The purpose of this report is to analyze the area of small businesses. It aims at identifying the meaning of small business by referring to its definition from different scholars. It will also look at the overview of small businesses both in the developed and developing nations. More emphasis is put on the sub-Sahara Africa where the rate of unemployment is very high as compared to other nations.
This report will look at some of the economic benefits that results from small business for instance a reduction in unemployment rate, increased GDP and per capita income. It focuses mainly on South Africa as a sub-Saharan country and looks at the contribution of small businesses in its economy. It concludes by giving some constraints that may hinder small scale enterprises in investing in South Africa. These include poor market structures, poor infrastructures, and barriers to entry.
Small businesses are small entrepreneurial enterprises that are developed by innovative minds.
As their name suggest, they are small in size and can be found in both the formal and informal sectors. Small businesses are common in developing nations which are faced with a couple of problems including lack of capital to start-up big enterprises and high unemployment rate. The main aim towards the establishment of small businesses is to create employment and to drive a country’s economic performance.
For a long time, small businesses have been viewed as the major drivers of the economy because they concentrate on the opportunities that have not been utilized especially in the rural areas. Some scholars define small businesses as sole proprietorships or partnerships that employ a small number of employees. According to European Union, the smallest businesses are referred to as micro businesses which employ less than ten people. There are other micro businesses that are managed by the owned only and may be with one assistant. It is also defined as a privately owned business that employs less than one hundred people. Small businesses are the main economic drivers since they create employment opportunities, alleviate poverty and contribute to economic growth and development. The definition small business depends on different countries.
Some countries such as the United States define a small business as a private owned enterprise that employs less than five hundred people while in others, a small business is defined as an enterprise than employs between ten to fifty people. Small businesses are diverse and exist in almost all sectors for instance; we have restaurants, hair dressers, private lawyers, accountants, real estate, just to name but a few. There is a difference between service and manufacturing small business; service small businesses are businesses that have been started up for the provision of services for example, restaurants, saloons, and real estates while as manufacturing small businesses are set up for the production of goods in small quantities. Manufacturing business employs a significant higher number of employees than the service business because a lot of processes are involved in the process of production. In service business, most of the employees offer direct services to their clients without passing through other hands; an example of this is a hairdresser who does not need the help of another employee to offer the services to the client.
In South Africa, a small business is a business that has been set up to take opportunities of the marginalized population. They are small scale enterprises, started up in the marginalized areas with a lot of government initiatives.
3. Overview of small businesses
In sub-Sahara Africa, the rate of unemployment is very low compared to the developed countries, most of these countries suffer from poverty. The per capita income is very low consequently leading to low standards of living. To make it worse, these countries have a very high population growth rate thereby making unemployment and poverty to be salient problems. Over the last twenty years, these countries for instance, Tanzania, and Kenya, have greatly benefited from small business.
With the advancement in technology, many people have become creative and are utilizing any opportunity that comes their way into new ideas. Most government especially the South African government has taken the initiative of encouraging innovating individuals in starting up new ventures. These people are given loans by micro finance intuitions at very low interest rates to help them put their ideas into action. In Kenya, most people especially the youths and women are encouraged to form groups and write up business proposal so as to secure some of the money that has been put aside to help small businesses. With this, the unemployment rate has dropped. The failure rate of small scale businesses is sub Sahara Africa is very high, for instance, in Nigeria and South Africa. Africa has the highest death rate for small scale businesses as compared to other parts of the world.
Statistics show that, only one out of five businesses survive for more than five years In sub-Sahara Africa, small businesses are seen as the major drivers of the economy. These countries have been involved in many policies and reforms in this sector but they continue to lag behind in terms of performance. World economic forum 2006 associates this failure to the harsh business environment these businesses are exposed to and the de-industrializing situation that most countries are exposed. However, comparing the present economic status to the 1980s, we find that, small businesses have had an immense contribution in the economic performance of these countries. Many jobs have been created and par capita income is on the increase, GDP has increased, and most individuals can now enjoy a high per capita income than before.
Homan (2010) observes that, the unemployment rate in the United States has dropped to 9.7% and this has resulted from the increase in small scale businesses in the nation. Many manufacturing businesses have been started which employ a significant number of people.
Over half a million Americans have been able to secure job places in small businesses and this outweighs the number (20, 000) that has been rendered jobless from the state and local government’s companies. Unemployment is a problem that is eating up many nations including the United States of America which is believed to be a global village. Many nations are forced to invest a lot of resources so as to create job opportunities and boast the economic performance.
Whereas institutional employment has received considerable consideration in most developed countries, it must be given critical consideration in developing countries and underdeveloped countries, more so the sub-Saharan Africa. The unemployment rate in South Africa is very high. For over a period of 30 years, more than one million job opportunities have been lost and most of them were lost because of disinvestment. To solve this problem, the government has dedicated its efforts in creating jobs to ensure that equitable growth is sustained. However, this has not been an easy task given that; the population is drastically increasing and is congested in urban areas. To address this challenge, the government focuses on the small and medium enterprises which are seen as the vehicle to drive the economy. The government believes that, the private sector is the real engine of sustainable growth and development and it has now shifted its focus from the government institutions to concentrate more on the private sector. South Africa is one of the countries in sub-Saharan Africa that has a wide variety of small business opportunities.
Entrepreneurs have many hot deals that they can utilize into productive opportunities. These include restaurants, real estates, saloons, and body tanning. This is just a few examples of the many opportunities that are currently available in South Africa. The idea of small business is becoming popular not only in South Africa but in many parts of the world.
They have provided a form of self employment to the youths who find it difficult to secure white collar jobs and their returns is just amazing. People have become innovative an ideas are being converted into big ventures. Statistics taken in 2009 review that, South Africa is in the grip of recession and many businesses are closing down. The unemployment rate has risen to significant levels; in the first two quarters of 2009, more than 475, 000 people are believed to have lost their jobs. This has resulted in a lot of adjustment being made in many ministries and the introduction of new national planning commission.
New strategies have been proposed which aims at integrating the marginalized segments into a productive economy. Through many researches, it has been found that, the marginalized areas have a lot of possibilities that can be utilized to boast the country’s economy. If these possibilities are fully utilized, then poverty can be alleviated, jobs created, and more revenue can be generated leading to economic growth. However, certain issues have to be addressed if these possibilities are to boast the country’ economy. For instance, is government ready to give the amount of support required to develop the private sector given the current situation in the country? What role does the private sector play in the development of the marginalized population? Should new alliances be formed, for instance private-public partnership to help in the delivery of public goods that are not delivered by the government or the market? Since 2004, the South African government has been fighting with the problem of unemployment and poverty. Before 1994, the economic growth rate was estimated to be 1% which later rose to 3% between 1994 and 2004. Since then, the country has been enjoying a growth rate of more than 4% per year and seems to be increasing annually.
Most of this growth has been contributed by the increase in small businesses where the government has put a lot of initiatives. The government has put good policies and a favorable environment that enables both local and international investors to invest in the country. The increase in growth rate has resulted in creation of more employment opportunities for instance in 2005, more than 540, 000 job opportunities were created although the unemployment rate is still high and stood at 26% as at 2005 although there was a slight decrease from 32% unemployment rate few years before.
4. Constraining issues
4.1 Economic environment
South Africa has a poorly developed road network in most of the marginalized populations. These are the population where there are a lot of investment opportunities although most of them are inaccessible making it difficult for entrepreneurs to invest. To make the situation worse, there are very few service providers such as banks, in the marginalized areas making it almost impossible for investment.
However, the government has been involved in a lot of initiatives that are aimed at making the business environment favorable for investment although it may take a long time before some of these areas can be accessed. Poor structural markets increase the cost of production since the entrepreneurs have to transport their products to the major markets. Some producers are forced to sell their products directly to their consumers because of lack of channels of distribution.
4.2 Political environment
The Political relationships in South Africa boost the success of small businesses. Over the past fifth years, South African government has been involving itself in massive initiatives that are aimed at developing the small and medium sized enterprises including the macro enterprises. Most of these initiatives are aimed at bringing the gap that exists between the underdeveloped economy and the first class economy. Many agencies have been developed to help these enterprises, one such agency is SEDA (Small Enterprise Development Agency) which was introduced to support the small scale and macro enterprises.
However, these agencies are not able to provide enough resources for the small scale enterprise and a micro-finance can only borrow up to R10, 000. Most start ups die before reaching the maturity because these initiatives fail in supporting them fully. Statistics taken in 2008 by the global entrepreneurship monitor (GEM) reveals that, South Africa lags behind other developing countries in terms of business survival rate. Only eight out of one hundred adults own businesses have survived for less than 3.
5 years and only 2.3% adults own business for more than 3.5 years. This is a rather low figure compared to other countries where business survival rate in 13 out of 100.
It has been found that, most business fail to survive because of failure from the government initiatives. It is true that, the government has launched new agencies that help in the start-up of new businesses but their work seems to end at the establishment of a new venture, they do not follow them to make sure that they survive to maturity stage.
3 Legal environment
The constraining factors regarding the legal environment include Competition regulation Intellectual property regimes- patenting Technical standards International pressure groups South Africa has limited investment opportunities; this is because, the country is up until now concentrated in upstream production sectors that specialize in the production of steel, iron, and chemicals. This puts some entry barriers to entrepreneurs interested in other form of business, the market structure also possess a major threats in the establishment of service industry or downstream production. To counteract this constraint, the government has to strengthen the industrial policies as well as the competition law.
4.4 Social environment
In South Africa, small business entrepreneurs are faced with some social factors that keep on changing with time, for instance, lifestyle trends and consumer preferences keep on changing requiring the innovators to be creative in coming up with products that will satisfy consumer needs. Other factors include demographic changes and major events and influences. For instance the government is poorly organized in its capacity to control and manage key institutions. These institutions are those responsible for providing economic services such as the banks. The government also fails in the development and implementation of necessary policies and this hinders the economic growth of the country. This makes it difficult for entrepreneurs to invest in small businesses in the country.
There is uneven distribution of markets between the rural and the urban areas. If the small businesses started in the marginalized areas and those to be started are to reap maximum benefits, then the government has to do something about the market structures. Markets need to be decentralized so as to encourage competition which in turn results in reduced prices consequently leading to increased production
4.5 Cultural environment
South Africa is one of the countries that embrace cultural diversity. It has a cultural environment that attracts investors all over the world for investment opportunities. However, there is a lot of Cultural sensitivity (high demand from acceptable business ethics) that limits how foreign investors conduct their businesses.
Small businesses are currently experiencing internal and external strategy constraints; for example, the lack of re-regulation measures that prevents expansion and operations, high global competition, and introduction of environmental laws. These are some risks that would limit the future operations of small businesses in South Africa.
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