Measuring the unimportance of being earnest

Image: Flickr, Biblioteca Nacional de España
Image: Flickr, Biblioteca Nacional de España

Does governance matter in attracting firms to invest in Africa? Yes, if investors’ statements are to be taken at face value.

Publicly, some investors justify their reluctance to invest on the continent by blaming bad governance. Risk increases and returns diminish if revenues are spent on bribes, they argue. Factually, though, there is another side to the story. An analysis of two annual publications — Transparency International’s Corruption Perception Index and the World Bank’s Doing Business report — combined with other data on the top foreign direct investment (FDI) destinations in Africa certainly point to a different conclusion: that good regulations and sound policy are not always enough to guarantee increased FDI.

And some enjoy the high returns possible in high-risk, poor governance environments.

To begin with, an improved business climate does not really appear to matter.

The Doing Business 2008 report suggests that Mauritius, SA, Namibia, Botswana, Kenya, Ghana and Tunisia are the most lucrative African environments in which to conduct business.

Yet investors are not running to invest in these economies.

On the contrary, only Tunisia and SA appeared in the top-10 list of FDI destinations in Africa last year.

Investment has been directed, rather, to countries such as Egypt, Nigeria, Morocco, Sudan, Equatorial Guinea, the Democratic Republic of the Congo and Chad — countries not at the top of the Doing Business Index.

Corruption does not necessarily serve as a deterrent either.

Of the top 10 investment destinations in Africa, only Morocco, SA and Tunisia are considered to be among the world’s less corrupt countries, while four African FDI magnets — Sudan, Equatorial Guinea, Congo and Chad — languish in the bottom 10. So considering this, does being
well-governed really matter?

Before going any further, however, we should note that the measurements themselves are questionable.

Juxtaposing the Doing Business report with the Corruption Perception Index shows some obvious contradictions. For instance, the former distinguishes the Kenyan business environment as one of the best in Africa, while the latter labels Kenya as one of the most corrupt countries on the continent, just ahead of Liberia and Zimbabwe.

So how can the Kenyan business environment be so conducive to business while it is riddled with corruption?

Well, as some investors might argue, if the loss-return ratio is still favourable, then spending a few hundred thousand on bribes is really not much of a concern.

Besides, Africa offers what some other continents cannot offer. Many investors are lured more by resources than by assurances of the rule of law.

Most of the top African FDI destinations are oil-producing countries, which means that investment is often directed to the energy sector.

However, it is important to emphasise that although good governance is not always what attracts investors to a particular country, it is what keeps them and enables them to reap long-term benefits.

The case for good governance is therefore unquestionable. A proper use of national revenues is guaranteed only by good governance. It is what takes the small and makes it big.

Firm and fair rules duly enforced improve the quality of products and services for customers and companies alike.

Therefore, good governance practices should be more than a marketing tool; they should serve as the fundamental principle on which an economy is built.

Many African countries have committed to the African Peer Review Mechanism (APRM), a process that seeks to improve a wide range of governance areas.

The mechanism is necessary for nation-building purposes, not simply to please external parties. For, as noted by an SA-based business consultant, “business does not care about the APRM”.

Good governance does not matter to business in the short term. But it certainly is important for any country’s future.

Corporations come and go; but lost resources are not easily replaceable. A well-governed country will, therefore, ensure that its resources are well managed and that revenues are used to build the economy from within.

It is then that investors will flock in, and will be in it for the long haul, rather than seeking to make a quick buck in an unregulated free-for-all. After all, looking at many examples outside of Africa, their attractiveness as investment destinations was built from within.