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What Africa's Entrepreneurs Can Teach the World

There are two major characteristics of African entrepreneurship: hyper-entrepreneurship and excess diversification.
It's becoming ever clearer that entrepreneurship is the answer to the vexing economic questions facing Africa today: job creation, capital formation, skills acquisition, taxation-based self-sufficiency, quality of governance-demand, and of course social inclusion. But how has it actually evolved in Africa? Are there peculiar features of African entrepreneurship we may consider relevant to big global debates on development and sustainability?

I spend a significant amount of my time associating with a pro-business think tank that has been building an impressive database of entrepreneurs, small businesses, start-ups, and innovation-driven enterprises in Africa. Sifting through case studies, anecdotes, questionnaire responses, and many other snapshots of entrepreneurial activity in Ghana and a few other places on the continent I was drawn to two major characteristics of African entrepreneurship. I will call them hyper-entrepreneurship and excess diversification.

Until recently, my attitude had been quite negative about both of these. I was looking for reasons why the grand take-off of the African economy has been slower than predicted by the super-optimists (the continent is growing by 5% annually rather than the 10% or more seen in recent years in China and India). African-style hyper-entrepreneurship and excess diversification are so different from the standard models of business success that prevail in the West that I figured they must be the problem.

On hyper-entrepreneurship, the insight was that the staff turnover rate appeared extremely high within the entrepreneurial segment of the economy (start-ups, small businesses, non-public businesses, innovation-led businesses, sole proprietorships etc.). Workers in the businesses we were looking at showed a much higher propensity than their counterparts in the West to leave their current job to set up a business, as opposed to looking for a a waged position elsewhere. This appeared to point to a serious deficit in quality followership in Africa, one that meant a dearth of vital managerial talent.

I am now convinced, though, that the entrepreneurial driver behind talent churn in African labor markets actually yields significant net benefits for African economies. This is simply because being in a job appears to trigger latent entrepreneurship, and also because there is a more intensive re-investment of social capital to generate financial capital than is customary in the West. This is to say, while many workers may not save enough in cash, they build confidence and contacts that in the generally informal economy can be as good as cash. In the West, the same advantage may be worth far less.

Then there's the tendency toward what I initially saw as excess diversification. My think-tank colleagues and I were stunned to see how many concurrent businesses the typical entrepreneur owns and manages in Africa. One famous waste utility entrepreneur had about 66 different businesses. On the whole, the businesspeople we studied appeared to run an average of six businesses.

This was crazy, we initially thought. We had explained the talent churn away as a consequence of small, sub-optimal, unscalable businesses that failed to give talented managers a vision of personal career growth. Managers running these stunted businesses were likely to have fewer prospects than if owners were focusing on fewer, scalable businesses and aligning their incentives with ambitious managers. The overall economy was, in this armchair perspective, also struggling under the burden of too many copycat grocery shops, restaurants, autogarages, foreign exchange bureaux, etc. Profit margins were low, leading to low pay; stunted growth; more departing managers, who went off to form more copycats; and overall economic underperformance.

These conclusions were hasty.

The more we probed the more obvious it became that the "excess" diversification was rational when viewed at the right level. These multiple, single-owner businesses played the role of tax vehicles, supply chain harmonisers, training grounds for mid-level managers, collateral shells (in the fragmented credit system), several other functions that in the West are achieved through different, not necessarily superior, means — including the hiring of expensive tax accountants, lawyers and consultants.

Once again, the overall difference in the structure of typical African economies, compared to the West, makes a big difference. The fewer resources available to regulatory and tax authorities and the smaller sizes of businesses jointly mean that when businesses make complex arrangements to rationalize their tax expenditures, their costs go up rather than down. Also, a shallower financial system makes the notion of a corporate treasury function similar to what is common in the West nearly redundant in the African setting. Higher inflation tends to discourage certain types of capital investment within a single organization but favors the parking of cash in trading affiliates. For this same reason, even "orthodox" businesses like banks that are not local outlets of multinationals maintain a wide array of subsidiaries that, considering their size (until recently, many such banks had a capitalization lower than $40 million), seems baffling. One such bank has security companies, car lots, courier firms, trading concerns, educational businesses, a golf club, and other similar operations all welded together in an unwieldy yet profitable group.

In a sense, African entrepreneurs run profit ecosystems rather than business units. These ecosystems interact with other ecosystems in a culturally elaborate manner that can produce extreme robustness, resilience, and flexibility.

The epiphany was like a thunderbolt. The failure to study African entrepreneurship as a creature beautiful and complex in its own right (the latest Global Entrepreneurship Monitor included only one sub-Saharan country — South Africa — in its survey of 54 countries and even here it employed the same uniform tools) has impoverished our global view of entrepreneurship. How?

When the World Bank's 2008-2010 survey of entrepreneurial activity observed that business failures in the wake of the financial crisis were far higher in the developed world than in the developing world, they shrugged off the need for deeper sounding.

Had they been more attuned to the unique character of business formation and propagation in places like Africa they may have questioned certain fundamental assumptions about risk management.

On my part, I have a fresher and deeper appreciation for African entrepreneurship. I believe that not only can it propel Africa forward in its quest for holistic development, but that the time is nearly here when groundbreaking management thinking from Africa will take the world by storm.
About the author: Harvard Business Review