Why Africa’s Big Four are not always the Best Four: Creating a Bigger Picture of Entrepreneurship with the African Entrepreneurial Ecosystem Index

A few years ago The Economist concluded that Africa has enterprising people, but too few businesses. Africans are far more likely to be self-employed than people in richer parts of the world, but the continent does not have enough productive firms. This often necessitates growing out of the micro firm segment, which would increase productivity, reduce poverty, create more and better jobs and address many other societal challenges. The key question is: How can the conditions for entrepreneurship, business creation and especially growth, be improved in Africa?

But Africa is not a country: it is a continent of enormous diversity, not least in entrepreneurship. If you ask people what the top countries are in terms of entrepreneurship, they will probably mention Africa’s “Big Four”: Kenya, Egypt, South Africa and Nigeria. There are several reasons for this. First, these four countries belong to the group of largest countries in Africa (which also includes the Democratic Republic of Congo, Ethiopia and Tanzania). Second, these four countries attract the most venture capital in absolute terms (80-90% of all venture capital in Africa). However, these two reasons divert attention from the overall conditions for entrepreneurship, which include much more than access to venture capital, and also do not take into account country size.

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The first step is to control for country size. If we compute the amount of venture capital controlling for population size, the Seychelles are number one, followed by South Africa, Mauritius and Kenya, with Egypt and Nigeria at places six and seven. The second step is to use a much more integrative entrepreneurial ecosystem approach, an approach that includes all actors and factors that enable productive entrepreneurship in a particular place. This is what the African Entrepreneurial Ecosystem Index does, a joint product of researchers at Stellenbosch University, Utrecht University and the Innovation for Policy Foundation. This index shows the strengths and weaknesses of African countries, with seven distinctive entrepreneurial ecosystem challenge areas: governance, culture, support, finance, infrastructure, market access, and human capital. The measurement of these qualities of African entrepreneurial ecosystems is based on 20 sub-indicators with data sourced from public and private organizations, within and outside Africa, including ten thousands of data points.

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Based on this African Entrepreneurial Ecosystem Index, the best four African entrepreneurial ecosystems are Mauritius, South Africa, Tunisia and Morocco. Why? Mauritius is the best or almost the best on six of the seven challenge areas. The only weak spot is its small home market. South Africa is the best of the rest: it has the most advanced financial structure of Africa, but does not do well on multiple challenge areas, and is particularly weak at culture, with low levels of trust in others. Tunisia is particularly strong in governance and human capital, and weak in market access. Morocco is strong in governance, infrastructure and human capital, but relatively weak in entrepreneurship support and market access.

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What about the other Big Four? Egypt is number 9, Nigeria number 13 and Kenya number 15 on the African Entrepreneurial Ecosystem Index. Many people, especially from these countries are rather disappointed with this ranking. For many this may be a reality check as Kenya scores low on culture, support and market access, Nigeria scores low on support, finance (which also includes credit to the private sector and stock market capitalization, next to venture capital), and human capital, and Egypt scores low on culture and support. Of course Lagos (Nigeria), Nairobi (Kenya), and Cairo (Egypt) are entrepreneurial hotbeds, but these cities are not countries: the other (bigger) parts of these countries do not provide such good conditions for entrepreneurship. For example, entrepreneurial support organizations are highly concentrated in these three cities, but are largely missing in other parts of these countries.

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The other countries in the top ten – perhaps hidden gems - are Cape Verde, Algeria, Namibia, Senegal, and Botswana. All small countries in this list suffer from a small home market, but still have a strong entrepreneurial ecosystem. Botswana is already long known of its relatively stable and well developed governance structure in Africa, with a strong rule of law and low corruption, and with a high literacy rate. Senegal is one of the few African countries that has produced a locally headquartered unicorn (young private firm with a valuation of more than 1 billion dollar): the fintech startup Wave. Senegal has high quality governance, which is also reflected in the recent peaceful transition of power after the 2024 presidential elections. Namibia excels in governance, infrastructure and human capital. Algeria excels in infrastructure and human capital, but is weak in support and finance. Finally, Cape Verde, is perhaps the surprising number 5 in the list. Yes, it is a very small country, with only 600 thousand inhabitants. But, the conditions for entrepreneurship, especially governance, infrastructure and human capital are very good in Cape Verde.

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If we want to achieve entrepreneurship-led sustainable development in Africa, we need to know what is holding back productive entrepreneurship in African countries. We need to look beyond singular views (for example venture capital) and consider many areas for improvement, including market access, governance, culture, infrastructure and human capital. The African Entrepreneurial Ecosystem Index provides a starting point for a bigger picture and fine-grained analysis to improve African economies.

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Erik Stam is professor at Utrecht University and extraordinary professor at Stellenbosch University, and has led a team of researchers from Utrecht University, the Allan Gray Centre for Africa Entrepreneurship at Stellenbosch University and the Innovation for Policy Foundation that has developed the African Entrepreneurial Ecosystem Index.

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This blog is an updated version of https://www.ourlongwalk.com/p/the-entrepreneurial-continent