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 ...............................................