Recently Facebook founder Mark Zuckerberg made a surprise visit to both Nigeria and Kenya.  In Nigeria Zuckerberg visited the Andela offices, a company which received $24 million in funding from the Chan Zuckerberg Initiative earlier this year, and in Kenya Zuckerberg visited the M-Pesa offices hoping to learn more from the mobile money giant and also to discuss a potential partnership.  Not only is Facebook interested in the happenings of Africa, but they are looking to bring free internet access to the entire continent.  Facebook and Zuckerberg are not the only ones showing a growing interest as foreign direct investment, also known as FDI, is growing and venture capital investments coming from traditional Silicon Valley venture capitalists and telecommunication companies is expanding.

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Mark Zuckerberg visiting Andela office in Lagos, Nigeria

The difference between Aid and Investment

It is important to note the difference between what is taking place now, and what has taken place in the past.  In the past Africa received foreign aid from non-profit organizations and governments.  The intention of this aid was good, but unfortunately all too often the aid ended up in the coffers of dictators and political leaders, and rarely ended up helping the people it was intended for.  It also created a dependency for many African nations.  The old saying of “give a man a fish and you feed him for a day; teach a man to fish and he eats for a lifetime” applied.  This is why FDI is so important, as the money coming in now is reaching those who need it the most, and is teaching these able entrepreneurs how to fish, rather than catching the fish for them.

Developing economies are now the world’s largest investor region.  FDI flows into developing economies are projected to grow from $681 billion in 2014 to $850 billion by 2017.  Africa has not been left out as $60 billion worth of FDI flowed into the continent in 2015 according to the World Bank.  The world looks at Africa’s potential, with over a billion people, a large youth population, a growing middle class, and for many the world’s last new business frontier, with enthusiastic fervor.

Africa’s largest trade partner and investor

China has emerged as Africa’s largest trading partner.  There is a growing volume of direct Chinese investment on the continent, but there is also a fear that China is depleting Africa of its energy and minerals to meet the needs of its growing domestic consumption.  There is also concern about some of the governments that China has partnered with, governments and regimes with poor human rights records, such as Angola.  However one may feel about China’s agenda in Africa, it shows the continuing interest and potential of FDI for the region.

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Unresolved issues hindering FDI growth across the continent

There are still many issues though that plague the continent and have hindered and will continue to hinder FDI if they are not addressed.  These include:

  • Poor Infrastructure: A lack of infrastructure is often blamed for stymying foreign direct investment into least developed countries, the majority of which are found in Sub-Sahara Africa. Africa needs major upgrades to its infrastructure in order to compete with the rest of the World.  This includes upgrades to their current road system, paved roads for areas where none currently exist, clean water and sanitation, proper sewage disposal, adequate healthcare and education which I covered in previous articles, here and here, and access to consistent electricity.  It has been reported that frequent power outages in Africa cost the African economy between 1-4 % points of gross domestic product, GDP,  yearly and African consumers spend seven times more for their energy needs compared to the rest of the World.  This is a major area of concern that needs to be addressed.
  • Corruption: Corruption for far too long has been an ingrained component to not only living in Africa, but doing business in Africa. Corruption takes place at all levels of African society, from corrupt government officials to police officers stopping motorists looking for bribes.  A Transparency International survey in 2014 estimated that 75 million people in Sub-Sahara Africa paid a bribe at some point, and 58% of survey participants felt that bribery and corruption was growing.  Western companies and investors do not look kindly on corruption, and with greater transparency across the business World, will look for other regions to conduct business and invest.
  • Inadequate Governance: Poor governance for many African nations has led to poor economic growth which in turn helps lead to other problems such as corruption, political instability, and the ineffective rule of laws and institutions. In many African countries public investments are obstructed by a poor political environment and a lack of quality governance.  Investors, especially foreign investors, tend to be scared off and channel their investments elsewhere.  A business environment that lacks quality governance is not conducive to business sustainability and secure returns.
  • Complex Business Environment: Conducting business in Africa can be complex, as the continent is not one homogeneous region, and has 54 countries that each has their own legal and regulatory systems, social and political environments, cultural and business values, as well as different languages and currencies. Only 6 African countries rank in the top 100 in terms of ease of doing business, according to the World Bank Group report in 2015. This is another major obstacle for foreign investors.  As long as Africa maintains its reputation as a complex business environment, investors may determine it is not worth the risk and will look to other regions that are considered safer and easier.

The obstacles I listed above need to be addressed, along with others, for continued growth and sustainability as it concerns investment.  Even with these obstacles, things are continuing to look up for the continent.  Africa is exporting more of its ideas and innovations beyond the continent, as the growth of mobile money is showing.  Africa is already exporting their culture in terms of movies, music, and fashion.  Look for continued growth and investment for this region of the World, albeit with continued challenges and difficulties.

I hope you have enjoyed this series where I have looked at the different issues and topics facing the continent, and please feel free to post your comments and share these posts.

 

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