February 28, 2011

Putting China’s Role in Africa in Context

At Nile Capital, we often find that investors’ interest in Africa is originally driven by a belief that China’s demand for natural resources will drive the continent’s growth. It is not uncommon to hear investors query whether an investment in Africa is just simply a way to increase exposure to the growing Chinese economy. We ourselves have written about China’s growing need for natural resources, (request a copy here) and the opportunity for investors in Africa to capitalize on Chinese demand. However, while China is undoubtedly an important part of Africa’s investment story, it is important to keep its role in context. We recently read an interesting article from Columbia University’s Vale Center on Sustainable International Investment which we thought was worth sharing.

First of all, the article points out that although there is a perception that China dominates Africa’s economies, about 90% of African FDI originates in the developed world (notably the United States and European Union). It also notes that simply focusing on Chinese investments in Africa misses an important part of the story, and that investments from other Emerging nations are significant as well. This is an interesting point to make. Articles like this one from Reuters have recently pointed out interest in Africa from Brazil, and similar flows are coming from across the globe. Thus, although China has established itself as a major headline-grabber, it is by no means the only country to notice Africa’s potential.

The article also notes that Chinese (and Indian) firms are not simply interested in natural resources. It points out that although on a capital basis natural resource projects still dominate, there are a wide number of investments taking place across a range of sectors, including “telecommunications, financial services, food processing, manufacturing, infrastructure, back-office services, and tourism.” This is an important point to note. As investors on the ground, we see a lot of opportunity in companies that invest in precious resources such as platinum, natural gas, coal, and gold. However, we are also finding compelling opportunities to invest in Africa’s rising middle class (see here and here for previous posts on this subject). As the Economist pointed out recently (see here), six of the top 10 fasted growing economies over the past decade were African, and seven of the top 10 over the next five years are expected to be as well. These are compelling numbers, and multinational firms are taking note. Thus, although China is and will continue to be a major player in Africa, they are only one small part of a larger story.

Material in this post was quoted from “Harry G. Broadman, ‘The backstory of China and India’s growing investment and trade with Africa: Separating the wheat from the chaff,’ Columbia FDI Perspectives, No. 34, February 17, 2011. Reprinted with permission from the Vale Columbia Center on Sustainable International Investment (http://www.vcc.columbia.edu/).

For more information about investing in Africa, please contact Nile Capital Management at (646)367-2820 or info@nilecapital.com

2 comments:

  1. Great article
    Thanks
    The exciting part about China is that newcomers create more opportunities for companies with similar objectives

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  2. Great article. Africa is an exciting but complex place to be and its economies are beginning to show sustainable traction. Political stability and a growing respect for democracy are the key drivers.

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