Half of Uganda’ s entrepreneurial activity is classified as‘ necessity-driven’, the greatest in sub-Saharan Africa. However, driven by negative push factors, entrepreneurs often choose business activities with low barriers to entry, rather than strong growth prospects. These sectors include recreational and personal services, hospitality, and retail trade. Accordingly, these activities are characterised by:( i) high entry and exit rates;( ii) very small firms; and( ii) competition resulting in destructive imitation rather than innovation.
Most Ugandan firms do not grow as a result of these poor growth prospects. Among businesses established in 2001 that survived to 2011, employment increased from 1.9 to 2.7 employees – a rise of less than one worker over the decade. A 35-year-old firm in Uganda is, on average, only twice as large as it was at its establishment. Part of the problem is the“ missing middle”. There are few established firms with several paid employees, compared to the large number of micro-enterprises, which naturally have more limited job creation and growth potential. [ 3 ]
In addition, access to credit is severely constrained for many small and medium-sized enterprises( SMEs), perceived as significant risk by lenders. This adds an additional barrier to entry for SMEs, while reducing competition among large incumbent firms. Since high interest rates mean firms use retained earnings, rather than credit, to fuel investment, business growth is further encumbered.
Fundamentally, the shortage of opportunities for new entrants to the labour force is likely to have detrimental effects on their confidence and aspirations, with negative ramifications on the wider economy. Under-utilising human capital will not only reduce the productive capacity of the Ugandan economy, but increase resentment and the risk of social and political upheaval.