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Sunday, 01 December 2002

The Economics Of SMMES In South Africa

  • Year: 2002
  • Organisation: TIPS
  • Author(s): Al Berry; Magali von Blottnitz
  • Countries and Regions: South Africa


South Africa has, since 1994, been faced with the double challenges of re-integration into global markets as a global economy, while at the same time positioning itself to realise the high expectations of its populace regarding a successful transition towards a more democratic order. To achieve the objectives of economic growth through competitiveness on the one hand and employment generation and income redistribution as a result of this growth on the other, South Africa's small micro and medium sized enterprise (SMME) economy has been actively promoted since 1995. Despite voluminous research, however, there is still little clarity about the extent to which South Africa's SMMEs contribute to poverty alleviation, economic growth or international competitiveness.

SMMEs encompass a very broad range of firms, from established traditional family businesses employing over a hundred people (medium-sized enterprises), down to the survivalist self-employed from the poorest layers of the population (informal micro-enterprises). While the upper end of the range is comparable to the SME population of developed countries, statistics reveal that an immense majority of SMMEs are concentrated on the very lowest end. These are primarily black survivalist firms.


Against this background, the objectives of this study are twofold, namely the provision of a more comprehensive understanding of the challenges at stake, to give future SMME policies a firm grounding, and an explanation of the lack of the impact of policy thus far. It also puts forward some new suggestions on the direction that government policy should take.

In detail, this study attempts the following:

Revisit the rationale of SMME policies

While there is a general consensus on the importance of SMMEs in South Africa, their economic rationale has to date been neither well argued nor rigorously investigated. In particular, there is a lack of clarity on how SMMEs fit within the industrial policy framework and with regard to other objectives of government.

Propose some goals for policy

Optimising the SMMEs contribution to employment and economic development could be translated into the following broad objectives:

  • Raising the rate of formation of new SMMEs with growth potential (as these SMMEs will contribute to investment, employment, and income generation);
  • Encouraging new SMMEs arising from previously disadvantaged backgrounds (as these start-ups can contribute to a redistribution of economic ownership and income, as well as a more participatory economy);
  • Increasing the rate of graduation of the micro into the small or medium-sized enterprise categories (as only then will the legacy of apartheid be overcome);
  • Raising performance of existing SMMEs (with a view to increase both their competitiveness, and their ability to fulfil a role in society);
  • Decreasing the undesirable mortality rate of SMMEs that could be viable undertakings.

Main areas of intervention required

  • Achieving these broad objectives typically requires policies, which focus on:
  • Increasing the supply of entrepreneurial talent and opening opportunities,
  • Providing support to existing SMMEs, and micro-enterprises in particular, at no higher than its social opportunity costs,
  • Providing incentives to formalisation of enterprises, including cultural bridging; and
  • Assisting SMMEs (where necessary) to use resources as efficiently as possible.

Within the context of overall macro-economic performance, the ideal policy package for SMME support in South Africa should allow this sector to maximise its contribution to the economy's overall performance in terms of growth, employment and income distribution. This is likely to involve making more resources available to the sector as well as raising the efficiency with which it uses the resources already available to it.

Evaluation of policies to date

With policy initiatives already under way, the study aims to disentangle the reasons for modest SMME growth, and why it has not made a more significant contribution to employment and overall economic growth in South Africa. By doing so, the study aims to assist the Department of Trade and Industry (DTI) in reconsidering its current SMME policy as an integral part of its industrial development strategies.