Three reasons why your company should have an Africa Strategy

2020-05-27

Category: All International growth Public funding

Keywords: Foreign markets, Growth Auditor, International Growth, Public Funding, Strategy

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Three reasons why your company should have an Africa Strategy

When Nordic companies are planning their internationalisation, they often focus on the geographically nearby markets. Based on Excedea’s experience, this is generally a sound approach, as internationalisation can be a highly time and resource consuming exercise. Review our video on one aspect that many companies get wrong when going international.

But bearing in mind the challenges posed by long travel times and cultural differences, it is sometimes essential to look for market opportunities off the beaten track. There are three main reasons why your company should start investigating business opportunities in Africa and formulate an Africa strategy. Firstly, many African markets are growing at a quick pace now, some indeed being the fastest growing in the world. Secondly, business opportunities are set to multiply in the long run. Africa is now undergoing a population boom, the effects of which will be witnessed in the coming decades. Thirdly, you can hedge your risks of expansion to Africa with soft money, because public funding bodies are shifting their focus toward Africa.

But before that, let us begin by providing some background information and considering the notion of ‘Africa’. While being the world’s second-largest continent in both land area and population, it is a laggard in terms of economic development Africa accounts for about 16% of the world’s population, but only for about 3% of the global GDP. Therefore, African markets are often simply overlooked. They are viewed as distant and obscure destinations with lots of red tape and limited market potential. Also, a common fallacy is to think of Africa as a single, homogeneous entity when in fact the continent consists of 54 distinct countries with versatile histories, as well as economic and political structures.

To shed some light on the African markets, Excedea has conducted a concise macro level analysis. In the figure below, we lay out the 54 African countries considering two determinants: market size (nominal GDP on a logarithmic scale) and economic development (the Human Development Index score).

Based on this quick exercise, we can divide African countries into four categories by their market size and level of development:

1) Large and developing, example: Nigeria
2) Large and developed, example: South Africa
3) Small and developing, example: Sierra Leone
4) Small and developed, example: Botswana

To keep things simple, we use a crude dichotomy between developed and developing countries here. Current research proposes four separate income levels for a more nuanced picture of economic development (see e.g. Bill Gates’ blog post on Hans Rösling’s Factfulness).

The figure shows that the majority of African countries are still developing markets. However, there is a large spread between the least developed market, Niger, and Mauritius, which ranks highest of all African countries. Similarly, the market sizes have significant variety, with Nigeria having overtaken South Africa as the largest economy on the continent.

With this basic analytical framework and a clearer picture of the diversity of Africa, we now proceed to the main question:

Why should your company have an Africa Strategy?

1) African markets are growing rapidly

African countries are catching up quickly, and many markets are outperforming the developed world in terms of economic growth. This is important to note especially in the current economic crisis. In 2020, Africa’s annual economic growth is projected to be 3,8%, with eleven African countries set to grow by more than 6%.

It may come as a surprise that some of the world’s fastest growing economies have come from Africa for some time already. Between 2013 and 2018, ten African countries grew at an average annual real GDP rate higher than 5,5%. These countries are Ethiopia, Ivory Coast, Djibouti, Tanzania, Rwanda, Guinea, Democratic Republic of Congo, Senegal, Kenya and Ghana.

When we highlight these ten rapidly growing markets in our diagram, six of them fall under the “large and developing” category, while four are smaller markets. At the same time, none of the more developed markets have grown at the same pace.

Based on these figures, the larger emerging markets such as Ethiopia, Ghana and Kenya are worth paying attention to in the future. For instance, Ethiopia’s real GDP has steadily grown in the double digits since the early 2000s. From the smaller markets, Rwanda stands out with its impressive growth record: average growth rate of 7,5% over the last two decades.

The successes of Ethiopia and Rwanda can, to a great extent, be attributed to sound economic policies pursued by their governments. This is in stark contrast with South Africa, where growth has slowed down in recent years. While South Africa has traditionally been an important regional economic hub, its role as a gateway to other African markets is arguably diminishing. Economic policies and the business environment can differ a lot even in neighbouring countries, and thus it is vital to thoroughly plan your expansion to Africa in advance.

2) Business opportunities will multiply in the long run

Africa will be the main source of global population growth in the coming years. The continent’s population currently stands at approximately 1,3 billion, and this number is projected to roughly double by the year 2050. Thus, a key question for African governments and policymakers across the globe will be how to fulfill the promises of UN Sustainable Development Goals to the rapidly increasing population.

At the same time, more and more Africans are migrating to cities. The rate of urbanisation is increasing, and some estimates claim that 80% of the population growth will take place in urban areas. Together, these dynamics will create significant challenges. Governments must take action to provide the necessary supply of energy, infrastructure, housing and services, such as health care and waste management. They will also need to guarantee food and water security in an environment adversely impacted by climate change. These challenges will be translated into formidable business opportunities for companies that have innovative solutions and have established presence on the continent.

Africa Excfiles
Africa’s population growth will be accompanied by a rapid rate of urbanisation.

In the more developed African markets, growing middle classes are increasingly demanding higher value-added consumer goods. This opens opportunities for transformative digital solutions. The continent is already home to more than 618 technology hubs, and there is a growing number of pockets of technological excellence in various universities. Companies ought to consider these innovation ecosystems as one potential entry point for African markets.

In search of business opportunities, Nordic companies can utilise the expertise of their countries’ embassies, trade offices and export promotion authorities in Africa. One good source of up-to-date market intelligence is Business Finland’s Market Opportunities database.

 3) Public funding bodies are shifting their focus toward Africa

We have examined the global forces driving public funding in more detail in this article. These trends are also conspicuous in the context of Africa, where several countries have traditionally been large recipients of foreign aid. The focus of policies is now shifting from aid to trade, equal business partnerships and encouraging local innovations.

The EU and the African Union are currently negotiating the details of the EU-Africa Strategy, which will shape the bilateral partnerships for the years to come. Key areas of the talks will cover green transition, digital transformation and sustainable growth and jobs, among others. Public funding instruments always tend to change according to the prevailing policy framework. Thus, the various aspects of the EU-Africa partnership will undoubtedly be reflected in the upcoming EU funding programmes.

Funding bodies are already prioritising projects that create long-lasting business partnerships and promote the transfer of technology and skills between European and African stakeholders. There are several ways to utilise public funding for planning your expansion to African markets, for instance when identifying market potential or listing suitable partners. And the availability of public financing for projects in Africa is set to grow, as policymakers are increasingly becoming aware of the societal challenges and business opportunities that exist in Africa.

Some examples of funding instruments include:

    • For Finnish companies, Finnpartnership offers Business Partnership Support with financing up to 85% of project costs, depending on the project’s target country
    • For Swedish SMEs that are looking for partners in Africa, Swedpartnership offers financial assistance up to 200 KEUR.
    • For all Nordic SME and midcap companies that have solutions promoting sustainability and green growth, NOPEF offers grants for feasibility studies.
    • EEP Africa is a programme hosted by the Nordic Development Fund that provides early-stage grant and catalytic financing to innovative clean energy solutions. The projects must take place in a target country in Southern or Eastern Africa.

 

Excedea has delivered hundreds of winning applications to funding programmes such as the ones mentioned above. In addition, we have developed the Growth Auditor methodology for devising growth strategies. The Growth Auditor process can be readily applied to any critical expansion decision, regardless of your business area. Therefore, it is an ideal tool for creating your company’s Africa strategy.

    • Are you considering African countries as potential target markets?
    • Have you systematically studied the market potential of your solution in the context of Africa?
    • Do you have a solution that contributes to achieving the Sustainable Development Goals?

 

If you are interested in discussing the topic further, please contact Excedea’s Senior Associate Leevi Törmäkangas.

 

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