Working Papers

Stunted Growth: Why Don’t African Firms Create More Jobs? - Working Paper 353

2/3/14
Leonardo Iacovone , Vijaya Ramachandran and Martin Schmidt
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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 in other parts of the world? 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 job creation.  We find that African firms, at any age, tend to be 20–24 percent smaller than comparable 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 employment levels.  

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.  Constraints imposed by the business environment and by market characteristics that limit the growth of African firms can be alleviated by policy reforms. But there appear to be constraints that are not captured by these measures--these require further research in order to design appropriate policies for job creation.