High-growth entrepreneurial firms in Africa

This article analyses the growth performance of a number of entrepreneurial firms in 10 manufacturing sectors of 11 Sub-Saharan African (SSA) countries. The focus of the article is on identifying the entrepreneurial attributes and company characteristics that tend to generate a significant number of high-growth firms (HGFs) in these countries.

To do this, the authors use quantile regression, which provides a more complete estimation of the growth distribution of firms conditional on different attributes. The authors investigate to what extent certain co-variates may affect the conditional distribution of company growth rates more fundamentally. They focus not only on the factors that systematically increase the ‘mean’ growth rates of firms, but also on the factors that tend to stretch the right tail of the conditional distribution of growth rates – in other words, factors that tend to generate a significant number of high-growth firms.

Fostering a Thriving Cass of Entrepreneurial Firms

Previous studies have examined company growth as a systematic process within a well-defined supply/demand growth framework. However, the wide dispersion of growth rates across firms is often overlooked. In this article, the authors have taken a different perspective and focus on the country, industry, firm and institutional factors influencing the mean level as well as the dispersion of company growth rates in a wide range of SSA countries.

It is generally recognised that a thriving class of entrepreneurial firms is necessary to provide the potential for creating employment and wealth. In the least developed countries (many of which have gone through a period of conflict), it is even more important to foster productive and high-growth entrepreneurship that can contribute to peace and transition.

The growth of the non-agricultural labour force also highlights the need to create employment in the productive sector, beyond the proliferation of marginal/informal trade and service activities that are traditionally associated with entrepreneurship in Africa. Strongly growing firms have the potential to create employment and technological capabilities and to generate both physical and human capital.

In this article, the authors first present the findings of a rich empirical and theoretical literature on company growth, identifying the factors that have been found to influence this growth, with special emphasis on studies from Africa.

Next, using the World Bank dataset for their empirical analysis, the authors provide some basic evidence on the existence of HGFs in various African countries. They then construct a growth model to identify the factors that affect growth at various levels of the growth distribution. Finally, the authors interpret their findings and discuss some of the limitations of their study.

Serving Markets Pro-Actively

The results of the study yield some powerful insights into the factors affecting not only the location but also skewness of the conditional growth distributions in relation to a set of company characteristics and resources. Companies that serve their product markets pro-actively — by successfully introducing new or significantly improved products, investing in their own transport for delivery, or linking with clients through their own websites — show distributions skewed to the right. The last two variables – which bridge distances between a company and its market – point to the self-reinforcing growth effects they generate in creating wider input and output markets.

Among firms like these, the likelihood of a significant number of HGFs is much higher than among those lacking the resources to undertake this pro-active stance. Therefore, if policymakers are seeking ways to stimulate the number of HGFs, improving conditions to ease a company’s access to this infrastructure would appear to be a very effective approach.

The results emphasise that a good transportation network and availability of transportation are key elements in widening the markets in which firms can grow. If low transport costs can be combined with economies of scale in production, a self-reinforcing growth process can occur, so that producing in larger volumes would reduce unit costs and make goods affordable for the customers further away. Indeed, previous studies indicate that only a few firms in SSA countries produce on an efficient scale (Goedhuys and Sleuwaegen 2003). Bigsten and Söderbom (2006) acknowledge that poorly developed transport infrastructure and unavailability of efficient transport are among the main reasons for the prevalence of small manufacturing firms in Africa, because this lack of adequate transport creates small pockets of demand which generate small-scale localised producers.

Educating Managers and Work Force

Interestingly, a number of firm-specific human capital variables – including higher education for managers and a trained labour force – shift the complete growth distribution but do not have a stretching effect but rather a compressing effect on the growth distribution. Education is an important growth-shifting variable for the ‘typical’ firm, causing a shift in the mean growth rate. This is also true for companies that have their own generator (enabling them to counteract electricity outages) as well as access to flexible credit facilities for financing business operations.

Consequently, to stimulate the growth of firms in general, public intervention should aim at increasing capabilities through an improved educational system that upgrades the skills of both the entrepreneurs and the labour force. At the same time, it is clear that electricity and financial constraints have industry-wide effects. Hence, policies tackling these obstacles to a company’s development can also shift the entire employment growth distribution of firms.

From here, case-study research should provide additional insights into the mechanisms of growth of African firms, including the many unobservable factors that explain the wide dispersion of growth rates found among those firms.

Related article

Goedhuys M. Sleuwaegen L. 2010. High growth entrepreneurial firms in Africa: a quantile regression approach. Small Business Economics. 34(1) : 31 - 51.

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