Unlocking the many existing economic opportunities on the African continent, particular in the 47 nations South of the Sahara Desert, for the U.S. private sector is not a question of countering China with a revamped Cold War-like view of economic engagement as a tool for great power competition. It’s a question of refocusing and rebooting investment strategy to effectively promote shared prosperity.
Prosper Africa holds great promise as the U.S. government’s policy tool to translate American belief in the promise of Africa into practical action. But, paraphrasing W. Gyude Moore, , a senior policy expert at the Center for Global Development, it needs to promote investment in Africa based on its inherent value, not “as a prize to be won in a competition with China”. Otherwise, it will fail to articulate what the U.S. is trying to build: a more prosperous Africa where U.S. companies can do good business well.
Replace the zero-sum view with demand-driven investment
A zero-sum view of trade and investment undermines the goal of promoting stability in U.S.-Africa relations. Prosper Africa should serve to shift the U.S.-Africa paradigm from need to demand and from economic choice based on basic advantage of natural resources to one based on the manufacturing of complex value-added products in a manner that is competitive in terms of content, costs and specialization and that respond to domestic, regional and global needs and demands.
Africa has emerged as a strategic partner in trade, peace and security in a fluid and interdependent global environment. It is calling on the U.S. to propose a compelling alternative to state-led economic models, promoted by countries like China or Russia, so it can assume its rightful place in the global economy. This requires demand-driven investments that will strengthen what Nigerian Kingsley Chiedu Moghalu, in his book Emerging Africa (2014), refers to as “an endogenous growth model in which it manufactures goods for its own markets as a first foundation, spreading out regionally from that base and emerging as an economic power in its own right through competitive advantage”.
U.S. private sector investment and business development in Africa should focus on profitable development. If American foreign direct investment (FDI) is to play a fundamental role in the economic transformation of Africa, it must focus on deriving profit from positive impact: improving relative competitive positions, developing opportunities for forward integration, enhancing inter-firm cooperation through an integrated supply and value chain approach, and reducing the time businesses spend rent-seeking through lobbying government officials for policy advantages instead of on understanding African consumers, costs and competitors (Moghalu).
American going global bias dampens Prosper Africa
Wishful thinking is not going to motivate U.S. investors to go big in Africa just because the U.S. government promises better U.S. agency coordination or has officials cheerleading Prosper Africa on Twitter. The program will be more successful in increasing U.S. trade and investment in the region if it takes a demand-driven approach focused on helping shape market dynamics and consumer behavior and implemented as part of broader policy mix that includes but is not limited to supply-driven measures.
Prosper Africa is touted as a whole-of-government approach to aligning and sharpening the U.S. government’s economic tools in partnership with private sector companies seeking to do business in Africa. But, as Judd Devermont at CSIS points out, despite all the bluster about it being “new way of doing business”, the program in practice amounts to a coordination mechanism that “does very little for U.S. companies that remain squeamish, skeptical, or uninformed about investing in the region.” The program just doesn’t do enough to win over U.S. companies not already gung-ho on Africa.
U.S. investors still suffer going global biases and show little interest in diversifying their portfolios abroad. Assuming that businesses are bullish on Africa, but have shied away because U.S. government support is inefficient is naïve at best. Even if Prosper Africa can make transactions easier for those U.S. companies already in Africa, it will do little to either increase or diversify U.S. trade and investment in sub Saharan Africa.
Although home bias in U.S. investment abroad has been declining since the mid-2000s, and larger flows of funds have been allocated to foreign assets, the participation of foreign direct investment (FDI) has actually remained stable. U.S. companies still prefer to invest in other industrial countries rather than in emerging markets, because the assets of industrial countries provide a better hedge during downturns in the business cycle.
Most U.S. foreign investments in securities are still allocated to European markets while growth in foreign asset position has been in large part fueled by investment in foreign corporate stocks in emerging Asian markets. Meanwhile, after peaking at $69.03 billion in 2014 U.S. direct investments in Africa dropped to $47.80 billion in 2018.
The basic problem is that U.S. FDI is overwhelmingly driven by investor preferences, rather than focused on solving for market demand. While there is a growing willingness to buy foreign stocks, home bias remains a feature of U.S. stock investment.
Investors naturally prefer high returns, yet they dislike the uncertainty associated with the volatility that often accompanies high returns. In fact, U.S. investors have unrealistically high levels of risk aversion. So even if returns on investment in Africa are among the highest in the world – between 20-30 percent -, greater opportunities abroad coupled with better institutional coordination and support at home and in Africa do not automatically translate into a change in perceptions of risk in Africa, even if those perceptions are lopsided and exaggerated.
Diversify U.S. FDI in Africa and invest for market demand
In order to succeed Prosper Africa needs to proactively establish and coordinate incentives that help U.S. companies, big and small, overcome the temptation to remain in established comfort zones, characterized by the relative safety of factor endowments. It should promote U.S. investment in new areas of opportunity.
The role of Prosper Africa is to be a facilitator for greater diversification in U.S. private sector participation in Africa’s market development dynamics, including sectoral diversification of investments. The most optimistic investors already have a presence in Africa, but new entrants are far and few. In addition, U.S. FDI stock is still overly concentrated in the extractive industries and natural resource-rich countries. According to the United States International Trade Commission, mining, including crude petroleum, is the largest destination sector.
If it is to go beyond being a program with just a facelift to being a true new way of doing business, Prosper Africa needs to highlight and promote the opportunities that Africa offers in non-commodities sectors such as professional and business services, financial services, construction, logistics, infrastructure related to transport, textiles and apparel, renewable energy, water management and access, education, and health. Not only does the U.S. have a comparative advantage in those sectors, but they all address growing demand in Africa for greenfield investments with a positive economic and social impact.
Foreign investment can help lift African countries from poverty to wealth only if, as Moghalu explains, it is targeted at the real economy and uses local suppliers, rather than having a lopsided focus on extractive industries. This demands that Prosper Africa make a concerted effort to promote and facilitate strategic investments that contribute to intensive economic growth in Africa, as opposed to extensive economic growth.
Intensive growth is derived from gains in overall productivity through innovation, increased efficiency of labor and a better utilization of capital and other means of production, as opposed to extensive growth, which is based on quantitative increases in labor, capital and land. Reliance on extensive growth is undesirable because in the long-run it exhausts resources, whereas intensive growth requires motivating and supporting an increase of investment in areas that will
- foster industrial development, through manufacturing based not on natural factor endowments but on productive and competitive advantage;
- contribute to balancing the need for agricultural production to address the whole value chain from inputs to cultivation, to storage, to transportation, processing and export, versus exporting raw agricultural products to feed industrial processes outside of Africa;
- encourage greater intra-African trade.
As Landry Signé and Eric Olander point out in a Brookings Institution Paper, industrialization and African continental trade together will “create sustainable growth that is less dependent on commodity exports elsewhere … and in which the U.S. has a strong competitive advantage compared to China.”
Bridge the gap between investment and impact
Prosper Africa should aim to bridge the gap between praiseworthy business principles and the practical aspects of putting free markets to work for Africa, not just for America. This means focusing on how to help African nations make the best use of their organic strengths and internal dynamics to ensure market serve societal priorities, not the reverse (Moghalu). The aim should be to promote U.S. investment in sectors that can serve Africa better for the long run in productivity, instead of over-focusing on great power competition for economic influence on the continent. Below are some specific recommendations:
Develop a specific support program for U.S. venture capital firms that can provide seed or start-up financing to U.S.-African private sector partnerships or joint ventures. Africa is a landscape rich in dynamically innovative micro and small businesses. Venture capital is critical for them and necessary to diversify Africa economies away from natural resources towards manufactured products based on local technology that can provide a competitive edge. In fact, having U.S. venture capital firms encourage the local development of and directly invest in local venture capital would be a strategic game changer (Moghalu).
Engage better and in more depth with African Investment Promotion Agencies. They provide accurate, up-to-date investor information, technical assistance and customized business support services to foreign investors. The U.S. Government can better reap the benefits of investment in Africa and the links to local productive sectors by participating and deepening discussion and debate on investment promotion strategies that will attract more U.S. businesses.
Prosper Africa should engage with individual country Investment Promotion Agencies by creating participative forums for direct engagement between U.S. and African businesses and investors. Together, the African investment promotion agencies and Prosper Africa can develop specific business promotion and facilitation activities to ensure that American businesses better understand the dynamics in Africa and make them more eager to invest and do business there.
It should also engage with the Africa Investment Promotion Agency Network (AfrIPANet), established by UNIDO to provide African Investment Promotion Agencies (IPAs) with a common platform to discuss and design investment promotion strategies. This network can be a strategic partner to help U.S. efforts to document and disseminate the diversity of opportunities in Africa and change the outdated perception among the U.S. private sector community of Africa as risky business to a “hot” destination for American micro, small and medium enterprises (MSMEs).
Embrace the African Continental Free Trade Area (AfCFTA), which is, along with Agenda 2063, Africa’s most important tool for fostering economic prosperity, accelerating industrialization and providing jobs for youth.
While the European Union, China and other African trade and investment partners have expressed support for the AfCFTA, the United States has been hesitant to do so, even though it contradicts one of the goals of Prosper Africa: to empower Africa to drive its own growth. The U.S. needs to produce a statement supporting the AfCFTA and develop strategies for supporting practical research on how countries can better balance and integrate the private sector in order to promote inclusive, participatory governance, thus reducing both perceived and real risks to doing business in Africa.
Domestically, organize yearly series of Invest in Africa seminars to educate U.S. businesses on the opportunities on the continent, how to invest in them and how to avoid the most common mistakes made by investors, such as having unrealistic expectations of going in fast and making a quick win, making decisions and taking action without specific country knowledge and understanding of culture gaps, knowledge of local ownership regulations and financial regulations, and due diligence on potential local partners.
Specific attention should be dedicated to educating U.S. businesses on understanding of demand-side determinants of FDI beyond just market size. Companies that become demand-driven are better able to sense market evolution and align their value networks more quickly to changes in demand and, as a result, provide better customer service with substantially less inventory, waste and working capital.
Training should specifically include: demand sensing, translation and orchestration, to maximize the use of resources while minimizing costs and maximizing profitability; contextualizing process focus, which designs business processes from the market back, based on sensing and shaping future demand, as opposed to from the business out to the market; aligning supply and value chain incentives to maximize true value (vertical rewards versus horizontal processes); balancing transactional efficiency (selling and purchasing) with relationship building to enable acceleration of time to market through innovation, thinking in sustainability and resiliency, and sharing of demand data.
Move from a political conversation to a long-term economic conversation
The U.S. government has to get over the fact that African governments generally welcome Chinese and other foreign investment and that Africans don’t need to choose one side or another. If the U.S. wants to revitalize its economic engagement with Africa, regain lost ground and be part of the market dynamics on the African continent, Prosper Africa must promote and support private trade and investment that can strengthen the fundamentals of economic transformation necessary for free markets to create true wealth in Africa (Moghalu).
U.S. businesses can no longer ignore the continent, nor can they afford to be ignorant of the opportunities it affords. Just because the continent has a rising and thriving market of 1.2 billion consumers doesn’t mean that any business opportunity that looks good to a U.S. company will realize sustained profits or serve shared interests. As Kingsley rightly points out, “A market of unproductive consumers creates little transformational wealth. It only appears better than it was” (Moghalu).
Protecting U.S. national security interests is unquestionably important for the America, but it certainly is not something helpful for African economic development or for U.S. private sector investment strategy. If Prosper Africa is to effectively unlock the many existing economic opportunities to promote shared prosperity and security in the United States and across the African continent, it needs to be refocused towards engaging with Africa as a strategic partner in trade and investment in its own right and rebooted with demand-driven investment focused on addressing the needs and aspirations of the African people.