If used properly, enterprise and supplier development enhances growth
Strategic investment in out SMME sector can help restructure our economy and provide real growth
Finance minister Tito Mboweni’s budget speech was a timely reminder of the need to keep our economy from falling off the fiscal precipice. The International Monetary Fund’s (IMF) recent commentary still looms large. In short, restructure, restructure, restructure!
But implementing the recommended structural changes to our economy is not something the government has managed to get right, yet. And it’s not going to be easy to implement structural changes given the pressures added by the Covid-19 pandemic.
We believe there’s a more efficient way to put SA’s fiscal trajectory on a growth path, and that is to prioritise investment into our small-, medium- and micro-enterprise (SMME) sector.
The SMME sector is the backbone of any economy and, globally, small and medium enterprises serve economies as the largest avenue to employment creation.
In Germany, 80% of GDP is generated from SMMEs, whereas in SA our GDP comes largely from the formal sector. Germany’s Mittelstand (SME) comprises small, family-owned businesses that drive Germany’s economic growth and demonstrate the kind of entrepreneurial spirit and innovation we need to incentivise.
Before the pandemic, small businesses had a disproportionately positive impact on employment in SA. According to the Small Enterprise Development Agency’s (Seda) SMME quarterly report of 2019, the sector provided employment to 10.8-million people, which accounted for 66% of all jobs (16.5-million) in the country. Of these, only 2.55-million jobs were for the SMME owners themselves, while the balance of 8.3-million (77%) were for their employees.
We have chosen a paradigm shift on ESD and see it as an opportunity for corporate venture capita
The combined job creation of SMMEs was a staggering 2-million positions in this period, an increase of 22% in the first quarter of 2019. One can see the power of the small-business sector to create employment and we need to bear this in mind as we plan our economic recovery.
SMMEs have also been contributing to growing a more inclusive and equal economy. In the year up to the first quarter of 2019, more than two thirds of the increase in SMME ownership were black. The share of black SMME owners for the same period was 75%. Of all jobs provided to others by SMME owners, an estimated 38% were filled by female workers.
The SMME sector that employs greater numbers of people as it grows, unlike large corporates that typically outsource opportunities or invest in automation as they expand.
However, since the end of 2013, the SMME sector has been under severe strain. The Covid-19 pandemic has added to the pressures as many SMMEs don’t have the cash reserves to subsidise downtimes or lockdowns.
The additional challenges of access to market and financing are also stifling. We’ve witnessed, on occasion, the unwillingness of corporations to adopt solutions offered by SMMEs, preferring quick fixes or international brands rather than supporting small businesses as part of a longer-term, nation-building strategy.
Over the past decade, the SA government has set up funds to assist the growth of small businesses that promote economic transformation and inclusion. The government’s enterprise and supplier development (ESD) policy should, in theory, have translated into real, meaningful support for the SMME sector, but it has had limited success.
ESD requirements for corporates are too often seen as a tax for conducting business. We have chosen a paradigm shift on ESD and see it as an opportunity for corporate venture capital. In this way, ESD has become an opportunity for our corporate partners to participate in ESD in a meaningful way to promote economic inclusion and transformation, while ensuring commercially attractive returns.
By leveraging the value that already exists within our economy, specifically in our private sector, we can drive innovation, competition and scale these economic opportunities through corporate investments into ESD that more than meet the minimum BEE scorecard requirements.
ESD can offer more merit and introduce opportunities through social and commercial investments in which SMMEs are not viewed as inferior economic proponents needing handouts, but as future economic powerhouses worthy of investment.
Strategic corporate investments into small enterprises can help restructure the SA economy towards a more inclusive and sustainable growth path in the same way that Germany’s Mittelstand does. We believe this is what ESD intends to enhance and nurture.
• Baumann and Fitzjohn are executive directors of Empowerment Capital.
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