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Entrepreneurs and Entrepreneurship in Africa: A liberal economic climate will help promote small businesses

Author(s):
International Monetary Fund. External Relations Dept.
Published Date:
December 1988
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Walter Elkan

There is a growing recognition that the private sector—especially the indigenous private sector—must now play a greater role in African development. In particular, the role of indigenous entrepreneurship is likely to be much more important in small businesses than in the large undertakings that were generally favored by African planners in the past. Many large businesses have not been profitable or economically efficient because of a lack of managerial skills necessary for complex undertakings; hence they have had to rely upon substantial subsidies, protection, and other government assistance. Consequently, a change of policy that provides greater opportunities to smaller businesses run by Africans is more likely to increase than to reduce the rate of growth of industrial output.

African entrepreneurs

Because entrepreneurship is difficult to define, there is no consensus on whether or not a particular country is well endowed with entrepreneurs. Much depends on whether the term is used primarily to describe a capacity to innovate, or whether it refers to the ability to run a large and complicated manufacturing operation.

A longer version of this article appears in the World Bank Research Observer, July 1988

Entrepreneurship has three essential and linked attributes. First, the ability to perceive profitable business opportunities. Second, a willingness to act on what is perceived. Third, the necessary organizing skills associated with a project.

African entrepreneurs typically come from four sources:

  • Some of the larger industrial undertakings, especially in West Africa, began in the informal sector. This has often been the case in the metal-working trades, in tailoring, and in furniture making. Although Eastern Africa now has an active indigenous informal sector, growth was stunted for many years, partly because of restrictive government policies.

  • Some of the former employees of large expatriate or Asian-run businesses developed large and successful companies. A survey of the 100 or so largest Nigerian industrial businesses in 1975 reported that 68 percent had been founded by former employees of expatriate firms. Five years earlier, a survey in Lusaka found similarly that the most successful businesses had been started by people who had held the better paid types of jobs available to Africans during the colonial era.

  • The most common route into manufacturing has been through trade and marketing. A typical example of traders who pioneered manufacturing enterprises is the Nigerian bakers whose success is attributable mainly to ingenuity and marketing skills. Other examples are timber contractors who seized the opportunity to start sawmills, and rubber traders who went into processing.

  • Many well-educated politicians and senior civil servants have also become part-time businessmen. A few are genuine entrepreneurs, but many become businessmen only because they are appointed directors of existing expatriate businesses or have been encouraged and helped by governments to take over businesses started by expatriates.

In most African countries the biggest entrepreneurial successes have not been in large industry but in property development and large-scale agriculture. The apparent preference for investing in real estate rather than in manufacturing industry has been criticized and is often taken to display a lack of commitment to national development. This seems an unreasonable criticism. Astute entrepreneurs will always try to maximize their expected returns and to minimize risks. Hence, indigenous entrepreneurs may prefer to invest in real estate where the annual return has often been high, and where Africans are protected from the competition of expatriates as legal restrictions debar foreigners from buying property. The ability to do well in real estate is also an indicator of entrepreneurial ability.

Management

During the early stages of development, managing factories has generally been a problem everywhere. Experience has been less successful in Africa than in many other developing countries, partly because labor legislation in Africa gives priority to social over economic considerations. Moreover, in making informed technological choices, Africans are at a disadvantage since they lack the necessary technical and economic expertise. However, this ability is not crucial for successful entrepreneurship; many successful industries are run by businessmen with little technical understanding. Indeed, many foreign-owned firms in Africa hire expatriate production managers to look after the technical side of the business.

In general, African businessmen are competent in running small firms but have often lacked the organizational experience for running large enterprises. Sometimes this constraint relating to larger enterprises has been eased by employing expatriate managers. This is true, for instance, for some of the large Nigerian factories in Kano, originally started by kola merchants. Elsewhere, African businesses have formed joint ventures with foreign firms as a first step toward independent management.

Enterpreneurs and government

As stated earlier, business conditions are greatly influenced by government policy. In countries which have had excessive state involvement in the economy, the opportunities for gaining entrepreneurial experience are limited. Much economic activity in Africa is in the hands of parastatal enterprises, or subject to licensing and controls. Farmers are often obliged to sell at prices determined by statutory marketing boards. The effect of marketing boards, for example, has been particularly unfortunate. Not only have these boards failed in their overt objective of raising or stabilizing farmers’ incomes; they have also deprived the farmers of commercial experience in buying and selling. Those who have succeeded in building businesses in spite of these handicaps have had to battle constantly with government officers for obtaining various types of licenses and permits and with banks for foreign exchange.

African governments differ in their attitude toward entrepreneurship. Some, such as Ghana and Tanzania, have deliberately discouraged the emergence of private African “capitalism.” Some have nationalized large elements of a previously foreign-owned private sector and transferred them to parastatal organizations. Although this provided the experience in running business organizations, the command and management structures have been modeled on a bureaucratic culture.

However in other countries, such as Kenya and Nigeria, private enterprise has continued to play an important role. There, governments have pursued a policy of promoting indigenous African enterprise and of helping in the transfer of ownership or control of expatriate businesses to nationals. However, some of these measures have created an illusion rather than the reality of African participation.

Performance of parastatals

African governments have generally played a major role in economic development and in starting large enterprises in the public sector. Many parastatals came into being when it was widely believed that rapid economic development required the state to take on the role of an entrepreneur; they were usually started as joint ventures with foreign firms, which supplied a part of the capital as well as technical and managerial expertise.

In most countries, the economic performance of these parastatals has been very disappointing. One of the major reasons is that they are run by bureaucrats with a “production mentality” which emphasizes maximizing output as the principal objective, while ignoring considerations of costs and markets. Everything is done according to set bureaucratic procedures. “Managers” are appointed for their bureaucratic and political skills and connections, rather than for their commercial acumen. There is also more overmanning in parastatals than in private firms, since they do not face the same competitive forces and are under greater pressure to provide employment for kinsmen or constituents of political leaders. Hence the recent trend towards giving a greater role to the private sector is partly due to pragmatic considerations because of the failure of the public enterprises to perform.

Giving the private sector a greater role in development involves a change in policy regime that removes restrictions on the private sector and denationalization or privatization of public enterprises. In Africa there have so far been few examples of the latter, but economic policy in many countries is becoming less restrictive and more liberal. Preliminary evidence suggests a favorable response by the private sector to the new entrepreneurial opportunities thus created. For example, the recent abolition of marketing boards in Nigeria has provided new openings to a large number of small entrepreneurs. Lower taxes and higher prices have done more to boost agricultural performance than the earlier attempts to encourage it by direct government intervention.

Efficacy of special measures

To promote private sector activities, it is desirable for the government to consider removing obvious disincentives by creating a liberal economic environment which minimizes restrictions rather than specific policy measures and incentives. For example, such measures as lower taxes, subsidized credit, cheaper business premises, and management training programs may have been largely ineffective, as indicated below, in promoting small enterprises or new entrepreneurs.

Tax incentives. Small businesses are the most promising vehicle of entrepreneurial dynamism in Africa. For such enterprises, tax incentives do not appear to be relevant. Large projects might benefit from such fiscal incentives as tax holidays or accelerated depreciation, but most small businesses—producing simple hand-made consumer goods such as beds, chairs, kerosene lamps, or charcoal burners—are outside the scope of the tax system. These small enterprises are, in general, highly efficient and provide a springboard for many people to gain entrepreneurial experience. They minimize the use of scarce resources, including capital and imported components, and they supply goods and services to low-income consumers at affordable prices without protection or subsidy.

Finance. Lack of finance on reasonable terms is the most frequently cited deterrent to entrepreneurship. It is argued that banks lend mostly to the larger established enterprises and so new ventures, small or large, are forced to borrow in the informal (or “kerb”) market where interest rates are much higher. Governments have responded by setting up development banks and other credit institutions that provide loans at subsidized rates of interest to new enterprises. They have been generally ineffective for lack of funds.

The real problem lies elsewhere. The alleged difficulty of small entrepreneurs in obtaining loans would be eased if governments were to stop imposing ceilings on the interest rates changed by financial institution. Low or negative interest rates discourage the deposit of surplus funds, thus reducing the supply of loanable funds. As a result, banks restrict their lending to large, low-risk borrowers, as a few large loans are easier to administer than many small ones. Meanwhile, the shortage of loanable funds raises the cost of borrowing from money lenders in the informal credit market to which prospective entrepreneurs have then to turn. On the assumption that a shortage of finance and high interest rates are a barrier to entrepreneurship, a lifting of interest rate ceilings is likely to bring greater benefits than the multiplication of credit institutions that provide (or fail to provide) loans at subsidized interest.

Subsidized rents. There is a widespread belief that entrepreneurship would be encouraged by the provision of workshops or factories fully equipped with access roads, railway sidings, water, sanitation, and electricity—all at minimal rents. The provision of such premises on industrial estates would economize prospective entrepreneurs’ capital and provide an implicit subsidy as an incentive to take a risk. Where premises are offered to operators in the informal sector as a way of “getting them off the streets,” they may do more harm than good because they may entice businessmen away from their market. If a firm’s customers are farmers, who come to town to buy a piece of furniture or an agricultural implement, it is better for the premises to be located near the country bus station. An industrial estate, miles away on the outskirts of the town, places a physical barrier between manufacturers and their customers; thus they either lose business or have to sell at wholesale prices to intermediaries. For small businesses this kind of re-housing, however well intentioned, is usually inadvisable.

Management training. Indigenous African businesses differ greatly in efficiency and management. The existence of inefficiency is often seen as an argument for teaming programs.

A distinction is sometimes made between the investment aspect of entrepreneurship—identifying market opportunities and acting upon them—and the managerial side—how to run a business once it is established. Most of the programs designed to improve small-industry efficiency are concerned only with the managerial side. They concentrate on teaching personnel management, human and industrial relations, stock control, and how to keep accounts. The emphasis on accountancy is of long standing. Small businesses do not keep books, often fail to distinguish between business and household expenditures, and are unable to compute their total capital. No doubt these deficiencies matter when firms grow beyond a certain size; but for most small firms, the most vital requirement is “business acumen”—a feel for buying in the cheapest market and selling in the most expensive.

Historically, accountancy became really important only with the separation of ownership from control, and with the introduction of taxation. Arguably, when a business grows beyond a certain size, even though it remains small in terms of capital or employees, it may benefit from keeping a ledger. For most small businesses, though, formal instruction in double-entry bookkeeping and other techniques of management is seldom relevant. Further, such programs are often given by instructors with either no business experience or, worse, with unsuccessful experience.

All types of inefficiencies cannot be reduced merely by special training programs. For example, when Nigerian sawmills were producing only 10 to 20 percent of the lumber that the installed machines were capable of producing, this was given as an instance of inefficiency. But the reason may not have been inefficiency as such. Most machines could technically produce more—for example, by being used for longer hours involving shift work, or by being operated at higher speeds. But that usually involves a higher cost that may not be covered by increased revenue. The machines may have been bought because no smaller ones were available, yet in the full knowledge that the market was not large enough for full capacity utilization.

There are two reasons for the almost axiomatic acceptance that training is necessary to enhance managerial efficiency. First, a widespread supposition that whatever needs improvement requires government action to bring it about. Second, finance and personnel for such teaming programs are often available from foreign aid donors at minimal cost. Both bilateral donors and some of the multilateral agencies have not just responded to requests for help, but have eagerly sought out opportunities to offer their assistance. The result is analogous to underpriced capital. When interest rates are artificially depressed, currencies overvalued, and imported capital goods are exempted from tariffs, the result invariably is excessive capital intensity. When aid donors provide apparently costless technical assistance by way of teaming, more courses may be established than would otherwise be necessary, and training centers may be equipped with unnecessarily expensive machinery. That can have an undesirable “demonstration effect” on the trainees who are taught to use this machinery; it can lead to excessive capital intensity or the purchase of machines that later remain unused or cannot be repaired for lack of spare parts and the foreign exchange with which to procure them.

This is not necessarily a conclusive argument against all types of training programs, for (like all education and training) they are likely to have favorable long-term effects, many unintended. But the alternative uses of resources should be considered. And there is always the risk that particular types of assistance are prone to gain a momentum of their own and to become self-perpetuating.

Conclusion

Incentives and programs specifically designed to foster entrepreneurship, or to assist small business development in African countries, have been found to be ineffective. The general economic environment, and especially whether government policy is liberal or restrictive, has a greater influence on prospective entrepreneurs. There is little evidence that Africans are lacking in entrepreneurial spirit or fail to grasp business opportunities when they are within reach.

Undoubtedly a people’s history does influence the development of entrepreneurial qualities; when the economic environment places the exercise of entrepreneurship at a discount, it is not suprising that there is then a dearth of it. But when the environment changes, and government policy becomes dependent upon greater enterprise, the likelihood is that the latent entrepreneurial abilities of people will emerge in the form of new enterprises.

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