The business environment in Africa is unique in that entrepreneurship is often a necessity to survive. According to research into the entrepreneurial environment in South Africa by African Centre for Cities: “In contexts where there are high levels of unemployment, many people, South Africans and migrants alike, turn to informal trading to make a living.”
While each country's situation is unique, this sentiment is true in many nations across the continent. There exists much research on the relationship between migration and entrepreneurship, but what are challenges entrepreneurs in Africa face, and how is the continent’s environment particularly unique?
Challenges to entrepreneurship in Africa
Africa is home to a large informal economy, with ILO estimating that this could account for as much as 85% of Sub-Saharan Africa’s employment. This means that barriers are relatively low for individuals who want to start selling goods or services on a small scale, but at the same time, this informality lends itself to tremendous risks and challenges for entrepreneurs. Micro, small, and medium-sized enterprises (MSMEs) across the continent face these at different scales, but some include:
1. Lack of access to finance
SME Finance estimates that these businesses account for about 90% of Africa’s businesses, yet they often have difficulty obtaining financing from banks and other traditional sources, which can make it difficult for them to start and grow their operations.
2. Limited infrastructure
Many small businesses in Africa operate in areas with limited infrastructure; this may include obstacles like poor road networks and lack of access to reliable electricity, which can make it difficult for them to transport goods and provide services.
3. Bureaucratic red tape
Small businesses in Africa often have to navigate complex and time-consuming bureaucratic procedures in order to start and operate their businesses, which can be a significant barrier to entry. (We’ll discuss this point in more detail below.)
4. Corruption
Corruption is a major issue in some African countries, which can lead to a lack of transparency and fairness in business dealings, making it difficult for small businesses to compete. (As with red tape, we'll going into more detail below.)
5. Political instability
Political instability and civil unrest can create a challenging and uncertain environment for small businesses, which can make it difficult for them to plan for the future and invest in growth.
6. Lack of skills
Many small businesses in Africa struggle to find skilled workers with the necessary knowledge and experience to help them start and especially grow their operations. Additional barriers include a lack of financial literacy or lack of knowledge about programs geared towards helping MSMEs.
What makes African entrepreneurship unique?
Entrepreneurship in Africa is different from other parts of the world. Above we discussed challenges, some of which are not necessarily unique to the continent. Below, we’ve identified several headline ways in which the environment is particularly unique, and how some of these challenges manifest specifically in Africa:
1. Challenges provide areas for opportunity
The burden of analog money transfers led to the creation of M-Pesa in Kenya which now handles up to one-third of the country’s GDP. We've discussed previously how the tech sector is transforming the continent, and similar challenges in the energy and services sectors, especially with fintech, are spurring the creation of new businesses to confront these problems.
2. Social and cultural barriers
Entrepreneurs in Africa may also face social and cultural barriers, such as traditional attitudes towards business and entrepreneurship, and limited opportunities for networking and mentorship. For example, patriarchy can serve as a barrier to female entrepreneurship, causing female-led businesses to have revenues nearly 40% less than their male equivalents.
3. Motivations for entrepreneurship
African entrepreneurs by and large appear motivated by less self-interested motives. A study of African business students found that just 7% listed “wealth attainment” as a primary motive for starting a business, and only 1% believed that foreign aid was an answer to the jobs crisis.
4. Antiquated systems and bureaucratic red tape
Red tape is not unique to Africa, but entrepreneurs on the continent often have to navigate complex and time-consuming bureaucratic procedures (typically paper-based) in order to start and operate their businesses, which can be a significant barrier to entry. While countries like Rwanda have implemented digital systems for businesses, this is far from the norm on the continent.
5. Risk of corruption
Building on the list above, slow and antiquated systems lack transparency and are ripe for corruption, which remains a major issue across the continent. Initiatives like the UN Global Compact and a joint initiative by the OECD and African Development Bank (AfDB) are attempting to rally businesses against corrupt practices, but a sea change across the continent is needed to effectively curtail the issue.
6. Economic instability and unpredictability
African entrepreneurs must deal with a higher level of volatility than those in other markets. Nigeria’s recent economic woes led to a showdown with airlines over repatriating funds from the country (an estimated USD 700 million), causing carriers to threaten cutting services to the country. Similar issues arise in times of economic uncertainty, when countries fear that outward flows of capital will only add to economic trouble.
Final note
The above list is not exhaustive, but despite these challenges and unique features of the African business environment for MSMEs, entrepreneurship is becoming increasingly important in Africa as a means of creating jobs and driving economic growth. There is also a growing number of initiatives and programs aimed at supporting entrepreneurs in Africa, such as business incubators and accelerators, and mentorship and training programs.
In the coming years, the continent will be home to a significant number of the world’s youth and working-age population. Supporting and connecting MSMEs now will be critical for ensuring a future of sustainable growth and employment.
CGO's mission is to connect businesses and organizations to the African market, and that includes making intra-African connections amongst MSMEs as well. If you're interested in knowing more about the entrepreneurial landscape or where your organization could have the greatest impact, get in touch with us today, and let us help you create a strategy tailored for you.