What makes successful companies in Africa? Insights from research

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1 What makes successful companies in Africa? Insights from research
Look South: Doing Sustainable Business in Southern Africa By Michael W. Hansen, Copenhagen Business School

2 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

3 What are the challenges and opportunities in East Africa?
High growth Pent up demand Low competition Vast resources Challenges Weak industrial environment De-industrialization and missing middle Problems of accessing inputs Under-developed supporting industries Institutional voids Corruption Deficent contract environment and weak infrastructures Implications for companies wishing to enter Africa Opportunities for first mover advantages and windfall earnings Challenges related to lack of inputs, weak support industries, and institutional voids Indicator Kenya Tanzania GDP per capita, PPP (constant 2011 international $) 2009: 2,405 2014: 2,818 2009: 2,049 2014: 2,421 GDP growth (annual %)    Average (calculated): 2010: 8.4 2011: 6.1 2012: 4.6 2013: 5.7 2014: 5.3 6.02 2010: 6.4 2011: 7.9 2012: 5.1 2013: 7.3 2014: 7.0 6.74 Exports of goods and services (% of GDP) 2009: 20.0 2014: 16.4 2009: 17.4 2014: 19.5 Foreign direct investment, net inflows (% of GDP) 2009: 0.3 2014: 1.5 2009: 3.3 2014: 4.3 Foreign direct investment, net outflows (% of GDP) 2009: 0.1 2014: -0.1 2009: 2014: No data available Manufacturing value added (MVA) performance 2005: 1,522.5 2010: 1,882.2 2005: 1,318.3 2010: 1,991.7 Manufacturing/ GDP 2007: 14% 2014: 11% 2007: 8% 2014: 6% Ease of doing business index (Rank: 1 to 189) 2009: 82 2014: 129 2015: 108 2009: 127 2014: 140 2015: 139

4 Why are Danish companies investing in Africa?
Companies internationalize for essentially four reasons Access resources Access markets Reduce costs Access assets Motives in Africa Mainly market seeking, in BtB and BtG markets, rarely BtC markets Rarely cost reduction motivated Implications for companies wishing to enter Africa 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. Hvad er de strategiske overvejelser Markedsadgang lang dominerende. - Infrastruktur og turist services i Afrika. I Asien er mange traditionelt rettet mod BtB markeder (såkaldte client followers (f.eks. Vestas mange følge virksomheder (LM, Steelcluster, etc)), men i de senere år store succeser hos end consumers (ECCO, Carlsberg, Bestseller). Effektivitets søgende i stigning - Værdikæde rekonfigurering: samler aktiviter i enkelte lokaliterer og laver en kompleks intern arbejdsdeling for at opnå storfdriftsfordele, omkostningsfordele og specialiseringsgevinster - Effektivitets motiverede investeringer er i stigning og inkluderer i stigende grad avancerede aktiviteter (Back office/ services/ R&D). Effektivitets motiverede investeringer koncentreret i Asien. Her er Sydøst Asien den nye destination. Vi ser en flying geese, fra Sydeuroa, til Øst europa til øst asien og nu syd øst asien. Andre motiver: Positionering overfor konkurrenter + læring og udvikling af nye markeder Ændret rolle: Mange IFU projekter har fået omfattende og ofte uventet betydning for den danske investor Ofte svært at fastslå et motiv og ofte udvikler de sig helt uventet Bestseller Kina: Fra en lille investeringer af Troels Holck, Ifu og 2 danske iværksættere, til flere 1000 butikker og en indtjening der svarer til 1/3 af Bestseller koncernen Carlsberg Kina: prøvede Østkina uden held, gik så ind i Vest kina med IFU’s hjælp. Ems helt central for strategi FLS Indien: Et støvet markedssøgende aktivitet til en enorm sourcing platform med 3000 ansatte hvoraf mange er ingeniør og den største afdeling i FLS. Men også de små ændre profil: Starter som offshoring, men ender som markedssøgende og vise versa (Hydratech og Innovation)

5 How are Danish investors entering Africa?
Multiple entry modes possible Depends on transaction costs and capability factors In Africa, local partnerships remain relatively common Difficult business environments Need to buy into local competencies Implications for companies wishing to enter Africa Rarely 100% equity entry, often non- equity 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

6 How are Danish investors in Africa performing?
Local and Danish companies in Africa are relatively profitable Relatively many Danish companies fail in Africa and many have low IRR However, huge improvements in performance of Danish investors in Africa over time Large fims succeed more, mediumsized companies are challenged Implications for companies wishing to enter Africa Prospects of large earnings Risks are large (but declining) Some companies are able to contain risk: How? Afkast er selvfølgelig en god indikator på, hvad Danmark får ud af disse investeringer En undersøgelse fra Nationalbanken viste at indkomsten fra direkte investeringer kan være betydelig. IFU har derfor fået Nationalbanken til at gennemføre en særkørsel, der viser, at afkastene på investeringer i udviklingslande og i emerging markets er væsentlig højere. Mens afkastene i ”ikke udviklingslande” er på omkring 10 procent er de på omkring 20 procent i ”udviklingslande og emerging markets. Hvad viser IFU tal Jeg kiggede på et sample. Af 64 projekter exited siden 1999 havde 3/4 positiv IRR. Det mest interessante her er nok at der er meget stor variation. Store partnere er meget bedre til at generere overskud. Overraskende synes IRR tal ikke at være voldsomt influeret af lokaliteten. Men andre ord, store investorer synes at være i stand til at isolere sig fra lande risiko. Sandsynligvis fordi den store partner har flere ressourcer og mere erfaring. Selv i vanskellige lokaliteter vil store partnere skabe kommercielt bæredygtige projekter IRR DEF The internal rate of return on an investment or project is the annualized effective compounded return rate or discount rate that makes the net present value of all cash flows (both positive and negative) from a particular investment equal to zero. In more specific terms, the IRR of an investment is the interest rate at which the net present value of costs (negative cash flows) of the investment equal the net present value of the benefits (positive cash flows) of the investment NB DEF Afkastgraden er for egenkapitalkomponeneten under direkte investeringer (dvs. koncernlån er ekskluderet). Beregningen er foretaget ved at tage i gennemsnit af beholdningerne ultimo perioderne sat i forhold til den samlede formueindkomst (dvs. geninvesteret indtjening + udbytte) ECONOMIST Globalization and increasing competitive pressure on companies have increased the opportunity cost of not investing in emerging markets.[8][8] A recent Economist Unit survey provides evidence of a link between investing in emerging markets and corporate financial success. Among surveyed companies from developed countries that derive less than 5% of their revenue from activities in emerging markets, only 24% reported their financial performance as being better than their peers. By contrast, for developed country companies that derived more than 5% of their revenue from emerging markets, the share reporting better performance than their peers was just under 40%.

7 So, what creates success in Africa?
Highly profitable investments are possible in Africa But the challenges and risks related to the business environment are also very high Accessing inputs Dealing with institutional voids and deficient infrastructures Finding partners Many companies have very good performance, hence the challenges and risks of the business environment can be contained There is probably not one-size-fits-all strategy to contain business environment challenges and risks. Instead each company must analyze on various strategy dimensions to identify its best strategy (Khanna and Palepu, 2010). 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 This latter dimension is echoed by Khanna and palepu (2010) who argued that MNCs essentially can adopt two generic strategies in relation to developing countries, namely adaptation versus shaping strategies. An adaptation strategy would i.a. imply modification of the existing business model, collaboration with local companies, acceptance of market regulation and continuous investment. A shaping strategy in contrast would imply continuation of existing business model, working alone, seeking change in market context and potentially exiting if conditions are not conducive.

8 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 performance 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 factors than by external factors. 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