Size Matters: Developing Businesses of Scale in Sub-Saharan Africa

Industrial complex for the production of galvanized roof sheets, Kampala, Uganda. Photo: Getty Images.
Industrial complex for the production of galvanized roof sheets, Kampala, Uganda. Photo: Getty Images.

Africa is overwhelmingly young – and getting younger. The coming ‘youth bulge’ is set to more than double the continent’s population from 1.2 billion today to around 2.5 billion by 2050. These new generations could be a huge asset in driving development. But they also represent a latent threat to the continent’s stability – particularly if they don’t have access to jobs. Here, Africa’s prospects are more concerning. Its GDP growth per capita is under half that of South Asian economies, with over double the proportion of unemployed.

But growth on its own is not enough. Business, especially good business, will not flourish under poor governance. Likewise, state-building is tied to business, via the key linkage of tax – central to the social contract between people and their government, and a driver of accountability. In much of Africa, governments raise only low volumes of tax, and many are handicapped by a small revenue base, or are dependent on returns from natural resources that are vulnerable to extreme price volatility. Economic diversity and higher rates of formal employment are key for social inclusion and long-term economic stability - which in turn help to entrench better governance

To capitalize on its youth, Africa needs increased investment. But while Africa comprises 15 per cent of the world’s population, it only receives around 4.4 per cent of total foreign direct investment, some $50-55 billion. Expatriate Africans also send home around $40 billion a year. But both are still eclipsed by capital flight – especially in resource-rich economies. Data shows that ordinary Africans invest in Africa, while the very richest, rather too frequently, do not.

No silver bullets

So how will Africa’s states create economies of scale and get that urgently needed inclusive growth? There is no single answer to this – no silver bullet. Africa’s immense cultural and political variability ensures that the solutions also need to be regional, local and global.

A new study by Chatham House identifies policy options for governments, businesses, and investors to support job-creating private-sector development through scaling up small- and medium-sized enterprises (SMEs) in four sub-Saharan African countries. It highlights what is needed to help businesses grow, to compete at home and in their regions, and to provide formal jobs to rapidly expanding young populations.

Developing Businesses of Scale in Sub-Saharan Africa: Insights from Nigeria, Tanzania, Uganda and Zambia draws on interviews conducted with owners and managers of over 60 businesses across the four countries to present a snapshot of these commercial environments, identify common concerns and highlight positive policy trends.

Larger companies are more productive, more competitive and make better employers. The report reveals great entrepreneurial energy across the four countries – many SMEs aspire to grow into major employers, and to become regional, continental or even global players. There are massive domestic and regional markets, among rapidly urbanizing populations and a growing middle class, that are largely untapped.  Africa certainly has the human potential to fuel a wave of home-grown business champions in the coming decades.

Harnessing the potential

But to harness this potential, it is necessary to identify the barriers that prevent SMEs from scaling up their operations. Firstly, they need to enter the formal economy. Many businesses operating in Africa’s vast informal sector are family run and often unregistered. Taking the step to the formal realm, essential for scaling up, is daunting, not least when taxes are high, regulations suffocating, and the returns to individual businesses – in services, infrastructure or legal protections – are undermined by poor governance.

Once they have made this step, SME’s identified a number of key challenges which cut across many countries, despite differences in political or cultural context. They require increased access to mid-scale finance; experienced middle managers and a skilled workforce to recruit from; better developed infrastructure networks, particularly electricity and roads; improved access to regional and international markets; and clear and consistent regulatory and tax regimes.

The research also highlights the contribution new technologies can make in addressing key areas for action, such as education and skills development, as well as access to capital and markets.

Time-bomb or engine of development?

Current African growth rates are not high enough to create sufficient formal jobs for young people, or even to generate employment in the broader informal economy. As such, Africa’s demographics are a ‘ticking time bomb’ – generations who will grow up with no job and no prospects. This alone should be sufficient to concentrate minds. But a more positive vision is also possible. Job creation, socioeconomic development and poverty reduction go hand-in-hand. Africa’s private sector will be vital to meeting the aspirations of sub-Saharan Africa and its peoples in the 21st century. The time-bomb can be re-engineered into a driver of growth.

So policymakers will need to better understand the drivers of, and obstacles to, the growth of African companies if they are to achieve national development goals and create better jobs. African governments that have recognized this are seeing continued private sector investment, despite the tougher investment climate that Africa finds itself in today. As the new Chatham House study has identified, small changes in national policy or investor attitudes to risk on the continent can make a marked difference by empowering entrepreneurs, nurturing businesses of scale, and thus creating jobs.

Dr Alex Vines OBE, Research Director, Area Studies and International Law; Head, Africa Programme

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