Many countries in Africa suffer high rates of underemployment or low rates of productive employment; many also anticipate large numbers of people to enter the workforce in the near future. This paper asks the question: Are African firms creating fewer jobs than those located in other parts of the world? And, if so, why?
One reason may be that weak business environments slow the growth of firms and distort the allocation of resources away from better-performing firms, hence reducing their potential for job creation.
The paper uses data from 41,000 firms across 119 countries to examine the drivers of job creation. It finds that African firms, at any age, tend to be 20–24 percent smaller than comparable firms in other regions of the world. The poor business environment, driven by limited access to finance, and the lack of availability of electricity, land, and unskilled labour has some value in explaining this difference. Foreign ownership, the export status of the firm, and the size of the market are also significant determinants of employment levels.
Key findings:
- The business environment and certain characteristics of firms do appear to play a role in determining firm size; and improvements to the business environment in many African countries may result in firms employing larger numbers of people, for every age cohort. Measures of the business climate and of firm and market characteristics, when taken together, explain about 40 percent of the difference of the size gap between African firms and firms elsewhere.
- But this also means that 60 percent of “the Africa effect” is not accounted for. Possible explanations may include the high cost of living in many African countries. Many African economies appear to have dualistic manufacturing sectors, where there is a steep premium for the cost of labour associated with increased size.
- At a more micro level, the lack of trust between employers and employees, and the need to share profits with extended family members are possible explanations, in need of further research. The role of competition also needs to be explored. Finally, a better understanding of why firms choose to enter a particular sector might also shed light on the dynamics of firm growth.
- The results in this paper are of particular importance, given that many countries in Africa suffer high rates of unemployment, and that many also anticipate large numbers of people to enter the workforce in the near future. Our results point to two important facts. First, there are constraints imposed by the business environment and by firm and market characteristics that limit the growth of African firms; these can be alleviated by policy reforms. Second, there appear to be constraints that are not captured by these measures–these require further research in order to design appropriate policies for job creation.
