Does Africa need more local business?

This article is published in collaboration with BCG Perspectives.

From a business perspective, Africa is at an inflection point. Local African companies have made investments and have expanded their offerings, in many cases taking business away from multinational incumbents. The multinationals are rethinking their positions on the continent and contemplating additional investments of their own. There’s a little bit of a chess match going on, as both sets of players look into the future and try to figure out which strategies to pursue.

Even now, as low oil prices threaten the continent’s energy exports, Africa’s long-term positives are too big to overlook. Population growth and higher household incomes have helped lift Africa’s GDP by more than 5% a year on average for the past 15 years. In addition, the Africa of today is more politically stable, with over half the 54 countries on the continent now holding democratic elections, compared with fewer than ten in 1990. As a result, foreign companies and governments have dramatically boosted their investments in certain parts of the continent: foreign direct investment in sub-Saharan Africa increased by a factor of five from 2001 to 2012.

Demographics are also working in Africa’s favor. The continent has a sizable working-age population; within a few decades the proportion of Africans in the workforce will exceed that of Europeans and Asians in their respective regions, according to the United Nations. People across Africa are also more educated and more connected to information sources than ever, with mobile phone and Internet use growing rapidly.

Together, those changes have put many African countries on a more solid economic footing, allowing them to withstand shocks that once might have been devastating. In 2014 and 2015, for instance, Africa as a whole maintained economic growth above the world average despite the oil price decline, the outbreak of Ebola, and high-profile attacks by militant groups such as Boko Haram and Al Shabaab. Low oil prices have pushed several African countries to the brink of recession and have significantly slowed the continent’s growth. But Africa overall is holding up much better than it has in the past, and the hope is that the slowdown will be temporary.

As Africa’s economy has risen in recent years, so have valuations, making it more expensive for MNCs to do business on the continent and to acquire companies based there. Still, the higher cost of entry hasn’t diminished foreign interest. An analysis by The Boston Consulting Group found that almost nine in ten MNC CEOs visited the continent in 2013, compared with fewer than one in ten in 2000. To many of those executives, Africa remains a frontier with huge opportunity for growth but unfamiliar rules. It’s still early in the game, and both the MNCs and the Africa-based companies they’re competing against have opportunities to develop dominant positions.

Publication does not imply endorsement of views by the World Economic Forum.

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Author: Patrick Dupoux, Lisa Ivers, Adham Abouzied, Abdeljabbar Chraïti, Fatymatou Dia, Hamid Maher, and Stefano Niavas

Image: An aerial view of Kenya’s capital city Nairobi. REUTERS