Think You Need an Emerging-Markets Strategy? Think Again

If there had been any doubt as to how quickly the global economic landscape—and the market perceptions of it—can change, it would have been erased by events during August and September 2015. Concerns about the Chinese economy and fretting over the next move by the U.S. Federal Reserve triggered massive global market volatility in stocks, commodity prices, and exchange rates. And that turmoil underscored a critical imperative: leaders of companies operating around the world need to move beyond old views and conventional wisdom as they set global strategies.

At the heart of many such strategies today remains a binary view that divides the world into “advanced” and “emerging” economies, with the former including wealthy nations and the latter encompassing less affluent, faster-growing countries. That mind-set has guided the setting of global strategies in corporate boardrooms, leading multinational companies to adopt emerging-market strategies for expanding beyond their traditional markets.

That binary view of the world economy is now hopelessly outdated, however. Colombia, Malaysia, Poland, and Turkey, for example, have as little—or less—in common with other so-called emerging countries such as Bangladesh and Kenya than they do with Germany or the U.S. Therefore, companies need to move beyond old labels and find new ways to set market priorities. And the answer is not just a matter of looking for new labels. Any approach needs to be dynamic and agile so that strategies can be altered when short- and long-term developments alter conditions within and across individual countries.

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Is impact investment the key to fixing Africa’s socio-environmental issues?

As is the case with many emerging markets, South Africa has its fair share of socio-environmental problems. If it’s not unsustainable food supply its lack of clean water or access to power. And while government bodies and non-profits alike have initiatives geared to address some of the most pressing of these issues in the interim, some argue that it’s really up to so-called high-impact entrepreneurs to ultimately implement solutions that are sustainable.

However simple that may sound, as always, the problem is a bit more complex. The ecosystem support structure for social enterprises is yet to mature to a stage where these high-impact entrepreneurs can achieve strong growth and scale their businesses.

Last year we told you about the Green Pioneer startup accelerator — one of the region’s few set out to help environmentally focused companies from Kenya and South Africa to become investment ready and ultimately, grow their businesses.

Committed to the 16-week programme, some of the companies selected for the programme included inspiring startups like Solar Turtle which distributes mobile solar battery-charging stations to off-grid communities. Mellowcabs, on the other hand, manufactures and operates electric mini-cabs for affordable transport in urban areas. Most of these businesses have been around for a couple of years but are struggling to take their operations to the next level.

One of the main organisations that headed the Green Pioneer programme, called Impact Amplifier, is a Cape Town-based business incubator and consultancy firm that helps impact investors realise opportunities in Sub-Saharan Africa.

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Five steps that create inclusive growth through SMEs

Despite being the world’s second fastest-growing region, Africa’s challenge is translating this growth into broad-based improvements in well-being. Tackling five key areas for sustainable SME development (infrastructure, regulation, capacity, finance and business linkages) together with targeted investment in high-growth sectors will put Africa on the trajectory toward booming, yet inclusive economic development.

How can a 5% GDP growth fail to translate into a commensurate reduction in poverty, over years and years? Perversely, how can Africa have managed to increase the number of people living in extreme poverty over the past decade?

It all boils down to economic expansion with insufficient job creation. In some countries, this is because GDP growth is mostly stemming from resource extraction and foreign investment, with relatively little upscaling of the local services or manufacturing sectors. For example, according to Standard Bank, the discovery of the world’s 4th biggest gas reserves in Mozambique is predicted to more than quadruple GDP over the next 20 years, but create less than 1 million jobs in a country of over 20 million (mostly young) people. In some cases, there is a misalignment in the types of jobs created and the educational backgrounds of and resources available to citizens. Insufficient local job creation is compounded by increasing urbanization of former agricultural producers, inadequate infrastructure, paltry public services, sub-par intra-regional trade and other limitations. All of this gives rise to the current situation, in which “lived poverty” pervades and remains virtually unchanged across Africa.

Promoting local small and medium enterprise is the most effective and sustainable solution for creating more inclusive growth. SMEs, in general, comprise the majority of firms and the largest employer in much of the world. As opposed to foreign investment, which may be concentrated in a particular sector or region, local SMEs create opportunities across geographic areas and sectors and employ much broader and more diverse segments of the labor force. In addition, preliminary evidence suggests that formal small enterprises provide better stability, higher pay and better benefits to their employees than micro enterprises and informal firms. In comprising the majority of firms and reaching much deeper and earlier market penetration than foreign firms, local SMEs are often the principal provider of goods and services in lower and middle income communities.  They also are more tapped into local networks and are instrumental in creating offtake for other local suppliers, thus strengthening local value chains.The expansion and fortification of these local value chains means higher local job creation and increased revenues to both private and public sectors.

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The Case for Impact Investment in Africa in 2015

Africa’s economy is expected to expand by 50 percent over the next five years, according to a new analysis from Deloitte. This explosive growth is driven, in part, by Africa’s emerging middle class. Yet despite this progress, many Africans still lack access to essential services like schools, banks and hospitals.

While governments and philanthropic groups worldwide operate with limited budgets, private industry in 2015 has a significant role to play in helping those left behind by the continent’s rapid economic expansion. In Africa, impact investing – targeted capital into businesses working to expand accessibility to essential products and services to those who most need them – is critical to the continent’s continued economic growth.

Impact investing isn’t philanthropy; it aims to turn a profit. But unlike conventional investing, impact investing is designed to serve a larger social purpose: providing underserved populations with the resources they need to improve their lives. By delivering the products and services that empower the poor to lift themselves out of poverty, impact investing can scale solutions quicker than traditional philanthropy.

Consider the revolution wrought by microfinance. Local entrepreneurs receive small loans to start and grow businesses. For many of the 160 million people who’ve received such assistance, microfinance has enabled them to build a livelihood and better address the needs of their families.

But the individual dollar amounts involved in microfinance are, more or less by definition, very small. And the needs in Africa are very big.

Take health care. There are only nine hospital beds for every 10,000 people in Africa. That’s two-thirds below the global average.

There are similar problems in education. Most African students are stuck in overcrowded classrooms with insufficiently trained teachers. In Chad, the average classroom size is 67 students – more than double what one would find in rich countries.

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Free African SMEs!

All sorts of meetings on the topic of Africa’s economic takeoff are constantly being organized. Local transformation, inclusive growth, industrialization, youth unemployment, competitiveness, etc. are discussed at them. Strangely, they often address the role of African SMEs between the lines. Yet they are the real drivers of Africa’s economic transformation.

Do we believe in the power of SMEs?

SMEs ensure that there is a broader and more equitable redistribution of the benefits of growth because they account for 90% of private companies in Africa and create 45% of employment. They serve as both laboratories and incubators by paving the way for innovation and entrepreneurship. Their remarkable distribution across all territories allows them to provide employment and purchasing power in areas that are the most remote from economic centers. They are also a remarkable melting pot for training and human resources. Finally, they constitute the first stage for Africa’s economic rationalization process. Despite this preponderance, why do SMEs only account for 33% of Africa’s GDP, against 60% in developed economies? It is because they do not benefit from the necessary economic and institutional attention that could promote their development. On the contrary, they are bombarded with taxes, which hampers their growth. Furthermore, the recent study by the PWC consulting firm has shown that African SMEs were the most subject to tax in the world. What benefit can SMEs hope to gain from the taxes that they will be made to pay? What public services will be rendered to them? Too few unfortunately. Consequently, they very often prefer to remain below the radar and stay in the informal sector. Another major factor which severely hampers the development of SMEs in Africa is their difficulty to access financing.

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