Enterprise growth and financial management in Africa
Article Type: Editorial From: African Journal of Economic and Management Studies, Volume 5, Issue 3.
The non-growth syndrome that has characterized most Sub-Saharan African countries during the twentieth century is gradually being replaced by steady economic growth in some countries and general optimism as well as increasing global interest. As Gatune and Najam (2011, p. 102) remark with distinct sense of joy, “poverty in Africa is falling, and falling fast; food productivity is rising; inequality is falling; women are assuming positions of leadership; democracy and elections are becoming the norm; regional markets are developing; anti-corruption measures are gaining prominence; Africa is becoming an important destination for foreign direct investment, especially from China; African intelligentsia is finding a more prominent voice in defining Africa’s options;and continent-wide cultural expression is strengthening a positive continental identity”. Thus, the twenty-first century has been dubbed by some futurists as Africa's century – a century during which Africa's economic, intellectual, political, and leadership resources will be optimally utilized to generate welfare for the citizens and provide the continent with a positive identity within the world of nations.
A key contributory factor to this new optimism is the growth of local enterprises fuelled by domestic and foreign investments. For example, 12 per cent of all FDI targeted at developing countries in 2011 went to Africa with the largest share going to oil producing economies such as Chad, Angola, Equatorial Guinea, Ghana, and Nigeria. There is also a growing acknowledgement among economists that private enterprise-driven economic growth provides a greater promise for absolute poverty reduction through lowering the levels of real unemployment and strengthening individuals’ capacity to care for themselves and their families (Fafchamps et al., 2001). Added to this, businesses also tend to generate revenues necessary for anti-poverty policies of governments (Barakatt and Sereke-Brhan, 2010). In a similar vein, the results of recent World Bank investigations revealed that overwhelming majority of African jobs come from the private sector, and private businesses are responsible for some of the most dramatic improvements in the African economic landscape over the past decade (Leo et al., 2012).
It is in the light of these observations that the relevance of the papers published in the present volume of AJEMS must be read. Michael Hansen and his colleagues write on “understanding the rise of African business – in search of business perspectives on African enterprise development”. The main thrust of their argument is that there is a need to develop an understanding of African firms’ strategy and performance that takes into account the specificities of the African business environment and African firms’ capabilities. Their contribution to filling the knowledge gap was to discuss the rationale underlying the widespread pessimistic view of African business in the twentieth century and compared this with the more recent optimistic perspectives on African firms’ performance. They also reviewed the existing empirical literature on successful African enterprises and proposed an analytical framework for understanding African firm success.
Enterprise formation and growth is directly linked to investment decisions of business owners and managers. Thus, the economic literature sees investment flows as an essential pre-requisite to triggering economic dynamism, enhancing productivity, diffusing new technologies, maintaining competitiveness and reducing poverty. This understanding has motivated Simplice Asongu's study on the “linkages between investment flows and financial development: causality evidence from selected African countries”. His aim was to assess linkages between investment flows and financial development dynamics using a multidimensional framework. The results of his empirical investigation produced the following three main conclusions: while finance-led investment elasticities are positive, investment elasticities of finance are negative; finance does not seem to engender portfolio investment in some African countries; and financial efficiency appears to impact investment more than financial depth. The implications of this study include policy initiatives that improve investment flows and financial efficiency.
Stephen Nkundabanyanga and his colleagues provide an additional perspective on investment management in Africa. They write about “intellectual capital in Ugandan service firms as mediator of board governance and firm performance”. The aim of their study was to examine the mediating effect of intellectual capital on the relationship between board governance and perceived firm financial performance. The results showed that intellectual capital mediates the relationship between board governance and perceived firm performance. They therefore see greater investments in intellectual capital as necessary requirements for improved performance of financial firms.
Another dimension of the investment and financial management challenges in African firms has been provided in Ben Ukaegbu's study which was entitled “the determinants of capital structure: a comparison of financial and non-financial firms in a regulated developing country – Nigeria”. He argues that maximizing firm value is not easy as it involves the selection of an appropriate mix of debt and equity, taking into consideration the costs and benefits applicable to these securities. Haphazard selection may lead the firm to financial stress and eventually bankruptcy. The extent of bankruptcy differs between financial (banks)and non-financial firms because in some cases, governments are likely to step in to bail out banks facing financial difficulties,presumably because once a bank is financially distressed the problem is likely to spread throughout the relevant financial environment. The spread of the distress within the economy may lead to credit contraction or restriction, with a significant impact on other industries. On the basis of these observations the study aimed at investigating whether there were differences between the determinants of the capital structure of financial and non-financial firms in a developing country. The results showed that there were similarities and differences in the capital structure determinants of the two sets of firms: banks tended to be more leveraged when they were more profitable and non-financial firms tended to be less leveraged when they were profitable. The study also showed that changes in the economy influenced the capital structure of financial firms more than that of non-financial firms and financial firms adjusted their leverage level faster than non-financial firms.
Anayo Nkamnebe and his colleagues’ study provide a consumer perspective on the finance issue by studying the determinants of bank selection by university undergrads in southeast Nigeria. The study was based on a sample of 300 undergraduate students from two universities in southeastern Nigeria. The results showed that Nigerian students attach importance to the following six factors (in a declining order) in their bank selection decisions: bank's financial stability, available and functional ATMs, professional bank staff, family and friends influence, proximity of bank branch to university campus, and internal and external aesthetics of bank.
Put together the studies indicate that there is still a lot to be done to improve investment flows and financial management in Sub-Saharan Africa in order to support the economic growth processes on the sub-continent. Despite the global recession,investment opportunities remain bright in many African countries. Policy initiatives are therefore required to improve financial services to both businesses and consumers. All the scholars contributing to this volume also stress the need for further research in the area.
John Kuada
References
Barakatt, C. and Sereke-Brhan, H. (2010), “Reflections on Africa: today and tomorrow”, in Barakatt, C., Burlando, A., Kariuki, J.G., Najam, A. and Sereke-Brhan, H. (Eds), Africa 2060: Good News from Africa, Pardee Center Conference Report, April, Boston University, Boston, MA, pp. 15-30
Fafchamps, M., Teal, F. and Toye, J. (2001), Towards a Growth Strategy for Africa, No. REP/2001-06, Centre for the Study of African Economies, University of Oxford, Oxford
Gatune, J. and Najam, A. (2011), “Africa 2060: what could be driving the good news from Africa?”, Foresight, Vol. 13 No. 3, pp. 100-110
Leo, B., Ramachandran, V. and Thuotte, R. (2012), “How can the World Bank group improve its private sector projects in African fragile states?”, Centre and Global Development Brief, Washington, DC, pp. 1-4, available at: www.cgdev.org/files/1426232_file_WB_Fragile_States.pdf (accessed 24 June 2014)
