Small businesses are often treated or viewed as a sideshow – or, worse, as a charity – in South Africa. A closer look at how things work exposes flaws in this viewpoint.
In reality, innovation and job creation are driven by SMEs. The government is now trying to push for the creation of 800,000 jobs per year between now and 2030 – 11 million in total – to stimulate and develop the economy. Awake to the impact of SMEs when they are given a chance and supply chain barriers are removed, the National Development Plan (NDP) envisages this sector as accounting for 90% of these new jobs.
It is time for a mindset shift in South Africa, especially in corporations that might be reluctant to procure goods and services from start-ups and other small entities.
Many large organisations procure from old peers without opening the door for small businesses unless we speak of nonstrategic services such as cleaning and catering. Amid pockets of excellence in the entrepreneurial world, not all SMEs are faultless. Some fail to collaborate, as consortia, even when critical mass means either landing or losing new contracts. Also, not all of them are professional.
This category can do with coaching. Excluding SMEs from supply chains due to misperceptions rather than skilling them or reducing entry barriers limits economic growth. How will SMEs be able to prove themselves and present track records unless given the chance to gain experience?
Blue chips like ArcelorMittal, Growthpoint Properties and Woolworths have been commended for building their own timbre by going the extra mile to shore up SMEs. Awake to the dearth of skills and resources in the nascent green economy, J.P. Morgan has stepped in to fund the Small Business Boost Programme at the Gordon Institute of Business Science (GIBS) Enterprise Development Academy.
This new project will offer extensive training, support and mentorship to two cohorts of 50 entrepreneurs. The list of companies that deserve praise for uplifting start-ups or procuring from small businesses is not short – but huge room for improvement remains.
Developed nations view the SME sector as a launch pad, which explains the healthy ties between corporations and small businesses, with governments playing supportive roles while universities churn out the relevant skills. A company like Microsoft comes to mind: it was built by students and grew because of the entrepreneurial and innovative minds behind it.
A huge 58% of gross value added in the 27 European Union countries came from SMEs in 2011. In OECD countries SMEs accounted for an estimated 99% of enterprises and two-thirds of employment in 2010.
These numbers highlight the fact that corporations don’t create jobs to the extent that might be believed. “Innovative SMEs fuel employment and economic growth,” added the OECD report. “Nearly all net job creation in the US between 1997 and 2005 came from firms less than five years’ old.”
Back home small businesses support the success of their larger peers. “The diversification of supply chains assists big businesses to have a wider choice of suppliers from SMMEs and promotes innovation within the value chain. The growth and sustainability of big business therefore depends on a strong small business sector, both as consumers and suppliers,” Small Business Development Minister Lindiwe Zulu once observed.
The benefits of cracking open supply chain management to include the SME sector are apparent. For South Africa to grow, research and development (R&D) should be made a top priority, because it catapults economies.
The South African government (which funds projects), academia and the private sector invest a smidgeon below 1% of its GDP on R&D, while the Netherlands – whose economy is much bigger than ours – spends twice as much in percentage terms. The average in OECD states is 2.5%.
If we are serious about being innovative and unlocking opportunities while also improving our competitiveness, we should bolster our R&D budget. We have just averted a credit downgrade – yet our economy, against the backdrop of runaway unemployment, has all the right ingredients for pronounced growth.
Coupled with that, new industries have to be nurtured to complement the entrenched ones such as mining and manufacturing. The question is: Where will the magic come from? To quote the NDP, the green economy is poised as one of the areas that will support growth.
Aggressive investment in transport will bring magic in three ways: it will create jobs, lower input costs and cut travel times – both social and economic benefits. The tourism and telecomms industries can grow further. The medical industry, with traditional herbs remaining untapped in commercial terms, also stands out for its potential to help stimulate the economy.
Captains of industry and lenders are well-placed to invest in R&D, to improve our competitiveness, and to help entrepreneurs chase these dreams. It is through a strong SME sector that South Africa can achieve some or all of the NDP imperatives and reach its true potential.