Monday, March 4, 2013

Doing Business In Africa - Dutch Style

A recent book by Marjolein Lem, Rob van Tulder and Kim Geleynse offers some interesting insights for those interested in promoting investment in Africa. Given from a Dutch perspective, Doing Business in Africa provides  some very useful insights for those of us worried about how African countries can attract "good" FDI, and how donor countries engage with their private sector for development.

Africa as a good place to do business:

1. Apart from the usual stuff about growth rates, growing middle class, improved macro and political stability, they point to the heterogeneity of the continent, and particularly the difference between RSA and the rest of sub-Saharan Africa, even if its economy will soon be overtaken by Nigeria for size:
  • Of Africa's 50 largest companies, 38 are South African
  • South Africa's rail networks represents around a third of that of the whole continent
  • RSA has 3000 supermarkets and 300 large shopping malls and 16 Makro- Nigeria has 10 supermarkets and 1 Makro
2. The importance of infrastrutcures - 23% of total investments in Africa from 97-07 were in electricity generation, distribution and transmission but still less than 25% of the population has access... 

3. "It is increasingly recognised that firms that adopt BoP strategies ["narrowBoP" focused on consumers; "broad BoP" including producers] or inclusive business strategies need to work in partnership with 'non-market parties' such as NGOs or local authorities. Such partnerships can help firms not only to reach untapped markets of poor, but also to develop adequate solutions"

What about doing business though... ?

4. "If large-scale agricultural projects are designed both to increase food production and include development goals, then they may dampen controversy - in particular for European investors"

5. 3 types of risk - if too much as a combination, no investment... 
  • Operational risk - currency risk, duties, fees, 
  • Strategic risks - political risks, expropriation, legal processes - government issues
  • Sustainability risks - "relationships with secondary stakeholders" - social risks, poverty, disease, environmental risks,  
6. Risks relate to distance measured as sending and receiving country relative positions on various indices:
  • cultural (Hofstede (1980) dimensions, Project GLOBE dimension) 
  • governance - government effectiveness, legal systems, political risk/corruption measures (Worldwide governance indicators; corruption perceptions index; freedom house data; political systems Uni Ottawa; Economic freedom index by Heritage foundation; ease od doing business WB)
  • geographical - physical distance between cities
  • economic or development distance - e.g. HDI positions; GDP per capita; WEF Global Compet Index; colonial distance index; EIU political instability index; responsible competitiveness index by Accountability
7. The "closest" countries to the Netherlands (and therefore with least risk for a Dutch co.) are: Botswana, Mauritius, South Africa, Namibia, Ghana, Cape Verde, Rwanda, Benin and Zambia. 

8. They conclude that while "doing business in Africa is like doing business in any other foreign country" in that operational and strategic risks can be somewhat minimised or mitigated, "the larger the development gap between the home and host countries, the more a firm will be challenged to take responsibility for the problems it will be expected to contribute to solving development issues" (P36). The Ethiopian government is mentioned as a government that requires local partnerships and employment creation. As such, decisions are a balance of risks and resposibilities. [this has echoes of the observation that poor people have more responsibility for everything in their lives form the Abdit Bhanerjee book]

Different approaches - multi-sectoral partnerships is one! 
9. They also present a useful hierarchy of entry modes, increasing in ownership and control, and in cost and commitment (so decreasing in ease of retreat):
  • indirect export
  • direct export - relatively easy retreat
  • strategic alliance/partnership (investment)
  • joint venture
  • marger and acquisition
  • greenfield investment
10. "96% of the world's largest firms have entered into partnerships with 'non-market' parties, primarily NGOs" while "all Amsterdam stock exchange companies have formed cross-sector partnerships". The folliwng Dutch firms formed these partnerships to enter new markets in SSA: Achmea, BAM Intl, Royal DSM, Friesland/Campina, Heineken, Philips, TNT Express, Vitens EVides International. DSM & Unilever laucnhed the Amsterdam Inititive for Malnutrition

11. Main focus of Dutch firms is governments and other businesses rather than consumers - so not actually "base of the pyramid" as such! Generally aimed at exploiting existing competencies, not developing new ones or seeking efficiency gains... 

12. Main reasons for doing business in Africa are: growth and profit (55%); growing consumer markets in Africa (31%), personal interest of management(30%). Still, 17% of surveyed dutch companies responded that they entered Africa becuase of subsidies, while 25% were "following the client into Africa"

13. Overall observations on motivations for entering Africa:

  • resources are out, markets are in - new markets more of a driver now than resources
  • Dutch firms don't feel the urge to "jump on the bandwagon" of African investment - "no belief yet of urgency"
  • SMEs and MNEs different in appraoach - Attractive financing more important to SMEs than large firms; MNE's more following the client; MNEs apply specific strategy to Africa, SMEs less so
  • motivations to work in Africa not very different from other emerging markets
14. Necessary tradeoffs

  • short versus long-term
  • alone vs partnering
  • exports vs local production
  • global coordination vs local responsiveness
  • spread of activities vs concentration
  • exploit existing abilities vs future opportunities
  • reactive stakeholder appraoch vs proactive stakeholder
  • local control/ownership vs high control/ownership
  • risk vs responsibility
  • costs vs benefits
15. For those firms engaged in Africa, most are satisfied. Even among dissatisfied, few considering pulling out.

16. 5 models for engaging in Africa (P148)
  • Trade
  • Multi-domestic
  • Regional
  • Global
  • Transnational
17. Heineken - working with USAID, Common fund for Commodities, and NGOs like EU Cooperative for Rural Development. Across countries take different approaches depending on "risk distance"

18. "Large Dutch firms on average participate in about 20 partnerships with non-profit organisations such as NGOs and public sector agencies". "The Dutch Government has formed more than 100 partnerships with the private sector".."Managing such large portfolios - involving many stakeholders from different sectors - is often difficult and can influence the effectiveness of the partnerships"

19. Successful partnership requirements:
  • link with most important stakeholders on a specific issue
  • think about entry and exit from partnership
  • align goals of oberall partnership with stakeholder interests
  • designate top management to oversee
  • monitor density, diversity and dependencies
  • ensure companies can dedicate enough resources
  • partnerships about building trust, not trust as a starting point
  • be explicit about where expectations/interests do not match

Some of the companies mentioned:
Dutch FLower Group (ODI AfT case study?)
Enviu - housing
Remco Afrique - generators
ROyal Haskoning DHV - fishing ports
DAF Trucks
SNS Asset Management

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