The prospect of increased Japanese investment in Africa has been in the news in 2014. January saw Prime Minister Abe's visit to Ethiopia, Ivory Coast and Mozambique, during which he doubled the 2012 promise of $1 billion in low-interest loans to Africa's private sector. In March, Noel Tata, Managing Director at Tata International, proposed that Indian companies should seek Japanese funding to grow their business in Africa.

Mr Abe highlighted why Africa is attracting interest from global investors: “Africa has now become the continent that carries the hopes of the world through the latent potential of its resources and its dynamic economic growth.”

Yet whilst Africa presents an enticing investment opportunity, the perceived risks of doing business there make many Japanese companies understandably cautious. Japanese investment in the continent lags behind the United States, France, the United Kingdom and above all China.

Common problems for Japanese companies

In 2013, the Japan External Trade Organization (JETRO) carried out its fourth survey on business conditions for Japanese-affiliated firms in Africa, to find out what the business risks actually are.

The survey found that the most frequent problem Japanese companies face doing business in Africa is "insufficient understanding from or communication with corporate headquarters" (34% of respondents), whilst on the ground in Africa, the two most common issues are "political and social instability" (98.2%) and "legislation and implementation of regulations/laws" (92.7%).

These three issues are considered below. 

Insufficient understanding

Africa is not a single entity. It is vast, approximately the size of Japan, China, the United States, India and Western Europe combined. There are 54 different countries, but thousands of different ethnic groups with distinct languages, cultures and laws, often cutting across country borders. A failure to take into account each country's individual circumstances is likely to lead to difficulties.

Those who have not spent time in Africa may not appreciate some of the basic challenges to doing business there. Electricity and internet connections can be unreliable; travel can be time consuming; the climate is draining. Personal relationships and trust are an important part of the business culture. Taking time, both to build relationships and to understand a particular country, can lay important foundations for dealing with (or even avoiding altogether) future disputes. Patience is perhaps the most important requirement for doing business.

Political and social instability

Obviously a major consideration for long-term infrastructure projects (particularly where the government is a partner) is political and social instability. Changes in government can also lead to renegotiation or even withdrawal of licences (both in the extractive industries and service industries such as telecoms operators). This may have significant consequences for the investor.

There are, however, ways to mitigate this risk. It is important to be thoroughly informed throughout the duration of an investment. Prior to any investment, investors should conduct a rigorous due diligence (legal, financial and reputational), and also research and understand the political landscape and prevailing public opinion, to assess properly the risk of future instability. (There are companies that specialise in evaluating these risks who can be engaged to prepare a report.) It is also advisable to take out political risk insurance as part of any major investment. The need to be informed does not end with completion, however. Those who have already invested should continue to monitor the situation for future developments. There is no substitute for having someone in the country.

In addition to assessing the potential risk, investors should seek to protect themselves from some of the consequences of civil strife. Contractual protections should be negotiated (for example, material adverse change and force majeure provisions) and it may be appropriate to structure a deal to obtain bilateral investment treaty (BIT) protection.

Whilst governments do look to renegotiate (or even rescind) licences or contracts from time to time, they are generally aware of the reputational risks involved in doing so and the potential cooling effect that may have on future international investment. Some reasons for renegotiation are beyond an investor's control, but others are not: for example where investors have negotiated one-sided agreements with governments, those agreements are likely to be vulnerable to renegotiation. One way to guard against the uncertainty of such renegotiations is to ensure that a balanced agreement is negotiated in the first place, or to propose renegotiation oneself (possibly offering to pay for a government to instruct international lawyers). It may seem counter-intuitive to pay for a worse deal in the short-term, but it can provide greater certainty in the future.

Legislation and implementation of regulations/laws

It can be tempting to assume that in less commercially mature markets, the law is not so important. In fact, the reverse is often the case. Judges may well apply the strict letter of the law, without regard to the commercial result. It is therefore critical to comply with the law at all stages of an investment, to minimise the potential for future disputes. Africa's primary legal systems are based variously on civil law, common law or a mixture of the two. Investors should not assume that all civil law or common law systems are similar, although 17 countries in west and central Africa are part of the Organisation for the Harmonisation of Business Law in Africa (OHADA). In particular, limitation periods can often be surprising: in Swaziland for example, there is generally no time limit for bringing a claim against another party (although there is a common law prescription period of 33.5 years), unless it is against the government, in which case the time limit is 90 days.

Alongside the primary legal system many countries also have customary laws, which may vary from region to region even within a country. Customary laws often govern land rights and community rights.

In addition to national legislation, supra-national laws, laws with extra-territorial affect (such as anti-corruption laws) and sanction regimes may apply and international "soft laws" (particularly in relation to social and environmental issues) need to be taken into account.

As with any high-risk investment, parties should plan for legal disputes from the outset, the better to ensure that any dispute takes place on a ground of their choosing. A key question is whether to litigate or arbitrate, which may depend on the quality of the local courts: standards vary considerably throughout the continent. With regard to arbitration, one consideration is enforcement. Currently, 33 African countries are party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (known as the New York Convention), which requires the courts of signatory states to give effect to arbitration agreements and to recognise and enforce arbitration awards, subject to certain limited exceptions. Even if the parties agree to arbitrate, local court challenges are common so litigation and arbitration will often take place side-by-side.

An improving picture

Whilst this article has focussed on the challenges with doing business in Africa, it is important not to overstate them. The World Bank's Ease of Doing Business Rankings 2013 places 10 African countries in the top 100 countries in the world. Top of the African countries is Mauritius in 20th place, with Rwanda close behind in 32nd place. Japan is 27th.

Many African countries are taking steps to encourage international investment, simplifying their laws and providing greater investor protection. Africa is therefore becoming increasingly business friendly. With careful planning, and plenty of patience, Japanese companies are well-placed to take advantage of these developments.