This Must be Africa

With investment levels surpassing $120 billion last year alone, Chinese companies have been increasing their business activities in Africa over the last decade (see graph below). All in all, their involvements have done more to fight poverty than any other country in the world by speeding up economic growth and producing jobs. However in the past few years, Africans have started contemplating whether there is a hidden agenda underneath all the investments. Are all the investments just modern colonisation? And why are Western businesses not as eager to enter the African markets? This article will uncover some factors that determine why Chinese investors find Africa so much more attractive than their Western counterparts.

One the one hand, Chinese investors are helping African countries by developing their infrastructure in a more effective way than they may have been able to do themselves. By bringing in the capital, technology and expertise needed, African businesses are able to realise projects that, without the Chinese, would be next to impossible. In addition, Chinese business boosts employment and brings competition which makes products cheaper for Africans. By looking at the situation from this angle, the Chinese investors almost appear as if “savours” of the African markets!

On the other hand, Chinese involvement causes Africans to become more dependant and in less control of their own resources. As an example, Commercial Bank of China recently bought up 20% of the major South African bank, Standard bank. However, despite this view that the Chinese may be seen to be exploiting Africa and its resources, there is little doubt that the continent’s true potential is being further unlocked.

The Attractiveness of Africa

When looking at characteristics of the African market, there are a variety of reasons that can explain why the level of investment differs between Chinese and Western companies. In fact, some of the factors that attract the Chinese actually have been known to discourage Western companies.

It is important to understand that 51% of the Chinese investment in Africa consists of manufacturing and mining. These are investments where the degree of rules and regulations impact the effectiveness and profitability: the less regulation, the more companies can exploit, pollute and operate freely.

  • The legal climate is still not very strict in certain parts of Africa which leads to greater flexibility and creativity for companies and their strategies. In China, businesses can quite freely operate in their own way and ignore the wishes of local communities. Because of these slack regulations in Africa, the “Chinese way of doing business” is transferable. Moreover, even though rules and regulations concerning the protection of employees and environment are in place in Africa, the institutions are not strong enough to enforce them; and lack of enforcement leads to companies being less aligned with the existing rules.
  • Chinese companies bring to Africa around 20% of the labour they need. Due to the loose regulation on wages, they can pay their imported Chinese workers less than the African minimum wages. The Chinese workers accept lower than this wage as it is still more than they would receive for the same kind of work in China.  Thus, they are able to out-compete local and Western competition due to lower production costs.
  • Another fit between the African markets and the Chinese companies is the acceptability of bribery. While China is at the top of the Bribe Payer Index, western companies are resistant to involving themselves in such practices.
  • Finally, whilst Western businesses often encourage good governance and human rights protection in the country they operate in, Chinese foreign investors often ignore these and leave country politics alone. The Africans might therefore, perceive the Chinese as better trade partners as they “get the job done” quickly without asking any questions about their way of doing business. The Western view is often that we need to change the African’s business practices to that of their own and hence can be seen to be patronising.

Conclusion

In summary, the Chinese and Western companies are both attracted and discouraged by several of the same factors that define the African markets.

Chinese companies do not have a problem with, and actually benefit from, slack regulations concerning: polluting, bribery, employee protection etc. The Chinese see the way of doing business in Africa to be similar to their own, and, therefore, entering the market is seen to be less of a risk.

In contrast, many Western companies see the African way of doing business as being in conflict with their values; acting against these might damage the company’s reputation and trustworthiness in the western world. If Westerners wish to compete with the Chinese in Africa, they need to adapt their business models.

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About Eivind Otnes

Online marketing professional focused on online local marketing.

Posted on April 7, 2012, in Analysis, Emerging Markets, GeoPolitics, Strategy and tagged , , . Bookmark the permalink. 2 Comments.

  1. This was a well-covered article. I feel that the author was bold in highlighting some of the controversial issues for doing business in Africa. However, with the conclusion that Western companies need to adapt their business models in order to operate in Africa, I was not sure whether this means that they would need to adapt their values (putting these aside) or whether perhaps, they need to bring competitive models that clearly show the $ value of keeping these high standards-because afterall, things like pollution, corruption and the like do have a huge cost to business.

  2. First of all, thank you for your interest in the topic Joy!

    Regarding your question “how could western companies adapt their business models in order to operate effectively in Africa?” you are right, I made it sound far more simple than it is.

    First of all, I do not believe western companies should put their values aside, as this would be the definition of exploitation; operating in a country with less regards to your values than you would do in your own country. This is why it is wrong to claim that the Chinese exploit Africa, they merely adopt the same way of doing business as in China. Because of this fit with their practices, they face a smaller challenge with conflicting values.

    Furthermore, depending of the size of the company, the ability to resist bribery, pollution, and exploitating of the counrty differs.Big internationals have usually put in place values and ethical frameworks that makes it easier for their expatriates to act aligned with pre set guidelines. Smaller companies or start ups might not have the same amount of resources and therefore face a bigger temptation to compromise their values when they realise that it might reduce their costs and increase chances for survival.

    The main point I want to make is that businesses of any size looking to enter unknown African markets, or any new markets for that matter, should carefully develop their own ethical framework that can guide them after market entry. A lack of embodied ethical frameworks can let the company drift along and be tempted to take part in practices they normally would not participate in.

    However, companies can use the responsible approach to their advantage and attract companies which are looking for responsible sources from Africa. Even though the companies may operating be more costly than their Chinese counterparts, they may be cheaper than european producers. Also, in the long run as several African markets develop further, there will be more and more attention to regulation and responsible players will be prefered.

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