Professional Documents
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Palesa Mojaki
in the subject
BUSINESS MANAGEMENT
at the
SUPERVISOR: Dr Z Ndevu
I declare that the work I am submitting for assessment contains no section copied in whole or in part from
any other source unless explicitly identified in quotation marks and with detailed, complete, and accurate
referencing.
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Small and Medium-sized Enterprise (SME) Development and Growth in Africa
ABSTRACT
Although there is substantial research done to prove the crucial role of small and medium sized
enterprises (SMEs) in growing the country’s economy, a high rate of SMEs in South Africa continue to
fail at an alarming rate year after year. The challenges experienced and the assistance needed to grow
and develop these SMEs are narrowly recorded. There is a compelling need to investigate the
effectiveness of resources available for the development and growth of these businesses in South
Africa, particularly looking at the impact of information and communication technology as one of the
determining success factors. Some of the challenges recorded are access to financing, expensive and
sometimes unreliable supply of electricity, the challenge of expensive data and access to information
technology, the lack of favourable policies for SMES and corruption in government departments. The
study will use research methods and design that will follow the quantitative, nonexperimental,
descriptive, cross-sectional study which will observe the role of SMEs in South Africa, and the
effectiveness of available resources to grow and develop their businesses.
1.1 INTRODUCTION
An article written by Professor Christian Friedrich dated 2016 for Moneyweb.co.za records that in South
Africa, small and medium enterprises have 70 – 80% chances of failure within the first five years of
establishment. This is an alarmingly high failure rate. Some of the recorded reasons for the high failure
rate, not only in South Africa, but across African economies are electricity supply, access to financing,
poor management, competency and capability, negative perception, access to reliable information,
government support and corruption (Muriithi, 2017). According to Statistics South Africa Survey of
Employers and the Self-employed (SESE) 2013 report of the non-VAT registered businesses, the
number of entrepreneur’s declined from 2001 at 2.5million to 1.5million in 2013 and the majority of those
entrepreneurs are of black race with the lowest levels of education. The report records that about 28%
of businesses investigated had no electricity, only 16.6% could access commercial banks financing, and
the majority of businesses required assistance with marketing skills.
Prah (2016) points out that worldwide research shows that SMEs are the source of economic growth in
both developing and developed countries and have a significant contribution to the county’s gross
domestic product (GDP). Prah (2016) notes that “there has been an obvious widespread of SMEs in
Sub-Saharan Africa due to the continuous recognition of SMEs as the catalyst of growth and macro-
economic variables booster”. According to a report done by van Manen (2018), “SMEs in the agri-food
sector are making a vital contribution to food security and poverty alleviation in Sub-Saharan Africa. The
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agricultural sector is of immense importance to Africa: it is by far the largest source of family income and
offers employment opportunities for the labour force”. There is substantial evidence that highlights the
importance of SMEs in contributing to the economy of a country.
This study will investigate the impact of information and communication technology (ICT) on SME.
According to Sianjase and Prof Libati (2016), SMEs are not aware that the use of ICT can help alleviate
some of the challenges experienced in their businesses. Rufai (2014), notes that the use of mobile
phones is Africa will be evolving from usage of communication to being used as a service delivery
instrument.
The overarching theme of this study is to highlight the role of SMEs in the South African economy and
the effectiveness of growth and development assistance available to these businesses. The study
hopes to gather information that will help both entrepreneurs and government departments to better
support the businesses and reduce the start-ups failure rates.
According to a survey of employers and self-employed done by Stats SA published in 2014, over 70% of
person running the informal business have an education level below matric as per figure 1. The issue
with this profile as reported by Muriithi (2017) is the lack of managerial skills and experience. Although
the entrepreneurs may have workable ideas that can be developed and grown, the lack of managerial
skills that could include basic bookkeeping, credit, inventory and cash flow management, and strategic
planning results in poor performance of SMEs and ultimately the failure of a business (Muriithi, 2017).
Muriithi (2017) notes it has been discovered that those SMEs with appropriate skills and a good
understanding of basic business management performs efficiently. This is an important finding for the
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support structures and organizations to be aware of the education level of the majority of the country’s
entrepreneurs’.
The Banking Association of South Africa, on their website states that “SMEs have been identified as
productive drivers of inclusive economic growth and development in South Africa and around the world.
Some researchers have estimated that, in South Africa, small and medium-sized enterprises make up
91% of formalised businesses, provide employment to about 60% of the labour force and total economic
output accounts for roughly 34% of GDP”.
According to the GEM report of 2017/18, Africa has the lowest proportion of entrepreneurs (17%)
projected to create employment of 6 and above job opportunities comparing to other continents. What is
exciting and interesting though about the findings in figure 2 is that innovation driven economies
entrepreneurs have a higher percentage of creating 6 and above job opportunities and the fact that the
average innovation levels increases with the economic development level. This gives African
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entrepreneurs inspiration to work on innovating ideas because research shows that innovation driven
economies increases the levels of economic development.
Rufai (2014) states that ICT has had a transformational impact on entrepreneurs and an improvement in
economic and social welfare, particularly in Africa where mobile telephony penetration is reported
highest in the world though still lacking behind in fixed broadband with low penetration rates at 6.1%
when compared with 27.2% of industrialised nations. Across Africa research is shedding light on the
impact of ICT and the improvement of SMEs performance. According to Rufai (2014), a study done in
Kumasi, Ghana “suggests that most of the SMEs studied experienced a positive business performance
as well as other benefits, as a result of using ICT” and another study done in Nigeria “also reported a
significant and positive effect of ICT’s investment on the profitability of SMEs”. Entrepreneurs are being
innovative in using ICT to improve the performance of their businesses. There are no recent significant
studies done in South Africa that links the usage of ICT by SMEs to innovation and improved business
performance. The proposed study will add to the literature on the subject of ICT usage and innovation
that leads to effective growth and development of SMEs in South Africa.
The banking association of South Africa on their website lists the challenges experienced by SMEs as 1.
crime and corruption, 2. appropriate technology and low production capacity (includes access to
electricity), 3. a lack of management skills and in adequate skilled labour, 4. finance and obtaining
credit, 5. access to markets and developing relationships with customers, 6. recognition by large
companies and government bureaucracy, 7knowledge and support for the role that they play in
economic development and 8. regulatory compliance. This list correlates to the SESE (2013) done by
Stats SA on the type of assistance needed by informal businesses. Figure 3 shows the SMEs
responses from 2001 to 2013 regarding their needs to improving the effectiveness to grow their
businesses. According to the survey all indicators grew substantially from 2001 to 2013. This shows that
there hasn’t been any improvement attending to their needs, the opposite has occurred in that the lack
of assistance has increased.
The entrepreneurs in the informal sector lists the top three of their needs to be assistance with
marketing, easing in government regulations, and better access to loans. These are all major factors to
impediments of business development and growth. Surprisingly access to technology is at the bottom 2
of their increased needs. This might suggest that the mobile phone technology penetration has
improved as mentioned earlier or the type of business in the informal sector has not much need for
usage of technology. These findings are not unique in South Africa, as research shows that it is
common findings in other African countries.
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Figure 3: Type of assistance needed by informal businesses, 2001 and 2013
Hoque and bin Awang (2016) study on the impact of entrepreneurial marketing (EM) skills found that
even when the entrepreneur would have a great business idea, the business would not survive the
competitive global market due to lack or limited marketing skills. This observation correlates with Cant
(2012) study as per table 1 below, where there is a positive correlation between entrepreneur marketing
skills and business success.
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Table1: The Pearson correlation
The data collected by Cant (2012) in figure 4 above shows that a high percentage (93%) of SMEs
experiences gaining understanding of the market and potential for growth as a challenge. Access to
finance is highlighted in many SMEs research studies as the main challenge experienced. There is
therefore a need for marketing skills training to help grow the SMEs. Lack of finances will also be an
impediment to growth and development even when the entrepreneur has marketing skills, because
marketing also needs funding.
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a few investors interested in funding them. The report also found that SMME lacks the knowledge and
skills to raise funds.
The Banking organization website also highlights the need for financial institutions to assess the SMEs
credit track record before lending money. This poses a challenge that is difficult to solve due to the
operating environment of SMEs versus the requirements of financial institutions. There is also a need
for training SMEs on how to raise funds and apply for credit as highlighted by the SMME access to
funding report. More research needs to focus on finding alternatives to financial institution and
government entities needs to invest more effort in training programmes.
According to the South African Science Technology and Innovation Indicators report (2017), “the
percentage of new entrepreneurs innovating with technology of less than five years is very high in South
Africa (55.1%) as compared with other BRICS countries other than India. It is exceptionally high relative
to the 4.0% of Brazil. Indeed, the country has a high potential to produce “gazelles”. The Department of
Small Business Development (DSBD) recently launched the National Gazelles Programme, a national
SME business growth acceleration programme to develop a new generation of successful South African
entrepreneurs”.
Although the South African government has programmes in place to help grow and develop SMEs,
there is also corruption that erodes the hard work done. According to Kanu (2015),corruption can
influence the prices of services and products due to bribe paid to officials, corruption can also influence
productivity and the quality of services and products due to the same reasons as bribery. Bribed officials
can give preference to highly costed with poor quality of services and products SMEs with dire
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consequences to the other competing SMEs in cases of tendering processes. Corruption in government
entities contributes to the high failure rates of South African SMEs.
Government regulations imposed on SMEs may be reason there is a large number of informal business
in the small and medium enterprise sector. The small and medium South Africa website has a list of
requirements for SMEs comply with the law. First SMEs must register their businesses with the South
African revenue services (SARS) and register themselves as taxpayers. If the business has employees
then the owner must minus VAT from their pay and pay SARS. There are labour laws, health and safety
regulations, municipal bylaws and consumer protection act that SMEs must adhere. For the informal
sector entrepreneurs profiled by Stats SA, these regulations are enough to discourage an earnest man.
In order to answer the problem statement, three secondary research objectives have been identified:
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1.4 RESEARCH DESIGN AND METHODOLOGY
1.4.1 Design
John Creswell (2014) describes research designs as “types of inquiry within qualitative, quantitative, and
mixed methods approaches that provide specific direction for procedures in a research design”.
In this study the researcher will use the quantitative, nonexperimental design using questionnaires.
According to John Creswell (2014) a survey research “provides a quantitative or numeric description of
trends, attitudes, or opinions of a population by studying a sample of that population”.
This type of design will allow the researcher to use the opinions of SME’s through questionnaires to
explore and validate the research objectives and thereafter enable the testing of theory in the literature
review (Leedy and Ormond, 2015). This study also allows for a large population to be used in other to
gather as much information as possible across African countries.
In this study the researcher will use the descriptive nature of studies. Neil Salkind (2012) states that
conducting descriptive research is to understand the as is situation at the time of the study and how it
relates to other factors. Data will be collected without any manipulation to capture the current state as is.
Since this study will be about observing the growth and development of SMEs in Africa. The research
methods and design used will follow the quantitative, nonexperimental, descriptive, cross-sectional
study which will observe the role SMEs in Africa and the effectiveness of strategies used to grow and
develop their businesses at one point in time. The study will observe the growth and development
strategies used by SMEs and findings will be based on the current matters.
This study will use simple random sampling because is it a form that provides a high probability of
representation. The variables growth and development in the study are constant throughout the
population. Therefore using simple random sampling is best suited for this study. The targeted
population will be SMEs across African countries.
The collection form is used to organize the data to be collected. In the SMEs study, the variables are
growth and development. These variables will be used to collect data. The researcher will group data
according to growth and development strategies used by SMEs in different countries.
According to John Creswell (2014), variables are distinguished by two characteristics, which are the “
temporal order and their measurement or observation”. Data can be measured using nominal data,
ordinal data, interval and ratio data (Neil Salkin, 2012). In this study the researcher will use the ordinal
level of measurement, where variables that are being studied can be ordered into ranked categories
(Neil Salkin, 2012).
The instruments used in research are questionnaire, interviews, observations, tests, checklists,
distribution, records, experimental and survey approach (Leedy and Ormrod, 2015). The researcher will
use questionnaire for the study on growth and development of SMEs. Questionnaires are often used in
a quantitative, nonexperimental study using descriptive methods. Neil Salkin (2012) lists some of the
advantages of using questionnaire as a cheaper form of research study that is able to cover a large
population in a broad geographical area and the respondents are more likely to be truthful in responses
as their anonymity is almost guaranteed.
John Salkin (2012) cautions that even though questionnaires might best in collecting data, its biggest
disadvantage is that “the completion and return rates are much lower than if you personally asked the
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questions of each potential respondent through an interview”. The researcher plans to design the
questionnaire in such a way that the questions will be direct, interesting, and short, focused on the
study.
After the data is collected, the researcher will use descriptive statistics to analyse the data. Descriptive
statistics is a tool used to “describe some of the characteristics of the distribution of scores collected”.
The researcher will use descriptive statistics to determine the effectiveness of the strategies used to
develop and grow SMEs in African countries.
There are several threats to the internal validity of the experiments. These are history or time taken of
the study, maturation of the experiment subjects, and selection of the participants, testing,
instrumentation, regression and morality.
The researcher plans to use random sampling, a questionnaire with descriptive statistics to increase the
internal validity and reliability of the study.
The study sample will be drawn from South African formal and informal SMEs
The study has to be completed in a two year timeframe
The study will be exploratory in nature
The study will focus on the impact of ICT and government policies on growth and development of
SMEs
The reliability of the data collected will depend on the authenticity of the source of information
which will be the respondents of the questionnaires
Chapter 1 – Introduction
Chapter 2 - Literature Review
Chapter 3 – Methodology
Chapter 4 – Results and Discussion
Chapter 5 – Conclusion and Recommendations
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1.8 SUMMARY
The GEM (2011) South Africa report gives a summary of entrepreneurial framework conditions for
SMEs to effectively grow and develop as listed on table 3.1 below. For the South African SMEs to grow
and thrive there is still a lot of work to be done by the private and public sector big organizations. The
literature reviews highlighted the need for training and mentoring of SMEs to market and grow their
businesses. There is also an issue of corruption and government regulations that must be investigated
and solved. Access to finance remains the biggest impediment to SMEs, even though there a number of
organizations available to help resolve this issue, the entrepreneurs need awareness on how to access
these organizations. There are opportunities brought about by the usage of ICT to innovate how SMEs
manage their business, from selling their products globally online to reducing costs in providing online
services (Olawe and Garwe, 2010). There is a compelling reason to conduct an investigation into the
impact of ICT on innovation and the effectiveness of growth and development for South African SMEs.
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1.9 REFERENCES
Leedy, P. and Ormrod, J. 2015. Practical Research: Planning and Design. 11th ed. New Jersey:
Pearson Education International
John W. Cresswell 2014. Research Design: Qualitative, Quantitative, and Mixed Methods Approaches.
4TH ed. University of Nebraska: SAGE
Neil J. Salkin 2012. Exploring Research. 8th ed. University of Kansas: Pearson Education
https://www.moneyweb.co.za/mybusiness/why-do-70-to-80-of-small-businesses-fail-within-five-years/;
Accessed 19/12/2018
https://www.gemconsortium.org/report/48359; Accessed 05/01/2019
http://www.statssa.gov.za/publications/P0276/P02762013.pdf; Accessed 05/01/2019
http://www.businessdictionary.com/definition/business-growth.html; Accessed 05/01/2019
https://www.forbes.com/sites/scottpollack/2012/03/21/what-exactly-is-business-
development/#4db42d07fdbb; Accessed 05/01/2019
https://www.banking.org.za/what-we-do/sme; Accessed 05/01/2019
https://www.thedti.gov.za/business_regulation/acts/small_business_amendment_act.pdf; Accessed
05/10/2019
http://www.naci.org.za/wp-
content/uploads/2018/07/South_African_Science_Technology_And_Innovation_Indicators_Report_2017
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Muriithi, M. S. (2017). African Small And Medium Enterprises (SMES) Contributions, Challenges and
Solutions. European Journal of Research and Reflection in Management Sciences, 5(1), 37-46.
https://www.researchgate.net/publication/315516536
Prah, S. (2016). MICROFINANCE CREDIT FACILITIES AND THE GROWTH OF THE SMALL AND
MEDIUM SCALE ENTERPRISES IN THE CAPE COAST METROPOLIS OF GHANA. International
Journal of Economics, Commerce and Management, IV(12), 720-744
Van Manen, B. (2018). Critical Capital for African Agri-Food SMEs: A review of demand for and supply
of risk capital for agri-food SMEs in Sub-Sahara Africa. Based on field studies in Kenya, Tanzania,
Zambia and Mali. AgriProFocus, ICCO Cooperation and Rabobank Foundation supported by the Food &
Business Knowledge Platform May 2018, Utrecht (Netherlands), 2nd revised edition
Kanu, A.M. (2015). THE EFFECT OF CORRUPTION ON SMALL AND MEDIUM ENTERPRISES:
PERSPECTIVE FROM A DEVELOPING COUNTRY. International Journal of Small Business and
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Olawe, F and Garwe, D. (2010). Obstacles to the growth of new SMEs in South Africa: A principal
component analysis approach. African Journal of Business Management 4(5), 729-738
http://www.academicjournals.org/AJBM
Cant, M. (2012). Challenges Faced By SME’s In South Africa: Are Marketing Skills Needed?
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Are_Marketing_Skills_Needed
Hoque, A.M and bin Awang, Z. (2016). The Impact of Marketing Strategy on Small and Medium Scale
Enterprises (SMEs): Case Study in Bangladesh. Conference paper October 2016.
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