The Endogenous African Business: Why and How It Is Different, Why It Is Emerging Now and Why It Matters

ABSTRACT

Africa is currently undergoing a transition that is unprecedented in its history. For the first time, the demand of urban populations pulls business development, thus creating economies with higher levels of specialization than before. This essay highlights the phenomenon of the endogenous African businesses that are arising in this process. These businesses tap into the natural resources and the social, economic, and cultural systems that build upon them. These resources and systems make the African business environment different from business environments in other parts of the world. Furthermore, the endogenous businesses have access to knowledge on how to manage modern businesses in the formal sector of the economy. In combination with African resources and systems, such knowledge enables them to create and sustain and competitive advantage in modern dynamic marketplaces. Endogenous African businesses are important because they have the potential to fuel economic growth, to revitalize rural areas, to contribute to food security and healthy diets, and to provide role models of which Africans can be proud. Hence, these businesses deserve our attention in the next two decades of scholarly research and education on African business.

KEYWORDS:

• Africa
• African business
• history
• natural resources
• rural areas

History never repeats itself but it rhymes

J. R. Colombo

The people without businesses?

When Sam Okoroafo (2000, p. 1) started the Journal of African Business, he stated that “Africa … has not yet reached its potential in business. Thus, it continues to remain an untapped frontier despite an abundance of resources, wildlife, natural beauty, and climate.” Twenty years later, business in Africa is probably more active than ever (e.g., Kgomoeswana, 2014). The increase in business activity in Africa seems to have attracted research on foreign investments (e.g., Kolstad & Wiig, 2011; Saky, Commodore & Opoku, 2015) and support industries, such as telecom (e.g., Asongu & Boateng, 2018), finance (cf. de Wet & Gossel, 2016) and energy (e.g., Pineau, 2011). Another line of research addresses the growing group of micro-entrepreneurs, some of whom manage to turn their activities into mature businesses (Babah Daouda, Ingenbleek, & van Trijp, 2016; Karakire Guma, 2015).

While these groups are well recognized in the literature on African business, another group of businesses is emerging that seems to be rooted considerably more deeply in African systems (hereafter referred to as endogenous African businesses). Such firms increasingly emerge in the African business literature and include ethnic food producers from Cameroon (Mefoute Badiang, 2018), firms targeting diaspora consumers (Griffin-El & Olabisi, 2018), Ethiopian leather footwear companies adding value to the country’s immense production of raw hides (Gebrewahid & Wald, 2017), and smallholders that transform into value-creating businesses (Teklehaimanot, Ingenbleek, & van Trijp, 2017). The commonalities between such firms are not yet fully recognized, despite their potential for African development. This finding is surprising because such companies as Coca-Cola, Microsoft, and Apple clearly build on the typical characteristics of the business environment of the United States because they seized market creation opportunities that emerged after infrastructural and/or technological improvements. In addition, Toyota and Sony are directly connected to the post-war industrialization of Japan, and BP and Unilever grew with the previous international expansion of the British economy. These companies’ unique profiles and core competencies cannot be separated from the histories and resources of their respective regions or countries of origin (cf. Jones, 1996). Why are firms with clear connections to the African business environment so scarce in the African business literature? Is it because only a small number of them exist or because we fail to recognize them?

When preparing for my first field research trip in Africa in the mid-1990s, I read Europe and the People Without History by Eric Wolf (1982). Wolf’s message was simple and powerful: historians were overlooking important developmental paths of the indigenous people living in what we now call developing and emerging countries. The historians essentially followed a Eurocentric perspective. In my view, the current state of research in the business field suffers from a comparable myopia, since it focuses mostly on businesses in or modeled after examples from the traditional economic centers in North America and Western Europe (cf. Burgess & Steenkamp, 2006; Sheth, 2011). Emerging markets are often approached as opportunities for international growth, rather than as a source to increase our understanding of what businesses are and how they function. For example, work on the base of the pyramid focused more on the market opportunities for foreign entrants than on co-creation with businesses and organizations from emerging markets (Kolk, Rivera-Santos, & Rufín, 2014).

This essay highlights the phenomenon of endogenous African businesses. I trace the historical roots of the endogenous business, highlight its unique differences from “other” businesses, and provide a first definition to facilitate further research. I prefer to use the term endogenous (part of the system) in order to not exclude resources that are deeply engrained in African economies, even though they may not be indigenous (of a specific origin), such as tea, bananas, and pineapples. I address the following questions. What makes Africa a special business environment? What are the typical common characteristics of African firms as consequences of the African business environment in which they emerged? Why do the African endogenous businesses emerge now? How can they be defined? Finally, why do they matter? In the remainder of this essay, I will address these questions in their subsequent order.

What makes Africa special?

What is so special about the African continent that affects business development? A quick glance at a globe or world map is sufficient to see that Africa’s most typical characteristic is that the orientation of its main axis is north–south (Diamond, 1997). For Africa, this orientation comes with at least three important features.

First, the landmass covers several climatic zones and therefore comes with a huge natural diversity (cf. Meredith, 2014). Different climates typically produce different vegetation and the vegetation in turn feeds different species of small and larger animals. Africa therefore has a remarkable variety of plants and wildlife (Meredith, 2014). If human life is a form of adaptation to natural conditions, it should not come as a surprise that many Africans moved to places where nature treated them relatively well for some reason. Communities logically would emerge in places where they could use the local natural resources in a way that helped them to survive and improve their lives. Open waters with good fishing grounds started to host fishing communities with specialized practices. Pastoralist cultures that specialized in lifestyles based on livestock herding emerged on the large plains in East Africa and below the Sahara. Bantu-speaking population spread across the fertile grounds across the continent to establish new farming communities (Diamond, 1997). As such, the different natural resources became a basis for different lifestyles and practices.

Second, biodiversity also has a dark side. Frankema (2015, p. 275) argues that throughout history, Africa had “an exceptional human disease environment”, meaning that it had relatively frequent occurrences of climate-related diseases, such as malaria. This frequency of disease outbreaks, in turn, constrained population growth. The lower level of population density is further caused by environmental constraints in the growth of agricultural outputs and relatively good conditions for nomadic pastoralism compared to agriculture (Frankema, 2015). Food production in that sense constrained population growth. As a consequence, the communities living at different spots on the continent were often relatively isolated. With people living in relatively remote communities where they needed to develop their own ways of dealing with their environment, the continent is also highly diverse in cultural terms. This heterogeneity is, among others, evidenced by the 1250 to 2100 different languages on the continent (Heine, 2000) but can also be witnessed in the different food crops, processing techniques, end products, tastes, and preferences.

Meanwhile, on the east–west-oriented Eurasian continent, food production became the basis for the first civilizations. These emerged in places that were suitable for agriculture since if farmers produced more than they needed for their own families, they could pay some share of their surplus as a tax to local rulers. Simply stated, if the place was, relative to where people could move next, pleasant enough to live, they accepted the constraints to their freedom, such as paying taxes and serving in armed forces (Morris, 2014). Establishing a rule of law brought business to a higher level. The Romans, for example, conquered new tribes and assimilated them into their empire to strengthen trade. Once the conquered people had access to a market, they could sell their produce for money. The money gave them access to other goods that constituted an improvement in their standards of living (Morris, 2014). As such, businesses, and societies in general, could step by step become slightly more advanced and specialized.

Many early civilizations emerged in and around the southern ranges of the Eurasian landmass, almost creating a “belt” with the Roman Empire, Greece, and Egypt in the West, such civilizations as Babylonia and Persia in the Middle East, and the Moghul Empire and China’s Han Dynasty in the East, just to mention some. They appeared in places with relatively good conditions in terms of the climate, the presence of rivers for transport and irrigation, and the absence of harsh conditions that make human life difficult. Jointly, they also had the advantage of being connected (Diamond, 1997; Morris, 2014). Over time, trade routes emerged and exchange started between the different regions. Goods and also ideas, practices, crafts, and technologies spread from the East to the West and back (Wolf, 1982). The lessons learnt in one place often held some level of relevance in other places because the conditions were roughly comparable. As such, harvests could increase and room was created for higher levels of craftsmanship and other more specialized business activities.

This subject brings us to the third consequence of Africa’s north–south orientation, which is that the diverse living conditions also affected the potential to learn from others. Africa was often only weakly included in the trade between the old civilizations that could learn from each other. Meanwhile, the Touareg, for example, could offer important lessons on how to survive in the Sahel, but these insights were of little relevance to people living in Central Africa coping with very different conditions.

In conclusion, since the geography of Africa is different from that of its closest neighbor Eurasia, different developmental patterns emerged. Despite the richness of its natural resources, development in Africa was hindered by climatic factors that made human life more difficult and the lessons of neighbors less relevant. Not surprisingly, different developmental patterns also create different types of business.

How was the African business different?

Since mother Africa itself gave birth to humanity, the first businesses “avant la lettre” must have emerged in Africa. A business can be defined simply as “an organization or economic system where goods and services are exchanged for one another or for money” (Business Dictionary, 2018). Some very early businesses therefore must have taken the form of people trading meat and skins from their hunting trips for fruits and vegetables foods found by gatherers.

In the presence of a wealth of diversity and relatively large distances between communities, it is not surprising that trade became the dominant business activity. Trade directly leverages the advantages that come with a large variety of resources. The logical way of creating value was therefore simply to explore what was to be found elsewhere. This must often have led to new discoveries of new fruits, vegetables, gems, practices, et cetera. Because communities were living relatively far away from each other, the discovery of something that was valuable to someone else easily led to a sustainable trading business. In his social network perspective on competition, Burt (1992) calls such a position a structural hole because the supplying and the demanding communities do not know each other, and the trader in fact creates a monopoly for herself or himself. In some parts of Africa, trade is therefore still second nature as even people with paid jobs run trading businesses on the side. Most indigenous African languages also do not seem to have words that indicate “business,” other than words that literally mean “trade.”

With the trade activities of Africans, marketplaces emerged. People started trading at specific places, such as where small bush roads meet larger, more accessible roads. Bigger marketplaces would emerge where two accessible roads cross, and probably the largest marketplaces emerged at the centers of trading systems, as in capitals where goods could be traded with people from long distances away (cf. Fafchamps, 2004). Through these networks of marketplaces, Africa got connected with the East–West trade routes that Marco Polo traveled and with the seafarers on the Atlantic and Indian Oceans. Goods could travel further if they were not too perishable and transaction costs were not too high (Fafchamps, 2004), like gold, diamonds, ivory, textiles, and salt (e.g., Hopkins, 1973).

Places that were remote but still connected to markets could specialize further. In that respect, the early African businesses were not organizations that existed separately from other forms of social organization. Families that were running successful businesses could bring the business to a higher level by involving other community members or extended families and clans. Family ties, social pressure, and even violence were used, not so much to conquer land, as in Europe, but to control labor forces (and with them secure the know-how of the business). Their specialized knowledge in the usage of local resources provides them with a comparative advantage in the marketplace (e.g., Arnould & Mohr, 2005) that allowed them to grow.

Most “businesses” were therefore not independent organizations but were directly related to families and clans. Kingdoms, such as Ashante, Zulu, and Buganda, were often based on controlling trade routes and keeping exchange going (for examples of early African states, see Casely-Hayford, 2012). Trade was important because it ensured that people would stay. Most of the pre-colonial African states therefore had a clear “business model” regarding the types of trade they controlled as a source of income. Despite the efforts, the lack of control over people made them more vulnerable than the states in the Eurasian belt and, generally speaking, they would not last as long as some of their Eurasian counterparts.

While development started to accelerate in approximately 1800 with the industrial revolution in Western Europe, international trade also intensified. The level of business activity in Africa grew with it and the first signs of a more diversified economy started to appear during the last decades of the nineteenth century (Allen, 2011). The period of colonization that came next ended the organic growth of African businesses. Coming from a part of the world where not labor but land was the scarce production factor, the colonizers started to draw state borders on the map. From their spheres of influence, they sourced natural resources for the emerging European industries that traded back their efficiently produced goods (e.g., Hopkins, 1973). The variety of Africa’s natural resources was not used to its full potential in this business model, while the new businesses in such places as Kano in current Nigeria stopped before they had a chance to flourish (Allen, 2011).

In summary, notwithstanding that in principle any type of business can be conducted in Africa, the traditional African business was more than just a business that happened to be in Africa. They tapped into Africa’s endogenous natural resource advantages and into the economic, social, and cultural systems to overcome the inherent labor scarcity and facilitate exchange. These characteristics may help us to recognize the modern endogenous African businesses.

Why are the endogenous African businesses emerging now?

The small size and relatively low level of proficiency that have characterized African businesses for a long time are now changing. Three current factors cause structural changes. First, with the growth of the population in Africa, in particular in the cities, for the first time in history markets are emerging that generate sufficient domestic demand for business to attract greater levels of specialization and competition (Economist, 2010). The growing African demand sometimes is an underestimated factor in Africa’s macro-economic development (Frankema & van Waijenburg, 2018). Many Chinese businesses, which are often suspected to be there to produce for the Chinese market, are actually attracted by the growing size of African domestic markets (Bräutigam, 2015). In other words, it is far more independent from foreign buyers than in previous periods of growth (cf. Allen, 2011), and the growing demand will now lead to new businesses that will start seeking different ways to survive and thrive.

Second, next to the growth of domestic demand, Africa is also becoming more integrated in the global trade of capital and goods. With the growing population worldwide, Africa’s resources are needed more than ever to fuel the development not just for Africans, but for everyone (Burgis, 2015). While in the past investors might have been scared off by high institutional risks, such risks no longer outweigh the gains associated with natural resources, such as metals, fishing grounds, and agricultural lands (Kolstad & Wiig, 2011).

Third, compared to the past, technology is in many ways no longer a frontier. We have the technologies to communicate without wires, to grow plants in deserts, to adapt to climate change, and to produce enough proteins and vitamins to provide food for the rapidly growing populations. In urban areas, we can grow leafy vegetables vertically along the walls of skyscrapers and apartment buildings. We can manufacture consumer goods that are printed with 3D printers that get their power from solar panels or biogas. If spare parts are needed, we can send a drone with supplies. It is not that everything is on hand and ready to be implemented, but the point is that Africa can step in at a level of development in which technology is often no longer the barrier. As such, it creates what Chandy and Narasimhan (2015) call “condensed change” since the technological steps of development that took centuries in other parts of the world can be taken in Africa over the course of one generation or less.

The technological progress is important also for another reason, namely, that it has made life in Africa more bearable, at least if we follow such indicators as life expectancy and infant mortality (United Nations, 2016). This is a break from the past because Africa can now build more on the knowledge of others. This is because climatic differences are less relevant in economies that are more developed. The inherent disadvantages of Africa compared to Eurasia are rapidly becoming irrelevant. Therefore, compared to the past, the population density is increasing in Africa, and so is the access to relevant knowledge and information. The factor that is stable over time is that Africa still has a rich natural environment to build businesses on.

Defining the endogenous African business

In essence, an endogenous African business integrates relatively unique natural resources with modern business knowledge and skills. Business knowledge is one of the knowledge-types that is now becoming more available, including all its sub-disciplines, such as management, marketing, and finance. The endogenous African businesses, and the schools and universities supporting them, can benefit from past developments in international business schools.

Business knowledge may help to create value from Africa’s diverse resource endowments and its social, economic, and cultural systems. In that respect, a new generation of Africans is arising that has received a modern business education or otherwise acquired a substantial amount of knowledge on how to manage a modern formal-sector business. They are also on top of the market opportunities that arise in their dynamic environments. By knowing these opportunities, they may recognize the resource potential of the rural areas. Because they still have the social and/or cultural ties that are in many cases needed to effectively do business in these areas, they also have the potential for stable access to such resources. Standing with one foot in their African heritage and with the other in the modern business world, they are uniquely positioned to develop strategies and business models that tap into the natural resource endowments. Following these insights, I define the endogenous African business as “[a] business that aims to create and sustain competitive advantage by integrating Africa’s endogenous natural resource advantages and the economic, social and cultural systems that build on them with modern business practices.”

Given that the factors discussed above come together now, it is not surprising that we see increasing more endogenous African businesses arising. For example, the Sanle factory in Burkina Faso dries mangoes, which is a fruit that the country produces more of than it can consume. The company sells the dried mangoes to supermarkets in the growing cities in several French-speaking countries of West Africa and it exports them to European wholesalers. Drawing on the knowledge shared by foreign buyers, the company clearly develops a competence in matching the quality requirements of foreign markets with its sourcing from small farmers in rural Africa. As another example, the fattening lots near Adama in Ethiopia purchase livestock at markets in pastoral areas and resell it to slaughterhouses and exporters that target the nearby Arab market. Additionally, these businesses are typically positioned at a place where they need to understand the social and cultural contexts of the pastoralists and the relatively modern value chain downstream. The wildlife parks across sub-Saharan Africa (but probably mostly in South Africa) directly draw on Africa’s biodiversity, which they make available for the rapidly developing tourism industry, while simultaneously contributing to rural development and the protection of natural resources (Cloete, Van der Merwe, & Saayman, 2015). Consumer service companies, such as Kaldi’s in Ethiopia or Melvin’s Tea in Kenya, use commodities in which their countries are traditionally strong, respectively coffee and tea, to create endogenous value propositions that directly compete with foreign entrants, such as Starbucks. In West and East Africa, several breweries that used foreign lager beer recipes based on barley are now brewing with endogenous alternatives, such as locally produced sorghum.

These companies all use modern business practices to create value from natural resources, often making connections to rural areas. As much as their business models may vary, their African signatures are unmistakably present.

Why do endogenous African businesses matter?

The current wave of growth will change Africa more than in any other period of change in its history. The most important factor is that the population growth creates a demand that justifies a much more diversified economy than before. Obviously, this mission can also be accomplished by “exogenous” African and foreign firms that enable the growing middle classes to live “Western” lifestyles. Money can be made by leveraging low labor costs in sweatshops. Investment capital can be used to grow the technological bases of support industries in new brain parks. Certainly all these scenarios can, and probably will, take place to some extent. The endogenous businesses can also contribute to the growth and there are several good reasons to support them.

First, because African businesses typically make use of African resources related to African geography and culture, they are deeply engrained in African systems, and contribute to the development of African economies (cf. Hunt, 2000). Because their resources are unique and difficult to imitate, they can create and sustain competitive advantages. As such, they contribute to a more refined, diversified and stable economy. Second, endogenous firms strengthen ties with and create new opportunities in the often depopulating rural areas. Third, they contribute to food security because they may make traditional diets available and attractive to the growing urban populations. They also make rural areas more vibrant, thus strengthening food production in general. Fourth, because their resources are difficult to imitate, the natural resources upon which they build their competitiveness may be valued more and thus receive more preservation against overuse and depletion. Fifth, once such firms become significant contributors to local and national economies, they can put pressure on administrators to create supportive business environments that will further foster growth. Sixth, endogenous firms reward creative entrepreneurs, and they are potentially gender-neutral. As such, they can counter gender imbalances. Seventh, let us not forget that the existing (exogenous) businesses are not without problems. Many established industries across the world eventually become unsustainable because they overexploit natural resources. The endogenous firms can create alternative models for more sustainable economies. Finally, endogenous firms are firms to be proud of because they prove to new generations that not everything from abroad is better.

Endogenous African firms also present interesting research opportunities. Because they operate in a rapidly changing and challenging context, their value-creating processes, learning patterns, competences, and resources differ from businesses in high-income markets. Studying them will enrich business theories since we may discover new boundary conditions and moderators to our theories (Burgess & Steenkamp, 2006; Ingenbleek, Tessema, & van Trijp, 2013). Such context-specific theories are still scarce in the African business literature (Zoogah, 2008). Therefore, the next logical research directions are to further explore the theoretical bases of the endogenous businesses and to bring examples to the forefront, such as through case study research. Role models are particularly important now and case studies can create such role models. Additionally, longitudinal research is important to trace the development of African businesses over time.

These studies may be at the root of new important classroom materials. Recognizing the uniqueness of African business also has consequences for what we teach African business students. It suggests that students should learn theories and read cases to which they can relate (and perhaps be proud of). Just think of the millions of African children who aim to follow in the footsteps of professional African football players in the big competitions in Europe. If only a small percentage of their time and energy is channeled toward following role models in successful endogenous African businesses, Africa may be at the dawn of a bright future.

Since the Journal of African Business aims to provide “valuable insights into successful business techniques and strategies for the African business arena,” it is probably the most logical host for these contributions (Journal of African Business, 2018). Hence, I think that it is worthwhile to work on this subject for the years to come.

Acknowledgments

The author thanks Ewout Frankema, Bert Helmsing, Maren Peters, and the JAB editorial team for their comments on a previous draft of this article. The ideas expressed in this article were partially developed while the author was visiting the Judge Business School at the University of Cambridge and the Nelson Mandela Business School in Port Elizabeth, South Africa. The author thanks these institutions for their hospitality, and Jaideep Prabhu, Steve Burgess, and others whom he met during his visits for the inspirational conversations on the topic. He also thanks his colleagues at Wageningen University who were active in the WASS Africa meetings. Special thanks go to Simon Sigue for his invitation to write this contribution.

Disclosure statement

No potential conflict of interest was reported by the author.