Entrepreneurship, SMEs, Natural Potentials and Industrialization in Africa

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A profound lack of growth opportunity, rising unemployment and declining human security in many African countries, has rekindled the debate about the continent’s development strategies.  The economies, despite being endowed with large natural resources, got stuck in severe difficulties in the 1980s and adopted exogenously imposed structural adjustment programs (SAPs) to revive growth.

The SAPs as a doctrinaire, addressed major macroeconomic constraints but neglected the formative role of entrepreneurship, and vividly provided no empirical condition for human creative vigor and necessary proclivity to Africa’s industrialization.  The long-term outcomes are both widespread economic and a whirlwind of social disorder[1], ex-tempore. The African economies that were implementing the SAPs were characterized by ubiquitous uncertainty[2] and iron-clad free-rider and adverse public characteristics for innovations and organizations on which entrepreneurships thrive.

Amid a continually growing population and rising unemployment in the early 21st Century, the continent is once more placed in front of new crucial issues, including a growing possibility of dangerous mass emigration, due to hardship. It, therefore, needs to re-contextualize its development strategies away from the ideals of the failed decades of SAPs. As in many successful examples in development history, entrepreneurship fundamentally creates the conditions and feed into the technical narrative of the arc that enable societies, through own capacities, to enrich their economies and internalize externalities thus facilitating the contributions to their sustainable development (see for instance, Aghion and Howitt, (1998)).  In terms of sustaining industrial growth, the entrenched large corporation gradually move to their saddle points, whereas the entrepreneurs and SMEs start upward ventures[3] (figure 1).  

Figure 2.: Entrepreneurial Innovation and Economic Growth.

Source: Adapted from Barnett (1998).

Also, as economies develop and advance, generally, it is entrepreneurship that generates the central positive pulse in the production functions – the innovations that drive intensive and extensive gains and are always the cornerstone for industrialization[4]. In the context of the above rubrique, we sketch a situation-differentiated web of production processes that shapes patterns – from entrepreneurship qua small and medium enterprises (SMEs) and industrialization in Africa. By entrepreneurship, we mean an activity of 1-19 persons set to achieve a productive economic objective.  We argue that the process needs some public-private intersection at the critical control points and transition experiments of the growth.  Generically, entrepreneurs mostly set off as SMEs and engage, invest and trade among the economy’s wider population, leading to secular growth and industrialization. A large body of empirical work has also found strong tendency for these entrepreneurs to reform and renovate outside the routines, thus generating transformative growth of industries. 

In this context, the economic growth of the industrialized and ‘catch-up countries’ such as the USA, China, Korea and Japan has been marked by a strong formative stage of entrepreneurship and SMEs.  The publication - “Job Creation in America” (Birch 1979) unambiguously disproved the widespread belief that large companies were the engines of job creation in the USA. After analyzing 12 million businesses tracked by Dun & Bradstreet over the period between 1969-1986, Birch and his MIT research team discovered that small firms created about 88% of all net new jobs (Birch 1987, p.16).

An important explanation of the dynamic and formative process of enterprise selection and industrial evolution is that entrepreneurs and SMEs are more likely to be operating at a suboptimal scale of output as the underlying technological conditions are such that there is a greater chance of creating innovations.  As these entrepreneurs and SMEs adapt and innovate, successfully, they grow viably into industrial leaders – attract more investments, create more jobs and innovate more.  The phenomenon has been recorded in the recent industrial history of both developed and developing economies.  In the USA, there were cases of: IBM vs APPLE Inc.; GM vs TESLA; AT&T vs FACEBOOK; (WPP GROUP vs AMAZON, MICROSOFT, TWITTER AND OTHERS).  In China, there are examples of China’s ZTE Corporation vs. Tencent Inc. (figure 2.).  All the latter companies were sole entrepreneurs, started by individuals, that had overtaken the entrenched industrial leaders by many indicators, including employment growth and investment, in less than ten years of existence.  Many more examples could be cited, illustrating the dynamic role of entrepreneurship and SMEs in industrial development around the world.

Figure 2.: Examples – Attracting Investment and Job Creation By                              Entrenched Enterprises Vs. Sole Entrepreneurs.

At the same time, it has widely been proven that investment follows productivity.  Productivity is driven by novelties and entrepreneurs produce more novelties than established companies.  Also, the industrial development literature shows that SMEs grow more sustainably in a situation where the public sector is active on the issue of the common good. Specifically, public intervention in managing and shaping the critical control points1 of value and supply chains are vital for SMEs, at least during the start-up stages.   Empirical analysis confirms this line of argument (see for instance, Aghion and Howitt (1998)).   Based on a large sample of countries during the period 1965-1985, Barro and Sala-i-Martin (1995) found that public institutions have a significantly positive effect on growth: a 1.5% increase in the ratio of public spending on education to GDP during the period of 1965-1975 raised the average growth rate of the economy by 0.3% per year.  In essence, it is easier to make SMEs work when public institutions are effective: promoting positive change in aggregate efficiency, including threshold organizational functions.  The principal questions are: what makes a strong formative stage for SMEs? What are the components of the formative stage?  And how can economies strategically adjust and manage their policies on entrepreneurships and SMEs to turn them into engines of industrialization? Critical views exist.

Classical theoretical positions on entrepreneurship and growth had commonly argued along the line of price mechanisms and generally assume that the requisite coordination and control can be achieved by the ‘invisible hand’. This had driven the application of the SAPs of the 1980s.  At the basic level, entrepreneurship is about ‘self-selection.’  What this term means in theory is that rational actors/entrepreneurs make optimizing decisions about what markets to participate in — job, location, education, marriage, crime, etc. What it implies in practice is that observed economic relationships should generally be viewed as endogenous outcomes of numerous optimizing decisions, rather than as exogenous causal relationships. The key factors that affect the choice of entrepreneurship are:

  1. Fundamental distribution of skills and abilities.
  2. The correlations among these skills in the population.
  3. The technologies for applying these skills.
  4. Consumer tastes that impact demand for different types of outputs.
  5. Geographical/locational advantages.

All these are control and transition points that have vital organizational challenges and require public intervention.  In the classical model of SAPs, however, the question of the serial and multiple-index simultaneous points in innovations were ignored.  The models immensely oversimplified the organizational challenges and little consideration was given to the complex contractual arrangements for intellectual property rights and enforcement. African economies were assumed to be totally ‘self-organizing’, under the principles of invisible-hand formula.  This has been proven to be an overextended belief, as a means of allocating resources, in all African economies characterized by ubiquitous uncertainty and iron-clad free-rider and adverse public characteristics for innovation.  Generally, the successful entrepreneurs thrive on these innovations but the social returns to innovation are usually greater than the private returns.  Therefore, any meaningful growth of entrepreneurship must be complimented by public institutions.  Very few of the developing African Governments provide the needed continuous technical support (a public good) and logistics for supply chain management (a quasi-public good) such as designing geographical entities into sustainable specialties and comparative advantages.

Yet, evidence from successful economies such as China and Japan show that these two components, easily classified as public and quasi-public goods and requiring non-exclusive innovation processes, cannot be overlooked (Johnson 1982).  The consequence of them being overlooked in the 1980s is a constant failure of innovative entrepreneurs and SMEs to go up the growth ladder in the continuous and additive manner needed to generate industrialization (see Nwokeabia 2009).  As the industrial and economic growth engines, therefore, SMEs require the catalytic role of public institutions. The argument is that public institutions can pool resources to cushion SMEs from some high-cost and non-exclusive innovations and direct their activities with an eye on the common goals of society to maintain a set industrial objective.  In the example of Japan, there is no doubt that the Ministry of International Trade and Industry (M.I.T.I) drove down the cost of securing foreign technology, as a critical control point, for Japanese enterprises. By intervening between Japanese firms and foreign companies, M.I.T.I. acted as a single buyer of technology, in order to reduce the royalties that Japanese concerns had to pay on technology licenses. By keeping domestic patent periods short, M.I.T.I. encouraged rapid diffusion of technology in areas where there were comparative advantages. It also made it a condition of entry into the Japanese market that foreign companies share many of their technological secrets with potential Japanese competitors (Johnson 1982).

Ways of public intervention

In conclusion, entrepreneurships create SMEs and drive sustainable industrialization.  However, Governments with the capacity to pool resources can act in a twin manner to help the growth through:  incentives (prices and regulations) and/or by investing directly to assist with high-cost and non-exclusive innovation for SMEs and recalibrate marginal intensive or extensive efficiency gains. These public institutions should provide the strategic phasing; and undertake multi-stage non/no-profit functions through which SMEs and economy-wide priorities are selected and switched - the ‘transition experiments’ such as adaptation and shaping-in of technologies (foreign and local), as conditions dictate.

With this, we have sketched an assumed new development path for Africa under the rubrique ‘Entrepreneurship qua SMEs and industrialization’. The argument assumes a concrete form of relationship between administrative and historical conditions for industrial agglomeration.  In other words, the path from entrepreneurship to industrialization needs multiple creative synergies, transition experiments and is far from self-organizing or through the invisible-hand formula.  

As such, countries that develop effective and sufficient depth of functional institutional capacity to engineer the critical control points[5] for these purposes are able to design industrial policies and implement them better and contribute more to the growth of SMEs and make development a lot more inclusive. Developing countries could contribute better to SME-led industrial growth as a basis of their development through higher marginal allocation to critical control point development of SMEs.  Private participants in entrepreneurships from the developing countries are too poor to engage in these types of venture, but most importantly, they cannot appropriate all the rents for doing them to themselves and usually avoid the sunk costs. As such these points require the intervention of public institutions for entrepreneurship, SMEs to prosper and achieve a sustainable industrialization agenda. 

Hilary Nwokeabia Development Economist (HARVARD UNIVERSITY) Author: Why Industrial Revolution By-Passes Africa.

 

References.

  1. Aghion Phillippe and Peter Howitt (1998). Endogenous Growth Theory. Boston, USA.: MIT Press.
  2. Barnett, Vincent (1998). Kondratiev and the Dynamics of Economic Development. London: Macmillan. ISBN0-312-21048-5.
  3. Barro Robert J. and Xavier Sala -i- Martin (1995). “Technological Diffusion, Convergences and Growth”.  NBER Working Paper, No. 5151, June 1995. 
  4. Birch, David L. (1979). The Job Generation Process.  Cambridge Massachusetts MA: MIT Program on Neighborhood and Regional Change. 
  5. Birch, David L. (1987). Job Creation in America: How Our Smallest Companies Put the Most People to Work.  New York, USA: Free Press. 
  6. Johnson C. (1982). MITI and the Japanese Miracle: The Growth of Industrial Policy, 1925–1975. Stanford University Press, CA.
  7. Nwokeabia Hilary (2009). Why Industrial Revolution By-Passes Africa: A Knowledge System Perspective. UK, London: Addonis and Abbey.

 

[1] An unimaginable social disorder where majority of the population is either unproductive or destructive.

[2] In many African countries, the unintended impact of SAPs is to push employees from the public sectors to join the crowd of entrepreneurs. The figures will be close to those of self-employed workers ie 53 per cent in sub- Saharan Africa, 44 per cent in Latin America, 32 per cent in Asia and 31 per cent in North Africa.  However, these self-employed workers were in dire need of technical support, and funding because they did not have access to formal loans.

[3] This process is explained in KONDRIATIEV Long Wave Model.        

[4] By industrialization, we mean a situation of economic growth, more efficient division of labor, and the use of technological innovation to solve problems as opposed to dependency on conditions outside human control.

[5] An example of such critical control points is the introduction of ‘Fordism’ principles to the operationalization of grand innovations.  By Fordism, we mean the process of aiming to achieve higher productivity in a system by standardizing the output, using assembly lines and breaking the work into small deskilled tasks.

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