Enhancing African Commercial Environments

In opening the African Growth and Opportunity Act Forum this week, U.S. Trade Representative Ron Kirk listed several elements that comprise a positive commercial environment that would attract foreign investment. The one most misunderstood is the sanctity of contracts.

According to the World Bank, African countries collectively have made progress in improving their business climates. For the first time ever, an African nation leads the rest of the world as the “top global reformer.” Rwanda ranked number one in the 2010 Doing Business Indicators, while Liberia finished at number 10 and Mauritius moved into the top 20 reformers. Still, Africa’s private investment rate collectively is below 15% of Gross Domestic Product, and eight of the ten countries judged as having the most difficult environment for starting a business in the world are African.

Despite the problems in some countries, much of Africa remains increasingly attractive to foreign investors, not only because of the reforms so many African countries have accomplished, but also because African investments have provided higher returns on investment than most other parts of the world at around 30% annually before the current economic crisis. Global emerging giants such as the so-called BRIC countries – Brazil, Russia, India and China – increasingly seek Africa’s resources, which increases commodity prices. China last year became Africa’s largest investor. Nevertheless, the sanctity of contracts and reasonable negotiations will always remain critical elements to foreign companies doing ongoing business in Africa no matter what their resource base is.

In a free market, there are economic calculations that determine for companies whether it is viable to do business in an environment or not. When you change those calculations, it may no longer be possible to make a profit doing what you have done previously. Such financial decisions have nothing to do with how a multinational company feels about a government or the country in which it operates. The business math is either favorable or it isn’t, and when the latter is the case, the foreign company may have to cease operations. No one – not even the smallest vendor on the corner – can afford to pay higher production costs than the price for which he or she can sell the product.

In difficult negotiations with a foreign government, American firms appeal to our government for assistance. It is the policy of the U.S. government to safeguard American investment abroad because of the positive impact it has on our economy. According to the U.S. Chamber of Commerce, nearly half of all revenue earned by the 200 top U.S. companies comes from their foreign subsidiaries and provides the funding for innovation and creation of better jobs here in America. U.S. companies that invest abroad create an estimated 2.3 jobs in America for every one they create overseas. Consequently, the profitability of American firms abroad is vital to the economic interests of U.S. companies and the United States itself.

This is why U.S. government agencies such as the Overseas Private Investment Corporation (OPIC), which makes loans and loan guarantees to support U.S. business abroad will become involved in business disputes and may, as they have in more than one situation, put a hold on such activities in a country. It is not merely to pressure a government to yield its national interests, but rather a matter of fulfilling its mandate to protect U.S. interests. The American government and the U.S. companies it is required to protect have an abiding interest in investing in Africa, but the cost must be calculated and found to be worthwhile.

In the real world of commerce, decisions about where to do business and under what circumstances business is conducted can be difficult ones for both sides. African countries possess much of the world’s valuable natural resources, but in many cases, these resources have not been tapped because the economic calculations are not favorable for doing so. Either the transportation costs are too high, or there is insufficient electric power to conduct manufacturing or the political risk is too great due to conflict. Or perhaps some other complication makes the cost of doing business too much to operate there.

American companies increasingly believe that corporate social responsibility projects benefiting the communities in which they operate are good business, but the cost of doing business there in the first place may be too high to operate. Such costs can change when contracts are renegotiated without regard to the bottom line of the foreign investor. That is a factor that African governments must consider as they engage in negotiations to attract or hold onto foreign investment.