Caught in Transition: Incomplete Digitalization among African Firms

By Marcio Cruz Santiago Reyes Ortega and Xavier Cirera

African businesses have made significant progress in digital uptake, but further efforts are needed to ensure they adopt and effectively use digital technologies. Despite having digital tools at their disposal to implement tasks more efficiently, they remain reliant on non-digital methods such as paper invoices, manual recordkeeping, and basic spreadsheet entries. This inconsistency, termed 'incomplete digitalization,' is the reality for two out of three African firms, according to IFC’s recent book on ‘Digital Opportunities for African Businesses.’ In its first chapter, “Making Full Use of Digitalization: Where Do Businesses in Africa Stand?,” we delve into this disconnect between deployment and adoption to map the digitalization patterns in African firms and the challenges they face in leveraging digital technology for productive purposes.

 The digital journey of firms is not a straightforward path. Digital foundations in Africa are growing, and digital payment technologies have become a success story in the region. Yet while this picture shows the promise of how digital technologies contribute to the region's development, it also reveals many challenges that firms face in realizing the full potential of digitalization. So, what exactly does the digital landscape look like for African businesses today? New evidence, based on nationally representative data from Burkina Faso, Ethiopia, Ghana, Kenya, Malawi, and Senegal reveals three key findings (Figure 1): 

• Increasing access, but some gaps remain: 86% of formal businesses with five or more workers have access to at least one digital tool such as computers, internet, or mobile phones. For microbusinesses, which employ 70% of Africa’s labor force, access to digital tools has come through access to mobile phones, but internet usage in their operations is still limited. Gaps between urban and rural areas, as well as in landlocked countries, remain.

• Uneven adoption: 63% of firms adopt some type of digital technology, most of these firms for digital payments. However, most rely on manual and analog methods for other day-to-day tasks.  Our research shows that only one out of three firms that adopted digital payments ended up adopting other advanced digital technologies to perform other functions.

• The more digitalized, the more productive: Digitalized businesses are associated with higher levels of productivity, meaning that firms that use advanced digital technologies more intensively have higher productivity levels regardless of their size, sector, and location. Differences in technology sophistication across firms may explain up to a third of productivity variation across establishments and over half of the agricultural productivity gap.

Figure 1. Degrees of Incomplete Digitalization across African Firms

By looking at data from two groups of African countries: Group 1 (Burkina Faso, Ethiopia, and Malawi) and Group 2 (Ghana, Kenya, and Senegal), and comparing with more advanced economies, such as Viet Nam and the Republic of Korea we find that incomplete digitalization is common in most countries, but in Africa the share of firms adopting and intensively using digital technologies in a business function is lower. In lower-income countries, many businesses still struggle to get basic connectivity. In middle-income countries, connectivity is widespread across firms, but there are still big differences between urban and rural areas. But the common challenge is to convert the adoption of digital tools into effective and productive use in business operations.  This is something policymakers need to focus on.

 Figure 2. Degrees of incomplete digitalization, by Country Group

The path forward to accelerate digitalization in Africa will require greater investment and financing for digital infrastructure, especially in remote areas. African countries also need digital strategies that are geared towards the variety of businesses that can benefit from technology. From ensuring access to affordable digital technologies and information for early comers to digitalization, to training for those adopting digital solutions.  Microbusinesses and agriculture play a key role in the economy, and digital technologies could help them expand markets and increase productivity. Startups are bringing innovative and affordable digital solutions to help businesses. All these efforts can unlock Africa's potential and transform digital access into a powerful engine for growth.

References:

Cirera, Xavier, Diego Comin, and Marcio Cruz. 2024. “Anatomy of Technology and Tasks in the Establishment.” NBER Working Paper 32281, National Bureau of Economic Research, Cambridge, MA. https://www.nber.org/papers/w32281.

Cirera, Xavier, Diego Comin, Marcio Cruz, and Santiago Reyes. 2024. Making Full Use of Digitalization: Where Do Businesses in Africa Stand? Chapter 1. In: Digital Opportunities in African Businesses, edited by Cruz, Marcio Washington, DC: World Bank. http://hdl.handle.net/10986/41447.

Fabregas, Raissa, Michael Kremer, and Frank Schilbach. 2019. “Realizing the Potential of Digital Development: The Case of Agricultural Advice.” Science 366 (6471): eaay3038. https://doi.org/10.1126/science.aay3038.

Daum, Thomas, Roberta Villalba, Oluwakayade Anidi, Sharone Masakhwe Mayienga, Saurabh Gupta, and Regina Birner. 2021. “Uber for Tractors? Opportunities and Challenges of Digital Tools for Tractor Hire in India and Nigeria.” World Development 144: 105480. https://doi.org/10.1016/j.worlddev.2021.105480