• Thursday, May 23, 2024
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The great miscalculation–and exit–of multinationals in Africa… again

The great miscalculation–and exit–of multinationals in Africa… again

By Efosa Ojomo

Deja vu.

In 2015, many multinational companies exited Africa. Nestle cut staff across 21 countries and Barclays, Coca-Cola, Cadbury, Eveready, and SABMiller retreated from different African markets they once believed had promise.

The allure of Africa, particularly the widely referenced Africa rising narrative, was fading.

The reasons the multinationals cited were all too familiar: failing or inexistent infrastructure, smaller than expected consumer market, struggling institutions, and corruption.

In effect, what they experienced in Africa was a disabling environment for business–as opposed to an enabling one.

After the lull in investment, which lasted a few years, the tides shifted. By 2019, Africa’s demographics, including its growing population, youthful and entrepreneurial spirit, and sheer potential as the last economic frontier revitalised the continent’s promise.

“Africa poised to play a major role in the world” is how David Pilling, the Financial Times Africa editor put it, writing about Africa’s promise. Naturally, investments began pouring in again and by 2021 foreign direct investment in Africa soared to almost $80 billion, the highest number on record.

Today, like deja vu, many multinationals are exiting the continent again. Bayer, GSK, Nestle, Unilever, and many others are cutting back significantly.

The reasons cited are identical to what many referenced almost a decade ago: the lack of an enabling environment.

One business leader noted that being in Africa “doesn’t justify the effort… If you do not have a conducive environment to grow and scale businesses, you will be left by the wayside.”

But has Africa ever promised anyone a “conducive business environment?”

The great miscalculation

Recently, I have been reflecting on Africa’s business environment and have come to the conclusion that Africa has really never lied to anyone about what it takes to do business on the continent.

The continent has never promised an enabling business environment, nor has it guaranteed ease of doing business.

First, by almost any metric that measures prosperity, the quality and predictability of a nation’s institutions, the pervasiveness of corruption (or at least the perception of it), or the level of infrastructures, African countries tend to rank dead last.

Whatever gains the continent has made are marginal, especially when compared to the gains many Asian countries, which African ones are often compared with, have made.

Second, a cursory overview of several reports shows the depth of Africa’s development challenges and the long road ahead as the continent marches towards prosperity.

For example, consider this Pew Research Center study which provides insight on global income distribution. Fewer than 0.3% of people across Africa live on more than $50 a day, or $18,250 a year. Approximately 96% live on less than $3,650 a year, according to the report.

This means Africa is full of nonconsumers–hundreds of millions of people who would benefit from consuming a product or service but can’t due to several barriers.

The implication is that if a company is not focused on market creation–that is, transforming nonconsumption to consumption–it need not be in Africa. There is no African middle class to exploit. It must first be created.

Finally, a casual conversation with anyone who has ever done or who is currently doing business in Africa will expose the nuances or difficulties specific to different African markets. The fact that doing business in Africa is difficult should no longer make headlines.

Yet leaders of heavily resourced multinational companies were again lured by reports of Africa being the next great growth engine that would power their businesses and Africa being the last frontier where they could sell seemingly mundane products such as diapers, milk, and detergent and mint billions of dollars. This possibility captivated their imaginations and caused a great miscalculation.

Doing business in Africa is hard. And it should be. Not because there’s something particularly wrong with Africa, but simply because of the stage of Africa’s development. Most things in Africa–from education and healthcare to infrastructure and institutions–should be hard. One reason for this hardship is due to how much resources the continent has to spend on fixing itself. Take government expenditure per capita as an example.

The average government expenditure per capita across Africa is approximately $500. These funds go toward servicing a country’s debt, building infrastructures, developing institutions, paying salaries, defense, security, education, healthcare, and social protection programs. In France, Norway, and the United States, government expenditure per capita is $24,000, $41,000, and $30,000 respectively.

So, when a U.S. or European company commits to do business in Africa and expects the business environment to be similar to the environment in a much wealthier region, the company places an unrealistic burden on its employees and on Africa. It is incredibly expensive to build an enabling environment and many African-country-governments neither have the money nor the incentive to do so.

How can multinational companies succeed in Africa?

By understanding what the business environment resembled when today’s wealthy countries were poor and by committing to market creation.

I have written about that too. Unfortunately, without that level of commitment, I’m afraid we will be here in ten years talking about another mass exodus of multinational companies from Africa.

Efosa Ojomo is a senior research fellow at the Clayton Christensen Institute for Disruptive Innovation, and co-author of The Prosperity Paradox: How Innovation Can Lift Nations Out of Poverty.

Efosa researches, writes, and speaks about ways in which innovation can transform organisations and create inclusive prosperity for many in emerging markets.