Though the tour of East Africa by the US president, Barack Obama, has wound up, the chatter about opportunities for foreign investment in the region continues unabated. Following Obama’s speech at the Global Entrepreneurship Summit in Nairobi, a series of investments has been announced to help entrepreneurs across Kenya. But will the African nations see any tangible benefits from these initiatives? To find out, we need to understand what it’s like to be an entrepreneur in Africa.
Sub-Saharan Africa is dominated by micro-entrepreneurs: these are business-people who employ fewer than five individuals – often family members – under informal arrangements. They typically run unregistered businesses, such as market stalls. Empirical evidence gathered since the 1970s shows that most sub-Saharan micro-entrepreneurs struggle to grow their businesses – and that these smaller firms are more likely to fail, due to the high levels of uncertainty and risk in their local environments. This instability is brought about by many factors including political and economic instabilty, changes in global commodity prices and regulations.
African entrepreneurs face some of the world’s toughest business conditions. Most African countries perform poorly in the World Bank’s Ease of Doing Business surveys. Kenya and Ethiopia – both of which were visited by Obama – place 136 and 132 respectively. The World Bank lists the top five constraints in Kenya’s business environment as practices of the informal sector, corruption, political instability, lack of electricity and lack of access to finance. These problems are common in many other African countries, along with a lack of skilled labour and adequate training. The resources necessary to grow a business – such as finance, human and social capital and infrastructure are less accessible in Africa. Finance, in particular, is costlier in Africa than in other parts of the world.
Interestingly, recent studies using World Bank Enterprise Survey data show that micro and small African firms tend to survive slightly longer that their counterparts in other regions. This is thought to be partly because the relative lack of regulation in these environments tends to favour firms of this size.
But this is where the good news stops: the same research also shows that businesses in sub-Saharan Africa are, on average, up to 24% smaller than businesses in other parts of the world, as well as being far less productive and competitive. And even when small firms in Africa do manage to grow into larger enterprises, they do not see the gains in productivity we might expect. The result is that there are relatively few large firms in Africa, compared with other developing countries.
These conditions will cause real problems for Africa going forward: the continent has one of the world’s youngest populations, and it’s set to double by 2050, meaning the demand for stable wages and employment will rise dramatically. Most employment in Africa is characterised as “vulnerable employment”. This means that individuals are likely to be working in seasonal agriculture jobs and running micro businesses (many of which sell agricultural produce), where there is no guarantee of income or wage receipts. Although this type of employment provides an important source of income for many, it does not typically increase productivity and investment in local economies, nor spur the growth required to drastically increase prosperity.
Saving the day?
At times like these, we’d typically look to entrepreneurs to create innovative, high-growth businesses that will increase the demand and capacity for skilled labour, provide stable wages and employment and attract foreign investment. This makes it all the more important for Africa’s entrepreneurs to overcome the challenges presented by their current business environment – but how? One simplistic answer is to ensure that finance is available to firms with the potential for growth. Another is to offer better education and skills training. Both these efforts should improve aspects of the local business environment and help to decrease the failure rate of start-ups, but they are not a cure-all.
Obama has made a start on solving some of these problems, as well as drawing further attention to Africa’s widely acknowledged business potential. The most prominent offering is US$200m from the Overseas Private Investment Corporation (OPIC), dedicated to supporting Equity Bank Kenya’s initiative to support small businesses (a US$525m loan scheme to assist small businesses with their long-term financing requirements). Chase Bank Kenya is also set to lend more than US$580m to entrepreneurs over the next three years, with a focus on young people and women. And the US government’s aid agency, USAid, has launched Power Africa – a scheme to increase access to gas and electricity in Sub-Saharan Africa which may have a big effect on Africa’s manufacturing sector.
There is no doubt that these investments in small firm financing, energy generation and skills training are much needed. But whether Africa’s entrepreneurs can meet the demand for jobs and solve their productivity and growth problems will depend on whether the governments of African nations will commit to further improving their local business environments through sustained investment, and preventing the leakage of capital from corruption.
Obama has set a good precedent, but these investments are just a drop in the ocean, when it comes to creating the supportive business environments and jobs that Africa’s economies need to swell over the next 25 years.