Botswana is a natural resource dependent developing country in Sub-Saharan Africa (SSA) constantly in search of ways to diversify its economy so as to avoid economic stagnation. This is important as the economy’s mainstay, diamond mining, is expected to decline significantly in the next 15 years, with adverse implications for the country’s development prospects. A diversified economic base is likely to generate sustainable growth beyond diamond depletion. Economic diversification is also essential in generating broad-based, inclusive growth. Despite being able to sustain positive rates of economic growth over the past five decades, a significant proportion of Botswana’s population has not benefitted from this growth. An increasingly diversifying economy is likely to generate more productive employment opportunities for the population. This may in turn promote broad based, inclusive growth. The 2008 global financial crisis, which resulted in significant loss of national income, provided further evidence of the importance of economic diversification for Botswana. A diversified economy is essential to mitigating the impact of external shocks and commodity price fluctuations on the economy.

The analysis of technical efficiency of SMEs proceeds in four steps. The first step involves estimation of technical efficiency of SMEs. A variant of Data Envelopment Analysis (DEA) is used for this purpose. The study relies on data obtained from the World Bank Enterprise Survey database. The data relate specifically to SMEs involved in manufacturing activities in Botswana. Two cross-sectional datasets for 2006 and 2010 are pooled to enhance the sample size, with 2006 used as the base year. Estimations are carried out in MATLAB using the codes of Valentin Zelenyuk who adopted earlier codes of Leopold Simar. Both Constant Returns to Scale (CRS) and Variable Returns to Scale (VRS) technologies are used to estimate the efficient frontier and how far each of the firms in the sample is from the estimated efficient frontier. The second step involves identifying potential determinants of technical inefficiency of SMEs. This is achieved through an exhaustive review of the literature on potential determinants of technical inefficiency. Based on data availability and relevance to the context of Botswana, the impact of financing constraints, export orientation, firm age, entrepreneurs’ education and experience on technical inefficiency of SMEs is tested in this study.

Entrepreneurial activity, especially the kind revolving around Small and Medium Enterprises (SMEs), has been identified by the Botswana Government as one avenue through which economic diversification can be pursued. This study investigates ways in which the Botswana Government can effectively promote entrepreneurial activity. The study relies on existing literature, specifically on policies likely to promote entrepreneurial activity in different contexts. It also relies on empirical evidence from analyses of technical efficiency of Botswana’s SMEs. Technical inefficiency of SMEs is likely to impact on feasibility and profitability of engaging in entrepreneurial activity, with the likelihood that promoting entrepreneurial activity may be difficult to achieve. Improving technical efficiency of these production units is likely to yield economic gains.

A review of the literature revealed that in designing policies to effectively promote entrepreneurial activity, policy makers must take into cognisance a country’s stage of development as challenges faced by entrepreneurs differ according to stages of development. At Botswana’s present stage of development, well-developed public and private institutions, quality infrastructure, stable macroeconomic environment, healthy and educated workforce, v higher education and training, goods market efficiency, labour market efficiency, financial market sophistication, technological readiness, and market size are fundamental. Developing entrepreneurship framework conditions is also paramount. These include availability and accessibility of finance for SMEs, the extent to which public policy gives support to entrepreneurship, the extent to which national research and development leads to new commercial opportunities and is available to SMEs, presence of property rights, entry regulations, presence of programs that directly assist SMEs, the extent to which entrepreneurship education is incorporated in the education system, as well as the extent to which social and cultural norms encourage entrepreneurship.

Recommendations for the design of policies to promote entrepreneurial activity in Botswana are drawn from this literature. These include reforms to the education system to ensure it incorporates entrepreneurship education, improving access to and affordability of entrepreneurial finance, encouraging national research and development, improving macroeconomic stability, encouraging foreign direct investment, optimising on market access afforded by existing bilateral and multilateral trade agreements, reducing barriers to trading across borders, and addressing the apparent skills mismatch in the labour market.

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