Business environment and productivity in Africa: macro evidence

Abstract

Purpose Africa's business environment (BE) is characteristically unfriendly and poses severe development challenges. This study evaluates the impact of business climate on productivity in sub-Saharan Africa (SSA). Design/methodology/approach Macroeconomic data for 51 sub-Saharan African economies from 1990 to 2018 are employed for the analysis. The seemingly unrelated regression model is used to address inter-sectorial linkages. Findings The study uncovers several findings. First, a high start-up cost substantially leads to productivity losses by limiting the funds available for investment in productivity-enhancing labour and technology and limiting the number of businesses that see the light of day. The productivity impacts of start-up costs are most enormous for industry, followed by services and agriculture. Second, economies with favourable financing environments tend to be more productive economy wide and sector wise. Third, high taxes and tax inefficiency lower productivity by reducing the resource envelope of firms, thus lowering investment amounts. Fourth, poor business infrastructure inflicts the most damage on productivity. Lastly, business administration and macroeconomic environments impact sectoral and economy-wide productivity. Practical implications SSA economies must strive to lower the cost of starting a business as high start-up costs injure productivity. One way of reducing start-up costs is to create a one-stop shop for registering and formalising a business. Another way is to automate business registration and administrative processes to reduce red tape and corruption. Originality/value The authors extend the body of knowledge by analysing sectoral and economy-wide productivity effects of various business climate indicators while accounting for inter-sectoral linkages, cross-sectional dependence and endogeneity.