Many entrepreneurs, but not enough wealth

Africa is a land of entrepreneurs, there is no doubt about that. It just takes a walk around any African city to see how the multiple vendors and informal businesses operate. But to what extent does this level of entrepreneurship impact the economy, and does it contribute to the overall prosperity of the continent?

Malik Fal

Malik Fal was selected earlier this year as the new managing director of Omidyar Network Africa, an investment firm that aims to catalyse economic growth and opportunities in underdeveloped nations. Fal – with over 15 years of experience in business strategy, development and entrepreneurship – shared his thoughts on the current state of entrepreneurship on the continent with How we made it in Africa.

Who are Africa’s entrepreneurs?

The Total Entrepreneurial Activity (TEA) index, is a survey that aims to measure national entrepreneurship, by looking at the percentage of the population who are entrepreneurs between the ages of 18 and 54 years. Whilst only a few African countries have been included in the survey, Fal said it provides comparable data from across the world that helps with understanding Africa’s entrepreneurial activity.

“In Africa we see that most countries have very high TEAs – so TEAs in excess of 25%, even though the average for developing countries is something like 12%. But yet, despite this high level of entrepreneurial activity, those countries are very low income,” said Fal. “The exception is South Africa. South Africa has had historically a TEA of about 4-6% but has slightly higher per capita income compared to the other countries.”

Countries like Angola and Uganda that were surveyed in 2010 show very high levels of entrepreneurship, of 32.4% and 31.3% respectively. The same goes for Ghana (33.9%) and Zambia (32.6%). “But the reason that is the case is that most African countries have high TEA indexes that is driven by what is called necessity entrepreneurship, as opposed to opportunity-based entrepreneurship,” explained Fal.

Necessity entrepreneurs are usually engaged in informal businesses activities, mainly geared at low-income consumers, and they often face a lot of competition from other informal traders. Most Africans struggle to find any formal employment so they become self employed in order to survive, essentially becoming necessity entrepreneurs. “So if people don’t fend for themselves they are in big trouble because there is no social grants; a few countries have them but very few,” said Fal. “But this form of entrepreneurship doesn’t create wealth… it doesn’t create enough surplus of wealth to lift large communities out of poverty, which is what the issue is.”

The role of the African middle class

However, Africa is beginning to produce more opportunity-based entrepreneurs, driven by various developing industries and the growing middle class. “So when you look at countries that have high levels of opportunity-based entrepreneurship, usually more industrialised countries, these are countries that have both high per capita income where entrepreneurs have come in to find complex, sophisticated demands,” said Fal. “For example, take all the advances in technology that came out of advanced societies or high disposable income societies where people came up with an idea to create products and services that high income people can use.”

“The goal as we have seen in many different sectors… it’s going to be to support entrepreneurs that serve this emerging middle class we are seeing in Africa and innovating to serve that class… There is a growing middle class, there is growing disposable income, particularly in the cities, and what we hope are going to increase the quality and scope of entrepreneurship are going to be the products and services to serve this growing middle class we are seeing in Africa.”

Africa’s growing middle class has also gained international interest and spurred investment in consumer goods. “We’ve seen that in Nigeria – with 160 million people. We’ve seen that in Ethiopia, even with no disposable income but, you know, I think the second largest population in Africa – 80 million people. And we’ve seen it in many countries like Angola and others with a small population but very high and rising disposable incomes. South Africans are also a good example. We’ve seen a lot of the banks, for example, moving into the rest of Africa.”

According to Fal, if Africa’s entrepreneurial activity is ever going to move from necessity to opportunity-based entrepreneurship, the start-up environment for SMEs will have to improve. Challenges to this include initial business financing, skills development, infrastructure, and business administration and services, according to Fal.