An evaluation of small business viability in the manufacturing sector within the EThekwini...

Sifiso Gwala

MBA (UKZN) Graduate School of business and Leadership

An evaluation of small business viability in the manufacturing sector

within the EThekwini Municipality:

A LITERATURE REVIEW

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Email Address: [email protected]

mailto:[email protected]

TABLE OF CONTENTS

ITEM DESCRIPTION PAGE

1. Introduction 1

2. Literature review 2 -7

3. Conclusion 7

4. References 8-9

An Evaluation of Small Business Viability in the Manufacturing Sector Within the EThekwini Municipality----.1

1

An evaluation of small business viability in the manufacturing

sector within the EThekwini Municipality.

Abstract

The purpose of this paper is to conduct a literature review on the viability of small medium

and macro enterprises (SMME) in the manufacturing sector within eThekwini region

(EThekwini municipality in particular).

Keywords: Small medium and macro enterprises, SMME, SME, entrepreneurship,

evaluation, viability.

Paper type: Literature review.

1. INTRODUCTION

South Africa as a developing country that has many challenges one of which is high

unemployment which is as a result of the lack of new production capacity within the state

and the private sector. The millennium developmental goals number one and number eight

speak to the eradication of extreme poverty and hunger as well as global partnership for

development. South Africa came up with many interventions among those was the

introduction of the black economic empowerment. I am very particular about

manufacturing sector because this sector produces products that can be sold in the open

market and can end up being exported depending on their need. The manufacturing sector

has a potential to expand and create more jobs and lower the unemployment rate. South

Africa suffers from a 25.2 % unemployment rate (Statistics South Africa Quarterly Report,

2012). The success of SMME is very crucial in any developing economy as these businesses

have a greater chance to make a difference in the economy. I will therefore look closely at

the viability of SMME in the manufacturing sector in the eThekwini Municipality.

The formation of BRICS (Brazil, Russia, India, China and South Africa) to form their block

with an aim of growing their economies as block is a process that is ongoing and the

indications are this should be beneficial to fight against the big brother mentality of the

developed world to usurp power and resources from the developing countries. The solution

for the country therefore, is higher growth and job creation to reduce and ultimately

eradicate poverty and inequality (State of the Nation 2012). Small medium and micro

enterprises have more significant role to play in improving economic growth and industrial

development of any nation by contributing to the creation of employment, promotion of

entrepreneurship, wealth creation and improving exports (Rajeev 2012). If small business

are created and they succeed they have a potential to create many needed jobs and by so

doing less imports will be needs as a result this will lower trade deficit of many imported

product. Tatalia (2010) proposes that without any entrepreneurial attitude societies risk

stagnation which has a potential to hinder growth of any nation.


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2. LITERATURE REVIEW

Definition of an SMME.

A common definition by the Department of Trade and Industry of a small medium, macro

enterprise in South Africa is any trading entity that is operating with up to 250 employees

with an annual turnover of up to R40 million.. Many of these SMMEs are run and managed

by their owners who are trying to minimise costs of employing staff until they are sure that

the business is viable and can be able to bear the inherent running and fixed costs. Chiara,

Edmore and Peter (2011) state that South Africa has about 6 million SMMEs in existence.

Some countries call them SME’s although then meaning is still the same.

Legislative framework around SMME and tax compliance

Around 20% of these SMMEs are registered with Companies and Intellectual Property

Commission (CIPC) and operate a bank account. Of the formal SMEs, less than 100,000

(27.3%) successfully apply and receive funds from the formal financial sector. Almost half of

the SMEs are not registered hence are operating informal. Ballard , Slabbert, and Tengeh

(2011), concur that the majority of SMMEs that they surveyed were in the informal sector of

the economy. Formality meaning that the business entity has conformed to the legislation

and registered with Registrar of companies in South Africa. This on its own state that over

50 per cent of the SMMEs are not legitimately known. This makes it difficult to contextualise

what impact they have in broader society. This is explained by the Akinboade and Kinfack

(2012), who state that the business regulation that businesses have to conform to before

they even start trading is burdensome and a hindrance to business. The findings are in line

Davidson and Hanrekssson (2002) and Odd-Helge et al (2006) as quoted by Akinboade and

Kinfack (2012), when they state that trade regulation and company laws are to be the

primary. Naidoo and Smulders ( 2011) claims that there should be a threshold below which

SMMEs do not have to submit tax returns. This will lessen the burden on SMMEs and allow

them to concentrate on their growth aspects. They further propose that there should be an

inclusion of tax education in the South African curriculum in order to assist those would be

entrepreneurs.


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Role and impact of SMME in reducing unemployment.

The major driving force for economic growth and reducing unemployment is the

development and growth of the small, medium and micro enterprises (Chimucheka, 2012).

In his study of the importance of a business plan it clearly shows that it is important to have

a business plan when starting a small business. The challenge for many people is the lack of

skill and knowhow of writing a business plan and let alone sticking to it. The small crafts

business that is run by a collective of rural woman will find it difficult to make such a

business plan. Although they are making and selling the craft to both locals and tourists and

making a profit but the issue of a business plan and hence seeing beyond where they are is

difficult. The small, medium and micro enterprises contribute significantly to national gross

domestic product and in reducing unemployment.

Incubation of small businesses.

Rajeev (2012) concludes that the best way to develop small, medium and micro enterprises

in Africa is through incubators. And the best incubators are those that are not directly

competing with the small businesses. If there is competition it tends to slow or destroy such

an incubation process. Lewis, Harper-Anderson, and Molnar (2011), found that that there is

a correlation between business an improved rate of success through incubation process

especially in the non-government sector. This also applies in the SMME manufacturing

sector provided that both funding and mentoring becomes part of incubation. Clearly many

banking institutions in South Africa realize that the risk of lending to SMME is great but this

is a sector for the future and to reduce their risk they need to mentor and incubate these

businesses in so doing they play the corporate social responsibility whilst increasing the

bottom line.


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In a World Bank initiative known as, Information for Development Programme (Infodev:

2010) a policy document describes a business incubator as focusing a range of services on

clients that are designed to help them launch a well-managed business. In this policy

document it illustrates a very simple model for business incubators.

Government support

Boysana and Ladzani (2011) claim that the slow growth of small, medium and micro

enterprises can be partly attributed to the lack of support that they receive from institutions

that borrow them money or other government institutions that should be mentoring them.

Regulations that have negative impact on small, medium and micro enterprises.

Abor and Quartey, P. (2010) findings states that the growth and development of SMEs are

largely constrained, amongst others, by the following actors:

lack of available at to appropriate technology;

limited access to international markets;

the existence of laws, regulations and rules that impede the development of the sector;

weak institutional capacity; lack of access to business information.

lack of management skills and training and most importantly finance and credit.

The challenges for small businesses in Nigeria are corruption, lack of access to finance, lack

of government support, poor road infrastructure, low profits, and the lack of demand of the

products produced. (Okpara , 2011) .

Access to finance

Fatoki, Lombard and Herbst (2010) found that SMMEs do not keep detailed financial

records of their businesses and some don’t even operate a bank account. This puts them at

risk of failing to account to both the registrar of companies and the South African revenue

services and hence risk hefty penalties and even being deregistered as formal legal business

entities. This is risky as many of these SMMEs depend on debt finance to fund their

business as they do not have equity to fund their startup businesses. Keskin (2010),

suggests that SMMEs stand a better chance to succeed as they are closer to the customer

and the decision on how to compete better to serve the needs of the customer can be take

faster. This is as a result that the decision make is closer to both the employees and the

customer and have more elasticity than large corporation to apply a concept of customer


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driven changes in order to respond to customer needs. Tshivhase and Worku (2012) found

that the market share among emerging contractors in Limpopo is significantly affected by

lack of entrepreneurial skills, lack of access to funding, poor spending capacity, high

competition, lack of engineering skills, and lack of seed capital. And recommended that

there is a need of capacity building to bridge the gap. There is a need to relook at

government funding agencies like IDC, Insika and Khula to be developmental in their

approach rather than being similar to commercial banks. Ahiawodzi and Adad, (2012)

discovered that SMMEs play a critical in the developing world, in Ghana as well SMMEs is a

big provider of employment at over 80% especially in the manufacturing sector, but the

major challenge is access to seed finance to start SMMEs. Also discovered that any injection

of capital has a positive growth with SMMEs in Ho Municipality in Ghana.

Entrepreneurship mindset

Neneh, (2012), argues that entrepreneurial mindset is important in order to ensure that

SMMEs succeed in their ventures. If the individuals who start SMMEs lack this drive the

SMMEs is bound to fail with the first five years. The key is ensuring that there should be re-

learning in order to change mindset and ensure that entrepreneurship is taught and

encouraged at a younger age and calculated risk taking can then take place.

Arko-Achemfuor (2012) claims that a lot of funds are mobilised through stockvels system in

South Africa. The figure is estimated at over R45 million and yet there is a high shortage of

funding needed by SMMEs for start-up capital. There is a greater need for start-up and

expanding capital in the motor body repair sector where technology is ever-increasing new

cars are manufactured yearly in order to keep on par with the competition and the

requirements of insurance companies (Muyengwa, et al, 2013). Many people are driven to

be entrepreneurs because they are jobless, if they had jobs they would not have ventured

into business. This is a challenge of the lack of the inner drive to be entrepreneurs. Emerson

(2011) stresses that the number one essential principle that all successful SME owners need

to possess is an entrepreneurial mindset.

Neneh and Vanzyl (2012) claim that In order to achieve SME long term survival,

entrepreneurs are expected to have the right mix of entrepreneurial competencies ((Q1)

entrepreneurial mindset, (Q2) entrepreneurial characteristics and (Q3) the required


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business practices). He further proposes that the following diagram clearly explains such a

phenomena

Figure 1: Adapted from Ngek Brownhilder Neneh and Johan Vanzyl (2012).

((Q1) Entrepreneurial Mindset, (Q2) Entrepreneurial Characteristics (Q3) The Required Business Practices).

Financial management. The results indicate that micro-enterprises do not engage in financial planning, analysis and

control (Chimucheka, 2012). The importance of technical assistance cannot be over-

emphasized, it is important for policy makers to take that into consideration when drafting

SMME framework. This will assist in empowering owners in management, financial and

entrepreneurship skills that are key to ensuring success of the SMMEs. This would be a

necessary cost as it would have a positive long effect on job creation (Bah, Brada and Yigit,

,2011). Clearly it is important that the SMMEs are supported in order to survive the first

five years when the failure rate is rather high.

Successes of SMME

Besnik and Iraj (2011) in a study conducted in Eastern Europe (Albania, Serbia and

Montenegro, and Macedonia) and Central Europe (Poland, Hungary and the Czech

Republic) they concluded that SMME were growing despite a number of challenges they


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faced. Boysana and Watson (2011), concede that the slow growth of SMMEs in South Africa

is as a result of the lack of support, legal knowledge, a lack of funding and a general lack of

business understanding and drive. South Africa competes at an international level with

many of its entrepreneurs still thinking like it was still a closed economy. The major

challenge that needs to be overcome by SMMEs is that they need to understand that their

products compete with products from highly developed countries and if they need to

survive they need to improve and better the playing field. Edward and Nafta (2012) found

that experience, mentoring, and proper funding of SMMEs are driving forces for success of

SMMEs.

Further research

The successes and failures of SMMEs have many causes. They would need further research

to be thoroughly understood in the South African context. Whilst everyone who has written

on SMME agrees that they are the most important pillar for economic growth and increasing

GDP. It would be of great interest to look at which sectors of manufacturing are most

successful and why are they successful.

3. CONCLUSION

Development of any nation depends on the skills of its population in the long run. The ability

of a nation to be entrepreneurial assist in the establishment of SMMEs which create

necessary jobs needed for a growing population. The key is how does all role players

(private capital, SMMEs, government and the universities) come together to tackle this

fundamental and crucial role of building and sustaining the SMMEs. No one can do it alone,

by merely creating an environment for business is merely a playing ground, leveling it

becomes key so that those who are new in the business are able to play fairly. It is in the

interest of government as it is sin the interest of SMMEs to have sustainability in the

economy so that people continue to enjoy a high quality of life.


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4. REFERENCES

1. Abor, J. and Quartey, P. (2010) Issues in SME development in Ghana and South Africa, International Research Journal of Finance and Economics.

2. Akwazi Arko-Achemfuor (2012), Financing Small, Medium And Micro Enterprises In Rural

South Africa: An Exploratory Study Of Stockvels In The Nailed Local Municipality, North West

Province, J Sociology Social Anthology 3(2), (2012).

3. Anthony K. Ahiawodzi and Thomas C. Adad, (2012), Access to Credit and Growth of small and

Medium Scale Enterprises in the Ho Municipality of Ghana, British Journal of Economics,

Finance and Management Sciences November 2012, Vol. 6(2).

4. Boysana M and Watson L, (2011), Factors That Hinder The Growth Of Small Businesses In

South African Townships, European Business Review, Vol. 23, No 6, 2011

5. David A. Lewis, Elsie Harper-Anderson, and, Lawrence Molnar (2011), An Incubating Success. Incubation Best practices That Lead to Successful New Ventures. National Business Incubation Association

6. Davidson and Hanrekssson (2002) and Odd-Helgeet al (2006) as quoted by Oludele

Akinboade and Emile Kinfack (2012).

7. Edmore Mahembe, Chiara Chiumya, and Peter Mbewe,(2011), Literature Review on Small and

Medium Enterprises’ Access to Credit and Support in South Africa a study on behalf of the

National Credit Regulator (NCR)

8. Edward M Rankhumise and Nafta Mokate Lehobye (2012), Success and failure of government-funded businesses: Evidence from a selected entrepreneurial entity in South Africa. African Journal of Business Management Vol. 6(16), pp. 5599-5605, 25 April, 2012.

9. El-hadj Bah , Josef C. Brada and Taner Yigit, (2011), With a little help from our friends: The effect of USAID assistance on SME growth in a transition economy, Journal of Comparative Economics 39 (2011) 205–220.

10. Emerson (2011), as quoted by Ngek Brownhilder Neneh and Johan Vanzyl (2012).

11. Fatoki Olawale and David Garwe, (2010), Obstacles to the Growth of the New Small, Medium

and Micro Enterprises in South Africa: A Principal Component Analysis Approach, African

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12. Fatoki Olawale, Mornar Roberts-Lombard and George Herbst, (2010), Aninvestigation to the

impact of the usage of debt on the solvency of SMMEs in the Buffalo City Municipality, South

Africa. African Journal of Business Management, Vol. 4(7).

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operating in the South African motor body repair sector. International Conference on Law,

Entrepreneurship and Industrial Engineering, 2013.

14. Hidayet Keskin (2010), The importance of small and medium sized enterprises SME’s) in

economies: SWOT analysis of the SMEsector in Turkey and Alabania.,Nigde university IBF

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15. Infodev (2010) as quoted by Edward Appiah(2013) in their Publication Design,

Development and Research Conference (2012).

16. http://www.infodev.org/ last accessed on 22 August 2013.

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http://www.infodev.org/


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