SMMEs need enabling economic environment to thrive

According to the Small Enterprise Development Agency (SEDA), there are 2.7 million SMMEs, of which 792 000 are formalised.

According to the Small Enterprise Development Agency (SEDA), there are 2.7 million SMMEs, of which 792 000 are formalised.

Published Jun 27, 2024


By Goosain Solomon

We observe Micro-, Small and Medium-sized Enterprises Day on June 27, Thursday, to acknowledge the potential of these businesses to create employment opportunities, boost economic growth and address poverty in poorer countries.

Small, Medium and Micro enterprises (SMMEs) constitute 90% of businesses and provide more than 50% of employment opportunities, while their contribution to the gross domestic product (GDP) in emerging economies is 40%, according to the World Bank.

The Quarterly Labour Force Survey released by Stats SA in May this year shows that South Africa, a dual and efficiency-driven economy, has an unemployment rate of 32.9%.

According to the Small Enterprise Development Agency (Seda), there are 2.7 million SMMEs, of which 792 000 are formalised.

Their contribution to gross domestic product is just under 40% (excluding micro-enterprises). In addition, South Africa, with a Gini coefficient of 0.67, is the country with the highest inequality rate in the world.

There is also a lack of entrepreneurial enthusiasm. The 2021/22 Global Entrepreneurship Monitor: South Africa Report shows that although the intention to start a business venture has improved from 11.9% in 2019 to 20% in 2021, it still lags behind the African region’s average entrepreneurial intention of 40.6%.

The fear of failure expressed by 53% of the sample could partially explain the low entrepreneurial intention.

According to Trade & Industrial Policy Strategies, the small business sector grew relative to economic growth suggesting that small businesses increase in step with economic growth.

This concept supports the notion that SMMEs require an enabling economic environment to be successful and flourish.

Small businesses face exogenous and endogenous risks. Exogenous risks are the external economic- and industry-related factors over which small businesses have little or no control.

Endogenous risks, on the other hand, relate to internal factors, for example, a lack of management skills, which the business can control.

However, another hampering factor is the lack of integration and focus from SMME support mechanisms, as echoed by Seda’s research manager: “There is too much disconnect among structures or organisations that support SMMEs”.

In achieving higher levels of success for small businesses, it might be useful to understand failure. Business failure does not always occur because of problems in one’s own company but can happen as a knock-on effect from actions made by other businesses, suppliers, and customers.

Therefore, it is important to recognise the early signs of business failure before it is too late for the situation to be resolved because business failure is not a sudden event, but a dynamic process as Jaroslaw Ropega pointed out in an article in International Advances in Economic Research (2011).

We struggle to detect a failure trajectory because we lack the ability to differentiate causes from symptoms.

Recognising symptoms of business failure is important. For example, the dominant symptom is often a lack of cash in the company’s ongoing operations. This points to a larger problem, namely the inability to manage the fall in profits and sales to compensate for the increasing costs of business.

Ropega’s research also shows that symptoms indicating small businesses’ weaknesses include lack of internal controls, lack of business plan in the area of owner-manager decisions, loss of trust in counterparties, problems with distribution in the area of market orientation, the reduction in efficiency of productivity, lack of staff development, and the reduction of quality of products or services.

So, how can we help SMMEs in South Africa to flourish?

What is required is a multi-faceted approach that includes the identification of opportunities at an industrial scale, the integration of enablers and support mechanisms, and the execution of targeted support. There are already various programmes developed by the Department Small Business Development, including the Small Enterprise Manufacturing Support Programme (SEMSP).

However, despite the SEMSP, a pipeline of competent SMMEs is needed to support the opportunities that are identified for example, the Enterprise and Supplier Development (ESD) where macro-level opportunities are enabled for SMMEs such as the Supplier Development Programme (SDP).

At the macro level, the primary actors are expected to facilitate an enabling environment, such as addressing the disconnect among structures or organisations that support SMMEs as per the quadruple helix – government, academia, business and society.

Opportunities and initiatives like the ESD and SEMSP are under way to promote business and entrepreneurship development.

One notable example is the establishment of the Centre for Africa Entrepreneurship at Stellenbosch University (SU), funded with R4 million from Allan & Gill Gray Philanthropies.

The centre will conduct research on entrepreneurial ecosystems, aiming to support the university in tackling these socio-economic challenges. The centre also intends to foster collaborations between public and private entities within the entrepreneurship ecosystem. This initiative reflects SU's enhanced focus on entrepreneurship and innovation, driven by the belief that entrepreneurship is crucial for economic growth and job creation, especially in South Africa and Africa.

In support of the ongoing initiatives, the new government of national unity has the chance now to leverage the opportunities for the SMME sector and play the role required in fostering an enabling environment for the sector to thrive.

That will give meaning to the words of President Cyril Ramaphosa on March 15, 2020: “It is true that we are facing a grave emergency. But if we act together, if we act now, and if we act decisively, we will overcome it.”

Goosain Solomon is a lecturer in the Department of Business Management at Stellenbosch University.