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SMEs in Africa: the “Missing Middle”

Written by: OECD Development Centre

Article Overview: The development of the private sector varies greatly throughout Africa. SMEs are flourishing in South Africa, Mauritius and North Africa, thanks to fairly modern financial systems and clear government policies in favour of private enterprise. Elsewhere the rise of a small-business class has been hindered by political instability or strong dependence on a few raw materials.

SMEs in Africa: the “Missing Middle”

The development of the private sector varies greatly
throughout Africa. SMEs are flourishing in South Africa,
Mauritius and North Africa, thanks to fairly modern financial
systems and clear government policies in favour of private
enterprise. Elsewhere the rise of a small-business class
has been hindered by political instability or strong
dependence on a few raw materials. In the Democratic
Republic of Congo, for example, most SMEs went bankrupt
in the 1990s – as a result of looting in 1993 and 1996 or
during the civil war. In Congo, Equatorial Guinea, Gabon
and Chad, the dominance of oil has slowed the emergence
of non-oil businesses.

Between these two extremes, Senegal and Kenya have
created conditions for private-sector growth but are still
held back by an inadequate financial system. In Nigeria,
SMEs (about 95 per cent of formal manufacturing activity)
are key to the economy but insecurity, corruption and poor
infrastructure prevent them being motors of growth.

Africa’s private sector consists of mostly informal microenterprises,
operating alongside large firms. Most
companies are small because the private sector is new
and because of legal and financial obstacles to capital
accumulation. Between these large and small firms, SMEs
are very scarce and constitute a “missing middle.” Even in
South Africa, with its robust private sector, micro and very
small enterprises provided more than 55 per cent of all
jobs and 22 per cent of GDP in 2003, while big firms
accounted for 64 per cent of GDP.

SMEs are weak in Africa because of small local markets,
undeveloped regional integration and very difficult business
conditions, which include cumbersome official procedures,
poor infrastructure, dubious legal systems, inadequate
financial systems and unattractive tax regimes. Many firms
stay small and informal and use simple technology that
does not require great use of national infrastructure. Their
smallness also protects them from legal proceedings (since
they have few assets to seize on bankruptcy) so they can
be more flexible in uncertain business conditions.

Large firms have the means to overcome legal and financial
obstacles, since they have more negotiating power and
often good contacts to help them get preferential
treatment. They depend less on the local economy because
they have access to foreign finance, technology and
markets, especially if they are subsidiaries of bigger
companies. They can also more easily make up for
inadequate public services.

Financing SMEs in Africa
by Céline Kauffmann
Policy Insights No. 7 is derived from the African Economic Outlook 2004/2005, a joint publication
of the African Development Bank and the OECD Development Centre

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Article Tags: business conditions, capital accumulation, democratic republic of congo, equatorial guinea, financial obstacles, government policies, legal proceedings, local markets, national infrastructure, north africa, oil businesses, political instability, poor infrastructure, private enterprise, private sector growth, regional integration, republic of congo, simple technology, smes, tax regimes



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Re: In-House or Outsource? - Unfortunately, in the South African context, very few SMEs see outsourcing as an option. They believe it is too expensive, and they are paranoid that someone will "steal their ideas". I believe that the three main functions that cannot be outsourced are marketing, sales and strategy. These must be done in house I believe. If you do not have the marketing skills then get them. Hire a consultant or attend a course, but get the skills. Even if you use a consultant, you need to understand what marketing is about, as no one knows your market like you do. Marketing is made to seem difficult and complex, but everyone who really understands their markets, can easily learn to do their own marketing. In South Africa, labour legislation is extremely inflexibile, and consequently labour broking is a large industry. This is an ideal starting point for SMEs in South Africa, as it is a legally complex area, whih comes with severe penalties. I say do it! Rob Smorfitt
Re: need advice - Africa is a pretty big place I think it is a question of where in Africa you would like to open a call centre. South Africa for example actually has plenty of call centres already operating, so it would very much depend on what part of Africa you are considering. MichelleJ
Re: Newbie from Africa - Hello Biiyke Welcome to the forum. Which part of Africa are you from it is quite a big continent? I live in South Africa. MichelleJ
Adventure travel to Africa. - Africa is a place where adventure is taking place. If you are a travel who loves adventure, nature, culture you should visit Africa. Safari Village operator is a .leading tour operator in Kenya who are offering marvelous tour packages to Africa. Saffari Villages Online is a trusted name for africa travel.
Re: Newbie from Africa - [quote="Evan":22gvtxlq]Welcome to the forums Biiyke! You asked if we know any sellers who were trying to reach the African market... I think you'd honestly have more luck going the other way - try to find sellers in Africa and sell to the rest of the world.[/quote:22gvtxlq] Hello Evan, You are absolutely correct.Thank you for your advice.That's actually the whole idea,Africa to the world and the world to Africa. So I will throw more weight on that area.


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