The Uncomfortable Truth About Business Scale Up
After three decades of failure, scaling micro-businesses remains easier said than done
“The cult of the smallholder and the micro-entrepreneur is a wrong-headed approach to poverty alleviation in Africa”. Thus pronounced David Pilling in this recent FT article. Pilling articulates something many people, the GPI team included, have been thinking for a while now: the mass of micro-entrepreneurs we see across low-income countries are a symptom of poverty, not its cure. Economic development requires the emergence of big, complex companies, bringing people together to perform Paul Collier’s “productivity miracle”.
A cursory glance at the data will tell you that. The self-employed make up 81% of total employment in low-income countries. In their high-income peers, it’s just 12%. The chart below breaks down the income-employment relationship for 130 countries. The message is clear: low self-employment goes hand in hand with high incomes. What’s less clear is how exactly we can scale up businesses and shrink self-employment in low-income countries.
Source: GPI Analysis of World Bank Data
The argument for big companies is well made in the FT article. We won’t make it again here. But these big businesses must start somewhere. Even today’s global juggernauts had tiny beginnings. Microsoft started as the two-man Traf-O-Data, with Bill Gates and Paul Allen tapping away in a garage in Albuquerque. Nintendo’s origins can be traced back to a tiny workshop in Kyoto where craftsman Fusajiro Yamauchi handmade trading cards. Kevin Plank, founder of Under Armour, initially ran the company from the presumably not-so-very-salubrious environs of his grandmother's musty basement. To be big, first you must be small.
Of course, most micro-entrepreneurs in low-income countries are micro-entrepreneurs not because they have a Zukerburgian zeal for entrepreneurship, or Gates’s gift for product development. They are microentrepreneurs because they have no other option.
But for development to happen, some large domestic companies must emerge, and they can’t all be foreign implants. Development experiences from across the world all involve the emergence of domestically formed complex organisations: Hyundai, Hisense, Dino Polska, Infosys.
We need to scale up small businesses in low-income countries. But the uncomfortable truth is, after years of trying, maybe we don’t really know how to do it. Just look at the chart below. 30 years ago, the self-employed made up 79.2% of employment in Sub-Saharan Africa. Now it’s 76.5%, having fallen less than a percentage point a decade on average. Countries in the European Union made faster progress from a far lower base.
Much of what the policy literature has to say is accurate but unsatisfying. A 2017 study by the think tank Chatham House interviewed more than 60 business leaders, policymakers, financiers and international partners in Nigeria, Tanzania, Uganda and Zambia seeking the secrets to SME growth in Africa. Many of the constraints identified are the same across the four countries: corruption, a lack of affordable finance, poor infrastructure, a small pool of skilled workers, a high tax and regulatory burden, and a paucity of capable managers.
This chimes with the GPI team’s experiences of running small businesses in Africa. High interest rates, low skill levels, heavy regulatory burden, costly logistics, lack of in country suppliers – it’s the death by a thousand cuts familiar to all small business owners in this part of the world.
So where does that leave us in terms of policy solutions? The standard answer is cracking down on corruption, boosting access to affordable finance, building infrastructure, training prospective workers and opening some management schools. But these solutions outdate the chart above. By now they are more platitudes than actionable solutions.
But looking beyond just firms, these policy prescriptions also correspond to the bigger challenge of boosting economic growth: infrastructure, education, finance, anti-corruption. Small business scale up and economic growth are of course intimately linked. We’ve been bad at scaling up businesses in sub-Saharan Africa because we’ve been bad at growing economies in sub-Saharan Africa, and vice-versa.
That’s all rather gloomy. But there is hope. Countries in East Asia and the Pacific have shown it’s possible, dropping their self-employed prevalence by 21.6 percentage points since 1991.
This group includes the famous East Asian Tigers – and the chart above is largely a reflection of their strong economic growth rates. As we’ve written about often enough, their governments made big efforts in selected industries to get things moving. Some leading domestic companies emerged first, and then others followed.
If you’ve read GPI blogs before then you’ll know that very little was accidental about this transformation. The evidence suggests that you need a big, targeted effort to get industries (and the businesses within them) to grow. Otherwise, stagnation is the norm.
The good news is that once you get things moving, the process might be self-reinforcing. For example, there is growing evidence that for skilled workers the chicken comes before the egg. As recently discussed by Growth Teams, people invest in their education when businesses close by are creating an abundance of jobs.
We wrote about one thing governments can do to kick-start this process in our last article: allow – even encourage – small businesses in key target sectors to import skilled labour. Once these businesses begin to grow and create jobs, there will be more incentives for locals to invest in their own skills.
But, as always, there is no grand theory. Maybe these conversations just describe what an economy looks like when it has big businesses, rather than a path along the yellow brick road to get there. We might know the ingredients for business scale-up – and economic growth for that matter – but that’s the easy bit. The real skill for policymakers is making the cake. Swiftly switching metaphors (again), Nobel-Prize-winning Economist Esther Duflo refers to economists as plumbers. Their value is in taking big ideas, adapting them to local conditions and tinkering until the leaking stops.
Creating the conditions for scaling up microbusinesses will look different everywhere. Again, not particularly satisfying. But it seems that’s where we are. If you’ve got some good case studies of successful business scale up programmes, then leave a comment below or send them to email@example.com. Hopefully we can publish them in a more optimistic follow up post in a few months’ time.
Thanks for reading The Global Prosperity Institute! Subscribe for free to receive new posts and support our work.