The Small Business Environment in Zimbabwe - Term Paper Example

 The purpose of this report is to provide an inside view of the small business environment in Zimbabwe; a state in the sub-Sahara region. The essay will start with the definition and its evolvement over the time and the nature of the small business in different contexts. It will be followed by the small business environment in the developed and developing countries and give an overview of the environment in the Sub-Sahara region as well. It will be continue on with the analysis of the small business environment in Zimbabwe with particular reference to political, legal and economic aspects. The results will be concluded and then recommendations will be provided based on the problems identified in the analysis stage. Small Business Report Definition of Small Business There is no one single, consistent definition of small business that is widely accepted. Therefore, there are different definitions for different sectors and regions. It is the objective nature of the business that defines the small business. Bolton Committee In 1971, the Bolton Committee put down the two separate definition of small business with respect to economic and statistics. The economic definition stated that the small business is one that is relatively small share in the market, true owners run the place with no management structure and were independent. Whereas the statistical definition stated that the definition varied across the sectors. It said that manufacturing and construction were defined by the number of employees, retailing and services by turnover and road transport by number of vehicles. For example: A manufacturing businesses is considered small if it employs less than 200 employees (Storey, 1994). Alternative Economic Perspective This perspective stated by Wynarczyk et al. said that the small firms will be different from the larger firms with respect to three important dimensions: uncertainty, innovation and evolution. The definition did not take a good pace in the minds of the researchers (Storey, 1994). European Commission Another definition of small businesses is laid down by the European Commission. They developed a new term ‘small and medium enterprises’ to define small businesses. This definition is invariant irrespective of the sector and region and uses only one variable, employee, to define the term. It stated that: Micro-enterprises: 0 – 9 employees Small enterprises: 10 -99 employees Medium enterprises: 100 – 499 employees. The Bolton Committee definition faced severe criticism on several grounds. And therefore, the definition put forward by the European Commission supersedes all the other definitions and is most commonly used these days. The research suggested that most economists use their definitions of small business which they deem appropriate at the particular situation (Storey, 1994). For example: In India, an industrial business that has fixed assets of less than Rs. 10 million is considered a small business. Nature of Small Business Small business comprises large number of firms around the globe. They are considered to an important source to all the economies around the world in terms of employment creation, contribution to GDP, innovation and stability of the economies. In Europe, more than 95% of all the firms are considered small businesses. Moreover, these small businesses face several obstacles in their path to growth and welfare. These hindrances could relate to lack of managerial skills, specialized labor, and access to capital, unstable macroeconomic environment, corruption, and poor infrastructure, depending on the country. Small Business Environment in Developed and Developing Countries The small business environment in the developed counties is dynamic. These businesses are considered to be a source of innovation, employment and stability of the long term economy in the developed countries. In the European economy, around 95 percent of the businesses are small and a source of employment to more that 50 percent of labor forces (Storey, 1994). In the United States, 99 percent of the enterprises employ less than 500 people and are a source of employment to more than 52 percent of the total US workforce (US Department of State, 2010) . The developed economies create a favorable business environment for the small business. They provide with easy access to finance, resources and services and formulating a legal environment that supports the growing of small businesses. In the developing economies, the governments support the small business environment. These governments provide these small businesses with the training facilities, easy credit terms for machinery, tax concessions, and bonuses to people staring businesses in backward areas. They also help these businesses with the marketing of their goods and services in both local and foreign markets. In these developing countries, most of the people live in rural and sub-urban areas which make the small business an optimal option for them. In India, small businesses employ the highest number of people after agriculture (Business maps of India, 2010). In Pakistan, small enterprises comprise 90% of all the firms existent in Pakistan and are a source of employment to more than 80% of non-agricultural workforce. At the same time, small enterprises face severe problems in these developing economies. Despite the claim that easy credit facilities are available, they face stern cash flow constraints, power shortages and are hindered by corruption (SMEDA). Small Business Environment in Zimbabwe The World Bank uses several different indicators to analyze the business environment of a country. Entrepreneurs in Zimbabwe usually have to go through a rigorous process of 10 steps over a period of 96 days to open a business. It is worse off than the regional average of 63 days(). The focus of the entrepreneurs in Zimbabwe is very short term. They want to enter the lucrative markets very early and earn as much as possible (Thandazile, 2007). Political Environment The political situation in Zimbabwe is fragile. The people and government are regularly met with threats and violence. At the same time, bad governance and the destruction of the economy have destroyed the image of the country (AFP, 2010). The government tries its level best to support the small businesses through its policies and reforms but is unable to focus due to the unstable political situations. Currently, Zimbabwean government is fully supporting the small and medium enterprises to guarantee their successful participation in the expo programs. The government tried to reduce the burden of the costs of participation and provided them with easy access to financial small loans (Golden, 2010). The unstable government and the fragile policies negatively impact the small businesses and dampen the environment for growth of businesses. Legal Environment In general terms, Zimbabwe has in place protection of the intellectual property and has legislations that process the registration of trademarks, designs and patents. At the same time, it is ranked 69th in terms of enforcing contracts. It usually takes more than 2 years to complete the process for filing of bankruptcy. The costs are usually high but the returns are very low. The legal environment for small business setup is really rough because there is no respect for intellectual property and patents and has a high ratio of piracy. Economic Environment There are a wide variety of economic problems that the small businesses face in Zimbabwe. The government printed the currency until 2009 to finance their budget deficits. This caused hyperinflation especially for consumer goods. Therefore, the small businesses could not cope with the high rate of rising costs. This year has seen some improvements because the government will no longer use the Zimbabwean dollars to finance and therefore, cease the hyperinflation (Theodora, 2010). The two major reasons affecting the small businesses in Zimbabwe are the lack of access to capital and high cost of finance. At the same time there is a limited interaction between the financial institutions and the emerging entrepreneurs. These institutions believe that the risk involved in financing the samm businesses is much higher as compared to market risks. On the other hand, the instability in the macroeconomic environment including government has increased the risk of investing and hence, the rates of interest on the financials (Kapil). At one point in time, the inflation rate was floating over 150% with cost of financing hovering over 100% and the unemployment figure had reached 70%. With these figures, Zimbabwe was considered the weakest point for small business investment in the Sub-Sahara region. Many of the entrepreneurs are finding it quite difficult to operate in such an unstable macroeconomic environment and often are seen leaving the business. In a single year 2005, around 800 companies are believed to have closed down their small manufacturing shops due to financial constraints and lack of foreign currency according to the Employers’ Confederation of Zimbabwe (Gift, 2005). Task Environment The workers in the Zimbabwean state are underpaid and. Therefore, conflicts between the unions and the governments often arise risking the chance of strikes. These strikes will cause the efforts of the government to stabilize the economy to prolong and hence worsen the situation for small business holders (). At the same time, the labor and the people in this country lack the necessary managerial skills to operate in a small business environment. The lack of training is one of the biggest obstacles to starting a self-run small business. Zimbabwe has a very high literacy rate of over 90% but lacks the vocational training as well as the business education that is relevant to small business development and entrepreneurship culture (Thandazile, 2007). Conclusion “Zimbabwe continues to be the case study for how political mismanagement can turn into an economic disaster which leads to a social collapse1.” The small business environment in Zimbabwe is very uncertain and fragile. The political situation is very unstable with frequent change in governments and change in policies. It is a low income country with unstable fiscal and monetary macro-economic policies in place. It has led to hyperinflation with a very high cost of financing the business. More than 80% of the people live under $2 a day and the purchasing power of the people has been declining over the years as well. At the same time, I believe that it has the relevant natural resources but does not possess the necessary skills needed to start a business. It is ranked as 159th in the “Doing Business” ranking (World Bank, 2010). Zimbabwe needs to understand the importance of the small business management and entrepreneurs in terms of job creation, creativity and contribution to the growth of the economy. These small businesses stabilized the financial system of the country. And therefore, to attract these entrepreneurs, Zimbabwean government needs to stabilize the economic fiscal and monetary policies by building a long term plan. Recommendations Much has been done and much needs to be done in Zimbabwe to improve the small business environment. The departure of the macroeconomic policies of the previous government in 2009 has put an end to the problems of hyperinflation, scarcity of the foreign currency and the multiple exchange rates. The government has also put an end to the price and exchange control restrictions. Therefore, the government has done much to improve the business environment in Zimbabwe to promote the growth of the small businesses. International Monetary Fund has provided them with $1 billion to help them with the cash flows during the decision making (USAID, 2010). The government could further create a more favorable environment for the small businesses. It could remove unnecessary obstacles and reduce the costs and number of days required to start a business. At the same time, the government needs to increase the interaction of the financial institutions and the emerging entrepreneurs to develop better forms of financing small businesses and the working capital. At the same time, the government should keep a check on the cost of financing and keep the interest rates competitive to the world environment. This would allow the foreign investment to flow into the country. The government should also try to bring the stability in their macroeconomic policies because it increases the investor confidence and allows the businesses to operate more successfully. Policies and reforms should be put in place to improve the small business environment. They should be protected for a limited period of time so that they become more competitive and productive. At the same time, the government should provide them with benefits of tax concessions, duty free import of capital machinery and other fringes top promote further development of small businesses. Special economic zones can be developed for smaller technological and more capital intensive firms. ` References D. J. Storey. (1994. Understanding the small Business Sector. Kapil Kapoor. (1997). Empowering small enterprises in Zimbabwe. World Bank publications E. Mayo (1995). The Role of the National Small Business Advisory Group in Small-scale Enterprises in Zimbabwe. IDRC. T. S. Mpofu (2007). Entrepreneurship and Leadership. B. Raftopolous. Current politics in Zimbabwe: confronting the crisis, in D. Harld-Barry, Zimbabwe: the past is the future, Harare, Weaver Press, 2004. Aleksandr Shkolnikov. (2009). The Social Costs of Political Mistakes. Retrieved on Apr 5th 2010 from http://www.cipe.org/blog/?p=1618 G. Phiri. (2005). Zimbabwe: Economic Crisis Batters Small Business. Retrieved on Apr 5th 2010 from http://www.afrika.no/Detailed/6957.html Maps of India. Small Business in India. Retrieved on Apr 5th from http://business.mapsofindia.com/india-business/small-business.html SMEDA. (2010) State of SMEs in Pakistan. Retrieved on Apr 4th 2010 from http://www.smeda.org.pk/main.php?id=34 USAID. (2010) Economic Growth Program Summary. Retrieved on Apr 5th from http://www.usaid.gov/zw/economic_growth.html US Department of State. ((2010). Small Business in the US. Retrieved on Apr 4th 2010 from http://economics.about.com/od/smallbigbusiness/a/us_business.htm Read More