Doing Business in Africa
Worldwide, more than 700 million people are still living in poverty and the estimation is that around 193 million people are currently unemployed (ILO, 2018). It should be no surprise that the creation of jobs is a top priority, especially for African countries where annually 12 million people enter the labour market, but only 3 million formal jobs are created each year (AfDB, 2018). These numbers are only expected to rise as a result of increasing population growth.
Research of the OECD (2018) has showed that in Africa there is the tendency to favor ‘outward-oriented towards extra continental integration, thus making intra-continental connections remain undeveloped and unimportant’. It is important that countries in Africa start to have a more inward-oriented approach and focus on sustainable economic development within the continent instead of outside the continent.
Currently, Africa bleeds capital as the continent receives 162 billion dollars capital a year but 203 billion dollars’ worth of capital is leaving the continent, mainly through profits of multinationals and illicit financial flows. More companies are turning into Africa for business opportunities. Moreover, in some parts in Africa more investments are being made by firms than what they receive in aid flows (Figure 1) .
Figure 1: Diplomacy, NGO’s, Firms alignment challenge or complementarity? (source, PrC, 2017).
Import substitution, the replacement of foreign import with domestic production, can be beneficial, because local production, even if not efficient, is still cheaper than import. Generally, however, import substitution failed in Africa (according to Chibuike Uche), for example due to illicit financial flows, but the way forward is private sector led import substitution when markets fail. The private sector is the engine of economic growth.
As The Netherlands, the Ministry of Foreign Affairs is focusing more and supports local entrepreneurs in developing economies and assist these companies to grow, while facilitating better conditions for companies to do business, create jobs and deliver products to markets in a responsible manner. In particular Small and Medium Enterprises (SMEs) generate income and create the majority of jobs in developing economies. Nonetheless, multinationals, such as Phillips, Heineken and Friesland Campina, are also seeing opportunities in the continent. An example of a successful African multinational, would be that of Dangote, who made Nigeria self-sufficient in cement production and is expanding to other countries and other sectors. This shows that foreign investors can play a role in Africa’s industrial, but key development will come from inside, from local actors.
Written by Ati van der Honing (MoFA IGG) and Laila Bouallouch (MoFA DDE)
Lecture on Business in Africa by Prof. dr. Uche (African Study Centre)