Leveraging Digital Tech for African Business Growth

Introduction 

Welcome to another episode of IFC Audio Stories, where we explore private sector solutions to global development challenges. I’m Lindy Mtongana. 

Today we take a look at a new book from the International Finance Corporation titled "Digital Opportunities in African Businesses.” It presents new data and analysis aimed at helping African businesses make fuller use of digital technologies.  

Coming up in today’s episode we break down the key findings of the report with IFC Principal Economist Marcio Cruz. We also hear some details on digital tech use by microenterprises in Africa. 

“So, the work sheds light on internet enabled digital technology use by very small firms, micro enterprises. It's strikingly low use. Less than 7% use smartphones, less than 6% use computers, 20% of micro enterprises don't use any mobile phone at all.”

Thats when, my colleague Brian Beary sits down with economist Mark Dutz who also contributed to the research study. 

Stay Tuned. You’re listening to “IFC Audio Stories”. 

Lindy Mtongana : Marcio, when we look at your key findings, what your research shows is that a large majority of African firms have access to the internet but few actually use digital technologies for business. You’ve termed this incomplete utilization, can you explain what this means? 

Marcio Cruz: It's the fact that a large share of firms in Africa do have access to what we call digital enablers, meaning you know, basic devices or connectivity, when you're thinking about mobile phone, computers, or internet, like, we usually refer to this as a general purpose technology. However, they are not using this technology to perform productive tasks. So that is the incompleteness. And it's not necessarily a negative term, because it means that there is a significant opportunity to make better use of technology that you already have access to. So, we do observe that about 86% of firms with five or more workers do have access to at least mobile phone, computers, or internet. However, when we try to understand what is the share of those firms that use these technologies  to perform productive tasks, we do observe that approximately 60% of these firms are using them to perform any type of productive tasks, as an example, business administration, business planning, sales, marketing, payment, quality control. And when we asked, among the 60% of firms that are using these technologies to perform some tasks, if these are the technologies that they use as the most important one to perform this task, the most frequent one, let me see like how intensively use ,we do observe that only about 20% of firms are using these technologies intensively. So it means that there is a significant opportunity here to basically leverage all the investments that were made in the last years in terms of digital infrastructure in Africa, to bring more opportunities for these firms to make fuller use of digitalization.

So what we're showing in the book is that first, digitalizing like using more sophisticated technology and more intensively is very strongly associated with gains on productivity. Firms that are using these technologies, they tend to be more productive. But more importantly, they also tend to grow faster and generate more jobs.  

Lindy: Why are these firms not taking advantage of these opportunities? What are the key barriers here? 

Marcio: So, we identified several key barriers, many of them are not restricted to African countries; are very common across the world, for many developing countries, such as lack of human capital, lack of infrastructure, lack of managerial capabilities, for example. Now, there is something in particular to African countries that is very important for this question. It's the fact that technology price in Africa is very high. So basically, when you compare prices of technologies, and here we're thinking about machineries and equipment, we could  think about hardware, but you could also think about like a digitally enable tractor, for example, right, as well as software. All these technologies, and actually both digitally enabled and non-digital enabled, they tend to be more expensive in Africa.  

Lindy: And indeed this does represent an opportunity for private sector.

Marcio: We do see that there are significant space for the private sector stepping in and address some of these barriers. Starting with infrastructure, for example, in the next couple of years, there will be significant expansion of the capacity of submarine cables in Africa. And that will lead to important opportunities on what we call middle and last mile digital infrastructure. Which means that we are basically redistributing this capacity in the country to make sure that they arrive to people and to firms. And consequently, if this happens, we expect that the price of connectivity will go down. And make much easier and more affordable for people and business to use this technology.  

The second important opportunity is related to startups, they have been quite dynamic in Africa. Actually, when you compare the African continent with other regions in the world, this is where we do observe the fastest growth of tech startups in general. And here when I'm thinking about tech startups, we're talking about young firms that generate novel solutions, they innovate,  providing solutions related to ecommerce, FinTech, business administration, for example. So, there is a lot going on in Africa already, there is significant opportunity to grow. However, when we do compare these startups in Africa, the tech startups that are generating these innovative solutions, with other parts of the world, they are getting less funding. Like it's almost like give you a practical example, I get two companies one in Latin America and one in Africa. And these two companies are doing the same kind of tasks. And they are incorporating, for example, artificial intelligence into their offering in order to try to reach out farmers with some solutions that apply to agriculture. Both of these firms are doing better than those that are not incorporating artificial intelligence. However, the start up in Africa, they are getting about 40% more in funding, while  the start up in Latin America is getting 100% more in funding. So, there is still a significant opportunity for the private sector to step in and increase the solutions there.  

And finally, in terms of financing, we do see that there is a significant space for the financial sector to step in, for example, for funding both the digital infrastructure, the startups, but also firms in general. There is a universe of about 12 million formal firms almost 230 million microbusinesses and here we're thinking about own-account businesses as well, that in order to be able to buy these technologies, they need finance. So there is a significant opportunity.  

Lindy: And what about the role of governments

And finally, we also highlight the importance of government. So there is also space to be played here in terms of policy. And I give an example. On average, when you compare tariffs, trade tariffs for digital goods across the world, they tend to be more expensive across Africa than in other parts of the world. And more importantly, they tend to be more expensive among lower income countries in Africa. So that means that there is significant space here to lower some of these tariffs, not only within African countries - because there is a new trade agreement that is already an important step towards this process. And it's happening that the tariff among African countries for digital goods are going down. However, most African countries rely on external countries, like countries that are outside of this region, in order to import many of these goods, and there the tariffs are still relatively high. So there's a lot of space also to facilitate regulations that facilitate data sharing, data infrastructure sharing and so on, for which the governments can play an important role.

Lindy: Thank you so much Marcio. 

Part 2:  Mark Dutz

Lindy: Let’s turn our attention to informal and microenterprises - those with fewer than five workers and include self-employment activities. Now this is an important subject of firms to look at because 70 percent of Africa’s labor force is actually employed by microbusinesses.  In Sub-Saharan Africa this represents about 400 million workers. Here’s Brian Beary and Mark Dutz with more on the digitalization patterns of this important group. 

Brain Beary: So Mark internet connectivity in Africa has risen in recent decades. But this is not correlating with usage of digital technology among micro enterprises. Can you talk us through the key findings of your analysis on this?

Mark Dutz: Thanks. So, the work sheds light on internet enabled digital technology use by very small firms, micro enterprises. So, the typical firm is self-employed with no full-time paid workers. And so, we ask, how much do they use different types of digital technologies? For microenterprises, it's a strikingly low use. So less than 7% use smartphones, less than 6% use computers, 20% of micro enterprises don't use any mobile phone at all. So that’s very striking to us - why it's so low. So, among those with smartphones less than half, so only about 3% of micro enterprises use internet to find suppliers. And only about half of those who use - it's only about 3% - use accounting software, or inventory control or point of sale software. 

Brain: Surprisingly low, take up rates there, indeed. Why are micro enterprises in Sub Saharan Africa not making greater use of digital technologies?

Mark: It turns out that about 20% of responses are that there's no service available, which corresponds with the fact that about 80% of Sub-Saharan Africa has availability. About a third say it's too expensive. And another third say, they just don't know how to use it. Now, multiple answers are possible. And what's striking is that a full 70% say they just don't have any need for it, they can't see a need for it. And that in itself is an interesting answer. And it could suggest a variety of reasons for why they don't have a need. It could be that there are just no apps available, that are useful to them in their local language, and that meet their productive needs. So, it could be a technology issue. It could be that their skill level doesn't enable them to really understand how to productively use it. So it could be a general skill question. Or it could be that the quality of service in their locality is so poor, that they can't really have downloads of information at times when they need it if the service is not functioning well. And so they couldn't even understand why this kind of service is appealing. So that certainly demands more work. 

The other way to answer the question is to look at objective data and look at what correlates with firms that are using it relative to firms who are not using it and there, kind of standard but interesting responses. Having a loan turns to be very important. So those micro enterprises that have a loan, those enterprises that have access to electricity, those firms that have business linkages with large firms as customers, so it may be the larger firms as customers that require the micro enterprises to have a smartphone. And finally managers that have vocational training. What's important to keep in mind in all of this, is that we're just able to look at correlations. So these relationships aren't causal, it may just be that the larger micro enterprises that  are more successful that have loans, and that where the managers are fortunate to have good vocational training are the ones that use it.

Brian: What can we do to encourage greater adoption of digital technologies among micro enterprises in the region of Sub-Saharan Africa?

Mark: So, two complementary types of policies are needed. A first range of policies have to do with affordable availability, boosting the ability to pay. So, affordability can be addressed through competition, and through better enforced pro-competition regulations. One other area of reform that I think is critical is regional integration. So, if entrepreneurs are able to sell the app they've developed not just in their own country, but across the entire continent, that would certainly help them expand scale and boost their bottom line. The other area beyond ability to pay is actually willingness to use, and that speaks directly to the will those micro entrepreneurs who said they had no need for it. So there policies to boost attractiveness and to boost the skills the capabilities of the micro entrepreneur owners and workers. So, in terms of attractiveness, it would be possible to redirect technology development, not just towards technologies that require sophisticated abilities to use it, but that they're very simple to use. 

Brian: Thank you so much for sharing your thoughts with us today Mark. 

Mark: Thank you for your interest

Lindy: Economist Mark Dutz in conversation there with Brian Beary. Thats is all we have time for today. For more on. Digitalization in Africa and to read the full report, visit ifc.org. Thanks very much to our guests Mark Dutz and Marcio Cruz. And thank you for listening to IFC Audio Stories!