Long-term business success requires CFOs to focus on multiple horizons. It’s not enough to ensure that things are running well now. You’re continually on the hunt for new opportunities where your company can invest, expand, partner, manufacture, distribute, or assemble goods.
Scanning the landscape, you may spot a region that offers a chance to gain leverage or competitive advantage through foreign direct investment. Perhaps one country seems to offer a solid opportunity to open sales to new markets, lower manufacturing costs, or simplify distribution chains.
But how can you best determine the next frontier? Over the last 30 years, I’ve seen companies invest in areas within Asia, South America, and Eastern Europe. Some of these ventures succeeded while many others failed. It’s difficult to find a sure bet.
Which criteria should you use to assess foreign investment opportunities? What steps should you take to evaluate and rank the possibilities? How should the digital economy factor into your decision-making?
Examining South Africa
For the last few months, I’ve been working from South Africa, which has the largest economy of the African continent. It is also one of the BRIC countries, considered by many to be one of the best sources for foreign expansion opportunities. In fact, last year the Global Opportunity Index ranked South Africa in the top 50% of the index. Does that make South Africa a good investment opportunity?
Consider the research on economic performance. The country struggled in 2015, thanks to global commodity issues, economic mismanagement, and a lack of international confidence. Gross domestic product rose by only 1.4%, placing South Africa 46th out of 56 developing countries. Inflation was relatively high at 5.6%, and the official unemployment rate of 26% may in reality be closer to 40%. The rand fell 25% against the U.S. dollar, with only Brazil’s currency performing worse.
The ruling party, the African National Congress, has been in power since 1994. With pervasive support from grass-roots members, the party could have done more to reduce poverty, create jobs, improve educational opportunities, support universal healthcare, or invest in infrastructure. Widespread corruption, which news agency Al Jazeera estimates has cost as much as US$50 billion, has further devalued the rand and inhibited foreign investment. Some rating agencies have threatened to further downgrade South Africa’s credit rating to junk status, which will further inflate borrowing costs.
Assessing risk and opportunity
At a time when South Africa’s problems scare off other companies, could this be the right moment for your organization to invest in South Africa? Is it too early or too risky? To improve its value as an investment opportunity, the country clearly needs to articulate how it will deal with its challenges in a way that will satisfy the international community. And then act on it. This will increase confidence and make investment more attractive.
There’s also a question of whether the country’s poor economic performance has truly hit bottom. Is more time needed to see a turnaround? Are there similar, less risky investment opportunities in other African countries? After all, Botswana, Mauritius, Namibia, Rwanda, and Zambia are also in the top 50% of the Global Opportunity Index. Could international companies seeking to invest in South Africa and other African countries take advantage of latest technology to leapfrog directly into the mobile digital economy, thus bypassing laptops and servers?
Focusing on the total picture
Evaluating the potential upsides and risks for foreign investment is a complex process. And research is only the beginning. Extensive data analysis can help build a case. Then it’s time to look closer. Some firms hire local and international consultants, send trusted emissaries on site, or make trial investments in small projects. The proof points and risk tolerances are different for every CFO and board of directors.
Maintaining a focus on near-term challenges and the longer-term investment horizon requires a CFO with exceptional vision and an appetite for calculated risk. I’d like to hear from you: What information would help you confidently make decisions about your next frontier?
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