SMEs Key to Economic Growth, Recovery

20 April 2011

analysis

GLOBALLY, small to medium size enterprises (SMEs) are being hailed for their pivotal role in promoting grassroots economic growth and equitable sustainable development. It is nevertheless important to note that the definition of SMEs varies between countries dependent on the country’s level of development. The definition is also based on considerations such as the number of employees and revenue levels.

The revitalisation of the small to medium enterprises (SMEs) sector will greatly contribute to the socio-economic development of Zimbabwe if all stakeholders work towards creating an enabling environment for growth.SMEs in both developing and developed economies have proved to be engines for economic growth. Yet it is common knowledge that Zimbabwe’s SMEs sector is the worst affected by the economic downturn. It is therefore important for Government and other key stakeholders to come in and address the challenges facing SMEs for the country to enjoy the benefits that come with a functional SMEs sector.

This new paradigm shift is a dichotomy from the static view that SMEs are suboptimal to the dynamic view that, SMEs over time can produce competitive products because of their low transaction costs derived from low capital and labour costs.

In the United States and European Union (EU) countries SMEs are enterprises with employees under 500 while in developing countries like Zimbabwe any enterprise employing below 100 employees would constitute an SME.

As SMEs have become more important in the economic matrixes we have seen in recent years across the globe through increased deliberate government policies and legislation aimed at nurturing SMEs as engines of economic growth and employment creation.It is also estimated that SMEs constitute over 90 percent of total enterprises in most economies with a high rate of employment growth. They are also a vehicle for increased industrial production and exports. For example, in the US and EU countries it is estimated that SMEs contribute over 60 percent in employment, 40-60 percent to Gross Domestic Product (GDP) and 30-60 percent to exports. The Asian Tigers such as India, Indonesia, China, Malaysia, Japan, and South Korea also have thriving SMEs sectors contributing between 70-90% in employment and an estimated 40 percent contribution to their respective GDPs.

In Africa, economic powerhouses such as South Africa, Egypt, Nigeria and Kenya and lately Zimbabwe the SME sector is estimated to contribute over 70% in employment and 30-40%contribution to GDP but contribute less than four percent to export earnings.

The low export contribution is attributed to lack of skills/management capacity, product quality, production capacity, poor market access, and lack of working capital hence the sector has tended to serve the bottom end of the domestic market. This trend is nevertheless changing as more focus is being directed at making the sector viable.

For example in Egypt a few years ago an SMEs stock exchange was commissioned to help the sector raise capital and improve quality of products thus bringing it into the main stream economic matrix allowing government to collect taxes. It is the Chamber view that at a time when we are rebuilding our economy there is a need to re-define the role of SMEs as important economic growth and employment drivers. Viewing SMEs as peddlers of trinkets and bottom-end players in the economy will be suicidal at this stage of the economic game.

The playing field has changed and going by new trends the thrust is to focus on the potential of the SMEs as a foundation for price competitive advantage, job creation and economic growth. For Zimbabwe the existing structures such as the ministry of SMEs and Sedco should be at the forefront of our economic recovery. We can certainly develop our own business model by drawing wisdom from time tested best practices such as the Japanese vertical and horizontal Keiretstu, Korean Chaebol and Indian cluster engineering programmes that encourage the establishment of networks between big and small enterprises on a win-win basis.

Our business model must seek to transform our SMEs and informal sectors into business systems that can produce competitive products and create jobs for our people. The creation of small enterprises linked financially to the big enterprises or as suppliers will help reduce working capital requirements, transaction costs, and ensure “Just in time” delivery. The thrust therefore, is to move away from the present straight jacket one stop production line which is not a viable option if we are to compete in the global market place. We need to adopt a new business model of small is beautiful across all sectors in order to grow our economy.

It is also the Chamber view that downsizing or un-bundling is not a solution to our viability problems. Empirical evidence has shown that unbundling and downsizing only help reduce costs in the short term by identifying toxic assets and your cash cows. Further unbundling that creates a plethora of strategic business units (SBUs) tends to increase management complexity and that over time increases administration costs. The recommended roadmap in re-defining an organisation should be guided by the end (goals and objectives) followed by strategy and then structure. Its energy and direction must be derived or founded in its organisational competences, values and exemplary leadership. For Zimbabwe identification of key sectors will be critical in launching SMEs as an economic driver. Manufacturing and agriculture SMEs clusters can be formidable vehicles of economic recovery/growth and job creation.

This requires a revisit and resourcing of the existing structures in order to improve capacity. The tourism sector which is basically a SMEs industry also needs to be integrated into the mainstream plan of SMEs.The tourism sector is made up of multiple small enterprises that are unable to borrow funds in order to re-energise their businesses after a decade long business drought. The thrust should be to enhance how they can access the market through ICT, packaging, networking/contracting, and hosting of open marketing forums focusing on how they can unlock value from this once a life time event and beyond. This will definitely enhance the sector’s future survival.

The state enterprise “silverware” ear-marked for disposal in the Sterp programme provides great opportunity to launch our own Keiretsu as it were. This will no doubt create more jobs, reduce transaction costs and improve viability of the silverware thus add value to the disposable value of the enterprises. Disposing of the state silverware in the current state will be tantamount to short-changing the tax payers. The state enterprises which are in dire need of capital injection may need to re-define their businesses by employing new outside the box business methods that embrace new technology.

To continue producing using antiquated technology will be an ingredient for disaster. Thus across sectors there is need to employ business models that can produce competitive goods which are able to compete with imports in both price and quality. This is time to engage our brains — it’s time to be innovative and creative. A business model that interlocks with network of suppliers taking a leaf from Hitachi which has over 680 member firms and subsidiaries all in effort to cut wastage will help improve the state enterprises viability thereby adding shareholder value.

The development of a viable SMEs sector will not come without a cost and sacrifice. There is therefore the need to avail funding, improve access to ICT, and management capacity building, development of information data bases, and incentives for the sector. Traditionally SMEs have been left out of the government incentive structures and this has caused them to avoid taxes because of lack of perceived benefits emanating from the fiscus. Hosting of reverse trade fairs in conjunction with the Ministry of SMEs and SEDCO where the big enterprises engage SMEs to come forth as partners can also be used to promote linkages between the big and small enterprises. Remember small is beautiful and the onus is upon all of us as stakeholders to chart a new economic recovery path for our country.

Concept note

More importantly, this paper needs to propose the establishment of an SME stock market which is less stringent than the current Zimbabwe Stock Exchange.

Benefits of small to medium Cap markets (For the economy)

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