Authors: Dr. Michael Borish and Mohamed Ramzi Roshdi
Site of publication: African Development Bank Group (AFDB)
Type of publication: White paper
Date of publication: September 2021
What is entrepreneurship?
A scan of sources for definitions of entrepreneurship and entrepreneurs is broad, but generally comes down to individuals and firms that show comparatively high levels of innovation and risk-taking compared to the norm. As noted in Entrepreneurship in Africa, entrepreneurship is often inherently disruptive, as it involves risk-taking based on a vision that seeks to redefine the status quo. This is most widely known as “creative destruction”, although dozens of other theories have been included in the economic literature since the early-to-mid-1900s.
While business entrepreneurship typically focuses on these characteristics as a means of achieving earnings and/or market share for future growth and market capitalization, not all entrepreneurs are in business. Entrepreneurship can also be personal or group initiatives above and beyond average levels of effort, creativity and imagination that lead to a desired outcome irrespective of monetary implications.
As most of the African economy is considered to be “informal”, namely subsistence-oriented activities and unregistered for legal and tax purposes, any discussion of harnessing entrepreneurship for future economic growth needs to account for the role played by the informal sector
People working for community organizations or NGOs are often entrepreneurial without being motivated by profits or other financial incentives. More recently in corporate board rooms, increasing efforts by activist shareholders to focus on environmental, social and governance reforms have become important in reshaping large-scale firm strategies in the market. Such activism, focused more on social outcomes than personal financial gain, may also be considered entrepreneurial from a policy or governance perspective.
“Formalizing” the informal economy: the legal and institutional environment
The institutional framework and informality
As most of the African economy is considered to be “informal”, namely subsistence-oriented activities and unregistered for legal and tax purposes, any discussion of harnessing entrepreneurship for future economic growth needs to account for the role played by the informal sector. According to the World Bank, Africa’s informal sector accounts for four out of five urban jobs, serving as the primary source of employment and helping to address challenges as varied as transport and food security. The urban informal sector is particularly prevalent for youth (responsible for the employment of 96 percent of those aged 15-24) and women (92 percent), making it a key dimension to combating poverty.
In effect, almost everyone in the informal sector is an entrepreneur as they are working for themselves and constantly thinking of ways to increase sales and incomes, similar to the established business focus on revenues, profits and cash flow. Their daily activities involve (1) product and marketing strategies (e.g., what goods and services to produce and sell, how and where to sell them); (2) efforts to cut costs for efficiency; and (3) efforts to access finance. The last item may come from rotating savings plans in markets with other vendors, as well as help from family and friends. All of these are characteristic of entrepreneurs.
Reversing negative incentives
Estimating the size of the informal economy in Africa is a guess at best due to data weaknesses and even definitions. Nonetheless, even casual observation leads to recognition that most employment is informal, and that a considerable amount of GDP is unrecorded due to the informal nature of activities. The ILO estimates that seven out of eight jobs in Africa are informal, with as much as 86 percent of GDP on the continent linked to the informal economy. However, irrespective of what the percentage is on any given day, what matters more is what it reflects. The high level of informality signals a lack of public trust and confidence in institutions or prevailing incentives, as well as a high level of poverty that simply makes formalities like business registration, fee payment, tax payments and other requirements untenable.
Transforming the business environment for entrepreneurship
Governments need a stronger fiscal base to provide public goods and services to instill confidence. Yet, until confidence is instilled, most households and businesses will not feel their formal payments will be properly administered and utilized. Instead, they will feel this represents additional confiscation of scarce earnings on top of the informal payments they routinely need to make to obtain services (e.g., driver’s licenses, getting goods out of customs, obtaining permits for construction or electricity hook-ups).
However, even more important is the signal that major physical and social infrastructure improvements are being delivered so that households and businesses feel the tangible benefit of such improvements. Access to electricity is one of the most important services that can be provided, and progress is being made on this front.
However, as global access to electricity has steadily grown over the past three decades, the only continent which has seen a rise in the number of citizens without access to electricity has been Africa. In 1990, nearly three out of every ten people on the planet did not have access to electricity: over 1.5 billion people in total. Less than a third of them were on the African continent. By 2016, 940 million were left without access to electricity, with approximately 600 millions of them in Africa. Most households in Sub-Saharan Africa still lack access to electricity, with rates generally among the lowest in the world.
The high level of informality signals a lack of public trust and confidence in institutions or prevailing incentives, as well as a high level of poverty that simply makes formalities like business registration, fee payment, tax payments and other requirements untenable
Moreover, some of the projects that will help with electrification are complex, large-scale, costly, will take years to complete, and/or are politically sensitive and may lead to other problems for African regions if not resolved diplomatically.
Opportunities from improved incentives
To the extent that it improves the incentive framework and “enfranchises” people and innovators, support for entrepreneurship could bring more of the informal economy into the formal economy. In particular, skilled people able to create significant value in the economy are expected to be major beneficiaries, in the process creating jobs, transactions and contracts for other African companies and individuals. Examples of activities include those that (1) enable e-commerce; (2) introduce easy- to-use digital payment systems for companies; (3) design easy-to-integrate specialized apps to make small businesses more efficient; (4) design websites that provide effective access to e-government services, jobs and procurement opportunities; (5) provide solutions to local problems such as waste management and recycling; (6) offer cleantech solutions for energy needs as well as improvements in production processes to reduce greenhouse gases; and (7) enable advertising and contracting as well as verification for references.
Enfranchising the disenfranchised
Entrepreneurship in Africa highlighted the importance of incubators and accelerators as part of the ecosystem of support for entrepreneurs. However, this is just one small part of a larger complex of factors that promote, support and sustain entrepreneurship. As noted above, entrepreneurship is a mix of many factors and can even be considered a culture reflecting incentives that are also subject to physical, financial and human resource limitations. The mix of variables is important, and when many or most are stifled, entrepreneurship is likewise stifled.
In Africa, entrepreneurship is on display in abundance. However, most of it is low in value- added and frequently focused on subsistence and survival, and the variables or factors that enable higher value-added are often missing. To correct for this and provide focus to policy reforms by the Bank and its partners, several initiatives could be pursued to enfranchise the disenfranchised. These include (1) designation of special zones to build clusters and critical mass; (2) establishing more incubators and accelerators linked to these zones as well as separately by working with large-scale firms; (3) expanding all of these initiatives to remote and rural areas to broadly disperse opportunities and leverage overlooked comparative advantages; (4) coordinate all of the above with business associations through active engagement and support; and (5) ensure support for education and skills development is linked to tangible initiatives described above.
Specific to the Bank and its undertakings, these could serve as targets of Youth Entrepreneurship Investment Banks (YEIB) financing, and potentially be linked to Bank support for the Alliance for Entrepreneurship (AfE). The Bank’s role could involve financing and technical support to establish concepts and pilots (with partners or on its own) that could be replicated more broadly across the continent with support from other partners (e.g., DFIs, NGOs, private sector investors, governments, foundations). In some cases, such as incentives to create opportunities in remote areas that entail ambitious structural and governance reforms (e.g., fiscal decentralization, credit bureaus, property registries), the Bank would need to work with others over the long term. Likewise, support for education, training and skills development would require collaboration with and support from partners due to the breadth of activities. However, in other cases, direct financing for startups and support for intra-African trade align well with both YEIB and AfE, as well as with existing initiatives like Compact with Africa that can be leveraged to build on other commitments.
Special zones and other economic clusters
This initiative would leverage the use of zones as a vehicle to build critical mass and supply chains, and as a springboard for trade and value-added. Zones and clusters where goods are processed would serve as (1) locations for critical mass to support production, processing and distribution in support of growing industrialization and value-added, while creating demand and consumption of locally produced materials and adding jobs and incomes; and (2) important outposts for trade in regional goods. These zones and clusters, established in corridors and along transport pathways to facilitate logistical coordination, would play an important role in increasing intra-African trade from the current 14-17 percent to a much higher share in the coming years. This has been highlighted in the agro- industrial segment of the economy that holds out so much promise for Africa, and applies to other activities as well.
For zones where services are provided and developed, it would be harder to designate production sites as “zones” as they only need internet connections. However, Silicon Valley is an example of how clusters and proximity play an important role in innovation, product development, and venture capital. Zones and clusters could promote ecosystem development in innovative services that would also be potentially helpful to producers of goods. Services providers that meet supply chain requirements of firms driving production and processing in these zones could be certified.
To the extent that zones and clusters help to create more critical mass, such development should increase the contribution of innovative services to economic and business development more broadly, including regional value chains.
A final note on zones and clusters is that they would be expected to include a mix of goods and services producers that could mingle and interact to better understand each other’s needs and capacities. When sufficient critical mass and dynamism exist, it is not uncommon for financial institutions to also locate. This could include investors (e.g., private equity, venture, seed capital) as well as banks and other mainstream financial institutions.
Education, training and skills development strategy
Young people, including entrepreneurs, will need education to gain required skills. The rationale for broad-based support for education and training is to develop an active outreach program to better link suppliers of expertise with the population of young entrepreneurs and small businesses that are the source of demand. This would enhance existing initiatives, and potentially be coordinated with university, college and school/training institute networks to boost overall capacity on the continent.
Such education, training and skills development will need to occur at different levels to match interests and talents. Boosting support for a broad range of education and training that is designed to include practical and applied work can serve as a feeder system for incubators and accelerators as well as supply talent to companies across the continent. The American University in Cairo’s business school provides an excellent example. It brought together the MENA region’s first university-based angel investor network (AUC Angels), alongside a startup accelerator program, a fintech accelerator program, and an eight-week startup “launchpad”—all under the university’s Venture Lab program.
Establishment of incubators and accelerators
The rationale for creation of additional incubators and accelerators is to use investment money committed to and from the private sector to support development of economic zones and promote synergies between these zones and the broader education, training and skills development strategy described above. The incubators and accelerators, together with education, training and skills, would serve as the institutional support mechanisms to advance entrepreneurship.
The objective would be to provide entrepreneurs with available human, physical and potentially financial resources needed for design, experimentation, testing, and possible commercialization of products and concepts. These would be encouraged in economic zones but not restricted to them. They could be supported anywhere there is backing from companies outside zones or from municipalities, business associations, schools or other entities. However, they would represent a good fit for zones and serve as a systematic way to leverage support for education, training and skills development. In effect, the incubators and accelerators would be outreach vehicles that bring companies (in and outside zones) and education, training and skills development institutions together to support young entrepreneurs. Encouraging CVCs to serve as anchors within these zones can also help catalyze specific sectors.
Tackling fragility and building resilience
According to the African Development Bank, there are 20 “transition states” in Africa, a comparable number to the World Bank’s 21 African “fragile and conflict-affected states” (FCS). Globally, the World Bank classifies 39 countries as FCS across three primary categories: high-intensity conflict, medium-intensity conflict, and high institutional and social fragility. Together, Africa’s transition states account for over 340 million people, and $208 billion in annual GDP (28 percent of Africa’s population and 8 percent of its GDP). Annual per capita incomes average $555 across transition state countries.
These countries also face the greatest challenges in addressing macroeconomic imbalances, as they have weak fiscal bases (less than 5 percent of GDP) and exports that amount to less than a third of GDP. With very low levels of value-added in their economic sectors, this leaves them highly dependent on concessional borrowings to meet public expenditure needs. Predictably under such a scenario, levels of social support are low. This results in consistently low Human Development Indicators (HDI). In fact, 13 out of the bottom 15 countries in the 2020 HDI rankings were transition states in Africa, and all 19 countries that were ranked were in the bottom.
While the discussion often compartmentalizes countries into fragile and non-fragile states, the distinction obscures realities within countries. Fragile states include households and businesses that are not desperate or highly vulnerable, while non-fragile states include households and businesses that are. Therefore, tackling fragility and building resilience is a challenge that affects all African states to varying degrees.
In this regard, private sector development—and entrepreneurship—can be a valuable tool to combat fragility and build resilience. This can be achieved by broadly supporting entrepreneurship with a focus on solutions to local problems related to fragility, as these are found across the board in agriculture and irrigation, the environment (e.g., forestry, grazing land), social infrastructure (e.g., health, education, housing, water and sanitation), and broader challenges of peace and security.
An example is found in Liberia, where public- private dialogue had a considerable post-conflict impact via the Liberia Better Business Forum. It is estimated that reforms yielded approximately $5 million in private-sector savings, created over 20,000 jobs, increased business registrations by 20 percent and attracted $13 million in private sector investment.
New frontiers for Africa: the green economy and digitalization
Mining and the green economy: entrepreneurship opportunities
Today’s hydrocarbon-dependent economies will experience considerable shocks due to the global energy transition to renewables and the need for decarbonization at a time when energy use and intensity is expected to increase. This will create major opportunities in the mining sector because of Africa’s enormous reserves of strategic minerals that can serve as feedstock for battery manufacturing technologies and renewable energy generation. Changes in agriculture in the quest for food security, better forestry management, inland and ocean water resource management, and the shift to clean energy and power in Africa’s efforts to industrialize will also be important.
Broad applications of technological innovation in the mining sector are required to increase productivity, ensure better safety, reduce hazard and waste, and limit environmental damage and negative spillovers. This includes methods of ultimately formalizing the artisanal and small-scale mining (ASM) sector, which accounts for about 20 percent of total mining output in Africa. ASM also constitutes an area where safety and hazard risk and abuse of labor (including child labor) is high, and returns for miners are low due to their weak levels of negotiating power when they sell product.
In more industrialized mining activities, new technologies are already being put to use. For instance, companies are using drones and artificial intelligence created by startups to help with the construction of mines as well as ongoing inspections for operations, safety and hazard. However, this requires cloud computing, provision of needed equipment, technical capacity to manage and service drones, and capacity to capture, process and analyze data for effective commercial decision- making.
Digitalization and fintech: meeting challenges and expanding gains
The digital economy
Discussion of the digital economy involves a broad range of rapidly developing, highly impactful, and heavily data-driven fields that rely on the mix of speed, capacity and range to perform functions not previously achieved, or at rates and volumes not previously attainable. More common references are to machine learning and AI, robotics and automation, linked sensors and the “internet of things” (IoT), drones, quantum computing, big data and analytics, and related activities.
These are all generally in their nascent or embryonic stages in Africa, although some sectors have already demonstrated capacity for their use. For instance, in the mining sector, the use of drones and artificial intelligence is helping with safety, efficiency and commercial decision- making. The boom in mobile payments, e-commerce and remote work are examples of how new technologies have been implemented in recent years in Africa. This will continue to be the case, with considerable gains resulting from these applications, including in health, education and social services.
Discussion of the digital economy involves a broad range of rapidly developing, highly impactful, and heavily data-driven fields that rely on the mix of speed, capacity and range to perform functions not previously achieved, or at rates and volumes not previously attainable
While governance and regulation appear to be the next frontier for AI and broader digitalization development, there are many challenges. These include (1) encouraging broader uptake, as adoption is currently limited to digitized industries and firms at the digital frontier, mostly in the northern hemisphere and very rarely in Africa; (2) deploying AI and other digital capabilities within government, as governments tend to be the largest buyers within states and can spur commercialization of technologies, while at the same time improving their own service offerings; (3) addressing employment and income- distribution concerns, as automation, robotics, and other AI technologies may upend some workplaces, occupations and tasks, including in the African state-owned enterprise sector; (4) ensuring the availability of data, including opening up public sector data to spur private sector innovation, such as for health, education and social services as well as environmental, biodiversity and forestry protection and protection of underwater resources and offshore territorial monitoring; and (5) resolving the multitude of ethical, legal and regulatory challenges that are problematic around the world and have only begun to be addressed in Africa.
As the success of mobile payments has shown, fintech has great potential to meet some of the continent’s financing needs, including for households and small businesses typically operating in the informal sector and outside the banking sector. This can be achieved without undermining banks or banking stability, given that banks mainly lend to large-scale firms and purchase government securities to maintain stable capital and liquidity ratios. Future efforts by banks to play a more prominent role in the small business and household sector could involve support through ecosystems and startups to develop apps and other services to accommodate targeted clients. This would presumably be linked to niche segments like credit cards and housing finance, with potential for expansion over time as Africa’s consumer market and middle class grows.
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