Digitization of the African Economy: An opportunity for international mid-size firms?
by Kacana Sipangule, Research Fellow at the Kiel Institute for World Economy and the Poverty Reduction Equity and Growth Network (PEGNet)
The recent pace of economic growth in Africa has been impressive: Between 2001 and 2014, many sub-Saharan African countries maintained an average real gross domestic product (GDP) of 5 percent. Following the recent economic slump of the last two years, the 2016 African Economic Outlook projects a recovery and steady rise in economic growth rates for many sub-Saharan African countries.. One of the most significant developments that have accompanied this economic growth has been the rise in digital connectivity across the continent. Previously characterized by high costs of Internet accessibility and long distance calls, the continent now boasts over 700 million mobile phone owners and 150 million internet users (Graham and Foster, 2014).
Despite these improvements in digital connectivity in sub-Saharan Africa, the accessibility and benefits from using these technologies remain low – particularly for the poorest segments of the population. This digital gap – along with cheap labor, a growing young population and a vast consumer market – presents a promising opportunity for small and mid-size firms that seek to invest in Africa’s digital sector.
Some of the major deterrents to the African digital revolution are the availability, affordability and accessibility of Internet. Most Internet users can only access slow and unreliable second or third generation (3G) Internet on their mobile phones. To improve Internet accessibility, a number of African countries have welcomed private investments into their information, communications and technologies sector (ICT). Investing in the provision of reliable and faster fourth generation (4G) Internet services is a lucrative opportunity for small and mid-size firms.
Another attractive opportunity is to establish mobile phone assembly plants. Africa’s population is projected to continue to grow over the next years and to remain relatively young. As the youth have the highest digital adoption rates, the demand for affordable and robust mobile phones will continue to rise. Investing in plants that provide affordable, locally assembled phones and other electronic devices, such as laptops and tablets, will be profitable, especially in countries that are centrally located with a good connectivity to other African regions.
Many African countries are at the forefront when it comes to the use of e-services. In Kenya, for instance, monetary transactions are conducted using M-PESA, a digital payment system. In Ghana, Tanzania, and Zambia health workers use mobile phones to report counterfeit drugs and stock-outs (World Bank, 2016). The e-service sector also provides many opportunities for mid-size firms to reach markets and consumers that were previously inaccessible. For example,firms seeking to sell goods or provide services, may take advantage of the existing e-commerce structures to broaden their client base in Africa.
Finally, opportunities also exist to provide infrastructure that will support digitization. As the digital revolution in Africa reaches full swing, the demand for supporting infrastructure, such as optical fiber cables and smart technologies, will rise. Naturally, firms should also take certain aspects into consideration before selecting a country or sector to invest in, like the country’s political stability, its ease of doing business, its proximity to other regional markets, the costs of labor as well as the general demand for the products to be provided by the firm. To curtail possible investment risks, firms may engage with already established local firms or in public-private partnerships. Investing in the digitization of the African digital revolution will not only contribute to closing the digital dividend and benefit firms, but will also have positive externalities on access to information, governance, job creation as well as fulfilling the sustainable development goals (SDGs).
African Development Bank (ADB), the Organisation for Economic Co-operation and Development (OECD), the United Nations Development Programme. (2016). African Economic Outlook 2016: Sustainable Cities and Structural Transformation. http://www.africaneconomicoutlook.org/en/outlook
Graham, M. and C., Foster. (2014). Geographies of Information Inequality in Sub-Saharan Africa. Oxford Internet Institute, University of Oxford, U.K. http://cii.oii.ox.ac.uk/geographies-of -information-inequality-in-sub-saharan-africa/.
World Bank (2016). World Development Report 2016: Digital Dividents. World Bank Group/ International Bank for Reconstruction and Development. Washington DC, USA. http://documents.worldbank.org/curated/en/896971468194972881/pdf/102725-PUB-Replacement-PUBLIC.pdf