Collaborations to scale up firms can create more jobs

Almost everyone agrees Africa needs more firms to create longterm jobs. But the current emphasis on creating new small firms, while not wrong, represents just a beginning. An economy really provides jobs when firms grow big enough to be competitive. We need to help firms grow.

Speaking during a Centre for Development and Enterprise webinar on why Africa needs more firms, developmental economist Sir Paul Collier described a small firm in Ethiopia employing 50 people that had a productivity per worker 10 times higher than a microfirm of four people making the same things.

This is, of course, in manufacturing. There won’t be a productivity gain on that scale in a small specialist services firm. A doctor or two with administrative support might even be more productive than a large team practice — or at least more caring. But if Africa is to restore and develop its manufacturing capacity, company growth is key. So is growth in focused sector hubs.

Collier referred to buttons. More than 60% of the whole world’s buttons are manufactured in the town of Qiaotou in China. Every day hundreds of factories produce millions of buttons each. At the centre of the town is a mall with 550 shops all selling buttons.

You might think it would be impossible to sustain that degree of competition in one town, but the synergies began to operate in everyone’s favour once Qiaotou was recognised as the world’s button capital.

New entrants find skilled labour, suppliers of raw materials, machines and technology, as well as financiers, regulators and local government who all understand the business, and a market brought to their doorstep by the town’s reputation.

In contrast, a Ugandan company that tried to make buttons went out of business — one cannot on one’s own compete with that scale of support and opportunity.

So that sounds a bit depressing for the rest of us. But there are ways to break into manufacturing. Most obvious is small specialist factories that supply a need not easily imported. Putting them together in hubs with supporting infrastructure and professional services is an obvious contribution.

A more ambitious route is to join a global supply chain — like Aspen Pharmacare has done with its vaccine plant in Gqeberha. The most difficult would be to create a complete hub with sufficient scale to be competitive internationally. Mauritius achieved it with textiles, and Ethiopia has made progress in the same direction.

Africa is a relatively small market in economic terms, but the bigger challenge is its fragmentation. At $2.6-trillion, Africa’s GDP is almost as big as France’s ($2.7-trillion), but spread among 54 countries. So competitiveness often requires cross-border value chains.

I recently bought a shirt boasting “Grown in Zambia, dyed and woven in SA, sewn in Lesotho”. That allows smaller economies to specialise in processes that build regional strength. With enough scale, that could even make a button factory viable. That is how strength is built on strength.

Global supply chains are not universally popular, but it is difficult to see how else small economies could break into manufacturing at a scale to tackle unemployment in Africa. The African Continental Free Trade Area should really help — provided it is supported by strengthening networks across the region.

This requires a good working relationship between business and government. Government provides infrastructure and an administrative environment in which business thrives, and facilitates global networks for local manufacturers to obtain inputs and export finished product. An example is the motor industry in SA.

To do this, governments need sophisticated knowledge of, and appreciation for, how competitiveness is built. Africa needs scale. And to achieve scale we need appreciative collaboration between governments and businesses.