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Paper short abstract

Scholarship often claims that countries in Africa struggle to innovate because of weak 'macro-institutions'. However, the growth of the mobile money sector in Africa reveals that innovation can occur so long as regulators and firms design effective 'meso-institutions'.

Paper long abstract

How can African countries innovate when they have weak 'macro-institutions' often emerging from colonialism - corrupt and under-resourced legislatures, courts and police? In theory, weak macro-institutions, which apply to everyone in society, discourage firms from engaging in the type of long term relationships with each other which are required to develop new technological innovations.

The growth of the mobile money sector - now numbering over 500 million active accounts in Africa - reveals that innovation can occur so long as regulators and firms design effective 'meso-institutions'. These institutions are rules for specific sectors of the economy. Meso-institutions are a combination of private ordering (rules designed and implemented by firms and customers, such as contracts and industry norms) and, to varying degrees, regulatory intervention in that private ordering (through regulation and/or monitoring contracts and norms).

Choices made by regulators shape meso-institutions which in turn determine which sectors will scale in an economy and how those sectors can operate despite weak macro-institutions. This makes regulators the 'hidden gatekeepers' of innovation in Africa. Regulatory choices supported mobile money in several African countries, creating significant growth in the sector: Kenya (30 million users), Tanzania (16 million users), and Uganda (26 million users). In contrast, decisions made by regulators generated meso-institutions in South Africa and Nigeria which supported the banking sector, resulting in very small mobile money sectors in those countries. This analysis suggests scholars and practitioners in international development should pay more attention to meso-institutions, through, for example, increased training of regulators.