Should Multinationals Invest in Africa?

For most multinational corporations (MNCs), Africa is the forgotten continent. Characterized by the media mostly in terms of political turmoil, malnutrition, and AIDS, Africa seems inconsequential as a potential market or as a low-cost manufacturing source. Yet several MNCs enjoy good, sustained profitability from their African operations. In addition, substantial political and economic changes now underway in many African countries prompt a closer look at the business opportunities in this emerging continent of forty-nine very diverse nations.

Our purpose here is to highlight these changes and to provide practical advice on business strategy, marketing, and organization to companies doing or considering doing business in Africa. We focus on sub-Saharan Africa and therefore exclude the Arab countries of North Africa that are more often identified with the Middle East. We studied a variety of firms, representing leading consumer, industrial, and service companies that are marketing and, in some cases, manufacturing in Africa.

Small but Growing Involvement

The commercial importance of Africa to multinationals is limited but increasing:

  • Exports to Africa from the United States are small but expanding rapidly. In 1991, exports rose 18 percent to $4.8 billion with 60 percent going to Nigeria and South Africa, which account for 28 percent of the continent’s population. This growth rate was two and a half times that of total U.S. exports. Between 1988 and 1991, exports to the region rose 70 percent.1
  • Of the United States’ $11.7 billion imports from Africa, almost all were oil and other commodities. Africa accounts for only 2 percent of U.S. trade, but, put in perspective, it still exceeds that with the former communist countries of Eastern and Central Europe. Europe’s trade with Africa is almost double that of the United States, given the traditional ties with its former colonies.
  • Most North American and European multinationals generate less than 1 percent of their revenues and income from African operations. However, there are important exceptions, such as the Coca-Cola Company, whose African operations account for 5 percent of revenues.
  • In 1992, multinationals invested $2.1 billion in Africa. While this amounted to only 5.8 percent of the total direct foreign investment in developing countries, the growth rate of foreign investment during the 1981–1992 period in Africa exceeded that in all other regions.2
  • Demographically, the African continent represents the fastest expanding marketplace. Its 600 million people are growing at an average annual rate of 3 percent, compared to 0.5

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References

1. G.M. Feldman, “Sub-Saharan Africa: Economic Reforms Are at a Critical Crossroads in 1992,” Business America, 6 April 1992, pp. 37–41.

2. International Monetary Fund data base.

3. World Bank, World Development Report 1992 (Washington, D.C., 1992), p. 269.

4. Ibid. p. 265.

5. B. Weimer, “The Southern African Development Coordination Conference (SADCC): Past and Future,” Africa Insight 21 (1991): 78–88.

6. J. Cantwell, “Foreign Multinationals and Industrial Development in Africa” (Reading, England: University of Reading Dept. of Economics, Discussion Paper No. 131, August 1989).

7. F. Williams, “Developing Countries Look for Better Deal on Trade,” Financial Times, 21 May 1992, p. 6.

8. R.J. Barnet, “But What About Africa?,” Harper’s Magazine, May 1990, pp. 43–51; and

M. Prowse, “Poor Nations Accuse the Rich of Breaking Their Own Rules,” Financial Times, 30 April 1992, p. 6.

9.“Controversy Over African Aid Simmers,” Africa News, 7 October 1991, p. 3.

10. “Democracy in Africa: Lighter Continent,” The Economist, 22 February 1992, pp. 17–20.

11. “USA/Africa: Policy? What Policy?” Africa Confidential, 11 January 1991, pp. 1–4.

12. A. Rusinga, “The Drive To Upgrade Transport,” Africa South, June 1991, pp. 25–33.

13. World Development Report 1992, p. 223.

14. K. Gooding, “Ghana Points the Way Along Africa’s Golden Road,” Financial Times, 28 July 1992.

15. J.E. Austin and M. Grossman, “African Enterprises: The Search for Success” (Boston: Harvard Business School, Research Project Working Document, 1992).

16. Deep devaluations in local currencies invariably limit a distributor’s ability to continue to obtain letters of credit through no fault of its own.

17. Indian foreign direct investments in Nigeria, for example, are greater than in any other country.

18. World Development Report 1992, pp. 278–279.

19. In the same vein, many MNCs place the country manager of Portugal in charge of sales in the former Portuguese colonies of Angola and Mozambique.

20. B. Bremner, “Doing the Right Thing in South Africa?” Business Week, 27 April 1992, pp. 60–64.

Acknowledgments

The authors wish to thank Lisette Rey, a research associate at Harvard Business School, for her assistance in conducting interviews for this study.