We have been long been hearing about the growth potential of Africa. From being described as a geography which is just waiting for the right incentives to grow to being described as one which will usher in the next wave of growth for the world, the continent has never had lack of people trying to foretell of its fortunes. However, it scarcely seems to be catching the eye of the global companies who remain circumspect about entering the continent. Although global corporations like Ford (NYSE:F), General Electric (NYSE:GE), Caterpillar (NYSE:CAT) have posted very impressive growth in the past year, Africa seems to be among the laggard nations in terms of growth for them. These companies talk about the emerging markets in India, China, South East Asia, Western Europe but they hardly seem excited about Africa.
The African continent has now six of the ten fastest growing nations in the world and has grown at an annual rate of around 5% in the past decade. What is heartening to note is the fact that this growth is coming from a variety of sources other than natural resources. According to a report by the McKinsey Global Institute, natural resources accounted for just 24% of the nation’s income while the remaining has come majorly from services. So, what’s going wrong ? Why has China, a communist nation virtually unknown in the field of economic development before 1990′s surpassed Africa to become the engine of the world in 20 years ? What is stopping the companies from being excited about Africa ? Why does it seem the claims for Africa seem too much?
The answer might lie in the structure of Africa. Africa is a collection of more than 50 individual economies which have very diverse dynamics and operating conditions. When we talk about the growth of Africa, we are taking about the region as a whole. This region contains pockets which have a very high growth rate and also regions which have negative growth rates.
Therefore, to capture the entire growth potential, a company will have to establish itself in various sub geographies in Africa at high fixed capital costs while dealing with a variety of complex regulatory and political issues in this region. Since individually the economies are small, none of them are big enough to present growth opportunities which might excite a big corporation. This disadvantage has been eliminated in South East Asia, where the countries have negated the disadvantage of their small size by forming a free trade area among themselves.
Africa will also need to do something similar if it wants to become a major economic force in the world. It’s population of 600 million and collective GDP of $1.6 trillion as of 2008, will continue to be average performers and second priority for companies as long as they are not able to address this issue.