard to socio-economic development. It is much poorer; by most measures, Latin America’s combined GDP is between two and three times greater than that of sub-Saharan Africa, and it’s as much as seven times per capita. Only a handful of African countries have a higher per capita GDP than Honduras, the poorest country in Latin America. Africa lags by every social and economic measure: infrastructure, electricity access, power generation, education, and health care are all areas where Latin American states are far ahead.
Latin America also is a far easier place to do business as a region. With the exception of Brazil, the de facto language of commerce is Spanish, with English widely spoken. Legal systems across the region have common roots. And perhaps most importantly, regional integration under Mercosur has facilitated cross-border trade and allowed firms to operate more easily in a regional context. Africa lags here. Part of this is due to its fraught colonial history, which left behind a linguistic, legal, and cultural mish-mash. Part is due to states’ inability to rationalize a jumble of regional trade blocs that hinder cross-border trade and investment, although the continent is making positive progress in this direction.
All that said, while Africa is a tougher place to do business than Latin America, it also offers significantly more opportunity for investors. The decline in Chinese commodity demand has struck developing economies around the world in the past year, but sub-Saharan Africa’s growth prospects look far stronger than Latin America’s. Growth in 2015 and 2016 will average about 4 percent for Africa, compared to about 1 percent in Latin America. This is partly the result of Africa rising from a far lower base, although protectionist economic policies in several Latin American states also look partly to blame. Impressively, some of the strongest African growth is coming in states largely lacking in natural resources; heavy investment in infrastructure will push Ethiopia into double-digit growth this year and next.
In addition, as a more mature market, Latin America offers far fewer possibilities for outside firms. From agribusiness to extractives to retail, Latin America has grown several companies into international giants—some of which, particularly from Brazil, are looking to the African market. Sub-Saharan Africa, on the other hand, has developed almost no internationally competitive firms in any sector, with the exception of a handful of South African companies. What this means is that while there is competition in Africa, there are many opportunities for foreign firms to win contracts and otherwise do business.
Ultimately, the decision to invest in Africa is a question of risks versus rewards; the former certainly exist, but the latter are potentially enormous. But the risks can be managed with the right advice. Firms with experience in Latin America certainly have shown they can navigate a region with political, social, and economic challenges—the prospect of Africa should not be daunting for them.
ISI Consultants assists U.S. companies to enter or further expand their business in Middle East and African markets. From small projects to longer-term engagements, we put our knowledge and experience to work for you, saving you time and money and minimizing your risk. And our results-oriented approach means we don’t just advise you on what to do to be successful – we work with you to get it done.
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