Friday, September 17, 2010

Is investment in Africa good for Africa?

Dear Colleagues

The conventional wisdom is that foreign direct investment (FDI) is good for the place that is receiving the investment ... but value chain analysis suggests that this is rarely the case.

Africa has not been short of FDI ... the exploitation of Africa's resources by international corporations has been going on for a very long time ... and most of the people of Africa remain in abject poverty, and in many countries getting worse.

It is convenient to promote the idea that FDI is a good thing for Africa ... a lot of corporate profit can be made from these investments, and from the African side, many of the key decision makers are also able to profit from having a flow of FDI into the country.

The so called "resource curse" is a silly proposition. The curse is not the resource, it is the behavior of decision makers on the international corporate side and among leadership and decision makers on the Africa side ... with everyone looking out for their own interests, and nobody looking out for the interests of the people of Africa.

The story of telecom in Africa has been relatively benign ... investments have been made and a broad customer base has been created that has had benefit from the use of telecom services. But even in this case the story has its problems.

My numbers may not be exact ... but the idea is sound and the orders of magnitude, I believe, correct. Over a number of years an African entrepreneur invested some $700 million in telecom infrastructure around Africa ... and subsequently sold the company for (say) $3 billion to a Kuwait telecom investment company. This transaction made the initial entrepreneur very wealthy ... but this transaction also increased the cost of telecom in Africa by about four times. In the short run, the cost increase did not translate into price increase ... but in due course it will.

And now the Kuwait company has been acquired by an Indian company ... and it is likely that once again there will be a stock profit that again will translate into cost increase for African telecom operations.

These thoughts were prompted by an article in the New York Times about the Indian company contracting with IBM to upgrade the African based telecom infrastructure. Maybe the Indian company has the resources in both finance and intellectual capacity to bring operational benefit to Africa ... maybe, in the end, all of my initial argument is wrong! It could be ... simply because technology when it is well used has amazing power to lower costs and provide very substantially better performance. IBM has some important technology capacity.

The NYT article may be found at The text is copied at the end of this post.

With good management of its resources, the African people can progress out of poverty. For most of the last half century the management of African resources by its leadership has been disastrous and only a few Africans have seen much, if any, benefit. This is preposterous state of affairs ... facilitated by international corporate leadership looking out for their stockholders and failure of any and all oversight mechanisms.

It would be nice if the story reported in the NYT is an indicator of change ... we should watch this closely over time. It might be the beginning of a paradigm change ... maybe?

Peter Burgess

September 17, 2010, 2:00 AM
I.B.M.: Africa Is the Next Growth Frontier

Samuel J. Palmisano, I.B.M.’s chief executive, doesn’t jet around the world to make an appearance every time the technology giant wins a services contract. But the announcement Friday morning in Nairobi is different, says I.B.M.

Bharti Airtel
Samuel J. Palmisano, I.B.M.’s chief executive, left, with Sunil Bharti Mittal, the chairman of Bharti Airtel.

I.B.M. will supply the computing technology and services for an upgraded cellphone network across 16 nations in sub-Saharan Africa. Its customer is India’s largest cellphone operator, Bharti Airtel, which paid $9 billion a few months ago for most of the African assets of Kuwait’s Mobile Telecommunications Company, or Zain.

Under the 10-year agreement, I.B.M. will handle customer service for Bharti and provide the hardware, software and services to run everything from billing and call-traffic management to delivering new services like music and video. The deal takes the broad partnership between Bharti and I.B.M., begun in 2004, beyond India. I.B.M. is not disclosing the dollar size of the deal, but analysts estimate it at more than $1.5 billion over the decade-long span.

The Bharti contract also punctuates I.B.M.’s Africa strategy. The company’s presence in Africa dates back 50 years, but in the last five years I.B.M. has invested $300 million in the region to build data centers, add country offices and foster technology training programs — and it plans to expand aggressively in the region.

“This is a huge step forward for I.B.M. in what we think is the next major emerging growth market — Africa,” said Bruno Di Leo, general manager for growth markets for I.B.M.

Though it looms small in the global technology market today, Africa is primed for growth, according to Frank Gens, an analyst at IDC. “And I.B.M. is, as it’s done before, getting in on the ground floor,” Mr. Gens said.

The company’s strategy calls for the growth markets — not only the well-known BRIC countries, Brazil, Russia, India and China, but also dozens of others — to increase as a share of I.B.M.’s revenue from 19 percent to 25 percent by 2015. That is the equivalent of $1 billion in new sales a year.

In these nations, I.B.M. is targeting the linchpin industries of economies including telecommunications, banking, transportation, health care and energy.

Mr. Di Leo, speaking on Thursday from his office in Shanghai, noted that mobile phones in developing regions like Africa were used not only for talking and texting, but for many other day-to-day activities like banking. He said only 23 percent of Africans have access to banking services, but already 8 million Africans use their cellphones for payments.

So that technology application alone, Mr. Di Leo said, was “a huge opportunity.”

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