Working Papers

Why Are There So Few Black-Owned Firms in Africa? Preliminary Results from Enterprise Survey Data - Working Paper 104

1/16/07
Vijaya Ramachandran and Manju Kedia Shah
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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.