Entrepreneurship Environment in Africa

Published on 7th November 2017

Young people represent more than 60% of Africa’s population, leading to the “demographic dividend” as the new buzzword of the development assistance and business world. Yet how can this booming generation of young Africans be integrated into the labour market and spur economic growth? Entrepreneurship, if supported through the right policies, can provide an effective solution.

In the aftermath of the global financial crisis, youth employment has been recognized as one of the major challenges of our times. Within debates on migration and development, migrants are often expected to be super-entrepreneurs who will benefit development, since there were not plenty of jobs available in the formal sector, some of the migrants were forced to enter self-employment activities, such as petty trading, work as street vendors, or manufacturing household goods. Nowadays, a great deal of the self-employment activities in developing countries are to be found in the informal sector which has been considered a safety valve for the unemployed in many developing countries.

An important question is how to distinguish between migration of entrepreneurs and migration of labour. The entrepreneurs are indeed self-employed and are bound by the rules which apply to workers in general. As long as the entrepreneurs run their own business and hire themselves without employing other people, their function is largely comparable with workers in general.

Entrepreneurship is also a top policy priority for policymakers in Sub-Saharan Africa (SSA) who are eager to improve prospects for decent employment among the region’s youth. The factors hampering youth employment in Africa are mostly structural and on the demand side of the labor market. Hence entrepreneurship, including youth entrepreneurship, can contribute to the solution.  Some posit that, if equipped with the right skills, mentors, social networks, technology and finance, young entrepreneurs could drive the region’s economic growth and social progress.

In the African context, youth typically refers to people of ages 15-35. This definition, adopted by the African Union, focuses on the transition to adulthood, when young people develop critical life-skills through applying their knowledge as well as developing a sense of their own abilities and autonomy. In Africa, young people are striving to achieve economic independence and find their identity in the context of globalization, weakening community structures and an educational system that does not always equip them with skills needed in competitive environments.

These Entrepreneurs play key roles in Africa including in the following areas:  First, Innovation – Entrepreneurship goes hand-in-hand with innovation, that is the ability to produce new ideas; provide better solutions; and pioneer new products or services.

Second, Entrepreneurship plays an indispensable role in the economic growth and development of any nation. Entrepreneurs help in the spurring of indigenous entrepreneurship, transformation of the traditional industry, generates income both internally and externally, reduce unemployment, create wealth etc.

Furthermore, Entrepreneurs are the engine for job creation in any economy, especially for those at the bottom of the pyramid. Entrepreneurs create job for thousands (or even millions in some countries) of people in a country.

Entrepreneurs have emerged as key employers of labour – over 70% of Africans work for Micro, Small & Medium Enterprise’s (MSMEs). Supporting research by the African Development Bank (AfDB), African Economic Outlook 2017, shows that firms with fewer than 20 employees provide the most jobs in Africa’s formal sector. Between 2015 and 2030, 29million new entrants annually will join Africa’s labour force, with this rise in population entrepreneurs need to be supported in a deliberate fashion as they would be providing the jobs needed by Africa’s teeming population.

Why should you care about entrepreneurship?

Entrepreneurship has been one of the fastest growing fields of academic research and education over the past twenty years. Throughout the world there are thousands of academics who teach and research in this particular area.

Today entrepreneurship studies are principally centered within Business Schools. However, this was not always the case. Interest in entrepreneurship within universities remained static until the 1980s. Commensurate with this growth in entrepreneurship courses was a rapid expansion of research activity in the area.

Although the field of entrepreneurship has expanded rapidly, there remained a great degree of ignorance and a lack of understanding between academics, government policy makers, and business owners and entrepreneurs. There were too many “myths” and insufficient knowledge about how small businesses and entrepreneurs actually worked. Among these myths was much of the accepted wisdom about small business growth, entrepreneurial networking and learning, plus the notion that fast growth companies are the major source of job creation.

As noted by some of the leading scholars in the field, too much attention has been given to the entrepreneur as an individual and not enough to how entrepreneurship applies to teams. Far too much attention has also been given to entrepreneurial opportunity recognition and new venture creation, with insufficient attention to the process of managing small firms and the nexus between entrepreneurship and innovation.

There is a need to recalibrate the field of entrepreneurship as an academic pursuit and refocus attention on undertaking research that makes a difference. If entrepreneurship is the driver of job and wealth creation, productivity growth and innovation then research into this area should be worth the investment.

Supporting entrepreneurship – Academic sector support

With the rise of entrepreneurship so far, it has yielded huge returns for entrepreneurs, and according to experts, there lies great untapped potential to drive the African continent into its next phase of development.

Entrepreneurs can get support from the academic sector through Skills and training. The lack of skills impacts the rate of productive start-ups in the region, including among young people. Recent studies by the Global Entrepreneurship Monitor (GEM) found that while entrepreneurship rates in Sub Saharan Africa (SSA) are high, the majority of entrepreneurs are driven by necessity rather than opportunity. SSA has also higher rates of potential young entrepreneurs than other regions, but a substantial portion (about one third) of them is also driven to entrepreneurship out of necessity. Most new enterprises operate in low value-added sectors such as the retail trade. Further, in contrast to other regions, young entrepreneurs in SSA are less confident than their adult counterparts that they will be creating jobs over the next five years.

The skill disadvantages of young entrepreneurs relative to their adult counterparts have been well recognized and covered in the literature. Besides lower educational attainments, these include less work experience among young entrepreneurs than adults and fewer links with professional networks. Interestingly though, (potential) young entrepreneurs in Africa sometimes underestimate the lack of business skills as a barrier to entrepreneurship, while – less surprisingly – they recognize access to finance as a key impediment. These perceptions vary across countries though – in Swaziland, for example, young entrepreneurs considered skill shortages to be a top barrier to start ups. Entrepreneurs who viewed the lack of skills as a key obstacle reported good sales performance less often than those who did not perceive skills as an impediment

The GEM concept of entrepreneurship, focused on ownership and management as well as the start-up process, was adopted.

Training and Entrepreneurial Performance

As the role of self-employment and entrepreneurship in job creation has risen in the aftermath of the global financial crisis, policymakers in Africa and elsewhere have been considering training programmes for entrepreneurs. The focus has typically been on technical, managerial and financial literacy training, with the programmes drawing on evidence that selected skills tend to be correlated with better performance. One of the key challenges in assessing such training programmes has been the lack of evaluation. A mix of skill training and financial support had a greater impact on labor market activity. Positive impacts on both labor market and business outcomes were found to be higher for young people than for adults.

The recent empirical analysis of data from the 2012 United Nations (UN) survey of entrepreneurs in Swaziland found that sales performance of firms run by trained entrepreneurs exceeded that of firms operated by their less trained counterparts. Training also had a more positive impact on the performance of young rather than adult entrepreneurs. To be effective, measures should be well targeted and tailored to specific groups. In Swaziland, advanced business training impacted positively on the performance of young entrepreneurs motivated by profits, but not those who entered entrepreneurship mostly for other reasons. Finally, training was found to be less effective in improving the performance of young women than men entrepreneurs.

Examining the key challenges

Beyond the progress made, there are challenges, some of which include:

Operating Environment: Operating environment can be greatly improved with the removal of unfair regulations and bureaucratic bottlenecks that increase the cost and time of doing business. In addition, many Small & Medium sized Enterprises (SMEs) face challenges and constraints caused by inefficient infrastructure – both hard and soft.

Infrastructure: Africa’s infrastructure deficit, estimated at $93 billion, poses a major challenge. Unreliable electricity supply means some businesses close because they are too small to afford power generators. Poor roads and unreliable transport facilities hinder the ability of many SMEs to move their goods to market, increasing business costs and/or leading to losses.

Access to Finance: Access to finance is another notable obstacle, with Africa’s SMEs facing a credit gap of $135 billion. Slowing economic growth in the region means it would be a tall order to demand for the public sector to bridge this gap. This creates an avenue for other stakeholders – from the private sector especially – to support African SMEs. For every $1 invested by multilateral institutions in African entrepreneurs, up to $5 in additional investment is generated: African SMEs are bankable and their businesses are viable.

How TEF is changing the landscape of entrepreneurship in Africa

In 2015 the founder, Tony O, Elumelu, CON heralded the decade of the African entrepreneur by committing $100 million to The Tony Elumelu Foundation (TEF) Entrepreneurship Programme with a goal of empowering 10,000 entrepreneurs. In 3 years of this we have reached over 150,000 applications which were sifted through a 4-stage multi-institutional selection process. Firstly the application is streamlined to 10,000 per annum by the TEF application review team utilizing 5 distinct areas of critique: Feasibility, Scalability, Market Opportunity, Financial Understanding and Leadership Qualities. The shortlisted 10,000 are further screened by a leading global consultancy – Accenture Development Partners (ADP), to 1000 recommendations and 500 alternatives which are then presented to a Selection Committee, comprising of eight distinguished professionals, business leaders and thought leaders who review ADP’s recommendation and ratifies the final selection of 1000 each year.

We have directly supported 3,000 African Entrepreneurs across 54 countries in Africa. The TEF Entrepreneurship Programme is a response to the challenges of entrepreneurs in several areas including: Mentoring; Training – online resource library; Seed capital funding; TEF Partnerships; and TEF Alumni Network.

By Emmanuel N. Nnorom

Group CEO, Heirs Holdings Group

This article has been read 1,176 times