CHAPTER 1 BACKGROUND AND DEFINITION OF STUDY 1.1 INTRODUCTION One of the priorities in the national strategy for the development of small, medium and micro enterprises (SMMEs) in South Africa was a “nation-wide network of Local Service Centres” (Republic of South Africa (RSA) (RSA 1995a:70)), more appropriately called “Local Business Service Centres” (LBSCs). The White Paper for the Development and Promotion of Small Business in South Africa (RSA 1995a:70) proposed that the LBSC network would be one of the most important instruments to spread support for small enterprises as each centre would operate at local level and would be independent. It should be noted that the ruling African National Congress (ANC) (ANC 1994:94) wanted more focus on the development of small business as it believed this was essential to grow the South African economy. The ANC’s outlook resonates with views by Acs (2008:xvi), Hisrich, Peters & Shepherd (2005:15), Floyd & McManus (2005:144) and Timmons (2002:16) who posit that the creation of small businesses is a necessity for national economic development. They argue, and this aspect refers specifically to South Africa, that small business has a great redistributional effect and fundamentally restructures society. Bennett (2008:375), in a seminal paper, reinforced the above by further arguing that small businesses account for 99 % of all companies in developed countries and account for around half of unemployment and turnover. He suggests that they are a constituency that government must continually engage with to improve the dynamism of their economies. 1 LBSCs were thus established in South Africa to support small businesses (RSA 1995a:40,70). It was also evident in terms of writings by Pretorius (2009:309) and Timmons (2002:32) that this support is critical as the failure rate of new ventures is high. Pretorius (2009:309) holds that the failure rate of new ventures oscillates between 30 % and 80 % within two years of commencement of the new enterprise. According to Timmons (2002:32), 24 % of small businesses collapse in the first two years after starting up; 52 % within four years and 63 % within six years of starting up. However, despite the launch of the LBSCs in 1995 to provide services to the SMME sector, there has been no noticeable improvement in their success rate over the years. Indeed, as recently as 09 August 2009, Sibanyoni (2009) notes that state bodies intend to reduce the number of consultants (some of whom are in the LBSC category) because of shoddy service. Concerns on the roll-out of the LBSC programme were originally brought to light by the Bloch and Daze 2000 study (Bloch & Daze, 2000) and the Urban-Econ 2002 study (Urban-Econ 2002). These were conducted nationally and both highlighted numerous problems in the roll-out of the LBSC network. The Department of Trade and Industry (dti) then introduced the National Small Business Amendment Act, Act 26 of 2003 (RSA 2003) because of this apparent lack of success in providing support to SMMEs. In a workshop involving all support agencies, the dti (dti 2007:2) accepted that there was a lack of co-ordination in the provision of services to small businesses. These observations reinforce similar ones in the dti’s Review of Ten Years of Small Business Support in South Africa 1994–2004 (dti 2004b). In this 10-year review (dti 2004b:8) the dti claimed that support programmes had their successes and shortcomings. Among the shortcomings were a lack of co-operation, poor co- ordination of services, insufficient depth and a lack of professionalism among staff of support agencies, and an erratic spatial coverage of needs. The dti rightfully pointed out that there were problems in the dissemination of services to SMMEs. This was a direct indictment on the LBSC programme. 2 Apart from past history in terms of small business support, a look must be taken at the future. Statistics South Africa (SouthAfrica.info 2008:1) cites national unemployment as being 23 %. Momberg (2009) and Mpahlwa (2009) declare that by the end of January 2009 thousands of employees in South Africa would have lost their jobs as a result of the economic downturn. Thus, well-functioning LBSCs are going to become crucial as more people are likely to take the entrepreneurship route and this means that service centres will be needed to provide assistance to these new entrants. The study is thus relevant as it interrogates the previous generation of LBSCs and it will suggest solutions and/or alternative methodologies in the provision of business development services to SMMEs. This is also timeous as in November 2008 the Gauteng Provincial Government’s Department of Economic Development released the Draft Gauteng SMME Policy Framework (2009-2014) (Gauteng Provincial Government Department of Economic Development 2008) on a new strategy to supply business development services (BDSs). This study will assist policy makers eliminate factors that will impact negatively on the effectiveness of service centres and include and encourage those that will make them effective. 1.2 LITERATURE REVIEW As the present ex post facto study probes the effectiveness of LBSCs, the focus of the literature review is on the delivery of business development services to SMMEs by service centres. This necessitates an understanding of SMMEs, the role of service centres the SMME environment and the underlying factors that influence the outcomes of the interaction between service centres and SMMEs. The literature review on these focus areas will assist the researcher to gain a better insight into the research problem. It will evaluate various models for de- veloping an SMME with a special focus on management and skills development. It will entail a review of existing published research for South Africa, Africa south of the Sahara, the developed world and the developing world. The information acquired will also assist in compiling the research questionnaire. 3 To commence with, the literature review assists in determining the understanding of the concepts “business development services” (BDSs), “service centres” or “one-stop shops”, and their “effectiveness”. Although they are discussed in detail in the body of the thesis (Sections 3.2.1 to 3.3.2.3), a brief understanding of these is important so as to put them in context and in relation to each other right from the onset. 1.2.1 An understanding of “business development services” Gibson (2001:3) maintains that there is no universally accepted definition of “business development services” and the best approach is to relate them to the needs of businesses. However, The Committee of Donor Agencies for Small Enterprise Development (ILO, 2001b:5) gives a broad definition when it holds that BDS refers to a wide range of services used by entrepreneurs to help them operate and grow their businesses. Rogerson (2006:56) and the Committee of Donor Agencies for Small Enterprise Development (ILO 2001b:5) see BDSs as a wide array of non-financial services critical to the entry, survival, productivity, competitiveness, and growth of small enterprises and an effective strategy of private sector development. Rogerson (2006:56) maintains that BDSs help entrepreneurs to operate their businesses more efficiently. The Commission of the European Communities (ILO 2001b:6) and International Finance Corporation (Hallberg 2000:13) refer to BDSs as “services originating in a public policy initiative”. Bellini (2002:8) endorses the International Finance Corporation and European Union and points out that an essential feature of these is that they provide collective learning. Harper (2005:viii) and the International Labour Office (ILO) (BDS n.d.) postulate that they offer a wide variety of non-financial services. According to them, they include labour and management training; extension, consultancy, and counselling; marketing and information services; technology development and diffusion; and a mechanism to improve business linkages through sub-contracting, franchising, and business clusters. Rogerson (2006:56) quotes from research by Miehlbradt 4 and McVay in 2003 to argue that BDSs have the broader purpose of making small businesses contribute to economic growth, employment generation and poverty alleviation. For the purposes of the present study the definitions by the European Communities (2001:6) and the International Finance Corporation (Hallberg 2000:13) definitions apply. The LBSCs, the basis of this study, were set up as a result of public policy and these definitions are thus relevant. It is also asserted that the difference in opinion between the European Communities (2001:6) and the International Finance Corporation (Hallberg 2000:13) and between Harper (2005:viii), the Donor Committee and the ILO is a mere question of semantics as it does not matter what the basis, they are a wide range of non-financial services. 1.2.2 An understanding of “service centres” Matlay (2004:507) and Sievers, Haftendorn & Bessler (2003:3) define a “service centre” as a structure set up under an existing national legal framework to provide business development services to small enterprises. Adams (2003:171) explains this further when she indicates that it is a vehicle for local partnership and a mechanism for directing local economic development. A “service centre” is also known as a “one-stop shop”, “business centre”, “enterprise development agency”, “business support” or “local enterprise agency”. Bridge, O’Neill & Cromie (2003:416) define a “one-stop shop” as the provision of “a seamless collection of services” to small business under one roof. They say that this is difficult to attain and talk should rather be of “first-stop shops”, which would mean first-time entrepreneurs get service under one roof to set up shop. Matlay (2004:507) and Sievers et al (2003:3) declare that the stated objective of such centres is to offer a full range of services to SMMEs in a specific locality.