South Africa: Fruit To Be Harvested In The Continent

Last Updated: 15 January 2014
Article by Warren Drue

Challenges abound for potential Chinese investors in Africa, but so do the rewards.

Africa has found favour with China, and China has become one of the largest investors in Africa, having concluded more transactions than any other country other than Britain and France.

China was one of the first countries to recognise that great opportunities existed in Africa, which, as a continent, will have the world's largest workforce by 2035, with half of the population now under the age of 20. This is in contrast to Europe, where populations are becoming older.

Africa is a continent rich in natural resources, and Chinese firms have invested billions of dollars in securing rights to these to ensure a ready supply of the resources needed to grow the Chinese economy. China's rapid modernisation and industrialisation can be directly linked to the African commodities boom.

More than 2000 Chinese enterprises have invested in more than 50 African countries covering industries such as agriculture, construction, logistics, manufacturing, mining and real estate. Even though China's interest in Africa has been driven mainly by securing natural resources, the fact is that less than one-third of Africa's growth has come from natural resources, perceptions to the contrary notwithstanding. The balance of growth has come from agriculture, construction, manufacturing and services, all of which have also been a focus of Chinese investment.

However, trade has not been one way, and a middle class is rapidly emerging in Africa that is now equal in size to that of India. So consumption is going to be an important driver of economic growth across the region, and this presents enormous opportunities for Chinese companies.

One of the primary benefits for Chinese companies investing in Africa is that commercial returns often exceed those achievable elsewhere. Huge investment and infrastructure development is planned in the short term, opening doors for Chinese companies in infrastructure and allied sectors.

While Chinese investment has been most welcome in Africa, a primary driver for wanting Chinese investment in Africa is to grow jobs. The unemployment rate on the continent poses a problem for leaders because most foreign direct investment in Africa, including that from China, is in the form of mergers and acquisitions, as opposed to green fields entry, which does not usually translate into more job opportunities.

While Chinese investment is welcome in its present form, being primarily that of mergers and acquisitions, it hinders the continent's desperate need to haul millions of its people out of poverty. The need for Chinese investment to create employment will be of increasing importance when doing business in Africa. Investments, no matter from whom and from where, will be more closely scrutinised for their potential to create jobs in Africa.

A problem with encouraging investment in Africa is that scepticism about the continent still runs deep. There is an outdated image of it as a poverty-stricken, disease and conflict-ridden basket case. Despite numerous African successes such as Botswana, Mozambique, Rwanda and Zambia, the focus tends to be put on cases of failure, and that reinforces the stereotype.

This is a perception that Africa needs to dispel, and recent events, such as the shopping mall siege in Nairobi, should not result in the entire continent's image as an investment destination being tarnished.

Chinese investment in Africa has not been without its challenges. In addition to the political risk attached to making acquisitions in Africa, Chinese investment has to negotiate other hurdles, including corruption, cultural differences, infrastructure and logistics challenges, uncertain property rights and unfamiliar laws and weakening currencies.

One of the primary detractors to Chinese investment and acquisitions on the continent are the local content and ownership requirements that form part of the laws of many African countries, such as South Africa and Zimbabwe. These laws discourage direct foreign investment, something that may need to be reconsidered by governments that have imposed these idealistic and protective laws, causing direct foreign investment to be channelled to other jurisdictions.

Despite the challenges, those in China who are willing to seek appropriate advice in those countries where investment opportunities exist and are willing to be guided by properly qualified local advisors in dealing with the challenges that the African continent presents will ultimately enjoy the fruits of what this previously forgotten continent offers.

Originally published by China Daily Africa.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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