If the Conditions in Sub-Saharan Africa Are Arguably Worse, Why Are South African Firms Investing There?

If the conditions in sub-Saharan Africa are arguably worse, why are South African firms investing there?

In sub-Saharan Africa there lies a litany of reasons as to why investing in the region is risky, such as; political risk, under developed private sectors, lack of educated workforce, currency fluctuations, donor dependency, faulty infrastructure and overall corruption.^[1] Often in business when there is greater risk there lies an opportunity for greater return; the outcomes of investment in sub-Saharan Africa follows suit. Companies moving in to sub-Saharan African have been able to benefit from “first mover advantage”. Due to the small sizes of many of the countries in Africa; there lies low levels of competition which often leads to high returns on investment.

        In addition to first mover advantage; South African firms have some unique natural advantages which allows it to be fairly competitive with firms from China, India, and Europe. South Africa has the ability to leverage its geographical location as an asset in engaging with sub-Saharan African countries. In being in the same continent it can leverage economies of scale in providing products and services to nearby countries. For example, in trading it could transport goods fairly quick using freight trucking modes of transportation as opposed to shipping or flight which required additional costs and tariffs. The value of South Africa’s location was evident through the actions of outside multinational firms. Many multinational firms would enter the African market through South Africa, the presumed safer investment and then would hope to use the S.A market as a hub for going deeper into the continent.  South African firms were able to react quicker to this strategy and carve out market share throughout the continent.

        In addition to geographical advantages, South Africa also benefited from financial advantages through African government policies. The New Partnership for Africa’s Development (NEPAD) provided South Africa with preferred exchange rate treatment for its Rand; its national currency. The preferred exchange rate further promoted South Africa’s buying power within the continental Africa. Another favorable advantage South Africa benefited from was the lower investment barrier for direct investments. Within Africa; S.A firms only required 25% significant interest as opposed to its 51% necessary for investments outside the continent. This policy made it attractive for SA firms to do business and help in the development of sub-Saharan Africa.