Constraints of Small Business Development in South Africa - Case Study Example

Topic: Constraints of Small Business Development in South Africa 0 Introduction Importance of small business in any country is vital for the sustained economic growth, poverty reduction and employment generation. Failure in the rate of long-term sustaining of small business is an impediment for the growth of a country’s economy. Environment for small business is not conducive particularly in developing countries although small business plays a crucial role not only for poverty reduction, employment generation and economic growth but for providing support to large businesses. This report on the constraints of small business development on the selected country South Africa will create consciousness on the huge potential of small business in the South African Economy among the stakeholder agencies including the international bodies like the World Bank, national and local governments in cementing the holes by providing a positive and congenial environment for the small business development. This report will help in providing right direction to the efforts of the World Bank in abolishing the constraints specifically in South African tourism sector of the economy and its growth by providing grant for deficient resources like finance, training, management, and technology. 2.0 Definition of Small Business Before discussing the constraints of small business development, it would be pertinent to know the definition of small business. Category-wise, small business comes below medium-sized business and above micro business, determined by such factors like head-count and turnover or balance-sheet total. The European Commission has created new thresholds on the limits of headcount, turnover and balance sheets, the conditions for the enterprise categories of medium, small and micro businesses that come in the category of small and medium enterprises (SMEs). To be more accurate, a company can be considered SME if it fulfills the headcount factor and either of the other two factors – turnover or balance sheet total. The table below will further help to understand the exact meaning of SME.1 THE NEW THRESHOLDS (Art 2) European Currency Units Enterprise category Headcount Turnover or Balance sheet total medium-sized < 250 ≤ € 50 million (In 1996 € 40 million) ≤ € 43 million (In 1996 € 27 million) Small < 50 ≤ € 10 million (In 1996 € 7 million) ≤ € 10 million (In 1996 € 5 million) Micro < 10 ≤ € 2 million (previously not defined) ≤ € 2 million (previously not defined) Source: European Commission 2010 The above table also provides comparative data on the previous limits of turnover and balance sheet total of the medium and small enterprises. The new increased limits on turnover and balance sheet have broadened the horizon of these enterprise categories. Government of South Africa has aimed to make this sector a medium of economic prosperity for the have-nots. The government has passed the National Small Business Act in 1996, which has helped in creating the support structure of providing funds and incentives through the Department of Trade and Industry (DTI). 3.0 Overview of the Small Business Context Sustenance of SMEs has become a big issue. Competition in business has become so sharp that small businesses’ survival rate has reduced sharply. New enterprises find survival very critical as very few newly emerged companies remain on the board and only a selected few taste growth. The common saying is that “Four out of five new firms fail in the first five years”. Whether it is true or not but the statement indicates the path to success is full of difficulties for small businesses whatever is the industry sector. Taking the example of tourism industry where a big chunk of travel business is handled by small and medium enterprises (70%), according to the World Travel Agents Associations Alliance (WTAAA), the majority of the member agencies come under the category of small and medium enterprises. In Australia only, more than 70% functioning travel agencies have yearly gross sales less than US $3,750,000.2 This fact raised the curiosity that while SMEs form a good chunk of business operations in countries like America, Europe, Australia and elsewhere what percentage of small and medium businesses the South African countries form and how they are struggling for sustenance. For example small business represents 98% of all business done in Canada, thus strengthening the economy of Canada in a huge way. According to Market Wire (2009), even in the time of crisis, the small and medium businesses in Canada have overshadowed other economic segments by transforming challenges into opportunities and working for the prosperity of the nation.3 It does not imply that countries elsewhere are not coming forward to the rescue of small and medium businesses. The Namibia Community Based Tourism Assistance Trust (Nacobta).3 inaugurated a program to help small operators in the tourism industry in April 2008 so that they could face competition sturdily. This nonprofit organization has 40% potential of a SME business survival. Potential in tourism through SME is huge which is evident from the fact that Namibia earned N$26.8 million from the Community Based Natural Resource Management Program, as per 2006 statistics. Income from tourism was 56% while overall the tourism sector added N$1.58 billion to the Namibian economy. Small business has been playing a significant part in South Africa’s economy along with medium and micro business (SMMEs). In comparison to 1996 when only 19% of those employed belonged to this sector, in 1999 their percentage increased to 26%. These SMMEs add to about half of the total employment, which comes to above 30% of the total gross domestic product. Data indicates that out of five export units one belongs to small and medium sector in South Africa.4 4.0 Constraining Issues Small and medium enterprises face many problems, as very limited research exists because of “paucity of primary and secondary data and by the challenges that the diversity of small firms presents”. Things have changed for the better since 1990 with a new interest in the range of issues pertaining to small business. Research has been done major way on developed countries in manageability and small firms.5 Focus of research has been Europe and rural and farm tourism with a special reference to hotel and hospitality business. A vast area of work has examined the part, dynamics and limitations of business managers and small firms in tourism. Support of the European governments and the European Union has been forthcoming particularly to help the tourism entrepreneurs for the economic growth of the tourism-dependent areas. 4.1 Constraining Issue 1 – Managerial Shortcomings Taking the example of tourism sector in South Africa, managerial shortcomings have been the major cause of hindering business growth and new entrepreneurs. Especially in the periphery areas and family run enterprises in far flung areas have been at a loss in the growth of tourism. Tourism SMEs are dominated by family businesses and owner-managers, whose motivations have been found to encompass a spectrum that runs from commercial goals and policies to lifestyle intentions. Implications for small business development indicate unprofessional and inflexible behavior of the family owners affecting the growth of the small business. 4.2 Constraining Issue 2 – Unfavorable institutional Regulatory Mechanism Another constraining issue, the unfavourable institutional regulatory mechanism, has been hindering business growth and new entrepreneurs. Particularly on the borders of cities, the growth in tourism has not been unsatisfactory because of the unfavorable institutional regulatory mechanism coming in the way of tourism growth. There is widespread discontentment among product owners related to the level and impact of official government support to Soweto tourism and local entrepreneurs, which is hindering the development of small business tourism sector. There is one common deciding factor weaved throughout the characteristics related to the profile of small entrepreneur that we call the human aspect of owner-manager. 4.3 Constraining Issue 3 – Limited Developmental Impact Small business in tourism sector bears the impact of limited development. In urban South Africa, tours have become “voyeuristic money spinners,’ collecting fee for the experience of watching people as if they are watching animals in the zoo. The perceptions of the socio-cultural impacts of township tourism indicates that it is creating quarrels between the direct beneficiaries and indirect beneficiaries as distribution of income is unequal, creating feelings of hatred among the natives for tourists because of making the life and culture of black community a saleable concept. 4.4 Constraining Issue 4 – Low Occupancy Rate As per the 2005 survey, the average occupancy rate of visitors’ accommodation was 8.3%. Although it has shown improvement from the previous 3.6% in 2003 yet it has not benefitted universally to all accommodations. Most of the hotels and other such establishments are fighting for sustenance, as tourists prioritize staying in Sandton or Johannesburg’s northern suburbs rather to an overnight stay. Rooms remain vacant sometimes for consecutive three months. Low occupancy is a worrisome issue. Data indicates that out of 60% surveyed establishments in Soweto, only 6% were found occupied. Further, only 3% establishments showed yearly occupancy level of 40%. Definitely, it affects the small business environment greatly. Constraining Issue 5 -- Homogeneous and Undifferentiated Nature of the Product Offering New tourism products offered by small business in South Africa have shown the limitation of homogeneous and undifferentiated nature of the tourism products. Such entrepreneurs struggling to sustain business come under the category of “second economy tourism entrepreneurs”. Firms face external and internal barriers. Small firms’ barriers are concerned with macro level factors on the city outskirts. These firms face financial hardships in the cost of getting funds besides sluggish demand of their products and services and increasing competition.6 Some other constraints of Soweto tourism included poor product quality and lack of investment in tourism products by small business; 70% employees are unskilled. Further 80% employees lack training. Lack of cooperation and knowledge about regulations and compliance has been offered a reason by entrepreneurs for their failures. 5.0 Recommendations For small business growth in South Africa, particularly in tourism sector, interventions and internal changes are necessitated. Institutional support is needed to support small entrepreneurs. What is required is an effective marketing strategy by all the stakeholders including product owners and local authorities. Educational institutions and support sector are also providing training programs and lectures to help increase the survival of SME. Training as a survival strategy could be an effective tool to save SMEs from losing business on the condition that trainers are adept in imparting relevant skills and can identify and analyze the upcoming talent. Small businesses can survive with quality training resulting in reduced percentage of failures, better margins and growth of the SME sector.7 At government level also help to SME is being provided through fiscal and non-fiscal policy incentives.8 Greater cooperation and networking among the product owners of Soweto tourism economy is required. Small tourism entrepreneurs need to identify and aim at specialized fields or niche markets like the Lebo’s Backpackers which has targeted the growing backpacker tourism market to South Africa. Niche areas of tourism are better managed by small and medium enterprises than big firms. SME’s fit the bill well by providing a balance of no-frills and luxury tourism by identifying the long term trend of green tourism having space for all. SMEs have captured the nerve of sustainable tourism to remain in the tourism business.9 Smaller businesses must win the confidence of major operators by developing relationships directly or through connections. The South African small business should look out for new business fields like in Canada, most of the new SMEs are venturing into new enterprises like business process outsourcing, software development, medical or wellness tourism and transport, which are not in the periphery of IFC’s sustainable businesses list of small business. Some new areas have been identified for SME sector by the IFC like agribusiness and aquaculture, wood and handicrafts, information technology and biotechnology, health care and education and training as innovative SME projects that could make an impact in the countrys development.10 Notes 1. European Commission 2010, “The new SME definition User guide and model declaration,” Enterprise and Industry Publications, 2010. 2. Hatton, Mike. The structural changes in the distribution system, 2005 OECD & Korea Conference Global Tourism Growth: A Challenge for SMEs, 2005. 3. Industry Canada 2009. 4. Market Wire, 2009. 5. Tjaronda, 2008. 6. Rogerson, Christian M, 2008. 7. New Business Development, 2010. 8. Morrison, Alison., Breen John., Shameem, Ali 2003. 9. Matthews, Virginia 2010. 10. Faune & Dimaculangan, 2008. References European Commission. “The new SME definition User guide and model declaration”. Enterprise and Industry Publications, 2010, .References> (19 November 2010). Faune, Shelly., Dimaculangan, C. “SME innovations starting small’, Business World.” (2008) 5, no. 1. (19 November 2010). Hatton, Mike. “The structural changes in the distribution system”. 2005. (19 November 2010). Industry Canada.. “The SME research database classification system: detailed definitions”. Small Business Research and Policy. 2009 (19 November 2010). Market Wire. Minister of State Ablonczy celebrates small business Week 2009. (19 November 2010). Matthews, Virginia. “The niche firms will leave the holiday giants in the shade.” The Independent. 2010. (19 November 2010). Morrison, Alison., Breen John., Shameem, Ali. “Small business growth: Intention, ability, and opportunity”. Journal of Small Business Management 41, no. 4. 2003. New business development. Boosting small businesses, 2010. http://www.southafrica.info/business/trends/newbusiness/smallbusiness.htm (19 November 2010). Rogerson, Christian M. “Shared growth in urban tourism: evidence from Soweto, South Africa”. Urban Forum. 2008. (19 November 2010). Tjaronda, Wezi. Tourist SMEs can hone skills. All Africa 2008. (19 November 2010). Vuuren, Van., Jurie. “Entrepreneurship training for emerging SMEs in South Africa.” Journal of Small Business Management. 2002. (19 November 2010). Read More