www.IFC.org/ThoughtLeadership Note 8 | September 2016 HOW TO STIMULATE INNOVATION BY AFRICA’S PRIVATE SECTOR Governments in advanced economies have historically helped spur commercial innovation, particularly as a result of spillovers from defense related research and development. In many emerging markets, however, government lacks the resources or capabilities to do so. In Africa, as in other emerging markets, this has created an opening for private firms to drive innovation. By applying advances in technologies, businesses are enhancing productivity and growth across the continent. In recent decades, government policy has played a significant role In particular, businesses in Africa have become a major catalyst in the development of new technologies in advanced countries. for innovation-led growth and economic development. Governments in these countries have invested heavily in basic Companies across the continent are developing inventions or new research and development, especially in defense spending. That applications of technical knowledge, adopting existing investment has led to the creation of commercial products and technologies from other countries wholesale or modifying services, driving overall economic growth.1 existing technologies to make them commercially viable in African markets. These innovations are not just commercially In 2011, government was the second largest source of basic viable, but in many countries also meet development needs across research funding after the private sector in five of the seven top the continent, addressing both private and social objectives. research and development spending nations—the United States, Japan, Germany, France, and the United Kingdom. In the United Looking at the continent’s success stories, several areas emerge States, for example, federal spending on research and where innovation in Africa can meet both commercial objectives development increased every year from the late 1990s through and development goals, including enhancing labor productivity, 2010, with defense accounting for more than half of U.S. annual boosting economic growth, and reducing poverty. federal research and development spending.2 CREATING ECONOMIES OF SCALE In addition to funding, governments in advanced countries have Africa is composed of numerous small, separate, yet contiguous, created strong incentives for innovation through policies such as markets. Historically, individual governments have integrated the legal protection of intellectual property. Such protections, neighboring markets by negotiating trade agreements to create which include patents and product standards, are critical for regional economic communities. Even without regional trade technology development at firms of all sizes. areas, however, businesses can combine operations across borders under a common corporate structure. A transnational structure can By comparison, governments in most emerging markets lack the allow a company to create its own economies of scale and can technical and administrative capabilities, as well as the human and foster regional exchanges that might normally be a challenge in financial resources, to play such a significant role in spurring Africa because of weak regional integration. innovation. While some emerging-market governments are starting to establish pro-business policies such as patent These economies of scale can be created by technology protections, they aren’t yet widespread or deep enough to foster development initiatives: in manufacturing, for example, with the economic growth. The result is greater economic space for production of portable solar powered electric chargers; in domestic and foreign companies to take the lead in financing new infrastructure, using drones to enable remote medical testing; or businesses and driving innovation. in the provision of services, with pay-per-view, customizable PURSUING PUBLIC-PRIVATE PARTNERSHIPS educational curricula tablets or multi-lingual call centers. Commercial investments in Africa and other emerging markets that bring together private and public objectives increasingly offer HARNESSING ECONOMIES OF SCOPE an opportunity for businesses to rebalance and reduce risk Co-locating businesses in complementary sectors has enabled a exposure to their proposed undertakings. And firms have number of emerging markets to grow through economies of scope. effectively used these partnerships to cut costs and boost revenue. In Thailand, for example, a cluster of automotive companies has significantly contributed to the country’s gross domestic product Partnerships between public and private players can lower input earning it the moniker “the Detroit of the East.” 3 costs, improve supply chain management, and generate economic and social multiplier effects in local markets. They can help While such clusters are usually in manufacturing, it is also businesses grow, raising incomes of people in the region where possible to establish services clusters. In Africa, where they are based, and promote economic development. manufacturing is still in nascent stages, service industries initially seem to be the best candidates for business hubs. PPPs can also experiment with new forms of finance, such as the use of advance payments, vouchers, output-based aid, and Some business hubs in Africa are starting to emerge, but they are blended finance. Businesses operating or seeking to operate in largely still sector-specific, rather than bringing together Africa that utilize such innovative forms of partnering and businesses across sectors. For example, health-related knowledge financing are likely to reap private gains that otherwise would be clusters are emerging in South Africa and mobile technology- elusive. The ‘pay-as-you-go’ solar panel distributed energy related services clusters have emerged in Kenya and Rwanda. service industry in Africa is an example of an industry that is experimenting with different financing models. Whether in services or in manufacturing, innovations that propel cross-sector clustering in Africa will be important both in terms CONCLUSION of economic development and social progress. They will not only Africa has a number of specific attributes that create openings for help businesses achieve commercial success, but will have the private enterprises of all types to advance technology and drive potential to deliver social change by spurring economic growth growth, including a deficit of skilled workers, geographically and job creation. The growing ‘pay-as-you-go’ solar energy fragmented national markets, a growing consumer class with industry, for example, has created prosperous businesses while increasingly discerning purchasing habits, and a large endowment helping people in Africa gain access to reliable energy supplies. 4 of underdeveloped or poorly developed natural resources. TECHNOLOGIES THAT BOOST PRODUCTIVITY While private firms in Africa and other emerging markets have a Throughout much of the world, investments in innovation tend to major role to play in boosting innovation, governments need to focus on labor-saving technologies to lower labor costs and raise support the sector with business friendly policies. They can productivity. Conditions throughout much of Africa are starkly promote innovation, for example, by developing and enforcing a different—not only is there a tremendous excess of labor, but rules-based institutional framework that protects property rights many workers are also largely untrained, under-trained, or ill- and sets standards and incentives for risk taking. By promoting trained. The high unemployment rates that result from excess private sector growth, countries can also meet social objectives labor pose a potential security threat to the quality and stability of that improve the living conditions of all of their residents. the continent’s business environment. Harry G. Broadman, is CEO and managing partner of Proa Global Partners LLC, an emerging markets-focused business strategy advisory However, because of Africa’s relatively low labor costs, consultancy and a member of the faculty at Johns Hopkins University. especially when compared with China, businesses across the Previously he worked in private equity, multilateral finance, international continent can use new innovations to employ and train these trade and investment negotiations, corporate governance restructuring, workers. The manufacturing of multilayered crop and seed and anti-corruption reform. protection storage bags, for example, has employed workers in (hgbroadman@proaglobalpartners.com / hgbroadman@jhu.edu) Zambia and Tanzania. Such innovations help boost agricultural productivity, while creating new manufacturing jobs. 1 Ben S. Bernanke, “Promoting Research and Development: The Government's 3 “Thailand’s booming car industry: The Detroit of the East,” The Economist, April 4, Role,” Federal Reserve, May 2011. 2013. 2 National Science Board, “Science and Engineering Indicators 2014,” February 4 Omar Mohammed, “Pay-as-you-go solar power is bringing electricity to more 2014. people in rural East Africa,” Quartz, January 8, 2016. This publication may be reused for noncommercial purposes if the source is cited as IFC, a member of the World Bank Group.