Making SMEs the real engine of economic growth in Africa
This article originally appeared in a 2014 exclusive interview with MSME News Network Malaysia featuring the GBSH Consult Group Chairman H.E.Dr.Ambassador Tal Edgars
As of 2013, Africa’s population stood at 1.111 billion and with steady population expansion on the continent, African governments and friends of Africa are expected to be considering new ways and contemplating new solutions to cope with the anticipated population boom, and using it to oil the wheels of growth and not allow it to become an unavoidable burden.
The SME sector could make this happen.
Even though accurate figures are unavailable as a result of the unorganised informal SME industry in Africa that outnumbers the formal arm, SME has been described as the most realistic sector to consider for creating more than enough jobs for Africans now and future. This is not surprising because SMEs in Africa are multifaceted. They exist in various sectors for various categories of professionals, cosmopolitan which present everywhere and pluripotent as their potentials are not yet fully tapped or harnessed. However, many African SMEs are struggling for survival instead of being the real engine of economic growth in Africa.
Ambassador Dr. Tal Edgars, a leading authority in the substantive dialogue on entrepreneurship and Africa Rising, noted that in the midst of the numerous setbacks, there is a growing wave of grassroots self-starters in Africa that are taking risks and defying obstacles to bring their money-making ideas to life. The self-starters are armed with a can-do attitude and hopes of striking it big. The self-starters are navigating a conundrum of challenges to pursue opportunities at a time when many African countries enjoy unprecedented levels of economic growth.
Assessment of entrepreneurship in Africa
The entrepreneurial landscape in sub-Saharan Africa is excellent. Its emergence and booming economy make entrepreneurship in Africa to be on the increase. Several African countries are starting to really increase entrepreneurial activity and move to opportunity entrepreneurship, rather than necessity entrepreneurship. Opportunities abound and a positive spirit is emerging amongst the population of these countries.
“I was so pleased earlier this year, when Global Entrepreneurship Monitor (GEM) published its annual report looking at the state of entrepreneurship globally. GEM found that sub-Saharan Africa is the region with by far the highest number of people involved in early-stage entrepreneurial activity (TEA - Total early-stage Entrepreneurial Activity), with Zambia and Nigeria leading the world rankings,” Dr. Edgars said.
Since The Economist labelled Africa “the hopeless continent” about a decade ago, a lot has changed. Labour productivity has been rising. It is now growing on average of 2.7% per year. Trade between Africa and the rest of the world has increased by 200% since 2000. Inflation dropped from 22% in the 1990s to 8% in the past decade. Foreign debts declined by a quarter, budget deficits by two-thirds. According to the World Bank, in the past ten years, sub-Saharan growth has been more rapid than East Asia's (though that includes Japan).
From hindsight a generation ago in Asia, relatively small increases in capital produced large productivity gains. When, after decades of capital starvation, outside investors started to take that disproportionate return seriously, they helped Asia blossom. Africa’s blossoming could be due to the same reason.
In financial centres such as London, barely a week goes by without an Africa investor conference. Private-equity firms that a decade ago who barely knew sub-Saharan Africa existed raised US$1.5b for projects on the continent last year. In 2010 total foreign direct investment was more than US$55b which is five times what it was a decade ago and much more than what Africa receives in aid.
Africa's demographic dividend, too, is far from guaranteed. A growing population and a bulge of working-age citizens proved a blessing in Asia. But population growth always has its costs. All those extra people must be fed, educated and given opportunities. If illiberal policies obstruct growth and discourage firms from hiring, Africa's extra millions may soon be jobless and disgruntled.
Fund challenge for African SMEs
“Just to bring this to context, African entrepreneurs are running on empty,” Edgar pointed out while referring to an estimate by the International Finance Corporation (IFC) that about 84% of small and medium-sized enterprises (SMEs) in Africa lack adequate financing.
Africa is plagued by a credit financing gap worth US$140b to US$170b, a credit financing gap worth approximately 17 times the Gross Domestic Product (GDP) of Burkina Faso. Inadequate financial markets coupled with poor access to traditional growth capital (debt and equity) remain exacerbated by insufficient infrastructure, regulatory measures and government policies.
What could work and is already working in some African countries including South Africa and to some extent Nigeria is equity financing such as venture capital and seed funding. They can offer entrepreneurs business expertise alongside capital; providing a support system that some may otherwise lack.
Dr. Edgars added that “There is a need to initiate local venture capital investing ecosystems to ensure that the most appropriate sources of funding are available for sustainable business development.”
Key to success in entrepreneurship
For entrepreneurs in Africa and other parts of the world, the essential ingredients for success in entrepreneurship are focus, competence, and passion.
“Multiply them together, and you have got a measure of a company’s stick-to-itiveness. And because adherence is a multiplicative function and not an additive one, a zero in any one of those three areas means that the company can’t stick to anything at all,” Dr. Edgars told MSME News Network.
Furthermore, effective business planning and strategy is critical to an entrepreneurial company's long-term success and its ability to raise capital and grow successfully. As a result, bankers, accountants, consultants and academics have written volumes about business plans. Yet, it seems the more information there is, the more confused people become. There's no one right answer. A properly prepared business plan should tell a story, make an argument and conservatively predict the future. All companies have different stories to tell, different arguments to make and different futures to predict, so they must resist the temptation to copy from others or to follow a rigid outline.
Global potentials of entrepreneurship
Entrepreneurs provide one of the main engines of growth in any healthy economy; they act as vital agents of change by developing new products and services, implementing more efficient production methods, and creating new business models and industries. They also generate jobs, support local communities and build prosperous societies.
For all these reasons, Dr. Edgars believes there is already a growing recognition of entrepreneurs’ importance across the Group of 20 (G20). Many countries have introduced a range of programmes and policy initiatives to help boost entrepreneurship.”
Reducing failure risks in entrepreneurship
Using South Africa as a case study, he submitted that providing more credit and more training would not guarantee success for African SMEs; he said their survival is dependent on whether government's strategies for supporting the SME sector and the kind of support being offered are appropriate.
According to him, small enterprise support is quite narrowly focused on issues such as access to credit, training and reduction of red tape. This often misses the wider market constraints confronting SMEs as a result of the structure of the economy.
He recommended that labour laws should be simplified for SMEs, promotion of governments’ SME support programmes, and integration of SME roles into strategic thinking on trade and industrial policy.
While Africa’s economies are often dominated by government and large corporations, the real engine of economic growth may be small and medium-sized enterprises.
“By adding technology to their operations (ICT) two economic “drivers” are brought together and sparks may fly. You may even get a significant productivity “jump”,” the expert pointed out.
What makes a good African entrepreneur?
Features of a good African entrepreneur are not different from those in other parts of the world. A good entrepreneur is someone that has the following features: tenacity, passion, tolerance of ambiguity, vision, self-belief, flexibility and rule-breaking by defying conventional wisdom.
Solving unemployment challenge
Africa’s private sector has a central role to play in solving the issue of unemployment mostly among the younger generations. Young people represent about 35% of Africa’s working age population and joblessness has hit them hard. While the unemployment rate, for instance in Ghana, averages about 8.7%, it is as high as 31.7% among the young generation. The situation is even worse in Sierra Leone, where youth unemployment is 52.5% against the national average of 10.2%.
More and more young graduates are coming onto the job market. The number of graduates in sub-Saharan Africa more than tripled between 1999 and 2009; from 1.6 million to 4.9 million. And that figure is almost double to 9.6 million by 2020.
The private sector creates wealth and jobs. More than that, Dr. Edgars advises that governments and other institutions should involve the private sector in development.
“It is not given enough attention to see how it foresees development,” he said.
