Investing in Africa’s Future – Knowledge @ Wharton

Colonialism ended across Africa decades ago, but its legacy lives on.

Many African countries are still struggling to strengthen and stabilize their economies by reducing their dependence on foreign direct investment (FDI) and aid. Despite the progress made in recent years, access to capital and finance remains a huge barrier for local entrepreneurs like Nelson Boateng. He is founder and CEO of Nelplast Ghana Ltd., a company that recycles plastic waste into paving stones and other industrial products.

Boateng said that it is very difficult for businesses to start or grow because capital is difficult to obtain; most African banks will not lend money until the business has achieved measurable success.

“Where I want to be, I still can’t get it because of this investment problem with increasing funding, he said. “It was a very difficult trip for us, but we are still pushing. We don’t give up.

Boateng spoke at the Virtual Symposium on Africa 2021 organized by The Lauder Institute of Management and International Studies at the University of Pennsylvania. The round table, entitled “Investing in the future, the future of investments”, was moderated by Regina abrami, Principal Investigator in the Wharton Department of Management and Global Program Director at the Lauder Institute. He also presented Erin hern, professor of political science at the Maxwell School of Citizenship and Public Affairs at Syracuse University; Euler Bropleh, founder and CEO of a sub-Saharan venture capital firm VestedWorld; and Patrice Backer, a Wharton graduate who is a partner and chief investment officer of AFIG Funds, which focuses on private equity investing in Africa.

Backer agreed with Boateng, adding that small and medium-sized businesses aren’t the only ones struggling with financing. Getting a bank loan can be daunting, even for large, established businesses.

“The banking industry in many countries is still a name lending banking industry as opposed to a cash lending banking industry,” he said. “This is who you know. It’s not what you know, what you do, or the strength of your business plan. This limits access to traditional capital, hence the need for more sophisticated capital markets. “

Investment firms like his are helping fill the gap, with $ 267 million in assets under management in sectors ranging from agribusiness to financial services to fast-moving consumer goods. Bropleh said his business typically invests around $ 500,000 per business at the start. Recognizing the challenges ahead, Backer and Bropleh said they were hopeful for the future. The value of venture capital deals in Africa reached a record high of $ 1.4 billion in 2019, and the total number of deals has been growing steadily since 2014, according to the latest industry report.

“We think the continent has a lot of growth ahead of it,” Bropleh said. “You start to see [it] with the influx of capital to various African countries. “

Why local investment markets matter

African investors are essential for African businesses because foreign capital can be mercurial. It can evolve according to the economic situation of each country and the perception of risk from the outside.

“When things are going well, people look at emerging markets and they put in a lot of money. If there’s higher liquidity, when the going is really tough, they pull it up, ”Backer said. “If you don’t have a local domestic market that is patient and understands the risks, you are at the mercy of global cycles. And that’s not a good thing.

Abrami agreed that it is often difficult for foreign capital providers “to see Africa’s proposition as a positive proposition, where you can get your return on investment, where they don’t see the risk premium too high. “.

“The challenge with FDI is that the outside actors really decide the direction of economic development and decide what the economic priorities are.” – Erin Hern

Hern pointed out that a foreign investor’s financial priorities may not align with domestic economic priorities, creating a mismatch that is difficult to correct even in the long term.

While FDI is important, a local investor class is “absolutely essential” to the financial health of a sovereign nation, she said.

“The era of formal colonialism is over, but we still have these asymmetric economic relationships,” Hern said. “The challenge with FDI is that the outside actors really decide the direction of economic development and decide what the economic priorities are.”

Supported by liquidity, foreign competitors can also crowd out domestic players. Bropleh referred to the flying geese paradigm, where the production of goods shifts from the most developed to the least developed as entrepreneurs seek to enter new markets. In Africa, this theory is being exhibited by Chinese companies that have entered local markets, he said. Some countries, like Ethiopia, have responded by limiting foreign investment in certain industries.

Panelists also cautioned against foreign companies harvesting the rich natural resources across Africa – such as coffee, cocoa beans and precious metals – and then exporting them out of the continent to make products elsewhere. While this long-standing practice is part of the global supply chain, it is not necessarily good for African countries.

Abrami wondered why big companies don’t see Africa as a place to diversify certain products. “For products with a long supply chain – we call these your commodities or your commodities – there is no reason why these cannot be made on the mainland,” a- she declared.

Backer said the change will require a modern mindset.

“We’re still replicating an economic model from the colonial days, when countries basically took raw materials, shipped them, and developed their own industries,” Backer said. “The local development of the way we process our raw materials should be and is a concern for many. We need to rethink the way we develop an ecosystem within a specific sector. “

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