What African businesses need to scale up

by Ofentse Sefolo
What African businesses need to scale up

Businesses on the African continent are eager to grow, but access to new markets and growth finance can be limiting factors. In order to achieve economic growth, it is necessary for home-grown businesses to expand, and therefore policymakers need to create an environment that enables businesses to thrive.

This is according to an Economist Intelligence Unit (EIU) report, “Promise and perils: Scaling up businesses in sub-Saharan Africa”, which examines the factors that would enable businesses in the region to move to the next level. Some of the key findings of the report have highlighted integration policies and infrastructure projects as business enablers.

Integration policies
One of the most ambitious integration policies is the African Continental Free Trade Agreement, which is committed to reducing tariffs and non-tariff barriers. If the entire continent was to implement the deal, it would create a single market of over a billion consumers with a total gross domestic product (GDP) of over US$3trn.

Other policies easing operational challenges include those enabling international money transfers and payments. Combined, these allow African small and medium-sized enterprises (SMEs) to expand operations across markets, creating attractive opportunities for investors too.

Expanding telecommunications networks
Wider and better Internet connectivity will drive the next wave of technological innovation, empowering companies to develop new digital services for consumers. Mobile money is also a growth enabler as it facilitates business lending.

By 2025, 3G mobile network coverage is expected to account for 61% of the mobile phone connections. Companies from China and the Gulf Cooperation Council (GCC) have identified opportunities to expand the region’s telecommunications networks.

Venture capital and private equity
High interest rates offered by domestic banks are a barrier for businesses seeking growth finances, which is why venture capital, private equity and even crowdfunding are preferred over bank finance by SMEs looking to scale up. Private equity closed deals worth US$25bn between 2013 and 2018, and venture capital deals grew four-fold from 2017 to 2018.

Foreign investors
GCC investment is concentrated in East Africa, with the United Arab Emirates being among the top ten source countries for foreign direct investment in sub-Saharan Africa, having invested US$649m between 2015 and early 2019.

Global operations
In addition, the presence of prominent global players such as Tencent and Mastercard proves that blue-chip brands still believe in Africa’s growth story.

“Africa’s growth recovery offers hope that the continent can return to its GDP surge in the earlier part of the millennium, but only if its businesses can scale within and across borders,” comments Melanie Noronha, editor of the report. “Setting up the environment to enable businesses to scale up in sub-Saharan Africa is no easy feat, but done right, it can create a launch pad for the world’s next global company.”

For the full report, visit https://eiuperspectives.economist.com.

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