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                                                                                   No. 146 November 1999


Findings occasionally reports on development initiatives not assisted by the World Bank. This article is one such
effort. The views expressed here do not necessarily reflect the views of the World Bank Group, the Government of
Ghana, or the banks and NGOs mentioned.




               Entrepreneurship and Firm Performance in Sub-Saharan Africa



The development of the private sector in Sub-Saharan Africa is of crucial importance to the
overall rate of economic growth of the region. Entrepreneurial firms have a prominent role in
the private sector in many countries in the region. This analysis measures the impact of various
entrepreneurial characteristics on the rate of firm growth. The analysis uses data from the
Regional Program on Enterprise Development (RPED) at the World Bank. Approximately 200
firms in Kenya, Zimbabwe, Zambia, and Tanzania were surveyed in each country in the food
processing, textile, furniture, and metalworking sectors; only the subset of firms owned by
entrepreneurs is used in this study.

Theory and Hypotheses

The literature on entrepreneurship poses several hypotheses regarding firm performance.

This analysis includes various "learning mechanisms" that affect firm performance. Following
other RPED firm growth studies, it includes firm age and firm size as independent variables in
the econometric model. The learning mechanisms that it controls for include previous
experience of the entrepreneur, whether the entrepreneur has a secondary education, whether
the entrepreneur has a university degree, and whether the entrepreneur has had technical
training. It also includes two variables that are somewhat indirect learning mechanisms--
whether the entrepreneur's family is in the same business and whether the entrepreneur owns
another business concurrently.

The literature also argues that minority ethnic firms have special advantages through the
creation of networks in the private sector. External environmental parameters such as limited
occupational choice, the threat of expulsion, and enforceable cooperation mechanisms help to
create and sustain these networks. Entrepreneurial networks provide access to scarce
information, risk-spreading arrangements, favorable terms of credit, and a tightly-knit group of
individuals to whom managerial responsibility can be delegated (Peter Kilby, "The Role of
Alien Entrepreneurs in Economic Development," American Economic Review Papers and
Proceedings, Vol. 73, pp. 107-111, May 1983). In general, the literature on minority
entrepreneurship concludes that contractual mechanisms generated within ethnic groups are
crucial to providing access to inputs, credit, technology, and finance. This in turn leads to
greater profitability and growth of firms within the network. Thus, this analysis hypothesizes
that the firms owned by entrepreneurs of Asian and European descent grow at a higher rate
than other firms in the sample.

Results

Average annual growth rate of employment of entrepreneurial firms varies between 6.8 percent
for Tanzania to 12.4 percent for Zimbabwe (which also has the highest percentage of minority-
owned firms). Slightly less than half of all entrepreneurs have completed high school in all
countries except Tanzania where the number is only 9 percent. The percentage of
entrepreneurs who have completed a university degree is highest for Zimbabwe (26.1 percent)
and lowest for Zambia (15.7 percent). The percentage of firms owned by women is the lowest
for Tanzania (7.1 percent) and highest for Zimbabwe (19.4 percent). The share of medium and
large firms owned by women is very small in all four countries; female ownership is
concentrated in the category of very small firms. There is a clear correlation between education
and size; a much higher percentage of entrepreneurs managing medium and large firms have
University degrees than those managing very small and small firms. The amount of previous
business experience is roughly similar across countries; between 31 and 52 percent of
entrepreneurs own another business concurrently. Between 9 and 20 percent of entrepreneurs
have parents in the same business. Firms in all four countries start out with an average of less
than twenty employees but have very different mean levels of employment at the time of the
RPED survey. Entrepreneurs in the sample are in their mid-forties and the average age of the
firm is between thirteen and eighteen years.

The RPED data reveal significant differences in the characteristics of firms owned by
entrepreneurs of Asian, European and African heritage. African entrepreneurs own almost 90
percent of very small firms, consisting of less than ten employees. Asians own most of the
firms with more than 250 employees in Tanzania, Zambia, and Kenya, while Europeans are the
dominant owners of large firms in Zimbabwe. A significantly higher fraction of Asian and
European entrepreneurs have University degrees, have worked in a foreign-owned or managed
firm, and currently own another business. However, more African entrepreneurs have
established their own businesses; Asian and European entrepreneurs are more likely to have
inherited or bought their businesses. Africans also have the highest share of female
entrepreneurs in every country in the sample.

The econometric results confirm earlier RPED findings that firm age and initial size and
statistically significant and inversely correlated with change in employment. They also show
that Asian and European firms grow at a significantly higher rate than African firms. This
result is consistent with the hypothesis described above. Minority entrepreneur firms enjoy a
higher rate of firm growth that is presumably due to the various advantages of being part of an
ethnic minority network, such as access to credit and informal contractual mechanisms.
Finally, formal education (both secondary and university) is significantly correlated with firm
growth and may serve as a substitute for access to networks of minority-owned firms. Access
to education presumably increases managerial skills, including the ability to hire and manage
larger numbers of people, thereby generating employment at a higher rate in the private sector
in Africa.

This article is based on the publication, "Minority Entrepreneurs and Firm Performance in
Sub-Saharan Africa" by Vijaya Ramachandran and Manju Kedia Shah, RPED Paper#080,
May 1998 (revised April 1999), Africa Region, World Bank, Washington DC. For more
information, please e-mail Mmbuyi@worldbank.org