Sustaining economic growth is the most important contributor to poverty reduction across Sub-Saharan Africa. It is a critical development driver, and the only sustainable exit strategy from long-term aid dependency.
Currently, SMEs and small informal businesses represent more than 90% of all businesses and provide the main source of jobs and income for poor people in Africa. These businesses form the bedrock of Africa’s economic growth but continue to face a multitude of challenges, including limited access to finance, lack of skills, poor infrastructure, low levels of regional and international trade, and corruption.
With 57% of the working population engaged in agricultural production,3 Africa’s ability to grow economically over the coming years will largely be determined by its ability to transform the competitiveness of its agricultural sector. At the same time, as per capita agricultural productivity rises and young populations across the continent enter the workforce, employment-intensive sectors such as tourism, retail and manufacturing will become increasingly important to growth and poverty reduction.
As strengthening Africa’s enterprise base becomes a growing priority for policymakers, three key themes emerge:
– Improving the climate for business: A weak business enabling environment hits SMEs especially hard. According to the World Bank’s Doing Business 20114 report, Africa remains the region with the lowest comparative ranking on the quality of its business environment. The 2009 Africa Competiveness Report reminds us that African firms are almost 20% more expensive to run than firms in East Asia.
– Improving the competitiveness of agricultural sectors: Small agricultural producers in Africa face daunting challenges that inhibit competitiveness and access to regional and international markets. Leaving aside the changes needed to international trading rules, at the heart of the problem are a range of constraints that include poor seed varieties, weak infrastructure (especially irrigation), limited access to fertilisers and finance, and structural weaknesses in the way agricultural markets function.
– Diversifying the region’s economic base to ensure more sustainable broader based growth: African economies remain amongst the least diversified in the world. Although there are signs of growth from emerging sectors, Africa’s economic base needs to widen beyond extractives and agriculture to protect the region from extreme swings in demand for natural resources in the future. Adding value to Africa’s agricultural output, through textiles and food processing for example, would also create new opportunities.
The Role of Business and Partnership in Enterprise
Large companies are natural engines of enterprise development. On one hand, they are huge markets – the business cycle creates demand for a variety of goods and services and generates business opportunities for enterprises up and down the value chain. At the same time, many companies sell products and services that make other enterprises more productive and profitable. Companies can also invest philanthropic resources in enterprise development programmes not necessarily linked to their value chains, leveraging core competencies such as know-how. Finally, companies can play significant indirect roles in enterprise development by advocating for business.
Driving Enterprise Development in Africa
Buying from, selling to, and distributing through low- income producers and micro, small, and medium enterprises (MSMES). Companies procure goods and services ranging from raw material and equipment to catering and distribution. At the same time, they sell productivity-enhancing goods and services ranging from inputs and equipment to information and communications technologies to financial services.
Investing in training and skills development for low- income producers and msmes within the value chain. Doing business with these enterprises often means investing in building their capacity – bringing suppliers up to quality, environment, health, and safety standards, for example, or teaching customers how to use the company’s products and services to their advantage.
Advocating for business enabling environment reform, with a particular focus on the needs of low-income producers and micro, small and medium enterprises. Property rights, land reform, business registration procedures, labour laws, and tax regimes all play critical roles in legal empowerment and financial inclusion, helping the poor to create, protect, and grow their businesses.
Sharing the cost and risk of developing new models of doing business with low-income producers and MSEMS. Experimenting with new products, services, and value chains in unfamiliar markets and difficult operating environments can bring even more uncertainty than the typical business venture usually faces. Because of the potential for development impact, partners like NGOs, bilateral and multilateral donors, private foundations, and government agencies can be willing to help.
Enabling low-income producers and msmes to participate in corporate value chains by building their capacity
and expanding their access to finance. Sometimes the capacity-building requirements of these enterprises go beyond what it is possible or economical for a company to do alone. NGOs, business associations, and financial intermediaries can be invaluable partners not only in building that capacity, but also in providing or facilitating access to finance and acting as aggregators – reducing the transaction cost to a company of doing business with large numbers of small enterprises. Partnership is especially appropriate when benefits are created that cannot be fully captured by the firm.
Leveraging core competencies and social investment resources to support enterprise development outside
the value chain. Companies can provide services (for example through small business mentoring) and build the capacity of local institutions to provide services (for instance through pro bono time and financial contributions). Local institutional capacity-building, in particular, helps sustain impact even after the company’s commitment is complete.
Create or participate in collaborative platforms to strengthen public policy input and make it more credible. Such platforms can enable companies, business associations, NGOs, and donors to pool experiences, exchange perspectives, develop valuable policy input, and deliver it in impactful ways.
Development in Africa
Enabling environment reform, which can have a disproportionately large impact on smaller enterprises with thinner operating margins and little capital to invest in navigating bureaucratic procedures or meeting exacting regulatory requirements.
But while companies’ comparative advantage in enterprise development is rooted in their core business operations and value chains, they are also finding that partnership can play a critical role in enabling – or deepening the development impact of – core business activity by adding to the knowledge, insight, implementation capacity, and financial resources at their disposal.
Collaboration in Action