Document of Public Disclosure Authorized The World Bank
Report No. 24330 - ZA
Public Disclosure Authorized SOUTH AFRICA Constraints to Growth And Employment Evidence of the Small, Medium and Micro Enterprise Firm Survey Public Disclosure Authorized
August 2000
Macroeconomics Technical Group Africa Region Public Disclosure Authorized This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization CURRENCY EQUIVALENTS Currency Unit: South African Rand (ZAR) US$1.0 = ZARI 1.65 ZAR1.0 = US$0.09 (August 2000)
FISCAL YEAR April I to March 31
Vice President: Callisto Madavo Country Director: Fayez Omar Country Program Coordinator: James Sackey Sector Manager: Philippe le Houerou Task Team Leader: Vandana Chandra CONTENTS
Foreword ......
Executive Summary ...... i
1. Introduction...... 1 Motivation and Objectives ...... 1 Central Themes ...... 3 Outline ...... 4
2. Demographics ...... S SMME Employment - Where Are the Jobs? ...... 6 General Firm Characteristics ...... 6 Age ...... 6 Race and PDI Ownership ...... 7 Legal Status ...... 9 Trading Orientation ...... 9 The SMME Entrepreneur ...... 9 3. Expansion of the SMME Tier...... 12 Employment Dynamics in Recent Years ...... 13 Employment Changes in Existing Firms ...... 14 New Entrants ...... 15 SMME Tumover ...... 16 Investment Trends ...... 18 Conditions for Expansion ...... 19 Necessary Conditions for Creating 10 Additional Jobs ...... 19 What Would SMMEs Like Govemment To Do? ...... 21
4. Labor Markets and SMMEs ...... 23 The Skills Constraint ...... 23 Recruitment Practices by SMMEs ...... 27 Labor Relations ...... 27 Labor Market Environment ...... 28 Response to Labor Regulations ...... 29 Use of Flexible Labor Arrangements ...... 31
5. Financial Co nstraints . ; ...... 33 Sources of Capital ...... 33 Low Bank Borrowing. iLimited Access Or High Cost? ...... 35 Effect of Interest Rates on SMMEs ...... 37 6. Government Promotion Programs and Procurement ...... 39 The Use of SMME Promotion Programs ...... 39 Procurement ...... 42 Licensing Requirements and Tax Rates .. 43 Impact of the 1999 Tax Cut .. 44 7. Location and Infrastructure ...... 46 Firm Ratings of Location ..... 46 Crime ...... 48 Choice of Location for Expansion ..... 51
8. Subcontracting and Trade Linkages ..... u...... 52 Subcontracting ...... 52 International Trade . . . . 53
9. Central Themes and Findings ...... 56
Bibliography ...... _60. . .
Annex 1: Demographics ...... 63
Annex 2: SMME Expansion ...... 65
Annex 3: Labor Markets ...... 75
Annex 4: Financial Issues ...... 78
Annex 5: Trade ...... 81
List of Boxes
Box 1.1. Macroeconomic background ...... 2 Box 3.1 The issue of SMME firn turnover - firm births and deaths ...... 17 Box 3.2 Survival rates among European SMMEs ...... 18 Box 6.1 SMMEs and government assistance - research in South Africa ...... 41 Box 6.2 Procurement to SMME finns in South Africa ...... 43 Box 7.1 Black SMME firms in inner city Johannesburg ...... 49 Box 7.2 Geographical clustering of black SMME firms ...... 50
List of Charts
Chart 2.1 Sectoral distribution of employment in SMME sample, 1999 ...... 6 Chart 2.2 Age of firms in sample, 1999 ...... 7 Chart 2.3 Sample SMMEs by race ...... :.8 Chart 2.4 Post-apartheid firms by race ...... 9 Chart 2.5 Main motivations for starting an SMME ...... 10 Chart 2.6 Motivation for choosing a particular sector ...... 1 Chart 3.1 Total employment and growth by sector, 1997-99 ...... 13 Chart 3.2 Employment growth in existing firms by sector and race, 1997-99 ...... 15 Chart 3.3 Employment in finms that started in 1998 ...... 16 Chart 3.4 Investment-expanding SMMEs ...... 19 Chart 3.5 Necessary conditions for employing 10 more workers ...... 20 Chart 3.6 Local authority measures to promote SMME growth ...... 21 Chart 3.7 National authority measures to promote SMME growth ...... 22 Chart 4.1 Employment of skills by race, 1999 ...... 23 Chart 4.2 Gender and skill composition of SMME employment, 1999 ...... 24 Chart 4.3 Proportions and amounts invested in fomWal skills training by sector, 1999 ...... 25 Chart 4.4 Recruitment practices for skilled, semi-skilled and low skilled workers ...... 27 Chart 4.5 Number of unions SMMEs do business with in GJMA, 1999 ...... 28 Chart 4.6 Level of collective agreement for SMME firms ...... 29 Chart 4.7 Effect of labor market regulations on employment ...... 30 Chart 4.8 Response to labor market regulations by size ...... 31 Chart 4.9 Reasons for hiring temporary workers ...... 32 Chart 5.1 Sources of start up capital, 1999 ...... 34 Chart 5.2 Reasons for not using formal bank loans in the last 5 years ...... 35 Chart 5.3 Effect of 1998 interest rate hike on SMMEs, 1999 ...... 38 Chart 6.1 Awareness and use of DTI SMM promotion programs ...... 40 Chart 6.2 Awareness and use of other SMIE promotion programs ...... 41 Chart 6.3 Firm ratings on licensing and regulatory requirements ...... 44 Chart 6.4 Impact of tax cut on expansion plans ...... 45 Chart 7.1 Firm ratings on proximity to markets and infrastructure ...... 47 Chart 7.2 Firm ratings on reliability and cost of services ...... 47 Chart 7.3 Firm ratings on availability of services ...... 48 Chart 7.4 Percent of firms subject to crime, 1998-99 ...... 49 Chart 7.5 Type of crime experienced by SMMEs, 1998-99 ...... 50 Chart 7.6 Choice of location for expansion ...... 51 Chart 8.1 SMMEs that act as sub-contractors to other SMMEs ...... 52 Chart 8.2 SMMs that act as sub-contractors to large firms ...... 53
List of Tables
Table 1.1 Key economic indicators ...... 2 Table 2.1 SMME sample by sector and employment size-class ...... 5 Table 3.1 Employment growth in existing SMMEs ...... 14 Table 3.2 New entrants by size and sector ...... 16 Table 4.1 Difficulty in finding skilled workers by sector, GJMA sample 1999 ...... 25 Table 4.2 SMMEs that invested in any formal skills training, 1999 ...... 25 Table 4.3 Percent of firms rating each training source as important ...... 26 Table 4.4 Use of flexible labor by SMMEfirms ...... 31 Table 5.1 SMM use of formal loans in last five years ...... 35 Table 5.2 Reasons for not undertaking planned investment in 1998 ...... 36 Table 6.1 SMME programs and the sponsoring agency ...... 39 Table 6.2 SMMEs that applied and were awarded government contracts in 1998-99 ...... 42 Table 6.3 Number of licenses needed for operations ...... 43 Table 6.4 SMME ratings of various governnent departnents ...... 44 Table 6.5 How the recent tax cut will affect SMME after-tax profits ...... 45 Table 7.1 Rand expenditure on security guards and devices in 1998 ...... 51 Table 8.1 Share of exports and exporters in main regional markets ...... 53 Table 8.2 SMME top competitors in export markets ...... 54 Table 8.3 Number and share of SMMEs that use export promotion programs ...... 54 Table 8.4 SMMEs complaining about customs clearing procedures ...... 55 Table Al. SMME sample by sector and size-class ...... 63 Table A1.2 PDI ownership in SMMEs-number & percent owned, relationship to age, 1999 ...... 63 Table A1.3 Sectoral breakdown of SMMEs within racial groups (percent), 1999 ...... 64 Table A1.4 SMME sample by legal status (percent) .64 Table A1.5 Racial distribution of sectors across SMMEs, 1999 .64 Table A2.1 Rates of employment growth in new entrants, 1998-99 .65 Table A2.2 Breakdown of new entrants by race and sector (frequencies), 1999 ...... 65 Table A2.3 Investment in new machinery and equipment, 1998 ...... 65 Table A2.4 Tracking employment for 116 SMMEs born in 1998 ...... 66 Table A2.5 Investment in new machinery and equipment by sector ...... 66 Table A2.6 Changes in employment, 1997-98 and 1998-99 ...... 67 Table A2.7 Necessary conditions to employ 10 more workers by size class ...... 67 Table A2.8 Necessary conditions to employ 10 more workers by sector ...... 68 Table A2.9 Necessary condition to employ 10 more workers by race ...... 68 Table A2.10 SMME firm births and deaths- international evidence ...... 69 Table A2.11 Survival rates for U.S. small firms 1978-1986 ...... 72 Table A2.12 Survival rates for U.S. small firms by sector, 1976- 1986 ...... 72 Table A2.13 Firm births and deaths in Japan ...... 73 Table A2.14 Survival Rates in OECD countries ...... 73 Table A2.15 Firm births and deaths in Taiwan ...... 73 Table A2.16 Firm births and deaths in developing countries ...... 74 Table A3.1 How many unions SMMEs work with by size ...... 75 Table A3.2 How many unions SMMEs work with by sector ...... 75 Table A3.3 Level at which collective agreements are reached ...... 75 Table A3.4 Implicit costs of doing business with labor ...... 76 Table A3.5 Impact of labor regulations ...... 77 Table A3.6 Reasons for subcontracting .77 Table A4.1 Sources of investment capital by firm size, 1998-99 .78 Table A4.2 Sources of investment capital by age, 1998-99 .78 Table A4.3 Sources of investment capital by race, 1998-99 .79 Table A4.4 Sources of working capital, 1998-99 .80 Table A4.5 Sources of woricng capital, 1998-99 by size-class .80 Table A4.6 Sources of working capital, 1998-99 by age .80 Table AS. 1 Percentage of SMME exporters as a share of total SMMEs. 81 Table A5.2 Exports as a percent of annual sales estimates by size .81 Table A5.3 Exports as a percent of annual sales estimates by race .81 Table A5.4 Exports as a percent of annual sales estimates ...... 82 Table A5.5 Main countries of destination for exports .82 Table A5.6 Awareness to exports incentives programs .82
This report was prepared by Vandana Chandra (Task Manager), Lalita Moorty, Jean-Pascal Nganou, Bala Rajaratnam, and Kendall Schaefer. We are indebted to Junaid Ahmad (AFCOI) and Ketso Gordhan (City Manager, GJMC) for initiating the LED Project. We thank Jeff Lewis and Hassan Zaman (AFTMI) for reviewing the document. In South Africa, we received financial and logistical support from M. Maganlal, R. Seedat, and B. Shibambu (Strategic Planning Unit, GJMC). A special note of thanks to Professor J. Martins, and D. Tustin (BMR) for expert survey management and to the survey teams in South Africa who were drawn from RAU, University of Pretoria, UNISA, Wits, Vista and the BMR staff. We also thank B. Smit (BER), I. Macun (DOL), C. Rogerson, R. Tomlinson, and hosts and participants of seminars held at GJMC, DTI, Durban Metro Council, University of Cape Town, DPRU, University of Stellenbosch and Urban Forum (Washington D.C). The views expressed here do not reflect those of the World Bank or its members and we accept responsibility for any remaining errors and omissions. FOREWORD
In an urbanized context like South Africa, the role of cities in economic growth and poverty reduction is of national interest In South Africa, over 80 percent of national GDP is contributed by the urban sector and about 60 percent of the population resides in urban conurbation. Nowhere is the urban economic and demographic concentration more visible than in South Africa's large metropolitan areas - Cape Town, Durban, Pretoria, East Rand and Johannesburg - which together account for 35 percent of the national economic pie and an equally large portion of the national population. In South Africa, therefore, the cities and the nation share a destiny that is intertwined. The policy question that naturally arises in this context is what are the mechanisms through which a metropolitan center can contribute to national targets if growth andpoverty reduction?
Traditionally, the answer has focused on mechanisms of fiscal stability, provision of local infrastructure and market efficiency. To begin with, a city capable of raising its own revenues and financing its own needs, contributes to the national objective of macro fiscal stability, a prerequisite for economic growth and poverty reduction. Similarly, a city capable of providing municipal infrastructure in an efficient and equitable manner contributes directly to the national economy. Households and businesses receiving reliable and affordable services can in tum meet the consumption and production needs of the economy. In this context, cities that select innovative partnerships in the financing and delivery of infrastructure by involving public-private-and community organizations act as national pilots of innovation. Such partnerships are often an important source of employment generation and direct foreign investment. Finally, by making sure that urban markets for land and transport are not impeded by local policies, cities establish the micro foundations for economic growth by permitting, for example, housing to be delivered more effectively or by facilitating the mobility of households.
In taking forward the iGoli 2010 framework, Johannesburg has adapted and innovated on the global best practices of fiscal management, infrastructure delivery and maling basic municipal markets work. The iGoli framework for better economic management of cities is thus Johannesburg's response to the divisions and dysfunction of the apartheid city. IGoli is also Johannesburg's contribution to national goals of economic growth and poverty.
But, in formulating the IGoli plan, the Johannesburg leadership also asked whether in addition to the routes of fiscal sustainability, infrastructure provision, and efficient markets, the city could directly influence employment generation. Cognizant of the trap of trying to pick "winners and losers" in the economic sphere, Council is seeking to assess its potential role in emnployment generation by understanding the urban economy of Johannesburgand its dynamics. The underlying philosophy of the approach was simple. Systematic and complete information was needed to gain an understanding of the pulse of Johannesburg's economy and, in particular, to assess the critical barriers to the growth of formal and informal economic nodes. Only this form of an information base - comprehensive and in depth in nature - would allow the decision-makers to identify the areas of policy intervention.
Equally important, the information system would also allow the policy makers to understand whether the impediments to growth and employment generation and the possible policy solutions were national or local in nature. In other words it would delineate the roles of national and local governments in meeting the challenges of economic growth and employment generation. This is an important point. Too often it has been assumed that macro instruments of fiscal and monetary control are the main levers of economic growth. Yet, in reality, these are necessary but not sufficient policy instruments. Intervention at the micro level in the operation of labor, land, and capital markets may also be needed in conjunction with macro level instruments. With cities playing such a national role in South Africa's economic structure, economic analysis at the city level is therefore a pre-requisiteto understandingthe microeconomics of macro growth strategies. In addition, with Johannesburg representing 42 percent of national manufacturing firms, the analysis even at the Johannesburg level by itself will provide important insights for national level policy makers.
The comprehensive economic information base was established under the joint partnership of a team comprising of staff members from the City of Johannesburg and the World Bank. The task team leader from the City's side was Mr. Rasheed Seedat and from the World Bank side, Dr. Vandana Chandra. Primarily drawing on local expertise and in collaboration with the Bureau of Market Research, UNISA, the study undertook six primary surveys. To its credit, the team trained local students from all corners of Johannesburg including Soweto, Alex, and the Northern Suburbs. These students undertook the survey under supervision of senior staff from the World Bank and BMR The growth of local capacity in the area of urban economic surveying was itselfa very valuable contribution of the exercise. As a result, the work was completed in record time - design, implementation of the surveys and data cleaning all happened in less than 12 months - and at record cost savings.
The information system will also serve as the base of the city's "Economic Intelligence Unit." Council was cognizant that information of the form being collected in the surveys will need to be updated periodically, analyzed continuously, and the assessments will need to be fed into the policy process in real time. The development of such institutional capacity was also an important achievement of the survey process. The data is available to the public through the City's website and will be updated automatically as new data is entered over time. Council's intention is to honor its commitrnent to transparency and to invite debate and analysis of its policies based on actual data collected in real time.
Finally, through the surveys a methodology was devised to enable Council to track the impact of its expenditure patterns on access to services by the poor. Poverty monitoring is analytically and logistically a very demanding task. Yet, for policy makers dedicated to the improvement of the welfare of the poor - a commitment that drives the Council's policy process - it was important that ultimately the City is capable of assessing the impact of its polices on the access by the poor of municipal services. But, such tracking would have to be undertaken in real time to inform the policy process regularly. Reliance on annual household surveys did not seem to respond to this need. The team rose to this challenge and has contributed a process that is analytically stringent and logistically manageable and will support the Council's objective of assessing access to services.
Ultimately such a comprehensive and amnbitious task could not have been undertaken without the collaboration and support of many organizations. We would like to thank Agence Fraincaise Development Propario (AFD) and Inca-French Fund for financial support, NBI and JCCI for logistical support with surveys and most importantly, CEOs of finns, the real participants of the survey, for their time and dedication to their City.
Ketso Gordhan, City Manager, Greater Johannesburg Metropolitan Council, South Africa
Junaid Ahmad, Deputy Resident Representative World Bank Resident Mission Office, South Africa
August 2000 EXECUTIVE SUMMARY
The main findings of the 1999 GJMC-World Bank SMME survey cover the responses of approximately 800 SMME owners across 8 manufacturing and service sectors. These are summarized below. Who is the Typical SMME Entrepreneur? The SMME cluster is frequently perceived as the solution for South Africa's long termn unemployment and poverty problem. However, the Survey shows that over 70 percent of the SMME owners had formal sector work experience and chose to start their own firm when they perceived a lucrative business opportunity; another 12 percent became SMME owners when they joined the family business, and about 5 percent came with similar business experience from another country. Less than 5 percent were unemployed and tired of searching for their first job when they started their own SMMEs. Since the majority of the-unemployed today are comprised of either young entrants who have never held a first job, or the long-term unemployed with non- transferable skills, this entrepreneurship pattern suggests that the SMME cluster may not provide such a strong engine of job creation for the poor and unemployed. Employment Creation and Growth Within the SMME Cluster
Raw employment statistics from the Survey are deceptive at first glance. They suggest that between 1997 and 1999, employment grew by 23 percent, defying trends in the overall manufacturing sector during the same period. However, much of this growth in aggregate employment occurs because of the birth of new firms within the period. Closer inspection of the firms that were established in 1997 or earlier (73 percent of the sample) suggests a different picture. For these firms, during 1997-99, there was job creation in 41 percent of these firms (in retail, tourism and IT sectors), job-losses in 27 percent, and no change in employment in the remaining 32 percent. Overall, net employment in these existing finns declined by 7 percent during 1997-99. Although between 26-30 percent of firms invested in excess of 10 percent of their capital stock during 1998-99, only 13 percent of SMME firms both invested and increased employment by more than 5 percent. SMME owners were asked the main reasons for not undertaking planned investments in 1998-99, and the most important factors that would cause them to increase employment. The primary reason for slow investment and employment growth was identified as "insufficient demand" for their products/services, thereby ranking market conditions as more important than labor or capital market constraints. "No need/desire," Ylack of access to capital" and "high interest rates" were the other main reasons for low investment. Similarly, in listing the main obstacles to increasing employment, 80 percent of firms "insufficient demand" as the most important constraint. Next most important for 40-45 percent of firms were three factors ranked equally: "fall in real interest rates", "increased business visibility" and "increased government promotion of SMMEs", followed by "more contracts from governmentAlarge business." Other Critical Constraints: Shortage of Skills African labor constitutes the majority of SMME semi-skilled employment. However, whites dominate skilled occupations and women are still under-represented. Despite the presence of African labor in semi-skilled occupations, the legacy of apartheid and its impact on skills development suggests that SMMEs face an important skills shortage. The most critical labor market issue that emerges from this Survey is the shortage of skills and the steps being taken to address it. 30-45 percent of SMMEs reported a skills shortage in 1999, when the majority of firms were not expanding. However, only about 24-30 percent of firms with over 5 employees, and less than 10 percent of firms with less than 5 employees undertook formal skills training in 1998. For those that trained, the median amnounts invested in training per employee decreased sharply from R1700 per annum for the micro firms to R938 and R400 per annum for the largr 'very small' and 'small' SMMEs. The higher expenditures undertaken by micro firms reflect the high fixed costs of training. The amount spent on training is generally less than the amount per employee spent on crime prevention. Low magnitude of training by firms could result from resource constraints and/or lack of awareness to training programs. In fact, SMMEs do report that they would like national authorities to improve education and training. So firms could be treating skills training as a public good and looking to government for assistance. Survey results also suggest that labor regulations are not a sizable constraint for most SMMEs, particularly micro firms. SMMEs in the IT and tourism sectors appear to be the least affected by these regulations. When small SMMEs do incur higher implicit costs of doing business with labor, they respond in ways quite similar to larger firms with over 50 employees: they create fewer jobs, and the jobs they do create are more likely to be non-permanent. Nevertheless, it would appear that most critical labor market problem for SMMEs remains the skills scarcity, rather than the degree of regulation. If skills development can be effectively promoted, the SMME cluster may be able to move towards faster growth and job creation. Inadequate Access Or High Cost of Capital
The most critical issues in the capital market are related to access to credit and its cost. Private savings consisting of family and individual savings and retained earnings finance the majority of firms' hvestment capital. An examination of the survey data revealed that SMMEs are not severely constrained by lack of access to bank loans. However, where access is an issue, it is related to the firm size, age, and race of the owner.
In addition to the issue of access to capital, high interest rates were also noted as a constraint. Although the share of bank loans used to finance start-up or working capital is low compared to the share of savings, approximately one-half of firms surveyed did report using formal credit in the last five years to meet their business needs. Firms that borrowed from banks confirmed that high interest rates had a negative effect on their business, although 24 percent of firms reported that the recent decline in interest rates had made little difference to their business. While this suggests that interest rates may still be too high, it also indicates that the cost of capital is not the sole factor inhibiting investment and growth in SMMEs.
iv Insufficient Government Support SMME firms perceive government to have a vital role in their development, and identified a number of interventions government can take to increase SMME competitiveness, marketability, and visibility. First, SMME firms want improved support systems. The support programs are of two types: DTI programs and programs administered by its apex institutions, Khula and Ntsika. The Survey indicates that awareness of DTI programs is about 7-34 percent; usage is even lower in the range of half percent for many programs. No more than 20 percent of SMMEs were aware of Khula and Ntsika programs, with the exception of the quality standards program offered by the South African Bureau of Standards. Less than 10 percent of firms that have heard of these programs have used them. Government support systems also exist in the form of export promotion programs to facilitate entry into international trade. The survey reveals that the 3 most well-known programs were tax exemptions, export credit guarantees and forward foreign exchange cover, all three indicating that direct monetary returns were preferred to other types of export assistance. With the exception of these three programs, no more than 4 percent of SMME exporters used any of the numerous other programs in place. Low awareness and even lower usage of the different programs raises the issue of whether it might not be more efficient to rationalize them to create more effective programs with a higher usage. In addition to promotion and procurement, SMMEs were asked to prioritize government policies that would facilitate their growth. The two most important actions for local government were identified as safety and security on the streets and infrastructure development. The two most important actions for national government were policy stability and following closely behind, four other actions: lower interest rates, prioritize education and training, promote efficient and flexible wages, and promote SMME participation in publicly provided service.
Opportunities and ChaDenges Greater Johannesburg appeared to be a popular location for the majority of the existing investors in 1998-99: 87 percent of the firms indicated that they would prefer to expand within Greater Johannesburg. This underscores the advantages and opportunities that the local authorities enjoy in terms of attracting more investors. Firms' choice of location indicated that 85 percent enjoyed close proximity to product and input markets; 74 to 86 percent of the SMMEs reported that reliability of water supply, electric supply, and telecommunication services was either fair or excellent. However, on costing, between 25-50 percent of firms flagged their dissatisfaction with the cost of telecommunication services, electricity, and water. All three ratings indicate that pricing is perceived as more of a problem than reliability. Additional challenges for local authorities emerged in the incidence and costs of crime prevention for SMMEs in Greater Johannesburg. 61 percent of the firms indicated that they were victims of crime in 1998-99. In general, frins spent R600-700 per employee on crime prevention in 1998-99 with the costs decreasing with firm size. Expenditure on crime prevention is higher than the expenditures on skills training.
v The Role of Race The Survey indicates that race, size and age were important markers of SMME development in the 1990s. For example, the smallest micro firms display the usual handicaps or advantages found in most countries, such as weaker access to credit or being subject to fewer labor regulations. Similarly, post-apartheid finns display the handicaps of younger firms in other countries such as poorer export penetration. However, the race of the SMME owner appears to capture a unique feature of the South African business environment, reflecting the handicaps that categories of entrepreneurs have regardless of size, age or location. Black-owned SMMEs appear the most disadvantaged - typically, they experience all drawbacks of micro and post-apartheid firms (but to a greater extent), and possess few of their advantages. For instance, about 50 percent of black SMMEs could not borrow from a bank because of lack of collateral, the right credit history or some similar reason. There are a few encouraging trends revealed during 1998-99 (although apparent trends in the data must be interpreted with care). First, the share of black entrepreneurs among new entrants rose to 9 percent, up from 6 or 7 percent in the full sample that includes older SMMEs. Second, in 1999, when the overall economy was sluggish, the share of black SMMEs that increased investment and employment above the critical minimum shot up from 15 percent in 1998 to over 30 percent. Black SMMEs also appeared to have more optimistic expansion plans than most other groups. But black SMMEs were also the only category that assigned the number one policy priority to education and training, a fact that is consistent with the low skills base among blacks, and the limited share of black SMME owners in general.
vi 1. INTRODUCTION
MOTIVATION AND OBJECiV ES This report evolved out of a partnership between the City of Greater Johannesburg and the World Bank during 1999-00 on the theme of local economic development (LED). It focuses on formal small, medium, and micro enterprises (SMMEs) and is the second in a series of reports' on local economic growth, job creation and poverty reduction. In this report, results are presented from the 1999 Greater Johannesburg Metropolitan Council (GJMC-World Bank SMNM survey of firms with less than 50 employees interviewed in the Greater Johannesburg metropolitan area (GJMA). Many of these results have wider implications for the larger South African economy. Macroeconomic performance in South Africa during the 1990s has been disappointing. Since 1996, in spite of a strong commitment to sound macroeconomic policy, the anticipated surge in private investment has not occurred, and economic growth has remained slow. Job creation was elusive, and the reason for continuing formal sector job losses in manufacturing and other industrial sectors throughout the 1990s remains unclear. While additional fine-tuning of existing macroeconomic policies might produce limited additional growth, it is increasingly obvious that such efforts need to be complemented with measures to address the structural constraints to investment and employment creation. Structural factors include the prominence of the SMME firm tier, inter- industry linkages, spatial location of markets, shortages of skilled labor, access to capital markets, insufficient infrastructure, etc. In the current South African economic context, these factors are viewed as perhaps more important than the broader price-related macroeconomic constraints. The motivation for this report, and the broader process of studying LED, is rooted in the need to understand the structural factors that constrain growth, job creation, and hence poverty reduction at the level of the South African firm.2 Altematively stated, the report uses firm survey results to determine the extent to which micro-evidence from SMME firms can explain some of the existing macroeconomic trends.
Other surveys focused on large manufacturing fims, large service sector firms, informal sector firms, informal households, training and credit providers and production-level workers in GJMA. The large finm survey results are presented in Chandra, Moorty, Rijaratnam, and Schaefer (2001). 2 Since there is a direct link between job creation and sustained poverty reduction, the emphasis in this report is on factors and policies that bear directly on SMME job creation and that, through the channel of employment creation, affect poverty. Other channels of poverty reduction include job creation through the growth of large firms, the informal sector, improved skills training, credit and better service delivery.
1 Box 1.1 Macroeconomic background
South Africa's post-apartheid govermnent faced the challenge of promoting growth and employment while ensuring the country's transition in an enviromnent of macroeconomic stability. Seven years later, the government's economic policies have achieved mixed results. Table 1.1 summarizes key economic trends. Declining fiscal deficits, low and falling external deficits, and the lowest inflation in decades are among the macroeconomic success stories. In the last several years, the government has taken steps to address other macroeconomic concerns. In particular, bank-lending rates have been brought down to a current level of 14.5 percent (they averaged 20 percent from 1996-98).
Table 1.1 Key economic indicators 1994 1995 1996 1997 1998 1999 2000
GDP [growth, percent] 3.2 3.1 4.2 2.5 0.7 1.9 3.1 Non-agricultural private sector employment 4 9 0.5 -2.6 -2.5 -4.8 -1.2 -2.7* [growth, percent] Exports, GNFS [percent of GDP] 22.2 23.0 24.5 24.6 25.9 25.9 29.1 Merchandise exports 14.5 15.8 16.8 17.3 18.4 18.9 21.9 [net of gold, percent of GDP] Merchandise exports 19 6 23.9 20.0 13.6 14.6 11.4 27.1 [net of gold, growth in current Rand mls.] Gross fixed capital formation by private llI 1 11.6 11.7 11.8 11.3 10.5 10.7 business enterprises [percent of GDP] CPI [growth, percent] 9.0 8.6 7.4 8.6 6.9 5.2 5.3 Interest rate [lending rate] 15.6 17.9 19.5 20.0 21.8 18.0 14.5 Exchange rate [R/$, end-of-period] 3.5 3.6 4.7 4.9 5.9 6.2 7.6 Current account balance [percent of GDP] 0.1 -1.5 -1.3 -1.5 -1.8 -0.4 -0.3 Source: South Afirican Reserve Bank *Firstthree quarters
Despite various Government initiatives, sustained economic growth has not ensued. Of concern is the lackluster growth (averaging 2.7 percent during 1994-00) which, combined with tight fiscal and monetary policies, has resulted in job losses. While overall employment in the non-agricultural sectors declined by 6 percent, the private sector witnessed a 15 percent reduction in jobs during 1994-00. Gross fixed capital formation by private business enterprises fell by 3.6 percent in 1999. The sharp Rand depreciation in 1996 and again in 1998 did not result in sustained export growth. Formal sector jobs continue to be shed, especially in manufactwing and mining.
The area surveyed in this report covered G.JMA in the province of Gauteng; Given that GJMA is South Africa's largest industrial area, and contains the largest black townships, a study of GJMA's SMMs is useful for understanding local economic development in South Africa. Further, research by the Department of Trade and Industry (DTI) suggests that Gauteng has the highest density of SMME firms, accounting for 34 percent of the national total (DTI, 1997). In light of the South African economy's level of urbanization, and the fact that Johannesburg represents an integral part of South Africa's industrial sector, lessons from the Johannesburg LED pilot are likely to be applicable to South Africa's other metropolitan areas and the broader national economy.
2 As an integral output of the LED effort, the GJMC plans to use the SMME survey data to establish a local economic development information unit (EIU).3 As part of the GJMC - World Bank research project, the SMME survey report will facilitate policy interventions permitting Johannesburg to compete for foreign capital and jobs, not only with South Africa's other metropolitan areas, but also with other cities in the global marketplace. Finally, in the absence of any recent sources of statistical information on Johannesburg's economy, it was necessary to engage in surveys that generated data for the study. Since Johannesburg was the pilot, the surveys were designed to be replicable in other metros. The analysis in this report is based on the 1999 SMME firm survey and yields information reflecting the perceptions of firm entrepreneurs as well as hard data from the firms. Since time series data is not available, the scope of the report is limited to the recent past. However, because an urban economy is inherently dynamic, it is hoped that future studies will encourage tracking of key economic indicators and updates of the baseline data.
CENTRAL THEMES
This report identifies several themes that cover both macroeconomic constraints, as well as structural factors. The policy implications related to perceived constraints were elicited through several lines of inquiry. First, firm owners were directly asked to list what local and national govemment could do to facilitate their growth. Second, available government programs for SMME development were listed and firm owners were asked to identify which ones they were aware of and used, how helpful they had been, and how relevant they found them to be. Third, in the context of macro price (interest and exchange rate) variables, firm owners were asked to identify how related policy changes had affected their operations. Fourth, possible areas for government action are identified as firm owners rate location-specific variables such as infrastructure and service delivery, crime and its costs to firms, labor regulations, etc.
One of the first themes is the issue of how investment and employment growth have performed over the last three years in the set of 800 SMMEs surveyed. Closer analysis reveals how the behavior of firms that have existed for three or more years differs from that of new entrants. In light of the rapid tumover among SMMEs, this issue is critical in suggesting the importance of policy actions that nurture existing and struggling SMMEs rather than just promoting the birth of new ones. Another theme examines the characteristics of SMMEs that have undergone sustained growth in both investment and employment in recent years. These results suggest that the capacity of the SMME sector to become the engine of growth and job creation in South Africa may be limited. Another theme pursues issues of skills scarcity, firm training and whether recent labor regulations constrain SMME growth. Pattems of recruitment are also examined. The characteristics of the "typical" SMME entrepreneur are analyzed, revealing that the majority of firm owners previously had a formal sector job and joined the SMME sector because they perceived a more lucrative opportunity for profits.
3 Creation of a metropolitan EIU makes sense against the backdrop of South Africa's nave towards fiscal and financial decentralization and Johannesburg's national leadership in city restructuring.
3 Capital market related themes center on two main issues: access to capital and its cost. The important role attributed to aggregate demand in determining the need for credit suggests that interest rate policies alone are unlikely to provide powerful incentives for SMME growth.
An analysis of the local environment points to high crime and fairly good quality infrastructure and services, and also reveals the opportunities and challenges that the local government faces. Sitting in one of the prime locations of South Africa, the local authorities of GJMC face the challenge of bringing crime under control to exploit their locational advantage in attracting new investors. Race, age and size variables run throughout the report as important markers, underscoring the fact that South Africa's apartheid heritage cannot be overlooked in the Government's effort to promote the SMME sector. Race appears to be particularly critical from the perspective of inequality and poverty reduction.
OUTLINE
Chapter 2 continues with a discussion on firm demographics for the 800 SMME firms surveyed. Characteristics such as age, race, size, and legal status of the firm are presented along with a brief description of the entrepreneurs' motivations for starting their SMME. Chapter 3 provides information on the degree to which firms in this survey have been expanding or contracting employment and investment levels, followed by a discussion of factors limiting further expansion. This section of the report also contains ratings indicating the policies SMME firms would like local and national government to implement or improve. The remaining chapters contain more detailed analyses of each of the main constraints identified. Chapter 4 discusses the skills shortage as well as the degree to which SMME firms are hindered by inflexible labor arrangements. Chapter 5 analyzes the capital constraint, both with regard to access and cost. Chapter 6 illustrates the insufficient progress made by government promotion and procurement programs. Chapter 7 discusses the business environment within which SMME firms must operate, paying particular attention to location ratings and crime. Finally, Chapter 8 evaluates the extent to which the SMME tier is linked to the international economy.
4 2. DEMOGRAPHICS
The SMME survey covers 7924 firms across 8 sectors in Johannesburg. With approximately 100 firms each in 4 manufacturing (clothing and garments, metals and metal products, furniture, and food and beverages) and 4 service sectors (tourism, construction, retail, and information technology), the survey is designed to permit sector-level analysis. 5 All surveyed firms are registered to pay VAT and vary in size from 1 to 49 employees, revealing ample heterogeneity across each sector. Since firm behavior may vary by firm size, firms are disaggregated further into the following categories: micro or size 1 (1 - 5 employees), very small or size 2 (6-20 employees) and small or size 3 (21 - 49 employees). 6 The distribution of firms across these size- classes is also consistent with the limited available data on the national distribution: around one- half very small firms (size 2), and one-quarter each of micro (size 1) and small (size 3) firms. Table 2.1 SMME Sample by sector and employment size-class
Number of Sectoral Micro Very small Small firms share (Size 1) (Size 2) (Size 3) interviewed (%) (%) (%) (%) Clothing and Garments 98 12 21.4 40.8 37.8 Metals and Metal Products 93 12 28.0 50.5 21.5 Furniture 92 12 15.2 51.1 33.7 Food and Beverages 115 15 15.7 62.6 21.7 Tourism 92 12 26.1 56.5 17.4 Construction 92 12 21.7 48.9 29.3 Retail 116 15 40.5 39.7 19.8 Information Technology 91 12 35.2 48.4 16.5 Total 789 100 25.5 49.9 24.6
In terms of capital, the sample reveals that 63 percent of SMMEs have a replacement value of their capital stock under R0.5 million, 16 percent fall in the R0.5-1.0 million category, another 15 percent in the Ri-5 million category, and 3 percent over R5 million. About 1 percent could not answer this question. Across sectors, between 60-80 percent of SMMEs in all but clothing and garments, metals and furniture sectors fall in the R50,000 - 500,000 range; no more than 12 percent of firms in metals and 6 percent in clothing have a replacement value in excess of R5 million. In all other sectors, the share of firms in this category is less than 3 percent. Size- class as measured by employment levels and the replacement value of a firm's capital are positively related.
4 Of the 792 firms, 789 belong to the 8 selected sectors while 3 fall in the "other" category. 5 In the absence of a nationally registered sample frame, it was not possible to determine an appropriate sample. As an altemative, a sufficiently large number of firns in each sector were randomly chosen.
6 These categories are consistent with DTI definitions.
5 SMME EMLOYMENT - WHERE ARE THE JOBS? In 1999, the SMMEs surveyed in Johannesburg employed an average of 14.7 workers per firm, representing total employment of 11,600 across all firms in the sample. Three manufacturing sectors (textiles, furniture, and food and beverages) created the most jobs, with each accounting for 14-16 percent of total employment in the sample. In comparison, IT generated the fewest jobs (9 percent).
Chart 2.1 Sectoral distribution of employment in SMME sample, 1999
IT...... IT - 0 _ Retaii = = = =t 3 1418 1 constuction M =M= ' 43 3
Tourism *122i = Prepared bod/beverage 7 =1 98
Fumiture - 163)
Metal workers *J12411 I. l I I I I I: 0 200 400 600 800 1000 1200 1400 1600 1800 2000 Number employed
GENERAL FItM CHARACTERISTICS
Besides employment size, the SMME survey also captures fnrm characteristics such as sector type (manufacturing or services), age and legal status, owners' ethnicity, ownership role of PDIs (previously disadvantaged individuals), and export status (Details are presented in Annex 1).
Age The age of a SMME reflects its market experience and affects its ability to grow and move to the next size class. Both market experience and firm size also affect access to credit markets. Post- apartheid firms may face a different set of constraints than pre-apartheid firms. In the sample, 30 percent are post-apartheid firms established since 1995, and are less than 4 years old. Another 30 percent of firms are between 4 and 10 years old. The remaining 40 percent are older firms split equally between those that are aged 11- 20 and those over 20 years. Age and size-class are closely related - about 40 percent of the micro firms (1-5 employees) are less than 4 years old compared to only 20 percent of the small firms with 21-49 employees. Younger firms are more prevalent in the service sectors than in manufacturing.
6 Chart 2.2 Age of firms in sample, 1999
100 __...
60
40o60 -9 F[ a.20
0- Size 1 Size 2 Size 3 ALL Manufacturing Services
*Less than 4 years old * 410 years old M 11-20 years old ° More than 20 years old
Race and PDI Ownership
PDI ownership is still relatively small - only 18 percent of the sample firms have an average PDI ownership of 8 to 10 percent. Among PDI-owned firms, a majority (63 percent) have been partially owned by a PDI for less than 4 years. From an altemative perspective, within the class of younger or post-apartheid firms (aged 4 years or less), about 24 percent have PDI ownership compared to only 16 percent among older or pre-apartheid firms.' Among sectors, a higher share of younger PDI firms are located in food and beverages, tourism, retail and IT sectors (see Table A1.2 in Annex 1). These also happen to be the sectors that have grown relatively fast in recent years.
Given high levels of unemployment and poverty among blacks in South Africa, it is useful to further disaggregate the PDI category by race. The low representation of blacks in the SMME sector is striking: while representing 77 percent of South Africa's population, they account for only 7 percent of SMME owners, in contrast to 9 percent SMME owners for Asians (2.6 percent of the population) or 56 percent SMME owners for whites (11 percent of the population). From a different perspective, there are 0.14 SMMEs owned by blacks for every 100,000 blacks, compared to 6.3 for Asians and 9 for whites.8
7 This result is statistically significant at the 5 percent level. S Shares of firms by race computed using 727 firms as the total number in the sample, since 65 finms did not indicate their race. These missing fums are treated as a "Race not indicated" category. The share of black firms would be 6 percent if 792 firms were considered.
7 Chart 2.3 Sample SMMEs by race South African - no race Black indicated \ 7% Coloured 17% 2% Asian Foreign-no 9% race indicated 9%
\ / ~~~White ~~~56%
The racial distribution across sectors is quite variable. The share of white-owned firms ranges from 10 percent in clothing to 19 percent in tourism. Asian SMMEs are concentrated in clothing and garments (30 percent), fumiture (15 percent), food and beverages (14 percent) and retail sectors (23 percent). Colored SMMEs are concentrated in furniture (58 percent) and IT (22 percent) sectors. Among black owners, the sectoral distribution suggests a greater service orientation that typically requires less business experience, shorter gestation and investment capital. About 64 percent of black-owned SMMEs are concentrated in the service sectors, with retail dominating at 23 percent (see Table A1.3 in Annex 1.). The distribution of young and old firms in the sample across racial groups reflects South African apartheid history. Consistent with discriminatory policies that restricted blacks from owning businesses, 60 percent of the black-owned SMMEs are post-apartheid firms (as compared to less than 30 percent for whites and Asians, 35 percent for colored, and only 25 percent for foreign SMMEs). In recent years, many policies have focused on the development of non-white SMMEs. However, as Chart 2.4 shows, in 1999, among all the post-apartheid SMMEs in the Johannesburg sample, the share of black firms remained disproportionately small at 13 percent. 9
9 About 17 percent of the fums in the sample noted they were South African but did not indicate the race of the owner.
8 Chart 2.4 Post-apartheid firms by race, 1999
.Asian White 10% 653%
Coloured 2%
13% South African - no race Foreign Non- Indicated African 15% 7% Legal Status The majority of the SMME sampled are registered as domestically owned independent units. Approximately 60 percent of the small firms and 75 percent of the micro firms are registered in this manner. For the remaining very small frms, 20 to 30 percent are head offices or holding companies, 4 to 6 percent are branch offices or subsidiaries, and 2 percent are foreign owned (for details, see Table A1.4 in Annex 1).
Trading Orientation The survey reveals that the majority of the SMMEs produce for and cater to the domestic rather than the global market. This could be attributed, in part, to the inland location of Johannesburg and, in part, to the relatively new emergence and small size of a multi-racial SMME tier in the South African economy. In contrast to the results of the 1999 GJMC-World Bank Large Manufacturing Firm Survey that showed that between 60-90 percent of the large manufacturing firms (with over 50 employees) in Johannesbuirg engage in international trade, only 22 percent of the sampled Johannesburg SMMEs trade. Of those engaged in trade, 64 percent are exporters. Propensity to trade is positively related 'to the size of a firm - about 8 percent of the micro firms trade compared to 16-17 percent of the very small and small SMMEs. Further details regarding SMMEs and international trade issues are elaborated in Chapter 8.
THE SMME ENTREPRENEUR In addition to the demogra,phic characteristics of any particular firm, the characteristics of the person who started the SMME are important. Specifically, the SMME survey sought to identify features of the "typical" SMME entrepreneur in Johannesburg, and discover how these entrepreneurs got started d6ing business.
9 Three-quarters of the SMME entrepreneurs held a formal sector job before starting the business, and moved when they saw a good business opportunity to make more money (Chart 2.5).10 Excluding retrenched workers, less than 5 percent of SMME entrepreneurs were previously unemployed individuals, a finding that suggests that promoting SMME entrepreneurship among unemployed individuals may not be an easy goal for policymakers.
Chart 2.5 Main motivations for starting an SMME
Other Had similar bus.exper.in another country Joined the family business Got tired of long term unemployment Got tired of searching for first job Retrenched from informal job Retrenched from non-ming.formal job Retrenched from rrunrng job
Had fomial job exp.& saw opportunity _f _ -_
0 10 20 30 40 50 60 70 80 iBlack a ALL Percent of respondents
Much of the prior research on SMMEs in South Africa has found that the primary motivation for starting an SMME was unemployment. This line of research, which includes Martins and Tustin (1999a), Rogerson (1997a, 1998), and Rwigema and Karungu (1998), tends to show that 40 to 60 percent of entrepreneurs formed their business as a result of being retrenched or unemployed. The second leading motivation found by these researchers was to explore a profitable opportunity. A strict comparison between the results in this survey and those found in other South African research is not statistically feasible. However, the reasons for an apparent discrepancy between past research and this survey may lie in the timing of the survey, in the geographical area (Rwigema and Karungu focused on the Southern MLC and Martins anl Tustin surveyed firms all over South Africa), the definitions used (did other samples include informal firms among SMMEs?) or the age of the firm on which the studies focused. For example, while Rogerson's research is focused on SMMEs that emerged in the post-apartheid era, our survey includes a large number of pre-apartheid firms. 1l
'° See Annex 2 for the actual percentages by size-class. 'To explore the role that the age of a firm plays, the data in Chart 2.5 was analyzed to see if young finns responded differentially than old firms. No significant differences were found. At 75 percent, the vast majority of young finn owners still responded that they had prior formal sector work experience and saw a profitable opportunity in forming an SMME.
1o The SMME survey also asked entrepreneurs to list the main reason they chose their particular sector for starting a business. These results are shown in Chart 2.6. Again, tde majority of SMME entrepreneurs answered that they had previous work experience in that sector, while the next most important reason was "business in the sector was growing fast."
Chart 2.6 Motivation for choosing a particular sector
C e 80-
° 60 - _; Black
2. 40-l40- o 30 - 20- 10
I had previous work This industry does A family Businessinthis It waseasytogeta Other experience in this not require too member/friend had Industry was loan for this sector many skills a business In this grwing fast business industry
In sum, a characterization of the typical SMME entrepreneur indicates that she started this business voluntarily because she had formal sector job experience and saw a profitable opportunity. The motivations also drove the choice of sector, as did the absence of too many special skill requirements. 3. EXPANSION OF THE SMME TIER
In recent years, political economy considerations in the South African economy have led to the perception ofSSMME development as a social imperative. This has, in tum, contributed to the notion that SMME promotion can become an important source of employment and income generation, and thus advance the goal of poverty and inequality reduction. An altemate perspective has raised concems regarding the feasibility of SMME promotion - does the SMME tier have the potential to serve as a source of sustained economic growth? Can its promotion lead to significant and sustained employment growth, or do the real sources of growth still lie in larger firms that have traditionally been the largest employers? The primary objective of both the 1999 large manufacturing firm survey and the SMME surveys was to focus on the main constraints to growth and employment. Each survey provides a snapshot of the recent employment and investment dynamics in its tier, and can be useful in shedding light on some of these complex issues. This chapter first discusses recent trends in employment and investment as revealed by survey data before focusing on constraints. 12 An important issue emerging from this chapter is the fact that growth in SMMB employment over the past two,years has occurred mainly because of the emergence of new firms, while firms that have existed for as little as year or more have been laying off workers. In fact, during the mild economic recovery that occurred in 1999, only about 30 percent of SMMEs increased empbyment above a 5 percent cut-off and only about 26 percent of firms increased investment in excess of a 10 percent cut-off. No more than 13 percent of SMMEs did both - i.e. increased investment by more than 10 percent and created jobs by 5 percent or more. For those firms that have not expanded through either the employment or investment channel, the SMME survey identifies insufficient demand as the key economic constraint. Other factors perceived as hindering firm growth are lack of firm competitiveness, access and cost of capital, and insufficient government support and promotion of the SMME industrial tier. SMME firms perceive govemments to have a vital role in their development and rank improving the business environment, both through safety and security and infrastructure provision, as the most important priority for local authorities. While the majority of established SMMEs ranked policy stability as the most important priority for national authorities, black SMMiEs considered prioritized education and training to be the most important. The key questions examined in this chapter are as follows:
* Are the SMMEs sources of employment growth? What are their characteristics by size? By race? By sector? By age? * What is going on in older established firms? Who are the new entrants? What are the implications of rapid tumover?
* Are the SMMEs sources of investment growth? In which sectors and how much?
12 Note that, while the SMME survey can illuminate factors affecting expansion for the finms interviewed, it is not possible to extrapolate from these results to generate trends in employment or investment for the entire SMME tier.
12 * What are SMME firm expansion plans and growth potential? What conditions do they consider necessary conditions for increasing employment?
* What can government do to help SMME growth at the local and national levels?
EMPLOYNT DYNAMICS IN RECENT YEARS
Has the SMME cluster been a source of employment growth in the recent past? Where have SMMEs created new jobs? Have jobs been created by new or existing firms? The SMME survey allows us to examine these issues in the Johannesburg area.
Chart 3.1 Total Employment and growth by sector, 1997-99
20D
Clothing rAc. Metal woqers Fumrnures- Pm^p.food Tourlsm Construction Retnhl IT 12% -3% 23% 54% 61% -12% 50% 53%
3199^7 3199 019991
The SMME survey asked firms to list their total full-time employment levels for 1997, 1998 and 1999. In the 792 SMMEs in the Johannesburg sample, total employment grew by 23 percent, from 9,400 jobs in 1997 to 11,600 jobs in 1999. Chart 3.1 portrays sectoral employment over the three years^ (the number below each sector group shows total growth between 1997 and 1999). Except for the metal products and construction sectors., employment growth was significant across all sectors, with increases of 50 percent or higher occurring in three service 3 sectors^ - tourism, IT and retail.' At face value, these numbers seem to suggest that the SMME tier generated substantial' new employment, especially at a time when larger firms in manufacturing were sheddint jobs. However, this conclusion rests on a critical issue: was the job growth generated by exiseng SMMEs that expanded and created new jobs, or through the emergence of new SMMEs? Since SMMEs are known globally to experience high turnover rates, from a policy perspective it is crucial to identify9 the actual source of employment growth, which we do by focusing on the employment dynamics in fshms that have existed since 1997.
13 Of course the survey does not track fin^s that have ceased production and thus omits an irnpo tant potential source of job losses.
13 Employment Changes in Existing Firms This section focuses on 582 SMMEs (73 percent of the sample) that have existed since 1997. Since these firms are at least 2 -3 years old, we can evaluate whether they have contributed to job creation. The survey results (shown in Table 3.1 and Chart 3.2) for this group of finms show that:
* From 1997-99, total employment declined by 7 percent, from 9,500 workers to 8,800. Average employment per firm declined from 16 to 15 employees.
* 27 percent of firms decreased employment, 41 percent of firms increased employment, and 32 percent of firms had no change in employment. Since overall employment declined, job losses in firms with decreasing employment more than offset employment gains in the firms that created jobs. Table 3.1 Employment Growth in Existing SMMEs
Net change in employment 1997-99 (%) All fins -7 Clothing and textiles -14 Metal products -18 Paper & funiture - 1 Prep. Food & beverages -2 Tourism 9 Construction -28 Retail 10 IT 25 Black -3 Asian & Colored 4 Wbite -5 Foreign -17
* Existing firms in all four production sectors and construction cut jobs, a trend consistent with the job losses recorded for the entire manufacturing sector in South Africa for the same period. The three emerging service sectors recorded employment gains of 9.25 percent, although from relatively low 1997 base levels.
14 Chart 3.2 Employment growth In existing firms by sector and race, 1997-99
ForWn __=_i__
White . _ _ _ _ X
*si . a d n4ttlturea_ __ ::':':".:::>.d:'. C2Percent of frms >::'::.:
Black .__= _* wih increased Black _____ .employmorit
IT RetWi R Percent of firm Construction . gf with decreased Tourism . _ . employment Prep.Foodxbev. Furnire a Metalworkers Clothing etc,
-40 -20 0 20 40 60 Percent of firms
The aggregate net employment loss of 7 percent between 1997-99 raises doubts over the SMME tier's potential to create sustained employment and incomes over the longer term. For the purposes of public policy geared to promote sustainable employment, this outcome suggests that SMME development policies are needed to support existing SMMEs, as well as emerging entrepreneurs. Moreover, given that many unemployed individuals lack the resources to become SMME entrepreneurs themselves, a large proportion of the unemployed need to become workers in labor-intensive businesses operated by SMIIES. 14 As such, policies to facilitate and promote growth in employment per fi rm may be essential for affecting unemployment in Johannesburg and South Africa in general.
New Entrants
In the 1999 Johannesburg S-MME survey, there were 210 "new entrant" firms that emerged in 1998 or 1999, comprising 27 percent of the sample. The share of black-owned SMMEs among the new entrants was 9 percent (up from 5, percent for existing firms), while new white-owned firms fell to 42 percent (down from 55 percent), and foreign firms were 8 percent . 5 Table 3.2 illustrates that 50 percent of the new entrants were very small firms with 6-20 employees.
14 This point is confirmed by Chapter 2, which illustrated the low percentage of SMME entrepreneurs that were unemployed prior to starting their business. Most SMME entrepreneurs tend, instead, to have been previously employed in the formal sector. - 5 The reminder of the firms did not report the identity of the owners.
15 Table 3.2 New entrants by size and sector
Number of firms Share of new entrants Size 1 68 32 Size 2 102 49 Size 3 40 19 All firms 210 100
Clothing/garments 20 10 Metal workers 15 8 Furniture 25 13 Prepared food/beverage 47 19 Tourism 30 16 Construction 15 8 Retail 35 14 IT 23 12
Chart 3.3 Employment in firms that started in 1998
@800 . -700 - 600 - ,500 ______l .*400 - ______E 300 - 0 200 l00 m S ~ 3 5 E 1! t G E 8g E C w Q 0 0~~~~~~~~~~~~~~~~* I s
- -
E IEplymes1998 3 Emploment19
These new entrants were not inherently more dynamic than existing firms. Employment in the 116 firms emerging in 1998 grew negligibly in all racial/sectoral categories (Chart 3.3), with only 25 new jobs representing employment growth rate of 1.5 percent.
SMME Turnover So it appears that new entrants, whose turnover rate cannot be determined from the survey data, drive the rapid employment growth rate recorded for the full sample in Chart 3.1. Whether or not existing SMME enterprises are able to grow and expand their workforce remains problematic in South Africa today. Since 1997-99 was a period of overall sluggish economic growth, it is not possible to judge whether existing firms are likely to generate more robust and sustained employment when the economy picks up at a higher growth rate.
16 Findings from Levy (1996) and Rogerson (1999b) show that young, small firms grow more rapidly than older firms. Levy argues that the age distribution of firms, as such, will have an impact on the growth of the SMME tier as a whole. He states that, while many of his survey's "high-flying" SMMEs tend to be disproportionately located among younger firms, since South Africa's SMMEs are skewed toward older firms, and since older firms tend to be larger, underperformance by older firms complicates the employment challenge. However, there is ample international evidence to show that births and deaths among SMMEs tend to be concentrated among younger and smaller firms.16 Annex 2 provides a variety of evidence suggesting that globally, SMME turnover rates range around 50 percent during the first three years in the life of small businesses (see Box 3.2). As noted earlier, the South Africa SMME tier is often characterized as having vast potential to increase employment, given the labor- intensive orientation of SMMEs. However, if the SMME tier is characterized by a high degree of turnover, so that firms emerge, survive for a few years, then die off, then the SMME tier may lack an element of dynamism necessary for sustained and significant job and income creation.
Box 3.1 The issue of SMME firm turnover - firm births and deaths
Winter (1995) studies SMME enterprises in economic development. He identifies a number of stylized facts related to the issue of firm turnover in the SMME tier 1) small firms tend to have short average lifetimes; 2) rates of disappearance relative to the current fium population at a given age decrease with size; 3) gross rates of entry tend to be large relatively to net rates, but more so in some industries than others; and 4) some turnover rates may be as high as 50 percent.
With regard to South Africa, prior research on the SMME furm tier confirms many of these stylized facts and suggests that a small numb er of micro-enterprises graduate to become successful, growing businesses. Some excerpts from these studies are included below:
"Moreover, in the early 1990s most growth in the Gauteng SMME manufacturing economy occurTed through the replication of micro-businesses, a pattern of involution, rather than the evolutionary expansion of existing enterprises which would result in the increase in the number of employees." (Rogerson, 1998, p. 283, referencing Manning and Mashego, 1993).
"The picture painted above of a community of increasingly successful black entrepreneurs in Johannesburg's inner city must be qualified by an appreciation of the extraordinarily high death rate which occurs amongst these emerging businesses. Property brokers and managers suggested that, of the new black businesses, which opened in the inner city, between 50 and 60 percent failed to survive. The high death rate was emphasized in one interview, in which it was observed that "If a hundred companies moved in, 40 percent would have died within two months." (Rogerson and Rogerson, 1997, p. 95).
16Picot and Dupuy (1995).
17 Box 3.2 Survival rates among European SMMEs
The OECD researched survival rates among SMME firms (as defined by employment) in Westem Europe in the early 90s and found the following:
France Netherlands United Kingdom Finland Beyond I year | 74 82 | 88 79 Beyond 3 years 65 67 62 69 Beyond 5 years 51 60 48 51 As shown, approximately 50 to 60 percent of firms survived past five years. Among the remaining frms that died off, between 12 to 26 percent exited within the first year of business. Source: Benassi (1995) for the OECD.
INVESTMENT TRENDS
Whether SMMEs can be sources of sustained income and employment growth depends in part on whether they attract new investment. The survey asked firms to report on capital investments such as new machinery and equipment in 1998 and 1999. Approximately 60 percent of the sampled firms reported such investments in each year. Since some investment is required merely to cover depreciation, we can also examine whether SMMEs generated "net" investment. Using a 10 percent cut-off for depreciation allowances, 45-52 percent of the SMMEs made no investments, 17 percent invested less than 10 percent of their fixed capital levels, and 32-38 percent of firms were "investment-expanding" in 1998 or 1999 (see Chart 3.4).
In sum, survey statistics on "investment-expanding" firms in 1998-99 suggest that no more than a third of the SMMEs were a source of some new investment growth in the recent past. From a policy perspective, an important issue is whether the truly "investment-expanding" firms were also a source of job creation, or whether they were cutting back on employment. Using a 5 percent threshold for employment growth, we can identify the SMMEs that "employment- expanded" in 1998 and 1999. When juxtaposed with the "investment-expanding" firms, this yields a smaller set of more dynamic SMMEs that expanded through both investment and employment creation.
* The share of SMMEs that "employment-expanded" in 1998 was 23 percent and 30 percent in 1999.
* The share of SMMEs that "investment-expanded" was 30 percent in 1998 but dropped to 26 percent in 1999.
* The share of "jointly-expanding" SMMEs was only 13 percent in both years. This result compares closely to the large manufacturing firm survey result, where the corresponding figure was 14 percent (Chandra, Moorty, Rajaratnam, and Schaefer, 2001).
18 Chart 3.4 Investment-expanding SMMEs
...... Foreign -T WhiteC Asian+Coloured __- 81ack ~i-=I 3
Retaill
Construction _ Tourism1 Prepared food/beverage Fumiture 199 Metal workers |1998 Clothingggamntents
All firms _ Size33_ Size 2 _ t _
size 1 ='::N 0 10 20 30 40 50 60 70 80 Percent of firms
CONDITIONS FOR EXPANSION Relative to their investment patterns in 1998, about 50 percent of the surveyed SMMEs revealed their plans for expansion. They appeared to have fairly optimistic plans for expansion over the next 1-3 years. Slightly less than half of all SMMEs surveyed expected to expand during the following year, 200Q. This was true even for firms that did not expand in 1998. Between 50 to 60 percent of all frmns had expansion plans in the next 2 to 3 years.
Necessary Conditions for Creating 10 Additional Jobs
The discussion in earlier sections of this chapter indicates that in 1999, 30 percent of all SMMEs increased employment by at least 5 percent. Of these,. 57 percent either did not invest at all or increased investment less than the cutoff of 10 percent. Only 43 percent increased investment in excess of the cutoff. Similarly, the share of "investment-expanding" SMMEs was 26 percent of all SMMEs. Of this group, more than half did not create significant new jobs. The survey also asked SMME owners what the necessary conditions were for them to create 10 additional jobs in the following year. Their responses reveal what they considered the impediments to expansion.
19 Chart 3.5 shows that almost 80 percent of SMMEs reported that they are most constrained by insufficient demand.' 7 Ranked as second most important by almost 40-45 percent of firms are three factors: a fall in real interest rates, increased business visibility, and increased govemment promotion of SMMEs. Ranked third are more contracts from govemment/large business. Fourth is a set of conditions ranked equally by about 15 percent of SMMEs: fall in real wages, increased exports, cheaper imports and a decline in foreign competition. While the low importance accorded to intemational trade is perhaps not surprising, given that only 10 to 15 percent of the SMMEs export or import, the equal rank given to lower real wages is more surprising.
Chart 3.5 Necessary conditions for employing 10 more worders
Dedine In foreign competiton Cheaper imports Inrcreased exports Fail in real wage More Govt/large bus. Contracts =_=__ Govemrnmert pronotion o SLMEs =_=
Inrreased business visIbility I _ Fall in real interest rates Increase In demande far
0 10 20 30 40 50 60 70 80 90 Percent of firms
Responses across SMMEs for creating 10 additional jobs varied by size and sector. Fewer micro firms required a fall in real interest rates or real wages or increased exports, but more required increased government promotion of SMMEs. In contrast, a greater share of the relatively larger or 'small' SMMEs pointed to the macro conditions: an increase in aggregate demand and exports, fall in real interest rates and real wage, and an increase in contracts from government. By sector, firn responses reveal interesting insights into key constraints to the creation of 10 additional jobs. For example, construction seemed relatively more constrained by high interest rates and high wages than any other sector while IT seemed least constrained by these factors. A large share of IT firms required an increase in aggregate demand. Clothing and garments seemed more affected by foreign competition, lower exports and cheaper imports and emphasized the positive role that government could play in SMME promotion more than any other sector. Both construction and IT considered increased contracts from large business and government more important, emphasizing yet another source of domestic demand but placed relatively little weight on foreign competition (for details, see Annex 2). The survey also examined firm responses to questions which focus on reasons for not expanding, reasons why firm stopped production temporarily, and reasons why sales declined. Responses confirm the sizable role that firns attribute to market demand; interest rates are perceived as the next most important reason, but by a much lower proportion. For example, the
7 All rankings are statistically significant at the 5 percent level.
20 primary reason for not expanding in'vestment in 1998 identified by over 30 percent of SMMEs was lack of sufficient demand followed by lack of access to capital and lack of desire to expand which may be a proxy for lack of market opportunities. Throughout the survey results, lack of demand, competitiveness, visibility, interest rates and access to capital emerge as the main economic challenges faced by SMME firms. Increases in demand and in business visibility both suggest that SMMEs need a larger customer base to expand employment, which is largely constrained by aggregate demand conditions in the economy. As such, the SMME tier is not necessarily any less constrained by low aggregate demand than the large firm tier, and will not be able to expand rapidly in a weak economic environment.
WHAT WOULD SMMEs LI GOVERNMENT To Do? SMME firms do perceive that there are a number of interventions government can take to increase SMME competitiveness, marketability, and visibility. In response to the economic constrints that firms face, the SMME survey asked firms to rank in order of importance the contributions that both local government and national government can make to facilitate firm growth. Chart 3.6 illustrates these rankings for the local government of the GJMA. Without exception, firm owvners noted that safety and security was the number one priority for local government, signaling that crime and violence in GJMA are imposing economic costs on SMME growth. With the exception of micro, black and post-apartheid firms, the second most important rating was accorded to infrastructure development. Micro and black firms considered the second most important factor to be targeted financial incentives whereas post-apartheid firms considered special incentives to female entrepreneurs to be important.
Chart 3.6 Local authority measures to promote SMME growth
Specal Incentives for femal entrepreneurs i Public traisport i Very Important
Targeted financial tncentives Ethical standards of locIrofiials Second mos important
Imroved attitude of tocal officials 0 Third most imporant Investment support Infrastnjcure @
Saletylsecunty ______L___M
0.0 0.5 1.0 1.5 ZO 2.5 3.0 WeI ghted ratings of firms
Chart 3.7 shows the ratings accorded to the various actions or policies that national government can undertake to promote SMME growth. The most important area for national government is providing policy stability; following closely behind are four other actions: lower interest rates, prioritize education and training, promote efficient and flexible wages, and promote SMME participation in publicly-provided services. Many of these factors also emerged in firm responses to related questions in the survey. And, each of these factors directly addresses
21 the issue of SMME competitiveness and confirms that SMMEs are directly looking to national government to facilitate their growth and development.
Chart 3.7 National authority measures to promote SMME growth
|Very* Impotant °Second most important °Third most important|
Prioritize educaton and training _
Promote efficient and flexible exchange rate a I
Promote eflicent and fexible wages _M J ,
Promote lower interest rate i i
Promote SMME partiolpation in publicly provided services _ - I
Provide business infomiation
Policy stability _ _ _ _
0.0 0.2 0.4 0.6 0.8 1.0 1.2 Weighted rings of firmnr
In sum, the rankings of the SMMEs underscore the fact that neither tier of government can act alone to improve the business environment for SMMEs and expect that the SMME tier will respond in terms of significant investment and employment creation. For policy makers, the message that emerges from these rankings is that both tiers of government must act in concert to promote a healthy business environment that is attractive for domestic and foreign investors.
22 4. LABOR MARKETS AND SMMES
The inter-relationship between SMME firms and the labor market is fundamental to the employment and income-generation potential of this tier of industry. The survey suggests that SMME firms: (1) face a labor skills shortage; (2) are affected relatively less than large firms by recent labor market regulations;' 8 and (3) engage in substantial use of flexible labor arrangements. All of these dynamics affect the way that frmns recruit labor, the conditions of employment, and the number of unemployed that can be absorbed by SMME firns. This chapter first examines the skills constraint within the SMME tier. It reports that African labor constitutes a majority of semi-skilled SMME employees, but many firms still have difficulty in finding skilled and semi-skilled labor. Additionally, firns are not responding to the skills shortage by providing adequate training. Next we present evidence on how firms have responded to the four labor market regulations legislated in the post-1995 era. Relative to the large-firm tier, the survey data suggest that SMME firms are less affected by labor market regulations. When they are affected, their response has adverse implications for permanent long- term employment. We conclude with evidence on SMME firms' use of temporary labor and subcontractors.
THE SKILLS CONSrRAiNT Data from the Large Manufacturing Frm Survey' 9 suggest that a primary factor constraining employment growth for larger firms in South Africa is the scarcity of skilled labor. The SMME survey sought to verify whether the same applied to firms with less than 50 employees.
Chart 4.1 Employment of skills by race, 1999
100 ...... C 90 80-. Og 70 . *Whites E 60 1. Indians l;40 - _ . . : . . .. , lUColoureds c30 - _ . . . . aAfricans e 20-
0 Skilled Semi-skilled Unskillea
18 Strict statistical comparison between SMME and large firm survey data has not been done, so the comparisons made here are intended to be suggestive only.
19 See Chandra, Moorty, Rajaratnam, and Schaefer (2001).
23 Chart 4.1 illustrates employment of skills by race in 1999. Both semi-skilled and unskilled occupations are dominated by Africans while skilled occupations are dominated by whites. Relative to employment in the large firm tier, the SMME tier is characterized by a much higher percentage of Africans in the semi-skilled category.2 0 Such data suggests that it has been easier for semi-skilled Africans to find jobs in SMME firms than in larger firms.
Chart 4.2 Gender and skill composition of SMME employment, 1999
.S70 ......
i 60 ~50
40 A Skilled
30 - t Unskilled
E 20
a 0 0 Chartthe 4.2skll diplays and gende compositionof employmen Srinheskilled
African Coloured Indian White
Chart 4.2 displays the skill and gender composition of employment in the sampled SMMNEs. Despite the higher share of Africans employed in semi-skilled occupations, whites still dominate skilled occupations and women are still under-represented in SMME employment. The legacy of apartheid and its impact on skills development would suggest that SMMEs, as in the case of larger firms in the Large Manufacturing Firms Survey, face an important skills shortage. Data from the survey supports this assumption. In fact, it shows that 30 to 45 percent of firms reported difficulty in finding skilled labor.21 As in the case of the larger firms, SMMEs with over 5 employees faced more difficulty than micro firms with less than 5 employees. Table 4.1 lists the proportion of firms by sector that reported difficulty in finding skilled workers. Except fDr the retail sector, the skills constraint appears fairly uniform. With over 30- 45 percent firms reporting a skills shortage, it is important to determine how SMMEs in GJMA respond to this perceived skills shortage through private provision of training. The SMMDE survey found that a fairly small proportion of SMMEs provide training for their workers (in comparison to 43 percent of the larger firms).22
20 In the Large Firm Manufacturing Survey, the approximate share of Africans in semi -skilled categories is: 30 percent of clerical and service labor, 50 percent of craft and trade labor, and 80 percent of plant operators (Chandra, Moorty, Rajaratnam, and Schaefer, 2001).
22 Both international and South African research on SMME development emphasizes the importance of improving both human capital and access to financial capital as ingredients for success. Inadequate training in the SMME sector has been noted by Rogerson (1998), Martins and Tustin (1 999a), and Rwigema and Karungu (1998).
24 Table 4.1 Difficulty in findling skilled workers by sector, GJMA sample 1999
Percent of firms Furmiture 56.5 Metal workers 48.4 Clothing/garments 39.8 Prepared food/beverage 35.7 Construction 44.6 IT 42.9 Tourism 42.4 Retail 20.7
Table 4.2 lists the share of SMMEs investing in formal skills training and the median investment per employee in 1999. Roughly 24-30 percent of firms with over 5 employees and less than 10 percent of firms with less than 5 employees undertook formal skills training in 1998.23 For those that trained, median spending per employee decreased as firm size increased.
Chart 4.3 Proportion and amounts SMMEs Invested In formal skills training by sector, 1999
IT IT.; ...... -.. - -.. _1 . t2500~~~~~~~ Retail = 240 Construction = 119 Tourism =1 1667 Prepared foodibeverage, 182 Furniture = Z1341 Metal workers 733 Clothing/garments 3 349
0 5 10 15 20 25 30 35 40 45 50
Percent of finns
Table 4.2 SMMEs that invested in any formal skills training in 1999 1Pjercent of firms Rands per employee (median) Size 1 9.9 1667 Size 2 23.7 938 Size 3 30.1 400
23 This question was analyzed to. see whether firms that export also invest relatively more in skills provision. The sample data shows that 32 percent of exporting firms provide training compared to 17 percent for non-exporting firms. This result is consistent with the findings discussed in Tan and Batra (1995).
25 Chart 4.3 shows that between 10-20 percent of firms provided training, with the exception of the tourism and IT sectors in which 30-40 percent of firms trained. The number to the right of each bar is the average training expenditure per employee. Except for the tourism and IT sectors, training expenditure per employee is generally less than crime prevention spending. 24 The survey also asked firms to rank the training providers they preferred or used. Table 4.3 shows that government institutes are not perceived to be the most important agency for skills provision, as in the Large Manufacturing Firm Survey.25 As noted in Chapter 3, SMME firms noted a desire for national authorities to improve education and training; it may be that firms that cannot provide any skills training look to government for assistance. Or, these data may suggest that firms see a role for government in facilitating and promoting private provision of skills training. In any event, in a business environment constrained by the scarcity of skilled labor, it is natural for firms to view the provision of training as a public good. In that sense, government must determine what role is most appropriate, and how best to ensure that the gains from training efforts are realized quickly, and focused on efforts to achieve faster growth in the SMME tier. Table 4.3 Percent of firms rating each training source as important
Percent In house 71.5 Private training schools 30.1 Vocational/technikons 29.6 Business partners 23.1 Industrial training boards 22.0 University 15.6 Government institutes 13.4 Church/community based training 2.7
The SMME survey shows that while around 40 percent of firms face difficulty in finding skilled labor, less than 25 percent of firms engage in any form of training. Due to resource constraints within SMMEs, it is not surprising that most firms perceive they are not able to adequately respond to a skills shortage without some government assistance. However, given the magnitude of the skills shortage in South Africa, the role of government in pursuing an aggressive skills strategy is particularly important.2 6 Moreover, such efforts would reinforce a strategy that assists not only emerging entrepreneurs in starting a new SMME but also assists existing enterprises in expanding their employment levels through growth and increased placement of workers in skilled jobs.
24 Data for crime prevention expenditures is presented in Chapter 7.
25 Rogerson (1999b) analyzed training by SMMEs and found that emerging enterprises do most of their employee training in house but that 40 percent of established firns use external courses linked to Training Boards. 9 9 26 Martins and Tustin (19 a) found that just over two-thirds of SMMEs in their survey indicated that they needed training, of which management training is perceived as most important, followed by bookkeeping and marketing. Also, they find that business advisors should visit owners/managers to help with imp lementation of training.
26 RECRUiTMENT PRACnCES BY SMMEs In addition to skills availability, the types of recruitment practices that SMMEs engage in also shape the potential for employment growth. If firms primarily recruit through networks or hire family labor, then chances for the long-term structurally unemployed to find jobs in the SMME tier will ultimately depend on personal connections to SMME entrepreneurs. Likewise, the extent to which SMME entrepreneurs are able to locate skilled labor will depend on personal connections. The SMME survey asked firms what channels of recruitment they use for skilled, semi-skilled and low skilled labor. Chart 4.4 depicts these results.
Chart 4.4 Recruitment practices for skilled, semi-skilled, and low skilled workers
Low-skilled
Semi-skilled .. . Skilled
0 10 20 30 40 50 60 70 80 90 100 Percent of respondents
EiWord of mouth a Family networks 0 Public advertisements
° Employment bureaus B Current workers . B Direct applications U Recalling layoffs 13 In house database * Other
Between 50-65 percent of all workers are recruited through informal networks, with "word of mouth" the most prevalent practice. Family networks are more important for recruitment of skilled workers; while for semi or low-skilled workers, word of mouth and hiring through current workers are relatively more important. Approximately 7.25 percent of workers are recruited through public advertisements and employment bureaus, depending upon skill level.
LABOR RELATIONS Evidence from the Large Manufacturing Firm Survey suggests that firm managers are less concerned about the direct costs of hiring labor, but nDre affected by the implicit costs of doing business with labor. These implicit costs consist of such factors as the number of unions that firms must work with, the number of disciplinary inquiries per annum, the number of strikes, the level of collective agreement, etc. The SMME survey also sought to determine the extent to which SMMEs were affected by recent labor market regulations.27 The survey suggests that these labor market constraints are far less binding in the SMME tier than in the large firm tier.
27 The four main pieces of legislation enacted in the post-1994 period are: Labor Relations Act (1996), Basic Conditions of Employment Act (1997), Employment Equity Act (1998) and Skills Development Levy (1998).
27 Labor Market Environment The survey asked firms about union membership, collective agreements, strikes, workdays lost, and disciplinary inquiries. The survey found that the extent of union membership among SMM employees is significantly lower than among large manufacturing firm employees. 28 In general, employees in 73 percent of the firms have no union membership, those in 23 percent do business with 1 union, and those in 4 percent of firms do business with 2 or more unions. Significant size- class and sectoral differentials mark this general picture and are shown in Chart 4.5. Notable is the fact that employees in 92 percent of micro or size 1 firms do not belong to any unions. This could be due to the prevalence of family labor networks in micro firms. As size increases (especially in firms with over 20 employees in the manufacturing and construction sectors), firms have to work with at least 1 or 2 unions. IT and tourism stand out as the two emerging sectors in which union membership remains relatively limited.
Chart 4.5 Number of unions SMMEs do business with in GJMA, 1999 rr --- - Retail __. Constiuction _ _ _ _ . 1 1t Tourism _ Prepared food/beverage _ _ _ _ - - Funiitumr _ _ _ _ Metal workers _ _ _ _
Clothing/gamets .-
Size3 __" Size 2 _ _ _ _-: Sizel _ _ _ _ . =-: -4 I -4 -~4-: 0 10 20 30 40 50 60 70 80 90 100
E*No unions E 1 union 0 2 unions| Percent of firms
Collective wage-setting agreements in South Africa play an important role in employment creation, by affecting the degree of flexibility to respond to local market conditions (such as the extent of unemployment or lack of work experience of new entrants). In this context, the SMME survey reflects sharp contrasts with the large firm survey (see Chart 4.6).29 Strong size-class
28 In the large firm survey, the share of firms working with no unions ranged from I percent (for fims with 200 employees or more) to 7 percent (for fims with 50-99 employees). 29 The Large Firm Survey (Chandra, Moorty, Rajaratnam, and Schaefer, 2001) showed that overall 13 percent of the firms had no collective agreements while 46 percent were subject to industry-wide agreements.
28 differences emerge - 90 percent of Size 1, 72 percent of Size 2 and 42 percent of Size 3 SMMEs are currently not bound by any collective agreement. Among the other SMMEs, agreements set at the sector or industry level predominate, covering as many as one third of Size 3 firms. In the two emerging sectors, IT and Tourism, over 80 percent of firms are not subject to any agreement, while in clothing, less than 50 percent of SMMEs enjoy such flexibility.
Chart 4.6 Level of collective agreement for SMME firms
Size3g~~~~~~~~~~...... i......
Size 2 - size 1 No agreement
IT _ _Establishment/plant- - Retail _ level_ IIEI - I _ _ _ _ E X . Construction _.Company .. - I _ level Tourism _ E_ _X r;::. Pre.ared Tourism . ISector/industry level Prepared foodrDeverage _ _sLTo24(bargaining council)
F.ritLfe _ _ _ .I *__i Wage Deternrination Metal workers - _11 ___ Board Clothing/garments __ ___ - 51i Other 0 10 20 30 40 50 60 70 s0 90 100 Percent of firms
Response to Labor Regulations
The SMME survey also asked firms to describe how they have been affected by recent labor market regulations. Firms were asked how they have responded to particular pieces of legislation, and to the set of regulations as a whole. For example, when the survey asked SMMEs how the Bargaining Council System as a whole has affected their employment levels, around 1 percent of firms reported an increase, 12 percent of firms reported a decrease, and 40 percent .of firms reported no change in employment. Approximately 42 percent of firms said they were unaffected by the Bargaining Council System. The response to how specific labor market regulations have affected employment levels was quite similar. As Chart 4.7 shows, 5 percent or less of the SMMEs increased employment as a result of the LRA, BCEA, Employment Equity Act, or Skills Development Act. Between 10-15 percent of firms lowered employment in response to these regulations. However, about 50 percent of the SMMEs reported being largely unaffected, while 20-22 percent noted these regulations were not applicable to them. Another 7-14 percent of ftrns were not familiar with them, especially those introduced more recently. In the case of each regulation, firms with over 20 employees were significantly more affected than the smaller firms.
29 Chart 4.7 Effect of labor market regulations on employment
) Raise it U Lower it D No effect 0 Not familiar with it * Not applicable 1X 0 * ...... 90 70 60 SD5- .40-
10 0 Labor Relation Act (LRA) Basic Conditions of Employment Equity Act of Skils Development Act of of 1995 Employment Act (BCEA) 1998 1999 of 1997
While the majority of SMMEs reported that their employment levels are relatively unaffected by any specific labor market regulation (Chart 4.7), their responses to how they adjusted to all four regulations as a whole suggests a preference for more flexible labor arrangements. Chart 4.8 summarizes what actions were taken in response to the full range of recent labor legislatiDn. As with Chart 4.7, these results show that 10-15 percent of the sample reduced employment in response to some labor regulations. But firms (especially larger than 20 employees) also reported hiring fewer workers (23-38 percent), substituting machinery for workers (11-23 percent), hiring additional temporary workers (19-31 percent), and sub- contracting (18-24 percent). All of these actions adversely affect permanent job creation. More favorable outcomes (such as increased productivity or improved labor relations) were noted by 12-15 percent of the larger SMMEs.
Relative to large manufacturing firms, SMMEs appear to be less affected by the unintended consequences of labor market regulations, although when they are affected, SMMEs respond to the restrictions in ways similar to those of large firms with over 50 employees. 30 Consequently, the unintended adverse impact on employment could still be. substantial, especially in the 20-49 employee fims, where the scope for job creation is more significant. For example, while capital-labor substitution may not be as feasible for SMMEs as for large firms, they may instead respond by hiring fewer workers. As SMMEs are supported and encouraged to expand, care must be taken to ensure that labor market regulations do not become more binding.
30 This finding is consistent with research undertaken by NTSIKA (1998) that analyzed the impact of the BCEA on small enterprises. NTSIKA found that there is a low degree of compliance among small enterprises and that emerging enterprises have more difficulty in complying. Low compliance is generally due to low awareness, rather than willful evasion, although new requirements related to employment termination are perceived as a hindrance.
30 Chart 4.8 Response to labor regulations by size
Saw labor relations and/or - - r productivity improve Rely on sub-contracting j j Hire workers on a temporary basis Substitute machinery for.. workers
Hire fewer workers
0 5 10 15 20 25 30 35 40 Percent of firms
USize 1 X Size 2 ° Size 3
USE OF FLEXIBLE LABOR ARRANGEMENTS
The previous section suggests that roughly one-fourth of the SMMEs surveyed are responding to labor market regulations by pursuing more flexible labor arrangements. Another critical factor encouraging the increased use of flexible labor arrangements (non-permanent job creation) during 1998-99 could have been low aggregate demand, identified by the sampled SMME owners as a constraint to firm growth. The survey shows that between 33 percent (Size 1) and 60 percent (Size 3) of SMME firms hire temporary labor (see Table 4.4). By sector, the construction and furniture sectors have the highest share of firms using temporary labor and IT and retail have the smallest shares. Between 37-42 percent of SMMEs engage in subcontracting. The prepared food and beverage and retail sectors outsource the least (between 15-22 percent) while construction and IT sectors outsource the most (62 percent).
Table 4A Use of flexible labor by SMME firms Temporary workers Subcontractors Size 1 33 37 Size 2 50 39 Size 3 61 42 Clothing/,garments 49 40 Metal workers 42 48 Furniture 57 45 Prepared food/beverage 51 15 Tourism 45 30 Construction 66 62 Retail 40 22 IT 37 62
31 A variety of factors could determine why a firm engages in flexible labor arrangements: firm size, product type, market size, extent of labor market regulations, variability in demand, etc. The SMME survey asked firms for the reasons they hire temporary workers (Chart 4.9).
Chart 4.9 Reasons for hiring temporary workers ...... --..r ...... I...... Temporary workers are easier to lay-off _ _ _ __
Flexibility to expand or contract
Non-wage costs of temporary workers are lower
Wages of temporary workers are.z__ lower _ _
0 10 20 30 40 50 60 70 80 90 100 Percent of firms that employ temporary workers
Flexibility to expand or contract is by far the most important reason why 95 percent of firms hire temporary workers, which supports the finding that SMMEs are most constrained by changing conditions in aggregate demand and are quite vulnerable to the business cycle or other variability in their customer base. 40 percent of firms hire temporary workers because they are easier to lay-off, while just over 20 percent of firms used temporary workers because they are cheaper. In conclusion, data from the SMM survey reveal that firms with less than 50 employees, as with large firms, face a skills shortage. Moreover, provision of skills training to this industrial tier is currently inadequate. Recruitment of both unskilled and skilled labor takes place generally through personal networks. Finally, though SMME firms appear to be relatively less affected by labor regulations, they respond to this constraint by hiring fewer workers and moving toward flexible labor arrangements.
32 5. FINANCIAL CONSTRAINTS
This chapter examines the extent to which SMMEs were constrained by high interest rates and by lack of access to credit. Survey findings indicate that the majority of SMMEs finance their capital requirements through private savings from individuals and family as well as retained earnings. A smaller proportion of SMMEs rely on formal credit such as bank loans. Both cost and access to capital are examined to determine their role in limiting bank financing. Survey data suggests that most SMMEs are not severely constrained by lack of access to credit. But where access is an issue, it is related to firm size, age, and the race of the owner. Of the SMMEs surveyed, 50 percent borrowed from the banks to finance their investment capital in the last 5 years. For these firms, declining interest rates will most likely lead to an increase in investment. Since lending rates averaged around 20 percent during 1996-98, firms that used bank capital reported being adversely impacted by the high cost of credit. 31 45 percent of firms surveyed noted that lower interest rates are necessary for them to add another 10 employees and expand employment. However, the low level of overall demand was identified as a more important reason than high interest rates for limited borrowing and investment in 1998. Continued depressed demand will likely remain a critical constraint to reviving the SMME sector, and suggests that high interest rates may not be the only limiting factor to SMME investment and growth. This chapter first examines the profile of start-up and working capital. The main reasons advanced by firms for choosing not to use formal credit are then explored. The issue of whether the SMME sector is constrained by access to capital is examined, followed by a discussion of how interest rates affected firms in 1998. Comparisons with the large manufacturing firms sector are presented where relevant.
SOURCES OF CAP1TAL
The SMME survey indicates that the main sources of investment capital are:
* Private savings, consisting of family savings, are used by 29 percent of firms (19 percent use this source for all their financing); individual savings are used by 49 percent of firms (32 percent use them for all financing); and retained earnings from a previous business are used by 10 percent of firms (6 percent use them for all financing).
* In 1999, 24 percent of fims borrowed from local South African banks to finance investment capital (7 percent use them for all of their financing). 3 2
31 Rates at which banks lend to the private sector. These rates are differentiated by the creditworthiness of the borrower and by purpose of the loan.
32 Rogerson (1999a) surveyed 135 SMMEs in inner city Johannesburg and found that nearly half preferred to remain independent of small business support structures with high interest rates cited as a prime reason.
33 * All other sources of start-up capital (church and community groups, retrenchment packages, and government agencies) play a minor role and finance less than 5 percent of all firms.
Chart 5.1 Sources of start up capital, 1999
...... Church/other Retrenchment package Govt acediVtequip. supplier Smal business agency Loan from foreign partner Loan fr. parent comp. Loan from a local bank Retained eamings fr.prev.business 8 Individual savingsSs Family savings ____;l 0 10 20 30 40 50 60 *1-49% 0 50 S9 % D 100% Percent of firms Chart 5.1 shows a profile of these sources for all firms. In terms of size, the sources of start-up capital available to micro firms with less than 5 employees te skewed away from the general profile reflected in Chart 5.1. On the one hand, almost 25 percent of micro firms resort to family savings and 5 percent use retrenchment packages to finance all of their investment. The corresponding figures for larger SMMEs are closer to 17 and 1 percent respectively. On the other hand, no more than 15 percent of micro firms use bank capital (5 percent use it for all financing) compared to about 28 percent of larger SMMEs. Many black firms are micro firms, and their financing patterns resemble micro firms in these ways (for details, see Annex 4). Additionally, less than 4 percent of black firms also received credit from small business agencies, government, equipment suppliers and even foreign banks. Like the black SMMEs, the Asian and colored SMMEs relied more heavily on family savings and retrenchment packages for investment capital. Moreover, almost 12 percent used capital from community groups for financing. Post-apartheid firms are distinct from micro fims or any other category. Their reliance on family savings is significantly less -- only 15 percent rely on this source to fmance all of their start-up costs. However, at 3 percent, while the numbers remain negligible by any standard, this category of SMMEs also benefited from small business promotion agencies by receiving as much as 100 percent of start-up capital. Annex 4 provides details for size class, age and race. To the degree that the share of bank financing signals access to capital markets, this survey implies that size-class and race play a role in determining such access, in that micro firms and black SMMEs may be more constrained than larger SMMEs in obtaining bank loans. However, post-apartheid firms do not appear to be bound by this constraint. It is interesting to compare sources of start-up capital for South African SMMEs with those of larger South African firms and similar firms in other countries. International experience shows
34 that larger (over 50 employees) firms typically tend to use more bank financing than smaller firms, which rely more on retained earnings." The SMME and Large Firm34 Surveys both show that South African firms generally rely more heavily on retained earnings compared to bank loans than is the norm in other countries. But some of the size differences among firms in South Africa are significant. For example, as many as 67 percent of large firms use retained earnings, compared to only 10 percent of SMMEs. However, as Chart 5.1 shows, 78 percent of SMMEs use individual and private savings in addition to retained earnings to finance start-up capital. Summing all three sources of private savings, South African SMMEs do seem to validate international experience.
In general, the majority of the South African SMMEs finance their working capital through private savings. Over 85 percent use capital from retained earnings, 23 percent from cheaper loans extended by partner or parent establishments, 5 percent from bank loans and about 7 percent from other sources. Greater reliance on private savings could also reflect a preference for cheaper loans relative to more expensive bank capital at a time when interest rates were at record high levels. Categories of SMMEs that seem to have limited access to cheaper loans from partner or parent establishments are micro firms and black firms (details are provided in Annex 4). For example, only 8 percent of black firms enjoyed access to such loans. Further, relative to other racial or size categories, fewer micro and black firms used more expensive bank loans. In comparison, more post-apartheid firms resorted to bank loans to satisfy their working capital needs, perhaps because of limited access to cheaper parent company loans from parent firms.
Low BANK BORROWING LIuMTED ACCESS OR HIGH COST? Prior research in South Africa on the extent to which SMMEs are constrained by lack of access to capital yielded conflicting evidence. Levy (1996) found that access to finance was not a major constraint. However, Rwigema and Karungu (1998) and Rogerson (1997) and Rogerson (1996b) and (1999b) found that up to,85 percent of emerging SMMEs complained about lack of access to credit. Common in all the past research, however, is that lack of access to credit becomes less binding as a firm becomes older and larger.35 This idea, as well as the issue of access to capital in general, is explored in this section using evidence from the current survey.
Table 5.1 SMME use of formal loans in last five years (percent) Size 1 29 All 501 Black 33 Size 2 521 Pre-apartheid 53 Asian & Colored 48 Size 3 66 Post-apartheid 43 White 51
33 This finding is consistent with other South African research as well as international experience. See Biggs et al (1999), Rogerson (1999b), and Webster (1991). 34 Chapter 4 of the Large Firm Survey Report (Chandra, Moorty, Rajaratnam, and Schaefer, 2001). 35 Levy (1996) states that access to capital is less prevalent for younger, smaller firms, and that once dhnicity is incorporated into the analysis, access to financing emerges as a more binding constraint. Rogerson (1999b) shows that access to capital is a constraint for 50 percent of his sample, but rises to 83 percent when considering new, black entrepreneurships.
35 Although interest rates touched record high levels in 1998 when the Rand crisis occurred, they had been much lower in previous years. To control for the effect of higher interest rates in 1998, this survey asked firms to describe their borrowing behavior over the previous five years. As Table 5.1 indicates, 50 percent of the SMMEs surveyed in 1999 had used a bank or other formal credit agency loan in the previous five years (henceforth, "bank loans" are used to denote loans from banks or formal credit agencies). The proportion of firms that used bank capital increases more than two-fold as firm size grows from micro to small. Only 33 percent of black firms had used a bank loan between 1994 and 1999, compared to about 50 percent of white, Asian and colored SMMEs. Fewer new, post-apartheid firms used bank loans.
Chart 5.2 Reasons for not using formal bank loans in the last 5 years
9.0 ia 60
E 30ii- - E:
MiD very emit nI Pfe-apafleid Post-apartheid Black AsenColoued White
E01do not need a loan 3 Ido not have right security/collateral ° ido not have the right papers 0 ° Ido not have a credn history * Ido not meet other loan requirements Interest rates are too high aOther
To determine whether low use of bank financing explains access to credit, the survey asked firms who had not borrowed in the previous five years to explain the main reasons for not doing so. Chart 5.2 shows the reasons for not borrowing given by 50 percent of SMMEs that reportedly did not use bank credit in the previous five years. The leading reason across all categories of firms for not borrowing from banks was that they did not need a loan. Size and race mark most of the differences among categories displayed in a stepwise manner in the chart. From 60 percent of the micro frms that gave this reason, the proportion rises to almost 80 percent of the sniall SMMEs. Firms associated low borrowing with market conditions rather than access to credit or its cost. An explanation for this response could be the low economic growth prevailing during the 1994-99 period.
The two other reasons for not borrowing provided by 10-12 percent of firms were "do not have the right security/collateral," and "interest rates were too high." While the lack of a collateral is directly related to lack of access to credit markets, high interest rates as the explanation for not borrowing signal that the cost of credit is the problem. In each response, the problem affected more micro firms compared to small or larger SMMEs.
Among black SMMEs, the reasons for not borrowing are equally associated with market conditions leading to the lack of need to borrow bank loans, and poor access to formal credit markets. 34 percent of black SMMEs noted that the two predominant reasons for not borrowing
36 were "did not need a loan" and "do not have the right security/collateral." Another 15 percent of black firms identified "do not have the right papers" and "do not meet other loan requirements," both of which can block access to credit markets. Aggregating these responses, for roughly half of black SMMEs, lack of access to formal bank credit is a critical problem. High interest rates seem to affect only 3 percent of black firms. In another context, the SMME survey asked firms how many had planned a new investment, had not implemented it and the main reasons for the latter. Approximately 30 percent of micro firms and 54 percent of black firms considered new investments in 1998; of these 37 and 50 percent respectively could not undertake them. The main reasons they provided for not implementing planned investment in 1998 are shown in Table 5.2. In the case of micro firms, the most important reason was general market conditions, especially if we combine "insufficient demand" with "no need." Table 5.2 Reasons for not undertaking planned investment in 1998
Size 1 Size 2 Size 3 Black Asian + White Colored Lack of access to capital 26 26 14 59 32 16 Interestratesweretoohigh 7 11 16 6 7 10 Insufficient demand 28 28 37 16 32 30 No need/desire 18 16 16 12 11 21 Insufficient business experience 14 12 2 6 12 10 Business coststoohigh 1 1 2 0 2 1 High laborcosts 1 1 3 0 0 2 Other 5 6 9 0 4 9
While survey data show that only half of the firms borrow from banks, except for black and to some extent Asian and colored SMMEs, the majority of firms that do not use bank finance are not necessarily limited by lack of access to capital. On average, poor business conditions that preempt the need for capital investment seem to be a far more critical explanation than limited access to capital markets or the high cost of credit. As such, the current SMME survey corroborates findings from Levy (1996) that access to financing is only a moderate constraint and that the financial system is indeed accessible for most SMMEs. Nevertheless, for the 10-12 percent of firms that reported that insufficient access to capital markets prevented them from expanding, as well as the post-apartheid and micro fuims who are relatively more constrained by collateral requirements, and half the black SMMEs who do not qualify for bank loans, the issue of facilitating access to bank financing mandates continued attention.
EFFFECT OF INTEREST RATES ON SMMES
In 1998, interest rates rose significantly as the Reserve Bank of South Africa raised them to arrest capital flight in the wake of the Rand crisis. The average nominal interest rate SMMEs paid on short-term liabilities was around 23 percent and 22 percent on long-term liabilities. The interest rate hike of 1998 (and an earlier more prolonged period of high rates) is considered one factor underlying continuing low growth in the South African economy. Approximately one-half
37 of the SMMEs surveyed reported using formal credit for business needs in the last five years and noted that interest rates had a negative effect on their business.3 6 Other SMMEs who could have borrowed, but did not, were also affected when the opportunity cost of capital rose. Chart 5.3 shows the response of all SMMEs to the interest rate increase. On average, for 26 percent of firms, this question was not applicable; 24 percent said they did not have any problems. 20 percent noted that they could not undertake planned new investment while 11 percent had difficulty in obtaining new debt. Between 6-8 percent of firms had problems in accessing sufficient working capital and/or repaying old loans. Another 22 percent had other problems.
Chart 5.3 Effect of 1998 interest rate hike on SMMEs, 1999
112...... I--
,,100. 0 -60. X40 IL20 0 MY:o Very smaE Small Preepertheld Post-pafhlid Black Asian+Cobured Whle * Not a probem 13Made i difficuft to get new debt ° Could not repay loans 0 Not enough working capital a CouLd not undertaketlreduced new expansion C Other
Size, age and race introduce differentials in the average profile illustrated in Chart 5.3. Small and pre-apartheid firms were more affected than others in their class, especially in terms of ability to undertake new investment. This was probably because more of them use formal credit relative to others in their category (see Annex 4). In contrast, since fewer black firms use bank capital relative to other racial classes, there were also affected in other significant and negative ways, such as difficulties in obtaining new debt and sufficient working capital.
As such, this section indicates that one of the primary effects of the 1998 interest rate hike was indeed on SMME growth. The hike directly constrained firms' ability to undertake new investment across the board, but especially in the case of those classes that rely more on formal credit as a source of investment capital. Other effects of high interest rates in 1998 manifested themselves in firms by making it difficult for firms to obtain new debt and sufficient working capital. The latter effects were particularly exacerbated in black SMNEs.
36 See Chapter 3. Also, in Levy (1996), between 40 to 60 percent of firms complained about the cost of credit.
38 6. GOVERNMENT PROMOTION PROGRAMS AND PROCUREMENT
In June 1996, the Government announced the macroeconomic framework for growth, employment and redistribution ("GEAR"). The promotion of SMMEs was a key element in the Government's strategy for employment creation and income generation. However, the SMME sector does not appear to have responded in line with expectations. Relevant legislation has been under review and various programs and institutions have been established to make the SMME development strategy more effective. The White Paper of 1995 proposed the creation of an enabling environment for SMMEs. The White Paper was followed by the National Small Business Act of 1997, which established two apex institutions and an umbrella network of SMME service providers to support the goals of the new legislation. Ntsika Enterprise Promotion Agency is an apex institution that supports non-financial needs of SMMEs, while Khula Finance Agency provides financial services. Both institutions work at the SMME level through their retail counterparts, namely Local Business Service Centers (LBSCs) and Retail Financial Intermediaries (RFIs). The DTI coordinates the SMME effort. In addition to promotion programs initiated and executed by DTI and its affiliated organizations and networks, govemment has also tried to support procurement policies favorable to SMMEs. In particular, government has established an affirmative procurement strategy designed to assist SMMEs owned by PDIs.
This chapter first examines the awareness and use of SMME promotion programs among the firms in our sample. Data shows that most programs have not been effective at reaching SMME firms. Next, the issue of direct govenmment procurement is discussed. Again, data suggests that improved efforts to expand procurement to SMMEs can be made. Finally, the impact of taxes, licensing requirements, and the relationship with local and national authorities is reviewed. Table 6.1 SMME programs and the sponsoring agency DTI Ntsika Khula Competitiveness fund Local Business Support Centers (LBSC) REI Sector partnership fund Tender Advisory Centers (TAC) Economic empowerment scheme Technopreneur programs SMME development program Training and Capacity building Emerging Entrepreneur scheme Venture capital scheme l
THE USE OF SMME PROMOTION PROGRAMS Table 6.1 shows SMME programs initiated by DTI and its implementing counterparts, Khula and Ntsika. Chart 6.1 shows the percent of firms that are aware of DTI programs (dotted line measured on the right-hand axis) and the percent of firms that use DTI programs (bars graphed on the left-hand axis).
39 Chart 6.1 Awareness and use of DTI SMME promotion programs
B Percent that have used it + Percent that are aware of it 0
0 60 3
40 O _=20 C
Awareness of DTI programs ranges between 7-34 percent However, except for the residual "other" training and loan programs, the figure is closer to 20 percent. Usage is even lower, in the range of one percent or less for most programs.3 7 Clearly, both awareness and use of DTI programs are low, certainly below what Government aimed to achieve when these programs were initiated. Among black and post-apartheid SMMEs, even though 60-90 percent had heard of these programs, only 3 black furms had approached these programs for help and 2 had actually used thm 38
Chart 6.2 illustrates awareness and use of the programs initiated by DTI affiliates Ntsika and Khula (the percentages that used the program are based on the number of firms that had heard about the program). Unlike DTI programs, no more than 20 percent of SMMEs had even heard about these programs, except for the South African Bureau of Standards program, which is more of a quality/standards approval agency than a provider of direct assistance to firms. Use of programs remnains low (although higher than for the DTI programs): usage rates varied from 3-10 percent. The most popular options are the Tender Advisory Center and Bureau of Standards, each used by around 10 percent of the firmTs that had heard of it. Despite limited SMME access to capital markets, no more than 3 percent of SMMEs use the retail financial intermediaries (RE;1) set up by Khula, and less than 10 percent know about them. Despite the tight skills constraint in SMMEs overall and among black and post-apartheid SMMEs in particular, the picture is similar for training and capacity building programs. Nevertheless, these programs seem to offer useful assistance and are being used relatively more actively on the ground, once they are known to SMM Es.
37 For example, only 1 finn out of the 792 surveyed is using the Venture Capital Scheme and only 1 firm is using the Economic Empowerment Scheme. The only program used by more than 10 firms is the (combined) loan program, used by 46 firms. The loan program mentioned most was the Small Business Development Centers (SBDC).
38 SMME promotion programs were analyzed to see if post-apartheid firms were relatively more aware or used programs more. Analysis revealed no statistically significant differences between these two groupings.
40 Box 6.1 SMMEs and Government Assistance - Research in South Africa
Recent studies on the SMME tier in South Africa suggest that while goverunent assistance has been perceived as an important tool for SMME growth, few firms have benefited from efficient or effective government programs (i.e. Rogerson, 1999b; Rogerson and Rogerson, 1997; and Rwigema and Karungu, 1998). Martins and Tustin (1999a) found that only 10 percent of SMME firms had benefited from the SBDC programs. Failure of government assistance programs has been attributed to uneven geographical coverage, an inadequate number of service providers and/or programs, the top-down approach to service deliveiy, low awareness, and gaps between the needs of entrepreneurs and the types of services offered. Weak local government support initiatives have also been highlighted as a major problem.
In terms of what services SMME firms desire, Rogerson (1999b) reports that most SMME firms in his survey sought government assistance for training and access to fnance. However, when fiurns were asked what type of support they would want, the overwhelming majority wanted marketing and niche marketing assistance (70 percent), exporting assistance (58 percent), Internet (54 percent), and human resource development (53 percent). Another study by Rogerson (1998) found that the most important needs of entrepreneurs not being met are technical assistance in project preparation and design, legal assistance and effective technology transfer services. For the study by Martins and Tustin (1999a), 50 percent of firms they surveyed said financial support would be most imnportant for improving business. Other needs included marketing assistance, more skiUed workers, own transport, transparency of tender biUboards and improved premises.
Chart 6.2 Awareness and use of other government SMME promotion programs
Have used it +Have heard of it 12 100 '5 10 80; 8 ~~~~~~~~~~~~~~~~60
4~~~~~~~~~~~~~~~~4 2 4 20~ | * - 0 M 0
Chapter 3 illustrated that SMMEs in GJMA rate government promotion programs as one of the leading contributors to growth. Data from this section confirms low awareness and even lower use of existing programs, and reinforces the case of SMMvIEs in GJMA that are seeking more effective govermnent promotion programs. Awareness of promotion programs needs to be increased and targeted to firms in the sectors and size-classes where the programs are most relevant. Moreover, quality and user-friendliness of programs needs to be improved to ensure that usage follows awareness. For some DTI programs, the survey suggests that awareness is relatively high and usage is still relatively low. Whether or not such programs are characterized by design problems is an issue that needs investigation. On the other hand, Ntsika programs, once known to SMMEs, are being used more frequently once awareness is raised, so that these programs may instead gain more from an aggressive dissemination and marketing strategy.
41 PROCUREMENT
Government procurement from SMMEs in our sample is characterized by a very low proportion of firms applying for government contracts, an average of 3-4 contracts being submitted and one out of every 3 or 4 being awarded a contract. For example, except for black SMMEs, less than 20 percent of SMMEs in any size, age or racial category submitted tenders in 1998 or 1999 (see Table 6.2). Among black SMMIEs, between 22-30 percent of firms applied in 1998-99. These low application rates are in contrast to the high importance that SMMEs attached to increased government support for their growth through improved procurement policies. Table 6.2 SMMEs that applied and were awarded government contracts in 1998-99 (Based on a 15-20 percent response rate) Percent Percent Total Number Total Number of firms of fimns Number awarded Number awarded that that submitted (median) submitted (median) applied applird (median) 1998 (median) 1999 in 1998 in 1999 1998 1999 Micro firms 8 4.5 3 1 5 1 Small Firms 17 19 5 1 4 1.5 Black finns 31.3 22.9 5 1 5 1 Asian + Colored 8.4 7.2 3 1.5 3.5 1 White 10.3 7.6 3 1 3 1 Pre-apartheid 11.7 8.6 2 1 3 1 Post-apartheid 11 8.9 6.5 1 4 1
Table 6.2 displays application rates, and the median number of contracts submitted and awarded in 1998 and 1999 for a variety of size-classes, racial and age categories. Response rates for this question were low and varied between 15-20 percent for most categories. Among the responses, size plays an important role. Almost 20 percent of small SMMEs applied for government contracts, while only 4-8 percent of micro firms applied. While a large proportion of black firms applied for government contracts, they were awarded 1 out of every 5 submitted. The other racial categories seemed to do better despite their low application rates. Supporting SMMEs in the tendering process is the mandate of Tender Advisory Centers (TACs). However, survey data suggests that despite the SMME procurement strategy in place, few firms apply for tenders. This could perhaps occur because firms are either not aware of the programs or find the application process tedious, or because some (such as post-apartheid or black firms) may lack business expertise, or find inadequate government support systems.
42 Box 6.2 Procurement to SIMME firms in South Africa
Recent South African studies find that expanding procurement is of key importance to SMME firm growth but that only a meager volume of government tenders reaches the emergent SMME economy. For example, Rwigema and Karungu (1998) find that only 27 percent of firms they surveyed knew about tendering procedures and only 6 percent actually tendered. Rogerson (1998) argues that reforn initiatives spelled out in the Green Paper on Procurement Reform, 1997 and Tender Advice Centers have not been able to increase participation by emerging SMMEs. Martins and Tustin (1999a) argue that SMMEs have not been able to successfully compete in hard-entry industries such as construction and manufacturing where large established enterprises dominate.
In response to poor tendering performance by SMME firms, Martins and Tustin (1999b) surveyed 16 public institutions and 22 private establishments that assist in government procurement. Their study finds that tender documentation is often seen as lengthy and cumbersome to complete. SMMEs would prefer to find out about all relevant tenders through a single source and, as such, a national information database is necessary. Training by these institutions should be more general and target legal aspects, claim procedure, procurement policies, adjudication systems, tendering procedure, management skills, business skills, money management, and marketing and technical skills.
LICENSING REQUIREMENTS AND TAX RATES The SMME survey asked fms to report on the various licenses, permits and regulatory requirements needed for operations. For existing SMMEs, the number of licenses required to avoid fines are reported in Table 6.3. About 70 percent of SMMEs need no more than 1 - 3 licenses. The number of licenses needed was considered reasonable by 85 percent of firms and excessive by the remaining 15 percent However, time costs to obtain licenses were rated as marginally more excessive than financial costs (see Chart 6.3).3
Table 6.3 Number of licenses needed for operations
No. of licenses needed to avoid fines Percent of all finns 1 38 2-3 32 4-10 24 11-20 4 More than 20 2
39 This finding is consistent with the time costs firms spend to prepare a tender submission.
43 Chart 6.3 Firm ratings on licensing and regulatory requirements
Mvery costil _ Reasonable/not costly ~~~~...... I._ . Other costs (bribes E__ '. etc.)
___= | _ | | - | 'Money Costs
_-__ 1 li _ _ _ lEi | Time costs
-30 -20 -10 0 10 20 30 40 50 60 70 Percent of firms
The Survey also asked SMMEs to report on how cumbersome they found various government departments (Table 6.4). These rankings are based only on a 15 percent response rate. The Johannesburg local authorities were ranked number 1 by all categories of firms, with the exception of black firms that considered the Department of Finance to have the most cumbersome procedures (and the Johannesburg authorities to be second).
Table 6.4 SMME ratings of various government departments (based on a 15 percent response rate) All Black Asian + White Pre- Post- Colored apartheid apartheid Department of Health 5 4 4 5 5 5 Department of Trade and Industry 4 3 4 4 4 4 Department of Finance 3 1 3 3 3 3 Department of Labor 2 3 2 2 2 2 Local authorities of Greater 1 2 1 1 1 1 Johannesburg Department of Transportation 7 4 5 Department of Home Affairs 6 5 6 6 Department of Public Works 9 Department of Tax and Revenues 8 Department of Liquor Licensing 8
IMPACr OF THE 1999 TAX CUT
In 1999, in an effort to boost investment, the Minister of Finance announced a reduction in the company tax rate from 35 to 30 percent. Firm surveys Wnerally find that the common response to questions regarding the level of present tax rates is that the levels are too high. Instead of this leading question, the SMME survey asked firms what effect they thought the latest company tax rate cuts would have on their after-tax profits. The results are shown in Table 6.5.
44 Table 6.5 How the recent tax cut will-affect SMMEs' after-tax profits Significant Moderate No difference NA Size 1 12 42 31 15 Size 2 17 41 35 8 Size 3 22 46 26 6 All 17 42 32 9 Pre-apartheid 16 41 35 9 Post-apartheid 20 46 25 9 Black 10 56 27 6 Asian + Colored 7 42 28 23 White 21 43 30 6 SA-no race 13 37 43 7 Foreign 21 32 32 16
On average, 17 percent of firms expected the tax rate cut would significantly affect their profits, 42 percent felt it would have only a moderate effect, and 32 percent felt it would have no effect (9 percent must be exempt or not pay tax because they noted that it did not apply to them). 40
Chart 6.4 Impact of tax cut on expansion plans
50 -
3510- - 25 -~ 20-
CID ~~ ~ ~ ~ ~ ~ ~0 . 0 |s b. E E 0 E a, 82E EX : 2P +
The survey also asked firms if the tax cut would positively affect their expansion plans over the next two years. (t-art 6.4 shows that more than 35 percent of SMMEs in furniture, food and beverages, retail and IT sectors said the tax cut would influence their expansion plans. Post- apartheid and black firms also indicated a positive impact on expansion plans. Since these categories and sectors comprise key target groups for government support, the data provide preliminary evidence that tax cuts may have a positive impact on expansion plans.
40 All surveyed firms are registered for VAT, but some of them could be exempt from the company tax.
45 7. LOCATION AND INFRASTRUCTURE
Efficient service delivery, good infrastructure and safety and security are three of the leading factors that contribute to an attractive location and influence an investor's decision to locate in a certain area. This chapter takes a closer look at the SMME ratings of infrastructure, service delivery and crime in GJMA to evaluate whether GJMA's location indeed provides an attractive location for domestic and foreign investors. Analysis of SMME responses reveals that, although a majority of firms gave a positive rating to infrastructure and service delivery, there is room for improvement. Around 20 to 40 percent of SMMEs rated reliability and cost of services as poor. This might explain why firms noted in Chapter 3 that local authorities had a role to phy in improving infrastructure provision. Also, an unambiguous message that emerges from this survey, as in the Large Manufacturing Firm Survey (Chandra, Moorty, Rajaratnam, and Schaefer, 2001), is that crime is a major deterrent to businesses. In fact, safety and security was ranked as the number one policy priority for local governments. Together the combination of safety and security and infrastructure and service provision present a set of challenges and opportunities for the local authorities of GJMC. This chapter examines how SMMEs rate their present location in terms of proximity, cost, reliability and availability of services and infrastructure. It then discusses the prevalence of crime in GJMA by firm attributes and by type of crime, as well as the financial cost of crime. The chapter concludes by reporting on firms' choice of location for expansion.
FRM RATINGS OF LOCATION
SMMEs were asked to assess their present location based on proximity to input and product markets.4 ' In particular, firms were asked to rate their location based on closeness to road, rail and air transport to determine if government can improve public transport and infrastructure, two key ingredients of a good location. Chart 7.1 summarizes the responses. Around 85 percent of firms regard their proximity to product markets favorably. Because of GJMA's inland location, proximity to SADC markets did not receive favorable ratings from many firms. Between 65-90 percent of SMMEs rated their proximity to input markets from fair to exellent. However, in terms of proximity to main transport facilities, only main road links scored high points from the 85 percent of firms of which, 65 rated them as excellent. Factors that GJMC's local authorities and national government should extend and improve emerged in the relatively low but positive ratings assigned to airport (45 percent of firms) and rail transport (25 percent of firms) facilities.
41 Firms were offered four choices: "Excellent," "Fair," "Poor," and "Not Applicable." The furms that answered "Not Applicable" and those that chose not to respond to the question are not shown in the charts, so the bars do not add to 100. Note that a shorter bar does not necessarily denote poor service; it may mean that more firms reported that the service is not applicable or that they chose not to answer.
46 Chart 7.1 Firm ratings on proximity to markets and infrastructure
______*~~ ~~Excellent Proximity to seaport/harbor . *Farl
Proximity to airport facilites X Poor Proximity to main road links Proximity to rail transport Proximity to suppliers of parts and machinery C Proximity to raw material and supplies Proximity to professional services 17 s _ _ _ _ _s -
Proximity to SADC export markets C
Proximity to product markets G ______>__.> __ _ 3
-20 0 20 40 60 80 100 Percent of firms
Firms were asked to rate their present location based on reliability and cost of services. In general, firms rated cost of services less favorably than their reliability. As seen in Chart 7.2, around 74 to 86 percent of the SMMEs reported that reliability of water supply, electric supply, and telecommunication services was fair to excellent. However, almost 25 percent of firms also rated reliability of telecommunication services as poor, pointing to an important factor that local authorities need to improve. Tax rates and the costs of phones and electricity were rated poorly by over 40 percent of firms. SMMEs also signaled the economic costs that crime inflicts on them because of their GJMA location. Both crime affecting staff and company property were rated negatively by over 50 percent of firms while only 40 percent assigned a positive rating to these factors.
Chart 7.i Firms ratings on reliability and cost of services
Low cnnme afferting property~~~~ ~~~~~~_ ~~~~~~ . _- EFairU~~~~~~~~EExcellent Low crime affecting staff 13Poor Low local tax rates 1S-E Low cost of offlce spaces Reliability of phones and fax services Low cost of phones and fax services Reliability of electric supply
Low cost of electricity - Reliability of water supply L_
Low cost of water _ _=__
-80 -60 -40 -20 0 20 40 60 80 100 Percent of firms
47 Chart 7.3 Finn ratings on availability of services
Availability of industrial land _ Availability of industrial waste facilities Availability of trucking services
Availability of containter/shipping services X Availability of courier/marketing services E Availability ofPublic transport _ i Availability of skilled labor E __X
a 10 20 30 40 50 60 70 80 r Excellent * Fair Poor 1-30 -20 -10 0 Percent of firms
Firm responses to the availability of services are shown in Chart 7.3. Public transport is widely used by firms and their employees; it received a positive rating from 65 percent but a negative one from 25 percent of the SMMEs, a negative rating matched only by their assessment of skilled labor availability.4 2 Overall, in terms of infrastructure to support SMME growth, firm ratings indicate that there is significant room for improvement in addressing concerns over property and staff related crime in GJMA, reliability and pricing of telecommunication services, pricing of water and electricity, and improved public transport for firms and employees.
CRIME
As discussed in Chapter 3, SMMEs ranked safety and security as the top policy priority for local government. As many as 94 percent of the firms noted that tackling crime should be given priority by the local governments. Of these, 77 percent noted it was the most important action local govemment should take. Although these priority ratings may be driven largely by perceptions rather than hard data on the prevalence and incidence of crime, these perceptions may plan an essential role in an investor's decision to locate a firm in (or move away from) a certain area.
Chart 7.4 displays the percent of firms subject to crime by firm attributes. Approximately 61 percent of SMMEs indicated that suffered from some type of crime in 1998-99.43 Ihe incidence of crime increased with firm size: more small than micro firms reported being subjected to crime. Differences in the prevalence of crime by age (pre-apartheid firms experienced higher crime than post-apartheid firms) or race (white-owned firns had higher crime) may be linked to locations patterns of firms over the late 1990s (see Boxes 7.1 and 7.2).
42 Firms reported that 55 percent of their employees used public transport. Of these, 38 percent use taxis.
43 Of course even fnmns that did not report any crimes during 1998-99 could still be adversely impacted by the high prevalence of crime in GJMA.
48 Chart 7.4 Percent of firms subject to crime, 1998/99
Post-apartheid _ r . Pre-apartheid l l
Asian+Cobured - - Black _ _
Snmall._ * No Very small
*Yes Mico _ _ 0 10 20 30 40 50 60 70 80 Percent of firms
Box 7.1 Black SMME firms in inner city Johannesburg
Rogerson (1999a) and Rogerson and Rogerson (1997) emphasize the important role of the inner-city in Johannesburg as a business location for emerging black enterprises. An excerpt from Rogerson (1999a) is included below:
"Beginning in the late 1980s, a new phase of black enterprise development was marked by the exodus of businesses from the violence-wracked townships of metropolitan Johannesburg, most notably Soweto. Former home-based enterprises engaged in light manufacturing (particularly clothing production and sewing) activities spearheaded the advance of new micro-enterprise development into the Johannesburg inner city. Initially, such enterprises were narrowly focused and tended to be simnilar in their production profiles; after a period of time in the inner city, an observed trend was for a greater diversity of production operations to be established...
Particularly since 1993, a noticeable upturn occurred in the number of black-owned enterprises establishing within the inner city. Although township violence was the initial trigger for an influx of black entrepreneurs into Johannesburg inner city, post 1993 this has been replaced by the puU of several economic advantages of inner city locations for developing small enterprises. By the mid- 1990s the expansion of black- owned enterprise had reached the point that it was recognized by the institutional property sector as an established feature of the Johannesburg inner city. Despite recognition from the property sector, however, it was disclosed that the majority of blackowned enterprises in inner city Johannesburg were overlooked by the leading small business support organizations.
The perceptions of emergent black entrepreneurs towards their location choice of the inner city were highly revealing. Questioned as to the advantages of an inner city location, issues concerning the importance of enhanced market access or proximity to suppliers were paramount considerations. The role of the inner city as a potential zone for enjoying economies of agglomeration was recognized in the majority of responses. Entrepreneurs stressed the vital attractions of the inner city as a market for both black and, in some cases, white consumers, accessibility in terms of transport facilities and, finally, its advantages regarding access to suppliers of inputs for production and retail types of enterprises." (p. 3-4).
49 Box 7.2 Geographical Clustering of Black SMME firms
"Overall, three sets of factors shape the broad geographical pattems of emergent black businesses in Johannesburg's inner city. First, the location of black enterprises within the inner city reflects the patterns of available low-rental C and D grade office accommodation. Second is accessibility of surplus C and D grade space in relations to key black transport termini. Thirdly, the heavy geographical clustering of black enterprises in specific zones of the inner city is linked to a process of informal networking of black entrepreneurs which results in a growth of businesses in a spatial pattern akin to that generated by chain migration..
Once initial black businesses are located in a particular building, the entrepreneurs function as a first information point for friends or neighbors wishing to set up other businesses in the city. From contact with these 'pioneer' business migrants into the inner city, new prospective black tenants glean information - before speaking to landlords and formally inquiring about lettable space; the result of this process of 'informal networking' is a snowball effect that reinforces a spatial concentration of black-owned enterprises in particular clusters and buildings.
Source: Rogerson and Rogerson, 1997, p. 97
Of the firms that were subject to crime in 1998-99, around 63 percent of the firms experienced break-ins and property theft while 40 percent reported employee theft. Around 35 percent of the firms reported that their employees were victims of crime while arriving or leaving from work.
Chart 7.5 Types of crime experienced by SMMEs, 1998/99
70 _ E 60 _ .
.40 ' 30 20-
'~10 "~ 0 Break-ins Vandalism Employee Arson Extortion Oter Crime and property Theft arriving and theft leaving from work
The direct economic cost imposed by crime and violence on SMMEs was computed using firms' expenditure on security guards and devices as well as their total expenditures on crime per employee. Expenditure incurred by SMMs on security guards and devices by size, race and age is showni in Table 7.1.
Table 7.1 indicates that expenditure on safety devices and guards was positively related to firm size and varied from a median of R 6500 for micro firms to R 24000 for small firms in 1998. Since expenditure on security is a fixed cost, Size 1 firms with fewer employees appear to bear the highest burden. Black-owned firms spent the most among all racial groups. Post- apartheid younger firms spent less than older firms, which may reflect different size distributions
50 as well as the impact of location. To put the cost incurred on crime prevention into perspective, the median amount spent per employee on skills training in 1998 or 1999 by micro firms was R 1700 and by small funms R 400 (Chapter 4). Comparing skills training expenditures with expenditures on security in Table 7.1 reveals that frms are spending nearly as much (or in some cases more) on security than skills, an allocation with a high opportunity cost. Table 7.1 Rand Expenditure on security guards and devices in 1998
| ~~~~Security guards Security devices Total security Median I~ Rand/employee I Size 1 3,500 3,000 6,500 1,200 hSize2 6,000 5,000 11,000 600 ISize 3 16,000 8,000 24,000 450 Black 10,500 3,000 14,500 800 lAsian + Colored 7,000 4,000 11,000 600 AlWhite 6,000 5,000 11,000 650 Pre-apartheid 8,000 5,000 13,000 620 Post-apartheid 5,500 3,750 9,250 700
CHOICE OF LOCATION FOR EXPANSION Despite the crime situation, an overwhelming proportion of SMMEs indicated that if they were to expand, they would prefer to locate within GJMA. Good infrastructure and service delivery make it a preferred location for investors. The fact that SMMEs prefer to remain within GJMA, despite the prevalence of crime, is a positive sign for the area. It also highlights the importance of government moving quickly to address finms' concerns and create a stronger business environment, which will both promote existing firms and attract potential investors. Chart 7.6 Choice of location for expansion Outside No response Gauteng 5%
Within Gauteng 5% *~
Within Joburg 0 . 14%~~ ~ ~ ~ ~ ~ ~ ~ 0
Within same ~ '
13%
51 8. SUBCONTRACTING AND TRADE LINKAGES
SUBCONTRACTING
In keeping with global trends, South African industry seems to be relying more on out-sourcing various functions, which has meant an increase in the extent of subcontracting relationships among firms. This trend could provide an important stimulus to the SMME tier, to the extent that existing or new SMME firms are able to strengthen or create linkages with other firms (both large and small) that are engaged in out-sourcing. This section examines evidence from the SMME survey on the extent of subcontracting among the SMME tier.
Chart 8.1 SMMEs that act as subcontracters to other SMMEs
Training _
Production ______MA General services = MarkeUing Transport
Maintenancedm and repaire0 l _.__ Admin isitrative Wt&s .s 'f USBS Sf ;..:ff: 6
0 2 4 6 8 10 12 14 16 Percent of SMMEs
Chart 8.1 shows the percentage of SMMEs that subcontract to other SMMEs. Less than 16 percent of fims act as subcontractors within their own tier for any of the above activities. Production, administrative services, maintenance and repair services, and transport services are contracted out by most SMMEs. Chart 8.2 shows the percentage of SMMEs working as subcontractors to large firms by activity. In Chapter 3, SMMEs indicated that increased contracts from government and large firms were needed for them to expand their employment. Chart 8.2 confirms the low prevalence of subcontracting (at less than 7 percent of firms) from the large firm tier to the SMME tier.4 Moreover, as noted earlier, only 5-6 percent of SMMEs obtain business from government This suggests that government promotion and procurement policies could be improved to boost growth in the SMME tier, as could efforts to promote networking and sub-contracting arrangements between large firms and SMMEs.
44 This data can be compared to that of Rogerson (1999b) who found that 46 percent of fiums subcontracted work out and 36 percent acted as subcontractors themselves, with emerging enterprises involved in relatively more sub- contracting arrangements. Also, Martins and Tustin (I 999a) found that SMMEs tend to be a contractor rather than a subcontractor and that less than 10 percent of firms were subcontractors.
52 Chart 8.2 SMMEs that act as subcontractors to large firms
Training I
Production = ... :>.RT:: - R. General services
MarkerngM_ Transport :>"A..>a::'m> Maintenance = repair = = Adrinistrative
0 1 2 3 4 5 6 7 8 Percent of SMMEs
INTERNA1IONAL TRADE Only 22 percent of SMMEs engage in international trade. 14 percent are exporters and 8 percent reported they were direct importers, although it is quite plausible that many more purchase imported inputs from retailers who are importers. The share of exporting SMMIEs rises from 8 percent for micro firms to 17 percent for small firms. The share of exporters among post- apartheid firms is below the norm at 11 percent, and the share of black SMME exporters even lower at 6 percent (see details in Annex 5).
In addition to the low overall share of exporters in the SMME tier, the share of output exported is also very low. The median share of output exported by all SMME exporters declined from 20 percent in 1997 to 15 percent in 1999, a finding similar to the Large Manufacturing Firm Survey. Although the four industrial sectors exported a low proportion (11 percent) of their output, all except clothing and garments maintained their shares between 1997-99. Table 8.1 Share of exports and exporters in main regional markets
Number Mean (% of exports) % of all exporters SADC 71 75.8 63.4 Rest of Africa 23 47.5 20.5 Western Europe 29 37.5 25.9 CentraVlEast Europe 13 33.7 11.6 Asia 16 35.3 14.3 Australasia 18 20.1 16.1 N. America 21 33.3 18.8 Rest of the Americas 6 26.3 5.4
Table 8.1 lists the mean percentage of exports and share of SMME exporters exporting their products and services in the different international markets. SADC represents the largest market in Africa: 63 percent of SMME exporters export an average of 76 percent of their exports
53 to SADC countries. The rest of Africa (comprised mainly of east African countries) is the second most common market destination, with 20 percent of all exporters selling 47 percent of their exports. Among the industrial economies, a quarter of SMMEs export to Western Europe. Table 8.2 SMME top competitors in foreign markets
Foreign Markets Top 3 Competitors
SADC Zimbabwe Botswana Mozambique Western Europe Germany France United Kingdom Rest of Africa Tanzania Nigeria Asia Singapore Hong Kong Thailand North/South America United States Canada United Kingdom
Table 8.2 lists the top 3 competitors for SMvMEs in the foreign markets where they sell their goods, providing an indication of the level of foreign competition that SMMEs believe they face in foreign markets. The absence of low- income industrial competitors such as China and India indicates the potential competition that South African firms would have to face were they to diversify into more labor- intensive product ranges in which these economies are strong. Low penetration of foreign markets may be due to insufficient SMME cost- competitiveness or it may be due to SMMEs' need for govermnent support systems to facilitate entry into international trade. The actual number of firms in the survey that have used export promotion programs are shown in Table 8.3:
Table 8.3 Number and share of SMMEs that use export promotion programs
Do firms use available export incentive programs?
Yes Share of exporters Export finance guarantee 5 4.5 Export marketing and investment 5 4.5 Export credit and reinsurance (ECRS) 2 1.8 Life scheme 2 1.8 Motor industry development program 3 2.7 Export credit facility-pre-shipment 2 1.8 Export credit facility-post-shipment 2 1.8 Export credit guarantee 5 4.5 Forward Forex cover 17 15.2 Transport subsidies 4 3.6 Tax exemptions (including VAT) 35 31.3 Other 1 0.9
As a share of all SMME, no more than 13 percent of firms were avare of the various export promotion programs in place for them. The 3 most well known programs were tax
54 exemptions, export credit guarantees, and forward foreign exchange cover, all three of which provide direct financial relief, rather than marketing or other assistance. With the exception of tax exemption and forward cover programs, no more than 4 percent of SMME exporters use the numerous programs in place, raising the possibility that efforts to rationalize and re-focus existing programs could be pursued. Table 8.4 SMMEs complaining about customs clearance procedures (percent share of all importers and exporters)
Serious Moderate Not a problem N/A Domestic dumping of cheap imports 22.2 7.4 24.4 43.2 Foreign dumping of cheap imports 1.1 5.7 36.9 52.8 Barriers to imports imposed by foreign countries 2.8 7.4 34.1 52.3 Illegal customs control procedures 16.5 10.2 34.7 35.2
With regard to non-tariff trade barriers, the survey found that among the 22 percent of firms that trade internationally, 22 percent believed domestic dumping of cheap imports to be a serious problem, and 16 percent identified illegal customs control procedures as a serious concem. The bulk of these firms were in the clothing and garments, metals, and fumiture sectors. Fewer than 10 percent of exporting SMMEs complained about barriers to imports or anti- dumping charges imposed by foreign countries. In sum, South Africa's SMMEs are not relying on foreign markets as a significant source of demand, especially when considered relative to firms that employ more than 50 workers. 45 And although exchange rates play an important role in determining South African firms' cost competitiveness, what may be of more importance to the SMME tier in particular is a stable policy enviromnent and a set of export promotion programs that can effectively reach the majority of exporters and assist them to increase their business visibility and enter unexploited foreign markets. The survey data suggest that such programs have not been greatly utilized by SMMEs, primarily due to low awareness and perhaps because not all of them are useful.
45 For large manufacturing finns, between 70 to 80 percent of firms engage in exporting. See Large Manufacturing Firm Survey report (Chandra, Moorty, Rajaratnam, and Schaefer, 2001).
55 9. CENTRAL THEMES AND FINDINGS
The main findings of the 1999 GJMC-World Bank SMME survey cover the responses of approximately 800 SMME owners across 8 manufacturing and service sectors. These are summarized below. Who is the Typical SMME Entrepreneur? The SMME cluster is frequently perceived as the solution for South Africa's long term unemployment and poverty problem. However, the Survey shows that over 70 percent of the SMME owners had formal sector work experience and chose to start their own firm when they perceived a lucrative business opportunity; another 12 percent became SMME owners when they joined the family business, and about 5 percent came with similar business experience from another country. Less than 5 percent were unemployed and tired of searching for their first job when they started their own SMMEs. Since the majority of the unemployed today are comprised of either young entrants who have never held a first job, or the long-term unemployed with non- transferable skills, this entrepreneurship pattern suggests that the SMME cluster may not provide such a strong engine of job creation for the poor and unemployed. Employment Creation and Growth Within the SMME Cluster
Raw employment statistics from the Survey are deceptive at first glance. They suggest that between 1997 and 1999, employment grew by 23 percent, defying trends in the overall manufacturing sector during the same period. However, much of this growth in aggregate employment occurs because of the birth of new firms within the period. Closer inspection of the firms that were established in 1997 or earlier (73 percent of the sample) suggests a different picture. For these firms, during 1997-99, there was job creation in 41 percent of these firms (in retail, tourism and IT sectors), job-losses in 27 percent, and no change in employment in the remaining 32 percent. Overall, net employment in these existing firms declined by 7 percent during 1997-99. Although between 26-30 percent of firms invested in excess of 10 percent of their capital stock during 1998-99, only 13 percent of SMME firms both invested and increased employment by more than 5 percent. SMME owners were asked the main reasons for not undertaking planned investments in 1998-99, and the most important factors that would cause them to increase employment. The primary reason for slow investment and employment growth was identified as "insufficient demand" for their products/services, thereby ranking market conditions as more important than labor or capital market constraints. "No need/desire," "lack of access to capital" and "high interest rates" were the other main reasons for low investment. Similarly, in listing the main obstacles to increasing employment, 80 percent of firms "insufficient demand" as the most important constraint. Next most important for 40-45 percent of firms were three factors ranked equally: "fall in real interest rates", "increased business visibility" and "increased government promotion of SMMEs", followed by "more contracts from government/large business."
56 Other Critical Constraints: Shortage of Skills
African labor constitutes the majority of SMME, semi-skilled employment. However, whites dominate skilled occupations and women are still under-represented. Despite the presence of African labor in semi-skilled occupations, the legacy of apartheid and its impact on skills development suggests that SMMEs face an important skills shortage. The most critical labor market issue that emerges from this Survey is the shortage of skills and the steps being taken to address it. 30-45 percent of SMMEs reported a skills shortage in 1999, when the majority of firms were not expanding.' However, only about 24-30 percent of firms with over 5 employees, and less than 10 percent of firms with less than 5 employees undertook formal skills training in 1998. For those that trained, the median amounts invested in training per employee decreased sharply from RI 700 per annum for the micro firms to R938 and R400 per annum for the larger 'very small' and 'small' SMMEs. The higher expenditures undertaken by micro firms reflect the high fixed costs of training. The amount spent on training is generally less than the amount per employee spent on crime prevention. Low magnitude of training by firms could result from resource constraints and/or lack of awareness to training programs. In fact, SMMEs do report that they would like national authorities to improve education and training. So firms could be treating skills training as a public good and looking to government for assistance.
Survey results also suggest that labor regulations are not a sizable constraint for most SMMEs, particularly micro firms. SMMEs in the IT and tourism sectors appear to be the least affected by these regulations. When small SMMEs do incur higher implicit costs of doing business with labor, they respond in ways quite similar to larger firms with over 50 employees: they create fewer jobs, and the jobs they do create are more likely to be non-permanent. Nevertheless, it would appear that most critical labor market problem for SMMEs remains the skills scarcity, rather than the degree of regulation. If skills development can be effectively promoted, the SMME cluster may be able to move towards faster growth and job creation. Inadequate Access Or High Cost of Capital
The most critical issues in the capital market are related to access to credit and its cost. Private savings consisting of family and individual savings and retained earnings finance the majority of firms' investment capital. An examination of the survey data revealed that SMMEs are not severely constrained by lack of access to bank loans. However, where access is an issue, it is related to the firm size, age, and race of the owner.
In addition to the issue of access to capital, high interest rates were also noted as a constraint. Although the share of bank loans used to finance start-up or working capital is low compared to the share of savings, approximately cme-half of firms surveyed did report using formal credit in the last five years to meet their business needs. Firms that borrowed from banks confirmed that high interest rates had a negative effect on their business, although 24 percent of firms reported that the recent decline in interest rates had made little difference to their business. While this suggests that interest rates may still be too high, it also indicates that the cost of capital is not the sole factor inhibiting investment and growth in SMMEs.
57 Insufficient Government Support SMME firms perceive government to have a vital role in their development, and identified a number of interventions government can take to increase SMME competitiveness, marketability, and visibility. First, SMME firms want improved support systems. The support programs are of two types: DTI programs and programs administered by its apex institutions, Khula and Ntsika. The Survey indicates that awareness of DTI programs is about 7-34 percent; usage is even lower in the range of half percent for many programs. No more than 20 percent of SMMEs were aware of Khula and Ntsika progrms, with the exception of the quality standards program offered by the South African Bureau of Standards. Less than 10 percent of firms that have heard of these programs have used them. Government support systems also exist in the form of export promotion programs to facilitate entry into international trade. The survey reveals that the 3 most well-known programs were tax exemptions, export credit guarantees and forward foreign exchange cover, all three indicating that direct monetary returns were preferred to other types of export assistance. With the exception of these three programs, no more than 4 percent of SMME exporters used any of the numerous other programs in place. Low awareness and even lower usage of the different programs raises the issue of whether it might not be more efficient to rationalize them to create more effective programs with a higher usage. In addition to promotion and procurement, SMMEs were asked to prioritize government policies that would facilitate their growth. The two most important actions for local government were identified as safety and security on the streets and infrastructure development The two most important actions for national government were policy stability and following closely behind, four other actions: lower interest rates, prioritize education and training, promote efficient and flexible wages, and promote SMME participation in publicly provided service.
Opportunities and Challenges Greater Johannesburg appeared to be a popular location for the majority of the existing investors in 1998-99: 87 percent of the firms indicated that they would prefer to expand within Greater Johannesburg. This underscores the advantages and opportunities that the local authorities enjoy in terms of attracting more investors. Firms' choice of location indicated that 85 percent enjoyed close proximity to product and input markets; 74 to 86 percent of the SMIEs reported that reliability of water supply, electric supply, and telecommunication services was either fair or excellent. However, on costing, between 25-50 percent of firms flagged their dissatisfaction with the cost of telecommunication services, electricity, and water. All three ratings indicate that pricing is perceived as more of a problem than reliability.
Additional challenges for local authorities emerged in the incidence and costs of crime prevention for SMMEs in Greater Johannesburg. 61 percent of the firms indicated that they were victims of crime in 1998-99. In general, firms spent R600-700 per employee on crime prevention in 1998-99 with the costs decreasing with firm size. Expenditure on crime prevention is higher than the expenditures on skills training.
58 The Role of Race
The Survey indicates that race, size and age were important markers of SMME development in the 1990s. For example, the smallest micro firms display the usual handicaps or advantages found in most countries, such as weaker access to credit or being subject to fewer labor regulations. Similarly, post-apartheid firms display the handicaps of younger firms in other countries such as poorer export penetration. However, the race of the SMME owner appears to capture a unique feature of the South African business environment, reflecting the handicaps that categories of entrepreneurs have regardless of size, age or location. Black-owned SMMEs appear the most disadvantaged - typically, they experience all'drawbacks of micro and post-apartheid firms (but to a greater extent), and possess few of their advantages. For instance, about 50 percent of black SMMs could not borrow from a bank because of lack of collateral, the right credit history or some similar reason.
There are a few encouraging trends revealed during 1998-99 (although apparent trends in the data must be interpreted with care). First, the share of black entrepreneurs among new entrants rose to 9 percent, up from 6 or 7 percent in the full sample that includes older SMMEs. Second, in 1999, when the overall economy was sluggish, the share of black SMMEs that increased investment and employment above the critical minimum shot up from 15 percent in 1998 to over 30 percent. Black SMMEs also appeared to have more optimistic expansion plans than most other groups. But black SMMEs were also the only category that assigned the number one policy priority to education and training, a fact that is consistent with the low skills base among blacks, and the limited share of black SMME owners in general.
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62 ANNEX 1: DEMOGRAPHICS
Table A1.1 SMME sample by sector and size-class Total number of Percent Percent Percent firms interviewed Size 1 Size 2 Size 3 Clothing and Garments 98 21.4 40.8 37.8 Metals and Metal Products 93 28.0 50.5 21.5 Furniture 92 15.2 51.1 33.7 Food and Beverages 115 15.7 62.6 21.7 Tourism 92 26.1 56.5 17.4 Construction 92 21.7 48.9 29.3 Retail 116 40.5 39.7 19.8 Information Technology 91 35.2 48.4 16.5 Total 789 25.5 49.9 24.6
Table A1.2 PDI ownership in SMMEs - number & percent owned, relationship to age, 1999 Number with Mean share 4 years or 5 or more PDI ownership owned (%) less of PDI years of PDI Size 1 39 9.6 26 13 Size 2 71 8.5 47 24 Size 3 35 7.5 19 16 Total 145 92 53 Clothing & Garments 20 9.4 6 14 Metals and Metal Products 5 9.8 3 2 Furniture 25 8.8 13 12 Food & Beverages 19 9.5 16 3 Tourism 11 7.6 8 3 Construction 12 7.1 9 3 Retail 32 9.3 19 13 Information Technology 22 7.3 18 4
63 Table A1.3 Sectoral breakdown of SMMEs within racial groups (percent), 1999
Black Colored Asian White SA no Foreign Foreign race African non- indicated African Clothing & Garments 11 0 30 8 10 0 17 MetalsandMetalProducts 8 6 1 11 17 0 9 Furniture 9 58 15 10 13 0 5 Food & Beverages 7 0 14 10 15 0 15 Tourism 10 6 6 15 4 100 8 Construction 16 7 5 13 7 0 12 Retail 23 0 23 9 10 0 13 Information Technology 14 22 5 12 4 0 20 Other 0 0 0 13 20 0 0
Table A1.4 SMME sample by legal status (percent)
Micro Very Small Small All Sole proprietorship 35.3 20.8 4.7 20.6 Partnership 7.0 5.3 5.7 5.8 Family business 5.5 3.8 1.6 3.7 Closed corporation 40.3 46.2 40.4 43.3 PTY limited 10.9 23.6 43.5 25.3 Cooperatives 0.5 0.0 2.6 0.8
Table A1.5 Racial distribution of SMMEs across sectors (percent), 1999
Black Colored Asian White SA no Foreign Foreign race African non- indicated African Clothing & Garments 6 0 23 43 17 0 12 Metals and Metal Products 4 1 1 58 29 0 7 Furniture 5 10 11 49 21 0 4 Food&Beverages 4 0 10 51 25 0 10 Tourism 5 1 4 76 7 1 6 Construction 9 1 4 66 12 0 9 Retail 12 0 17 45 17 0 9 Information Technology 7 4 4 64 7 0 14
64 ANNEX 2: SMME EXPANSION Table A2.1 Rates of employment growth in new entrants, 1998-99 Employment Number of Absolute growth rates, new entrants, employment 1998-99 1998-99 levels, 1999 All new entrants 65.95 210 2788 Clothing/garments 34.0 20 437 Metals and products 37.6 15 183 Fumiture 98.1 25 315 Prepared food & beverages 128.5 47 617 Tourism 54.5 30 394 Construction 35.9 15 261 Retail 74.6 35 379 IT 57.8 23 202
Table A2.2 Breakdown of new entrants by race and sector (frequencies), 1999
Black Coloured White SA no Foreign No race + race indicated Asians indicated Clothing & Garments 0 4 6 5 3 2 Metals and Metal Products 1 0 4 9 0 1 Furniture 1 6 9 2 1 6 Food & Beverages 2 5 23 9 4 4 Tourism 3 2 21 1 2 1 Construction 2 1 4 3 1 4 Retail 6 6 12 4 3 4 Information Technology 3 1 9 3 3 4
Table A2.3rInvestment in' new machinerv and eauioment, 1998
Median inv'estment in Rands Percent of firms that invested Size 1 30,000. 40.1 Size 2 60,000 50.9 Size 3 1120,000 60.0 Metals and metal produ&s 100,000 45.2 Tourism 80,000 46.7 Retail 80,000 46.6 Prepared food/bvfera'gc 80,000 37.4 Furniture 68,000 53.3 Construction 60,000 64.1 IT 50,000 68.1 Clothing/garments 30,000 45.9
65 Table A2.4 Tracking employment for 116 SMMEs born in 1998 (percent)
Employment growth 1998-99 All 1.5 Black 22.1 Asian + Colored -7.2 White 0.6 South African - No race -7.7 Foreign 16.1 No indication 11.8 Clothing and Garments -10.1 Metals and Metal Products 3.8 Furniture 15.1 Food and Beverages 9.6 Tourism -12.2 Construction 10.4 Retail 12.9 Information Technology -10.9
Table A2.5 Investment in new machinery and equipment by sector
1998 Median investment 1999 Median investment (1000 Rands) (1000 Rands) Black 45 50 Asian + Colored 100 50 White 72 70 South African - No race 70 40 Foreign 78 55 Clothing and Garments 30 40 Metals and Metal Products 100 45 Furniture 68 50 Food and Beverages 80 93 Tourism 80 60 Construction 60 46 Retail 80 65 Information Technology 50 72
66 Table A2.6 Changes in employnmnt, 1997-98 and 1998-99
1997-1998 1998-1999 No Less 10% or No Less 10% or change than more change than more 10% 10% Size 1 36 14 50 51 14 35 Size 2 26 18 56 47 14 40 Size 3 17 23 60 29 17 54 All 25 19 56 43 14 43 Clothing & Garments 33 22 44 57 9 35 Metals and Metal Products 25 25 50 50 11 39 Furniture 23 36 41 43 22 35 Food & Beverages 37 21 42 42 12 46 Tourism 35 15 50 50 19 31 Construction 15 8 77 33 26 41 Retail 39 22 39 59 11 30 Information Technology 6 3 90 18 5 77 Black 0 33 67 47 11 42 Asian + Colored 30 15 55 54 7 39 White 28 14 59 37 15 49 Foreign 36 18 45 43 24 33
Table A2.7 Necessary conditions to employ 10 more workers by size class (percent)
AU Size 1 Size 2 Size 3 Increase in demand 78 75 77 85 Fall in real interest rate. 44 37 44 51 Increased business visib,ility 46 50 46 42 Government promotion t of SMMEs 39 43 36 41 More contracts from Gov/large businesses 32 30 29 38 Fall in real wage 17 11 17 24 Increased exports 15 7 15 24 Cheaper imports 15 13 14 18 Decline in foreign comipetition 14 13 12 19
67 Table A2.8 Necessary conditions to employ 10 more workers by sector (percent)
Clothing Metals & Furniture Food & Tourism Constr- Retail IT All & Metal Beverage uction Garment Product Increase in 82 78 76 75 78 83 87 87 78 demand Fall in real 42 41 43 43 42 61 34 34 44 interest rate Increased 55 35 52 45 45 33 63 63 46 business visibility Government 46 41 40 31 39 43 40 40 39 promotion of SMMEs More contracts 32 32 28 15 32 43 54 54 32 from Gov/large businesses Fall in real 21 19 23 14 14 28 7 7 17 wage Increased 26 27 21 9 14 7 14 14 15 exports Cheaper 21 16 14 8 11 12 19 19 15 imports Decline in 33 18 12 11 13 7 4 4 14 foreign competition
Table A2.9 Necessary condition to employ 10 more workers by race (percent)
Black Asian + White SA no Foreign Colored race Increase in demand 75 77 81 70 83 Fall in real interest rate 46 36 49 34 39 Increased business visibility 6 17 21 15 8 Government promotion of SMMEs 54 52 46 40 45 More contracts from Gov/large businesses 8 22 16 11 11 Fall in real wage 10 25 15 11 14 Increased exports 77 49 42 25 30 Cheaper imports 46 39 32 27 28 Decline in foreign competition 8 25 14 15 8 Other 0 7 13 15 16 Total 100 100 100 100 100
68 Table A2.10 SMME Firm Births and Deaths - International Evidence
Study Type of Firms Time Period Survival Rates (percentages) Other Findings OECD - U.S. Agarwal (1998) 2213 small firms from Thomas Historical - 1912 to Low tech: 90.43 for I" year, 61.01 for Register of American 1950s on average 5 years, and 45.37 for 10 years. Manufacturers as defined by asset size and technological Hligh tech: 93.87 for I" year, 68.50 for activity. 5 years and 50 for 10 years. Phillips and Kirchhoff Small Business Administration 1978-1986 See Table 2. Firms that grow have survival (1988) Establishment Longitudinal rates of 66.3 percent, but only 10 Microdata files for firmns with On average, 39.8 survive 6 or more percent of firms show growth in less than 500 employees. years. the first four years. Audretsch (1991) 11,154 small firms from Small 1976-1986 See Table 3. New firm survival is promoted by Business Data Base. extent of small -firm innovative activity and discouraged by high capital-labor ratios. Winter (1995) on study 327 small firms in Wisconsin that 1979-1986 50 percent of manufacturing firms The mean employment size of by Pakes and Er icson started operations in 1979. survived 6 years and 40 percent of survivors was 2.7 times larger retailing firms survived 6 years. than the mean employment size of the original cohort. Winter (1995 on study Small firms in 387 U.S. Less than 50 percent over five years by Dunne, Roberts, and manufacturing industries from and less than 35 percent over ten. Samuelson (1988) the Census of Manufactures OECD Everett and Watson Surveyed 51 shopping center 1961-1990 50 percent survived the period. Economic factors accounted for (1998) managers providing data on between 30 to 50 percent of small 5,196 small firms in Australia business failures. where small firms are defined as having only one or two persons making critical management decisions. Koshiro (1990) Small firms in Japan's Census of 1966-1981 See Table 4. Establishments defned by employment and assets. Study Type of Firms Time Period Survival Rates (percentages) Other Findings OECD- Europe Benassi (1995) Small firms as defined by .See Table 5.
69 . 1 employment using Eurostat data. Fotopoulos and Louri 209 firms established in 1982-84 1982-1992 Year 1 = 79.2 Year 6 = 45.0 Location in Greater Athens (2000) and having an average size of 46 Year 2 = 69.2 Year 7 = 38.3 positively affected survival rates. employees. 120 out of the 209 Year 3 = 62.3 Year 8 = 33.7 were located in Athens and the Year 4 = 54.1 Year 9 = 32.3 others were located in other areas Year 5 = 51.2 of Greece. Callejon and Segarra Spanish manufacturing firms in 1980-1992 Generally 40 to 60 percent over 5 Find that new firms are users of (1999) the Registry of Industrial years: innovations and not producers of Establishments. 1980-85 = 8.15 per year exit innovations. 1986-1992 = 7.64 per year exit
95 percent survival over I" year, 90 percent over 2nd year and 85 percent over 3d year in early 1990s. Middle Income __ Winter (1995) on study Medium and large manufacturing 1975-1985 Mean years of survival after by Behrman and firms with over 20 employees in 1975 is 6.4 and only 45 percent Deolalikar(1989) Indonesia. of firms survived through 1985. Aw et al. (1997) Manufacturing firms from 1981, 1986, 1991 See Table 6. Taiwan's Census of Manufacturers In general, over 80 percent of firms that existed in 1981 did not exist 10 years later.
70 Study Type of Firms Time Period Survival Rates (percentages) Other Findings Low Income ____. Mead and Liedholm Small firms in commerce and 1990-1993 See Table 7. In Kenya, of those who closed, 60 (1997) on various manufacturing that sell at least 50 percent opened a new business. surveys in Africa and percent of output to market and Retail trading firms face highest Domiinican Republic. employ 50 or less people. Rtitrdnfrm faehg stOver 50 percent of closures take closure risks and are 30 percent place within first 3 years of start- more likely to close than up. Urban firms have a 25 percent manufacturing counterparts. greater chance of survival. Kapoor-et-al4(1;997 GEMNlNl-itddies by-USAl1of 1991 and -1993 Mortality rates 'how that 48 5000 microeriterprises in percent of closures take place Zimbabwe of which 69% were in within the first three years. manufacturing and 23% were in the commercial sector. Small firms have less than 50 workers. Kesper, Anna. (2000) 120 successful (experienced 2000 Firm closures between 1998 and 2000: growth from 1994-98) SMME Clothing = 25% firms in Gauteng/Witwatersrand Fumniture = 5% in clothing, furniture and metal Metal working = 12.5% working?. Small firms have less Total = 14% than 50 workers and medium firms have 50-200 workers. Rogerson and Rogerson 85 small black enterprises in Informal interviews with property One said "If a hundred companies (1997) Johannesburg inner city brokers and managers yields estimate moved in, 40 percent would have that 50-60 percent fail to survive. died within two months".
71 Table A2.11 Survival Rates for U.S. Small Firms 1978-1986
Percent surviving 6 years By number of employees at birth 1 to 4 37.2 5 to 499 49.2 All firms 39.8 By degree of employment growth Zero growth 27.5 Low growth 66.3 By sector Construction 35.3 Manufacturing 46.9 Wholesale trade 44.3 Resale trade 38.4 Services 40.9 Source: Phillips and Kirchhoff (1988).
Table A2.12 Survival Rates for U.S. Small Firms by sector, 1976-1986
Sector Number of Survival Rates Firms in 1976 2 yrs 4 yrs 6 yrs 8 yrs 10 yrs Food 474 71.7 58.4 42.8 32.1 30.4 Textiles 308 73.1 53.6 36.0 28.6 27.3 Apparel 864 72.0 55.2 38.4 29.6 27.3 Lumber 794 75.7 64.7 44.0 33.6 32.2 Furniture 531 74.0 58.4 36.9 30.3 28.4 Paper 126 78.6 63.5 53.2 46.0 45.2 Chemicals 322 77.0 61.2 45.3 37.0 35.4 Leather 124 -71.8 60.5 33.1 26.6 24.2 Fabricated metals 962 78.8 66.3 51.2 43.0 41.0 Non-electrical machinery 1519 81.8 69.4 54.0 46.6 44.4 Electrical machinery 635 77.0 59.5 40.8 33.1 30.9 Source: Audretsch (1991).
72 Table A2.13 Firm births and deaths in Japan
1966-69 1969-72 1972-75 1975-78 1978-81 Construction Birth rate 5.4 6.4 5.4 4.6 4.7 Mortality rate 0.8 0.5 2.2 1.1 1.1 Manufacturing Birth rate 6.0 5.6 4.3 3.4 3.7 Mortality rate 2.5 3.2 3.4 2.3 2.5 Wholesale Trade Birth rate 6.2 7.7 7.9 6.6 6.3 Mortality rate 6.5 4.1 5.3 3.8 3.9 Retail Trade Birth rate 5.0 4.8 4.3 4.9 4.4 Mortality rate 2.1 3.6 3.6 3.3 4.0 Services Birthrate 6.3 6.7 6.1 6.1 6.4 Mortality rate 3.9 4.0 3.8 3.3 3.1 Source: Koshiro (1990)
Table A2.14 Survival Rates in OECD countries
France Netherlands United Kingdom Finland Beyond 1 year 74 82 88 79 Beyond 3 years 65 67 62 69 Beyond 5 years 51 60 48 51 Source: Benassi (1995)
Table A2.15 Firm Births and Deaths in Taiwan
Share of firms in 1991 Share of firms in 1981 1986 Entry 1991 Entry 1986 Exit 1991 Exit Cohort Cohort Cohort Cohort Textiles 23.8 59.4 60.9 17.8 Clothing 22.1 63.5 73.7 13.8 Chemicals 19.8 64.0 56.4 14.2 Plastics 21.5 64.8 62.2 16.1 Basic Metals 16.2 74.3 67.1 14.9 Fabricated Metals 21.7 66.4 65.5 16.7 Non Electrical Mach'inery 19.3 66.6 61.1 16.1 Electrical Machinery 20.0 68.6 58.8 16.0 Transportation Equipment 20.1 66.9 62.0 15.7 Source: Aw et aL. (1997)
73 Table A2.16 Firm Births and Deaths in Developing Countries
Closure Rates Birth Rates Botswana 6.0 32.0 Kenya 15.9 19.7 Malawi 15.0 24.6 Swaziland 10.5 22.0 Zimbabwe 11.5 23.5 Dominican Republic 26.0 27.1 Source: Mead and Liedholm (1997)
74 ANNEX 3: LABOR MARKETS
Table A3.1 How many unions SMMEs work with by size (Percent)
No Unions 1 Union 2 Unions Size 1 86.6 6.9 0.5 Size 2 73.4 20.5 2.0 Size 3 46.2 41.0 10.8
Table A3.2 How many unions SMMEs work with by sector (Percent)
No unions 1 union 2 unions Clothing & Garments 50.0 37.8 9.2 Metals and Metal Products 66.7 25.8 1.1 Fumiture 46.7 40.2 10.9 Food & Beverages 72.2 25.2 0.0 Tourism 84.8' 7.6 4.4 Construction 69.6 21.7 2.2 Retail 78.5 12.9 3.5 Information Technology 90.1 6.6 0.0
Table A3.3 Level at which collective agreements are reached
No Establishment Company Sector / Wage Other agreement I Plant level level Industry level determination (Bargaining board Council) Clothing & 44.3 8.2 2.1 42.3 4.1 1.0 Garments Metals and 70.8 9.0 3.4 18.0 1.1 2.2 Metal Products Furniture 59.6 5.6 4.5 24.7 5.6 5.6 Food & 72.8 5.3 7.0 11.4 3.5 1.8 Beverages Tourism 81.5 5.4 3.3 4.3 4.3 2.2 Construction 64.1 8.7 4.3 15.2 4.3 6.5 Retail 81.1 5.4 6.3 5.4 2.7 1.8 Information 92.0 2.3 1.1 2.3 0.0 2.3 Technology
75 Table A3A Implicit costs of doing business with labor
Clothing Metals & Furniture Food & Tourism Constr- Retail IT & Metal Beverage uction Garment Product Strikes/Stay- aways None 22 24 37 38 26 24 31 16 1-3 stnkes 12 7 7 3 0 6 4 1 More than 3 2 1 0 0 0 2 0 0
Workdays lost None 24 23 37 35 25 23 27 15 1-3 strikes 10 3 6 4 1 7 8 1 More than 3 2 5 1 2 0 2 0 1
Disciplinary inquiries None 26 22 16 26 18 23 22 13 1-3 strikes 9 8 27 12 7 9 13 3 More than 3 1 2 1 3 1 0 0 1
Dismissal time (months) Median 3 1 2 2 1.5 1 1 1 numberof 10 13 10 5 6 13 10 3 respondents
Cost of dismissal Median 1750 2500 1500 1000 3000 695 1000 5500 numberof 14 18 7 9 7 14 11 3 respondents
76 Table A3.5 Impact of labor regulations
Clothing Metals Furniture Food & Tourism Construction Retail IT & & Metal Beverage Garment Product Hire fewer 29.5 32.9 28.9 21.1 14.6 46.1 12.7 14.9 wcrkers Substitute 10.4 20.9 18.9 11.5 6.7 25.8 2.7 5.8 machinery for wcrkers Hire workers 26.8 18.7 23.1 16.8 10.1 45.5 15.3 12.9 on a temporary basis Relyon 15.8 25.3 27.8 2.8 8.9 46.1 9.9 16.8 subcontracting Saw labor 16.8 6.6 10.0 8.0 7.8 19.3 8.1 5.9 relations and/or productivity
Table A3.6 Reasons for subcontracting
Wages of Non-wage costs of Flexibility to Temporary temporary temporary expand or to workers are workers are workers are lower contract easier to lay off lower Clothing & Garments 8.8 11.8 95.8 43.2 Metals and Metal Products 4.4 18.2 97.4 25.0 Furniture 21.4 21.4 94.1 54.8 Food & Beverages 28.9 18.4 89.3 28.6 Tourism 26.7 15.4 100.0 41.7 Construction 26.8 35.0 96.6 48.8 Retail 42.3 32.0 92.5 42.3 Information Technology 5.9 20.0 93.8 31.6 Size 1 11.4 15.2 91.8 38.9 Size 2 29.9 28.9 94.2 43.7 Size 3 12.7 13.9 97.4 35.6
77 ANNEX 4: FINANCIAL ISSUES Table A4.1 Sources of investment capital by firm size, 1998-99
Size 1 Size 2 Size 3 149% 50- 100 1- 50- 100 1- 50- 100 100% % 49% 100% % 49% 100% % Family savings 2 3 25 5 7 17 3 7 7 Individual savings 4 7 34 9 10 33 9 10 30 Retained earnings from 0 1 6 3 3 6 3 3 8 previous business Loan from a local bank 3 7 5 5 13 9 6 15 6 Loan from a parent 0 0 0 1 1 0 1 1 1 company Loan from a foreign 1 0 1 1 0 0 1 1 2 partner Small business agency 0 0 2 1 1 2 1 1 1 Government 0 0 0 1 0 0 1 1 0 credit/equipment supplier Retrenchment package 1 1 5 1 1 1 1 1 1 Church/Other 2 2 1 2 3 3 5 3 2
Table A4.2 Sources of investment capital by age, 1998-99
Pre-apartheid Post-apartheid 1-49% 50-100% 100% 1-49% 50-100% 100%
Family savings 4 6 21 2 7 15 Individual savings 4 10 34 8 8 29 Retained earnings from previous business 2 2 6 2 3 7 Loan from a local bank 5 12 6 4 11 9 Loan from a parent company 0 1 0 1 0 1 Loanfrom aforeignpartner 0 0 1 2 1 1 Small business agency 1 1 1 0 0 3 Government credit/equipment supplier 1 0 0 1 1 0 Retrenchment package 1 1 2 1 0 3 Church/Other 2 2 7 3 3 5
78 Table A4.3 Sources of investment capital by race, 1998-99
Black Asian + Colored White 1-49% 50- 100 1- 50- 100 1- 50- 100 100% % 49% 100% % 49% 100% % Famnily savings 4.2 10.4 22.9 6.0 4.8 25.3 3.7 7.6 17.9 Inclividual savings 6.3 8.3 29.2 13.3 8.4 30.1 7.6 10.8 29.4 Retained earnings from 0.0 0.0 8.3 3.6 1.2 6.0 2.0 2.9 6.4 previous business Lon from a local bank 2.1 8.3 4.2 4.8 13.3 2.4 5.9 12.3 8.6 Loan from a parent 0.0 0.0 0.0 1.2 0.0 1.2 0.5 0.7 0.7 company Lom from a foreign 2.1 0.0 0.0 0.0 0.0 0.0 0.7 0.5 0.7 paxtner Small business agency 0.0 2.1 2.1 0.0 1.2 1.2 0.2 0.2 1.5 Government 2.1 2.1 0.0 0.0 1.2 0.0 0.5 0.2 0.0 credit/equipment supplier Rezrenchment package 0.0 2.1 4.2 3.6 1.2 1.2 0.2 0.5 0.7 Church/Other 6.3 2.1 2.1 4.8 4.8 2.4 2.7 2.7 3.4
Table A4.3 (continued)
SA-No, race Foreign 1-49% 50-100% 100% 1-49% 50-100% 100%
Family savings 78.2 3.2 18.5 79.7 4.7 15.6 Individual savings 56.5 9.7 33.9 53.1 4.7 42.2 Retained earnings from previous business 92.7 2.4 4.8 89.1 3.1 7.8 Loan from a local bank 77.4 15.3 7.3 84.4 10.9 4.7 Loan from a parent company 100 0 0 98.4 1.6 0 Loan from a foreign partner 97.6 0.8 1.6 96.9 1.6 1.6 Small business agency 97.6 0 2.4 100 0 0 Government credit/equipment supplier 100 0 0 100 0 0 Retrenchment package 92.7 0.8 6.5 100 0 0 Church/Other 100 0 2.4 100 1.6 1.6
79 Table A4.4 Sources of working capital, 1998-99
All 1-49% 50-99% 100% Retained/internal earnings 4.2 15.2 67.9 Loan from a parent/partner company 8.2 8.1 6.8 Loan from a local bank 2.0 1.4 1.1 Other 2.1 2.1 2.7
Table A4.5 Sources of working capital, 1998-99 by size-class
Size I Size 2 Size 3 1- 50- 100% 1- 50- 100% 1- 50- 100°/ 49% 100% 49% 100% 49% 100% Retained/internal earnings 3.0 8.4 77.2 4.3 16.2 65.6 5.1 20.0 63.1 Loan from a 3.0 5.4 5.0 9.6 8.4 8.1 10.8 10.3 6.2 parent/partner company Loan from a local bank 2.0 0.0 0.0 1.8 2.0 0.8 2.6 1.5 3.1 Other _ 2.5 2.5 4.0 1.5 2.8 2.5 3.1 0.5 1.5
TableA4.6 Sources of working capital, 1998-99 by age
Pre-apartheid Post-apartheid 1-49% 50-100% 100% 149% 50-100% 100%
Retained/internal earnings 4.5 16.5 67.6 3.4 11.9 68.6 Loan from a parent/partner company 9.5 8.5 6.7 5.1 7.2 7.2 Loan from a local bank 1.6 1.1 0.9 3.0 2.1 1.7 Other 2.5 2.2 1.4 1.3 2.1 5.5
80 ANNEX 5: TRADE
Table A5.1 Pe rcentage of SMME exporters as a share of total SMMEs
Percent of firms that export All 14.2 Size 1 7.9 Size 2 16.0 Size 3 16.9 Black 6.3 Asian + Colored 18.1 White 15.9 SA - No race 9.7 Foreign 12.5 Pre-apartheid 15.6 Post-apartheid 10.6
Table A5.2 Exports as a percent of annual sales estimates by size
Size 1 Size 2 Size 3 Overall median Estimates (1999) 30 20 7 15 Estimates (1998) 20 17 5 15 Estimates (1997) 40 26 10 20
Table A5.3 Exports as a percent of annual sales estimates by ra ce
Black Asian + White SA - No Foreign Pre- Post- Colored race apartheid apartheid Estimates 40.0 8.0 20.0 12.5 10.0 10.0 30.0 (11999) 1Estimates 30.0 12.5 20.0 15.0 12.5 13.0 30.0 ( 1998) Estimates 25.0 20.0 30.0 10.0 12.5 15.0 45.0 ( 1997)
81 Table A5A Exports as a percent of annual sales estimates
Clothing Metals Furniture Food & Tourism Constr- Retail IT & & Beverage uction Garment Metal Product Estimates 5.0 10.0 10.0 11.5 55.0 5.0 30.0 10.0 (1999) Estimates 5.0 13.0 10.0 3.0 65.0 5.0 35.0 15.0 (1998) Estimates 10.0 10.5 10.0 11.5 60.0 5.0 35.0 25.0 (1997)
Table A5.5 Main countries of destination for exports
SADC Zimbabwe Botswana Namibia Rest of Africa Kenya Ghana Nigeria Western Europe United Kingdom Germany France Asia Singapore Guam Australasia New Zealand Australia North America United States Canada
Rest of Americas Argentina Brazil _
Table A5.6 Awareness to exports incentives programs
Share of all ftrms Share of exporters Yes Export finance guarantee 6.1 42.9 48 Export marketing and investment 5.4 38.4 43 Export credit and reinsurance (ECRS) 4.0 28.6 32 Life scheme 2.0 14.3 16 Motor industry development program 2.1 15.2 17 Export credit facility-pre-shipment 4.2 29.5 33 Export credit facility-post-shipment 3.8 26.8 30 Export credit guarantee 8.6 60.7 68 Forward Forex cover 10.9 76.8 86 Transport subsidies 4.7 33 37 Tax exemptions (including VAT) 13.5 95.5 107 Other 0.3 1.8 2 World Player Scheme (IDC) 0.4 2.7 3
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Report No.: 24330 SA Type: ER