|SMEs in Africa: Challenges and the role of Government for the future|
|Written by Yejoo Kim (1) Friday, 02 December 2011 08:18|
Small- and medium-sized enterprises (SMEs) are considered the engines of growth in developing countries. In developed countries, SMEs have historically played a vital role in creating jobs, spurring innovations, and creating new products, and thus contributed to economic vitality and growth. Taking these experiences into account, African countries should not overlook the importance of promoting SMEs in the same regard. However, considering the situation of most African countries, there are several impediments that have to be removed in order for SMEs to flourish. Recently, the strong presence of Asian SMEs in Africa and increasing competition have negatively affected local SMEs.
The purpose of this paper is to revisit the challenges facing the growth of SMEs in African countries, especially regarding the contemporary presence of Asian investors on the continent. The paper begins with a discussion about the general situation of SMEs in Africa. Secondly, impediments will be explored by looking at some case studies. Focus is placed on how the Asian private-public sector has influenced SMEs in Africa and, furthermore, the critical role of African Governments is explored.
The general features of African SMEs
It goes without saying that SMEs in Africa have played a significant role in the macro economy.(2) In the case of South Africa, the most economically developed African country, SMEs generated more than 55% of all jobs and 22% of the country’s Gross Domestic Product (GDP).(3) Despite the importance of SMEs, SMEs in other African countries have generally shown asymmetrical development. Unlike that of South Africa and the other powerhouse, Mauritius - two notable examples of countries with vibrant SMEs – most countries have relied on oil or other natural resources for their economic development. Additionally, in some countries such as the Democratic Republic of the Congo, most local SMEs went bankrupt due to the civil war. Long-lasting civil wars have undermined the foundations for many SMEs.(4) To further complicate matters, in many countries, the lack of infrastructure and environmental conditions such as unattractive tax regimes and legal systems, small local markets, and corruption have hampered the development of SMEs.(5) All of these factors have resulted in an uncertain environment for local entrepreneurs. As a result, local businesses tend to stay in the informal sector and do not contribute to national economic growth.(6)
In the case of developed countries, for example Germany, the economy is characterised as having strong SMEs and about two-thirds of the workers are employed by these enterprises.(7) Furthermore, in newly industrialised Asian countries, SMEs have become the driving force in their rapid growth. For example, SMEs account for 99% of all enterprises and 88% of all employees in South Korea.(8) Some of the world’s leading Korean companies such as Samsung and LG were once small enterprises. From these examples, it is clear that SMEs are important to the development process and that it would be beneficial for African countries to promote SMEs for further growth.
Challenges for African SMEs
Despite the importance of SMEs, barriers do exist for SMEs in Africa. Most notably, many African countries lack the governmental capacity necessary to properly support the development of local SMEs. What is worse, it has been pointed out that some African Governments impose harsh regulations on local SMEs. As an example, in Ethiopia many local SMEs complain that regulation is too tight. They feel that it is too difficult to obtain a licence. Additionally, proof of premises and requirements for large amounts of capital and high qualifications stifle growth. SMEs are also heavily taxed. This makes it difficult for SMEs to emerge from the local sector.(9)
Some Governments actually present quite an ironic attitude towards their own local SMEs. For example, in Ghana, after the discovery of oil in the Sekondi-Takoradi region, many local businesses related to both the oil sector and related industries such as gas refinery have emerged. Thus, many new SMEs have tried to enter the market. In actuality, however, it is said that the existing legal system provides a more favourable environment for international companies. It is, therefore, impossible for local SMEs to compete with international firms that have greater know-how and capital. Thus, the Ghanaian Government is supporting foreign investment rather than local growth.(10) There is another complaint from local Ghanaian SMEs that the bidding process seems to favour foreign companies. Local SMEs complain that information about contracts is not made available to local providers; this situation is closely related to corruption and the agreements signed behind closed doors between businesses and governments. Locals perceive that there is no transparency in this regard.(11)
When it comes to the influx of Asian investors in the case of Chinese businesses, in general, many are likely to think that Chinese companies operating in Africa are mostly related to oil or other natural resources sectors; however, 80% of the Chinese companies currently in Africa are SMEs.(12) Chinese businesses are likely to enter where most other foreign businesses do not consider it worthwhile to do business, because there are low profit margins and weak supply chains. Chinese businesses see this as an opportunity and Africa as a new market.(13) The problem is that the increasing penetration of China in the African market has also brought about several negative consequences.
For example, Chinese SMEs are likely to bring over their own workers, and thus “new” business does not contribute to local job creation. Secondly, it is said that the Chinese do not trust local systems; for example, they do not trust the local banking system, so they are likely to send profits back to China instead of reinvesting in the host countries. Most importantly, Chinese SMEs lack an understanding of African business, as they do not try to integrate into the host countries.(14) The most significant consequence is that as a result the strong presence of Chinese SMEs forces local firms out of business. Thus, the penetration of Chinese companies threatens to undermine the development of local (African) SMEs.
The role of African Governments in creating an environment for local SMEs
Realising this, some African Governments have started to protect their own industries by enacting new laws. For example, the Nigerian Government prohibits the import of fully-manufactured products from China. In this way, for example, the Government indirectly forced Chinese manufacturing companies to establish their factories in Nigeria and expects those companies to contribute to (local) job creation and technology transfer. As a result, up to 93% of the workers are now local in Nigeria due to this regulation.(15)
There is another similar case in Namibia. Recently, since the Windhoek Chamber of Commerce complained about an invasion of Chinese SMEs, regulations have been changed so that all foreign businesses in public transport and hair salons, which Chinese businesses have dominated, are now regulated under a new permit system, which states that new entrepreneurs have to comply with local registration requirements.(16)
These are examples of how the role of African Governments is important when it comes to protection of local SMEs. At the end of the day, however, these are all passive responses, and instead, Governments need to be more pro-active in creating favourable environments for their own SMEs.
The role of Asian Governments for promoting African SMEs
Many Asian countries – from China and Japan to South Korea – have established various mechanisms to boost African SMEs by emphasising the importance of local ownership.(17) In reality, however, the outcomes are rather insignificant. From time to time, their efforts bring about counter-productive results. In the case of South Korea, the Government agency, the Small and Medium Business Administration, has tried to seek ways to promote SMEs in Africa as part of Official Development Assistance (ODA). The approach, however, has been criticised both inside South Korea and the recipient country, Kenya.
In 2011, for example, a local South Korean newspaper reported that aid programmes from South Korea were causing strains in Korea-Kenya relations.(18) According to the Korean Times, while the Kenyan Government placed a priority on technical, industrial, vocational, and entrepreneurship training, South Korea instead preferred agricultural programmes such as supplying tools.(19) Although the Government has emphasised transferring its own developmental experience to other developing countries, in actuality, it seems that the Government ignores the real needs of Kenya.(20) The South Korean Government has to realise that its own successful development strategy from the 1970s has to be modified when applied to African countries since the environment is different. South Korea, as well as other newly emerging Asian donors, is likely to highlight the sharing of their own developmental strategies; however, before applying these strategies, the needs of the recipient countries should also be considered.
The African continent is currently undergoing an unprecedented rate of rapid development. Without economic transformation, however, it is difficult to expect further progress. In this regard, the promotion of SMEs cannot be overlooked.
Several factors are vital. In order to build an enterprise culture, the role of Government is significant. As is evident from the previously mentioned cases of Nigeria and Namibia, African Governments have to exert themselves to create favourable conditions for their own entrepreneurs.
In terms of Asian investors, Asian companies have hands-on experience, and it is hoped that they will share their experience and contribute to the local economy. When Asian enterprises enter Africa, they should provide opportunities for local companies. In practice, however, only a few Asian businesses consider that as part of their overall goals. As seen from the case of South Korea, it is important to create renewed emphasis on meeting the real needs of the recipients as a top priority.
(1) Contact Yejoo Kim through Consultancy Africa Intelligence’s Asia Dimension Unit