Promoting employment is one of the priorities of the African continent for the coming years. According to the African Development Bank, only 3 million formal jobs are created each year in Africa, while 10 to 12 million young people enter the job market.
Young people often relies on informal activities with low and irregular incomes, non-existent social protection, and little prospect of advancement. This situation could worsen in the face of the demographic challenge ahead. According to United Nations projections, Africa’s population will double by 2050, with a majority under 25 years old. The lack of formal employment could induce social and political tensions in the coming years. To this end, many African governments and donors have set up programs to promote youth employment (youth training, support to enterprises, etc.).
Understanding the drivers of (formal) job creation and business dynamics in Africa is, therefore, a first step to design effective policies. The idea that large firms were small enterprises that have grown fast (also called “gazelles”) is rather far from reality. Rather than gazelles, business in Africa is mostly made up of “mice” (small firms with no real prospect of growth) and “elephants” (large firms with slow dynamism).
Two groups of firms account for the majority of job creation. Entrepreneurship provides a significant part of the new jobs (See two studies, on Côte d’Ivoire and Tunisia) . When a new entity emerges, it creates at least on job (for the entrepreneur). Despite their number, these new jobs are fragile. New firms have a high failure rate in the first years (job destruction is also mainly explained by the disappearance of these entities and high level of job creation is due to churning). The second group of job providers is the high-growth firms (HGFs or “gazelles”). Indeed, only a handful of HGFs experience growth and create jobs, while the majority of firms stagnate.
Consequently, many efforts have been dedicated to identify and support HGFs. Academic research both in developed and in developing countries underlines the difficulty of identifying future gazelles ex-ante (even using big data). HGFs do not a priori differ from their counterparts in their observable characteristics (sectors of activity, initial size, etc.).
Another question, albeit related, concerns the future of HGFs after a period of rapid growth. Indeed, detecting HGFs supposes that these firms will continue to grow in the future (and therefore continue to create jobs). In a recent study, we have tried to distinguish between “gazelles” (which run fast and for a long time) and “cheetahs” (which run out of breath quickly) among HGFs. Our analysis focuses on formal firms in Senegal. Senegal has the advantage of having a politically and economically stable environment. This stability allows firms to grow without suffering from external shocks (unlike the next countries dependent on natural resources or subject to political instability). We exploit the register of all formal firms operating in Senegal.
Analysis of the data reveals an inability of Senegalese companies to sustain their growth over several years. Only 15 percent of HGFs continue to grow fast after observing an episode of rapid growth (gazelles). The other HGFs have either stagnated or experienced a decline in activity (cheetahs). It emerges that these HGFs are more likely to see their activity decline sharply than to continue to grow at a high rate. This result is in line with researches on European companies, which has highlighted the difficulty of HGFs in maintaining their growth.
In a second step, we investigate whether it is possible to identify factors that may explain why some HGFs maintain their growth while others decline. In particular, we hypothesize that firms combining rapid business growth with higher profits or better productivity are more likely to continue to grow. Better performance may help these companies to spur future growth directly (financing of the business) or indirectly (signal effect on potential customers, suppliers, banks, or employees). Moreover, the combination of rapid growth and better financial performance can underline that these entities have something extra (inherently better performing). Nevertheless, our empirical analysis highlights that neither profitability nor productivity explain why some HGFs continue to grow while others decline or stagnate.
This work shows the difficulty of distinguishing among high-growth firms, “gazelles” (which are capable of running fast and for a long time) from “cheetahs” (fast but over a short period of time). Improving our knowledge of business dynamics remains on the research agenda if we are to improve public employment policies.