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2 JAD POLICY ON COPYING and DISTRIBUTION of ARTICLES Because a major goal of JAD is to disseminate the research efforts of our authors and to make their work as widely available as possible to policy makers, professors, and students, JAD hereby grants blanket permission to photocopy the material it publishes if that material is to be used for nonprofit purposes. This permission covers tables, figures, charts and fulllength articles, as well as multiple copies of articles. All copies must indicate the Volume and issue of JAD from which they were copied, plus the cover page and this policy. Persons intending to photocopy JAD material for non-profit use are not required to give notice or remit copying fees. However, please note that permission is still necessary (and fees are usually charged) for JAD material that is to be published elsewhere or used for profit oriented activities by individuals or organizations. The Journal of African Development ( JAD) is an official publication of the African Finance and Economics Association in cooperation with New York University. The African Finance and Economics Association and New York University do not assume responsibility for the views expressed in this or subsequent issues of the Journal of African Development. JAD Editorial Policy and Guidelines for the preparation of manuscripts may be found at

3 JAD Journal of African Development Spring 2012 Volume 14 #1 TABLE OF CONTENTS From the Editor 9 The Effect of Trade Liberalization on Food Security: The Experience of Selected African Countries 13 Mesfin Bezuneh and Zelealem Yiheyis Women s Access to Microcredit and Children s Food Security in Rural Malawi 27 Gautam Hazarika and Basudeb Guh-Khasnobis A Co-Integration Analysis of Growth in Government Expenditure in Ghana 47 Grace Ofori-Abebrese The Perceived Success Factors and Problems of Small Business Owners in Africa 63 Cynthia Benzing and Hung M. Chu Research Note Aid and Liberty in West Africa, Cameron M. Weber Policy Perspectives Making Economic Policy Research Influential: The Case of African Research 109 Mesfin Bezuneh and Carl Mabbs-Zeno What Role for Africa After 50 Years of Independence: Provider of Natural Resources or a New Global Leader? 127 Frannie A. Léautier Book Reviews The Darfur Conflict: Geography or Institutions? by Osman Suliman 153 Ola Olsson The New Harvest: Agricultural Innovation in Africa by Calestous Juma 157 William A. Amponsah 3

4 JAD Journal of African Development Spring 2012 Volume 14 # 1 The Perceived Success Factors and Problems of Small Business Owners in Africa CYNTHIA BENZING and HUNG M. CHU 1 ABSTRACT Approximately 600 micro and small business owners in Kenya, Ghana and Nigeria were surveyed to better understand their perceived success factors and ongoing problems. According to the entrepreneurs, hard work, good management skills and good customer service are the most important ingredients for success. Fifteen of the 17 success items could be broken into four factors. The factor for controllable non-managerial items was seen as the most important factor governing success for entrepreneurs from all three countries. The most significant problems as reported by entrepreneurs were a weak economy and unreliable employees. A factor analysis of the problems revealed significant differences among the three countries. Ghanaian entrepreneurs were less concerned about their lack of training and locational issues and more concerned about their lack of capital. Compared to Ghanaian and Kenyan entrepreneurs, Nigerians had greater concern with the factor related to safety, location and employees. 1 Benzing (Corresponding Author): Department of Economics and Finance West Chester University West Chester, PA [email protected]; Chu: Department of Management West Chester University West Chester, PA [email protected] 63

5 JOURNAL OF AFRICAN DEVELOPMENT INTRODUCTION Small businesses play an integral role in every successful growing economy. In Africa that role is even more important as African countries struggle to reduce poverty, boost overall GDP and provide employment for those displaced by privatization. Although differences in definitions make comparisons difficult, small and medium sized enterprises (SMEs) accounted for 18 percent of Kenya s GDP in 2003 and employed 3.2 million persons (Kauffman, 2005). In Nigeria, SMEs provided 70 percent of industrial jobs and 95 percent of its manufacturing activity during 2003 (Kauffman, 2005). In Ghana, 70 percent of the business firms are microenterprises and approximately 70 percent of the workforce is employed in micro and small enterprises (MSEs) (Government of Ghana, 2003; World Bank, 2006). The vast majority of households in Ghana are participating in some type of private sector activity (Government of Ghana, 2003). Africa s private sector consists primarily of informal microenterprises whose growth is constrained due to legal and financial obstacles. These microenterprises co-exist with large enterprises that are better able to secure financial capital. As a consequence, most developing nations face a business sector with a missing middle (Kauffmann, 2005). Microenterprises and small businesses face an uncertain economic environment and, consequently, often stay small and use simple technology in part to avoid large losses in the case of bankruptcy. They often face high levels of competition in small localized markets, a corrupt and highly bureaucratic business environment, and poor infrastructure. To counteract these problems international agencies like the IMF and OECD have worked with governmental agencies to develop strategies to help these businesses grow so that their potential as job and wealth creators can be realized. Researchers have tried to determine a common set of factors that lead to the success of small business owners around the world. In addition, researchers have examined common problems facing micro and small enterprise (MSE) owners. But, establishing a common set of success factors and problems across countries has proven difficult because of the many cultural, political and economic differences that influence the business environment. This study is designed to compare the business problems and success factors across three 64

6 BENZING AND CHU: SMALL BUSINESS OWNERS IN AFRICA African countries: Kenya, Ghana and Nigeria. It will also examine the common factors that micro and small business owners face in Africa. The differences and commonalities across countries must be better understood if countries hope to develop effective policies aimed at MSE growth. BACKGROUND The three countries under consideration in this study have some commonalities in that they are categorized as low income sub-saharan countries. But, they also have many differences that could affect the business success of MSEs. With respect to business climate, the World Bank (2007) Doing Business index ranks Kenya s business environment 72 nd and Ghana s 87 th out of 178 economies. Both countries saw significant improvement in their business environment between 2006 and 2007 and were ranked among the 10 best reformers in the world. In contrast, Nigeria ranked 108 th in both years (World Bank, 2007). Table 1 provides a cross-country and regional comparison of some key economic and business factors. 65

7 JOURNAL OF AFRICAN DEVELOPMENT Table 1. Economic and Business Environment Kenya, Ghana and Nigeria Kenya Ghana Nigeria Region* Growth in real GDP (2006 %) Per capita GDP (2006 US $) ,158.0 Inflation rate (2006 %) # of days to start a business (2007) Cost of starting a new business ( % of GNI per capita 2007) # of days to build a warehouse obtain licenses, permits, inspections (2007) Total tax rate includes profit taxes, labor taxes, etc. (% of profit 2007) Time to prepare, file and pay , taxes (2007 hours) Rigidity of employment index (2007) with higher numbers indicating more rigid regulations Sources: Kenya National Bureau of Statistics, Ghana Statistical Service, Nigeria National Bureau of Statistics, U.N. Statistics Division, unstats.un.org; World Bank Group Doing Business, IMF World Economic Outlook (WEO), Oct. 2007, *The regional statistics for growth in real GDP, per capita GDP and inflation rate are based on the continent of Africa. All other regional numbers represent sub-sahara Africa. For all three countries it takes between 9 and 12 procedures and days to establish a business. But, as shown in Table 1, there are sharp differences in licensing procedures (related to building a warehouse) and tax burdens. In Kenya it takes 100 days to obtain the licenses, permits, inspections and utility connections for a new warehouse. This is in sharp contrast to the 220 days and 350 days in Ghana and Nigeria, respectively. Total tax rates also differ markedly among the three countries. Kenya s total tax rate is 51 percent of a business s 66

8 BENZING AND CHU: SMALL BUSINESS OWNERS IN AFRICA profit. This is extremely high when compared to Ghana s 33 percent rate and Nigeria s 30 percent rate. Economically, the three countries have rates of real GDP growth that are on par with the rest of sub-sahara Africa and the continent. Inflation rates have decreased during the past two years, however, they continue to remain a concern. The IMF has cautioned all three countries to maintain macroeconomic policies that support sustainable growth with closely controlled inflation. Africa s GDP growth is expected to increase from 5.5 percent in 2006 to 6 percent in Nigeria s annual growth rate is expected to be faster than Ghana s and Kenya s at 7 percent in 2007 due to increases in oil prices and continued improvement in agriculture and services (African Development Bank, 2007). As shown in Table 1, Nigeria s per capita GDP is significantly higher than the other two countries. This number, however, may not be a fair reflection of the actual per capita income differences. Looking at the GNI per capita in US$, Nigeria s is 640 which is much closer to Kenya s 580 and Ghana s 520 (unstats.un.org). With respect to quality of governance, some stark differences exist among the three African countries. According to the Ibrahim Index of African Governance (2007), Ghana has the 8 th best quality of governance out of 48 African nations. In contrast, Kenya ranks 15 th and Nigeria ranks 37 th. While Kenya and Nigeria have similar ratings on safety and security, Nigeria is ranked much lower on rule of law, transparency, corruption and human rights. All three countries showed a slight improvement in their rankings since , but obviously Nigeria has a long way to go. Nigeria s 36 governors and President Yar Adua have pledged to improve public confidence by making government more accountable and prosecuting corrupt public officials. Economic growth is related to good governance in that foreign investors and aid organizations expect their funds to be carefully accounted for. 67

9 JOURNAL OF AFRICAN DEVELOPMENT LITERATURE REVIEW Surveys of entrepreneurs in developing countries have found that entrepreneurs rate the following three factors as critical to success: managerial skills, personal qualities, and the ability to secure funding. In Huck and McEwan s (1991) study of Jamaican entrepreneurs, small business owners identified management skills, planning and budgeting skills, and marketing/selling skills as necessary ingredients for business success. South Pacific islanders (Yusuf, 1995) reported that good management skills, personal qualities, access to financing, and satisfactory government support were the most important success factors. In a study of small business owners in Pakistan (Coy et al., 2007), entrepreneurs rated three factors as particularly important to their success: hard work, good customer service and good product quality. Factors that were not considered important were government programs and training programs. According to the results of a survey of Turkish entrepreneurs (Kozan, Oksoy & Ozsoy, 2006), business management training and financing were significantly related to an SME owner s expansion plans in Turkey. Surveys of entrepreneurs in Kenya and Ghana (McDade, 1998; Neshamba, 2000; Pratt, 2001) have found that previous work experience, the availability of capital, and support from family and friends are important contributors to business success. The Kenyan entrepreneurs in Neshamba s study also reported that hard work, as evidenced by long working hours, is also important. Söderbom, Teal and Harding (2006) used panel survey data to determine that firm survival in Ghana, Kenya and Tanzania is related to productivity for larger firms, but not smaller firms. With respect to the problems faced by entrepreneurs in Africa, small business owners face regulatory problems, corruption and capital constraints. According to Macculloch (2001) small businesses in East Africa complain about a system of regulations and permits that overlap and duplicate themselves at federal and local levels. Agboli and Ukaegbu (2006) found the same regulatory duplication in southeastern Nigeria. Entrepreneurs face lengthy and costly delays in clearances and approval processes throughout most of sub-sahara Africa. Regulatory problems are compounded by the added expense of corruption and bribery. (Kiggunda, 2002; Pope, 2001) Corruption diverts financial resources from productive enterprises to non-competitive businesses 68

10 BENZING AND CHU: SMALL BUSINESS OWNERS IN AFRICA related to bribery and brokering contracts. For the entrepreneur, this means less money for reinvestment and expansion which can only reduce a nation s output of goods and services. According to Macculloch (2001), micro and small operators in East Africa are often subject to the constant harassment and intimidation of enforcement officers who repeatedly confiscate their property and means of livelihood. (p. 13) The same is true in other parts of Africa. A survey of Ghanaian entrepreneurs reported that traders in Accra often face confiscation of goods in addition to paying approximately 5000 cedis (US $6.75) per month to city officials (Chamlee-Wright, 1997). Although corruption is a serious problem across the African continent, the level of corruption differs from country to country. Transparency International s Corruption Perceptions Index (2007) ranks countries on their perceived level of corruption with higher rankings indicating greater corruption. In the 2007 survey Ghana ranked 69 th, while Kenya and Nigeria ranked 150 th and 147 th respectively out of 159 countries. Although government bureaucracy and corruption hamper business growth, many researchers believe that the most serious problem facing entrepreneurs in Africa is the inability to obtain financial capital. (Ariyo, 2004; Cook, 2001; Gray et al. 1997; Horn, 1998; Mambula, 2002; Pratt, 2001; Spring & McDade, 1998). Banks are reluctant to make small loans because the costs of administering such loans can significantly reduce their profitability. In addition, weak business laws make it difficult and expensive for banks to pursue borrowers for non-payment. Even when bank loans are available, small firms often face exorbitant collateral requirements, difficult loan application processes and high interest rates. (Cook, 2001; Macculloch, 2001; Umoh, 2006) For these reasons, many entrepreneurs rely on their own savings and that of family and friends to meet short-term and long-term capital needs. Inegbenebor s (2006) 2004 survey of 1,255 Nigerian small and medium-sized industries (SMIs) found that less than 10 percent used banks for either seed money or expansion funds. Similarly, Umoh s 2001 survey found that 61 percent of 35 Nigerian micro-enterprises obtained funds from informal sources rather than banks or government sponsored programs. Ekpenyong s (2002) survey found that 10 percent of Nigerian small businesses used bank credit with most relying on savings and family loans to sustain their enterprises. 69

11 JOURNAL OF AFRICAN DEVELOPMENT In a 2001 survey (World Bank, 2002) of Nigerian manufacturing firms in the formal sector, inadequate access to finance was the third most serious problem after infrastructure problems and an uncertain business environment (lack of demand). Forty-eight percent of the micro-enterprise owners and 39 percent of the small business owners felt credit constrained. A study by Abumere et al. (2002) found that 52 percent of the entrepreneurs in the Nigerian formal sector believed the lack of financing was a major constraint on the growth of their businesses. According to Inegbenebor (2006), between 1997 and 2001 almost 80 percent of firms across Nigeria reported an inability to obtain credit. His survey of small and medium-sized industrial enterprises (SMIs) in Nigeria indicated that despite efforts by the government to ease the credit crunch only 39 percent of the entrepreneurs were even aware of the government s program to compel banks to invest at least 10 percent of their pretax profit in SMIs. A 1999 survey (Ekpenyong, 2002) of 200 small scale businesses in Nigeria found the same top three problems as the 2001 World Bank survey. This study will determine what entrepreneurs in Kenya, Ghana and Nigeria believe are the most important factors necessary for their success. In addition, it will indicate what are the most serious problems faced by small business owners and how they differ among the three countries. This is the first study to compare the perceptions of success factors and problems of small business owners across three African countries. Because of economic, political and cultural differences, we expect the perceived success factors and problems to differ across the three countries. If this is true, then governments must custom-design their policies to meet the needs and problems faced by their country s small business sector. METHODOLOGY Surveys were completed by 599 entrepreneurs in Kenya, Ghana and Nigeria. The samples were chosen from the Chamber of Commerce membership directories for Nairobi and Accra, the capital cities of Kenya and Ghana, respectively. The Nigerian sample was obtained using the Yellow pages (business directory) in Lagos, the former capital city. Although Lagos has not been the capital since 1991, Lagos is still the largest city and the administrative and economic center of the country. Every second entry in the business directories 70

12 BENZING AND CHU: SMALL BUSINESS OWNERS IN AFRICA was chosen for contact. To be eligible for the survey a business had to be domestic, employ less than 250 persons, and have a fixed location. Non-profit organizations, government owned enterprises (SOEs) and internationally owned enterprises were not included in this survey. If the second entry did not satisfy the requirements or the business owner refused participation, the next entry from the alphabetical list of businesses was contacted. The surveys were conducted by paid graduate assistants/teachers. The method of filling out the questionnaire was a face-to-face meeting with the owner. In the Nigerian sample, telephone interviews were conducted when the business was located at some distance from the interviewer. Two hundred Kenyan business owners, 156 Ghanaian entrepreneurs and 242 Nigerian entrepreneurs agreed to participate in the survey. Since English is the official language used in Kenya, Ghana and Nigeria, the survey was written and conducted in English. The questionnaire used in this study was developed by Hung M. Chu (Chu & Katsioloudes, 2001) and has been used in studies of entrepreneurs in Vietnam, Romania, India and Turkey (Benzing, Chu & Callanan, 2005; Benzing, Chu & Szabo, 2005; Benzing & Chu, 2005; Benzing, Chu & Kara, 2009). The strength of a success variable or problem was measured using a five-point Likert scale. The scale ranged from one which indicates that the success variable or problem is considered unimportant to a score of five which indicates that the success variable is considered extremely important or the problem is considered very serious. A mean score was computed for each of the 17 success variables and 12 problems. A higher mean score indicates that the success variable is more important to the entrepreneur or the problem is more severe. A nonparametric test (Mood s Median Test) was used to determine if there was a significant difference among the scores of the three countries on a particular success item or problem. ANOVA could not be used because the Anderson-Darling normality test indicated that the data are not normally distributed. A nonparametric test does not require an assumption concerning the distribution of the population and is more robust against violation of assumptions used in parametric tests. Two factor analyses were performed to determine if the success variables and the problems could be effectively grouped into meaningful factors. 71

13 JOURNAL OF AFRICAN DEVELOPMENT Both the principal components factor analysis and the maximum likelihood factor analysis with and without varimax rotation were performed to determine which factors provided the most meaningful groupings and explained the highest percentage of variance. To test for reliability, Cronbach alphas were computed for each factor. The factors that result from a factor analysis indicate which variables are intercorrelated, but a factor analysis does not explain how or why the variables are intercorrelated. Because the underlying common characteristic is undefined, the naming of such factors can be somewhat arbitrary and open to interpretation. SAMPLE CHARACTERISTICS The characteristics of the businesses and the entrepreneurs are summarized in Tables 2 and 3. According to the Organisation for Economic Cooperation and Development and the United Nations Economic Commission for Europe, a micro-enterprise employs less than 10 full-time workers or full-time annual work units while a small-sized enterprise employs between 10 and 50 (UN-ECE, 2006). All businesses surveyed for this study employ less than 50 fulltime workers and, thus, can be classified as either micro- or small-sized enterprises (MSEs). Both samples are dominated by micro-enterprises with 85 percent of the Ghana sample and 92 percent of the Kenya sample employing less than 10 full-time workers. Since the majority of the businesses in all countries are microenterprises, the sample is consistent with the larger world market. The sample is also fairly consistent with the level of microenterprises found in Africa. According to Spring and McDade (1998) and Manu (1999) 98 percent of businesses in Africa have less than 10 employees. Although annual sales data could be used to determine firm size, self-reported sales figures may be less reliable than the number of employees if business owners believe that such disclosure will trigger greater taxation or regulation. This study follows the precedent set by the World Bank (2003) and other surveys of small businesses by utilizing the number of employees to measure firm size. It is interesting to note that the Nigerian sample has a higher percentage of older married entrepreneurs. In addition, the groups are quite different with respect to their educational levels. Forty percent of the Nigerian sample reported completing a graduate degree, while only 7 percent and 21 percent of 72

14 BENZING AND CHU: SMALL BUSINESS OWNERS IN AFRICA the Ghanaian and Kenyan samples reported a comparable education. The age of the businesses differs in that the average age of a Nigerian business in the sample was 8.4 years, while the age of a Kenyan and Ghanaian business was 4.76 and 4.42 years, respectively. It is not altogether surprising that entrepreneurs in all three countries have a fairly high level of education. According to an ILO survey of 50 MSE owners in Accra, Ghana, 34 percent of the entrepreneurs reported completing years of education. The average number of years of schooling was 15 years (Morton, 2001). Ekpenyong (2002) also found a high level of education among 200 Nigerian small business owners in According to his survey, 47 percent had a tertiary education at either a university or polytechnic. A more recent study (Okpara & Wynn, 2007) of almost 396 small business owners in Nigeria found that 50 percent had post-secondary education and 38 percent were high school graduates. Table 2.* Sample Characteristics of Kenyan, Ghanaian and Nigerian Businesses Kenya Ghana Nigeria (N=200) (N=156) (N=243) Type of Business Retailing 39% 20% 18% Wholesaling 4% 6% 16% Service 44% 42% 45% Manufacturing 4% 21% 9% Agricultural products, tools, equip. 6% 7% 7% Other 4% 5% 5% Type of business ownership (Respondents could select more than one answer so percentages can total to more than 100%) Established by you 56% 76% 70% Bought from another 7% 4% 8% Inherited 4% 11% 2% Independently owned 46% 81% 36% Partnership 13% 7% 5% Incorporated 5% 0 5% 73

15 JOURNAL OF AFRICAN DEVELOPMENT Franchise 2% 0 1% Average number of employees Full-time Part-time Average age of business (years) *Not all survey respondents answered every question. For some questions more than one answer was allowable which leads to a total number of answers greater than sample size. All percentages are based on the number of entrepreneurs who answered the question. Kenyan, Ghanaian and Nigerian entrepreneurs work fewer hours in their businesses than entrepreneurs in other countries. Kenyan entrepreneurs reported working 45 hours on average per week; Ghanaian and Nigerian entrepreneurs reported 38 hours per week. In comparison to other studies of entrepreneurs in developing countries like Vietnam, Romania and India, the average hours worked is relatively low. (Benzing, Chu & Callanan, 2005; Benzing, Chu & Szabo, 2005; Benzing & Chu, 2005) Nineteen percent of the Ghanaian owners and 35 percent of the Kenyan and Nigerian owners work 20 hours or less per week in their businesses. These entrepreneurs may be working second jobs or running other businesses. In contrast to small business owners in other regions of the world, African business owners often own and operate several businesses simultaneously which increases their diversification and reduces the risk of putting all their eggs in the same basket (Spring & McDade, 1998) Although many entrepreneurs work part-time in their business, those who reported a fulltime commitment work extremely long hours. For instance, fourteen percent of the Kenyan entrepreneurs reported working 84 hours or more per week. Another factor that may reduce the number of hours worked is the statutory limitations in place in some countries. All three countries have national labour laws that specify the normal work day and week. Ghana and Nigeria have legislated a 40 hour work week while Kenya has legislated a 45 hour work week. (International Labour Organization, 2007) Although the employer work week doesn t have to conform to these hours, owners may limit business operations to the statutory hours to avoid paying overtime. 74

16 BENZING AND CHU: SMALL BUSINESS OWNERS IN AFRICA Table 3* Characteristics of Kenyan, Ghanaian and Nigerian entrepreneurs Kenya Ghana Nigeria Sex of respondents Percent Percent Percent Male 65% 64% 69% Female 35% 36% 31% Marital status Married 54% 47% 76% Single 46% 53% 24% Average age of respondents (yrs) Average working hours per week Educational level achieved Percent Percent Percent No formal education 1% 3% 2% Some grade school 3% 9% 2% Completed grade school 5% 15% 2% Some high school 6% 7% 5% Completed high school 14% 20% 12% Some college 9% 13% 4% Completed college 31% 21% 17% Some graduate work 10% 5% 16% Graduate degree 21% 7% 40% *Not all survey respondents answered every question. All percentages are based on the number of entrepreneurs who answered the question. SUCCESS VARIABLES RESULTS The mean scores for the 17 success variables are shown in Table 4 by country and for the entire sample. A higher mean score indicates that a success variable is more important. There were statistically significant differences across the three countries for all success variables but one the ability to manage personnel. With a mean score of 4.48 hard work was rated the most important ingredient to success. Hard work was closely followed by good customer service and good management skills. The three least important factors were: satisfactory government support, community involvement and political involvement. 75

17 JOURNAL OF AFRICAN DEVELOPMENT Table 4 Mean Score for Variables Contributing to the Success of Small Businesses in Africa (5=extremely important, 4=very important, 3=mildly important, 2=not very important, 1=unimportant) Mean Success Variables Kenya Ghana Nigeria for total sample@ 1. Good management skills ** 2. Charisma: Friendliness ** 3. Satisfactory govt. support ** 4. Appropriate training ** 5. Access to capital ** 6. Previous business experience ** 7. Support of family & friends * 8. Marketing/Sales promotion ** 9. Good product at competitive price ** 10. Good customer service ** 11. Hard work ** 12. Good location ** 13. Maintenance of accurate records ** 14. Ability to manage personnel Community involvement ** 16. Political involvement ** 17. Reputation for honesty The Mood Median Test was used to determine if the scores across the three countries were significantly different. A non-parametric test was used to compare the scores because of the non-normal distribution of the data. Two asterisks indicates that the scores on a success variable differ across the three countries at the 99% level of significance. One asterisk indicates that the scores on a success variable differ across the three countries at the 95% level of significance. Interesting differences in the perceived success variables emerged when the scores were compared across the three countries. Ghanaian entrepreneurs believe satisfactory government support is more important for success than entrepreneurs in either Kenya or Nigeria. Kenyan entrepreneurs believe that previous business experience and support of family and friends 76

18 BENZING AND CHU: SMALL BUSINESS OWNERS IN AFRICA are less important than entrepreneurs from Nigeria or Ghana. In comparison to Kenyan and Nigerian entrepreneurs, Ghanaian entrepreneurs indicate that community involvement and reputation for honesty are more important. Table 5. Principal component factor analysis of perceived success variables for total sample Sorted factor loadings (Varimax Variable Factor 1 Factor 2 Factor 3 Factor 4 Communality 2. Charisma; friendliness Good customer service Good product at a competitive price Reputation for honesty Hard work Maintenance of accounting records Ability to manage personnel Good location Good management skills Access to capital Political involvement Community involvement Satisfactory govt. support Appropriate training Previous business experience Variance % Var Success variables #7 (support of family and friends) and #8 (marketing/sales promotion) did not load onto any factor and were, therefore, removed from the final factor analysis. As shown in Table 5 the factor analysis showed that 15 of the 17 success variables could be grouped into four factors. As recommended by Hair, Black, Babin, Anderson and Tatham (2006) all variables within a factor have a factor loading greater than.40 and all communalities exceed.50. The total percentage of variance (trace) explained by the factor solution is 61.7 percent. The first factor can be called controllable non-managerial characteristics and consists of success variables 2, 9, 10, 11, and 17. These variables include hard work, 77

19 JOURNAL OF AFRICAN DEVELOPMENT reputation for honesty, good customer service, and friendliness and explain 20 percent of the variability. The second factor relates to the managerial skills of an entrepreneur and includes success variables 1, 5, 12, 13, and 14. This factor explains 18 percent of the variability and includes things like the ability to manage personnel, maintain records and obtain financial capital. The third factor is related to external influences such as political and community involvement, and government support. Finally, the fourth factor relates to the experience and training of the entrepreneur. Success variables #7 (support of family and friends) and #8 (marketing/sales promotion) did not load onto any factor and, consequently, were removed from the final factor solution. The variance row of numbers represents the eigenvalues and indicates the relative importance of a factor in explaining the variance associated with the variables. According to the results in Table 4, factor #1 - the non-managerial characteristics has the highest explanatory value. In terms of reliability, the alphas were satisfactory and support a strong association among the variables in each factor. The Cronbach alpha for factor 1 is.817; factor 2 is.769; factor 3 is.750 and factor 4 is

20 BENZING AND CHU: SMALL BUSINESS OWNERS IN AFRICA Table 6. A comparison of summated scales for the perceived success factors of Kenyan, Ghanaian, and Nigerian Summated Scales Mood s Median Test* * Kenyan Ghanaian Nigerian Summated Scales Entrepreneurs Entrepreneurs Entrepreneurs Chi-sq. P-value (N=200) (N=156) (N=243) Scale 1 - Factor 1: Controllable non-managerial characteristics Scale 2 - Factor 2: Managerial skills Scale 3 - Factor 3: External influences Scale 4 Factor 4: Summated scales were calculated as average score across items contained in that factor. Scale 1 is the average of the scores on success variables 2, 9, 10, 11, and 17; Scale 2 is the average of the scores on success variables 1, 5, 12, 13, and 14; Scale 3 is the average of the scores on success variables 3, 15, and 16; and Scale 4 is the average of the scores on success variables 4 and 6. * A non-parametric test (Mood s Median Test or sign scores test) was used to determine if there was a significant difference among the three countries on each factor. A non-parametric test was used because the data is not normally distributed. Table 6 shows the summated scales for each factor by country. The Mood s median test, a nonparametric test, was used to determine if there were significant differences among the countries on each factor score. The average mean score for each factor indicates that factor #1 controllable non-managerial characteristics is considered the most important factor for success across all three countries. Entrepreneurs who believe that the locus of control rests with themselves are more likely to be optimistic and successful. It appears that entrepreneurs in Kenya, Ghana and Nigeria believe that they are the captains of 79

21 JOURNAL OF AFRICAN DEVELOPMENT their own ships. Despite a less than supportive economic and business environment, they believe that hard work, friendliness and good customer service are the most important factors leading to business success. The median test also indicates that Ghanaian entrepreneurs rate factor #3 external influences more highly than entrepreneurs in Kenya and Nigeria. Ghanaian small business owners appear to believe that support from the government, and political and community activity are more important to business success. Nigerian entrepreneurs placed more importance on previous experience and training. The Nigerian sample had more wholesalers than either of the other two samples. Perhaps previous experience in wholesaling is important for success in that field. PROBLEMS FACING AFRICAN ENTREPRENEURS The mean scores for the 12 problems are shown in Table 7 by country and for the entire sample. A higher mean score indicates that entrepreneurs consider the problem more serious. With a mean score of 3.98, the condition of the economy was rated the most serious problem facing entrepreneurs in Kenya, Ghana and Nigeria. The inability to obtain short-term and long-term capital, the level of competition, and undependable employees are also serious problems. The least serious problems are limited parking and the business registration/tax system. The business registration/tax system may be less of a serious problem for these entrepreneurs because most of these micro and small businesses are outside the formal business environment. They operate as part of the informal economy and, as such, may not face the full weight of the tax/regulatory system. The issue of parking was included in the survey since surveyed businesses were located in an urban environment and maintained a fixed location. The survey instrument was originally used in more developed areas of the world and, consequently, ignored some potentially important problems facing entrepreneurs in Africa. The survey could have been improved by including problems such as electricity, clean water, and the communication infrastructure. In examining the differences across countries, all problems showed statistically significant differences except for the ability to maintain accurate accounting records and too much competition. For instance, Ghanaian 80

22 BENZING AND CHU: SMALL BUSINESS OWNERS IN AFRICA entrepreneurs perceive themselves as more credit constrained than their Kenyan and Nigerian counterparts. Safety and government regulations appear to be more of an issue for Kenyan and Nigerian entrepreneurs. Ghanaian and Kenyan entrepreneurs rated general economic conditions as a more serious problem than did the Nigerian entrepreneurs. Table 7 Mean Scores for Problems Faced by Small Businesses in Africa (5=very serious problem, 4=serious problem, 3=problem, 2=minor problem, 1=not a problem) Mean Problems Kenya Ghana Nigeria for total 1. Unreliable and undependable employees ** 2. Too much competition Inability to obtain short-term fin l capital ** 4. Inability to obtain long-term fin l capital ** 5. Too much government regulation ** 6. Limited parking ** 7. Unsafe location ** 8. Weak economy ** 9. Lack of management training ** 10. Lack of marketing training ** 11. Inability to maintain acct. records Business registration /tax system The Mood Median Test was used to determine if the scores across the three countries were significantly different. A non-parametric test was used to compare the scores because of the nonnormal distribution of the data. Two asterisks indicates that the scores on a problem differ across the three countries at the 99% level of significance. One asterisk indicates that the scores on a problem differ across the three countries at the 95% level of significance. As shown in Table 8 the factor analysis showed that 10 of the 12 success variables could be grouped into four factors. But, the best factor solution of the problems did not provide as strong a fit as the factor solution for the perceived success variables. Although all but one variable has a factor loading greater than.4, a number of the communalities are less than the recommended.5. The total 81

23 JOURNAL OF AFRICAN DEVELOPMENT percentage of variance (trace) explained by the factor solution is 56.8 percent. The Cronbach alpha, however, is strong for all four factors and supports the model s assertion that the problems within each factor are strongly associated. The Cronbach alpha for factor 1 is.777; factor 2 is.758; factor 3 is.638 and factor 4 is.637. The first factor can be called lack of training and consists of problems 9, 10, and 11. These variables include lack of management training, lack of marketing training, and the inability to maintain accounting records and explain 18 percent of the variability. The second factor relates to financing problems and includes problems 3 and 4. This factor explains 14 percent of the variability and includes the inability to obtain long-term and short-term capital. The third factor is locational and includes problems related to parking, safety and unreliable employees. Finally, the fourth factor consists of problems 5 and 12 which relate to business registration/tax system and government regulation. Problems #2 (too much competition) and #8 (weak economy) did not load onto any factor and, consequently, were removed from the final factor solution. This does not mean that competition and weakness in the economy are unimportant. These two problems were rated as very significant by entrepreneurs, but they did not relate strongly enough to any other variables to be part of a factor. Table 8. Maximum likelihood factor analysis of problems for total sample Sorted factor loadings (Varimax Variable Factor 1 Factor 2 Factor 3 Factor 4 Communality 9. Lack of management training Lack of marketing training Inability to maintain accounting records Inability to obtain long-term capital Inability to obtain short-term capital Limited parking Unsafe location Unreliable employees Business registration/ tax system Too much govt. regulation

24 BENZING AND CHU: SMALL BUSINESS OWNERS IN AFRICA Variance % Var Problems #2 (too much competition) and #8 (weak economy) did not load onto any factor and were, therefore, removed from the final factor analysis. Table 9 shows the summated scales for each factor by country and the results of Mood s median test. There were significant differences (at the 95 percent level) among the three countries for all four factors. Compared to Kenyan and Ghanaian entrepreneurs, Nigerians believe their lack of training and locational factors are a more serious impediment to their business success. In contrast, Ghanaian entrepreneurs were less concerned about their lack of training and locational issues and more concerned about financing. Table 9. A comparison of summated scales for the problems facing Kenyan, Ghanaian, and Nigerian Summated Scales Mood s Median Test* Kenyan Ghanaian Nigerian Summated Scales Entrepreneurs Entrepreneurs Entrepreneurs Chi-sq P-value (N=200) (N=156) (N=243) Scale 1 - Factor 1: Lack of training Scale 2 - Factor 2: Financing Scale 3 - Factor 3: Locational Scale 4 Factor 4: Summated scales were calculated as average score across items contained in that factor. Scale 1 is the average of the scores on problems 9, 10, and 11; Scale 2 is the average of the scores on problems 3 and 4; Scale 3 is the average of the scores on problems 1, 6, and 7; and Scale 4 is the average of the scores on problems 5 and 12. * A non-parametric test (Mood s Median Test or sign scores test) was used to determine if there was a significant difference among the three countries on each factor. A non-parametric test was used because the data is not normally distributed. 83

25 JOURNAL OF AFRICAN DEVELOPMENT One must be careful when generalizing these results, because the surveys were conducted in three urban centers and the sample is dominated by micro and small enterprises. Businesses in rural areas or other regions, as well as larger private enterprises, may not experience the same economic and regulatory conditions and problems. DISCUSSION While many similarities emerged across MSE owners in the three countries, there are also some significant differences in the perceptions of entrepreneurs in Kenya, Ghana and Nigeria. For instance, in comparison to Ghanaian entrepreneurs, Kenyan and Nigerian entrepreneurs believe that finance is less of a major obstacle to their growth/expansion. At the same time, Ghanaian entrepreneurs indicate less concern about safety and security. Ghanaians believe more government support and community/political involvement would enhance their success, while Nigerian business persons seek greater training opportunities. Ghanaian and Kenyan entrepreneurs show more concern about general economic conditions than Nigerian entrepreneurs. Kenyans, on the other hand, indicate stronger concern for the business registration and tax system then their counterparts in Ghana and Nigeria. As discussed earlier, caution should be used when applying these results to larger private businesses or businesses located in rural areas of the three countries. Both Kenya and Nigeria have numerous initiatives to provide microlending to MSEs. Kenya has increased its support for small businesses in the informal sector (referred to as the Jua Kali) by improving access to credit and reducing government interference. The Jua Kali sector currently employs 18 percent of the workforce with the potential to employ millions more. The Kenyan government has increased financial resources through public initiatives such as the Youth Fund, the Kenya Women s Finance Trust and the Women s Enterprise Fund, as well as through private banks such as Equity Bank and Family Bank. (Business Daily, ; The Nation, ) Some banks in Kenya, like Fina Bank, specialize in lending to registered SMEs such as beauty salons, barber shops, garages, printers, etc. Fina has been so successful that it has 84

26 BENZING AND CHU: SMALL BUSINESS OWNERS IN AFRICA expanded across Kenya s borders into Rwanda. As part of its personalized service, Fina offers borrowers free workshops and training each quarter. (Onyango, 2007) The Kenyan government has also established the SME Solutions Center and SME Development Initiatives with help from the International Finance Corporation. Nigeria has provided access to financial capital through various initiatives. Nigeria currently has a plan by which banks pay 10 percent of their after tax profit to Micro Finance Banks (MFBs) for microfinancing. As pointed out by the chief executive of FirstInland Bank Plc, Okey Nwosu, capital is not the major challenge facing SMEs in Nigeria. According to him, infrastructure and inconsistent government policies are much greater problems (Leadership, ). The results of this study tend to support that conclusion. Like Kenya and Nigeria, Ghana recognizes the importance of SMEs to the economy, but has been slower to provide microfinancing through its banking industry. The Ministry of Trade and Industry and the National Board for Small Scale Industries (NBSSI) are working to facilitate small business growth. Ghana has also been working with a number of European countries and the IFC to establish funds for micro-enterprises. Some programs that lend to Ghanaian small businesses are EMPRETEC Ghana Foundation and the Venture Capital Trust Fund. Despite these initiatives Ghana must continue to improve access to financial capital by training banks. Banks need more training to learn how to assess small business loans. Since large banks are more resistant to small business lending, local and/or regional banks that specialize in small lending, like Fina bank in Kenya, might be established to fill this niche. As suggested by Tagoe et al. (2005) the Ghanaian government might also consider setting up credit guarantee programs to reduce the risk associated with SME lending and reduce the cost of screening applicants. Finally, Ghana should increase its use of promotional activities to make sure that business owners are aware of existing and new financing opportunities. Compared to Kenyan and Nigerian small business owners, Ghanaian business persons appear to believe that community and political involvement are more important to their success. Ghanaians may have a greater sense of how community and political relationships can be used to increase and improve 85

27 JOURNAL OF AFRICAN DEVELOPMENT business. Since the Ghana Chamber of Commerce and Industry was created by an Act of Parliament in 1961, it has been lobbying for business interests at all levels of government. The Chamber joined together with the Ghana Employers Association, the Association of Ghana Industries, and the Federation of Associations of Ghanaian Exporters to form the Private Enterprise Foundation (PFE) in Since then the PFE has had some success in influencing government policies and working successfully with international agencies like the UN. Perhaps Kenya and Nigeria s private sector associations have not been as effective, consequently, MSE owners have not seen the benefit of such groups. After independence and until recently, the Nigerian private sector was largely ignored in the development of economic policy (Agboli & Emery, 2005). In response, the Nigeria Better Business Initiative (BBI) was created to develop a meaningful public-private sector dialogue. But, there is still much more work to be done. Recently, Nigeria s Minister for Commerce and Industry worried that Nigeria s private sector was still not effective in articulating its needs to the federal government. He indicated that the private sector had no unified voice to speak and interact with the National Economic Council. (Osagie, 2007) Nigeria s government should continue to engage the private sector and support its organizational efforts. At the same time, the private sector can develop a more effective business lobby by modeling itself after successful organizations in other developing countries. Strong public-private interaction is instrumental to developing pro-business policies and a pro-growth economy. According to the results of this survey, Ghanaian entrepreneurs are less concerned for their safety than Kenyan and Nigerian business owners. Small business persons operating in Nairobi and Lagos have serious safety concerns. Despite increases in the police force, police pay and community policing, Nairobi s crime problem actually got worse during The U.S. Department of State maintains a travel warning against travel to Kenya and indicates that crime in both Kenya and Nigeria are at critical levels. Nairobi s most common crimes are carjacking and armed robbery which often result in the victim s death. Similarly, Lagos suffers from a critical level of violent crime such as carjackings, home invasions and robberies, as well as non-violent crime such as fraud and scams. (OSAC, 2007) Lagos citizens are faced with frequent police checkpoints at which armed police demand cash. Ghanaian crime is in general much lower 86

28 BENZING AND CHU: SMALL BUSINESS OWNERS IN AFRICA than that of Nigeria and Kenya. According to the U.S. government (OSAC, 2007), Accra s criminal activity is similar to the level of inner city crime throughout the United States. Citizens are often faced with street theft, fraud and phony police road blocks, but car-jackings are relatively rare. A generally safe environment reduces business costs by reducing the costs of security and losses related to crime. In addition, a safe environment can increase revenue by permitting retailers and service providers to conduct business later in the evening. The results of this study show that MSE owners realistically assess the safety situation facing them in each of the three countries. In comparison to their counterparts in Kenya and Ghana, Nigeria s small business owners indicate that training is more important to their success. If this is the case, then Nigeria should fund or subsidize more training opportunities. Currently, Nigeria has 86 training and research centers compared to 131 in Kenya. In addition, Nigeria only has 2 development consulting firms while Kenya has 13 (te Velde, 2006). Since Nigeria s population is more than 3x that of Kenya, one might expect Nigeria to have 3x more training centers and development consulting firms. The results of this survey indicate that Nigeria s MSE owners believe that more training would increase their chances of success; consequently, Nigeria needs to make sure greater resources and energy are allocated to training. Although small business owners in all three countries believe the weak economy is their most serious problem, Ghanaian and Kenyan entrepreneurs are more concerned about general economic conditions. This result is supported by some of the economic data in Table I which shows that Nigeria has higher per capita GDP and a lower inflation rate. Both conditions lead to a more favorable economic climate for small businesses. As Ghana and Kenya continue to work with international agencies to promote growth and restrain inflation, this may become less of a concern to entrepreneurs in those two countries. On the other hand, given the recent changes in the global economy and falling oil prices, it is perhaps more likely that Nigerian entrepreneurs will face greater challenges in their domestic economy thereby bringing economic conditions closer to that of Ghana and Kenya. With respect to the business registration and tax system, it is not surprising that Kenyan entrepreneurs believe these are more serious problems 87

29 JOURNAL OF AFRICAN DEVELOPMENT than in Ghana and Nigeria. As shown in Table 1, the total tax rate facing businesses in Kenya is 51 percent, compared to 33 percent and 30 percent in Ghana and Nigeria, respectively. Further, small businesses in Nigeria have a tax holiday during their first six years of operation. As shown in Table 1, the number of days to start a business in Kenya is higher than that in Ghana and Nigeria Finally, Nigerian and Kenyan entrepreneurs in this study are more seriously concerned about governmental regulation than entrepreneurs in Ghana. Both Nigeria and Kenya continue to work toward streamlining their administrative burdens. As suggested by the National President of the Nigerian Association of Small and Medium Enterprises (NASME), Dr. Abugu (World Bank, 2009), the Nigerian government needs to address the multiple tax structure, the high cost of business registration, and excessive collateral requirements. To this end, the Small and Medium Enterprises Development Agency of Nigeria (Smedan), working with the Nigerian government and the UNDP, have been working to develop a strategy for MSME growth. The program has been developing policies in three key areas: the regulatory framework; technology and R&D; and support services. The Kenyan government has also recognized the need to engage in regulatory reform. In 2005 the government began to reduce its redundant licensing system, simplify immigrant work permits and provide a single point of regulatory information. In 2006 Kenya created a Business Regulatory Reform Unit to review all new licensing laws and regulations. As these reforms take place, one would expect an improvement in governmental regulation in Nigeria and Kenya. CONCLUSION According to the results of this survey, MSE owners in three major cities in Kenya, Ghana and Nigeria believe that hard work, good customer service and good management skills are essential for business success. When a factor analysis was applied to the 17 success variables, four factors emerged. The most important success factor is associated with controllable non-managerial characteristics such as hard work, reputation for honesty, good customer service, friendliness and a good product at a competitive price. These aspects of a business are largely under the immediate control of the business owner in 88

30 BENZING AND CHU: SMALL BUSINESS OWNERS IN AFRICA contrast to government support, training and access to capital. Thus, it appears that entrepreneurs in all three countries believe their success is largely the result of their own initiative and abilities rather than forces beyond their control. Entrepreneurs across the three countries differ in some respects with Nigerian entrepreneurs reporting that experience and training are more important for success than Kenyan and Ghanaian entrepreneurs. In contrast, Ghanaian entrepreneurs believe community involvement and satisfactory government support are more important to business success. Looking at entrepreneurs in all three countries as a group, the condition of the economy is the most serious problem they face. Other serious problems are the inability to obtain short-term and long-term capital, the level of competition and unreliable employees. Ten of the 12 problem variables grouped onto four factors with the lack of training factor explaining 18 percent of the variability. It should be noted, however, that the survey did not include questions related to infrastructure problems such as electricity, water, roads, etc. Prior surveys have shown these to be serious problems in all three countries. With respect to their problems, some significant differences among the entrepreneurs emerged. Ghanaian entrepreneurs are more concerned with obtaining credit while Kenyan and Nigerian entrepreneurs are more concerned with safety and government regulations. This study shows that while micro and small business owners in three urban centers face many similar problems and need many of the same things for success, they also exhibit differences across countries. Since countries develop at different rates, have different levels of public-private sector interaction, and different support structures, one would expect the needs of entrepreneurs to differ by country and region. As a result, it is important for policy-makers to establish programs and policies that meet the needs of entrepreneurs by country and specific to the urban or rural area within a country. To do that, they must encourage greater public-private interaction and seek the input of small businesses on a more regular basis. 89

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