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Cape of good hope

Since the early 2000s, fast-globalising corporations from India, China and other Asian countries have shown a growing appetite for foreign direct investments in Africa, writes N Chandra Mohan.

india Updated: Mar 30, 2010 22:50 IST

Since the early 2000s, fast-globalising corporations from India, China and other Asian countries have shown a growing appetite for foreign direct investments (FDI) in Africa. This push into the world’s poorest continent has been motivated in part by a desire to secure access to raw materials for their rapidly growing economies. Their hunger for oil and minerals has led western observers like the billionaire George Soros to dub them as Africa’s ‘new colonialists’ as they are perceived to be exploiting the continent like the Europeans had in the past.

This drive into Africa by Indian transnationals does appear, prima facie, problematical. The continent is home to more than half the 35-odd countries that have experienced humanitarian emergencies — largely man-made crises in which thousands of people perish in wars. Sudan is civil war-ridden but that hasn’t prevented India’s oil giant ONGC from being heavily involved in oil exploration there. In this milieu, a scramble for resources is bound to appear controversial with India vying with China to become one of the largest investors in Africa.

The flow of India’s FDI into Africa averaged $334 million a year between 2000 and 2004, hitting a peak of $883 million in 2002, largely reflecting ONGC’s involvement in Sudan. Now, with Bharti Airtel’s $10.7 billion acquisition of Zain, Kuwait’s third largest telecom operator, for its African assets (excluding Sudan and Morocco), India’s FDI in Africa has touched, according to Indusview Advisors, a mergers and acquisitions advisory firm, $16.7 billion. Much of these investments represent more than a search for oil and minerals.

Not so long ago, Bharti had agreed to buy Warid Telecom in Bangladesh, signaling a new strategy of scaling up globally through a string of small and medium-sized acquisitions in the developing economies. Africa is the new frontier for Bharti as its telecom market is the most underdeveloped and is spread over a vast geographical area. The market has relatively low rates of penetration with only three to four operators. In India, in contrast, most of the global players are already present in the industry and the market has become highly competitive with wafer-thin margins.

More generally, India Inc’s African safari is more than resource-seeking in nature. India’s biggest domestic auto manufacturer, Tata Motors, is making preparations to launch its ‘people’s car’, the Nano, in the continent. Godrej Consumer Products Ltd wants to take its products to Africa and has recently bought Tura, a household brand in Nigeria. The investment intentions of even a mining conglomerate like the Vedanta Group also go beyond its interest in copper as it intends to set up a power project in southern Africa not only to meet its own requirement in Zambia, but also to cater to demand in Mozambique, Botswana, Malawi and Angola.

Far from being a search for oil and minerals, “some of these investments are propelling African trade into cutting-edge multinational corporate networks, which are increasingly altering the international division of labour,” argued Harry Broadman, a World Bank economist. One of the top 25 agri-business transnationals, India’s Karuturi Global Ltd, a global leader in the production and export of roses, acquired Sher Agencies, the world’s largest rose farm in Kenya. It is also engaged in large-scale agricultural farming in Ethiopia to produce rice, palm oil and sugarcane.

Indian giants like the Tatas — whose commitment in current and future projects in the continent is pegged at $1.24 billion — and Mahindra and Mahindra are making outbound investments in South Africa to exploit a booming market in the continent. Back home, they have acquired critical size and now look increasingly overseas for growth. According to consultancy firm, Accenture, companies like these follow a ‘string-of-pearls’ approach, gaining experience and confidence by venturing into smaller markets in emerging economies before tackling more mature markets. Mahindra’s auto business, thus, targeted Malaysia, Thailand and Indonesia before moving onto South Africa. The American and European market represents the ultimate challenge.

While rising FDI from India holds great promise for Africa, reforms are needed to strengthen this process. The business environment needs to be made more investor-friendly and transaction costs lowered. An Indian firm in Ghana found it so costly to ship a container from Accra to Lagos that it decided to do a cross-border investment than export. Broadman also advocates reforms that leverage linkages between investment and trade to allow African business-participation in global production-sharing networks generated by Indian and Asian investments.

India, for its part, has considerable advantages in engaging Africa. The biggest of these is the Indian diaspora, especially in south and east Africa. The diaspora’s contribution has been significant in India’s trade, as they own distribution channels, manufacturing facilities and even mines in these countries. Unfortunately, this potential has not been adequately tapped, although India Inc has made diverse investments of late in a range of industries, including infrastructure. India’s growing partnership with Africa must harness the diasporic potential.

N Chandra Mohan is Professor of Economics and International Business at the IILM Institute for Higher Education, New Delhi
The views expressed by the author are personal

First Published: Mar 30, 2010 22:45 IST