Skewed R&D incentives in sub Saharan Africa are a threat to SMEs

March 31, 2014

Tax incentives for Research and Development are a disaster for innovation in sub Saharan Africa technology companies, according to a new study. The most vulnerable are small ICT software and internet-based development businesses that have over the past half a decade created hundred of thousands of jobs in the continent. Incentives have always favored multi national firms and small firms that want to obtain the tax incentive find it harder for small software developers to qualify. A newly released study dedicates an entire section to software research. In East African region, if the terms set out on the study were to eventuate, mushrooming ICT companies will probably be hurt the most because of the tightened definition on software development funding and tax holidays. On the face of it looks nice and attractive but the way it has been working is that some companies currently getting funding are likely to miss out in the future but large companies most of them multinationals are going to get a lot more. A concern is that it could stifle and reverse a lot of innovation in Africa. In most African countries, funding is open to anyone conducting research and development that is likely to benefit that particular country.

However, the business are directly affected if everything on the current laws comes continues into the futures with companies that develops highly complex Internet based software for commercial use most likely to be affected. In Finland scenario, it takes a lot of money and faith in the product and not only are companies required to create a commercial version of the invention but also to adapt that to global digital infrastructure, so there’s two levels of work involved but that has not been the case in Sub Saharan African countries according to the study in my possession. Unless there are changes and revision of existing laws, it will become harder to justify to investors the decision to stay in Africa rather than moving to other parts of the world. A number of countries according to the study are in the process of introducing new regulations to funding of R&D that could potentially force small and medium software developers to consider setting up their research and development outside the continent.

There are several countries that limit the amount of claimable funds for supporting development and suggest restricting the availability of the incentive on supporting activities which is not investor friendly. Clients specifically set up their research and development facilities in Africa because of the attractive grant system and, because of this, had created thousands of jobs in the region. Jobs have been created and research that started created two collaborative projects with various universities, all because of our grant system but the reverse will happen if small and medium companies lose those incentives. I believe that if the Government’s support of research and development that keeps young talent in Africa rather than moving into other markets, especially when you have a commercially global product would be beneficial to economies and well being of the continent. African IT companies need to be aware of what’s going on and need to start responding to the rules that are favoring large companies that might have more access to more money and are squeezing out small and medium sized companies. Limiting the expenditure to a percentage of core research and development activities and eligible expenditure to where the sole purpose is to support core research and development activities have been the main impediment to progressive growth of information and technology sector.

Contador Harrison