Corruption Holds Small Businesses Back: Ghana Study Reveals Two Strategies To Avoid The Traps

Small and medium enterprises account for 95% of all registered businesses and contribute about 50% to the total GDP of countries in sub-Saharan Africa.

Yet they face significant obstacles to growth and prosperity. These include, but are not limited to, the traditional barrier of acquiring finance.

Corruption is perhaps the biggest challenge. Its effects are worsened by the region’s generally weak governance and, in some cases, political instability. Small and medium businesses in these kinds of environments struggle to get the vital resources and expertise they need to operate efficiently and to grow.

 

Ghana is no exception. The country was ranked 70th out of 180 countries on the Corruption Perceptions Index in 2023, indicating a high level of perceived corruption. Corrupt practices, such as bribery and nepotism, exacerbate the difficulties Ghanaian small and medium enterprises face in accessing government services, licences and contracts.

In a recent research paper we set out to understand how small and medium enterprises in Ghana can mitigate the adverse effects of corruption. Two key strategies emerged.

One was institutional networking. This involves building and maintaining strong relationships with government officials and regulatory authorities. Regular interactions at industry forums or community projects can help small and medium businesses to stay informed about legal or regulatory changes, allowing them to ensure compliance and avoid exploitation by corrupt officials. It is also useful for learning to navigate bureaucratic hurdles more effectively, since efficient operations and proper documentation minimise delays and eliminate the need for bribes.

The second strategy involved having extra financial resources available. This financial slack allows businesses to invest in networking activities and provides a buffer against the effects of corruption.

The study

We selected a diverse sample of small and medium enterprises from various industries, though all operated broadly in the manufacturing space. The study focused on companies that were no more than 10 years old.

The data collection process involved two phases. First, we distributed questionnaires to entrepreneurs to gather information on instances when corruption harmed their businesses. We also asked about what sort of institutional networking they engaged in. Second, we collected data from finance managers regarding financial slack – that is, whether they set aside money for tough times – and how their firms had grown, or not, over time.

Initially, we distributed questionnaires to 272 entrepreneurs, achieving a 34% response rate. However, 17 questionnaires were incomplete, leading to 255 valid responses. For the second phase, we collected 228 responses from finance managers. After eliminating 16 overlapping responses from dual-role individuals (both finance managers and entrepreneurs), we analysed 212 complete responses. This yielded a 26.5% overall response rate, which is good for this type of research.

The responses shed light on the pervasive nature of corruption and its detrimental effects on business operations. One finance manager told us:

Corruption makes it hard to compete fairly. Those who can afford to pay bribes get ahead, while those who can’t are left behind.

And an entrepreneur noted:

We waste so much time dealing with corrupt officials instead of focusing on growing our business.

Another business owner lamented that, whenever they needed a permit or licence, “we have to pay bribes, and it eats into our profits”.

Mitigating effects

The people we interviewed said their organisations used various strategies to combat corruption and its adverse effects on their operations.

One involved fostering strong relationships with government officials and regulatory bodies. Additionally, many participated in industry associations and advocacy groups.

A participant said:

Engaging with regulatory authorities and industry peers has not only helped us navigate bureaucratic hurdles more effectively but also allowed us to collectively advocate for a fairer business environment.

Moreover, maintaining financial slack allowed some businesses to invest in networking activities and buffer against the impacts of corruption. This financial cushion allowed them to engage in essential networking without immediate financial strain, enhancing their resilience against corrupt practices. Of course this isn’t always easy but it is something businesses of this size should consider as a goal.

These findings echo those from elsewhere on the continent. A study in Kenya revealed that small and medium enterprises with robust networks and regular interactions with regulatory authorities experienced fewer instances of bureaucratic corruption and were more successful in advocating for transparent business practices.

Recommendations

Based on our findings, we propose several proactive steps for both small and medium enterprises and policymakers. These can help to cultivate a more supportive business environment in Ghana.

Businesses should establish and nurture relationships with government officials and regulatory bodies. By engaging actively with political figures and government officials, they’ll be able to better navigate a complex regulatory landscape.

The government and policymakers can help to make this happen by organising industry-specific conferences, public-private partnership initiatives, and networking events.

Policy is key. Stringent anti-corruption laws and transparent procurement processes will make a huge difference. Simplified regulatory procedures are important, too. A more transparent environment levels the playing field for smaller businesses and diminishes the necessity for corrupt practices.

Initiatives such as grants or low-interest loans can provide small and medium enterprises with the financial slack needed to navigate corrupt environments. These programmes can furnish the capital necessary for growth and innovation without imposing immediate financial pressures. Some already exist in Ghana. One example is the government’s Microfinance and Small Loans Centre. It offers affordable financing options at low interest rates. That allows small and medium enterprises to grow and innovate without resorting to high-interest informal loans, which often come with corrupt strings attached.

Source:norvanreports.com