I: The basics
The African environment for entrepreneurship
Learning objectives: upon completing this chapter you will:
- • Gain knowledge of the nature of African entrepreneurial ventures
- • Understand the diversity and commonality that characterize African countries
- • See the importance of context and how it shapes entrepreneurial behavior
- • Be able to identify the macro-environmental challenges that African entrepreneurs face
- • Develop an ability to analyze the macro-environment and assess potential impacts on entrepreneurial activity
A history of entrepreneurship in Africa
Entrepreneurship has existed since humans engaged in market exchange activity with one another (fancy words for buying and selling). The earliest observed entrepreneurship anywhere in the world took place in New Guinea around 17,000 BCE, when obsidian was exchanged for tools, skins, and food. Such entrepreneurship in hunter-gatherer societies was probably common, although evidence of it remains limited.
Entrepreneurship expanded greatly with the agricultural revolution. On the African continent, market activity began with the rise of agriculture in the then-fertile Saharan Desert. Agricultural surpluses allowed Africans, who possessed them, to trade with other Africans and further afield, initially with Southwest Asia. All of this began between 10,000 BCE and 8000 BCE.
The next phase in African entrepreneurship began with the expansion of international trading routes, which accelerated after 2000 BCE. Such trade initially involved North Africa, which became linked through Egypt and the Phoenicians with Greece, India, China, and the Arabian Peninsula. Trade within Africa was facilitated by entrepreneurs crossing the Sahara, and by Nubia (located in contemporary Sudan) and its linkages with Chad and Libya. Traders on Africa’s east coast also plied international routes — Swahili entrepreneurs linked the continent with China and India.
During the same period, entrepreneurship became a significant phenomenon in the ancient world.
Then came slavery, initially as an internal affair, but then increasingly linked by European entrepreneurs with the Americas. Sad to say but true, entrepreneurship and slavery were closely linked. Each slave ship could be seen as a new venture. Many slavers came from Great Britain and the United States, but were supported by Africans who captured and then sold slaves to foreign slavers.
Entrepreneurship in Africa is also closely linked to colonialism. Many significant ventures arose out of colonial efforts. King Leopold H’s Congo Free State, which extracted ivory, rubber, and minerals at the cost of great human suffering and loss of life from 1885 to 1908 in the territory, is occupied today by the Democratic Republic of the Congo (DRC). In 1888, Cecil Rhodes established De Beers, which continues to be a major diamond mining and trading concern to this day. Both Leopold II and Rhodes are examples of a particular type of entrepreneur — the actor at the wealth-power nexus who uses wealth or power to gain the other. These examples also point out that, contrary to the breathless cheerleading of so many of entrepreneurship’s proponents, entrepreneurship is not always a positive thing.
In postcolonial Africa, entrepreneurship has been a tale of two cities. One city is occupied by the rich, powerful, and connected entrepreneurs who have reaped most of the benefits of startup activity. The other city is lived in by the ordinary entrepreneurs, often motivated less by ambition and more by necessity to scrape out an existence in the absence of stable employment opportunities. In between are a few tech entrepreneurs who have adapted technologies from elsewhere to African conditions or used the distinctive local conditions and problems to generate interesting new products that have been exported elsewhere, such as M-Pesa mobile money. As and when institutional conditions improve and income levels rise, entrepreneurs in Africa can be expected to develop new products and firms that we can only imagine today.
Scope and types of enterprises
African entrepreneurial ventures are characterized by several common features even though there is a wide variety of them. Ninety percent of them are small enterprises or mircoenterprises and mostly operate in the informal sector. They are predominantly run by “necessity-driven" people who start ventures because they have no viable employment opportunities elsewhere. Thus, very few entrepreneurial ventures are started by “opportunity-driven” people who are pursuing profit and independence (African Development Report, 2011), a phenomenon discussed in detail in Chapter 3. A 2018 report by the William Davidson Institute of the University of Michigan on a study of six Francophone West African countries identified the following groups of entrepreneurial ventures:
- • A very large cluster of small necessity entrepreneurs.
- • Moderate growth entrepreneurs running mostly family-owned businesses.
- • Smaller clusters of high-growth startups run by young entrepreneurs mainly in the technology sector.
- • Opportunity-driven small- and medium-sized enterprises (SMEs) run by entrepreneurs copying successful business models and operating several businesses.
- • Gazelles (successful startups with high growth rates).
The African Economic Outlook (2017) reported the following:
• Twenty-two percent of Africa’s working-age population are starting new ventures, a rate higher than any other region of the world. There is a wide range across countries from 7% in South Africa to 39% in Senegal.
- • Forty-four percent of African entrepreneurs start ventures to exploit market opportunities while 33% do so because they cannot find jobs.
- • Most entrepreneurs operate in the services sector.
- • The 25—34 age group accounts for 38% of entrepreneurs followed by 18—24 and 35—44 age groups with 23% each.
- • The majority (55%) of early-stage entrepreneurs are in retail trade, hotels, and restaurant businesses. The next category is agriculture, forestry, and fishing with 10% and then manufacturing at 8%. Again, there are wide variations across countries ranging from 27% in Cameroon to 81% in Malawi for the percentage in retail trade, hotels, and restaurant sectors. The popularity of this sector is because there are fewer entry barriers, it does not require much investment or higher level skills.
- • Fewer than 20% of African early-stage entrepreneurs offer new products to the market.
Other characteristics of African entrepreneurial ventures are low levels of employment, low sales, low profitability, and high staff turnover.