Pitfalls Multinational Firms Make When Entering Africa
With sluggish growth just about everywhere, Africa continues to represent a significant opportunity for many multinationals — one that is largely under-served and has significant long-term potential. However, firms often make two critical mistakes.
Biggest Opportunity ≠ Best Opportunity.
Typically, firms approach Africa from a country prioritization perspective (McKinsey however argues for a city-level focus). After identifying which countries hold the largest opportunity for their respective markets, they enter one country after another, looking only at the size of the pie and ignoring two critical considerations: ease of execution and structural risk.
Two of the largest opportunities, Angola and Nigeria, are often at the top of many firms’ Africa strategy. These countries are also some of the most difficult places in the world to do business. Corruption is widespread; laws, regulations and taxes are ambiguous; and enforcement is inconsistent. Furthermore, volatile local currencies and insufficient foreign currency reserves create nightmares for global treasury departments.
Don’t get me wrong. There are multinationals that have been successful in these countries. I am not advising to avoid these African markets altogether. However, make consideration for more than just the size of the opportunity. Think about the relative ease of doing business and the associated risk of each country. Then, after considering all three variables, decide which market represents the largest addressable opportunity.
Expecting a BRIC-like learning curve
Africa is not a country. It is composed of 54 distinct and diverse countries. Sure, this seems rather obvious but this is actually a fact that many (typically American) multinationals seem to overlook. Africa, collectively, is a $2.2T economy, which, from a size perspective, puts it in the same ballpark as Brazil ($1.8T), India ($2.1T) and Russia ($1.4T). Demonstrating an imperfect understanding of the nuance across the continent, many multinationals try to simplify things by treating the continent as just another BRIC-like country.
Countries, even ones that share a border, currency, or language are drastically different. Don’t fall into the trap of believing that because you have had success in one territory, it will lead to any sort of learning curve progress in another. Just because Senegal and Cote d’Ivoire are both Francophone countries, use the same currency, and are part of the ECOWAS economic zone, this does not mean that your success in setting up a business in Cote d’Ivoire will lead to an easier time doing the same in Senegal.