The challenges facing entrepreneurs in Central Africa were vividly described in a recent article in the newspaper Iwacu (here). Although the businesspeople interviewed are Burundian, similar problems occur across the border in the Democratic Republic of Congo (DRC). The challenges described are the lack of customers, the lack of public support for new entrepreneurs, the number of documents required to bid for public contracts, and above all, the lack of finance. Here are the words from one of the entrepreneurs interviewed:
“Founded two years ago, Edaco, a company specialising in architecture and construction, is nearly “fictitious”. It doesn’t have a physical address… It hasn’t hired anybody.
Prechore Nsabiyaremye, general manager of this business,… has been disillusioned. “I had created this business to compete for government contracts.” It’s an objective that he still hasn’t reached. His company can’t bid for government contracts as a business. It doesn’t have sufficient financial guarantees and experience. Where the trouble comes from, he says regretfully, is that no financial institution will agree to grant credits to new companies without a mortgage. Since 2016, he has won no contract.”
Source: http://www.iwacu-burundi.org/des-entreprises-et-emplois-fictifs, with my translation from the French.
Potential investors can have a number of concerns that make them reluctant to invest in an entrepreneur’s project . One concern is that the investment returns are likely to be highly uncertain, so that it is difficult to value the investment. Another concern is that the investors probably know less than the entrepreneur about the planned project, so that the entrepreneur could secretly act against the investors’ interests. Concerns about limited project information and anti-investor activity may be particularly acute in the DRC, where it is often difficult to collect information about companies or entrepreneur behaviour. It will also often be difficult for investors to ensure in law that entrepreneurs don’t act against the investors’ interests, due to difficulty in legal access and enforcement.
Potential investors are more likely to provide finance if their concerns are calmed. The entrepreneur can help to calm their concerns by doing a number of things. The entrepreneur can start by giving more project information to the investors. The information could be a business plan or detailed financial and organisational information. Such information could be released initially, or during the life of the project perhaps with extra investment being released if the information is good. The entrepreneur could also give evidence of their past successes or their skills for running the business, as well as of the skills and suitability of other people and organisations connected with the business. Additionally, the entrepreneur could look for finance from investors with whom they have worked in the past, or with whom they have social ties, since such investors are likely to know more about the entrepreneur, and their abilities and ideas.
A problem with disclosing information about the project is that the investors could use the information to undertake the project without the entrepreneur. However, if the project is small, has low or moderate profitability, or is difficult to implement, then the chance of the investors acting alone is reduced as the incentive for them to undertake the project is reduced. The entrepreneur could also avoid disclosing detailed information on how to run the project, at least before its start.
The entrepreneur could also give potential investors more control over the use of their funds, if they choose to finance the project. If the investors have more control, the entrepreneur cannot easily act against their interests. The entrepreneur could invite the investors to participate in the management of the project, perhaps as non-executive directors. Investors will probably only be interested in participation if the project is quite large. The entrepreneur could also give investors control over some business activities, such as asset sales, which could make the entrepreneur richer at the expense of the investors. Additionally, the entrepreneur could agree not to do certain things, such as selling assets or expanding the business rapidly.
There are some problems with transferring control to investors. One problem is that it can leave the entrepreneur with a reduced role in the business, even though they are likely to be its most knowledgeable and committed supporter. Another problem is that it can be difficult or expensive to enforce legally the transfer of control, particularly in the DRC where the government has limited jurisdiction over part of the country. An entrepreneur’s reputation and experience is likely to be important for showing investors that the entrepreneur can be trusted to do what they say.
The entrepreneur could also help to calm investors’ concerns by reducing the investors’ exposure to risk. If investors are less exposed to risk, then concerns about limited project information and anti-investor activity may be less important to them when deciding whether to finance the project. The entrepreneur could offer the investors some protections against risk. One type of protection is guaranteed repayment of funds before other creditors are paid, if the business closes. Another type of protection is transfer of ownership to the investors if performance targets are not met. A further type of protection is repayment of funds with a fixed additional amount after a certain time period – in other words, funding through debt, rather than through equity or something else that pays an amount linked to profit.
There are problems with reducing investor risk, both for the entrepreneur and investors. One problem is that if investors are given extensive protections, then any uses of their funds which threaten the protections become unsuitable, so the funds can’t be used for many business purposes. A second problem is that it is impossible to anticipate all potential threats to investors’ funds, so that the investors will always be exposed to some risk even if they are offered protections. A third problem is that it may be difficult to enforce in law any protections promised or written in a contract. A fourth problem is that if debt funding is used, then the investors may still be exposed to risk. The entrepreneur will receive any profit or loss from the business after debt repayment. If the entrepreneur’s potential loss is limited (for example, if their business has limited liability), then they may choose riskier business strategies that increase the expected profit or loss, but decrease the chance of repaying their debt. The risk faced by the investors would have a different form, but would still be there.
Table 1 summarises actions that an entrepreneur can take to increase their chances of getting finance, organised by their aim. An entrepreneur who takes these actions is not certain to get funds, but it’s more likely.
Table 1: Actions that an entrepreneur can take to increase their chances of getting finance
Aim: Reduce investor uncertainty
1. Give information about the project to the investors, either initially or during the project life
2. Give information about the entrepreneur’s skills or experience in running a business
3. Work with investors who have worked with the entrepreneur in the past
4. Work with investors who are socially connected to the entrepreneur
Aim: Reduce investor concerns about acting against their interests
1. Invite the investors to participate in project management
2. Give the investors control over specific business activities which could be against investor interests
3. Agree not to do specific business activities against investor interests
Aim: Reduce investor exposure to risk
1. Guarantee that the investors will be repaid before other creditors, if the business closes
2. Guarantee to transfer the business to the investors if performance targets are not met
3. Ask for debt funding, rather than equity funding (this action changes the form of investor risk, rather than removes it)
. The analysis here follows the book Shane, 2003, “A General Theory of Entrepreneurship”, chapter “Resource Acquisition”.
Companies in the Democratic Republic of the Congo (DRC), like companies everywhere, often benefit from innovation. Innovation is making or doing something new, and then trying to get money or a benefit out of the change. Some examples are shown in Table 1. They could also be considered as examples of entrepreneurship, the process of setting up a new business, which is closely linked to innovation.
Table 1. Examples of innovation
There have been many studies of things that increase a company’s innovation. Most of these apply just as much in the DRC as in other countries. For example, the textbook “Managing Innovation” (written by Tidd and Bessant) discusses seven features of a company which can increase innovation. They are listed in Table 2.
Table 2. Features of a company which can increase innovation
But what about things that influence innovation more in the DRC than in other countries? One way of finding them is to look at the special circumstances that apply there, and then see what things would be particularly influential in those circumstances. It’s an approach that I’ll use here. I’ll start by looking at influences linked to the special demand circumstances faced by Congolese innovators, before looking at influences linked to their special working circumstances.
Influences on Congolese innovation linked to special demand circumstances
Congolese innovators can aim to meet growing domestic demand. The DRC has a moderate to high growth rate in personal income by the standards of developed countries, and the population is growing quite quickly (link). As people become richer and the population larger, demand for different types of goods is likely to emerge fairly quickly. It’s important for a company to innovate fairly quickly as well, to meet the emerging demand. Some features of a company which can accelerate innovation are mentioned in Table 3. Additionally, a quick and readily available source of ideas is the goods sold in richer countries. If a company monitors goods sold in medium-income and rich countries, then it could copy or adapt them, saving some money on idea search and market analysis.
Table 3. Features of a company which can accelerate innovation
Congolese innovators can aim to adjust to disruption to demand in domestic markets. Markets in eastern parts of the DRC are vulnerable to disruption due to military activity. Demand for goods may rise or fall considerably at short notice, for example as physical markets are destroyed, or as refugees arrive. A company should be able to innovate quickly to meet this demand, and we have already discussed how some company features can accelerate innovation (the list is in Table 3). A second approach is to produce flexible innovations, which have many different uses, or which can be adapted to a different purpose without much difficulty. A third approach is to ensure flexibility in the innovation process, by selecting ideas, processes, and technologies that may be used to produce different innovations. A fourth approach is to make innovations and use processes which can be transferred easily into different markets. For example, if an innovation is produced mainly by human skills rather than heavy machines, it is easier to transfer into a different market.
Congolese innovators can aim to meet growing international demand for goods. Export opportunities are opening for DRC companies, as incomes rise around the world. There may be also less competition in the production of some goods, as production costs rise in industrialising countries. A company should be able to innovate to meet this international demand. What seems important here is being aware of international opportunities, and being able to take advantage of them. A company could monitor international marketplaces (for example through online retailers) for goods that it could produce at a competitive price. It could also maintain links with international companies known to sell or use their goods.
Congolese innovators can also aim to overcome geographic and military barriers which constrain demand. The transport links between different parts of the DRC are often limited, restricting access to markets by companies based outside those markets. The access problem is worsened by military action in the East, which can hamper free movement of goods and people there. A company should be able to produce innovations that can overcome these barriers. It could produce innovations whose production could transfer easily to the region where the demand is, which would require the company to establish relationships with manufacturers and retailers in those regions. Alternatively, it could produce more intangible innovations, such as computer programs or new types of services.
Influences on Congolese innovation linked to special working circumstances
Now I’ll look at influences on Congolese innovation that are linked to the special working circumstances in the country. To start, Congolese innovators can aim to adjust to disruption to their working environment. The innovative process may be disrupted by military activity, particularly in the east of the country. One way of handling the disruption is to innovate quickly, so there is less time for disruption to occur – we have already discussed how innovation may be accelerated by some company features (with the list in Table 3). Another way is to ensure that the innovation process requires few physical assets, and proceeds in clear, self-contained stages, so that the innovation process can be temporarily suspended or transferred somewhere else if disruption occurs.
Congolese innovators can also aim to overcome geographic barriers which hinder their innovation. Geographic barriers, whether due to restricted transport links or military action, can prevent the innovator getting information and ideas from outside of their region. They can also prevent them from using the best partners for developing the innovation. An approach to overcoming the geographic barriers is to make heavy use of online communications for meetings, networking, and the innovation process in general. Another approach is to maintain the largest possible network of information sources and potential innovation partners, so that any available information and opportunities can be used.
In summary, many of the things that can increase innovation in DRC companies are the same as in companies in other countries. However, some things have stronger effects in the DRC, or are mainly suitable there. Table 4 summarises the actions that a DRC company can take to increase innovation. They need to be supported by evidence from DRC companies before they can be considered recommendations, so at the moment they are just my first thoughts.
Table 4. Actions that a DRC company can take to increase innovation
A business forum, the Katanga Business Meeting, was held last month in the city of Lubumbashi, in Haut-Katanga province, South Eastern D.R.C (link). The aim was to allow businesses to meet and form commercial links with each other. 130 companies attended, from sectors including agriculture, services, mining, and energy.
Such forums are a good idea. They can help companies to identify and assess the feasibility of business opportunities. They can help companies to access resources required to realise those opportunities, and to find potential partners, suppliers, and customers. They can help companies to assess demand and potential competitors, and to decide on the best strategy to enter a market. They can help companies to find goods and services that make their operations perform better.
Given all these potential advantages, how can an organiser prepare a forum to achieve them? A forum is more likely to bring advantages if it engages a large number of companies, and facilitates communication and opportunity identification between them. So an organiser would want to make detailed preparations that promote engagement and communication . Here’s what I’d do.
The first thing I’d do is contact as wide a cross-section of companies as possible and let them know about the forum. If more companies are involved, the forum’s impact is likely to be bigger. So I would use telephone directories, tax records, business organisations, business networks, and expert knowledge to identify and contact companies. Advertising in business publications would be useful. I’d also advertise in more general newspapers, both to contact those companies not reached by business publications, and to attract potential businesspeople who have not yet established a company – a nominal entry fee may ensure that forum participants are committed to business. A well-publicised forum website would also be useful, giving information about the forum. I would also encourage involvement by stating that the forum has support from prominent business associations, government, and international organisations. Stating that many other companies will be attending can influence companies to attend themselves. I’d also look at whether broadcasts or internet conferencing could be used to link to companies whose representatives cannot attend in person.
The next thing I’d do is hire people who are familiar with the companies and their business, or who can learn about them. Such people can act as “brokers” or “go-betweens”, connecting companies who may not be aware of each other. Their knowledge can be used to arrange group or bilateral meetings between companies with common features, or to provide information to participating companies, or to arrange communications whether in print or on the internet. The brokers may also be able to resolve any difficulties between companies, if the brokers have negotiating skills or can acquire them.
The third thing I’d do is explain before the forum what companies can do when they arrive. Letting companies know in advance allows them to prepare, and makes the interactions at the forum more effective. So I’d tell companies that they will meet other firms from their own and other industries, and that they can swap product samples, leaflets, and business cards. I’d also tell them that they can exhibit and present publicly.
The fourth thing I’d do is arrange the seating, spaces, and timetable in the forum so that company representatives can meet and move on quickly. The more meetings a company has during the forum, the more likely it is to identify business opportunities, partners, or suppliers. Company tables and stalls could be positioned close to each other, perhaps side-by-side so that representatives can move from company to company with few omissions. I’d suggest that initial meetings would be limited to a few minutes, with opportunities for further discussion in subsequent open meetings or at lunch. Sessions could be held for companies from different regions and industries, and on different topics of business interest. These sessions would increase the range of company interaction.
The next thing I’d do is distribute information about the region, industry, industrial specialisation, and product range of each company, together with contact information. A company will often be interested in opportunities where it can use its existing knowledge and skills, and such opportunities may arise from observing and cooperating with firms with which it shares some features. Recognising local suppliers and clients may allow companies to reduce costs, as business with local partners will have lower transport expenses, which can lead to large savings in a region where transportation is difficult. Indeed, without finding a local supply chain, a business may never get going. Additionally, if companies are aware of other firms with shared features, they can form lobby groups to protect their interests.
The sixth thing I’d do is encourage companies to talk about their work. Discussion of work can stimulate ideas and collaboration. I’d ask companies to give public presentations for five minutes about their products, organisation, and goals. Companies could provide samples of their work, and describe how they can assist other firms. Companies could also describe any problems that they have, so that potential partners or contractors can work to solve them. Open meetings could discuss topics of interest to some or most businesses, including electricity supply, regulation, taxation, and technology.
The seventh thing I’d do is promote contacts between companies after the forum ends. Companies could be encouraged to exchange business cards during the forum, and enter their names in a database available to other firms. Some of the forum employees who know about the companies and their business could continue to work temporarily after the forum ends, connecting companies who want to find partners, suppliers, or clients. The employees could also collate and summarise information given during the forum, which could help companies cooperate in future, and which could be a commercial product in itself.
1. Some academic studies have looked at preparations used in other forums and similar networks, including (in English)
Jack et al. (2013) An entrepreneurial network evolving (link)
Lockett et al. (2013) Motivations and challenges of network formation (link)
and (in French)
Chabaud et al. (2003) Les incubateurs d'entreprises innovantes (link)
There’s a new platform to promote investment in DR Congo from the United States, as well as import and export between the two countries. The platform is called Easy Commerce USA-RDC (website (still being built); facebook), and is run by the Association of D.R.C. Entrepreneurs, which has the objective of entrepreneurial promotion and development. One part of the platform is called Easy Profile, which was described by Ted Mvutu, the Association’s president, in a recent radio interview:
“We have planned the program called Easy Profile, which creates a virtual professional profile of a Congolese entrepreneur who is going to attract foreign investors who come to invest in the D.R.C.
“The investors who are coming to the D.R.C. have to find a platform of entrepreneurs organised so that they contact directly operators corresponding to their projects. In this profile, we put the identity, the sector of entrepreneurial activities, and we are going to connect these factors to the U.S. Department of Commerce to facilitate the task of American investors who want to come to the D.R.C.”
(Ted Mvutu. The text is my translation from the French)
A business directory of “Easy Profiles” could bring in two types of investors. One type of investor could bring foreign direct investment (where a business is established in the D.R.C. and (at least partially) owned and run by the U.S. company), while the other type of investors could bring finance investment (where a business run by Congolese entrepreneurs is financed by U.S. money). The encouragement of each type of investment would require a different emphasis on information provided by Easy Profile, and I hope that the Association specifies their own plans in more detail prior to starting the activities. As the President of the Association says that U.S. investors can contact local entrepreneurs, instead of being contacted, it seems more likely that they will be bringing foreign direct investment rather than finance investment.
Foreign direct investment could benefit from the Easy Profile business directory in at least two stages: the search for new business ideas, and the acquisition of resources to realise an idea. When considering whether to set up a new business, an entrepreneur will typically search for business opportunities from numerous sources, and show some flexibility in the opportunities that they will pursue. Under foreign direct investment, the flexibility will typically be reduced, as the investor will be likely to have clearly identified production aims coordinated with other companies owned by the investor. However, it is possible that local ideas and expertise may influence the details of the investment, for example if resources used in other countries are not readily available in the D.R.C., or if the best human resource management practices differ in the country. Within a directory format, it may be helpful to include a section where each company could write freely about anything it considers important. For example, it could describe the products it offers, or why it could offer something unusual, or any ideas it has for new products and services. It could also give opinions on current Congolese business conditions and markets. Easy Profile could translate into English.
The Easy Profile business directory could also benefit foreign direct investment by aiding the acquisition of resources to realise an idea. The D.R.C. is unfamiliar for most potential U.S. investors, and they will want to find local companies which help them to realise their aims, by providing relevant and suitable goods and services. Easy Profile could help them to find such partners, suppliers, and subcontractors. The presentation and ease of access would be important – I would copy the design of leading websites in the area, and allow data to be sorted, collected, and extracted easily. The website should be in English and French, so that it can be used by both U.S. and D.R.C. entrepreneurs.
To help investors to identify opportunities and D.R.C. companies, it would be helpful if the Easy Profiles contained the following information:
Further information would help to build the trust between investors and local companies. Trust can be a major issue in any business relationship, and during investment in a foreign country it is of particular importance. Helpful information may include:
There is speculation among the press and aid agencies that DR Congo may be close to returning to widespread conflict. I've written before that earlier war in the country was an economic disaster. To recap, a war can lead to incomes which are lower by around US$1000 per person per year than they would have been. Over ten years, that's $10,000. For a population of 80 million, that's $800 billion.
One of the reasons that war is economically disastrous is that business operations are badly hit. With a very few exceptions, such as arms smugglers, it is hard for business to prosper during war time. Of course, there are wider economic consequences to consumers and government, and effects in the long term through changes in labour, education, and investment, but let's stay on business for the moment.
War can affect business operations by interfering with a firm's ability to identify new opportunities. Familiarity with, and knowledge of, an environment is an important way for business people to find such opportunities. When an environment changes radically under war, then business people's ability to identify opportunities is diminished. Any search procedures to identify opportunities - for example, by touring local markets, or surveys - may become dangerous or impossible. Further, the number of opportunities is likely to fall as well, as markets are disrupted. While the changing environment due to conflict will bring some new opportunities, the disruption of markets established over a much longer period seems almost certain to lead to large net loss of opportunities.
Additionally, formerly attractive opportunities may not be worth the risk after conflict starts. Capital is likely to be in short supply during wartime, driving up its cost. Extra risk, such as that brought by war, is usually compensated by higher returns as well. If an opportunity's expected return is the same or lower when conflict starts as before, then it may no longer meet the required investor return, and so not happen.
Another reason for war's effect on business operations is that it interferes with the ability of businesses to plan. War brings increased uncertainty about the future - the actions of the combatants are unknown, and future events that were previously likely may be disrupted. A planner would have to guess about the future to a greater extent, and additionally have to include the actions of the combatants. The number of future events the planner would have to consider would be much wider, and costlier to examine in full if that is even possible.
The ability to find solutions to any opportunities is also hampered by conflict. Earlier ways of formulating ideas may no longer be readily possible or suitable. For example, a company which previously examined the practices of other companies may find that those practices are no longer as visible, or the practices are no longer applicable in the wartime economy. If solutions are proposed, then testing their viability may be difficult, with methods such as surveys or limited launches likely to be more expensive during war.
What's more, war can interfere with a company's ability to implement any proposed solutions. Finance may be not accessible even if required returns can be met, and the available workforce is likely to smaller. Fixed capital stock would be a target for looting. Networks of potential business collaborators may be reduced in size.
Overall, then: war is bad news for business operations.