Small Business and Development in South Africa

Introduction

SMEs (small and medium enterprises) are increasingly gaining recognition for the crucial role that they play in facilitating the economic development of nations. They are usually regarded as prolific and efficient job creators, fuel engines of the national economy, and as seeds for the large enterprises. Even among the developed industrial economies, the SME sector, as opposed to the multinationals, is recognized for the role that it plays in creating jobs to accommodate the largest workforce. A majority of the nations have endeavored to extend the debate on the role played by SMEs as far as the development process is concerned. In this regard, governments at the various levels have been seen to play an important role in helping to promote SME growth. The development of SMEs enhances intra and inter-regional decentralization. Furthermore, their growth could also act as a force to counter the economic power that the larger enterprises may exhibit.

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By and large, SMEs development is regarded as important in helping to enhance the attainment of wider socio-economic goals, and this includes the issue of poverty alleviation as well.

An OECD report indicates that nearly 35 % of the exports to Asia and 25 % of the exports to the OECD countries are often produced by SMEs. More than 90% of the private businesses are SMEs. In addition, over 50% of employment GDP in a majority of the countries in Sub-Saharan Africa is attributed to SMEs (UNIDO, 1999). In South Africa, small enterprises are regarded as a distinctive feature of the nation’s landscape of production. In addition, in South Africa, nearly 91 % of all the formal business entities are categorized as SMEs. In addition, SMEs in South Africa is responsible for between 52 and 57 % of the country’s GDP, not to mention that nearly 61 % of the workforce in South Africa is to be found in the SMEs Accordingly, SMEs play a significant role in employment generation, stimulation of economic growth, and poverty alleviation.

The aim of this paper is to explore the constraints that face small business development in South Africa. In this case, the environmental constraints with regard to the SMEs shall be explored. This will then pave way for recommendations that needed be adopted in an attempt to enhance the plight of the small business environment in South Africa.

The definitions of an SME

The definition of SMEs is quite controversial, with different authors voicing diverse definitions of SMEs. Even as a number of researchers have endeavored to make use of capital assets as a yardstick with which to define SMEs, on the other hand, we have other authors who have dependent on labor and skill turnover levels as a means of defining an SME. On the other hand, we have other authors who have decided to define SMEs on the basis of production methods and legal status. Storey (1994) has endeavored to summarize the danger associated with the application of size as a tool with which to define a firm’s status.

In this case, Storey argues that in certain sectors, all the firms could be seen as being small, and in other sectors, one may not find a single small firm. The “statistical” and “economic” definition of what constitutes a small firm was first formulated in 1971 by the Bolton Committee. From an economic point of view, in order that a firm may be regarded as being small, it needs to fulfill the three criteria provided below:

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  • The market share of the firm ought to be small
  • The owners or part owners of the firm manage it in a personalized manner, as opposed to via a formalized structure of management
  • It is quite independent in nature, in that it does not constitute part of a bigger firm.

About the “statistical” definition, the criteria provided below were proposed by the Bolton Committee:

  • The small firm’s size as well as its role in contributing to the GDP, exports, and employment, among other contributions
  • The changes in the economic contribution of the small firm, over time
  • The application of the statistical definition in comparing the economic contribution of the small firm within the cross-country context.

Definition of SMEs within the South African Context

The 1996 National Small Business Act 102 has found wide application as the framework to enable a definition of SMEs in the country. The Act has provided a definition of five groups of business that are to be found in South Africa. The number of employees, annual turnover and the gross assets of a firm are some of the elements that have found use in the definition of a small firm in South Africa. Nevertheless, the categories for defining different enterprises in South Africa are provided below:

  • Survivalist enterprise: these are the enterprises that generate an income that is below the minimum income in South Africa. This group consists of subsistence farmers, hawkers, and vendors.
  • Micro enterprise: the annual turnover of microenterprises is less that the limit set for VAT registration in South Africa (in this case, R150 000 per annum). There is no formality that is usually followed with regard to the registration of such enterprises. Examples include minibus taxis and spaza shops. The number of employees at such enterprises does not normally exceed five.
  • Very small enterprise: in South Africa, the very small enterprises have a workforce of below 10 paid employees. The only exceptions in this case are the manufacturing, mining, construction, and electricity sectors. In these sectors, the minim number of employees is about 20. These enterprises are usually contained within the formal market. In addition, they are in a position to access technology.
  • Small enterprise: with regard to the small enterprises in South Africa, these do not usually have a workforce that exceeds 50 employees. By and large, the small enterprises tend to be more established in comparison with the very small enterprises. In addition, they also manifest complex business practices.
  • Medium enterprise: at the medium enterprises, the workforce does not normally exceed 100 employees. However, the mining, manufacturing, electricity and manufacturing sectors are an exception in this case, and the maximum number of allowable employees is 200. Power decentralization is one of the characteristics of the medium enterprises.

Constraints of small business development in South Africa

Although SMEs have a huge potential in helping to accelerate job creation and the growth of the South African economy, nevertheless, there are several bottlenecks hinders the SMEs from attaining their full potential. There are a number of factors that hinders SME development in South Africa, and these include management skills, lack of finances, regulatory issues, access to international markets, technology and equipment.

Economic environment

Previously, SMEs were somewhat insulated from international competition. However, at the moment, a majority of the SMEs in South Africa have to contend with enhanced global competition, not to mention the dire need to increase their market share. On the other hand, their poor product standardization and quality control, limited experience in the international market, and limited access to partners from the international market, has continued to hinder the desire by SMEs to expand into the international markets Furthermore, SMEs are also deficient in the necessary information regarding foreign markets.

The issue of lack of access to capital is yet another significant problem that the SMEs have to contend with. When an SME lacks enough financial resources, what this means is that it is greatly constraints in its quest to pursue development. In spite of the fact that the SMEs are already recognized by a majority of the developing countries as an important facet to aiding in the developmental process, nonetheless, the development of SMEs is almost always hindered by limited financial resources to enable the firm meet different investment and operational needs.

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Cook and Nixson have viewed the issue of finance as vital in enabling SMEs realize their developmental needs. In South Africa, many SMEs lack access to the appropriate and sufficient forms of equity and credit.

Regarding the question of what they really view as constraints to their business and more importantly, with regard to the issue of starting or expanding their businesses, the entrepreneurs indicated that access to financial resources remains by far one of the major constraint to realizing their goals. Similar sentiments have also been echoed by SMEs owners who have been interviewed elsewhere. Such requirements as market or product identification, the acquisition of the needed licenses and property rights, and property maintenance of records have all been regarded as fundamental to the issue of running SMEs, as opposed to finance.

According to a report released by the World Bank in 2006, in order to deal with the issues of business licensing in South Africa, one needs 176 days. Furthermore, one has to undertake some 18 procedures while handling the issue of business licensing in South Africa. Since antitrust legislation is absent, this in effect appears to favor the larger firms, at the expense of the smaller ones.

On the other hand, SMEs are also limited by the absence of property rights limits in their quest to gain access to foreign technologies.

As a result, a number of studies indicates that an increasingly higher number of SMEs fail as a result of non-financial reasons, such as the existence of laws, inaccessibility to the most suitable technology, rules and regulations that hinders development within the sector, deficient management training and skills, and weak institutional capacity.

Socio-cultural environment

When SMEs are deficient in managerial know-how, this could greatly contain their development. Although motivated managers are usually attracted to SMEs, nevertheless, the larger firms are exceedingly competitive. SMEs in South Africa are characterized by comparatively higher unit cost and as such, this could very well hinder efforts by SMEs to enhance their managerial capabilities given that many of the consulting firms lacks suitable cost-effective management suctions that are necessary for the development of SMEs.

In addition, although there are many institutions in South Africa that provides advisory and training services, the SME sector is characterized by a large skill gap.

The reason behind this is that many of the entrepreneurs are not in a position to afford the high advisory services and training cost and on grounds of complacency.

There are also those entrepreneurs who have no interest in enhancing their skills. More often than not, it is quite hard for SMEs to access the most suitable information and technology. For the most part, SMEs makes use of foreign technology coupled with a small portion of shared leasing and ownership. Many bare the small firms that have opted to acquire foreign licenses owing to the difficulty tied to the issue of obtaining local patents.

Regulatory issues have also been seen to impact negatively on the issue of the development of SMEs. Even as diverse structural reforms that have been institutes in the business world in south Africa has resulted in improvements, nonetheless, at the firm level, enterprise development prospects are yet to be addressed.

Conclusions

The paper has explored various definitions of SMEs, along with the role that they play in enhancing economic development, and the constraints that face small business development in South Africa. There lacks a universal, single and uniformly accepted definition of SMEs. Accordingly, a number of indicators have found use in helping to define SMEs, including a firm’s workforce. Further, the researchers have also explored the definition of an SME within the South African context.

In this case, the exploration of SMEs in South Africa was on the basis of their economic role as well as their distinct characteristics. The significant role played by SMEs in the developmental process was also examined, along with the contributions that SMEs plays in terms of job creation, production and income generation in the developing economies. As such, policy makers in South Africa are well aware of the crucial role played by SMEs in as far as the issue of the developmental process is concerned. In spite of this recognition, there are several factors that hinder small business development in South Africa.

These factors include the inability to access the most suitable technology, poor access to the global market, existing regulations, rules and laws that hinders the desires by SMEs to develop, deficient management training and skills, and weak institutional capacity. Nevertheless, access to financial resources still remains by far the main concern for many of the SMEs. When SMEs are deficient in managerial know-how, this could greatly contain their development.

Although motivated managers are usually attracted to SMEs, nevertheless, the larger firms are exceedingly competitive. SMEs in South Africa are characterized by comparatively higher unit cost and as such, this could very well hinder efforts by SMEs to enhance their managerial capabilities given that many of the consulting firms lacks suitable cost-effective management suctions that are necessary for the development of SMEs.

Recommendations

In an attempt to help reduce the constraints that faces the development of small business in South Africa, the research paper proposes the suggestions below to be considered for implementation:

  • In order to enhance the ability of SMEs to access credit, there is need to encourage entrepreneurs in South Africa to form cooperatives. This is important, because financial institutions are convinced that peer pressure is vital in helping to reduce the associated risk.
  • The South African government should consider the introduction of tax incentives aimed at encouraging specific NGOs and training institutions to offer training and advisory services to entrepreneurs in such areas as managerial know-how and record keeping.
  • There is need to promote the use of inexpensive, adaptable and simple avenues of technology transfer in an effort to increase the productivity levels of SMEs.

Bibliography

BEES, 1995. “Guide to the Preliminary Results of the ERU / BEES SME Survey”.

Berry, Al., von Blottnitz, Magali, Cassim, Rashad, Kesper, Anna, Rajaratnam, Bala and van Seventer, Dirk. 2002. The Economics of SMMEs in South Africa. Trade and Industrial Policy Strategies, Johannesburg, South Africa.

Bolton, John. 1971. Report of the Committee of Inquiry on Small Firms. London, HMSO, Cook, Peter. & Nixson, Francis. 2000. Finance and Small and Medium-Sized Enterprise Development. IDPM, University of Manchester, Finance and Development Research Programme Working Paper Series, Paper No 14.

Feeney, Lawrence & Riding, Anne. 1997. Business Owners’ Fundamental Tradeoff: Finance and the Vicious Circle of Growth and Control, Canadian Business Owner.

Hassbroeck, David. 1996. Entrepreneurship Training for the Informal Sector in South Africa, in Educating Entrepreneurs in Modernising Economies. Aldershot, Hants, Avebury.

Gockel, Andrew & Akoena, Samuel. 2002. “Financial Intermediation for the Poor: Credit Demand by Micro, Small and Medium Scale Enterprises in Ghana. A Further Assignment for Financial Sector Policy?”, IFLIP Research Paper 02-6, International Labour Organisation.

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Kayanula, Daniel, & Quartey, Paul. 2000. “The Policy Environment for Promoting Small and Medium-Sized Enterprises in Ghana and Malawi. Finance and Development Research Programme”. Working Paper Series, Paper No 15, IDPM, University of Manchester.

Lader, Paul. 1996. The Public/Private Partnership. Springs Spring, 35(2): 41-44.

Millinuex, Anthony. 1997. “The Funding of Non-Financial Corporations (NFCs) in the EU (1971-1993): Evidence of Convergence”. Mimeo, Department of Economics, University of Birmingham.

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