Why investors should look at Africa’s high-growth SMEs

This article is published in collaboration with The Conversation. 

People leave Africa for a number of different reasons. Persecution, compulsory military service, war and turmoil are the headline causes. But just as important are the lack of opportunities for employment for young people and poor welfare conditions.

Unfortunately, an approach defined at the summit of EU and African leaders in Malta does not focus enough on tackling these root causes of the current rates of migration into Europe from Africa – it merely treats some of the symptoms.

Billions of Euros have been pledged to support legal migration into Europe. The summit also discussed ways to help these African countries to take back failed asylum seekers and economic migrants. Meanwhile, visa regulations have also been relaxed for African business-people and students.

But often those leaving Africa are young people with the sort of talent and drive that Africa needs to create its future economic growth. So this brain drain is bad news for the continent, when – if the continent were able to hold on to its brightest and best – the potential for growth in Africa would huge. Interest in the undeniable opportunities that exists in African markets has prompted a flurry of visits from Western leaders – including the US president, Barack Obama, in July.

But entrepreneurs in Africa come up against a number of problems, chief among them a lack of investment – and if Africa is to realise this vast potential the current trickle of investment needs to become more of a raging torrent.

Small vision

Most of the aid that goes to Africa – and the additional support that has been announced at the Malta summit – is not focused on providing stable wage-paying opportunities for young Africans. Nor is it focused on inspiring highly educated Africans to remain and to create and grow innovative businesses that will drive African economic growth and welfare.

Of the current aid that is focused on entrepreneurship and economic development (a small proportion, incidentally, of total aid), much is directed towards starting micro businesses and “necessity” entrepreneurship as an alternative means to poverty alleviation. The problem with this is that these jobs often in vulnerable businesses with high rate of failure. The firms that these entrepreneurs typically build have very little chance of growing and surviving for a number of reasons.

Most empirical evidence from around the world shows that the main contribution to net increases in employment is from high-growth small and medium-sized firms (SMEs). Africa needs investment and commitment to develop more of these high-growth SMEs, rather than a predominant focus on micro firms.

Larger businesses tend to be run by entrepreneurs with better connections than the people who run micro enterprises. Consequently that have better access to finance – not to mention the valuable experience of the challenges and costs involved in navigating the complex and uncertain regulatory and general business environments that exist in many African states.

Evidence on entrepreneurship and business growth in Africa shows that medium and large firms are typically more productive than their smaller counterparts. They provide more stable employment (and incomes), have a greater propensity to innovate and export and are better able at adapting to volatile local business conditions.

Yet the little support that goes towards fostering entrepreneurship in Africa is heavily focused at micro and unproductive small firms.

How to keep talent

The EU would do much better to include specific finance aimed at entrepreneurship – and particularly the support of high-growth small firms and larger-scale productive businesses owned by experienced entrepreneurs. Measures could include ways of increasing the involvement of these experienced and successful entrepreneurs, such as creating effective policy and regulatory advisory groups and creating better functioning, more robust networks and linkages between the entrepreneurs in Africa and in Europe.

A tax incentive for European entrepreneurs and institutions to invest in Africa and/or with local African entrepreneurs would be very valuable. Additional measures could also include advice and funding to increase, improve and develop investment legislation for equity finance in countries where this is thin on the ground.

Increasing trade further between the EU and Africa would also be a massive help. This means further reductions in the barriers for firms that are trying to export from Africa.

Europe could also help by providing more training and mentoring schemes where experienced entrepreneurs both in Africa and Europe assist novices with potential. Entrepreneur-backed and driven angel and venture capital funds and tax incentives to bolster and encourage these types of equity finance would also help to increase the amount of finance available to promising start-ups across Africa.

These measures could ultimately lead to increasing the supply of wage paying opportunities for African youths and talented workers thereby reducing the motivations and causes for migration, while contributing to economic growth and development within the continent.

Publication does not imply endorsement of views by the World Economic Forum.

To keep up with the Agenda subscribe to our weekly newsletter.

Author: Antonio Malfense Fierro is a Lecturer in Entrepreneurship and Innovation at the University of Hull. 

Image: A girl selling apples by the roadside waits for customers just outside the Angolan city of Lubango, January 15, 2010. REUTERS/Finbarr O’Reilly.