Introduction
With the world population increasing at an alarming rate, the rates of unemployment are expected to increase and people will have to find alternatives to the formal employment by finding other means through which they can make a living.
From all spheres of the world, it has been lately discovered that creation of small businesses is one of the way through which a country citizens can reduce their reliance on the nation and that small businesses play a very important role in the economic, political, and social development of a country. This sector however has been faced with many challenges on their establishments particularly in the developing countries such as in the Asian and African states.
The small business faces quite a number of challenges from taxation issues to lack of funding and corruption. The objective of this study will be to analyze the challenges small businesses face in South Africa and recommend on the likely solutions to these challenges. The reason for choosing South Africa rather than Sudan is the fact that in South Africa small business enterprises are very important particularly to the majority of the low skilled population[1].
It is a fact that:
“Small, medium and micro-enterprises (“SMMEs”) contribute 36.1% of the country’s gross domestic product (“GDP”) and employ 68.2% of the workforce in the private sector. In the agriculture, construction and retail sectors, SMMEs employ more than 80% of the total workforce. Over the last few years, the growth in employment by SMMEs has exceeded the growth in their contribution to GDP, highlighting the job creation potential of this sector of the economy”.[2]
That is the reason why many refer small businesses as the development engine for most countries as they aid in economic growth and job creation. In the last few years, they have been the sole means which has accelerated growth in rather poor economic conditions as most of them create employment and enhance poverty reduction[3].
Definition of Small Business
It is a very difficult process of defining what a small business is because it all depends on the perspective you look at it. The few characteristics one may look when defining a small business include the potential market size, the management, the size of the employees and many other factors. Some people define a small business as a business having less than 20 employees[4], categorizing them as non employing businesses, micro businesses and other businesses.
Others define small businesses in terms of ownership and management characteristics. These classes of small businesses include the independent owned, close control by owners and partnerships. In consideration that this study is based on South Africa, we will use the country’s definition according to the National Business Act that a small business is a business with not more than 50 employees with the turn-over rates varying according to the sector.
There is quite a big distinction in small businesses between service and manufacturing small businesses. The policy makers and business owners of small manufacturing businesses attribute old technologies and management strategies as some of the challenges they face on their way to growth while the service businesses are all about one’s attitude and adaptability of the business.
In terms of size, the service industries are also known to be larger than the manufacturing businesses and their out put per worker is higher compared to the manufacturing businesses due to the simple fact that while manufacturing rely on physical capital service, businesses rely on human capital which can be increased or decreased according to the situation. Small services businesses are also not entitled to registration for taxation in contrast to the manufacturing businesses which have to register and pay taxes.
For example, a small manufacturing business will require capital to buy the plant machinery while a service industry such as the hair salon requires the human effort only to earn the money. Another challenge lies on the differences in the costs of acquiring assets. It makes it more beneficial to start a small service business rather than a manufacturing one.
According to the South African law “”small business” means a separate and distinct business entity, including co-operative enterprises and non-governmental organizations, managed by one owner or more, which including its branches or subsidiaries (if any) is predominantly carried on in any sector or sub sector of the economy”[5]
And the amendment of the bill in 2003 classified small businesses under the following categories (see appendix for the table)[6].
Overview of the Small Business Context
Small businesses in South Africa do not contribute more to the GDP compared to other developing countries due to several challenges which include the high unemployment rate and inflation. Many studies show that the small business sector contributes 30 to 50 % of the country’s GDP. SEDA puts the figures at 42% as of year 2002, 46% as of 2004 and at 30% as of 2007.
Aswani[7] estimates south Africa had 2.5 million enterprises as of 1999 with 45% of south Africans working in the sector which represented 4.8 million people and at that time the small businesses contributed about 50% of the GDP. With the poverty rates having risen from 15.5 % in 1995 to 30.5% in the year 2002, the small business contribution has since reduced to the above said level. To the employment, the small business sector absorbed 57% as of 2002[8].
Constraining Issues
As in any other sector in the economy, the small business sector faces quite a number of challenges as they try to improve and increase their contribution to the south African’s GDP. According to the SADE SMME (Small Medium and Micro Enterprises) development and support plan, the major factors hindering the growth of small businesses are:
“Finance, structural demands, intensity of competition, cost of labour, labour legislation, managerial skills, and managerial style”[9].
These above constrains will be covered in this study as under infrastructure, corruption, inflation, lack of credit and the human resources.
Corruption: (Legal – Political – Economic)
The act of unfair or illegal influence in decision making process by use of power or wealth, for example, the act of giving or receiving a bribe in order to give service or an illegal substance can be described as corruption. This vice occurs in every country in the world and in every level be it in the private or the public sector[10].
The giver and the receiver of the bribe are beneficially of the crime and thus both need to be punished by the existing laws. Instance of corruption have been reported in south Africa for example in places where crime rates are high, small business owners are reported having given policemen money in order to access their protection from the criminal activities[11].
Analysis:
If the small businesses are not protected from the criminals, they will continue losing their millions of investment but paying policemen in order to acquire their services (while that is the job they are assigned to do) amounts to corruption and losses to the already endangered small business enterprises.
Implication:
Corruption in South Africa is a major hindrance to the country’s small business sector and action need to be taken against corruption as it reduces the productivity capability of the small businesses.
Inflation: (Economic)
Small businesses are also vulnerable to the low inflation rates which increase the cost of doing business and leads to a probability of businesses making huge losses as a result of the decreased prices. In the year 2010 the country recorded a 3.2% as of September this is very risky for those doing business within[12].
Analysis:
When inflation is at very low rates it reduces the chances of recovering the borrowed capital. For example, let’s say you bought an item for 10 Rands and then next time the price falls to 5 Rands that means if the money was from a borrowed source you will have to find ways of sourcing for 5 Rands per item and this makes the banks to take higher precautions when giving out loans.
Implication:
Low inflation rates while they may be healthy for the population as a whole do not favour businesses in realizing their profitability due to the decreased prices of commodities.
Infrastructure: (Technological – Economic)
Despite the good infrastructure network in South Africa, a research based on Soweto youth entrepreneurs shows that infrastructure is a major barrier to the success of small businesses in that area.
They cites examples of the city of Johannesburg making some efforts in tarring the roads and providing taxi facilities but the report also complains that the city is doing nothing to support business activities in Soweto. The report also indicates that improvements in the transport sector would allow more people to move easily within the Soweto area and this could enhance their business activities[13].
Analysis:
If the infrastructure connecting major towns and rural areas such as Soweto could be improved, the small business sector could improve a lot as this would enhance cheaper movement and exchange of goods and services between the major and the minor players in the business sector.
Implication:
Poor infrastructure increases costs of conducting business in any place and thus to increase the contribution of small business sector in South Africa infrastructure need to be improved in all places.
Lack of credit funding: (Economic)
Commercial banks and other financial institutions are unable to fund small businesses due to internal capacity problems. Most of the small business owners requiring financial assistance from the finance and banking sectors are unable to provide the banks with adequate reliable information which can allow their evaluation on their credit worthiness.
This makes the commercial banks in South Africa provide credit facilities to only those businesses which provide reliable information fulfilling the credit worthiness criterion. Offering loans to small business owners is also difficult in South Africa as most banks offer loans with high return rates and this increase the cost of borrowing in the country. Information from Investors Network indicates that on average when people present their business plans to financial institutions this is what happens:
“60% are rejected after a 30 minute review
25% are rejected after a 3 hour appraisal
10% are rejected after a full day evaluation 3% are rejected following failed negotiations
2% succeed in raising funds
Yes, read it again, only 2% of businesses seeking private equity are successful.”[14]
Analysis:
With the high costs of borrowing most of the South African small business owners are unable to source for extra capital that may be required to expand their businesses and also the low probability of accessing loans in south Africa makes it hard for small businesses to succeed as in other countries.
Implication:
The small businesses in the country will continue to suffer unless legislations are enacted which can allow most of the small business entrepreneurs access loans without much scrutiny as far as there are collaterals to the loans.
Human Resources: (Social Culture)
There is the inability of small businesses to obtain well trained and qualified personnel as they are unable to provide comfortable and better pay working conditions and most of the time they offer wages which are way below the current market rates[15] . As a result, larger businesses remain way above small businesses.
Most small businesses as we saw with the country’s guidelines are made of few employees thus higher chances of understaffing. The apartheid era employed an inferior education system and unfair patterns of population settlements. Thus, it has been evident that most of the South Africans of the African origin are inadequately skilled in any field they are participating in and this has been a major challenge as they start up and run their small businesses.
Analysis:
The low education among the South Africans of African origin is one of the major causes of the limitation of small business staffing particularly those owned by the blacks. Understaffing is also a major problem as most small business want to gain higher profits; the result is exhaustion and poor workmanship.
Implication:
As long as the small businesses are understaffed, their productivity will always remain low compared to the large business enterprises.
Recommendations
To improve the small businesses situation in South Africa, the small business owners need to access funds for their business activities. The government and the banking institutions need to agree on the requirements one has to fulfil when acquiring loans.
To the question about infrastructure, the government should ensure that the transport network is well established in all places whether in the major towns or in the ghettos so as to promote the growth of small businesses in the country. The challenge of inflation is more of a global issue but the central bank in the country should control its releasing and hold up of money so as to avoid high inflation or deflation rates on the country’s currency.
Action Plan:
To reduce inflation the government should design policies which enable its currency value to be at a stable position to avoid unexpected changes in prices. For the corruption part if the country authorities could ensure that every citizen is safe when doing business and that bribes are not given out in order to gain favours, small businesses will move miles ahead.
Understaffing is brought about by the inability of small businesses to acquire enough capital to run the business and thus by enabling small business owners access loans at lower costs will enable them hire more working personnel.
Conclusion
The small business contribution to the country’s GDP is very low compared to other countries and thus for their contribution to be higher, challenges they face such as corruption, poor infrastructure, inflation and inadequacy in human resources need to be addressed and a good solution reached.
Bibliography
Anonymous. “Small business in Australia.” Australian Bureau of Statistics, 2009. Web.
Aswani, Frank. “Barriers and facilitators to transitioning of small businesses (SMME’s) from the second to the first economy in South Africa: Gordon Institute of Business Science.” University of Pretoria, 2007. Web.
Centre for Development and Enterprise report. “Young Soweto entrepreneurs.” CDE, 2007. Web.
Foreign Investment Advisory Service of the World Bank Group. 2007. South Africa.
Investors Network. “Private Equity Financing for SMEs in South Africa.” Investors Network. Web.
Minnaar. “BUSA Anticorruption Working Group.” Newsletter, 2008. Web.
Molapo, Sekoala. “Financial sector support for small business development.” University of Johannesburg, 2007. Web.
National Small Business Act. Republic Of South Africa, 1996.
National Small Business Amendment Bill. Republic of South Africa, 2003.
Newham, Gareth. “Tackling police corruption in South Africa.” Centre for the Study of Violence and Reconciliation, 2002. Web.
Okpara John & Wynn, Pamela. “Determinants of Small Business Growth Constraints in a Sub-Saharan African Economy.” SAM Advanced Management Journal, 2007.
Trading Economics. “South Africa inflation rate.” Tradingeconomics, 2010. Web.
Xhariep SMME Development and Support Plan. Small Enterprise Development Agency, 2009.
Footnotes
- Foreign Investment Advisory Service of the World Bank Group. 2007. South Africa.
- Foreign Investment Advisory Service of the World Bank Group. 2007. South Africa p.15.
- John, Okpara., & Pamela Wynn. “Determinants of Small Business Growth Constraints in a Sub-Saharan African Economy.” SAM Advanced Management Journal, 2007.
- Anonymous. “Small business in Australia.” Australian Bureau of Statistics, 2009.
- National Small Business Act, 1996. clause XV.
- National Small Business Amendment Bill, 2003.
- Frank, Aswani. “Barriers and facilitators to transitioning of small businesses (SMME’s) from the second to the first economy in South Africa: Gordon Institute of Business Science.” University of Pretoria, 2007.
- Xhariep SMME Development and Support Plan. Small Enterprise Development Agency, 2009.
- Xhariep SMME Development and Support Plan. Small Enterprise Development Agency, 2009. p.14.
- Minnaar. “BUSA Anticorruption Working Group.” Newsletter, 2008.
- Gareth, Newham. “Tackling police corruption in South Africa.” Centre for the Study of Violence and Reconciliation, 2002.
- Trading Economics. “South Africa inflation rate.” Tradingeconomics, 2010.
- Centre for Development and Enterprise report. “Young Soweto entrepreneurs.” CDE, 2007.
- Investors Network. “Private Equity Financing for SMEs in South Africa.” Investors Network.
- Sekoala, Molapo. “Financial sector support for small business development.” University of Johannesburg.