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Don't burden larger enterprises for growth

Sep 20 2015 16:30
* Johannes Wessels

THE National Development Plan’s emphasis on the key role of small businesses as champions in the battle against unemployment, poverty and inequality and the government’s creation of a dedicated Department for Small Business Development stand in contrast with international research that points to the importance of enterprises that can bestrode the global trade arena.

In key aspects the 2015 OECD study “Entrepreneurship at a Glance” that was released last month arrives at conclusions that are the opposite of the policy and strategy thrusts of the South African government.

Entrepreneurship at a Glance indicates that expectations of what small enterprise can achieve in terms of employment, economic growth and innovation should be tempered.

Micro enterprises (1 – 9 employees) dominate the OECD business worlds. The belief that they and small enterprises (10 – 49 employees) are key job creators and crucial in the battle against unemployment and poverty should be considered against the following OECD findings:

• Productivity in small and micro firms is much lower than in medium sized and large firms. Whilst micro enterprises constitute between 68% and 92% of the formal enterprise landscapes, they contribute a mere 10% – 20% of gross value added (GVA) except in Greece where micro firms contribute 33% of GVA.

• From 2008 to 2012 the share of employment by young enterprises (those supposed to be the job creators) have steadily decreased across most countries and ranges currently between 4% and 12% of total employment.

• “In all countries micro and small firms are responsible for a limited share of total exports even if they present the majority among all exporting enterprises.”

Enterprises that according to OECD data contribute most in terms of employment, value addition and exports are large firms (250 employees and more) and the gazelles. Gazelles are fast-growing enterprises and most likely to be in the medium category (employment between 50 and 249 employees). Entrepreneurship at a Glance highlights the following:

• Large firms account for between 50% and 80% of all exports in all the countries studied.

• Firms exporting to at least 10 countries and more account for 90% of total exports. (In order to export to 10 countries imply size).

Less than 2% of firms with 10 and more employees are gazelles but their importance to national economies far exceeds their numerical strength. They contribute between 5% and 15% of overall formal enterprise turnover and therefore job and wealth creators.

The South Africa government is however more focused on promoting new black owned enterprises than on strategies to grow the economy. Since 2005 the government injected at least R2.5bn just as grants to cooperatives in addition to devoting several billion rand’s public service resources (officials, offices, travel costs, etc.) at national, provincial and local levels to promoting and supporting cooperatives. A study in 2014 on cooperatives in the Free State province indicated a success rate of only 0.16% of cooperatives within a year.
 
Detea officials (Department of Economics, Tourism and Environmental Affairs) in the Free State acknowledged that they are instructed to take to trade shows entrepreneurs and products that often lack the expertise and the quality respectively to make impact, but that they find it difficult to take established white owned enterprises to the trade shows. When they succeeded in including McKinley Chocolates from Ficksburg in their trade show offer in 2013, the firm was an instant hit.

The challenge is to determine whether support to an already established firm with a quality product or service can assist such a firm to achieve a breakthrough.

The government should, as for trade shows, not try to pick the winners.  It should rather than trying to be the incubator for tens of thousands of cooperatives that all pursue basic production or run-of-the-mill services (whether cooperative chicken farming, catering services, security services or a 100 new black industrialists without the government publishing its assessment on which industrial products would secure sustained international demand) understand what could make a successful flower exporter from the Free State or the wine cluster of the Western Cape even more successful.

It often appears as if the government is not interested in enabling such success stories to become even bigger success stories.

Entrepreneurship at a Glance also has a message for a government that considers restrictions on landownership by foreigners and that introduced the Private Security Industry Regulation Amendment Bill of 2013 that requires all foreign-owned security companies to have 51% South African ownership: foreign owned firms have a typically higher export value percentage than the average exporting firm.

Foreign investment should therefore be enabled and the Investment Bill is an example of how not to do it, just as the visa regulations boils down to an anti-forex stance. Visits by Deputy President Cyril Ramaphosa to Japan conveying the message that South Africa is open to business is meaningless given the negative trend since President Jacob Zuma took power on a range of international indices (Figure 1. The three indices were calibrated on a scale of 100 for comparison).


In the Global Competitiveness Index South Africa dropped from the 40th position to 56th out of 148 countries. In the Ease of Doing Business Index South Africa dropped from 28th to 43rd out of 189 countries, and in the International Corruption Perception Index South Africa dropped from 43rd to 67th out of 175 countries.    

A good place to commence stemming the rot that has been setting in would be for the government to treat established businesses (large, medium and small) as champions for growth and job creation, rather than by burdening them with numerous constraints and suffocating them with inefficient state-owned enterprise services. In the wake stream of such growth, opportunities for new enterprises will also emerge.  

Whilst National Book Week is celebrated in September one could wish that Cabinet Ministers would read a copy of Entrepreneurship at a Glance rather than reciting Lenin’s Toward the Seizure of Power.

* Johannes Wessels is Director of the recently established Enterprise Observatory of South Africa, an independent not-for-profit company dedicated to analysing the world of enterprise. Contact details: jowes@intekom.co.za

sa economy  |  growth  |  small business
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