ROLES OF SMALL

BUSINESSES IN AN
ECONOMY
BY
DR S SENA
SENIOR LECTURER
BUSINESS STUDIES DEPT
 The role of SMEs in the global
economy
 The importance of Small and Medium-Scale
Enterprise (SMEs) in the world economy cannot be
underestimated.
 In recent years, these enterprises have been given
increasing policy attention particularly in
developing countries because of growing
disappointments with results of development
strategies focusing on large scale capital intensive
and high import dependent industrial plants
 The importance of SMEs is felt in many ways
that include:
greaterutilisation of local raw materials,
employment generation,
encouragement of rural development,
development of entrepreneurship,
mobilisation of local savings,
linkages with bigger industries,
 Provisionof regional balance by spreading
investments more evenly,
 Provision of avenue for self-employment, and
provision of opportunity for training managers and
semi-skilled workers
 The vast majority of developed and developing
countries rely on dynamism, resourcefulness and
risk tasking of small and medium enterprises to
trigger and sustain process of economic growth’.
 Inoverall economic development, a critically
important role played by the small and medium
enterprises is employment creation
 Inthe EU SMEs provide 66% of the jobs though the
percentage is rising considerably as the SMEs are
matching their challenges and utilise the
opportunities brought about by globalisation.
 They are managing this largely through e-commerce
and greater internet usage.
 According to Economic Survey (1998-99), ‘SMEs
were the major creators of new jobs, whilst on
average; big industries downsized; retrenched
employees and reduced employment’.
 The Survey further alluded that ‘in the EU, SMEs
generated 56.2% of the private sector turnover.
However, the role of SMEs in generation of
employment has in most cases been temporary since
most new businesses die out before their fifth
birthday further contributing to unemployment.
 SMEs have been criticized for their high rate of
bankruptcy. While they create many jobs, they also
destroy many jobs.
 SMEs have also been criticized because they provide
low value added goods and services and have short
life.
 In Pakistan, SMEs provide employment to about 65% of
work force in the industrial sector.

 According to the Economic Survey (1998-99), SMEs

with a mere 20% investment and resource to less than
10% of the total formal credit generated a massive 80%
of the total employment in Pakistan.

 They contribute to the GDP around four times as much as

the large scale industries.
In Italy, the share of micro-enterprises in
total employment is 48 %, and 57 % in
Greece.

Meanwhile, in Ireland and the United

Kingdom large enterprises’ share of
employment is over 45 %
 THE IMPORTANCE OF SMES IN
DEVELOPING COUNTRIES’ ECONOMIES
 There is a general consensus that the performance
of SMEs is important for both economic and
social development of developing countries. From
the economic perspective, SMEs provide a
number of benefits (Advani, 1997), these
enterprises have been recognized as the engines
through which the growth objectives of
developing countries can be achieved.
 They are potential sources of employment and
income in many developing countries.
 There is growing recognition of the important role
small and medium enterprises (SMEs) play in
economic development, they are often regarded as
efficient and prolific job creators, the seeds of big
businesses and the fuel of national economic
engines.
 SMEs boost employment more than large firm growth
because SMEs are more labour intensive thereby
subsidizing SMEs may represent a poverty alleviation
tools, by promoting SMEs and individual countries and
the international community at large can make progress
towards the main goal of halving poverty levels
 Entrepreneurial development is therefore
important in the developing countries like
Nigeria’s economy which is characterized by
heavy dependence on oil, low agricultural
production, high unemployment, low utilization
of industrial capacity, high inflation rate, and
lack of industrial infrastructural base.
 These constraints limit the rate of growth of
entrepreneurial activities in Nigeria.
 SMEs in Kenya employed some 3.2 million
people in 2003 and accounted for 18% of
national GDP.
 In Kenya 90% of all enterprises are SMEs
providing employment to over 60% of the total
employed population.
 Small firms accounted for 16% of both jobs and
production and medium and large firms 26% of
jobs and 62% of production.
 In Ghana and South Africa, SMEs represent a vast portion
of businesses. They represent about 92% of Ghanaian
businesses and contribute about 70% to Ghana’s GDP and
over 80% to employment.

 SMEs also account for about 91% of the formal business

entities in South Africa, contributing between 52% and
57% of GDP and providing about 61% of employment.
Micro and very small businesses in South Africa provided
more than 55% of total employment and 22% of GDP in
2003.
 SMEs represent over 90% of private businesses and
contribute to more than 50% of employment and of
GDP in most African countries.

 SMEs in Ghana are a characteristic feature of the

production landscape and have been noted to provide
about 85% of manufacturing employment of Ghana.

 They also contribute about 70% to Ghana’s GDP and

account for about 92% of Ghana’s businesses.
 Similarly, in the Republic of South Africa, it is
estimated that 91% of the formal business entities
are SMEs
 They also contribute between 52 and 57% to GDP
and provide about 61% of employment
 SMEs therefore have a crucial role to play in
stimulating growth, generating employment and
contributing to poverty alleviation, given their
economic weight in African countries.
 SMEs can make a major contribution to economic
growth, employment creation and poverty reduction.
 the major contributions of SMEs in various countries
of the world are:
 They provide around 50% of productive
employment, (UK: 45%, EU: 66%, Japan: 72% and
in Developing countries: 50%-70%),
 In South Africa, statistics show that SMEs in 2005
absorbed nearly 57% of the people employed in the
private sector and contributed 42% of formal total
Gross Domestic Product,
 In India, the SMEs sector contributes 70% of the country’s Gross
Domestic Product,

 SMEs in Europe and Latin America contribute more than 50% of the
Gross Domestic Product,

 SMEs Contribute to about 30% of global exports by value,

 In the EU around 40% of over a million firms that export goods are
SMEs,

 In Australia, nearly 70% of exporting firms and over 60% of importing

firms are SMEs, and

 The small proprietor business sector in Northern Italy is the source of

major innovation in the Italian economy.
 SMEs IN THE ZIMBABWEAN
ECONOMY
 The Act of Parliament governing the formation and operations of SMEs in
the country is the Small and Medium Enterprise Act Chapter 24:12.
 The Act also provides for the establishment of a funding organization in
the form of the Small Enterprise Development Corporation (SEDCO).
 SEDCO’s main task is to source funds for the SME sector.
 The organization works with various stakeholders in the financial services
sector, which include the Agricultural Development Bank (AgriBank),
and the Infrastructural Development Bank of Zimbabwe (IDBZ) to
provide funding facilities to this sector.
 Funds from the SEDCO assist SMEs to access capital funds for their
operations.
 The government of Zimbabwe crafted the
Small-Medium Enterprise Policy framework,
whose main thrust was to strengthen the
momentum of the small-medium enterprises.
 The main objective behind the policy
framework was to utilise the informal sector’s
ability to create jobs, reduce poverty, empower
the marginalized and stimulate economic
development in the country.
 The government of Zimbabwe realized that the informal
sector can be a major player in the national economy as it
could contribute about 60% of the GDP and contribute
more than 50% of the total employment.
 The SME sector in the country is made up of different
sectors depending on the nature of their business, which
include agriculture and agro-processing, arts and culture,
mining and quarrying, transport, manufacturing, repairs,
construction, tourism, retailing, metal fabrication,
carpentry, clothing and textiles.
 The SME sector activities are involved in retail
trading, cottage industry, urban agriculture
utility services and financial networking such as
rotation savings and credit associations, money
changing and pawn brokers.
 These situations represent very important fabrics
of the urban systems in most African countries,
which are characterized by entrepreneurial and
tactical operations of the marginalized urban
poor to survive the harsh economic
environments in urban areas
 The Zimbabwean policy framework presents a
planning opportunity to come up with strategies
that integrate this sector into the main stream
economy thereby contributing to the Zimbabwe
Agenda for Sustainable Socio-Economic
Transformation (ZIM-ASSET) economic blue
print.
 In its bid to regularise the SME sector the
government of Zimbabwe established a fully
fledged ministry responsible for the affairs of the
sector.
 The Ministry of Small and Medium Enterprises
and Cooperative Development has offices
throughout the country starting at district,
provincial and the national levels.
 Who is the Minister responsible for this very
important Ministry?
The Zimbabwe Government Support of
SMEs Operations
 According to the Small and Medium Enterprises Act; Chapter 24:12
the government of Zimbabwe shall endeavour to create an economic
and regulatory environment that promotes MSMEs in order to
develop and enhance their contribution to national development.
 The government objective shall be implemented through appropriate
administrative and legislative measures including:

 Ensuring proper coordination and implementation of national

policies, legislation and programmes that have a direct impact on the
development of MSMEs,
 Facilitating the entry by MSMEs into widening spheres of
economic activity,
 Facilitating the provision of training and advisory services to
enhance the managerial and entrepreneurial capacities of
persons who own or manage MSMEs,
 Fostering joint ventures, partnerships and other forms of
business linkages and associations between MSMEs and
corporations, local authorities and commercial industrial
organisations, and
 Facilitating MSMEs access to capital finance.
 SMEs Policy Framework Achievements
(2002-2015)
 The government of Zimbabwe, through the Ministry of SMEs’
policy framework on SMEs has made significant progress in
promoting the operational environment for the sector. According to
GoZ (2015) notable initiatives and progress were made in the
following areas:

 Access to finance

Most financial institutions in Zimbabwe have a window for

MSMEs where they provide services tailored to their needs. Most
financial institutions have adopted the group lending schemes
especially for micro enterprises.
Banks like Central African Banking Services (CABS), Post Office Savings
Bank (POSB), AgriBank and Kingdom Bank through its Micro-King Finance
branch give loans to MSMEs after production of workable business plans.

 Savings and credit cooperatives

The mobilisation of resources through savings and credit co-operatives has seen
a number of SACCOs registered although the ultimate goal is to establish
a Co-operative Bank.

 Access to Markets

In marketing and distribution support for MSMEs products at both local and
international levels the government has provided some infrastructure in some
areas and efforts are underway to operationalise an MSMEs market pavilion in
Yiwu, China.
 Trade facilitation programmes

 One Stop Border post at Chirundu as well as the facilitation of Cross Border Trading through
the COMESA Simplified Trade Regime (STR) were effected and are operational between
Zimbabwe, Zambia and Malawi. The introduction of the Passenger/Cargo manifest system
also facilitated easy access to markets by cross border traders between Zimbabwe and Zambia.

 Technology Infrastructure Support

 In 2011 Cabinet approved the Infrastructure Development Policy and most stakeholders’
strategic plans are now in sync with the MSMEs development agenda. In order to facilitate the
introduction of new technologies and innovation, common facilities centers were set up in
more than ten places countrywide including those at the Harare Institute of Technology and
the Bulawayo Polytechnic. Technology Parks and incubator facilities were also were also
being pursued.
 Entrepreneurship, Management and Skills Development

The MSMEs Database Management System was put in place

to enhance information dissemination for the development of
the sector. To enhance entrepreneurship at a national level
through comprehensive entrepreneurship development
programmes most higher and tertiary institutions introduced a
subject on Entrepreneurship in their syllabi. State universities
like Chinhoyi University of Technology (CUT) have
introduced degree programmes on entrepreneurship at both
degree and masters levels.
 Targeted Support
Sectoral business clusters have been set up following needs
identified through needs assessments in order to develop
cluster based enterprise and embark on specific sector targeted
support programmes.
 Institutional Reform

 The Small Business Advisory Council (SBAC) was provided

for in the SME Act (Chapter 24:12) to provide a representative
body for SMEs advocacy fora.
 An apex body in the sector, the National Chamber of SMEs
was formed and has put structures at district, province and
national levels to provide a coordinated and integrated
institutional set-up for SME development.

 Monitoring Mechanisms

 Annual forums for stakeholders are held to monitor and

evaluate the implementation of the SMEs policy and strategy.

 Presentations are also made at fora organized by National

Economic Consultative Forum (NECF).
 In Zimbabwe a lot of people lost their jobs during
the Structural Adjustment Programme, when
approximately 400 000 workers were retrenched
between 1991 and 1995’.

 The most affected were towns, cities, mines,

farms and the impact were also felt in the rural
areas.
 The economic melt-down decade (1998-2008) further
aggravated the situation when the formal economy
failed to generate enough jobs to absorb the ever
increasing job seekers.
 The SME sector was the major absorber of the
redundant work force and as such played a very
critical role in poverty alleviation and job creation in
the country and became the major driver of national
economy in Zimbabwe.
 Empirical Evidence On The Importance of
SMEs In Zimbabwe
 Basing on the survey report by FinScope (2013) that was
carried out under the auspices of the Ministry of Small
and Medium Enterprises and Cooperative Development
and funded by the Multi Donor Trust Fund headed by the
World Bank it was shown that as of 2012, of the MSMEs
in the country:
 10% were classified as Micro enterprises with an approximate
of 108 000 employees,
 70% were Small enterprises with 2 035 000 employees, and
 20% were Medium enterprises with 672 000 employees.
Ownership Styles of SMEs in Zimbabwe
Ownership style

Sole Proprietors 71%

Partnerships 29%

Gender

Female 53%

Male 47%

Age group

Over 30 yrs and experienced 73%

Below 30 yrs 27%

Geographical Location

Urban 34%

Rural 66%

Education and experience

Secondary education 71%

Acquired informal training in 73%

running a business
 Motivation to start a business
Mainly needs driven 63%
Monthly income
Low levels salaries 51%
Less than US$200/Month 40%
No salaries 11%
Position in the household
Heads of households 66%
Dependents 34%
Work period
Work fulltime (8 hrs/day) 50%
Contract workers
Source: FinScope (2013)
40%