How African Firms Can Make the Most of Outside Investment

Trade between Africa and China surpassed $200 billion this year, strengthening China’s position as Africa’s biggest trade partner, a position it has now held since 2009. Less than 15 years ago, the corresponding value was a modest $10 billion. This statistic demonstrates the growing pulling power that Africa holds for foreign investors. Beyond trade relationships, investors increasingly look at African consumers and see immense opportunity to invest locally. For African companies, this presents a special chance to climb the food chain of global competitiveness.

After all, many of China’s present national champions began life as local partners in joint ventures with Japanese or Western operators. They successfully navigated the path from being local tour guides to competing on the forefront of many global industries. Similar windows of opportunity are opening across Africa today. A decade ago, most of China’s economic activity in Africa was situated at the level of government contracts (mostly delivered through state-owned enterprises) or haphazard imports from small-scale entrepreneurs. Today the ‘middle corporate’ sector is gaining traction. For example, Chinese special economic zones have been set up as far apart as Egypt, Ethiopia, Nigeria, and South Africa in joint cooperation with local firms, and Chinese factories are going up in many more nations. The Chinese are not the only ones in the mix ? Indian, Brazilian, Israeli, and Western companies are setting up shop, too.

How can African companies capitalize on this opportunity? The key is to shift priorities away from short-term profits and towards longer-term autonomy by creating institutional memory and integrating around customer needs.

Create institutional memory. Foreign operators bring with them processes, operating models, and organizational cultures. The better the local partner can internalize (and adapt) these best practices to their business model, the greater the chance of autonomous success. Best practice transfer happens across all layers of the organization: people, technology systems, compensation, working practices, etc. A metrics dashboard should be used to track progress across all these layers.

Seek integration. By orienting towards greater control and value chain integration, local partners signal to the external market and, more importantly, their managers and staff that they want to be leaders and not followers. This helps with a process of self-selection amongst both investors and employees, leaving those that are willing to be pushed outside their comfort zone and have patience for a longer-term game.

It may seem that pursuing this strategy puts local firms at odds with the foreign partners they work with. But there are many reasons why this is a short-sighted view:

  • Competition grows the market. Foreign operators who breed independent local competitors often find that the local firms choose to grow the market in areas of non-consumption, rather than competing head-on.
  • Strong local partners are better at customer innovation. They understand customer needs better and may help the foreign operator garner unique insights that can be deployed elsewhere.
  • A reputation for sustainable partner development has its rewards. Governments and other local companies will prefer foreign partners with a track record of leaving strong domestic partners.

Today, most of Africa’s local partner firms have not positioned themselves to be able to stand on both feet following joint ventures with foreign operators. Some macro factors contribute to this, including the absence of effective government regulation or coordinating capacity through associations. Nevertheless, many African companies can do much more. There is a new Africa gold rush underway, and the local firms that can build successful partnerships will find the path to success.

source: How African Firms Can Make the Most of Outside Investment April 08, 2014 at 01:00PM

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