Monday, June 01, 2009

Why US companies don't invest in Africa

The corporate America has so far given a cold shoulder to Africa when it comes to investing. Asia remains a choice destination for the foreign direct investment by US companies.

Africa is the most poor and underdeveloped continent. With one billion people, it accounts for 14% of the world's population. Still the region's share of the global foreign direct investment is only 2.2% as against Asia's 17.3%.

A new survey report by a consulting firm Baird's CMC and the US Chamber of Commerce says that US companies are now taking interest in Africa but African governments needs to build a favorable environment in order to attract investment from foreign companies. The report is based on behind closed door interviews with senior executives of 30 top multinational companies.

The survey points to the following main reasons why US companies don't consider Africa an attractive investment destination:
  • a week rule of law
  • The middle class is not large enough (who will buy our goods?)
  • Political instability in the region
  • Corruption
  • Prohibitive taxes
  • Poor transportaion and communcation structure
  • Insufficient trained human resource

The African countries that hold most interest are South Africa and some countries in the North, like Egypt; there are also some pockets of interest in West Africa, most notably Ghana, Nigeria and to some extent Angola; while some in the South (Botswana and Mozambique) and East (Uganda and Kenya), are also being watched.

According to the survey, US companies would consider investing in Africa if the African governments took the following steps:

  • Invest in education , health and infrastructure
  • Ensure the rule of law and a business-friendly climate for all investing companies
  • Show it is serious about attracting foreign investment
  • Market itself as aggressively as other regions of the world
  • Demonstrate opportunity cost of not investing

The US buisness wish-list for Africa includes:

  • Invest in the health and education of the African people to create a large pool of
    skilled and productive human resources.
  • Invest in and maintain infrastructure—transportation, communications, electricity, and
    security—so that there will be a reliable society in which to operate.
  • Build a functioning legal system to ensure the rule of law, transparency, and fair play.
  • Create a positive climate for foreign investments by reducing bureaucratic processes,
    eliminating corruption, and reforming tax systems, irrespective of country of origin.
  • Ensure stable political environments—that may or may not be based on
    western democratic principles—that work toward the common good of all
    stakeholders in society.
The problem is that most African countries don't have the resources and/or political will to take these steps. But the question is whether multinational companies are doing everything they can to find ways to invest in Africa. African communities may be poor. But smart companies can innovate to develop products and services that can be sold to poor people while uplifting their socio-economic lot in the process. This, then can lead to the creation of a swelling middle class which in turn can bring in higher profits.
The bigger question is whether large multinational companies can legitimately call themselves socially responsible by not investing in a region where communities really need them.

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