Is close enough good enough for business?

Many of the world’s fastest-growing economies are characterized not just by high growth rates but also volatility and risk. Especially those countries that have experienced long periods of underinvestment or political upheaval.

But while the growth rates in these countries are attracting businesses attuned to opportunities offered by new emerging markets, the perils of instability and unforeseen risk can often act as a brake on investment.

Given that, a trend has emerged in recent years of corporates adopting a safety-first policy of following growth in one emerging but fragile market by investing in a stronger neighboring country. The theory is simple: locate in a market with strong institutions, rule of law and established tax regime in order to tap into burgeoning consumer demand or commodity boom in the volatile state next door without taking on the risk.

The examples of this are numerous, and mark an evolution in the way established corporates are planning emerging market strategies. Kenya, for example, has seen extraordinary economic growth in the past decade. Its institutions have become stronger, the tax collection rates much improved and the middle class has grown, fueling demand for consumer goods. It is, in many ways, an exemplar of how a country should develop: steady growth driving improved living standards for all.

Kenya lies at the heart of East Africa and, as such, has become (along with Tanzania) the main recipient of foreign direct investment (FDI) in the region. Next door lies Ethiopia. Here, some of the same demographic and economic trends that have boosted Kenya have been spotted – the standard of living is improving, albeit slowly, with one million people leaving extreme poverty in 2012; consumer demand is growing, and GDP growth reached 9.7% for 2012-13.* However, there is no doubt that private investment is still wary of the country as a target for FDI.

A growing number of consumer-facing businesses, including telecoms and financial services firms, have opted to use Kenya as a base for their entry into the East African region in order to sell to Ethiopians, Sudanese and Rwandans. Supply chains are shorter, and tapping into Kenyan expertise can offer critical market insight for the investor company.

The same has been true for other parts of Africa, where regional hubs attract FDI, which then ripples out into neighboring markets. Egypt, despite its recent political travails, is now seeing increasing inflows of foreign investment, in part due to the desire on the part of multinationals to access growth opportunities in the new Libya.

The uprising in Libya had a damaging effect on the country’s infrastructure and markets, causing a desperate need for workers and expertise, thereby creating unlimited business opportunities. In June 2013, four cooperation protocols were signed by the Libyan and Egyptian Ministries of Housing, in the fields of urban planning, training, establishment of new urban communities and real estate financing.

EY’s Business Development Manager in Egypt, Medhat Affifi, explains that these protocols open business development opportunities for all companies operating in Egypt. “The geographic location of the two neighboring countries facilitates the movement of assets, capital and people quickly and smoothly, resulting in a competitive advantage for companies based in Egypt,” he says. “This would enable them to have strong existence in the Libyan markets in a short period of time, with a quick and safe exit plan in case of any violent events or threats, to minimize risks and losses.”

In the past, Libya has been a big market for the Egyptian labor force. This experience has familiarized the Egyptian workforce with the Libyan culture and way of doing business, giving companies in Egypt, using local workers, a competitive edge.

Whether the trend will continue is unclear. It may be that, as trade flows increase over the borders, the immature states grow stronger and are able to attract and support greater FDI levels. Only time will tell.

* www.borgenmagazine.com/ethiopia-emergence-economic-powerhouse/, accessed 6 February 2014.

The article was written by:

  • Christian Doherty

Download the article as pdfpdf149.44 kB

EY refers to one or more of the member firms of Ernst & Young Global Limited (EYG), a UK private company limited by guarantee. EYG is the principal governance entity of the global EY organization and does not provide any service to clients. Services are provided by EYG member firms. Each of EYG and its member firms is a separate legal entity and has no liability for another such entity's acts or omissions. Certain content on this site may have been prepared by one or more EYG member firms