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Stunted Growth: Why Don't African Firms Create More Jobs?

  • Leonardo Iacovone, Vijaya Ramachandran, and Martin Schmidt

    ()

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.

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Paper provided by Center for Global Development in its series Working Papers with number 353.

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Length: 32 pages
Date of creation: Mar 2014
Date of revision:
Handle: RePEc:cgd:wpaper:353
Contact details of provider: Web page: http://www.cgdev.org

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  1. Nicholas Bloom & Raffaella Sadun, 2012. "The Organization of Firms Across Countries," The Quarterly Journal of Economics, Oxford University Press, vol. 127(4), pages 1663-1705.
  2. Bronwyn H. Hall, 1986. "The Relationship Between Firm Size and Firm Growth in the U.S. Manufacturing Sector," NBER Working Papers 1965, National Bureau of Economic Research, Inc.
  3. Hallward-Driemeier, Mary & Khun-Jush, Gita & Pritchett, Lant, 2010. "Deals versus rules : policy implementation uncertainty and why firms hate it," Policy Research Working Paper Series 5321, The World Bank.
  4. Evans, David S., 1986. "Tests of Alternative Theories of Firm Growth," Working Papers 86-36, C.V. Starr Center for Applied Economics, New York University.
  5. Nick Bloom & John Van Reenen, 2006. "Measuring and Explaining Management Practices Across Firms and Countries," NBER Working Papers 12216, National Bureau of Economic Research, Inc.
  6. Justin Sandefur, 2010. "On the Evolution of the Firm Size Distribution in an African Economy," CSAE Working Paper Series 2010-05, Centre for the Study of African Economies, University of Oxford.
  7. Pakes, A. & Ericson, R., 1990. "Empirical Implications Of Alternative Models Of Firm Dynamics," Papers 594, Yale - Economic Growth Center.
  8. Eric Bartelsman & John Haltiwanger & Stefano Scarpetta, 2013. "Cross-Country Differences in Productivity: The Role of Allocation and Selection," American Economic Review, American Economic Association, vol. 103(1), pages 305-34, February.
  9. McPherson, Michael A., 1996. "Growth of micro and small enterprises in southern Africa," Journal of Development Economics, Elsevier, vol. 48(2), pages 253-277, March.
  10. Francis Teal, 1999. "The Ghanaian manufacturing sector 1991-95: Firm growth, productivity and convergence," Journal of Development Studies, Taylor & Francis Journals, vol. 36(1), pages 109-127.
  11. John Sutton, 1997. "Gibrat's Legacy," Journal of Economic Literature, American Economic Association, vol. 35(1), pages 40-59, March.
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