The highest return on foreign direct investment in the world is found in Africa, according to the Overseas Private Investment Corporation (OPIC) and UNCTAD. But, there are also many unique risks faced by those that invest in Africa. From civil wars to political risk, companies face a number of hurdles competing in the region’s promising economies.
Benefits of investing in Africa include:
Natural wealth. Africa has an enormous amount of natural resources, ranging from oil and diamonds to gold and uranium. And many of these natural resources remain untapped due to a low human density along with a lack of infrastructure and financing.
Large population. Africa’s population represents approximately 14.72% of the world’s total population with about a billion inhabitants in more than 60 territories. This creates a huge opportunity for consumer goods, such as telecommunications and banking.
Relatively emergent. Africa remains relatively undeveloped with per capita income that lags the rest of the world. This means that there may be an enormous opportunity for growth in the future as its population grows and becomes wealthier.
Risks of investing in Africa include:
Governmental issues. Some governments in Africa are known for their corruption or lack of policy. Corruption can lead to a number of problems, ranging from extortion to nationalizations, while the lack of policy can make it complicated to do business.
Lack of infrastructure. Africa has a low human density and per capita income, which contributes to its lack of infrastructure. This makes it difficult for companies to get the electricity, roadways and other necessary components to operate in some areas.
Regional conflicts. Africa is well known for its civil wars and conflicts, which have taken a toll on its population. Regime changes can also be very difficult for companies since it causes a great amount of uncertainty.
Investors should carefully weigh the benefits and risks of investing in Africa before taking any positions. In general, it’s a good idea to only allocate a small percentage of assets to riskier regions, like Africa, to maximize risk-adjusted returns.
Author: Gesture Chidhanguro