Colonialism ended across Africa decades ago, but its legacy lives on.

Many African nations are still working to strengthen and stabilize their economies by reducing dependence on foreign direct investment (FDI) and aid. Despite the progress made in recent years, access to capital and financing remains a huge barrier for home-grown entrepreneurs like Nelson Boateng. He’s founder and CEO of Nelplast Ghana Ltd., a company that recycles plastic waste into pavement blocks and other industrial products.

Boateng said it’s very difficult for businesses to start or scale because capital is hard to secure; most African banks won’t lend money until the enterprise is showing some measurable success.

“Where I want to be, I’m still not getting there due to this investment problem of getting funding to scale up,” he said. “It’s been a very tough journey for us, but we are still pushing. We are not giving up.”

Boateng spoke during the virtual Africa Symposium 2021 hosted by The Lauder Institute of Management and International Studies at the University of Pennsylvania. The panel discussion, titled “Investing in the Future, the Future of Investments,” was hosted by Regina Abrami, a senior fellow in the Wharton management department and director of the Lauder Institute’s Global Program. It also featured Erin Hern, political science professor at Syracuse University’s Maxwell School of Citizenship and Public Affairs; Euler Bropleh, founder and managing director of sub-Saharan venture capital firm VestedWorld; and Patrice Backer, a Wharton graduate who is partner and chief investment officer of AFIG Funds, which focuses on private equity investing in Africa.

Backer agreed with Boateng, adding that small and medium-sized enterprises aren’t the only ones to struggle with funding. Getting a bank loan can be daunting even for large, established companies.

“The banking sector in many countries is still a name-lending banking sector as opposed to a cash-flow lending banking sector,” he said. “It’s who you know. It’s not what you know, what you’re doing or the strength of your business plan. That constrains access to traditional capital, hence the need for more sophisticated capital markets.”

Investment firms like his are helping to fill the gaps, with $267 million in assets under management across sectors ranging from agribusiness to financial services to fast-moving consumer goods. Bropleh said his firm typically invests about $500,000 per company at the early stage. Mindful of the challenges ahead, Backer and Bropleh said they’re hopeful about the future. The value of VC deals in Africa reached a record high of $1.4 billion in 2019, and the sheer number of deals has been climbing steadily since 2014, according to the latest industry report.

“We believe that the continent has a lot of growth ahead of it,” Bropleh said. “You’re starting to see [it] with the inflow of capital coming to various countries across Africa.”

Why Local Investment Markets Matter

African investors are critical for African businesses because foreign capital can be mercurial. It can ebb and flow based on the economic situation in each country and the outsider’s perception of risk.

“When things are great, people look at emerging markets and they pour in lots of money. If there’s higher liquidity, when things are really tough, they pull it up,” Backer said. “If you don’t have a local domestic market that’s patient and understands the risks, you are at the mercy of the global cycles. And it’s not a good thing.”

Abrami agreed that it is often difficult for the purveyors of foreign capital “to see the Africa proposition as a positive one, where you can get your return on investment, where they’re not seeing the risk premium is too high.”

“The challenge with FDI is that external actors are really getting to decide the direction of economic development and getting to decide what the economic priorities are.” –Erin Hern

Hern pointed out that the financial priorities of a foreign investor may not align with domestic economic priorities, creating a mismatch that’s hard to fix, even over the long term.

While FDI is important, a local investor class is “absolutely critical” to the financial health of a sovereign nation, she said.

“The era of formal colonialism is gone, but we still have these asymmetric economic relationships,” Hern said. “The challenge with FDI is that external actors are really getting to decide the direction of economic development and getting to decide what the economic priorities are.”

Buoyed with cash, foreign competitors can also crowd out domestic players. Bropleh referred to the flying geese paradigm, where the production of goods moves from more developed nations to less developed ones as entrepreneurs seek to corner new markets. In Africa, this theory is on display through Chinese firms that have penetrated local markets, he said. Some nations, such as Ethiopia, have responded by restricting foreign investments in certain industries.

The panelists also raised a caution about foreign firms that harvest the rich natural resources across Africa – such as coffee, cocoa beans and precious metals – then export them out of the continent to make products elsewhere. While that longstanding practice is part of the global supply chain, it isn’t necessarily good for African nations.

Abrami questioned why large corporations aren’t looking at Africa as a place to diversify certain products. “For long supply chain products – we call those your staple products or staple goods — there’s no reason why those couldn’t be manufactured on the continent,” she said.

Backer said change will require a modern mindset.

“We’re still replicating an economic model from colonial times, when countries were basically taking raw materials and shipping it and developing their own industries,” Backer said. “The development locally of how we transform our raw materials should be and is a concern to many. We have to rethink how we grow an ecosystem within a specific industry.”