By Rafiq Raji, PhD
I present a cultural framework for investing in Sub-Saharan Africa. If you are looking to invest in Africa, it is important to be aware of the cultural characteristics of the various countries and how they affect the likelihood of success. In general, most African countries have collectivist cultures. Still, there are differences. South Africa ranks relatively high for individualism, for instance.
I rely on the 2019 soft power rankings by the Nanyang Centre for Emerging Markets (CEM) Singapore for a quantifiable proxy for culture. Thereafter, I juxtapose this culture proxy with the 2019 World Bank Doing Business rankings to identify countries with cultural characteristics and business environments likely to make investing in them worthwile endeavours. And for the selected countries, I identify the sectors that are best suited to these characteristics.
The framework differentiates between investments aimed at production, consumption or both. Because even when the production of a good or service may not be ideally suited for some countries, consumption via importation may be viable. So, for instance, high-end goods, which may not be ideally suited for production in many African countries ex-South Africa, in light of the individualism-innovation nexus, may still do very well if imported, since collectivist face-saving cultures make even those not well-to-do aspire to the consumption of high-end goods.
Based on CEM’s 2019 Emerging Market Rankings, I identify the following top 2-3 countries for each region as ideal investment destinations. Botswana is the only African country in the rankings’ 2nd-level “accelerating” EM countries. South Africa and Namibia are the only SSA countries in the 3rd-level “intermediate” EM countries category, while the remainder Ghana, Senegal, Rwanda, Uganda, and Kenya form part of the penultimate 4th level “early” EM countries category of the rankings.
These choices correlate with the cultural thesis of my prior “culture and development” paper, which put Southern African countries on top. The CEM 2019 Soft Power Ranking similarly identifies South Africa, Namibia, Ghana, Senegal, Kenya, Rwanda as the top 5 SSA countries with soft power. I recommend the top 2 countries in each region based on these indices. They are thus Botswana & South Africa (Southern Africa), Ghana & Senegal (West Africa) and Rwanda & Kenya (East Africa).
Figure 1: SP-DB mapping of African countries
Thus, my framework relies on these factors – culture, doing business ranking, EM status, & soft power ranking – to recommend sectors in Africa that are likely to be successfully tapped by foreign investors. I rely on the Global Industry Classification Standard (GICS) in this regard.
Oil & gas exploration decisions are not primarily culture-based. If there is no prospect of finding oil & gas resources in a jurisdiction, it does not matter what cultural variables there are. But in areas where exploration does take place, culture does matter. The pervasive and entrenched corruption in the Nigerian oil & gas industry has cultural underpinnings, for instance. There is also a cultural element to why a robust indigenous value chain around oil & gas exploration has been elusive in Nigeria, the continent’s top oil producer. Government-owned refineries, the only ones in any case, are moribund or underperforming. Instead, fuel is largely imported.
Would it be profitable for a foreign investor to invest in a refinery in Nigeria, say? It is highly unlikely without local support. But a local investor like Aliko Dangote, Africa’s richest man, who is currently building a refinery in Lagos, Nigeria’s commercial capital, is incidentally likely to be successful, however. This is because in addition to his having access to foreign capital, he is also fully enmeshed in the political, social and cultural fabric of Nigerian society. A foreign investor looking to invest in the sector would thus be well-advised to invest through such an influential local investor; if at all.
A good example in this regard is cement manufacturing, which with increased automation, no longer requires as much manpower as in the past. And with automation comes requirements for new skillsets and know-how, most of which are scarce on the African continent and take time and resources to acquire locally. Top-tier management talent is also in short supply. The pan-African success of Nigeria’s Dangote Industries, which relies a great deal on Indian expatriates, who are world-renowned for their work ethic, to fill the skills gap bears lessons in this regard. So even when an investment decision on a materials venture on the continent relies on where the key raw material is located, disadvantages related to skilled labour and capital could easily be overcome with foreign alternatives.
The success of the Chinese in illegal Ghanaian gold mining, which contiunes unabated despite government action, is also a case in point. Chinese entrenchment in Ghana’s mining sector is on the back of a pervasive local culture of artisanal-type but illegal “galamsey” small-scale mining practice. With many poor Ghanaians dependent on galamsey for their livelihoods, and the Chinese now major players, it has become very difficult for the government to clean up the sector. The illegality is not at all endorsed here. But the cultural element as a factor in the success of the Chinese in the Ghanaian gold mining industry is noteworthy.
Aerospace & defence, machinery and transportation industry groups thrive in innovative cultures. Southern African countries are ideal. They score highest for individualism and other relevant cultural dimensions. Incidentally, these industry groups already thrive in South Africa. Would they do similarly well in the identified countries in East and West Africa? The low scoring for individualism and high power distance rankings do not recommend them well for such investments.
- Consumer Discretionary
Downstream automobile production is enjoying a resurgence in Africa. Foreign brands have set up bases (or plan to) in Rwanda, Kenya and Ghana.,, Unsurprisingly, much more upstream activities (e.g. design) take place in South Africa, which already has a thriving automobile industry. There is easily a cultural explanation for why the labour-intensive but less innovative downstream activities (e.g. assembly) are more viable in East and West Africa while a broader spectrum of the value chain thrives in South Africa. On the consumption side, however, almost every African country qualifies.
Retailing (apparel, etc.) is also more lucrative in South Africa, where a mall culture is already entrenched. The case of South African retailer Woolworths is instructive. When it expanded to West & East Africa, it failed. Still, its business continues to thrive in South Africa. Incidentally, relatively small-scale local retailers, who import apparels etc., thrive in these same West & East African countries.
- Consumer Staples
Food & staple retailing has been found to be successful in almost all African countries. South African retailer Shoprite’s success in its African ventures is a good example; albeit they are floundering lately. And while largely a low-cost retailer, this has not been primarily the source of its competitive edge in its operations outside South Africa. A local culture of projecting success in Nigeria, say, means a visit by the average shopper to Shoprite during the weekend is more than just about shopping. In general, food, beverage & tobacco investments have been similarly successful across the continent. Still, foreign and local firms involved in the industry have had to rely on robust market research on local cultures to succeed.
High-end pharma activities are largely not viable in most African countries. Still, when a venture relies on certain local factors for success, it is still feasible. 54gene, a Nigerian healthcare startup, leverages on the local population for Africa-focused genetics research. That is, even as local expertise is scarce. Diaspora expertise fills this gap. And much of its output feeds into ventures abroad. So, this is an example of a high-end innovative venture that uses the advantages of a large population and overcomes the expertise constraint using highly qualified diaspora Africans who also understand the local culture.
There are now quite a number of pan-African banks; mostly headquartered from South Africa & Nigeria. Insurance has not been similarly successful across Africa, with West Africa the continental laggard. Insurance unsurprisingly thrives in South Africa, which scores high on individualism and low on power distance. I would not advise foreign investments in the insurance sector in West & East Africa, for instance. But my framework would certainly recommend one in South Africa.
- Information Technology
Only southern Africa comes close to being well-suited for high-end tech hardware and semiconductor production. The latter is virtually non-existent on the continent, in any case. Low-end tech hardware like PC assembly could thrive almost anywhere. But such low-end tech hardware production is already being phased out. A Chinese firm manufactures phones on the continent, though. Software and services, on the other hand, could be viable in most African countries. The success of Nigerian tech talent firm Andela is a good example. Call centres would certainly also thrive across the continent, since talking is a favourite past-time.
- Communication Services
Collectivism, high power distance scores, etc. support talking as a past-time in most African countries. The huge success of South Africa’s MTN in Nigeria is an ideal case of how an investment decision based on a cultural practice proved to be quite profitable.
Except for South African countries, where there is relatively high state capacity, my framework would not recommend an investment in the African utilities sector; not in the traditional way, at least. Innovative solutions like off-grid, solar & other renewable power solutions are proving to be viable, though. But they tend to be development-oriented and better suited for NGO-type ventures.
- Real Estate
My framework would not recommend REITS ex-South Africa. There is a culture of direct house ownership for those who can afford it. And for rented real estate, there is a huge informal element in most African countries.
Table 1: Soft Power v Doing Business
||Soft Power Ranking
||Doing Business Ranking
Source: Nanyang CEM, World Bank
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