• Prof Chris Ogbechie & Dr Franklin N. Ngwu

Internationalisation by African firms

LBS Insight

Internationalisation by African firms

Internationalisation is a process by which firms gradually increase their international engagement. With the increasing interconnectedness of the global economy enhanced by rapid technological advancement and consumer mobility, many companies are now growingly producing goods and services outside of their home country. Many factors have been adduced for this uptrend such as, but not limited to profit advantage, technology advantage, economies of scale and scope, tax benefits, competitive pressure, proximity to consumers and markets.

Evidence has shown that the scope, speed, and scale at which African firms have been investing in the global economy is growing, while the debate as to whether they are improving and becoming relevant in the international business environment persists.  For example, many African banks, Fast Moving Consumer Goods (FMCG) and Online Retail outlets have emerged to become relevant international players. South African companies such as Standard Bank, MTN, SABMiller, Shoprite, Multi-Choice, and Telkom now have a presence in more than two dozen countries. The sector that has witnessed significant uptrend in internationalisation in many African nations is the banking sector. Togo-based Ecobank, the regional banking giant, has a presence in about 36 African countries and five foreign countries. Equity Bank of Kenya has expanded to six African nations, while Mali’s Bank of Africa is present in 27 countries. In fact, Nigerian banks have not only regional aspirations but also a global presence. The United Bank of Africa (UBA) now has operations in 19 African countries and three developed countries; Guaranty Trust Bank in eight African nations and UK; and Zenith bank in three and First Bank in ten countries.

Firms internationalise for various reasons such as access to basic inputs, diversification into new markets, and the search for new customers and sources of revenue. The authors, Prof. Chris Ogbechie, Dr Franklin N. Ngwu & a co-author, toeing the line of Czintoka et al., classified the motivation for internationalisation into proactive (pull) and reactive (push) factors. The proactive factors entail exploiting profit advantage, unique products, exclusive market information, tax benefits and economies of scale. The reactive (push) reasons, on the other hand, include competitive pressure, declining domestic sales, excess capacity, saturated domestic markets and proximity to customers and markets.

For African firms, the predominant motive for internationalisation is exporting. However, for most Nigerian firms, their internationalisation drive is triggered by growth aspirations and proactive opportunity search. Other reasons for African firms setting up foreign branches are to exploit international opportunities or diversify their product range to obtain sufficient returns. Others do it to circumvent poor amenities within the local markets.  The authors also identified upstream motives such as the need to import technology and other inputs as reasons for Africa’s internationalisation.  The current trend reveals a unique variety of factors propelling African firms to internationalise: reliance on formal and informal network ties, the tendency to serve regional African markets, the dominance of the service sector, and rising number of early stage and minority entrepreneurs etc.

The authors identified psychic distance as the bedrock of most African firms’ internationalisation strategy. Psychic distance refers to those factors that could aid or impede the flow of information between the firms and the markets. African companies initially export their products to countries they initially understand, then build acquired experience to explore opportunities in other countries. For instance, Europe has been the foremost markets for most African products, e.g. most Moroccan manufacturing goes to France and Spain; South African wood/ furniture products go to UK, Germany and a lesser extent, Australia.

Using CAGE (C= cultural distance; A= Administrative Distance; G= Geographic Distance; E=Economic distance), the authors identified cultural difference as the prime factor that must be considered by managers when internationalising. UBA, for example, could not adopt the greenfield approach — where home country nationals are used as managers — in Burkina Faso and DR Congo because of stringent cultural regulations.

Notwithstanding, it is vital that African governments should emphasise guarded openness, industry competition and good corporate governance to foster better internationalisation by regional firms.

The study is a chapter contribution to the Routledge Handbook on Organisational Change.

How can African firms become more relevant in the global business environment?

How can African firms become more relevant in the global business environment?

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