There are more than a few, I will dare to say - many, papers juggling around different aspects of economic and financial theory in an attempt to explain the gap between theoretical capital flow in to Africa, and the situation in practice.
The reason most experts are puzzled is rather simple. If one American dollar takes you further in Africa than anywhere else, how come tons of American dollars are not flowing in to Africa to maximize their value?
I will start by giving a rather academic response. In Africa the qualitative, institutional and social conditions may imply that financial information levels are insufficient to support the fundamental assumptions that underline mainstream theories. If investors are not capable of accessing sufficient information to approximate the probability distribution of future events they will be unable to take a rational investment decision in the mainstream sense.
In simple words, Jack, a manager working in a British firm, would like to invest and build a factory in, buy goods from Africa. In order to plan, create a strategy and take good decisions, Jack needs to perform a comprehensive research. Jack starts to look for information. When he does so, say go to his Bloomberg screen or look for a suitable market research, he is likely to find at best very little.
Now, unless Jack has a good friend, who is highly familiar with the business game in a particular region in other words, a powerful contact, Jack will not invest.
There is another twist to this story. Jack the uninformed manager is an employee in a big corporate firm. He will have to explain his manager and perhaps the board why their company will not operate in Africa. In order to do so, Jack develops a complex model. In his model Jack will translate his lack of information in to risk. The result will be that from every potential dollar the company is expected to earn (or save) in Africa the model will cut more than a third and perhaps a half.
This is not to claim that in Africa there is no risk. Of course there is. However the risk in practice is much lower than the risk conceptualized by Jack.
Who lost?
From his prospective, Jack took the right decision. He simply didn't know how risky entering Africa is. Since this was the case he took the worst case scenario.
In practice everyone lost. The people of Africa lost a business opportunity, employment and perhaps access to know how. The corporate lost an opportunity to produce his products cheaper from all other companies and gain an advantage in the market. Finally, the consumers of the products of the corporation will not enjoy a cheaper price.
An opportunity…
The scenario above is not isolated. Every day millions of business decisions are being taken based on the information available. Since there is generally very little business information available for Africa, most decisions are likely to oppose entry.
Indeed a great business opportunity! Why is it an opportunity? Well it is simple, if there are no bids for offers, the price of the offers will drop down. If the situation continues for some time, the offers are likely to be so cheap that the one who dares or better said knows! will win an exceptional profit.
