Promoting Small and Medium Enterprises
4.1 The Role of SMEs in Economic Development
Promoting Small and Medium Enterprises
4.1 The Role of SMEs in Economic Development
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n many developed and emerging economies, SMEs account for over 90% of the to-tal number of business enterprises, and for more than 50% of toto-tal employment. The definition of SMEs varies from country to country and is generally based on the size of enterprises in terms of employment, investment level, and output. The specification of these factors for SMEs tends to be affected by the size of leading industrial and commer-cial establishments in each country.Other general characteristics of SMEs in LDCs include relatively poor access to basic commercial services such as credit and technology, and relatively modest internal organi-zational skills that constrain their full participation in mainstream commercial activities.
Most African enterprises are of small and medium size with general characteristics of informal sector enterprises. Their development and overall impact on socioeconomic de-velopment is hampered by weak technical and management skills, poor access to technol-ogy and research services, poor access to credit, poor exposure to markets, insufficient assistance from productivity centres and training centres, poor access to production in-puts, poor physical infrastructure for production, and poor access to suitable utilities for commercial production. In comparison, SMEs in industrialized countries are involved in modern manufacturing and services, often with cutting-edge technology, strong entrepre-neurial bases, vibrant export sectors, and a good base of technical skills.
Table 4.1: Shares of SMEs in GDP and Employment in Selected Countries
Country Contribution to:
GDP (%) Employment (%)
S. A. [Informal Sector] (2000) Unknown 26.0%
S. A. [Small Business] (2000) 34.8% 55.0%
Mauritius [SMEs] (2002) 23.4% 36.3%
Netherlands [Small Business] (1996) 60.0% 50.0%
Europe [Small Business] (1996) 47.0% 66.5%
Japan Regional [Small Business] (1998) 25.0% proxy 83.2%
Japan Metro [Small Business] (1998) 25.0% proxy 75.6%
Source: Ntsika (2000): The State of Small Business in South Africa 2000; The State of Small Business in the Netherlands 1996. Commissioned by the Dutch Ministry of Economic Affairs, compiled by K. I. de Lind van Wijngaard;
Japan Small Business Research Institute Annual Report, 1998; and Mauritius CSO.
Table 4.1 summarizes the comparative contributions of small business to GDP and em-ployment rates in Mauritius and South Africa as compared to Europe and Japan. The formal sector contributed 74% (55% by small business alone) and the informal sector 26% of employment in South Africa, in the year 2000, not very different form European figures.
Box 2.2: SMEs and the Informal Economy
In a study of SMEs in Eastern and Southern African countries, Ng’andwe (1986) observed that in spite of the several constraints, SMEs and the informal sector were making major contributions to these economies. Many household goods such as kitchen utensils and furniture for the majority of low- income people come from SMEs. Construction activities for rural houses and low-income urban houses are dominated by SMEs, and so this is the same for agriculture. In Uganda, when the civil strife of the 1980s led to the complete collapse of major industries, the Ugandan economy was sustained by SMEs, further underlying the insignificance to the overall economy.
In recognition of the important role of SMEs, most countries in the Southern Africa sub-region had by the mid-1980s established public institutions for the promotion of SMEs. Tanzania has established a Ministry for Small Industries. Uganda and Mozambique are the only two countries in Eastern and Southern Africa that do not have specialized public institutions for the promotion of SMEs. However, their SME organizational and promotional efforts are directed and coordinated by the private sector-owned Small Business Associations. In this respect, Uganda and Mozambique present a rare model in which the concerned private sector entrepreneurs, through their associa-tions, are nationally recognized as the principal architects of policies and programmes related to the promotion of SMEs.
The shares of Mauritius SMEs in GDP and employment are the lowest for the sub-region, which may be explained by the definition of SMEs in Mauritius. Mauritius is an excep-tionally small economy and its definition of SMEs is bound to be significantly different
from the other countries. What is evident though is that SME contributions to GDP and employment are very significant in Africa, Europe, and Japan.
Table 4.2 shows the contribution of SMEs to employment growth in South Africa for the period 1981-2000. The smaller the enterprise the higher the average growth rate i.e. micro (3.4%), small (1.22%), medium (0.96%) and large (0.93%). Considering that the com-bined small and informal sector accounts for 81% of total employment, the high growth rate in this sector are very significant for the overall growth rate of employment.
In agriculture, trade and transport, large-scale businesses have better employment growth rates, while in mining, manufacturing, and business services, the SMEs have superior employment growth rates. In construction, the large, medium and small have average negative employment growth rates, while the micro has a positive 1.47% growth rate.
These trends may reflect the greater flexibility of SMEs to adapt to changing market conditions.
Table 4.2: Average Employment Growth Rate in South Africa by Sector
Sector
Average Employment Growth Rates in S. A. over 1981 – 2000 period
Business Services 4.46% 11.24% 22.97% 5.70% 6.75%
Other Services 12.91% 19.97% -21.82% N/A 2.33%
Average Growth 3.42% 1.22% 0.96% 0.93% 1.33%
Source: Ntsika (2000) “The state of small business in South Africa”.
Table 4.3 shows the role of SME in improving average disposable incomes. While aver-age salaries declined in the construction sector for small, medium and large enterprises, and for the transport and agricultural sectors with regard to micro enterprises and small enterprises respectively, the average nominal salaries increased for all the other productive sectors and enterprise categories. The contribution of SME to growth in incomes is very significant. Except for the transport sector where large enterprises salaries grew at average 3.65% compared to 0.49% for small, 1.23% for medium, and –1.4% for micro enterpris-es, the combined SME growth rate is significantly superior to that of large enterprises.
Table 4.3: Salary Growth Rates by Sector in South Africa
Sector
Average Salary Growth Rates in S. A. over 1981 – 2000 period
Average Growth 6.14% 2.94% 3.60% 2.35% 3.90%
Source: Ntsika (2000) “The state of small business in South Africa”