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Industrial Clusters and Micro and Small Enterprises in Africa
for success of the business. Ramachandran, Gelb, and Shah (2009) find that indigenous African entrepreneurs with a university education tend to start their business as a larger enterprise and that these enterprises remain larger than those of owners without a university education. In addition to these two variables, several other factors need to be considered in analyzing the performance gap between foreign and domestic enterprises in Africa, one being capital intensity of production. Capital intensity of production is the measure of a firm’s use of physical capital, such as machinery and equipment, relative to labor. More use of machinery and equipment per worker increases output per worker because machinery and equipment replace part of the manual labor of workers. Capital intensity also corresponds to the level of technology in production. Therefore, more intensive use of capital may also indicate that an enterprise is producing a higher-quality product. Access to finance affects the investment patterns of enterprises and thus their ability to obtain physical capital. Limited access to finance among micro and small enterprises in Africa constrains their investment in physical capital. In addition, market risks discourage them from investing in new assets. Gunning and Mengistae (2001) argue that investments in African manufacturing have been held back by high risk rather than low returns on investment. Access to markets beyond local markets is another critical factor that facilitates higher productivity at the enterprise level, regardless of whether the larger market is national or international. Access to larger distant markets increases the volume of sales and, hence, raises productivity by creating economies of scale; it also provides incentives to expand production capacity. Also, as is discussed in the various studies that have looked at the relationship between productivity and exporting, enterprises increase productivity by exporting, gaining new knowledge and skills from serving overseas customers who have more diversified tastes than domestic customers, and from competing with a larger number of producers. This is often called the learning-by-exporting hypothesis.3 A similar story applies to national domestic markets, where enterprises face potentially more competitors than in local markets and more diversified tastes among customers, particularly among micro and small enterprises (see figure 2.1). The following section analyzes the foreign-domestic gap in labor productivity in two ways. First, it looks at how much domestic or foreign ownership explains the level of productivity of individual enterprises. Second, it systematically decomposes the foreign-domestic productivity gap into the following factors: access to finance, education level, market access, capital intensity, and size.