Module 4: Large Enterprises in Developing Countries

For decades, foreign consumer goods such as Coca-Cola and Nestle have served Africa. In recent years, new companies founded in Africa are attempting to expand and accommodate the African middle class. Because these companies are African-based, they ensure that the profits stimulate domestic industry. The following summarizes a few successful initiatives:

Nakumatt Holdings Ltd.

Base location: Kenya
Known for: The top supermarket chain in East Africa

Nakumatt, like Wal-Mart, was inspired by K-mart, which in the 1980s was one of the few stores that sold food, household goods, and furniture all in a single store. K-mart also featured clean and wide aisles for easy browsing, contrasting sharply with the cluttered, cramped corridors of the typical African grocer. Beginning with offering food and household wares, Nakumatt added more product lines every year, and features products made in Kenya as well as from Europe, USA, and Asia. In 2010, revenue reached US$350 M, having increased by 76 % from 2006 levels. Nakumatt currently has operations in Kenya, Rwanda, and Uganda, and plans to expand to Tanzania and the Democratic Republic of Congo. Growing investment and trade is beneficial to the African continent because it helps to shield it from economic fluctuations, such as the global financial crisis of 2007-2010.(1)

MTN Group Ltd.

Base location: South Africa
Known for: A leading cellphone provider in Africa and the Middle East

The mobile phone market is booming in Africa. From 2000 to 2010, 316 million Africans signed up for cell phone subscriptions.(2) As of 2007, the South African cell phone company MTN has been active in 21 different countries, serving over 116 million individuals.(3) Part of the reason for its success is that its location directly in the developing world facilitates building trust and social networks in the community, making it more sensitive to local changes and allowing quicker capitalization. Another defining feature of the company is its willingness to share infrastructure and transmission with other mobile phone companies—lowering cost and environmental impact.(4) MTN has revenues of approximately US$ 15 billion, showing a strong nine % growth from 2008 to 2009.(5) The potential growth of the company is also massive, with a market penetration of less than 50 % in most of the populations it serves.

Ecobank Transnational Inc.

Base location: Togo
Known for: One of the first pan-African banks

The early 1980s saw a dominance of the West African banking industry by foreign institutions. In 1985, a Togolese bank called Ecobank was founded and has been one of a group of African banks that have established a local presence in the African banking scene. In 2010 Ecobank had expanded to 29 different African countries in 746 branches, and the assets of Ecobank total US$9 billion. Local African banks have become key sources of commercial capital for African companies and individuals. Ecobank’s social objectives include providing a regulated and safe source of capital for low-income individuals, especially by partnering with microlending institutes. Along with these partners, Ecobank hopes to establish microlending firms in 20 African countries by 2012. Furthermore, Ecobank also provides loans and services to over 250 microfinance institutions. These kinds of social objectives can be in part attributed to Ecobank’s roots in the local community, making it more likely to be sensitive to community challenges.(6),(7) 

Despite a number of success stories of African large enterprises, a number of obstacles continue to impede growth. Weak infrastructure means that companies have higher energy costs and increased transportation costs. Unfavorable trade tariffs deter investment in new African markets. Furthermore, because much of Africa remains in poverty, consumer spending power is constrained.(8)

Some solutions include more favorable legislation from governments, with the incentive that there will be improvements for regional trade. Facilitating cross-border trade can also help. In 2010, East Africa will become a regional trade zone, reducing cost of cross-border trade.(9) Similar measures across Africa could promote the development of African enterprises.

These previous examples illustrate how large African companies can serve the needs for their own people. African companies can also play large roles in the international market:

Case Study: Good African Coffee

Although many African companies have supplied raw coffee beans to make high-quality coffee, this practice of exporting only coffee beans is not ideal. Being able to not only produce high-quality coffee beans, but also to be able to process the beans—for example, roasting and packaging them—followed by exportation to the developed world, maximizes the profits for a company. Increased profits allow local job creation and a better compensation to farmers. Better yet, high profit margins encourage other locals to imitate the company, which creates sustainable growth of the domestic economy.  

The company Good African, founded in 2003 in Uganda, is the first African company to produce its own processed coffee products and have them marketed at grocery stores in the United Kingdom. One of the key marketing approaches of the company is to claim that being able to process the coffee completely in Africa gives the coffee a distinctly African flavor.(10)

Good African found it difficult to convince supermarkets in the developed world to purchase their products. Many unpleasant prejudices about African entrepreneurs continue to exist, specifically that they are looking for handouts. Furthermore, due in part to these same prejudices, Good African required 14 visits to British companies before being able to convince Waitrose, a major supermarket chain, to stock Good African coffee in 2005. In 2009, a second supermarket chain, Sainsbury’s also started stocking the coffee, and the coffee can now be purchased online in the USA. Furthermore, Good African plans to expand its product line to tea and chocolate.(11)  As of 2010, over 14,000 African farmers help supply the coffee beans to Good African coffee, and benefit from better compensation for their coffee beans.(12)   

For initiatives such as Good African to continue to prosper, there needs to be a shift in attitudes while dealing with African entrepreneurs. The new “cheetah generation” of African entrepreneurs make effective use of technology, such as mobile phones, to lower their business costs. More importantly, they are not willing to wait for NGOs or governments to solve their problems. Policy officials in the developed world ought to recognize these mentality shifts—by providing readily available sources of venture capital specifically for Africa is a start. Furthermore, instead of giving African businesses special privileges, a better strategy would be to give them a share of developed markets. Andrew Rugasira, the founder of Good African, explains “Africa has plenty of entrepreneurs. They just need you (the developed world market) to take your dollars out of your pockets and spend them on their products.”(13)  

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Footnotes

(1) Connors, W. and Childress, S. “Africa’s Local Champions Begin to Spread Out.” 28 May 2010. The Wall Street Journal. Accessed July 14, 2010.

(2) McKinsey Global Institute. “Lions on the Move: The Progress and Potential of African Economies.” 2010. McKinsey Global Institute. Accessed July 26, 2010.

(3) MTN group. “MTN Group Footprint.” 2007. MTN Group. Accessed July 26, 2010.

(4) Ibid.

(5) Connors, W. and Childress, S., 2010.

(6) MTN Group., 2007.

(7) Connors, W. and Childress, S., 2010.

(8) Ecobank. “About Us: The Pan African Bank.” 2010. Ecobank. Accessed July 26, 2010.

(9) Connors, W. and Childress, S., 2010.

(10) Ibid.

(11) The Economist. “A Good African Tale: An African Entrepreneur Struggles for Recognition in Rich-Country Markets.” 11 May 2010. The Economist. Accessed July 9, 2010.

(12) Ibid.

(13) Good African. “Our Story.” Good African. Accessed July 25, 2010.