Africa stands at the edge of an economic breakthrough. Technological progress, urbanisation, infrastructure investment, human capital, education and integration into the global economy are themes that are now central to the continent's countries as the gap between them and the more developed world begins to close. The recent shift in economies after the global downturn has further encouraged companies to refocus strategic growth towards emerging economies and is changing the way companies are thinking and doing business.
Investors are now looking to frontier markets such as Ghana, Botswana and Nigeria as sources of future development growth. Africa is the second-largest continent in terms of population and land mass. But at US$1.75 trillion (Dh6.42tn), it accounts for less than 2.5 per cent of the world's GDP. As the region becomes more tightly integrated into the broader global economy, African GDP is likely to exhibit considerable possibilities for growth. Africa also has 10 per cent of the world's proven oil reserves and 8 per cent of its gas reserves, and a rich endowment of metals and minerals.
Rising commodity prices have served as the primary catalyst for foreign direct investment in Africa, with the biggest recipients being resource-rich countries such as Nigeria, Sudan, Chad and Equatorial Guinea. But as telecommunications and transport infrastructure development spread across Africa, the targets for such investment are becoming more diverse. There is no doubt that in Africa there is huge expansion potential, but also huge risk - a bit like China 20 years ago.
An outside player without specialist knowledge still faces the problem of how to invest in these opportunities. How in does the new investor approach a region of 53 countries, each with their own political and business issues? Outside providers are increasingly keen to get involved but they need guidance and that poses challenges. Opportunities are highly specific, so to assess their value and the risks it is essential to have detailed knowledge of the business and the project in question.
Identifying the sectors where domestic investors are sinking their money into their own economies is the best indication of confidence in a particular economy. Countries with a track record of growth and basic strength, offering good opportunities and attractive synergies from regional integration - such as Nigeria, South Africa, Kenya, Tanzania, Ghana and Uganda - offer a good starting point. Out of an increasing number of opportunities for investment there is a focus on those relevant to certain growth sectors that contribute to the development of these countries: health care, alternative energy, logistics, finance, agriculture and technology.
Mobile telecommunications has levelled the economic landscape and led to the rapid growth of mobile banking and internet use. Improved access to information has had profound economic effects such as more highly competitive pricing. Farmers, for example, are able to access real-time prices of goods to make informed decisions on whether to take produce to market. Other benefits include increased worker productivity and business models geared towards less wealthy segments of the population.
The viability of small and medium-sized enterprise is essential to the health of any economy and the frontier markets are no exception. It is the growing entrepreneurial companies that create a multiplier effect. But it is not possible to create sustainable business with microfinance alone. Because of a virtual absence of capital an equity base in the capital structure, which is almost non-existent in the developing world, is required. Thus, to achieve real impact on societies, expanding venture capital opportunities is a very practical approach.
Africa's long-term prospects are likely to be intricately linked to the extent to which African and foreign investors and entrepreneurs can capitalise on the potential in its commodity, infrastructure and mobile telecoms sectors. And although the global crisis will certainly dent Africa's short-term growth prospects, these three secular industry trends are likely to form the foundation for Africa's sustainable long-term growth.
Raadiya Begg is the director of the Africa Initiative at INSEAD's Middle East Campus in Abu Dhabi @Email:business@thenational.ae
