Stunted Growth: Why Don't African Firms Create More Jobs?

32 Pages Posted: 7 Feb 2014

See all articles by Leo Iacovone

Leo Iacovone

World Bank; University of Sussex

Vijaya Ramachandran

Center for Global Development

Martin Schmidt

University of Maryland, College Park

Date Written: February 3, 2014

Abstract

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 elsewhere? 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 firm growth, with a special focus on African firms. African firms, at any age, tend to be 20-24 percent smaller than 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 labor 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 firm size.

However, even after controlling for the business environment and for characteristics of firms and markets, about 60 percent of the size gap between African and non-African firms remains unexplained.

Keywords: Africa, underemployment, finance, economic growth

JEL Classification: D22, D24, L2, L25, O12, O14, O55

Suggested Citation

Iacovone, Leonardo and Ramachandran, Vijaya and Schmidt, Martin, Stunted Growth: Why Don't African Firms Create More Jobs? (February 3, 2014). Center for Global Development Working Paper No. 353. Available at SSRN: https://ssrn.com/abstract=2390897 or http://dx.doi.org/10.2139/ssrn.2390897

Leonardo Iacovone

World Bank ( email )

1818 H Street NW
MSN3-311
Washington, DC 20433
United States

HOME PAGE: http://www.worldbank.org

University of Sussex ( email )

Sussex House
Falmer
Brighton, Sussex BNI 9RH
United Kingdom

Vijaya Ramachandran (Contact Author)

Center for Global Development ( email )

2055 L St. NW
5th floor
Washington, DC 20036
United States

Martin Schmidt

University of Maryland, College Park ( email )

College Park, MD 20742
United States

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