Across Africa, despite a relatively well-established banking sector, legal regimes that guarantee property rights, corroborate ownership as collateral, or make credit histories accessible, still inflate the transaction costs associated with assessing risk. High transaction costs, in turn, often preclude banks from offering affordable loans. If the cost of capital is prohibitively high, it means businesses shut down, and people lose jobs. Because equity financing is typically later stage, and requires cash and a plurality of exit options to make capital recuperation viable, a significant gap still exists between those entrepreneurs serviced by microfinance, and those buoyed by large capital injections. This gap, termed the “Missing Middle,” is measured in lost employment and output.
In 2007 I represented Google.org’s Global Development Team as a Business Development Consultant and lecturer in TechnoServe’s national business plan competition, advising and working with the top 70 SME entrepreneurs in Tanzania.
In Tanzania, business taxonomy differs markedly from the developed world, but can be categorized in systematic ways. Globally, the constituent elements of a successful business need not vary significantly; viable companies address a problem, provide a solution, and time their entry when market demand is poised for growth.
Research on business taxonomy in Tanzania indicates that companies typically:
- Fill market holes
- Innovate through technology
- Convince buyers of value
Expectedly, the frequency with which companies were classified as “filling market holes” was much greater in Tanzania, given a more inchoate marketplace and lower barriers to entry in activities involving less competition. One entrepreneur explained that a cattle epidemic had increased consumer demand for chickens, and the four-month delivery latency of baby chicks made his egg hatchery business immediately viable. There was a large market hole, and his company was able to efficiently provide a service.
In developed countries, the first-mover advantage in simple services has largely been eroded, and firms must innovate to carve out an advantage, often seeking temporary monopoly rights through intellectual property retention. Market holes are less salient, and consequently firms must default to this next best option.
After market holes have been filled, and technological innovators seek consumers already saturated with choice, firms must endeavor to convince buyers of value by altering preferences. For example, a commodity may be available, but its alternative at a price premium may offer features not yet understood and factored into consumer preferences. Convincing consumers to alter preferences, often for a product with a price premium, is quite difficult, and is necessarily less preferred to easier alternatives.
The business taxonomy uncovered in Tanzania unveils a striking entrepreneurial parallel to a putative psychological notion; there is a “hierarchy of needs,” even in markets.
Abraham Maslow articulated a hierarchy of needs for individual human development, building upon the needs for sustenance, shelter, and companionship. In Tanzania, and in developing markets across Africa, there is a hierarchy of business taxonomy, and a baseline ratio by which sector development might be measured. The most underdeveloped markets will contain the highest density of firms seeking to fill market holes, followed by those innovating, and then by those convincing consumers of value.
Further research on business taxonomy will likely confirm the extent to which we are at the base of Maslow’s entrepreneurial pyramid, but this only indicates tremendous upside.
International press may illuminate large-scale ventures, and London-based private equity investments as seeing the African continent forward. In practice, it is the empowerment of entrepreneurs, and the economic fuel from a robust SME sector that will construct a sustainable platform for growth. In the African hierarchy of opportunity, those with the courage and humility to build from the bottom may be the most visionary yet.
Scott E. Hartley (Stanford, ’05) is a former Google.org Business Development Consultant and dual-degree MIA/MBA graduate student at Columbia University School of International & Public Affairs and Columbia Business School. He writes on Internet & Democracy for the Berkman Center for Internet & Society at Harvard Law School.