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Globalization is creating profitable opportunities for daring entrepreneurs who are looking to frontier markets for their next investment opportunity. As it turns out, the action is currently taking place in emerging markets where rising populations and urbanization are shifting the economic paradigm and are growing two to three times faster than developed economies. However, before making a move, it is important to figure out how best to capitalize on the opportunities as well as identify the best place to get started. To begin, let us examine why expanding into a frontier market is a compelling business idea.
Why Expand into a Frontier Market?
High Growth Potential – Emerging markets typically feature rapidly expanding urban populations of “middle class” consumers with high purchasing power. At the same time, they could provide virgin territory for goods and services that are flooding more mature markets, translating to less competition.
Investment Diversification – Expanding to an emerging market offers an opportunity to diversify investments. You will not only find new customers but will no longer depend solely on a single market, thus insulating your business against economic recessions and other unforeseen events. Moreover, because these markets are still growing, they are not saturated with numerous players, presenting a lot of untapped potential that you can take advantage of.
Factors to Consider When Expanding to a Frontier Market
The great opportunities that emerging markets offer equate to greater risk. These are mostly events beyond your control and include financial or economic risks, operational risks, and political challenges. They could range from regulatory changes, currency fluctuations and breached contracts to non-payment, and political violence. Most risk can be assessed by doing groundwork, but if you work in a hyper-specific industry, it is better to hire a third-party company to do an in-depth analysis.
Growth of the Market
Though a region might have enjoyed remarkable growth in the past, it is essential to assess its potential for future growth. To illustrate, Africa in 2019 had an average projected growth of about 2.6% compared to South America’s 0.7%, highlighting higher growth prospects.
Product Market Fit
How much localization will you require in order to trade successfully in any given market? Consider factors such as cultural differences, language, and other aspects peculiar to a given market. Africa once again offers a noteworthy advantage in this respect, as English is the predominant business language across most of the continent. That means there is one less challenge to overcome.
How Does Africa Compare to Southeast Asia and South America?
For any business contemplating expansion into a frontier market, regions such as Africa, South East Asia, and Latin America are likely to top on the list. But which of these regions holds the highest potential?
South America has for a considerable period been a favorite investment destination, particularly for American companies. Not only do they exist in the same time zones, but the US has also been politically influential in a number of South American countries. While this suggests favorable trading conditions, it also comes with high competition from international companies. A good amount of South American companies have grown into internationally competitive companies, particularly Brazilian companies such as Banorte and Odebrecht. However, with the exception of South Africa, there are very limited sub-Saharan African companies that have found success on a global scale.
According to the IMF, Southeast Asia and Africa are two of the fastest-growing regions globally, with the former having grown by 5.5% and the latter, 5.1% between the years 2000 and 2015. While both regions boast great diversity, Southeast Asia is way ahead of Africa in the growth process, with Asian countries accounting for almost 40% of global output and a global average income of 80% compared to Africa’s 40%. Explosive growth in this region has led to a saturation of investment, in contrast to Africa which remains vastly underutilized.
Sub-Saharan Africa presents a multitude of challenges for potential investors in the form of poor infrastructure and concerns about corruption among other things. But overall, a lower saturation of investors on the continent coupled with relative stability translates to more opportunities to innovate and disrupt various sectors.
Africa, Opportunities Abound
For European companies, in particular, Africa makes a lot of sense as a huge growth market opportunity. Africa’s appeal as an investment destination has been consistently rising over the past decade. Admittedly, it is harder to do business on this developing continent in view of the challenges highlighted above but the opportunities presented due to the rapid development in the region are even higher. This is why more and more financial companies are choosing to expand to Africa.
A key barrier facing such companies is the financial infrastructure on the continent or lack thereof. By serving as a platform for international investments to enter the country, financial infrastructure and growth go hand in hand, to provide businesses with a secure and efficient way to make international transfers. Through our flagship product, TransferZero, we have made great strides in developing hybrid financial infrastructure that enables businesses to expand to Africa through one easy API integration.