Less than a quarter of African businesses use sophisticated digital technology intensively, finds IFC

Less than one in four African businesses use sophisticated digital technology intensively in their operations, despite evidence that use of digital technology is positively associated with business productivity, according to a report from the IFC.

Evidence based on nationally representative data from Burkina Faso, Ethiopia, Ghana, Kenya, Malawi, and Senegal shows that 86% of firms with five or more workers have access to one or more digital enablers, such as mobile phones, computers, or the internet.

But 23% of digitally enabled firms do not adopt digital technologies for productive tasks, such as business administration, planning, sales, and payments, while 39% of firms adopt digital technologies for those functions, but not intensively. On average, only 24% of firms make intensive use of the most sophisticated digital technology they adopted in a business function.

The report lists several ongoing barriers to digital integration. The research finds that machinery and equipment, both digital and analogue, are 35–39% more expensive in Sub-Saharan Africa, in absolute terms, than in the United States, and 13–15% more expensive in North Africa. Other factors that complement technology adoption, such as digital infrastructure, electricity, and specialised high-skilled workers, are also relatively scarce and expensive in Africa, compared to other regions in the world.

There is also a lack of funding for African businesses, with the report finding that firms in Africa experience a greater rejection rate when applying for loans to carry out technology upgrades than those in other regions.

Another barrier for integration is digital literacy. “(In Africa) we need the software engineers, the IT specialists, maths and science graduates. There is a scarcity of people in these industries which constrain development,” Susan Lund, IFC’s vice president for economics and private sector development, told African Business in an interview.

Infrastructure is another perennial issue. The World Bank estimates that half of Africa’s population – some 600 million people – lack access to electrification. There are positive developments on the infrastructure front, however, with the report highlighting that the arrival of new submarine cables in Africa is projected expand access to internet, and lower the costs of broadband internet for many Africans.

IFC estimates suggest that this expansion of connectivity could lead to a 10–11% annual drop in the price of broadband internet below the historical trend. Yet to reduce prices and increase the number of connections among new users, up to $6bn of investment in middle and last-mile infrastructure is required annually.

The report suggests that there is a crucial role for governments in Africa to play, in order to address these problems. One of them is to implement regulatory reforms promoting competition and a level playing field for business so they can attract investments and encourage foreign participation.

A major opportunity

The study finds that over 600,000 formal businesses and 40 million microbusinesses in Africa could substantially benefit from digital processes and services, highlighting a vast market for digital services, platforms, and infrastructure development. Africa is also the fastest growing region for startups in the world.

“We find that at every step of digital integration, businesses become more productive, revenues grow faster, the business employs more people, pays higher wages, so when you think about long term growth and bringing people out of poverty, digital adoption is really important,” Lund says.

The report says that the overall economic effects of firm digitalisation might be limited if not expanded to microbusinesses and informal businesses, which account for most employment in Africa. 7 in 10 African workers are self-employed, and the bulk of employment is informal.

If all formal firms with the predicted market potential to upgrade to advanced digital technologies were to do so, the gain would be limited to 7% of all formal workers in Africa. If micro and informal businesses were to upgrade, about 15% of all workers could gain access to some form of digital technology for productive tasks.