Johannesburg, 05 Aug 2011
What is it about the SME sector that justifies the amount of focus and energy that this particular part of the economy enjoys? And what are we doing wrong, from a policy and execution perspective, which holds back the creation of SMEs compared to the much-benchmarked BRIC countries, of which South Africa is now a peer?
In a World Bank paper1 on the subject, four important drivers are identified, which support current thinking around the importance of SMEs in the broader structure of economies:
1. SMEs are the engine of growth;
2. SMEs are essential for a competitive and efficient market;
3. SMEs are critical for poverty reduction; and
4. SMEs play a particularly important role in developing countries.
Let's unpack these in greater detail, from a South African perspective. Firstly, do SMEs really warrant the claim that they are the engines of growth for the economy?
In a 2010 paper2 on the role of SME job creation in the South African economy, Kungolo notes that SMEs (defined as businesses employing 1 - 499 people) account for over 76% of the total employment in the economy, and of the net new jobs created between 2004 and 2007, they created 53% of these.
In short, any sector creating 53% of the new jobs in our economy needs to be nurtured. Remember, this is arguably the 'highest risk' component of entrepreneurship (few SMEs have the luxury of corporate budgets or government largesse - if things don't work out, the shareholders and employees have very little safety buffer). If better policies and institutional support can encourage more entrepreneurs to launch their SMEs, imagine what this could do for job creation in SA?
On the second point, SMEs in SA play a massively important role. Take telecoms, for example. Many of the innovative products, new delivery models and general innovations are often driven by the SME sector. It would seem that SMEs are better placed to take advantage of the deregulating sector, and are nimbler and hungrier than their corporate peers. This is great news for the general public, as competitiveness increases, and ultimately, the economy is driven to a more efficient and productive space.
The third point, that of poverty reduction as a result of SME activity, requires some more exploring. SMEs are often located in geographical areas outside of the typical large urban centres. This may be for lifestyle reasons, or simply because that is where the opportunity for business exists. Whatever the reason, the point is that economic activity outside of the major metropolitan areas leads to job creation, and the good old 'multiplier effect', much beloved by economists, kicks in, helping reduce the poverty of rural areas. Not every SME is in a non-metro area, of course, but both non-metro and metro area SMEs assist with poverty reduction through employment, training and softer social benefits such as CSI.
Finally, do SMEs have a disproportionately important role in developing economies like SA's? In short, yes they do. The presence of SMEs on a large scale can completely change the dynamics of economies - one only has to look to the growth booms in the East Asian economies in the late 1990s and early 2000s to see that the entrepreneurial energy, and nationwide innovation, was largely thanks to a strong SME sector. And it is this same sector that has been impacted the least by the global recession of the last two-and-a-half years.
So what's the problem? Basically, SMEs are struggling, and getting very little love from policymakers and corporate giants in SA.
With all the recent discussion around South Africa's admission to the much-coveted BRIC nation status, we need to benchmark the infrastructural support given to our fellow BRIC nations' SMEs. It is common cause that the SME ecosystem needs to be supportive of the growth requirements of this sector. Telecoms services specifically are vital for the success of hi-tech, innovative SMEs. At this point, I need to ask whether South Africa's telecoms ecosystem is supportive of our SME sector? I don't think it is.
Fibre access is scarce and expensive. While prestige corporate parks are getting plenty, smaller offices and commercial parks are not. Pricing and product development is either focused on the enterprise, or the consumer. The SME is lost in the middle. Account management and support levels from network providers show a similar “sorry, you're too small to take care of” indifference.
Accessible telecoms has been shown over and over to rapidly stimulate SME growth - but where are tax breaks to make it affordable? Policy directives to ensure greater delivery to SMEs through open-access requirements?
The SME sector is a latent treasure trove of economic potential and job creation ability. We need to support and nurture this sector with the collective will of a country in the midst of hosting an international sporting event. The sector's ability to deliver stellar returns on all fronts has been proven. Let's move forward from here.