Why are There so Few Black-Owned Firms in Africa? Preliminary Results from Enterprise Survey Data

25 Pages Posted: 2 May 2007

Date Written: January 2007

Abstract

Much of the discourse on economic development and the private sector has focused on the role of foreign direct investment. While it is clear that FDI can play an important role in generating growth, it is also increasingly evident that countries cannot grow without a vibrant, domestic private sector. Ultimately, it is not foreign aid but rather privately generated profits which are the source of economic growth and poverty alleviation. Yet most of the growth in sub-Saharan Africa in the past decade has come from extractive industries, rather than from private, entrepreneurial activity. Furthermore, non-extractive activity in the formal private sector is often dominated by firms owned by minority ethnic entrepreneurs - Asian, Middle Easterners or Caucasians - not black Africans.

In this paper, CGD visiting fellow Vijaya Ramachandran and her co-author analyze the constraints faced by domestic firms in Kenya, Tanzania, Uganda, Senegal and Benin. They find that indigenous firms start smaller and grow more slowly than minority-owned firms; however their rate of growth is positively influenced by whether the owner-entrepreneur has a university degree. They do not find overwhelming evidence that credit is the binding constraint but that indigenous firms do receive less access to trade credit than firms owned by minority entrepreneurs. Finally, they offer policy solutions that might enable indigenous entrepreneurs to enter and survive in a vibrant, multi-ethnic private sector, including building networks among indigenous entrepreneurs and increasing university education among business professionals.

Keywords: Sub Saharan Africa, extractive industries, formal private sector, indigenous entrepreneurs, credit

JEL Classification: O1, M20

Suggested Citation

Ramachandran, Vijaya and Shah, Manju Kedia, Why are There so Few Black-Owned Firms in Africa? Preliminary Results from Enterprise Survey Data (January 2007). Center for Global Development Working Paper No. 104. Available at SSRN: https://ssrn.com/abstract=982942 or http://dx.doi.org/10.2139/ssrn.982942

Vijaya Ramachandran (Contact Author)

Center for Global Development ( email )

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

Manju Kedia Shah

World Bank

1818 H Street, N.W.
Washington, DC 20433
United States

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