SMMEs in National System of Innovation 29 January 2010: IERI.

SMMEs in National System of Innovation29 January 2010: IERI

Structure

1. Defining SMEs 1. The statistical definition of SMEs varies by country, and is usually

based on the number of employees, capital, or the value of assets and sales volume. It is best to adapt an international standard.

2. Role of SMEs in the economy 1. Basic statistics on role of SMEs in one country2. History of SME in one country. 3. Role of SME in high-tech industry4. Role of universities and government research institutes in creating

spin-offs5. The role of venture capital in the creating of innovative SME 6. The spirit of entrepreneurship and culture for innovative SME7. The role of female in SME

Structure (contd.)

3. Public policy to promote SMEs innovation and entrepreneurship.

4. Industry Clusters1. Manufacturing clusters2. Innovation clusters3. Science parks and incubators

5. Barriers and opportunities for SMEs in BRICS-countries1. Financing of SME2. Family business and regulation of SME3. Capability building of SME

6. Policy suggestions

Broad policy focus

• the majority of SMMEs are in the low-tech sector

• the main focus of the government policy is upon the low-tech firms which are expected to graduate and become medium-tech firms

• in this category of SMMEs, the diffusion of technologies and application of high technologies is still a challenge

Survivalist

• income generated is less than the minimum income standard or the poverty line

• little capital is invested• skills and training are minimal • no paid employees • asset value is minimal• scant prospects for opportunities for upward

growth into a viable small business enterprise

Survivalist• use and diffusion of technology is low and there

is less commitment to develop the enterprise than to hope for a job offer

• the lack of diversity and concentration of SMMEs in a somewhat narrow range of economic activities results in fierce local competition, ‘overtrading’ and low returns to entrepreneurs

Micro• involving the owner, some family members and at most hire

one to four employees • turnover that is less than the VAT registration of R150 000 per

annum. Their gross assets are less than R100 000. • Usually not formally registered• only rudimentary business skills or training• assumed to eventually make the transition into viable formal

small businesses• problems relate to access to finance, particularly lack of credit

and working capital; lack of access to markets and too many competitors; and, information to help them graduate into small enterprises (South Africa, 1997; Nobanda, 1998).

Very small enterprises• employ fewer than ten paid employees, except in

mining, electricity, manufacturing and construction sectors where the figure is set at twenty employees.

• gross assets excluding fixed property range from R150 000 to R500 000 depending on the industry

• operate in the formal market and have access to technology that they require.

Small and medium enterprises• employ not more than 50 employees • gross assets excluding fixed property range from R2 million to

R4.5 million depending on the industry• often they outgrow direct supervision of the owner-

entrepreneur and require a secondary co-ordinating mechanism in the form of professional management.

• need an individualized package of technical assistance, training, and credit resources

• constitute the bulk of the established business. • in this category innovation policy could be more productive,

contributing to international competitiveness of the sector.

Medium enterprises

• a maximum number of 100 employees, except for the mining, electricity, manufacturing and construction sub-sectors where the employment ceiling is 200 employees

• turn-over of R5 million per annum. • gross assets excluding fixed assets range between R2

million and R18 million, depending on the industry. • decentralization of power to an additional

management layer and the division of labour is the difference between small and medium-sized enterprises.

Size distribution of the SMME sector (Ntsika)

Institute for Economic Research on Innovation

Survivalist Micro Very small

Small Medium Large Total

184,400 466,100 180,000 58,900 11,322 6,017 906,739

Table 2: Distribution of SMMEs in 1996, according to type of location


Ntsika 1997 Ntsika 2000

Survivalist Micro Very small & small Medium Total SMMEs Total SMMEs

Mainly urban provinces 63.9% 73.5% 77.5% 66.6% 57.9%

Mainly rural provinces 36.1% 26.5% 22.5% 33.4% 42.1%

SMMEs and Innovation


• South Africa is characterized by two incubation movements, business incubators and technology stations

• Technology stations programme was developed by Department of Science and Technology to strengthen and accelerate interaction between Universities of Technology and SMMEs

Technology Stations


•Focus on technology transfer and offer support and advice to low technology-based SMMEs to improve performance and graduate into high-tech SMMEs

•Focus on electronics and electrical engineering; clothing and textiles; metals and manufacturing; automotive components; chemistry and chemical engineering; composite materials

Technology Incubators

• Technology incubators focus on provision of physical facilities and incubation

• Their key objectives are economic growth, job creation, technological innovation, international competitiveness

• Focus on software; life science technologies; ICT and electronics; chemicals; manufacturing; small-scale mining


SMME Public Policy Environment• SMME economy has been actively promoted since

1995• 1995, White paper on National Strategy for the

Development and Promotion of Small Businesses• First time that a comprehensive policy and strategy on

SMMEs was formulated in the country• Seek to address enabling environment; facilitate

access to markets, finance, technology; capacity building, and institutional strengthening


1995 White Paper: Objectives

• creating an enabling legal framework; • streamlining regulatory conditions; • facilitating access to information and advice; • facilitating access to marketing and procurement; • facilitating access to finance; • facilitating access to affordable physical infrastructure; • provide training in entrepreneurship, skills and management; • improve industrial relations and labour environment; • facilitate access to appropriate technology; • encouraging joint ventures; • capacity building and institutional strengthening; • introducing differential taxation and other financial incentives

The Review of Ten Years of Small Business Support in South Africa

• Acknowledged great diversity of the SMME sector• Many support programmes only tackle symptoms of

deeper lying problems• Lack of skilled human capital due to legacy of

apartheid education and low levels of education • Lack of markets for SMME products due to isolation of

many SMMEs to mainstream economy and their inferior products


Integrated Strategy on the Promotion of Entrepreneurship and Small Enterprises (2005)

• strategic actions – increase supply of financial and non-financial support services; – create demand for small enterprise products and services; – reduce regulatory constraints– equalisation of access to support services equalised across urban and rural areas;– greater balance is required between the cost, reach and impact of support

interventions – a more systemic approach to those structural issues, like access to finance for

black entrepreneurs; • Identified research priorities

– a sectoral approach to the analysis of SMMEs in national systems of innovation; – knowledge and understanding across the full range of support suppliers and the

support each one provides as well as to whom and under what conditions;

Main Constraints• Access to finance

– Not enough flexibility in the banking sector– Khula Enterprise Finance provides

• entry level programme which provides group loans to survivalist and/ or micro enterprises

• larger loans are provided by Retail Finance Intermediaries (RFIs) through micro lending programmes

• Credit Guarantee Scheme aims to assists the more established entrepreneurs wishing to acquire or expand their business through a bank loan but not in a position to provide the necessary security or collateral

Policy shortcomings• Khula allowed RFIs that were inexperienced in respect of on-lending

• failed to scrutinize the weak lending methodologies of certain RFIs.

• outreach targets encouraged RFIs to chase volumes rather than quality.

• inadequate capacity building before and after loan implementation

• more emphasis was placed on ‘international best practice’ without being sufficiently cognizant of South African conditions

• the choice to use commercial banks to implement the loan guarantee scheme by Khula was a policy flaw as many commercial banks lack the necessary technical skills and knowledge to lend to the SMME sector.

• absence of community-based savings or loan institutions, limited financial oriented NGOs, such as credit unions, and lack of established credit delivery mechanism targeting SMMEs without collateral

Policy recommendations

• develop institutional variety and increased innovation in the provision of institutions that provide access to finance for SMME sector

• identify business opportunities for SMME producers outside the local economy

• encouragement of linkages between the private sector enterprises and the emerging SMME economy

• encouragement of networks and linkages between SMME themselves

• expanded access to government tenders through the public procurement system

• human capital development and competence building

Gender in SMME Development• Technology for Women in Business (TWIB) is a national initiative of the DTI that started in 1998; managed

by the DTI’s Gender and Women Empowerment Unit and implemented in partnership with the CSIR; operates in partnership with the DST, Department of Minerals and Energy, Department of Communications; DTI’s Small Enterprise Development Agency (SEDA). Non-government organizations (NGOs), donors, and SMME advisory centres also participate in the initiative. However, apart from the DTI, only the Department of Minerals and Energy has been active in TWIB. Its contribution has been in the facilitation of the activities of TWIB in mining, oil and gas; in electricity and energy; and in jewellery.

• implementation of TWIB from the top misses the regional and local differences. Thus the use of regional systems of innovation in the analysis of the programme could provide useful insights which could improve the whole innovation policy.

• TWIB facilitation of access to applied science and technology information for business applications and systems, technical support and access to technologies that provide relevant solutions towards unlocking constraints for enterprise innovation, growth, and local and global market competitiveness.

• TWIB’s priority sectors are agriculture and agro-processing; construction; clothing and textile; arts, crafts and tourism; mining, minerals and energy; and information and communication technology.

Single strategic modality

• one modality for collective action can be through sectoral associations which can represent their membership’s interest to service support providers, act as coordinating body, gather information and disseminate it to the members, offer collective services in terms of export market research, and bulk purchasing. It can be expected that a collective approach may lead to decreased transaction costs, facilitate mutual learning, increase production efficiency, enable collective innovation and facilitate adaptability of enterprises (Bourgouin, 2000).

Conclusions

• Compared to other contexts in the developing and developed world, South Africa has a short history of SMME development

• Dates back to 1995

• In the developed world contexts, SMMEs play a much greater role in innovation and economic growth SMME promotion remains a key element in Government’s policy

• Due to history and several constraints, South Africa’s SMMEs remain weak

• Majority of them tend to be less innovative and survivalist in character

• Public policy acknowledges them for their role in poverty eradication, job creation, and black economic empowerment


Thank You


SMMEs in National System of Innovation 29 January 2010: IERI.

Documents

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