Emerging Markets: Japan Is Not Competing Hard Enough To Reap Investment Rewards in Africa

These days, all eyes are on Africa. However, of the 32 soccer teams competing in the FIFA World Cup, one country, which continues to increase its African influence in all areas outside of football, is missing. This emerging market superpower is China. Many years ago, the government in Beijing identified Africa as an area of significant economic and strategic interest. By combining state intervention with private investment, China and its companies have become the main players on the huge continent. Africa accounts for 20 percent of the world's total land area, nearly 15 percent of its population. It is a land famous for its abundant supply of natural resources, resources that countries including Russia and China, continue to jockey for. Nowadays, the armies of Chinese workers involved in Africa's huge infrastructure projects are visible to every tourist who travels through the hinterland. In some towns there are even more Chinese than Africans. Of course, this expansion has not come without controversy. In some parts of Africa, China has been accused of making unscrupulous deals with local governments to gain access to oil and other natural resources. The most prominent case of this is Sudan, where Beijing was accused of tolerating the genocide in Darfur to complete its quest for Sudan's natural resources. China, has also been accused of tolerating lax, as well as dangerous working conditions, and an unnecessarily high rate of worker injuries and fatalities.

Still, China's assessment of Africa goes beyond viewing it as a source of raw materials for fueling domestic industrial development. It also views Africa as a rapidly growing market not yet dominated by domestic, American, European or Japanese players. Japan continues to face a number of domestic challenges that necessitate rapid foreign investment. Japanese companies are facing aging societies, shrinking populations, and an everlasting scarcity of natural resources at home threatens to derail economic growth. Thus, despite its persistent challenges and difficulties, Africa represents a business opportunity that Japanese cannot afford to ignore. Unfortunately, for many generations, Japanese businessmen have perceived Africa as a vast, wild land too distant from home. In fact, despite the huge geographical divide, it has primarily been the psychological distance that has prevented Japan and Africa from forming closer economic relations.

Nowadays, urged on by the globalization of the Japanese economy, an increasing number of Japanese firms are starting to strategically work within the African market. In addition to general trading companies, manufacturers are finally developing a visible presence in Africa. Ajinomoto, for example, has been systematically building up its presence on the African continent by adjusting to local conditions. Additionally, Japanese automakers are starting to send substantial exports from China to Africa and continue to look to increase local production. Despite these recent developments, however, Japanese companies still lag behind their Chinese and European peers. In fact, foreign direct investment in Africa rose from $9 billion in 2000, to $62 billion in 2009, with Japan accounting for only a small portion of it. Furthermore, German and French companies continue to generate substantial benefits from their strong historical ties with the continent; ties, that date back to the days of European colonization.

Future success in Africa will depend not only on connections, but also the various economic policies applied to the continent. While the EU follows the approach of achieving strategic economic partnership or free-trade agreements (EPAs and FTAs) with influential African countries, Japan has traditionally used official development assistance (ODA) funds to generate business opportunities for its companies. In May 2010, Foreign Minister Katsuya Okada confirmed Japan aims to raise its African ODA $1.8 billion a year by 2012. Unfortunately, given the difficult budget situation, this goal might turn out to be too optimistic. Moreover, the ODA — even if granted in yen — will not necessarily lead to more business for Japanese companies. EPAs and FTAs are the main drivers known to support the development of trade. While Japan's bureaucrats figure out how to optimize their efforts, Japanese companies will have no choice but to trust to their own marketing strengths. Furthermore, the break even parameters in Africa differ from other BRICs countries, organizations operating within the emerging market must use a fit-tailored approach. Japanese firms have more than once proven that they are able to successfully adapt their strategies to foreign markets. Hopefully, they can find the courage to continue and aggressively invest in Africa before the Chinese, Russians, and other emerging market nations gain a stranglehold on this critical emerging market.