What Makes Some African SMEs More Innovative Than Others?

Small and medium-sized enterprises (SMEs) in Sub-Saharan Africa are vital in driving economic development, but they face significant challenges in innovating. Factors such as weak institutions, limited access to resources, and inefficient infrastructures make it difficult for these businesses to introduce new products or improve their processes. In our recent study, “Dealing with Adversity: Innovation Among Small and Medium-Sized Enterprises in Developing Economies,” we shed light on how these businesses overcome local constraints through international strategies.

Co-authored with Nuraddeen Nuhu (Bridgwater College, Virginia, USA), Mahdi Tajeddin (Sobey School of Business, Saint Mary’s University, Halifax, Canada), and Amon Simba (Nottingham Business School, Nottingham Trent University, UK), the study explains the strategic alternatives SMEs in Sub-Saharan Africa leverage to enhance their innovation efforts when operating in weak institutional environments. 

What Was the Study About?

Our research explores how SMEs in challenging environments innovate by utilising three main international strategies: exposure and learning gained through exporting activities, international quality certifications, and foreign ownership. The study aims to understand how these strategies affect innovation outcomes. That is, how they enable SMEs in emerging economies to introduce new products or improve production processes despite the burden of operating in weak institutional settings.

Data and Methods Used

The study is based on data from the World Bank Enterprise Survey covering 8,466 SMEs across 11 African countries, including Nigeria, Kenya, South Africa, Ghana, and Tanzania. The data spans from 2011 to 2020 and provides insights into business operations, innovation activities, and institutional barriers. We empirically assess how the three international strategies impact product and process innovations. 

Key Insights

Exporting Activities Drive Process Innovation

Exporting exposes SMEs to advanced technologies, global knowledge, and customer feedback. Our study reveals that exporting contributes significantly to process innovations. That is, it helps these businesses to improve their production methods and operational efficiency. These findings are consistent with the “learning-by-exporting” hypothesis, which suggests that firms can gain valuable insights and capabilities by participating in international markets.

Quality Certifications Boost Innovation 

International quality certifications, such as ISO 9001, play a crucial role in enabling SMEs to introduce both new products and improved processes.  These certifications build credibility, reduce information asymmetries, and facilitate access to global markets.  In sectors like agribusiness, such international quality certifications encourage continuous upgrades, leading to innovation while meeting regulatory and market demands.

Foreign Ownership has Limited Impact on Innovation

The study finds that foreign ownership does not significantly enhance innovation among SMEs in Sub-Saharan Africa. This finding may be due to information asymmetries and misaligned goals between foreign investors and local managers. For instance, some managers may prioritise short-term interests over long-term innovation, thereby diluting the impact of foreign investments. 

Implications for SMEs, Policymakers, and Investors

SMEs should prioritise exporting and obtaining international quality certifications to drive their innovation efforts while being conscious of resource limitations. They should build strategic partnerships that facilitate knowledge and technological exchange.

Second, policymakers should strengthen institutions by improving infrastructure, legal frameworks, and access to finance. Additionally, governments in Sub-Saharan Africa should support SMEs by investing more in export promotion programmes to boost their international competitiveness and innovation capacity.

Third, foreign investors should adopt investment strategies that fit the local business environment, ensuring sustainable innovation efforts. They should also work closely with SMEs to reduce information asymmetry, foster more robust partnerships, and promote long-term value creation.

Taken together, our study reveals that exporting and international certifications are effective strategies for driving innovation among SMEs in Sub-Saharan Africa. While foreign ownership has potential benefits, its impact on innovation is not straightforward due to management challenges and institutional voids. In developing regions such as Sub-Saharan Africa, where market-supporting institutions are inefficient, developing international strategies are crucial to SME innovation and sustainable competitiveness.  Our study offers essential insights for policymakers on the need to build strong institutions in order to promote entrepreneurship, innovation and economic development in Africa.