Constraints of Small Business Development in South Africa - Research Paper Example

Constraints of Small Business Development in South Africa Table of Contents Introduction 2. Definition of Small Business 3. Overview of the Small Business Context 4. Constraining Issues 4.1 The lack of effective support by the government 4.2 Social environment 4.3 Discrimination 4.4 Marketing 4.5 Ineffective HR policies 5. Recommendations 6. Conclusion References 1. Introduction The increase of competition in all industries worldwide has caused a series of alterations in existing business policies; firms of all sizes update their plans and proceed to the development of strategic alliances in order to face their competitors. The potentials of firms to stabilize their position in a particular market seems to be directly related with the market conditions and the support available by the state. Current report focuses on the constraints in small business development in South Africa; the firms of this size seem to face a series of obstacles in regard to their entrance and their survival in the local market. This report presents the factors that negatively affect the development of small businesses in the particular country and suggests a series of measures, which could help towards the limitation of these constraints – even in the long term. Important functional problems but also problems in these firms’ external environment are presented and critically analyzed. 2. Definition of Small Business Legislators worldwide have described the term ‘small business’ using similar criteria; most commonly the number of employees is the key criterion for characterizing a business as ‘small’. In accordance with Little (2005) the term small business is used for describing a firm with up to 499 employees, in accordance with the description given by the Small Business Administration (USA). The annual revenues of a business is another criterion for the characterization of this business as ‘small’; in the study of Hillman (2001) it is noted that a business is characterized as small when its annual revenues are up to $25 million. 3. Overview of the Small Business Context In South Africa, the criteria used for the characterization of businesses as small are slightly differentiated compared to the criteria used in Western countries for the same purpose; a comparison can be made between the characteristics of small businesses in USA and those in South Africa; in fact small businesses in USA could be characterized as small businesses in South Africa (Goldman et al 2008). In South Africa, the size of the firm is decided in accordance with the following criteria: the number of its employees, the level of its annual turnover, the industry in which the specific business operates, the type of its management and the capital backing the organizational activities (Goldman et al. 2008). In this context, in order for a business in South Africa to be characterized as small, the following criteria need to be met: a) the employees of the business have to be up to 50, b) the capital of the business has to be from small to medium level, c) the annual turnover of the business need also to be from small to medium, d) the business need to be managed by its owner and e) the business can operate in all industrial sectors; it should be taken into consideration that for manufacturing firms the minimum number of employees – for categorizing the businesses – is higher (Goldman et al 2008). The government has supported the development of business activities in South Africa; in fact, the support offered by the local government to businesses of all sizes has been part of the effort made for the country’s economic growth – which has been stabilized to 2.8% for the last 10 years (Department of Trade and Industry, 2003 in Galbraith et al 2006); this is an important achievement taking into consideration the fact that the inflation in the country has been estimated to be lower than 1% (in 2004) from 15% (in 1990s) (Galbraith et al 2006). The contribution of small and medium businesses in the economy of South Africa is extremely important; in fact, it is estimated that the number of small businesses operating in the specific country is between 1.6 and 3 million (Small Business Annual Review, 2003, in Roberts, 2006). It should be noted that a major classification of small and medium businesses in South Africa involves in the sector at which these businesses operate: ‘about 85% of these businesses operate in the services sector – only 15% are involved in the production of goods’ (Roberts, 2006). 4. Constraining Issues The establishment and the operation of small businesses in South Africa face a series of constraints; the constraints are identified in these firms’ external and internal environment. These constraints are analytically presented below followed by suggestions for their limitation. 4.1 The lack of effective support by the government In the context of the small businesses’ external environment, the support of the government to the entrepreneurial activities developed by small businesses can be quite important for the stabilization of these firms in the local market (Carter et al. 2006). This support can have two different forms: a) funding – either in the initial phases of the business existence, i.e. when entering the market or b) supportive regulation, i.e. laws which support the development of the activities of small businesses within the local market. The introduction by the government in South Africa of ‘the White Paper on National Strategy for the development and promotion of small businesses in South Africa (1995) and the National Small Business Act (1996)’ (Reinecke et al. 2004) did not support the small businesses across the country at the level expected. In the context of the above texts, the development of departments for the support of small businesses in South Africa is promoted in order to enforce those businesses’ activities; however, the achievement of the targets set has been significantly delayed (Bethlehem et al. 1997). 4.2 Social environment Another severe constraint in the development of small businesses in South Africa can be identified in their external environment; reference is made to the social conditions in which small businesses in South Africa have to operate; the continuous increase of violence and criminal behaviour is a key characteristic of daily life in the specific country; measures need to taken by the government for the limitation of such phenomena. Otherwise, the development of business activities across the country is expected to face delays; in small firms, the effects of social conditions on business activities can be more intense – taking into consideration the fact that the firms of this size do not have the necessary capital in order to develop appropriate mechanisms and infrastructure for facing the specific problem (Rogerson 2001); for instance in large firms the chances for damages in central offices as a result of criminal activity or because of internal failures are limited – at least compared to small businesses. On the other hand, since the financial performance of small businesses in South Africa can be quite low, often the need for developing social policies for the support of these businesses is overlooked (Reinecke et al 2004). 4.3 Discrimination One of the most intense problems in regard to the business activity in South Africa is discrimination. This is a constraint referring to the small businesses’ external environment and is related to the cultural and social characteristics of the country. In the business sector of South Africa, discrimination has primarily the sense that not all business activities are allowed to black people. In fact, in a relevant research it has been revealed that small businesses belong – to their majority – in black people (Moritz et al., 1994). On the other hand, it has been revealed that the participation of Africans in the formal business sector of the country is just 21% - while in the informal sector this participation reaches the 90% (Roberts, 2006). 4.4 Marketing The access of small businesses in South Africa to effective marketing techniques is difficult; this resulted from the following two facts: a) small businesses in South Africa do not have the funds required for the development of effective marketing policies, b) the people working in small businesses in South Africa do not have the skills necessary for identifying the marketing needs of their firm; in this way, they cannot suggest appropriate measures; even if effective marketing plans are applied – through the intervention of individuals or firms that specialize on the particular field, still it is necessary that these plans are effectively monitored, otherwise they cannot perform in accordance to their planners’ schedule (O’Berry, 2006). 4.5 Ineffective HR policies The human resources management is a key organizational sector in firms of all sizes; in small firms, the control of the effectiveness of employees can be difficult not because of the number of the employees but mostly because of the operational structure of the organization; in accordance with Longenecker et al. (2009) employees in small firms are most likely ‘to work slow and take unjustified sick’ (39); the fact that the operational activities of small businesses are not particularly demanding – compared to large firms – is commonly used for justifying such phenomena. The problem appears also in small firms in South Africa; the lack of skilled HR staff makes the resolution of the problem more difficult. 5. Recommendations The development of business activities by small firms in South Africa faces a series of constraints. The limitation of these constraints could be achieved through the following measures: a) establishment by the government of effective mechanisms for the monitoring of the progress made on the schemes introduced in regard to the country’s small businesses, b) introduction of appropriate regulation aiming to reduce inequalities in the access to business activities across the country, c) increase of the measures taken for the limitation of criminal behaviour; these measures could include incentives for creative engagement in the workplace – probably through the increase of the minimum wages of employees in various industries. 6. Conclusion The position of small businesses in the South African market can be characterized as satisfactory; in fact, small businesses have contributed to the improvement of the country’s economy to a level of 30% (South African Info 2010) but also to the development of changes in regard to the traditional social beliefs – for instance the view of women for work (Stones 2001). The research on the operational characteristics and the environment of small businesses in South Africa revealed that efforts are made for the improvement of these businesses’ performance but the support provided is inadequate; the development of a series of measures – as suggested above – is necessary for helping these businesses to stabilize their position in the South African market. 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