Despite the headlines that focus on political instability, violence, and poverty, the business environment in Africa is perhaps the continent’s biggest success story. Africa is home to over 400 companies that have revenues greater than USD 1 billion, and these companies – as well as the startups they inspire – could have a transformative role in the economic development of Africa.
How has the environment changed to foster this growth, and what are business trends to keep on eye on?
The changing business environment
While the market remains underestimated (and often misunderstood) by outsiders, its companies are growing faster and more profitable than many around the globe. General attitudes toward the continent are outdated; the business environment in Africa has undergone significant changes since the turn of the century.
Here we lay out some of the key ways in which the business environment in Africa has changed:
Economic growth
The African economy has grown at an average rate of about 3.5% per year since 2000, which is higher than the historical average. This has created new business opportunities and has led to an increase in foreign investment in the continent. According to UNCTAD, this investment totaled a record USD 83 billion in 2021.
Political stability
Many African countries have become more politically stable (though still fragile) since 2000, which has created a more conducive environment for business. This has led to the growth of new industries, such as telecommunications and banking, and has helped to attract more foreign investment to the continent.
Increased trade and investment
Africa has increased its trade and investment with other regions since 2000. The continent has also increased its intra-African trade and investment, which has led to the growth of new industries and has helped to diversify the economy. Further, if even partially successfully implemented, the African Continental Free Trade Area (AfCFTA) could have a major impact on increasing intra-African trade.
Technology
The advent of technology and the internet has improved the business environment in Africa. The growth of mobile phone usage has greatly expanded access to financial services, mobile banking and e-commerce, which have helped to improve access to markets and to create new business opportunities.
Demographic change
Africa has a youthful population, and this demographic change is expected to drive economic growth in the future. However, it also poses significant challenges such as youth unemployment, lack of skills and education, which are hindering the development of the business environment.
Corruption
Corruption has long been a major issue on the continent and remains a significant problem in many parts of Africa. It can create obstacles for businesses with excessive bureaucracy and red tape, a particular strain for small and medium-sized enterprises (SMEs). It can also discourage foreign investment and lead to a lack of trust in government institutions.
What the future (may) hold
In net terms, the business environment across the continent has improved in the last decades and is rapidly growing. Telecommunications, banking, and retail (e-commerce) have experienced significant growth in recent years. There is a growing interest in renewable energy and digital technology on the continent. Some broader key trends to keep an eye on will be:
Increasing foreign investment
Many countries in Africa are seeing an influx of foreign investment, particularly from China and other Asian countries, as well as from the Middle East and Europe. As the financing frenzy from China’s Belt and Road Initiative cools, it will be important to see how other international investment programs like the EU’s Global Gateway and the US-led Build Back Better World engage with the continent.
Infrastructure development
Related to the first point, this investment has enabled many African countries to invest in infrastructure development, such as building new roads, railways, and ports, to improve connectivity and facilitate trade. While improved connectivity can pay enormous dividends, it will be critical for countries to have clear, long term visions in place before embarking on expensive projects.
Growing entrepreneurship
There is a growing number of entrepreneurs and small businesses in Africa, particularly in the technology sector, which is helping to drive economic growth and create jobs.
Economic integration
As mentioned with the AfCFTA, African countries are renewing efforts to better integrate their economies, both within the continent and with other regions of the world. The AfCFT aims to create a single market for goods and services across Africa, and would encompass 1.3 billion people and a combined GDP of approximately USD 3.4 trillion.
Digital revolution
Africa is witnessing a digital revolution, with the increasing use of technology to drive economic growth and improve access to services such as education, healthcare and banking.
Final note
The business environment in Africa has improved in many ways in the past twenty years, though there are still significant challenges to be overcome in order to create a more conducive environment for businesses.
While the continent appears poised for a potential technological and economic revolution in the coming years, there is a focus on sustainable economic development and ensuring that the benefits of this revolution extend far and wide. To succeed in this environment, companies need to have a long-term strategy and be prepared to invest in the development of local capabilities.
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