MARK SMITH: Can SMMEs be the answer?

The president’s state of the nation address (Sona) in February underlined the importance of the private sector for job creation and boosting the economy in SA. With the economy facing the challenges of rising inflation, energy shortages, global uncertainty and high unemployment rates, the challenges are large. The possibility for small and medium-sized enterprises (SMMEs) to provide a way forward has once again been underlined as important. The president is not alone in reaching for entrepreneurship and small business owners to help.

SMMEs are regularly highlighted as a source of economic growth and employment creation. Indeed, in SA they account for more than 90% of registered companies and about three-fifths of employment. This statistic is replicated across countries and regions around the world, not to mention the size of the informal sector of emerging and developing economies. Furthermore, the research suggests that SMMEs account for about two thirds of all employment growth.

However, it is important to note that while SMMEs create employment, they also lose employment. The sector, and employment in the sector, are far more turbulent than that of larger organisations. Indeed, when employment is increasing or declining, SMMEs will also be destroying and creating jobs against the trends. Thus, before we seek a panacea for the economy’s woes we should remember the volatility of employment in the SMME sector and that fewer than half of start-up companies survive more than five years.

Much has been made of the need to create a conducive business environment and cut so-called “red tape”. This is a common refrain around the world as governments rail against regulations, often disregarding that they may have been the legislators themselves in the past. It is perhaps easy to blame this red tape for problems in the economy, but we should also remember that those regulations may protect some workers, protect customers, and provide a degree of stability for organisations competing in the same market.

SMMEs by definition have a more limited capacity to deal with such regulations and institutional requirements. We see this in the responses to Covid-19 across the world, the responses to Brexit in UK, and the day-to-day challenges of doing business in SA. Rightly, there are frequently exemptions from regulation for SMMEs that recognise their more limited capacity to cope with the regulatory burden.

The famous red tape is just one of the issues faced by all organisations and in particular SMMEs. Potentially bigger obstacles stand in their way, for example access to finance, response times from bureaucratic processes, the lack of professional management, capacity issues and payment delays from larger organisations. In fact, a supportive environment for SMMEs is perhaps more important than concerns about red tape.

By providing them with a stable environment, effective and efficient processes for registration, finance and advice, the so-called red tape may seem less important for business owners. Here business schools can play a role in advising and advocating for a supportive environment.

The potential benefits for providing a rich and conducive environment to SMMEs is high. There are many untapped human resources that could be encouraged and developed for the SMME sector, including women and young people, with benefits for the wider economy and particular groups. Furthermore, small enterprises can be a driver for innovation in sustainable development for wider society. What the country needs is a coherent strategy and, importantly, implementation of the strategy.

• Smith is director of the Stellenbosch Business School.