By Dr. Jean Cedric Kouam (Download pdf version)
Increasing the Impact of Business Support Structures in Sub-Saharan Africa
According to a report published by the International Monetary Fund in 2017, the informal economy accounts for between 20% and 65% of the gross domestic product of Sub-Saharan African. This sector counts for more than 70% of employment in some countries (Cameroon, Congo, Burundi, Cote d’Ivoire, etc.). As a result, on average, 80% of total female employment and 60% of male employment in these countries are highly vulnerable (African Development Bank, 2017).
For many years, it has remained omnipresent in both urban and rural areas, employing most of the working population. However, the predominance of informal enterprises in this region of the world is not without effect on the development of the various countries within. It remains a major obstacle to the improvement of the business climate and weakens the position of economies on the international scene while depriving them of the fiscal resources necessary to carry out structural investments.
To address the many challenges posed by the informal sector and to promote private sector development, Africa needs support to close the gap related to the acknowledged lack of essential skills to enable a business enterprise to become sustainable. This explains the flurry of business incubators and accelerators that have been springing up on the continent for several years. As elsewhere in the world, these business support structures have become almost indispensable. According to a Roland Berger study conducted in 2019, the number of accelerators and incubators worldwide over the last decade has increased fivefold, from 560 in 2009 to 2,616 in 2018. Serving the burgeoning start-up ecosystem, first-generation incubators built their service offering around standard start-up support, consisting of office space, mentoring, and networking. At the same time, accelerators addressed the issues of differentiation through investment and access to technology.
This backdrop that this article aims to exemplify factors that can be supportive to governments and civil societies in Sub-Saharan Africa in view to increase the impact of business support structures, especially as concern the development of private sectors. The article is structured in two sections. In section 1, we present the opportunities of business incubators and accelerators for promoting social innovation in SSA. Section 2 highlights the barriers to the development of business incubators and accelerators in SSA. Afterward, we propose solutions that could help SSA countries take full advantage of the growing number of business incubators and accelerators in the region to promote their economic development.
Opportunities of Business Support Structures for Economic Development in SSA
For the World Bank, Small and Medium Enterprises in some countries of Sub-Saharan Africa account for more than 90% of all enterprises, of which 70% to 80% are micro and very small enterprises. They are the main source of employment and income for populations after subsistence farming (Tadesse, 2009). In Cameroon, for example, the statistics show that eight out of ten businesses disappear only two years after their creation (Entreprises du Cameroun, 2015). Furthermore, in a report published by CAMERCAP-PARC in 2016, it emerged that 72.24% of companies created from 2010 onwards were non-existent in the file of the General Directorate of Taxes on 31 May 2016 in Cameroon.
However, business support structures enable the young enterprises they support during the first months of their activity to be more effective and sustainable than young enterprises that do not use their services (Arlotto et al., 2012). Business support structures, therefore, contribute to the sustainability of companies through rigorous professional support, monitoring of management methods, and an omnipresent back office for legal, tax, and accounting issues. The main stake is to develop an economic model which is more connected to innovation, create value-added wealth and strengthen the resilience of enterprises to the various shocks that can affect economic activity.
On a report of the World Bank and Global System for Mobile Communication (GSMC), Africa now has more than 443 business support structures, compared to only ten or so in 2010, either an increase of almost 98% in a decade. However, their development remains slow compared to other regions of the world due to several constraints they encounter. The same source states that, if the importance of these structures, which are booming in Africa, is no longer questioned, it is nevertheless true that they are still mostly very young, isolated, with very heterogeneous levels of professionalism from one end of Africa to the other, and a lack of means or adapted tools. Despite their best efforts, the business support structures will not enable the beneficiary entrepreneurs to overcome the main difficulties of their ecosystem and growth. Therefore, if these structures do not improve their effectiveness, efficiency and do not develop further, their impact on growth, social innovation, and job creation will remain limited.
In addition, due to the decline in mortality rates, slowly declining fertility at a very young age. The population of SSA countries could quadruple by the end of the 21st century, from 1.09 billion in mid-2020 to 3.8 billion in 2100 (May and Rotemberg, 2021). This demographic boom is generating faster growth in the working-age population and their earlier entry into the labor market. According to the World Bank, unemployment rates in SSA in 2020 remain relatively higher compared to North Africa and the Middle East – 11.73% for SSA against 6.63% for North Africa and the Middle East. Indeed, young people are increasingly resorting to entrepreneurship which unfortunately remains subsistence. Informal employment has almost become the norm and accounts for between 20% and 65% of countries’ gross domestic product (IMF, 2017).
By 2050, more than 450 million young Africans will reach working age in SSA (AfDB, UNDP, and OECD, 2017). To fully benefit from this youth bulge, strong and dynamic workforce, estimated at nearly 64% of the population, there is an urgent need to develop a new way of doing business, naturally carried by support structures whose objective is to support entrepreneurs so that they can be the bearers of innovations and creators of stable and decent jobs.
The goal is to have a positive impact on local economies by promoting the emergence and competitiveness of small and medium-sized enterprises, which have very little chance of becoming large enterprises because of the low survival rate associated with them (African Development Bank, 2019). This may require a discussion of the barriers to entrepreneurship in sub-Saharan Africa.
Obstacles to entrepreneurial development in SSA include low access to bank financing, legal and fiscal frameworks that are often inadequate for start-ups, training deficit of entrepreneurs, and lack of information on procedures, policies, and regulations. The support structures thus have the potential and the mandate to help businesses overcome the difficulties they face.
Moreover, the need for business support structures in SSA is justified by the heterogeneity of the informal economy, the complexity of which constitutes a major obstacle to the implementation of appropriate public policies. In the world, we distinguish between structures offering personalized support (incubators, accelerators, start-up studios), those offering shared services to entrepreneurs (incubators, business hotels), and third-party structures (coworking spaces, FabLabs), which promote the exchange of skills, knowledge, and resources. These services generally include advice, access to equipped and connected premises, access to a network, and support in seeking financing. These different structures act at different stages of the company’s development. Incubators support entrepreneurs at the beginning of their journey, while FabLabs (manufacturing labs) enable innovators to develop a product, and accelerators lead to the scaling up of companies.
Given the rapid increase in the working-age population in SSA and the limited supply of jobs in the labor market, business support structures are very useful in responding to the various demands of entrepreneurs, facilitating the transition to the formal sector, and expanding the boundaries of businesses.
Thanks to the establishment of policy frameworks conducive to the advent of private enterprises with high growth potential, these structures offer a real opportunity to the various countries. Some of these benefits include:
- Increase employment opportunities for the working-age groups and diversify economic activity. This would enable SSA to benefit from the demographic dividend like most of the world’s densely populated regions, such as East Asia.
- Activate the levers of inclusive and sustainable development based on innovative entrepreneurship by multiplying employment opportunities. This mechanism would make it possible to absorb a significant share of the young people and women of working age who enter the labor market each month.
- Strengthen the competitiveness of companies and the development of entrepreneurs. Thanks to new technologies, support structures can allow companies to leapfrog traditional development processes, accessing a world of possibilities previously out of reach but also creating business opportunities for its entrepreneurs.
Challenges Faced by Business Incubators and Accelerators in SSA
While it appears that SSA is favorable terrain for the advent of business support structures, there are still many obstacles that slow down the creation of innovative high-growth businesses and preventing filling the gaps in the current ecosystems. These include the current regulations, difficult access to financing, mismatch between supply and demand in the labor market, difficult access to the market and scarcity of business opportunities, and weak infrastructural development.
- Current Regulations: The unfavorable business climate for business development in SSA also affects existing support structures. This is illustrated by the poor rankings of most countries in the Doing Business Index report despite the proliferation of these structures. Economies that score well in the Doing Business Index report generally enjoy higher levels of entrepreneurial activity, driven by business support structures (incubators, accelerators, business nurseries, FabLabs, business hotels, business brooder, coworking spaces, and start-up studios).
- Access to Finance: This represents a major challenge to the development of support structures in SSA, which are poorly supported by public authorities. Truly adapted financial instruments, such as venture capital funds and business angels, or alternative tools such as honorary loan mechanisms and crowdfunding, are barely emerging and remain far too few.
- Poor Infrastructure Development: Like the companies they support, business incubators and gas pedals in SSA face a lack of communication, telecommunications, and transportation infrastructure (roads, ports, communication networks, access to electricity, etc.). These hurdles make it difficult for digital businesses to emerge and for other high-ambition, larger-scale businesses to expand (Obokoh and Goldman, 2016).
- Insufficient Human Capital: According to the Global Entrepreneurship and Development Institute (2018), the quality of human resources is a very detrimental factor for a business to take off. Higher education remains poorly accessible than in some countries, and states place too little emphasis on vocational and technical training. Moreover, due to the lack of awareness and education on entrepreneurship in all curricula and the weakness of entrepreneurship training in higher education, entrepreneurial skills (business model, business creation, operations, management, etc.) remain scarce, which complicates the work of support structures.
- Market Access: Sectoral growth poles in SSA are still underdeveloped, yet they could facilitate horizontal and vertical business linkages between entrepreneurs and larger firms, especially foreign ones. This is the case of the technological and digital sectors, for example. While the small size of domestic markets forces high-growth entrepreneurs to seek expansion early on, they still face barriers to trade and divergent regulatory and normative frameworks.
Economic Policy Recommendations
To enable business support structures to achieve their objectives, which can be summarized as follows: directing graduates towards entrepreneurship, encouraging female leadership, promoting open innovation, testing innovative financing mechanisms, enhancing the value of research products, creating social and/or environmental impact, and boosting the national economy; the following recommendations are made to the main stakeholders of the entrepreneurial ecosystem
- Public authorities should substitute the creation of public agencies to supporting entrepreneurship for the promotion and extension of business support structures. Indeed, existing public agencies are costly, difficult to maintain, and would not be well adapted to the needs of innovative entrepreneurs. Similarly, the international consultancies that governments hire to implement sound entrepreneurship policies are very expensive, lack local expertise in the field, and are not able to provide medium- to long-term follow-up. Moreover, governments could use the support structures to benefit from the expertise of innovative start-ups that offer enormous opportunities for modernizing public services.
- Private sector actors should put more trust in business support structures. These structures represent a less costly and tailor-made solution to stimulate growth entrepreneurship and can provide a pragmatic response to the local problems of entrepreneurs.
- Business support structures should communicate more on the relevance and legitimacy of their actions as well as their contribution to the achievement of sustainable development objectives. Indeed, they are a strong link to promote entrepreneurship training, facilitate youth employment, encourage social innovation, support job creation and business development, and ensure inclusive and sustainable economic growth.
To solve the problem of unemployment faced by more than half of the working-age population in SSA and to strengthen resilience to various shocks (socioeconomic, climatic, and migratory crises, etc.), public authorities should promote the development of business support structures. These structures represent an affordable and tailor-made solution to stimulate growth entrepreneurship.
As potential strategic partners of governments to foster entrepreneurship, job creation, and innovation, business support structures have become essential to achieve sustainable development goals. With the collaboration of other actors in the entrepreneurial ecosystem (project holders, developing businesses, capital providers, research institutes, development aid institutes, etc.), they have the capacity to yield better outcomes as they intervene on a small scale and favor qualitative rather than quantitative support.