The importance of SMMEs on the South African economy

Written by Vernon Cheung

May 12, 2017

According to the 2015 World Bank’s Global Economic Prospects, six of the fastest growing economies in the world are in Africa: Ethiopia, Tanzania, Mozambique, the Republic of the Congo, Rwanda and Cote d’Ivoire. Whilst South Africa offers a business-friendly environment, out of 189 economies listed by the World Bank in terms of the ease of doing business, it has slipped six places – from 37th (2014) to 43rd (2015).

According to Gideon Nieman in his book Small Business Management: A South African Approach (2006), SMMEs in South Africa have become an important focus for policy makers because:

  • The labour-absorptive capacity of the small business sector is higher than that of other size classes
  • The average capital cost of a job created in the SMME sector is lower than in the big business sector
  • They allow for more competitive markets
  • They can adapt more rapidly than larger organisations to changing preferences and trends
  • They often use local resources
  • They provide opportunities for aspiring entrepreneurs, especially those who are unemployed, under-employed or retrenched
  • Workers at the smaller end of the scale often require limited or no skills or training; they learn on the job
  • Subcontracting by large enterprises to SMMEs lends fertility to production processes
  • They play a vital role in technical and other innovations

SMMEs are expected to function as a driving force in South Africa’s social and economic stability. The country is experiencing an expansion in the middle income segment with its increasing access to buying power. Consequently there have been mounting pressures on existing infrastructure such as healthcare, security systems, services, supply of electricity, clean water and recycling, all of which offer opportunities for SMMEs to service them as well as markets around the globe. The growth of the Internet offers prospects for small companies to grow through becoming e-commerce enabled – and geographical boundaries have therefore become porous.

SMME growth projection: 2011–2014

Government policy such as that of Broad-Based Black Economic Empowerment, particularly its Enterprise or Supplier Development pillars, can facilitate the realisation of increased economic growth coupled with appropriate tax policy to result in SMMEs making a considerable and important difference to the South African economy. The small businesses sector in South Africa does already make a significant contribution to the gross domestic product (GDP).

According to South Africa Web, small businesses contribute 30% to South Africa’s GDP – which is less than small businesses in developed countries that contribute around 50% to the GDP and those in Asia that contribute around 40%. With regard to employment, SMMEs in South Africa absorb about 70% to 80% of the employed population and contribute less than 4% to export earnings, leaving a large margin for growth.

The government, particularly with the championing by the Ministry of Small Business Development, Minister Lindiwe Zulu, has committed to a high level of support for small business through a mix of tax concessions, grants and free advisory services.

“We live in a time where jobs are no longer secure or abundant. We are increasingly called upon to be self-reliant, to take risks and initiatives and to generate our own income,” says Bev Moodie in her book, Entrepreneurship Made Easy (2000). Thus entrepreneurial activity has to become the cornerstone of economic growth in South Africa and can be an important source of net job creation which the country sorely needs.

What impedes business growth?

  • Burdensome regulations
  • Lack of skills
  • Local economic conditions
  • Cost of labour
  • Lack of finance
  • Municipal cost & services
  • Increased competition

In their 2015 SME growth index headline results, the business environment specialists SBP, who conduct an extensive annual study, analyse the challenges small businesses face in South Africa. They survey 500 established companies employing less than 50 people in manufacturing, business services and tourism. The 2015 survey listed the following factors that are constraining growth and which need to be addressed: burdensome regulations (40%), lack of skills (38%), local economic conditions (37%) and the cost of labour (32%).

This important research maps the way forward in terms of issues that need to be addressed in order for this crucial sector to burgeon and grow the economy so that South Africa joins the list of the fastest growing economies in the world.

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