Welcome to ‘Notes for 2050’ from Acrosights, a bi-monthly newsletter dedicated to the discussion of Africa’s emerging innovation eco-systems. The objective of these newsletters will be to provide concise and relevant content that explores the trends, themes, and actors shaping Africa’s bright future. The hope is that these newsletters resonate with readers with a similar level of passion for tracking Africa’s growth, as well as an astute awareness of the exciting potential of the continent. We hope you enjoy this first piece that introduces the idea of the innovation economy, and how it works in the African context.
In this first article, we’re going to look at the innovation economy and its role in Africa’s development. As this will be part of a series of publications focused on innovative developments in Africa we will be bringing you up to speed on key concepts and definitions that are frequently used when defining an innovation economy. These concepts range from leap-frogging, legacy systems to innovation hubs, we also give examples of the firms and policy changes shaping these outcomes. Crucially, throughout this piece, we will explain how and why these developments are taking place in Africa at this moment.
What is the Innovation Economy?
The ‘innovation economy’ is the idea that social progress and economic advancement are fuelled by technological developments and entrepreneurial breakthroughs. These advances have the potential to improve the way institutions function and the efficiency through which resources are allocated at scale.
Central to the innovation economy is the idea of knowledge partnerships. These partnerships - often termed ‘networks’ or ‘clusters’ - involve multi-stakeholder collaboration and a process of idea-sharing to identify solutions to shared problems. A good example of these ‘networks’ is special R&D zones. These zones represent the coming together of experts across industries to develop common solutions to shared problems.
The best-known example of a ‘cluster’ would be Silicon Valley. The Bay area has been recognized as the epicenter of technological development for the past two decades. And this success is no coincidence, rather, founders, engineers, and financiers have all deliberately descended on the valley to share their expertise and achieve their goals.
‘Centres of innovation’ have existed throughout history, Athens, Baghdad, and Istanbul have all been historical epicenters for much of the progress that we enjoy today.
Of course, this momentum comes and goes, and whilst many wait to see where the next Silicon Valley will be, parts of the world are still engrossed in developing effective solutions to the problems that matter most to them.
What is the Innovation Economy in the African Context?
In Africa, the innovation economy is of growing importance as it offers a myriad of new solutions to longstanding challenges. Many of these challenges are persistent and deep-rooted in history as well as the continent’s particular geographical environment. Central to this theme is that traditional institutions can be replaced by more dynamic systems that reflect the fast-changing demands of Africa’s growing youthful population.
But what exactly are these changing demands? And what exactly does innovation mean to Africa’s rapidly changing population?
The African innovation economy is best characterized as African-centric solutions to specific African challenges. These solutions, which predominantly stem from the advancements in the digital economy and the power of new technologies, enable Africans to mitigate many of the challenges faced in their daily livelihoods. Common practices in the advanced world, such as a lack of disruptions to daily routines are not a reality in large parts of Africa because of systemic inefficiencies and underdeveloped legacy systems.
“A legacy system is a practice that can be replaced by a more efficient product but remains in place due to user trust or familiarity, a local bank branch is an example despite the advancements of mobile and online banking.”
Access to finance and physical infrastructure are typical examples: 66% of sub-Saharan Africans remain unbanked and for every 1,000 km² there is an average of 204 km² of road, less than a quarter of which is paved. These factors have severely hindered Africa's development, stifling the effective delivery of key services and allocation of resources.
Alongside this, one of the main explanatory variables for Africa’s infrastructure deficit is the existence and dominance informal economy. Across Africa, much day-to-day economic activity takes place informally. This means that it is not registered, and acknowledged by formal institutions. Governments cannot collect taxes and formal institutions are not able to engage and interact with this economy through traditional mechanisms. As a result, the informal economy makes it very challenging for state institutions to build capacity and therefore provide a consistent service or function.
The informal economy in Nigeria is estimated to be as large as 75% of the formal economy. This is almost as big as South Africa’s GDP.
As a consequence of these above factors (and others including colonial legacy and geography), most African economies have failed to develop the systems and processes that exist in the advanced world. Yet, while these remain significant challenges for which there is no easy remedy, a lack of established processes provides opportunity gaps at multiple levels. Either these gaps can be filled by importing processes from the advanced, or by African’s looking to develop their own innovative solutions to address these problems.
What problems has innovation solved?
There are several instances where developments taken in the innovation economy have begun to offer alternative solutions to overcoming challenges facing African societies.
One such challenge has been for African’s to exchange payment for goods and services reliably and securely. Indeed, the majority of African’s still remain unbanked, with most transactions taken as cash payments. This a difficult issue to solve as on the one hand, it remains an infrastructure issue. There are simply not enough Brick & Mortar retail banks for Africans to open bank accounts with. But it is also a trust issue - many African’s remain sceptical of traditional institutions, cash can be used to bypass these access points. The result is that many African’s do not have access to a personal bank account, this makes it hard for them to access credit, take out loans, and eventually take risks to build a small business.
A simple solution to this problem has been mobile payments. A medium in which Africa is now considered a global leader. Mobile payments emerged on the continent in 2005, initially as a way of providing African’s with access to micro-finance. The leader, in this case, was M-PESA, a Kenyan payments firm which intended to create a service that would allow microfinance borrowers to conveniently receive and repay loans across geographical entities. However, as the concept was implemented it became clear that the system could be used for direct transactions as well as just borrowing. This newfound momentum encouraged M-PESA to relaunch and pivot into Peer-to-Peer (P2P) transaction payments.
Since 2005 P2P transfers via mobile phone has seen exponential growth in Africa, with 400 million users currently completing transactions via this medium. The impact of P2P cannot be overstated; not only does it provide unbanked African’s with a quick and reliable solution to manage their finances and pay for goods and services, but it also promises transparency across payment systems. Mobile payments and P2P remove unnecessary intermediaries and provide traceable transaction data essential for discrepancy management. This is important if there is to be widespread adoption of these methods by businesses and individuals across the continent, a market that could well grow to $75bn by 2025.
This is just one of the numerous examples of how the emerging generation of African entrepreneurs have been able to innovate and overcome challenges caused by an under-developed and generally dysfunctional financial system.
One of the more surprising features of African economies is the lack of physical retail banks and ATMs. For example, Nigeria has 4.4 physical bank branches per 100,000 people whilst Kenya has 7.6 ATMs per 100,000 people. Both of these statistics highlight the underdeveloped aspects of Africa’s retail financial infrastructure. On the other hand, both of these examples have well-developed mobile payments infrastructures. M-PESA in Kenya for instance has been in operation since 2007 - long before mobile payments were even considered as a realistic solution in the advanced world. This dichotomy reflects African’s ability to ‘leapfrog’ over traditional hurdles facing industrialized countries.
Leapfrogging: the harnessing of new innovative technologies resulting in a “quick jump in economic development”.
Leapfrogging is a useful term for understanding Africa’s relative advantage in becoming a center for innovation and technological development throughout the coming decades. It is a multifaceted concept with various definitions across the economic and developmental theory. In the case of Africa’s innovation economy, it is the process whereby new innovation makes processes more efficient by streamlining inefficient practices and removing intermediaries. In Africa’s case, the harnessing of innovative technologies by entrepreneurs and governments has created a rapid developmental jump with a limited process of replacing existing economic structures, avoiding the mass lay-offs and redundancies reminiscent of automatization in the developed world.
One of the main reasons Africa is so well equipped to quickly adopt new technologies and processes at scale is its previously untapped potential and access to abundant human and material resources. This leap forward is indicative of the African innovation economy whereby Africans adopting new technologies become trendsetters and not just followers.
This leapfrogging takes place at both the macro and micro levels with individuals and corporations embracing technological innovation at an earlier stage than in developed economies, reflecting Africans potential as champions for rapid growth.
Enabling Factors
The key to Africa’s ability to leapfrog is its relative lack of legacy institutions and processes - meaning an absence of existing institutional systems to reform and replace to enable advancement. Whilst Africa remains behind most of the world in key development factors it does boast a rapidly growing population base. This places the continent at a marked advantage in embracing innovation at scale across finance, healthcare, and transportation.
The growing youth population would be expected to form the world's largest workforce by 2030. Beyond contributing to a more competitive economy, this population has begun to demand more from existing modes of resource allocation. A natural outcome would be for Africans to lean toward dynamic grassroots solutions that otherwise may not be realised due to the dominance of existing economic giants.
The leapfrogging phenomena in Africa are also enabled by governance factors, specifically, a lack of regulation and legacy systems. The combination of demand and regulatory arbitrage is best twinned with proactive government policy in order to produce a fertile testing ground for setting standards and regulations for emerging and established products. Rwanda is the strongest example of where there is regulatory arbitrage and a pro-business environment for the innovation sector to flourish. Recently Kigali has openly encouraged firms like Volkswagen to use the capital as a testing zone for a new ride-sharing app as well as electric cars. The benefits to Volkswagen are clear, lower costs to operate, an absence of regulatory obstacles, and availability of human capital. These factors produce a low-cost-to-serve environment and render Rwanda an ideal testing ground in comparison to advanced economies where taxes and regulation could make such ventures cost-ineffective.
These mutually beneficial partnerships are becoming more frequent across the continent. The most ambitious of which being Project Khokha in South Africa, highlighting how innovation has been flagged by governments and institutions as a key sector for long-term growth. The South African Reserve Bank has launched Project Khokha in 2018 alongside consortiums from the private sector to trial the use of DLT (Distributed Ledger Technology) based on a tokenized version of the South African Rand. Following its success, including the ability to process a large amount of transaction volume privately, a follow-up Project Khokha 2 was launched in February 2021.
Innovation without Industrialisation?
It might seem a little odd to talk about technology and digital innovation in Africa when most of the continent does not have access to basic necessities. Nor for that matter has the economy industrialized at scale.
The most obvious development path for African economies to continue to undertake is that year-on-year increases in income, accompanied by sustained population growth will lead to the emergence of a more skilled workforce underpinned by an increasingly affluent middle-class. As a result, it would be expected that there will be more opportunities for innovators to tap into this new demand as well as the newly skilled labour force.
However, at this point whilst there are innovative developments taking place, there is little to suggest that it goes further than small ecosystems within major cities.
This is not to say that African economies cannot go on to engage in “innovation at scale”
Acknowledging that many economies are yet to fully industrialize and move beyond resource extraction, innovation can be a way of speeding up this process. Just as the process of industrialisation leads to the creation of new types of jobs, it also comes to replace outdated modes of resource extraction and material allocation.
Moreover, innovation offers African economies the opportunity to pursue an alternative development path that could eventually be adopted by governments as a chosen industrial strategy. In its simplest form, the build-up of innovation capacities can enable economies to develop competitive advantages within particular industries over a long period. For Kenya, it could be becoming the Fintech epi-center of Africa, while Rwanda could become the leading specialised drone manufacturer in the global south. Ultimately, if governments in Africa pursue innovation strategies, which enhance competitiveness, and result in the provision of goods and services the expected outcome can be new jobs, rapid regional development, and widespread wealth creation.
Development States
Whilst this model of development has often been associated with late-stage industrialization in Western Europe and North America, several countries have developed this model from a similarly low base as Africa. Specifically, in East Asia; South Korea, Singapore, and Taiwan have all found success through industrial leadership which demonstrated early indications of innovation (i.e. Samsung and Hyundai in South Korea). The notion of a development-orientated state is particularly relevant here as these states all pursued clear, long-term national industrial policies rather than ad hoc enterprises.
If African governments prove capable of emulating this model, through a partnership with innovators via favorable policies, they may be able to embrace innovation at scale.
However, currently, this African innovation is highly regionalized. Cities such as Lagos, Cape Town, and Nairobi have become the main regional hubs for African innovation. Briter Bridges, a data-driven market intelligence platform, has listed the top 10 cities in Africa as being home to 40% of Africa’s tech hubs and financiers recognize this too, with 89.2% of capital flows going to Kenya, Nigeria, and South Africa. This trend is visualized below:
Innovation Ecosystems
The concentration of activity across these cities has given rise to the notion of an ‘innovation ecosystem’. This ecosystem is best defined along the following lines, with accompanying visualization:
“The evolving set of actors, activities, artefacts, and the institutions and relations, including complementary and substitute relations, that are important for the innovative performance of an actor or a population of actors.”
There are multiple ways to unpack innovation ecosystems in the African context, but they are best understood in tandem with a push towards a more intra-African economy. This is seen with the African Continental Free Trade Agreement (AfCTFA), the largest free-trade area in the world in terms of participating countries (excluding the WTO).
The objective of the AfCTFA is to deepen economic integration amongst African states through the removal of tariffs and other non-tariff barriers from 90% of intra-African trade. These liberalisation measures would be expected to boost the volume of goods and services traded between member states.
The AfCFTA is predicted to cover a market of more than 1.2 billion people and up to $3 trillion in combined GDP, with the potential of increasing intra-African trade by over 50%. According to the World Bank, the agreement could also add $76 billion in income to the global economy. On its completion, the AfCFTA will become the largest free trade area in the world since the establishment of the World Trade Organization.
The significance of this agreement is that it could open the door to unprecedented levels of intra-African investment, which would enable organisations across Africa to build the economies of scale that are necessary to be competitive in the wider global economy.
What happens next?
This newsletter set out with the ambitious task of introducing a relatively niche concept. Whilst there is growing attention being placed on the positive developments taking place in Fintech and AgTech, this level of success has not been widely discussed in the context of the ‘innovation economy’. Even less discussion has been given to these developments in an African context.
Yet, the innovation economy has relevance for understanding the momentum at which positive developments in these spaces are taking place on the continent. From Lagos to Nairobi, from Fintech Payments startups to Ag-Tech drone operators, skilled Africans are coming together en-masse' to build out solutions to challenges that for too long have not been tackled effectively.
In conclusion, for the innovation economy to be realised in its full potential (whereby governments acknowledge innovation as a way of allocating resources at scale) not only will innovators and founders have to continue providing tangible solutions to the key problems that face Africans, they will also need to be awarded the technological and physical infrastructure that will facilitate their ideas. This is of course dependent on whether governments can work alongside private industrialists to build the infrastructure that is necessary for innovation.
For now, we hope you enjoyed this first piece. Please share with your freinds and let’s grow the Acrosights community!