Africa is on the verge of something big. This seems to be a quiet, cautious consensus in some investment communities. The past year has been peppered with stories of tech startup hubs emerging across the continent, from Lagos to Kigali to Agadir. The model of American tech entrepreneurship looks to be slowly sparking a renaissance in the Silicon Sahara.
As the gaze of America’s VCs begins to settle on African entrepreneurs, many open questions are left unanswered. Will Africa play host to the tech world’s next gold rush? Can these markets stay stable enough to grow the next billion-dollar Internet companies? Does Africa have what it takes to emulate Silicon Valley? The answer is a resounding “Yes.” Big things are ahead for African tech.
While China was reaping the windfall of massive growth and dealing with the investment challenges of a “free” market within its borders for the first time, it was quietly scaling up its investment outside the country, as well.
Over the past decade, driven by its meteoric economic growth, China has quietly but steadily increased its foreign direct investment (FDI) in Africa. In the five years from 2003 to 2008 alone, Chinese investment in Africa shot up by a CAGR of 105%, from $75 million in 2003 to $5.5 billion in 2008. The same went for imports and exports between the two, which grew from $10 billion in 2003 to more than $50 billion in 2008.
Unlike the west’s investment, China’s ravenous appetite for African labor and resources is not tied to countries with good governance. The only two criteria for Chinese investment in the continent appear to be stability and profitability. This has allowed China, which still only accounts for 3% of the FDI in Africa, to grab the lion’s share in some of its larger FDI recipient markets, such as Sudan, Congo DR and Nigeria, all of which score low in world democracy rankings. Zimbabwe, long a thorn in the side of the western world, recently made the yuan its official currency, effectively making it an economic vassal state of China.
Conventional wisdom holds that Chinese investors want to make a play for African resources — such as mining — as fuel to power China’s mighty manufacturing sector. However, the data tell a different story: China is slowly moving its industrial and services sectors to Africa. Indeed, 38% of African FDI has gone to manufacturing and construction, and another 20% to finance and business services.
So why does this matter for Africa? In all likelihood, it means that over the last two decades, as the Chinese middle class grew and became richer, and as western standards for factory labor became more strict, Chinese goods slowly became more expensive. As evidence, China has consistently devalued the yuan in recent years in order to keep its exports cheap. But at some point, prices will catch up with producers, and China will need to find cheaper factories for its companies to be competitive. Enter Africa.
Chinese FDI in Africa shows no sign of slowing, even as it goes through a credit crunch and a run on its stock market. If it continues at this rate, Africa could become the new world’s factory in the next 10-20 years, and the African middle class could find itself yanked out of agrarian poverty just as quickly as China’s over the last 20 years. And why wouldn’t Chinese investment continue? Relative to the boom and bust of the Chinese debt and equity markets, African FDI has looked remarkably stable.
As long as China, like the Medicis of Renaissance Italy, continues to be a patron of Africa’s enterprising manufacturers and builders, both will profit, and the African middle class will grow.
As more and more manufacturing and services companies look to increasingly stable African economies in which to offshore their operations, the African middle class will grow. And as the middle class grows and business environments become increasingly wealthy and stable, entrepreneurs will emerge in Africa’s nascent tech startup scene.
It’s important to note here the alluring temptation to over-homogenize Africa. The western world tends to think of Africa as a cohesive unit, while countries as close to each other as Egypt and Rwanda are in reality as diverse as Luxembourg is from Turkey. Some will welcome the tech scene; many will not.
But early signs are encouraging. Literacy and education rates are skyrocketing. Studies are coming out on entrepreneurship as the best driver of growth on the continent. The Rwandan government just announced a $100 million venture fund for local tech entrepreneurs. Djibouti is modernizing rapidly with an eye toward becoming East Africa’s Singapore. Mobile phones still have yet to reach their potential. And The World Bank says that Africa is “poised to become the next great investment destination.”
It’s tempting to patronize a bit and characterize these entrepreneurs as “African solutions for African problems,” seeing them only as incubators for social enterprise. Western ears tend to hear about these startups and call up pictures of mosquito nets, clean water, cheap lighting and malaria vaccines. Yet these companies will compete for the same markets to distribute the same products as western ones, with new tactics.
As support structures grow around entrepreneurs in emerging markets, they will gain access to the resources that have buoyed Silicon Valley for 30 years now, and will compete head-on with Silicon Valley startups.
In the words of Andela, a Nigerian education startup backed by the American VC firm Spark Capital, “genius is evenly distributed; opportunity is not.”
This is just the beginning.