Business Environment, Innovation and firm Performance in Africa

Abstract

This thesis examined the effect of different aspects of business environment and innovation on firm performance in Africa. It employed micro-level data set (World Enterprise Survey, 2013) from a sample of 9,019 firms and used eight econometric regression techniques in the empirical estimations: Stochastic Metafrontier, OLS, standard IV, Lewbel 2SLS, ESR, probit, PSM and dominance analysis. Using the stochastic meta-frontier efficiency estimation approach, evidence is adduced to show that firms in Sub-Saharan Africa on the average are more efficient than their counterparts in the Maghreb Africa area and also operate closer to the best technological frontier than the Maghreb firms though the efficiency levels in all the sub regions are found to be very low. However, firms in all the two regions operate under increasing returns to scale suggesting that they are functioning within the first stage of production and not utilizing the most optimal combinations of inputs available to them. There is, therefore, room for firms in the two regions to improve their efficiency by reducing their long-run average costs. The empirical estimation of the relationship between the business environment and innovation on firm efficiency conditioned on firm characteristics showed that business environment and innovation independently and positively enhance firm efficiency but their combined effect is greatest. Empirical results also suggest that efficiency significantly influence capacity utilization, sales, and exports, though in varying degrees. From a policy standpoint, governments in Africa are encouraged to strive to create the facilitating business environmental conditions which motivate firms to innovate, and also adopt more modern production technologies to be able to scale up their efficiencies. Firms must also be encouraged to employ appropriate innovation strategies to achieve specific performance objectives.