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AfCFTA: A strategic framework for business (5)

African Continental Free Trade Area Agreement (AfCFTA)

Crucial to the entire movement toward free trade is the free movement of people that the AfCFTA is expected to facilitate. Successful pan-African firms and MNCs grapple with finding and retaining talent. Often, they must train local hires from scratch in every country in which they operate. When the free movement goal underpinning the AfCFTA is realised, it should be far easier for firms to move talent around the continent, leading to a cross-fertilisation of ideas and experiences, and building a resilient, continental talent pool. To some extent, information technology already makes this a reality. When the Covid-19 pandemic forced individuals to work at home, teams were able to use video conferencing and cloud facilities to work together across borders on the continent and abroad.

What should be the pace & sequence of firms’ operations in their chosen markets and sectors?

According to Signe (2020), pan-African firms and multinational companies tend to follow one of three models for setting up their operations. The first, a centralised model, has one headquarters for the continent, where decisions are made, with products produced and shipped to other locations. In the second model, operations are decentralised and country-based. In other words, each country of interest has its own semi-autonomous unit, with most decisions taken without recourse to headquarters. A third model integrates the first two, with each regional cluster having its own operations, allowing for greater co-ordination while enabling managers to quickly and independently adapt to local conditions.

In many cases, a firm’s operations begin from a centralised hub, and thereafter decentralise. The AfCFTA raises prospects that some decentralised operations could now be recentralised, as country location may no longer be a critical issue when there are no trade barriers. It seems likely that the transition to this would be gradual. And as firms must position themselves early on, planning must anticipate the initial difficulties emanating from structural adjustments. The likely scenario for most firms would be a hybrid centralised-decentralised model. This might initially entail regional hubs.

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In the optimistic scenario of full free continental trade, a PAF or MNC may not need more than one hub for the entire continent. In that event, African countries would likely be competing to be hosts of such hubs. Thus, the pace and sequence of structural reconfiguration would vary. New entrants would necessarily evolve from an initial centralised model to decentralised regional hubs over the first 10 to 15 years from 2021, then recentralise in the event of a fully functional continental free trade area.

Despite the myriad challenges that the AfCFTA is now expected to ameliorate, many firms are now successfully pan-African, and can give many multinational competitors a run for their money on many fronts

For manufacturers, Signe (2020) advises that firms “identify optimal SEZs for the relevant subsector” to take full advantage of government prioritisation, better infrastructure, lower bureaucratic bottlenecks, cheaper and quicker logistics, and tax incentives. Thus, the governance circumstances of SEZs in selected markets should determine the pace and sequence of a venture. As Signe (2020) suggests, “identifying upcoming SEZs as they are in the planning and development phases” will provide advantages in scaling up. If SEZs are already established, securing a place in a country’s SEZs may be the best starting point for a new venture beyond the traditional growth mechanisms of JVs, mergers, and acquisition. And such SEZs are likely to help differentiate competing countries operating under the AfCFTA.

A phased approach aligned to AfCFTA negotiation outcomes would probably be ideal. This is because even if AfCFTA negotiations conclude in a timely and smooth manner, a significant lag in implementation is likely. Thus, if a business decision is dependent on a particular element within the agreement, there should be sufficient redundancy and flexibility built into the decision-making process to mitigate risks and minimise losses.

Conclusion & Recommendations

The AfCFTA is a game-changer for the continent’s economic and social prospects. Relatively small economies suddenly become attractive, as they provide access not only to the few million people within their respective jurisdictions, but also to more than a billion people across the continent. But the course has not been entirely smooth, as when key countries shut borders owing to the Covid-19 pandemic and disputes over border administration. Still, many countries demonstrate remarkable enthusiasm for the pan-African project, for example by easing visa policies. Yet anxiety surfaces over potential losses; of customs revenue, from dumping, of jobs, and even of sovereignty.

African firms, over 400 of which earn US$1 billion or more in annual revenues, are certainly desirous of leveraging the potential benefits of the AfCFTA. Despite the myriad challenges that the AfCFTA is now expected to ameliorate, many firms are now successfully pan-African, and can give many multinational competitors a run for their money on many fronts. For them, the AfCFTA is a welcome development.

At the very least, 90 per cent of traded goods would enjoy a reduction in tariffs over 5-10 years (and over 15 years for six countries), with zero tariffs at the end of the period. Longsuffering pan-African firms (PAFs) and multinational companies (MNCs) have cause to be delighted by this development. Yet more firms are expected to venture into the continent on the back of the AfCFTA. As the Covid-19 pandemic created an imperative for “building more resilient GVCs”, with global firms already reducing their dependence on China, the AfCFTA could not have come at a better time for African firms seeking to tap into emerging shifts by GVCs away from China.

For firms looking to position themselves to take full advantage of the AfCFTA opportunity, we adapted the Hambrick & Fredrickson (2005) strategy diamond framework to show how firms could pursue this course. We focus on three elements of the framework pertinent to the purpose at hand. We assume that the economic justification is compelling, as our prior exposition abundantly demonstrates. Thus the essential questions firms will be able to think through are which countries or markets to be active in, how they would venture and at what pace. Relying on data and prior research, we show how firms can make these determinations in a methodical and objective manner to achieve optimal outcomes.

Article was first published by the NTU-SBF Centre for African Studies at Nanyang Business School, Singapore. Figures, tables, & references are in orginal article viz.