Africans want to do business

December 12, 2013
Martha Melesse and Colm Foy

Sub-Saharan Africa is the most dynamic region in the world when it comes to entrepreneurship. As many as 84% of Ghanaians see a career in business as a good choice, a view that is shared by 76% of sub-Saharan Africans overall. In Uganda, more than three-quarters of adults say they are intending to start their own businesses, while more than 40% of Zambians are actually running or starting a new business.

A report published in Lusaka in November 2013, financed by Canada’s International Development Research Centre (IDRC), details entrepreneurship in 10 sub-Saharan African countries.

The Global Entrepreneurship Monitor (GEM), the largest ongoing study of entrepreneurial dynamics in the world, surveyed more than 2,000 adults in each country to gather information about whether they were actually in business, about to start one, or had recently closed one. They were also asked about their motivations and attitudes to business, future growth expectations, and the factors that constrain their potential. The results are surprising and encouraging.

High esteem

Africans generally hold business activities in high esteem. They no longer see the State and a stable salary with benefits as the only sources of income, nor do they expect someone else to support them through aid. The surveys show that Africans are more interested in producing their own wealth through private endeavour.

Of course, some of this is because those government jobs aren’t as plentiful as they had been earlier and aid levels have been falling for years. High levels of unemployment persist among young people throughout sub-Saharan Africa, with no serious prospect of improvement any time soon. Even in the oil-rich countries of Angola and Nigeria, opportunities for jobs in the formal, regulated sector are low. Data from the GEM surveys suggests that enterprise creation is helping to reduce youth unemployment.

However, although many of those opening new businesses say that they are doing so out of necessity, they also set up on their own account for the opportunity to improve their livelihoods.

A solution to unemployment?

Most African businesses are small, many with only one employee who is also the owner. In Malawi for example, 80% of businesses fall into this category. The situation is similar elsewhere. Opinions about future growth and the resulting job creation vary wildly, but a slim majority of business owners expect job-creating growth in the near future. Much depends on growth in the non-extractive sectors of the economy, since natural-resource extraction historically creates neither business opportunities for local people nor significant employment.

Ghana, a new oil producer, is grappling with finding jobs for its people in a context of high GDP growth based on the oil industry. As such, the country is undergoing the same transformation as Nigeria and Angola in the past with vast inflows of wealth into the country but the persistence of poverty and rising inequality. However, even in Ghana, there is a large supply of potential entrepreneurs, with women taking a particularly significant role. Somewhat surprisingly, few people seem to fear failure when contemplating a business venture.

The downside is that many new businesses fail to grow or close. Indeed, even established businesses are often unable to mature and grow. African entrepreneurs need help to overcome the barriers they face, but they are not getting sufficient assistance from government or financial institutions.

Neglected by banks and government

A key hurdle reported in the surveys is finding finance to start a business or to make it grow. African banks are reluctant to lend to clients they see as high-risk. When they do lend, they demand collateral that is beyond the capacity of the new or hopeful entrepreneur. Loan repayment periods are often very short – three to five years – which also limits their usefulness for start-up businesses. More needs to be done to foster financial inclusion.

There are limited other sources of finance in sub-Saharan Africa, unlike other regions studied by the GEM group that are home to stock markets, venture capitalists, and so-called “angel investors.” Government help for new or expanding businesses is often absent and, where it does exist, it is insufficient. Fiscal incentives for new businesses are also missing in most sub-Saharan African countries.

Experts questioned during the survey point to the inadequacy of training for entrepreneurs, especially the young. Education, they say, is generally poor and does not equip people for running their own enterprises. Corruption is also highlighted as an issue in many of the countries studied, making the already complex regulatory framework almost impossible to navigate. Businesses are also severely hampered by the inadequacy of existing infrastructure, including information technology.

Potential for progress

The IDRC-funded survey points to huge potential for the private sector in sub-Saharan Africa. Africans want to do business, are ready to take the risk of setting up on their own, and think they have the skills and knowledge to do so. To date, however, the efforts of the many who have taken the plunge and struggle to keep their businesses alive are constrained by factors over which they have no control. If the private sector is to make a significant contribution to creating employment and reducing poverty, it not only needs room to exist, it also needs room to grow. One of the features of the sub-Saharan African business landscape is the gap between very small businesses and large, often foreign-owned corporations. By filling this so called “missing middle,” private enterprise can create more and better jobs while contributing to sustained, long-term growth.

Martha Melesse is a Senior Program Specialist at IDRC, Ottawa, Canada. Colm Foy is a consultant in international development based in Victoria, Canada.

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