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The birth of business: Business incubators in Africa

5th October 2012

By: In On Africa IOA

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This CAI paper explores the role of business incubators as important vehicles for facilitating small- and medium-sized enterprise (SME) growth in Africa. It briefly discusses the importance of SMEs in emerging economies and examines the obstructions to their growth in African contexts. It then describes the business incubator model and gives various examples of current incubators from across Africa.

Why SMEs?

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SMEs play a vital role in job creation, creating a skilled workforce, facilitating private ownership, rapid response to market demands and output generation. Because of these factors, SMEs tend to be more effective in driving economic development than bigger businesses.(2) However, in order for these important economic entities to flourish they must exist in a favourable environment.

The Global Entrepreneurship Monitor 2011 Global Report identifies some of the factors that comprise such an environment and calls them “entrepreneurship framework conditions” (EFCs).(3) The EFCs are described as entrepreneurial finance; general and regulatory Government policy; Government entrepreneurship programmes; primary, secondary and post-school entrepreneurial education; research and development transfer; internal market dynamics and openness; physical infrastructure for entrepreneurship; commercial, services and legal infrastructure for entrepreneurship; and cultural and social norms.(4) While these conditions may be present in varying degrees across the continent, in many contexts they are lacking.

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Where are all the SMEs?

The most commonly cited challenge to SMEs in Africa is the lack of access to entrepreneurial finance, namely start-up capital.(5) Consequently, start-ups do not have the resources to see their pilot production or pilot processes through to the point of profitability. Other common impediments are an under-educated and under-skilled workforce which inevitably results in a dearth of technology development and transfer.(6) Thus, innovative ideas born out of established entrepreneurial culture and social norms tend to be absent.(7)

Government is an important role player in creating a habitable environment for SMEs as previously alluded to. However, African Governmental structures often become obstructive due to “stringent labour regulations and an onerous regulatory system.”(8) Unfavourable national policy ends up sidelining SMEs while creating market opportunities that big business exploits with ease.(9) All of these factors combined mean that African SMEs struggle to grow to the point of becoming competitive on a global scale.(10)

When assessed by EFCs it is clear that many of Africa’s economies are unsuitable for significant SME growth.(11) Different approaches along the spectrum of private-sector to Government reforms and improvements have been advocated to rectify these difficulties. While some approaches may be helpful, there is a current model that is enabling some African entrepreneurs to realise their dreams of building healthy start-ups: the business incubator.

The business incubator model

The business incubator model has been around for several decades, but has gained significant momentum in recent years. Throughout its history it has been applied to a variety of industries and contexts, necessitating constant adaptation. It is estimated that there are currently 7,000 incubators across the world.(12)

Drawing from its physiological counterpart, an incubator nurtures a business through its “childhood.”(13) Incubators tend to do this by offering support services and resources, such as networks, finance, office space and mentorship to local start-up businesses.(14) Their core objectives in offering these services are usually geared towards job creation, developing entrepreneurism, growing a particular industry, retaining business and economic diversification, all within a particular locale or community.(15) Many incubators operate as non-profit entities such as “[G]overnment groups and economic development agencies.”(16) However, there are also incubators that are for-profit which they often achieve by obtaining returns on shareholders investments.(17)

The business accelerator is another related model which is often referred to interchangeably with the business incubator; however, they are slightly different. Accelerators assist businesses that are in an “adolescent” phase and require further development of their institutional strength, vision and strategy.(18) Accelerators also often operate on a much shorter timeline than incubators. They partner with their clients for as little as a couple of months; true to their name, engagement is short and intense, at the end of which tangible results are expected.(19) Accelerators or their sponsors usually take an equity stake in their client business.(20)

Incubating Africa

The business incubator model offers client businesses some of the key components that are lacking in many African contexts. As such, incubators are currently operating across the continent in a variety of forms and functions based on the different markets they engage. Highlighting a few African examples will be instructive.

Many of Africa’s incubators have been established by companies from the private sector. In 2008, Jorn Lyseggen of the Meltwater Group established the Meltwater Entrepreneurial School of Technology (MEST) in Accra, Ghana.(21) MEST is a non-profit institution whose core goal is “creating jobs and wealth locally in Africa by training young Africans to become software entrepreneurs.”(22) It aims to achieve this by engaging a three-fold process of training, incubation and mentorship.(23) Although the vision is Africa-wide, the incubator exclusively serves MEST’s Entrepreneurs in Training due to limited resources at present. The incubator provides anywhere from US$ 30,000 to US$ 300,000 as a means to seeing the sponsored company through to its initial revenue; office space; an advisory and mentorship network; hands-on business assistance; and access to international markets through other incubators based in San Francisco and London.(24) All this is provided in exchange for a minority equity stake in the sponsored business.(25)

Academic institutions also play an important role as business incubators, often working in partnership with other sectors. Jomo Kenyatta University of Agriculture and Technology, in Kenya, runs a business incubator through its Centre for Business Innovation.(26) It is a hybrid incubator as it is supported by both Government and the private sector, granting its members access to funding from both.(27) The incubator focuses on the use of Information and Communications Technology (ICT) for community development and SME development.(28) There are many more examples of academic institutions across Africa that connect cutting edge research to the SME development process through business incubators.

As previously alluded to, Government plays a role in business incubation often through funding.(29) Nigeria’s Katsina state Government has taken ownership of its youth and is in the process of creating a Technology Incubation Centre geared towards them.(30) In South Africa the Small Enterprise Development Agency is an agency under the Department of Trade and Industry that provides development and support services for SMEs.(31) It partners nation-wide with more than 24 incubators and requires that they address stipulated “focus areas” in order to ensure the fulfilment of its incubation strategy.(32)

A collective strategy

Forums of African Heads of State and Government also contribute significantly to the incubation process. The Economic Community of West African States (ECOWAS) and New Partnership for Africa’s Development (NEPAD) have recently committed EUR 1,000,000 (US$ 1,250,860) to the Business Incubator for African Women Entrepreneurs (BIAWE) project.(33) This project provides business support structures, promotes entrepreneurship and secures funding for women entrepreneurs from rural areas who work primarily in agriculture.(34)

Initiatives such as the ECOWAS and NEPAD sponsorship of BIAWE demonstrate the growing, Africa-wide recognition of the importance of the business incubation model. Other non-governmental collectives have sprung up across Africa to harness this new energy. The African Incubator Network (AIN) is one such example. The AIN is based out of Nigeria and currently works in partnership with infoDev, a programme of the World Bank Group.(35) AIN seeks to create a “collaborative network of African incubators and other business development service providers, and to facilitate the provision of appropriate knowledge to support the development of innovative small enterprises.”(36) AIN has already garnered an impressive list of AGRITECH and ICT incubators from across the continent. It also creates platforms for international entrepreneurial exchange, for start-ups to connect with potential investors and it holds mentor awards.(37)

Another collective body associated with AIN and infoDev is the Southern African Business and Technology Incubation Association (SABTIA). Launched in 2004, SABTIA seeks to “coordinate and promote business incubation” across Africa and to promote constructive exchange among incubator managers and SME developers.(38) It operates as a non-profit entity and maintains a pan-African reach although the majority of its patronage is from the Southern African countries.(39) SABTIA plays an important role as the “leading accreditation body for business and technology incubators in Southern Africa.”(40)

Concluding remarks

Africa’s economic scenarios tend to pose serious challenges to the establishment and growth of SMEs. Business incubators offer to meet the needs of SMEs and so present a viable means of rectifying these challenges. They provide adaptable models that can be employed by companies, academic institutions, Government or as a hybrid of them. Incubators are still developing on the continent and are yet to be exploited for their full economic worth. However, cognizance of their significance as interventions for SME growth is steadily growing. Business incubators will play an integral part in Africa’s future economic success.

Written by Tapfuma Musewe (1)

NOTES:

(1) Contact Tapfuma Musewe through Consultancy Africa Intelligence's Optimistic Africa Unit (consultancy.africa@consultancyafrica.com).
(2) Soni, S., ‘The challenges facing small businesses: A global perspective’, The Dorrian Consulting Group Connections Newsletter, November 2005, http://www.dorriangroup.com.
(3) Kelley, D.J., Singer, S. and Herrington, M., ‘Global Entrepreneurship Monitor: 2011 Global Report’, Global Entrepreneurship Monitor, 26 July 2012, http://www.gemconsortium.org.
(4) Ibid.
(5) Kauffmann, C., ‘Policy insights: Financing SMEs in Africa’, OECD Development Centre Report No. 7, 2005, http://www.oecd.org.
(6) Soni, S., ‘The challenges facing small businesses: A global perspective’, The Dorrian Consulting Group Connections Newsletter, November 2005, http://www.dorriangroup.com.
(7) Tredger, C., ‘Top 10 reasons why African tech start-ups struggle’, IT news Africa, 21 August 2012, http://www.itnewsafrica.com.
(8) Kelley, D.J., Singer, S. and Herrington, M., ‘Global Entrepreneurship Monitor: 2011 Global Report’, Global Entrepreneurship Monitor, 26 July 2012, http://www.gemconsortium.org.
(9) Soni, S., ‘The challenges facing small businesses: A global perspective’, The Dorrian Consulting Group Connections Newsletter, November 2005, http://www.dorriangroup.com.
(10) Ibid.
(11) See Fig. 12 for spider graph rating the EFCs of 48 global economies surveyed, including some of Africa’s economies as either factor-driven or efficiency-driven. Kelley, D.J., Singer, S. and Herrington, M., ‘Global Entrepreneurship Monitor: 2011 Global Report’, Global Entrepreneurship Monitor, 26 July 2012, http://www.gemconsortium.org.
(12) ‘Business Incubation FAQ’, NBIA, http://www.nbia.org.
(13) Sepulveda, F., ‘Business accelerator vs business incubator’, Impulsa Business Accelerator, http://www.impulsaxl.com.
(14) Ibid.
(15) ‘Business Incubation FAQ’, NBIA, http://www.nbia.org.
(16) Linton, I., ‘Business accelerator vs. business incubator’, Chron.com, http://smallbusiness.chron.com.
(17) ‘Business Incubation FAQ’, NBIA, http://www.nbia.org.
(18) Sepulveda, F., ‘Business accelerator vs business incubator’, Impulsa Business Accelerator, http://www.impulsaxl.com.
(19) Linton, I., ‘Business accelerator vs. business incubator’, Chron.com, http://smallbusiness.chron.com.
(20) Ibid.
(21) Meltwater Entrepreneurial School of Technology website, http://www.meltwater.org.
(22) Ibid.
(23) Ibid.
(24) Ibid.
(25) Ibid.
(26) Humala, H. and Olafsen, E. (eds.), ‘Incubator Network Africa’, infoDev Activity File, http://www.infodev.org.
(27) Ibid.
(28) Ibid.
(29) ‘SABTIA mini survey’, SABTIA, 23 June 2010, http://www.sabtia.com.
(30) Okojie, G., et al., ‘Nigeria: Tacking the unemployment menace’, AllAfrica, 12 August 2012, http://allafrica.com.
(31) Small Enterprise Development Agency website, http://www.seda.org.za.
(32) Ibid.
(33) Ahmad, R.W., ‘West Africa: Ecowas, Nepad sign 1 million accord to empower women’, AllAfrica, 22 August 2012, http://allafrica.com.
(34) Ibid.
(35) Humala, H. and Olafsen, E. (eds.), ‘Incubator Network Africa’, infoDev Activity File, http://www.infodev.org.
(36) Africanincubatornetwork’s blog website, http://africanincubatornetwork.wordpress.com.
(37) Papuc, I., ‘On the rise: Why Africa is the next big tech scene’, TECHLI, 19 July 2012, http://techli.com.
(38) Southern African Business and Technology Incubation Association website, http://www.sabtia.com.
(39) Ibid.
(40) Ibid.

 

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