By Grant T. Harris
Investment attitudes toward sub-Saharan Africa tend to swing wildly between overly optimistic, excessively negative, and everywhere in between – often based on the latest economic outlook and commodity prices. In truth, there are both sizeable risks and opportunities within the continent’s many different markets. Savvy American investors would be wise to recognize the realities behind the hype and misperceptions.
Range of investment opportunities
Underlying the range of investment opportunities in Africa are some undeniable demographic and economic trends that will shape markets for decades to come. Africa’s population is young and expanding quickly: in the next 35 years, 1 out of every 4 people in the world will be African.
The region is already witnessing rapid urbanization, and a growing middle class and consumer market. Although Africa’s exciting economic growth has slowed dramatically in the last 2 years due to falling commodity prices, quite a few non-commodity exporters are projected to grow by over 6 percent in 2017.
Of course, it is equally undeniable that Africa faces real economic challenges. Not only is the region insufficiently connected to global markets, but intra-continental trade is also far too low. Poor infrastructure is a significant hurdle: 2 out of 3 people lack access to electricity, while inadequate road, rail, and harbor services increase the cost of cross-border trade within Africa by 30-40 percent. These deficiencies can be extremely costly for businesses, but can also present opportunities for investment.
More to the point, American companies are well placed to use their expertise and comparative advantages to fill unmet needs across a range of sectors, including energy, agriculture, and information technology (tech), to highlight just a few.
Africa’s massive energy shortfall provides an opening for a wide range of players in electricity production, delivery, and financing, including to harness Africa’s huge renewable energy potential.
In agriculture, Africa continues to experience low yields, even though the region contains 60 percent of the world’s uncultivated arable land, and despite the fact that agriculture is at the core of most countries’ economies and livelihoods. U.S. agribusiness companies could be at the forefront of supplying agricultural inputs while helping to improve food security on the continent.
In tech, Africa’s environment is primed to enable and benefit from disruptive innovations. Having bypassed the landline, cell phone usage is increasing exponentially, paving the way for groundbreaking mobile products and services. Facebook and Google have recognized Africa’s promise and are racing to facilitate Internet connectivity in the region – others in Silicon Valley may well find their own niche.
Moreover, investing in these essential sectors could, in turn, spur additional opportunities. For instance, improved energy access and infrastructure could boost untapped possibilities in manufacturing, where output could nearly double to US$930 billion by 2025 if governments create the right enabling conditions.
Challenges can be immense
As is true when investing in any emerging market, the challenges can be immense. Above all, investors must keep in mind that markets and business climates vary dramatically across the continent, as do the time-frames for profitable opportunities.
But as McKinsey puts it, Africa has “robust long-term economic fundamentals.”
And those who have already invested in the region know it: according to Ernst & Young, investors present in Africa retain a far more positive outlook on the region’s prospects than those who have never done business there.
American companies would be smart to define how Africa can and should relate to their global strategies and growth plans. Over-simplifying the continent could mean misjudging risks, while opting to “wait and see” could lead to missed chances, just as many overly cautious investors now lament their late entry into China. Plenty of opportunities remain in Africa, but only well-informed investors will reap the benefits.
Grant T. Harris is CEO of Harris Africa Partners LLC. He also served as principal advisor to former U.S. President Barack Obama on issues related to Africa, serving as Special Assistant to the President and Senior Director for African Affairs at the White House from August 2011 to August 2015. The original version of this document was published in Initiative for Global Development publication.