An analysis of the competitiveness of firms in fragile and conflict-affected countries in Africa

Abstract

Fragility is evident in various guises for countries spread across the globe. Instability in these countries result from causal factors ranging from conflict to the inability of governments and institutions to perform their mandated functions. This holds especially true within an African context, where the majority of fragile and conflict-affected states (FCS) are located (according to World Bank research). To assist countries in addressing fragility certain aspects of the literature advocated interventions in the economic environment as an avenue to achieve this. Firms are one of the main actors in the African FCS economies through amongst others employment creation, production and exports. By identifying and addressing both barriers to the competitiveness of these firms and constraints inhibiting the likelihood and volumes of exports these firms could make an improved contribution within fragile African countries. This allows a bottom-up microeconomic approach to assist countries in moving beyond fragility. Thus the study focuses on the determinants of firms in African fragile and conflict-affected countries which both constrain their competitiveness and influence their ability to export. Countries in Africa were identified as fragile through the World Bank’s harmonised list of fragile situations, whilst the firm-level data garnered through World Bank enterprise surveys allowed analysis of 14 of these countries. These two focus areas were addressed in two separate articles in this study. The first article studies constraints to microeconomic competitiveness. Porter’s seminal work pertaining to the Diamond of National advantage outlines various forces affecting competitiveness, ranging from demand conditions to related and supporting industries. Literature highlighted certain diverging views around the role of competitiveness, whilst a review of competitiveness reports from the WEF, World Bank and IMD revealed recurring themes within these reports of infrastructure, finance and the labour market. These aspects affect the environment where firms operate. Within fragile countries and specifically African FCS countries the political environment can also significantly impact firms and development, characterised by its instability in fragility and conflict. This necessitates more self-reliance in the microeconomic environment by firms constrained by the political environment especially. As such the empirical analysis in this article ascertains microeconomic competitiveness differences between politically constrained and non-constrained firms in these countries. This is achieved through the application of independent samples t-tests and Chi-square tests for independence. The analysis found practices of competitors in the informal sector, tax administration and an inadequately educated workforce to be constraints related to politically non-constrained firms. Further constraints for these firms included more security costs than politically constrained firms and greater sales losses resulting from a higher frequency of power outages. Conversely politically constrained firms displayed a greater reliance on internal funds for working capital purposes and a higher dependence on credit sales relative to politically non-constrained firms. A variety of barriers exist within African FCS countries which impact firms’ export propensity and –intensity, which forms the focus of the second article. Within these countries this holds true, as highlighted by their low levels of mostly primary exports. Through literature the benefits of international trade to various economic actors were underscored, including aspects such as increased foreign exchange and employment. This was elaborated upon by outlining theories, motives and triggers of internationalisation where firms become more involved in exports. Three groupings of firm-level export barriers were then expounded upon, underscoring the wide variety of barriers which exists to exports. Against the above the empirical analysis in this article investigated the firm-level barriers to the likelihood (or propensity) of becoming involved in exports, as well as the volume (or intensity) of these exports, with a specific focus on African fragile and conflict-affected countries. A Heckman two-step selection model was specified to serve as the above analysis. Aspects displaying a significant negative correlation with export propensity include working capital sourced from retained earnings and credit sales, corruption and firm productivity. Contrarily foreign ownership, firm size and –age, access to a website and email, the utilisation of foreign inputs and notably also an inadequately educated labour force displayed a positive relationship with export propensity. Export intensity displayed a significant positive relationship with firm size, productivity and firms which experience corruption as an obstacle, while firm age was the only variable which was found to have a significant and negative relationship with export intensity. By addressing these firm-level constraints to competitiveness and export propensity and intensity firms are in a better position to both contribute to the economies of fragile states and provide economic alternatives. This could assist these countries in moving away from fragility. Interventions ranging from the development of in-house training to improve firms’ obstacles around an uneducated workforce, the inclusion of foreign ownership in these firms to leverage multinational firms’ expertise and financial backing, as well as the formation of business lobby groups creating groupings that adhere to ethical standards rather than corruption have been mooted amongst others to help address these constraints.