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

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  • Leonardo Iacovone, Vijaya Ramachandran, and Martin Schmidt

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Abstract

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.

Suggested Citation

  • Leonardo Iacovone, Vijaya Ramachandran, and Martin Schmidt, 2014. "Stunted Growth: Why Don't African Firms Create More Jobs?," Working Papers 353, Center for Global Development.
  • Handle: RePEc:cgd:wpaper:353
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    Cited by:

    1. Gelb, Alan & Meyer, Christian J. & Ramachandran, Vijaya, 2014. "Development as diffusion: Manufacturing productivity and sub-Saharan Africa.s missing middle," WIDER Working Paper Series 042, World Institute for Development Economic Research (UNU-WIDER).
    2. Marco Sanfilippo & Adnan Seric, 2014. "Spillovers from agglomerations and inward FDI. A Multilevel Analysis on SSA domestic firms," RSCAS Working Papers 2014/76, European University Institute.
    3. World Bank Group, 2016. "Kenya Country Economic Memorandum," World Bank Other Operational Studies 24008, The World Bank.

    More about this item

    Keywords

    Africa; underemployment; finance; economic growth;

    JEL classification:

    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • L2 - Industrial Organization - - Firm Objectives, Organization, and Behavior
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • O12 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Microeconomic Analyses of Economic Development
    • O14 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
    • O55 - Economic Development, Innovation, Technological Change, and Growth - - Economywide Country Studies - - - Africa

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