Why Is Foreign Investment In Africa Growing? By Arun Panchariya

The easy answer is simple: Africa has become during the recent years much more interesting from an investor perspective

. Behind this it is a number of facts and assumptions about the future of which some are starting to be obvious.

On the macro level: Some African countries are among the fastest growing countries in the world. Africa south of Sahara as a region is one of the fastest growing in the world. Last year GNP grew at 4.9 % and estimated to grow 5.2 % this year according to the World Bank. According to most predictions the further growth potential is large. One obvious driver for the growth is the vast natural resources in Africa and the reprising of most of these on the world markets. But also other factors are important. The political stability has increased in most places. The same relates to legal frame works that are more predictable than before.

As the least integrated region in the world there are obviously larger variations from country to country. But severe problems and challenges some places should not cloud the overall picture that Africa mostly now is a success story with huge opportunities.

As I have mentioned often before and in my view is as essential as the driving forces mentioned above is the new generation of well-educated Africans with a great entrepreneurial spirit. This fact is an important factor in the future growth and investment opportunities in Africa. Good managers and entrepreneurs are obviously a key success factor for most investments.

Obviously many problems remain. One is the lack of infrastructure (even though this also creates investment opportunities) and another is the poor integration between most of the countries. Many examples could be mentioned, but a striking example is the almost no existing integration between the two Congo capitals Kinshasa and Brazzaville which actually easily could be considered as one metropolitan area as each city is located on each side of the Congo River.

Investment in natural resources is still a great opportunity and will still be so in the future. However, the new thing is to invest in other areas closely linked to the African growth and the new breed of entrepreneurs. Such investments include businesses that can thrive on the growing middle class. This means there are increasingly a room for private equity and venture capital financing on the continent.

In spite of the increased global financial market volatility and risk aversion that characterized the second half of 2011, overall capital flows to Africa south of Sahara rose by $8 billion in 2011 to $48.2 billion Foreign direct investment represents about 77 percent of these capital flows.

Some commentators indicate that export out of Africa has to come after a pan African development of the respective businesses. It is obviously usually a good thing for a company to get experience from export in neighbouring countries before starting global export. But a Pan African strategy is not necessarily the best option.

In certain key areas a quicker integration to the world markets can be profitable especially in areas where local entrepreneurs can take advantage of special circumstances based on agricultural and natural resources.

Not surprisingly a number of outside financial institutions have raised or are raising funds to invest more in Africa. As always some of these will not succeed as competence and knowledge about the local markets usually is essential fact and that is not always appreciated. However, the possibility for very good returns in Africa are great for the investors that do the basics right. In my view it is now an excellent timing to enter the African market for foreign investors.

Mr. Arun Panchariya is specializing in cross border transactions globally and is currently involved in a number of project related to Africa

by: James Peterson

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