SMEs As An Engine Of Social And Economic Development In Africa

Feature Article SMEs As An Engine Of Social And Economic Development In Africa
JUL 29, 2013 LISTEN

SMEs (Small and Medium-sized Enterprises) are very important to the growth of any nation. It is no surprise that developed countries enjoying a growing and booming economy attribute most of their achievements to a flourishing SMEs sector.

Empirical studies have shown that SMEs contribute over 55 percent of gross domestic product (GDP) and over 65 percent of total employment in high-income countries.

In the developed economies, small businesses are recognized as the main engines for growth and development because of their significant contributions to economic growth and prosperity.

The potential of SMEs to promote domestic-led growth in new and existing industries and to strengthen the resilience of the economy in a competitive and challenging environment is inarguable. According to the Department of statistics of Malaysia, the economic growth in developed countries such as Korea, Japan, Taiwan and many others, was significantly generated by SME activities. The percentage contribution of SMEs to Gross Domestic Product (GDP)/total value added ranges from 60 percent in China, 57 percent in Germany, 55.3 percent in Japan and 50 percent in Korea, compared to 47.3 percent attained by Malaysia. The SME growth is assessed by SME contribution to the three (3) main sectors of the economy; manufacturing, services and agriculture.

This shows that small and medium enterprises (SMEs) have been the backbone of economic growth and driving industrial development. Due to their sheer numbers, size and nature of operations, the role of SMEs in promoting endogenous sources of growth and strengthening the infrastructure for accelerated economic expansion and development has been recognized.

Small and medium-sized enterprises (SMEs) are increasingly being recognized as productive drivers of economic growth and development for African countries. For example, it is estimated that SMEs account form 70 percent of Ghana's gross domestic product (GDP) and 92 percent of its businesses. They also make up 91 percent of formalized businesses in South Africa and 70 percent of the manufacturing sector in Nigeria. SMEs not only contribute significantly to the economy but can also serve as an impetus for economic diversification through their development of new and unsaturated sectors of the economy. In addition, innovative and technology-based SMEs can provide an interesting platform for expanding outside of domestic borders, and entering intra-regional and international markets.

In many African countries SMEs account for about 50% of job creation. In Tanzania for example, it is estimated that more than a third of the GDP originates from the SME sector. In South Africa on the other hand, it is estimated that 91 percent of the formal business entitles are MSMEs, contributing between 52 and 57 percent to GDP and providing about 61 percent to employment.

A study conducted by the University of Ghana in the past estimates that small enterprises in Ghana provide about 85 percent of manufacturing employment and also further states that SMEs are believed to contribute about 70 percent to Ghana's GDP and account for about 92 percent of businesses in Ghana.

Small businesses contribute to local economies by bringing growth and innovation to the community in which the businesses are established. Small businesses also help stimulate economic growth by providing employment opportunities to people who may not be employable by larger corporations. Small businesses tend to attract talents who invent new products or implement new solutions for existing ideas.

Larger businesses also often benefit from small businesses within the same local community, as many large corporations depend on small businesses for the completion of various business functions through outsourcing.

Irrespective of the awareness of the remarkable contribution of SMEs to the development of African economies, it has to be admitted that the growth of SMEs in Africa faces a number of generic challenges. The first and common challenge is the lack of access to appropriate capital from both the banking sector and the capital markets. There is a general perception in the financial sector that lending or provision of capital to SMEs is risky business due to a number of reasons: high mortality rates of SME businesses, suspect management capabilities and skills, poorly prepared business proposals, obscure historical records of the operations of the SMEs and the lack of reliable collateral or collateral mismatch between type of assets held by SMEs and type of assets required by banks for collateral.

Contrary to the developed world where SMEs enjoy a great deal of protection and pampering, Africa's SMEs are said to be living on the edge as borrowing institutions dedicate much of their loan portfolios to big business. Besides, SMEs in African countries lack the needed infrastructure and strong government policies to protect and support them put up their best to contribute to economic development.

It is said that the contribution of SMEs to the national GDP of Nigeria is poor for myriad reasons, including inadequate infrastructural/financial support to businesses operating within the various sectors, limited application of innovation to operations within the segment, unfavourable competition with foreign goods and services among others.

Lack of credit access indeed places a heavy burden on entrepreneurs to raise large amounts of capital for business development themselves and makes it hard for ideas to grow into enterprises. Improving access to credit is thus crucial if SMEs are to reach their potential and allow businesses to move from start-ups to established businesses with growth potential. Credit is also essential for creating an entrepreneurship spirit as it allows businesses to fail and rebound rather than just fail. Indeed, it is common for a number of start-ups and small businesses to fail, and a climate that allows failure allows an entrepreneur to learn from that failure and start afresh. It is in such an environment that innovation and success can most thrive.

Although small businesses may not generate as much income as large corporations do, they are a critical component of and major contributor to the strength and growth of local economies. Small businesses present new employment opportunities and serve as the building blocks of the largest corporations in developed countries.

Economies that have had the SME sector make better contribution to GDP have shown consistent commitment to the development of the sector by implementing access to finance and financial incentives, basic and technological infrastructure, adequate legal and regulatory framework, and a commitment to building domestic expertise and knowledge.

In this context, a policy thrust to grow successful SMEs must take pre-eminence if long term sustainable economic development and transformation of Africa is to be realized.

Editor's Note:

Charles Yeboah Frimpong
University of Ghana
Member, The Institute of Chartered Accountants (Ghana)
Tel: +233-246-542-642
Email: [email protected]