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 .