Digital Opportunities in African Businesses

Digitalization offers an array of investment opportunities both for African firms and those who conduct business with them. Making fuller use of digitalization across all economic activities can help businesses become more productive, profitable, and integrated in global, regional, and local value chains.

There is great scope for businesses to expand the functions for which they use tech. Fewer than one in three firms that have adopted digital technologies intensively use them for business purposes, a phenomenon defined as incomplete digitalization. This under-utilization of the technology is even more pronounced among small and micro-sized firms, who comprise the vast majority of African enterprises.

Making greater use of digital technologies would likely help companies’ bottom line: the research shows a strong positive association between more advanced digitalization and intensive use with higher levels of firm productivity, even after controlling for firm size, sector, and location, among other factors. Using more advanced technology can explain firm-level differences in productivity by as much as 30 percent.

But the picture is far from being all gloomy. The continent’s mobile internet ecosystem is thriving. Most firms in Africa, including microbusinesses, have access to mobile phones. More than 50 percent of businesses with five or more workers have computers with internet, rising to 80 percent for medium and large firms.

Digital payments are important entry points to digitalization, with 62 percent of firms using advanced digital technologies for payments. However, many are slow to deploy digital solutions for other business functions. The findings indicate that digital technology can be an indispensable tool for enterprises of all sizes, smaller ones especially, helping them to expand markets, obtain information, and connect with suppliers and customers.

Three overarching barriers are impeding the path to fuller digitalization: lack of infrastructure, high prices of technology, and insufficient funding. An estimated 600 million Africans—or about half the population—has no access to electricity, while approximately the same number lack access to 4G mobile coverage. Africans also pay more for their digital devices and connectivity than consumers in any other region. For example, digitally enabled machinery and equipment, including software, is a third more expensive to buy in Sub-Saharan Africa than in the United States, even before adjusting for Africans’ much lower purchasing power. Fixed broadband internet costs about 20 percent of per capita gross national income in Sub-Saharan Africa, compared to under 6 percent in other developing regions.

Despite these barriers, the continent has had many remarkable digitalization success stories, both in developing the infrastructure and with innovative business applications. For example, the Eastern Africa Submarine Cable System, a 10,000-kilometer submarine fiber optic cable, has greatly expanded digital capacity in that region. On the business applications side, a project in Mozambique, Third Eye, deploys flying sensors that provide farmers with analyses of imagery captured, thereby helping them better manage inputs and maximize yields.

More investment in so-called middle- and last-mile digital infrastructure can improve the quality of internet connectivity across the region while lowering prices. The installation of new submarine cables is projected to increase international internet bandwidth sixfold by 2027 compared with 2022. This expansion is likely to lead to a drop in the price of broadband internet and may generate as much as $32 billion of investment over the next five years.

More competition among digital service providers would be welcome as this tends to drive down prices and boost access. In Comoros, for example, after the state-owned telecom company ended its monopoly, the share of the population using mobile telephony jumped from 27 to 38 percent. When fintech provider Wave was allowed compete with market incumbents in Côte d’Ivoire and Senegal, it led to a lowering of transaction fees for payments made on mobile devices.

Digital technology providers, particularly innovative startups, can create affordable, user-friendly applications and platforms tailored to specific business needs. The startup ecosystem is thriving in Africa, with the number of tech hubs more than tripling between 2016 and 2021. So far, startups have mainly been funded by venture capital and private equity investors from Europe, North America, and by development finance institutions, suggesting there is room for further growth in these markets.

Africa’s tech hubs are primarily concentrated in the major cities of Egypt, Kenya, Nigeria, and South Africa, but their growth is picking up elsewhere. Increased support through grants and venture capital, particularly in high-impact sectors like agtech, e-management, healthtech, and edtech, could help them overcome financial barriers such as high interest rates and lack of collateral.

Further support is needed for enterprises across sectors to enable them to digitalize day-to-day operations. For example, based on different scenarios, existing formal firms would need as much as $2.7 billion in additional financing to help them digitalize business administration functions. African firms that apply for loans to carry out technology upgrades and expand production face higher rejection rates than their peers in other regions, a constraint that is particularly relevant for small firms. Emerging digital credit markets may offer a potential increase in funding at lower cost by improving access to information and risk assessment.

Lower tariffs on digital goods and better integrated markets for digital business solutions would make the technology more affordable. Tariffs on digital goods are higher in Africa than other regions. While the African Continental Free Trade Area is set to reduce tariffs on technology goods imported from member countries, its impact might be limited if tariff concessions are not extended beyond member countries. Also needed are regulatory reforms that boost competition, reduce risk, and encourage further private investment in digital infrastructure, innovative start-ups, and adoption of digital technology by businesses.

Looking to the future, Africa’s incomplete digitalization presents an array of opportunities for the private sector. Investments in new digital technologies have the potential to further disrupt the way in which products across sectors are produced and distributed, making it easier to obtain and interpret information, and in the process helping workers to upgrade their skills as they work.