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28 Jan 2022

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Africa’s digital transformation needs more startups and more funding

With hot spots like Nairobi and Lagos and success stories like Mpesa (mobile payments) and Jumia (retail), the digital economy in Africa is on the rise. However, a new World Economic Forum report titled 'Attracting Investment and Accelerating Adoption for the Fourth Industrial Revolution in Africa' argues that more needs to be done because Africa still lags behind other regions of the world.

1.7 million jobs

Although startup investments have grown sixfold in five years, with 1.2 billion dollars invested by 2020, the amount of total investments is very small in comparison to other parts of the world.

The Forum's report was written in collaboration with Deloitte. The report was published just weeks after Google announced a $1 billion investment to support digital transformation across Africa, including the installation of a new subsea cable between Europe and Africa. This is expected to increase digital capacity by 20 times by 2025 and create 1.7 million new jobs, the report states. By mid-decade, the region's digital economy could generate nearly $180 billion in revenue. Yet, only 39% of Africans use the internet, making it the least connected continent in the world.

Unicorns

Start-ups such as Kenya's Mpesa mobile money solution and online retailer Jumia, Africa's first unicorn, demonstrate the potential of Africa's small business sector. At the same time, Africa invested just 0.42 percent of GDP in R&D in 2019, compared to the global average of 1.7%. Additionally, only 14 of the 188 business incentives in 32 African countries facilitate investments in Fourth Industrial Revolution technologies. Most of these incentive programs lack an efficient system for gauging their effectiveness.

Learning process

African governments can learn a lot from one another, the report states. For example, Côte d'Ivoire has created a tax incentive for R&D to direct investment away from commodities and toward innovation. In order to achieve the 60% local content goal set by the Automotive Production and Development Programme (APDP), the largest manufacturers in South Africa created a fund to facilitate the development of a diverse supplier base. Tunisia offers state salaries for three startup founders per company during the first year of operations, with the right to return to their old jobs if the venture fails.

Recommendations

Three policy enablers are identified in the report. Pass legislation such as 'Start-up Acts' to encourage innovation in the private sector, reduce regulations, and promote entrepreneurship, as Tunisia and Senegal do. Include incentives for start-ups in legislation, such as start-up grants, rebates on technology implementation efficiency gains, co-investment in critical infrastructure, and tax-free operations in the early years. Only 2% of Africa's university-aged population holds a STEM degree (science, technology, engineering, mathematics). The report recommends investments in educating and training the workforce.

Photo credit: Harshil Gudka

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