Small and medium enterprises (SMEs) constitute the biggest part of the economy and have the potential to create a significant number of jobs in South Africa, which would help to reduce poverty, unemployment and inequality. Evidence worldwide shows that SMEs are the most significant source of new employment in a country. Under the right conditions, they can enhance competition, innovation and entrepreneurship.
While SMEs are the largest contributor to private employment in South Africa, they fall well short of the averages in developed and developing economies. Smaller businesses in South Africa contribute only 65 percent to employment, compared with a worldwide average of 95 percent, indicating the potential of sustainable black enterprise development to facilitate inclusive growth.
In 2015, with support from the International Labour Organization, BUSA embarked on a series of research and reporting activities to develop an evidence-based policy position and action strategy to boost enterprise development and facilitate the transition of informal businesses into the formal economy. This research formed the basis of BUSA’s policy position, action plan and engagement with its social partners.
Thriving SMEs are a means of creating an inclusive economy and a transformed society. At a time when manufacturing and the primary sectors of the economy are under great stress and the economy remains concentrated in the hands of a few, small and medium local businesses and township economies have great potential to help grow and develop an inclusive economy.
The concerns and needs of small and informal businesses need to be heard in national economic and social policy debates, so care must be taken to reduce their regulatory burden and the administrative inefficiencies that hinder them. There needs to be a “think small first” principle in policy development. While BUSA is often incorrectly seen to mainly represent the interests of big business, it is correct that it must become an effective, more vocal representative of informal, small and medium enterprises.
Research by BUSA has identified the following as key obstacles to the development of small businesses and their incorporation into the formal economy:
- Entrepreneurship must be encouraged and skills development strengthened. A major obstacle to enterprise development in South Africa is that the education system does not teach young people to be entrepreneurial. Coupled with this, a skills shortage in the workplace consistently ranks as one of the biggest impediments to the growth of small firms.
- Information about hiring and employment practices and accessing finance and market opportunities are particular areas where small businesses need support.
- There needs to be a coherent definition and legislative treatment for small, medium and micro businesses to ensure policy alignment across government and public and private institutions.
- Support measures need to target the needs of specific kinds of small business.
- Small businesses carry a disproportionate regulatory burden. In terms of the burden of government regulations, the 2015 Global Competitiveness Report places South Africa at 117 out of 144 countries. Findings from the Davis Tax Committee and the SME Growth Index indicate that the burden of regulatory compliance to small business equates to an administrative opportunity cost of R216 000 a year, or R18 000 a month.
- Entrepreneurship and business support services are underdeveloped in South Africa. There are too many procedures to register a business or to access development support from government. Many businesses do not know what support is available or how to navigate the bureaucracy around it.
The way forward
To practically address the challenges facing small business, BUSA has developed an Action Plan on Enterprise Development for SMEs, Start-ups and Formalising Businesses. The key outcome of the plan is to create “an enabling environment for sustainable small business development and growth and the formalisation of the informal economy”. This can be achieved in the following ways:
- Evaluate and propose workable solutions to reduce the regulatory burden and red tape faced by small businesses. Advocate for the inclusion of small business growth as a key criterion in government’s socioeconomic impact assessment.
- Provide better access to information, particularly in relation to access to finance, registration of business and how to manage labour relations. BUSA can foster links with members and partner associations that provide information on support services and incentive programmes for business start-ups and SMEs.
- Partner with government, institutions and associations to provide support to SMEs on specific challenges: for example, the Commission for Conciliation, Mediation and Arbitration on hiring and employment practices; the Banking Association South Africa on financing opportunities; and government on how to register a business.
- Identify the main challenges imposed by the tax regime on small businesses and work with the National Treasury to resolve them.
- Help strengthen the voice of small business in national economic and social policy debates.
- Advocate for the establishment of a platform of government, business and labour partnerships to focus on small business support and job creation.
- Prepare a position paper and recommendations to simplify the definition of a small business in the National Small Business Act.
- Prepare a self-help guide for small businesses so they can better access Sectoral Education and Training Authorities opportunities and funding.
- Explore social security benefits for SMEs and informal business owners and employees, including health care, pension funds and unemployment insurance.
Enterprise development and drawing informal enterprises into the formal economy are major opportunities to achieve the employment and growth objectives of the National Development Plan. This requires a “think small first” approach to policy development and coordination across all spheres of government. A uniform definition of a small business across all programmes would help increase coherence in policy and enable small businesses to know when they may be eligible for differentiation. To this end, BUSA should ensure that it is an effective advocate for SMEs, representing and advancing their interests in national social and economic policy debates.
BUSA. Action Plan on Enterprise Development for SMEs, Start-ups and Formalising Businesses.
BUSA. Triple Challenge of Inequality, Poverty and Unemployment. Presentation. 26 July 2017.
Trade and Industrial Policies Strategy. Report for BUSA: Towards a Single Definition of Small Business. December 2016.
SBP. The Enabling Environment for sustainable Enterprise Survey. 30 September 2015.