Transcript Institutions in International Business

WHAT MAKES SUCCESSFUL
COMPANIES IN AFRICA?
INSIGHTS FROM RESEARCH
Look South:
Doing Sustainable
Business in
Southern Africa
B y M i c h a e l W.
Hansen,
Copenhagen
Business School
OVERVIEW OF PRESENTATION
 Purpose of presentation
 What do we know about performance of companies in Africa?
 What are implications for companies considering to enter Africa?
 Topics





What are the challenges and opportunities in Africa?
Why are Danish companies entering Africa?
How are Danish companies entering Africa?
How are Danish companies in Africa performing?
Conclusion: What creates success in Africa?
 Sources
 2011 IFU survey of 200 Danish investments in Africa
 2015 survey of 172 local companies in Tanzania and Kenya
WHAT ARE THE CHALLENGES AND
OPPORTUNITIES IN EAST AFRICA?
 Opportunities
 High growth
 Pent up demand
 Low competition
 Vast resources
 Challenges
 Weak industrial environment
 De -industr ial i zat ion and missing middle
 Pr oble ms of acce ssing inputs
 Unde r -de ve lope d suppor ting industr ie s
 Institutional voids
 Cor r uption
 De fice nt contr act e nvir onme nt and we ak
infr astr uctur e s
Indicator
Kenya
Tanzania
GDP
per
capita,
PPP 2009: 2,405
2009: 2,049
(constant 2011
international
What
are the main
institutional
barriers
2014: 2,818
2014:
2,421to firm growth
What are the main
barriers
to
firm
growth
for local
$)
for local companies?
GDP growth (annual %)
companies?2010: 6.4
2010: 8.4
2011: 6.1
2011: 7.9
2012: 4.6
2012: 5.1
High input
costs/no
access to2013: 5.7
Inadequate
infrastructure
inputs
2013: 7.3
2014: 5.3
2014: 7.0
Average (calculated):
InstitutionalCorruption
factors
6.02
6.74
2009: 17.4
Exports
ofof
goods
and
services
Lack
competence
among
Weak
business
networks
and2009: 20.0
(% of GDP)
Government
linkages bodies -…2014: 16.4
2014: 19.5
Insufficient/lacking
Foreign direct investment,
Other2009: 0.3
government support…
net inflows (% of GDP)
2014: 1.5
2009: 3.3
2014: 4.3
Inadequate government
Unfair
competition
Foreign
direct
investment,
2009: 0.1
regulation
and
enforcement…
2009:
net outflows (% of GDP)
2014: -0.1
2014:
Manufacturing value added
2005: 1,522.5
No data available
2005: 1,318.3
Lack of competence among
Poor Infrastructure
government bodies - locally
0% 1,882.2
10%
20%
Weak role of business
(MVA) performance
2010:
 I m p l i c a t i o n s fo r c o m p a n i e s w i s h i n g to
e n te r A f r i c a
 Opportunities for first mover advantages and
windfall earnings
 Challenges related to lack of inputs, weak
support industries , and institutional voids
Tanzania
Kenya
Tanzania
Kenya
30%
40%
50%
2010: 1,991.7
association
Manufacturing/ GDP
2007: 14%
Ease of doing business index
2014: 11%
2009: 82
(Rank: 1 to 189)
2014: 129
2014: 140
2015: 108
2015: 139
0.00%
10.00%
2007: 8%
20.00%
2014: 6%
2009: 127
30.00%
WHY ARE DANISH COMPANIES INVESTING
IN AFRICA?
 C o m p a ni e s i n te r n a t io n a l i z e f o r e s s e n t i a l ly
four reasons
 Access resources
 Access markets
 Reduce costs
 Access assets
Share of Danish investors motivated with market
access
All
Asia
 Motives in Africa
 Mainly market seeking, in BtB and BtG
markets, rarely BtC markets
 Rarely cost reduction motivated
 I m p l i ca t i o n s f o r c o m p a n i e s w i s hi n g to
e n te r A f r i c a
 Companies are almost all market seeking,
mainly in BtB markets
 Only a few companies seem to engage in
local sourcing and production, however this
may change in the longer run.
Central and Eastern Europe
Latin America
Middle East and North Africa
West Africa
Southern Africa (ex ZAF)
South Africa
East Africa
0.00%
50.00%
100.00%
HOW ARE DANISH INVESTORS ENTERING
AFRICA?
 M u l t ip l e e n t r y m o d e s p o s s i b l e
Pure
Contractual
Joint
Acquisition
Fully
market
entry
venture
controlled
(equity) 100% ownership of
Share entry
of Danish investors having
 Depends on transaction costs and
c a p a b i l i t y f a c to r s
DECIDING ON ENTRY MODE
Market
seeking
 I n A f r i c a , l o c al p a r t n e r s hi p s r e m a i n
r e l a t i v el y c o m mo n
 Difficult business environments
 Need to buy into local competencies
•
Export
•
•
•
• Sales and
project
service JV
Franchise
Agent
Distributor
Asia
Fully controlled
• License
Transaction • Importsubsidiary
Production
Central and Eastern Europe
• Outsourcing
costs
oriented
(IPR protection,
contract enforcement,
uncertainty,
complexity)
 Rarely 100% equity entr y, often nonequity
 Local partnerships are essential, e.g.
agents, distributors and JVs
 There is no ”right” mode, it depends on
the balance of transaction cost and
capability factors
Production
JV
Acquisition
of sales and
service
organization
Acquisition of
•local
Acquisition
company
of producer
License/
franchise
Middle East and North Africa
Southen Africa
East Africa
•
Sales and
service
subsidiary
•
Soucing
office
Production
subsidiary
•
Latin America
West
Africa
Export
 I m p l i ca t i o n s f o r c o m p a n i e s w i s hi n g
to e n te r A f r i c a
•
•
Joint venture
Local purchase
of inputs
Need for complementary
resources
0.00% 10.00% 20.00%
30.00%
40.00%
(Market knowledge,
networks,
access to 50.00% 60.00%
authorities, access to local labor, cultural
intelligence)
HOW ARE DANISH INVESTORS IN AFRICA
PERFORMING?
 Local and Danish companies in Africa
a r e r e l a t i v e l y p r o fi t a b l e
 Re l a t i v e l y m a ny D a n i s h c o m p a n i e s f a i l
i n A f r i c a a n d m a ny h av e l ow I R R
 H o we v e r, h u g e i m p r ov e m e n t s i n
p e r f o r m a n c e o f D a n i s h i nv e s to r s i n
Africa over time
Performance
of Danish
investors
Africa
Performance
in Africa
andin
size
Danish
investor performance
over time
70.00%
90.00%
80.00%
60.00%
70.00%
50.00%
60.00%
All
Asia
50.00%
40.00%
40.00%
Stop of operation
Stop of operation
Negative
IRR
Negative
Negative
IRR
IRR
Central and Eastern
Europe
30.00%
20.00%
20.00%
10.00%Latin
America
0.00%
10.00%
 Large fims succeed more, mediumsized
companies are challenged
 I m p l i c a t i o n s fo r c o m p a n i e s w i s h i n g to
e n te r A f r i c a
Middle East and
0.00%North Africa
Small firms
West Africa
Stop of
operation
Medium sized Large firms up
firms
to 1000
More than
1000
Southern Africa (ex
ZAF)
South Africa
 Prospects of large earnings
 Risks are large (but declining)
 Some companies are able to contain risk:
How?
East Africa
0.00%
20.00%
40.00%
60.00%
80.00%
SO, WHAT CREATES SUCCESS IN AFRICA?
 H i g h l y p r o fi t a b l e i nv e s t m e n t s a r e
possible in Africa
 B u t t h e c h a l l e n g e s a n d r i s k s r e l a te d to
t h e b u s i n e s s e nv i r o n m e n t a r e a l s o v e r y
high
 Accessing inputs
 Dealing with institutional voids and deficient
infrastructures
 Finding partners
 M a ny c o m p a n i e s h av e v e r y g o o d
performance, hence the challenges and
r i s k s o f t h e b u s i n e s s e nv i r o n m e n t c a n b e
contained
 T h e r e i s p r o b a b l y n ot o n e - s i z e - f i t s - a l l
s t r a te g y to c o n t a i n b u s i n e s s e nv i r o n m e n t
challenges and risks.
 I n s te a d e a c h c o m p a ny m u s t a n a l y z e o n
v a r i o u s s t r a te g y d i m e n s i o n s to i d e n t i f y
i t s b e s t s t r a te g y ( K h a n n a a n d P a l e p u ,
2 010 ) .
Khanna and Palepu winning strategies in
emerging markets
Replicate or adapt business models, products,
etc.
Compete alone or acquire capabilities? JV with
local partner
Accept market context as given or change
through own initiatives
Enter/stay despite institutional voids or seek
opportunities in alternative locations/markets
OVERALL FINDINGS REGARDING DANISH
INVESTORS
 High risks but also high returns for MNC subsidiaries
 Implication: The return/risk profile may reflect adverse selection in the sense
that MNCs only invest in high return projects in developing countries
 The level of variance in per formance has been falling over time
 Implication: We witness a certain degree of mainstreaming of performance e.g.
due to improved capabilities of MNCs, improved business environments, or
improved screening ability of financial markets.
 The variance is consistently explained better by firm capability/
strategy factor s than by external factor s.
 Implication: MNCs with strong capabilities and/or MNCs adopting the right
strategies can overcome adversities of developing country and industry
environments. It is factors within the control of the MNC that largely determines
performance. Achieving high performance has over time moved from being
externally determined to being internally determined