Why Do American Companies Avoid Africa?

Africa has a population of about one billion people, and the land is extremely wealthy in natural resources. The strong European business presence makes sense because of the colonial legacy. Without a modern colonial impact in Africa, the Chinese have been making strides in Africa to secure access to natural resources. As the beneficiaries of early colonialism, Cold War political meddlers, and the richest (and most opportunistic?) country in the world, why are American companies so hesitant to invest in Africa? This is the question that Baird's CMC and the US Chamber of Commerce tries to answer in a recently released study, The Conversation Behind Closed Doors.

It doesn't seem that the question of investment is specifically focused on the extraction of natural resources. Baird's is talking real investment for growth such as the establishment of local factories to produce for the local market.

Through interviews with top management in "30 leading U.S. multinational corporations," Baird's identified the top 5 factors that influence the decision to invest in Africa:

1. Rule of Law - In corporate, civil, and criminal fields.
   
2. Attractive Market - Not only currently, but promise of future development.
3. Risk Adjusted ROI - Risks are pretty high in Africa.
4. Supportive Business Framework - With logistics as a key elements.
5. Welcoming Environment - Including the health and education level of the local workforce, as well as supportive policies for FDI.
   

Of these, they identify the three biggest hangups for American management in investing in Africa.:

1. Difficult Business Case - The risks simply outweigh the rewards of the African markets.
2. Corruption and Uncertainty - "Do you see that bridge over there?"
3. Opportunity Cost - Africa is not selling itself, and no other US companies are competing aggressively, so there is no sense of an opportunity being lost.

The study is very interesting, but I have my own theories about why American companies are not investing in Africa. But first, not content with my own thoughts, I posed the following question in my gChat status:

Why don't American companies invest in Africa? Thoughts?

I received three responses:

1. "cause africans will steal our crap if we bring it over there" - The report brought this up too. I agree that African IPR is weak to nonexistent, but is the education of their workforce and sophistication of their manufacturing base even close to high enough to steal IP at a relatively Chinese level? I doubt it, but it is still a strong concern.
2. "isn't africa notorious for being especially unstable?" - The report brought this up, and again, I agree. But that hasn't stopped the US from investing in Latin America. "Latin America?" you say. Yes, Latin America. Argentina's only had free elections since 1983, Chile since the end of Pinochet's reign in 1990, Nicaragua since 1990. Meanwhile, Mobutu Sese Soku ruled that poster child of African violence, Zaire, for 32 years, al-Gaddafi has ruled Libya since 1969, and Tanzania has been relatively stable since 1964. Am I cherry-picking? Sure, but political stability is only a piece of the puzzle when money is involved.
3. "because africa sucks" - I agree, but see final sentence above. Additionally, I can see Lagos, Mombasa/Nairobi, and Dar Es Salaam becoming the Pearl River Deltas of Africa at some point.

That third comment also led into a discussion about what I think makes US companies hesitant to invest in Africa. The optics are totally off. First, Africa does suck and I think that there is the perception that Africa is Europe's problem because it was largely a European colony that turned into a dangerous place. Second, America benefitted greatly from European colonialism, and I think there is a guilt involved in hiring Africans at low wages to do raw material extraction and to work in factories. These are two things that we need to just get over. Africa needs investment, and if American companies can figure out how to invest in Africa, then the situation in Africa will imporve, plus I think there is an absolute killing to be made (at least at some point).

This is a high hurdle to cross, and as one of the interviewees in Baird's intriguing report, which you should certainly review, makes clear:

"We are a stock market-listed company, so the first thing is return on investment. Can we make money?"

As opposed to companies that are beholden to shareholders, the Chinese have a competitive edge in Africa that US companies do not. Chinese companies can invest with an eye to the future, whereas US companies must keep their shareholders happy in the present. Hopefully this report will open US eyes further to the possibilities in Africa.