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How to Navigate Institutional Voids and Successfully Invest in Africa

institutional voids - source Heidelberg Nigel
source Heidelberg Nigel

In my more than  twelve years’ experience in promotion of investment opportunities in Africa to businesses in Australia, one re-occurring question I get from prospective Australian investors is how could they verify the attractive business opportunities presented to them. I usually suggest robust market research options and sound due diligence. My responses are informed by my knowledge of institutional voids in emerging markets in Africa and their negative impact on flow of foreign direct investments into the continent.

Over the years, I have observed many smart African government representatives make brilliant power-point presentations on attractive investment opportunities in their country but not acknowledge or mention the existence of the big elephant in the room, “institutional voids” in their home market.

To gain a better understanding of the subject matter, institutional voids can be described as the lacunae created by the absence or poor functioning of specialised market intermediaries in any given market.

Institutional voids include unreliable sources of market information, an unpredictable regulatory environment and inefficient judiciary systems. These are the three main sources of market failure that make investors reluctant to do business in any given market including Africa.

Furthermore, there are many other institutional voids including erratic electricity supply, poor road networks, absence of reliable supply chains and qualified suppliers, if the requisite raw materials do actually exist.

Institutional voids create a business environment that is very different and much more unpredictable than that which companies have taken for granted in their home developed markets.

In contrast to emerging markets in Africa, developed and well-functioning markets tend to have efficient intermediaries which enable relatively low transaction costs and high liquidity. Intermediaries in developed markets also enhance greater degrees of transparency and shorter time periods to complete transactions.

In developed markets, intermediaries are mostly owned and operated by the private sector hence are driven by market forces. The fact that so much economic activity is devoted to market intermediaries suggests the magnitude of challenges faced by buyers and sellers in conducting their business in the absence of intermediaries.

Considering that intermediation in any given market is based on deeply specialised knowledge and skills, the institutional voids in Africa are not only investment roadblocks, they also present viable opportunities for entrepreneurial foreign and domestic companies to build businesses based on filling these voids.

There are essentially six types of market intermediaries that support efficient function of any developed market.

The market intermediaries include but not limited to:

  • Credibility enhancers
  • Information analysers & advisers
  • Aggregators & distributors
  • Transaction facilitators
  • Regulators
  • Adjudicators

From our June newsletter, we will analyse the roles of each listed market intermediary starting with Credibility enhancers and Information analysers & advisers.

If you are considering expanding your business to any market in Africa, reach-out to us and learn about strategies to mitigate impact of institutional voids on your business.

 

For more information contact:

Mr. Frank Aneke

Email: Frank@octoberfirst.com.au

Mobile: 0401 808 739

Online: octoberfirst.com.au

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