South Africa is squandering a critical economic asset and source ofjob creation by failing to create an environment for the small and medium enterprise sector to flourish. Butthe good news is that this can be remedied. This is the key message to emerge from the 2011 SME GrowthIndex, produced by research specialists SBP.
The headline report – Priming the soil: Small Business in South Africa – presents the findings of the first roundof SBP’s annual study. It will run initially for three years, tracking the performance and experiences of a panelof 500 SMEs. These are firms that can make a big dent in unemployment – they have survived the first two years of operation, they currently employ between 10 and 50 employees, and they operate in sectors that government has prioritised for growth – manufacturing, business services and tourism.
These firms represent a crucial subset of the business community. They contribute upwards of 50% to South Africa’s GDP and 77% of all private hiring. They are recognised internationally as a key outlet for entrepreneurial talent and the foremost driver of job creation.
The Index finds some good news. Just over half the firms surveyed plan to grow in the short term. SMEs in the business services sector in particular are confident of growth, but manufacturers and tourism firms are less so. Just over half of business services firms envisage expanding staff numbers, as do 35% of manufacturers and a fifth of tourism firms.
The bad news however is that job creation in recent years has been slow. Less than half the firms on the panel have grown their staff numbers over the past five years. Less than a third created new positions in 2011. South Africa’s SMEs are simply not growing at the pace needed for large-scale wealth and job creation. Of the factors contributing to this, the economic climate, not unexpectedly, rates highest.
With over 65,000 data points collected, the SME Growth Index provides a fascinating overview of what it is like to be an SME in South Africa. Says SBP’s Chris Darroll: “The Index is the first longitudinal study of its kind in South Africa. It provides unique and unprecedented insights into the dynamics of this sector and the firms within it. The evidence it presents helps to identify the key factors supporting and impeding the growth of SMEs in South Africa.
The Index appears against the background of repeated commitments to the principle of SME and entrepreneurship development. Most recently, the National Planning Commission’s Vision 2030 envisages that the overwhelming majority of the new jobs in the next 20 years will be generated by “small andexpanding firms.”
But recent studies show that South Africa does poorly on entrepreneurship. Our proportion of ownermanagers is among the lowest worldwide, and many new start ups fail within the first two years.
The SME Growth Index looks at the challenge from a fresh angle. Notes Darroll: “The study investigates the job creation potential of SMEs that already exist, to identify factors that help them flourish. It looks not only at external factors such as the regulatory environment and skills requirements, but also at the internal dynamics of the firm – issues like how the business owner responds to risk and whether innovation is prioritised.”
Major regulatory barriers identified by the Index are inflexible labour laws, Broad Based Black Economic Empowerment (BBBEE) and SARS inefficiencies. These are areas in which government policy is decisive, and present real possibilities for productive reform.
Firms across the panel identify the inflexibility of labour legislation as a critical constraint to growth, denying SMEs the flexibility needed to respond to rapid changes in the market. SMEs also express anxiety about increased inflexibility if proposed amendments to labour legislation materialise.
Compliance with BBBEE is also a major barrier. Says Darroll: “It emerges clearly from the data that the country’s SMEs feel weighed down by BBBEE requirements that are costly to implement, but offer few benefits. Widespread dissatisfaction among all the firms, including black-owned businesses, is very evident, despite some 57% having accreditation. Accreditation comes with annual costs, is administratively burdensome, and is not balanced by enhanced access to procurement opportunities.
Inefficiencies in government departments, including SARS, create further barriers, while paying VAT on invoice jeopardises firms’ cash flow and competitiveness.
“Also clearly emerging”, notes Darroll, “is that older firms tend overall to employ more people. This is in contrast to government’s emphasis on supporting start-ups. It’s questionable whether government’s strong focus on micro-enterprises is the best course of action. Government needs to prioritise its micro-economic goals. At present, employment targets, BEE, and labour protection are jockeying in an unviable mix. If government accepts that small business is key to its employment and economic growth goals, then it must reconsider the regulatory environment. For too long, this has been a discussion heavy on assumption and ideology and light on evidence. We need to take small businesses’ concerns seriously and find practical ways to address them”.
SBP is engaging with government, business associations and small firms themselves to explore policy implications emerging from the findings, and strategies to address the challenges.
The full report can be accessed at www.smegrowthindex.co.za