THE NATIONAL POLICY ENVIRONMENT OF

SMALL, MICRO AND MEDIUM ENTERPRISES IN SOUTH AFRICA – AN

EMPRICAL STUDY

Dinesh C Jinabhai* Farida Kadwa Department of HR Management Department of Fashion Design Durban University of Technology Durban University of Technology South Africa South Africa

ABSTRACT

With unemployment levels in South Africa standing at 42%, the government’s

priority is to focus on economic transformation and SMME development. The

government hopes to fast track the development of micro and small business, allow

greater access to finance for people operating in the second economy and to reduce

the cost of setting up new business - all in a bid to stimulate jobs. In fact, South

Africa is lagging behind the rest of the world on several entrepreneurship indicators.

Of the 31 countries surveyed last year, total entrepreneurship activity was 8.8%,

while for developing countries it was 18.4%. South Africa’s total entrepreneurship

activity was 4.3% and the country was ranked 22. More alarming is that the rate is

dropping significantly year-on-year. In 2001 the rate was 9.4%, while in 2002 it was

6.5%. Focusing on the experience of the clothing industry, this paper reveals that the

picture in this sector is not particularly better either. A response rate of 52.29% was

obtained using the mail survey for the empirical investigation. A key finding was the

lack of government support for the continued growth of SMMEs. Similarly, it was

noted that recent shedding of jobs in the textile, clothing and mining sector is likely

to be a cause of instability on the labour front. All told, clear government policies

and goals are imperative in order to negate barriers for sustainable SMME

development and growth.

INTRODUCTION

As early as 1996 it was clear that political and economic changes in South Africa were

having a profound impact on the clothing retail sector (Harrison and Dunne, 1998:13).

Social and cultural changes in the country have led to huge changes in the market place.

Consumer awareness has increased through global exposure, advertising and the use of

multi-media technologies. Quality, design and image are becoming more important to the

upwardly mobile as income distribution patterns change within the South African society.

Moreover, sophisticated consumers are demanding increasing variety of product choices.

This, according to Salinger, Bhorat, Flaherty and Keswell (1998:6) is leading to shorter

product seasons, more rapid product cycle turnover, and smaller lot sizes. In support

Kaplinsky and Manning (1998:157) inform that the scope for SMMEs will strengthen as

per capita income increases and consumers are prepared to pay more for non-standardised

products manufactured (and sold) in smaller units. The key to unlocking the potential

growth of the SMME sector is clear policy mandates and enabling legislation. These

imperatives should be underpinned by concrete initiatives by government policy

interventions.

By international standards, South Africa’s unemployment and poverty levels are

disproportionately high for the country’s per capita income. Growth, job creation and

poverty alleviation are pressing priorities, both economically and politically (Driver,

Wood, Segal and Herrington, 2001:6). The Business Bulletin, (2001:2), further highlights

the situation in the country, “the unemployment level in South Africa is still rising. The

South African economic growth rate is expected to fall short of the anticipated 3% per

annum, again mainly because the SMME contribution/output is falling short. Although

the SMME sector is already carrying some 57% of jobs in the South African economy,

expectations are being pinned on the sector to create further jobs, because that is not

forthcoming from big business”. With as much as forty percent of the employable labour

force unemployed in some parts of the country, labour intensive development strategies

are key economic topics of discussion (Salinger et al. 1998:4). South Africa faces

important challenges in the area of targeted initiatives for SMME growth and employment

generation.

Against this background the paper seeks to achieve the following objectives: a) to

investigate the barriers influencing the SMME development in the clothing industry; b) to

ascertain the perceptions of small and medium manufacturers in procuring Government

tenders or contracts, and c) to evaluate the regulatory environment in which clothing

SMMEs operate.

THE ROLE OF SMMEs IN DEVELOPMENT IN SOUTH AFRICA

SMMEs in South Africa are not contributing to the growth of the economy, and to

employment generation as in other parts of the world. This is equally applicable to the

clothing industry in KwaZulu-Natal. The SMME sector in Europe, as an example, is

considered crucial to competitive development. It employs the majority of the European

labour force and commands two thirds of sales volume in the non-primary sector. Most of

the expansion of employment in Europe over the last decade has been in very small firms

(Mulhern, 1995:83). Inggs (2005:1) quotes Brian Brink the chief executive of the SA

Textile Federation when he states that “we need some sort of government support on

interest rates so that it would be easier for us to upgrade our technology” (Sunday Tribune,

Business Report, 23 January 2005:1). In a recent study Sewsunker (2004:2) reports that

South Africa is lagging behind the rest of the world on several entrepreneurship indicators.

Of the 31 countries surveyed last year, total entrepreneurship activity was 8.8%, while for

developing countries it was 18.4%. South Africa’s total entrepreneurship activity was

4.3% and the country was ranked 22. More alarming is that the rate is dropping

significantly year-on-year. In 2001 the rate was 9.4%, while in 2002 it was 6.5%

(Sewsunker, 2004:2).

The NCMA Report (1999) indicates that employment in the Clothing Industry reached its

peak in 1990. In the greater Durban area, some 45 000 employees were employed by 450

companies. During this period, protectionism was offered to manufacturers because

quantitative customs permits controlled clothing and fabric imports. Only 7% of garments

sold by retailers were imported. The effect of this protectionist policy has been to make

domestically produced and imported goods more expensive in South Africa, than they

would have been in the absence of these policies. Secondly, it made South African

exports more expensive on international markets, because of the higher cost of inputs

(Salinger et al. 1998:1). This resulted in the clothing industry being inwardly focused,

rather than being export oriented.

Table 1 Tariff phase done under the World Trade Organisation Description

1994 1995 1996 1997 1998 19991 2000 2001 2002

Textiles

30.1 33.8

31.8

24.9 23.4

21.9

20.3

18.7

17.3

Clothing

73.7 73.6 68.2 54.6 50.5 46.4 42.4 37.7 33.2

Electrical Machinery

11.0 6.1

6.0

5.8

5.7

5.7

5.7

5.7

5.7

Source: Cassim, R. and Onyango, D. 2001. (Adapted). South Africa's Trade

Reform and the World Trade Organisation: Background and Progress. Trade & Industry Monitor, Vol. 19, Page 3.

The Department of Trade and Industry (DTI) indicated that while the tariffs (Table 1)

were being reduced, some supply side measures would be introduced. This was intended

to offset the higher cost of imported inputs and thereby replace local sales with export

sales. For this restructuring exercise to work it was essential that the Customs and Excise

department enforced and policed tariffs at the various points of entry. Custom and Excise

failed to provide this short-term protection and are therefore blamed by clothing

manufacturers for contributing to the job losses presently being experienced (NCMA

Report, 1999:4). In an attempt to compensate exporters for the Rand’s overvaluation, the

South African government introduced the General Export Incentive Scheme (GEIS) in

1990. This strategy was further augmented by other general schemes, which allowed duty

exemptions or rebates on goods imported for the production of exports (Salinger et al.

1998:8).

GEAR STRATEGY: The Growth, Employment and Redistribution (GEAR)

macroeconomic strategy, announced in mid 1996, showed that the government of South

Africa recommended a conservative fiscal and monetary programme to dampen inflation

and stabilise the domestic currency (Rand). Although strongly supported within the

government, the GEAR strategy was criticised for raising domestic interest rates, curbing

economic expansion, and thereby exacerbating unemployment, in a country where

employment patterns are already highly skewed (Salinger et al. 1998:8).

UNEMPLOYMENT: The GOVZA Economy Report (2002:33) highlights that

unemployment remains South Africa's most formidable economic challenge. Statistics

South Africa (2001) announced in September 2001 that the country's official

unemployment rate stood at 26,4% for February 2001. In February 2000, it stood at

26,7%. Government is focusing on the formal sector and small-business growth, and

supporting development sector initiatives to create more jobs. Patrick Craven (2005:1)

spokesperson of the Congress of Trade Unions in South Africa warns that “thousands

more jobs will be lost if the industry collapses, which will be a tragedy for the South

African economy, which would have lost a major part of the manufacturing industry

(Inggs, 2005, Sunday Tribune, Business Report, 23 January 2005:1). According to the

GEM Report (2001:46), the general consensus is that small business development is seen

as high priority for policy at national government level. However, putting this

commitment into practice has proved complex in terms of both the general policy

environment and programmes aimed specifically at supporting small enterprises. This

sentiment is echoed by the Business Bulletin (2001:2) “the back-up, especially from other

central government departments also dealing with the SMME sector, is lacking. It is as if

at central government level the role-players are fiddling around, not knowing exactly what

and how to do, let alone provide clear directions and encouragement”. Government

officials lacking business experience have little understanding of the varied and complex

needs of entrepreneurs (GEM Report, 2001:48).

RESEARCH METHODOLOGY AND DESIGN

Sekeran (2000:265) states that surveys are useful and powerful in finding answers to

research questions, but they can do more harm than good if not correctly targeted. The

research methodology for the study provided both primary and secondary data. The

primary data collected formed the investigation using a structured questionnaire. The

scope of the SMMEs concentration was delimited to the Kwa-Zulu province of South

Africa. The target population meeting the criteria was extracted from The Industrial

Council list of Clothing Firms and the 2000 Clofed (Clothing Federation) Handbook.

Initially, the probability sampling method using simple random sampling (SRS) was found

to be the most appropriate for the present study. The selection criteria adopted to form the

target population included the following:

Small businesses located in KwaZulu-Natal; and

Businesses whose employee composition was less than two hundred employees or

who stipulated owning less than two hundred sewing machines.

SAMPLE SELECTION AND DATA COLLECTION: Both the lists were composed of

large as well as small manufacturers. A screening procedure was used to eliminate those

firms who were not members of the group under study. The literature highlights various

probability and non-probability sampling methods, as well as randomisation using

numbers from tables (Bless and Higson-Smith, 1995; Melville and Goddard, 1996;

Welman and Kruger, 2001). For this study it was initially decided to draw numbers out of

a jar, using the simple random sampling technique. Mixing the numbered slips and

returning them between every selection ensured that every element in the sampling frame

had an equal chance of selection (Welman and Kruger, 2001; Cooper and Emory, 1993;

Melville and Goddard, 1996). According to Cooper and Schindler (2003:185) this serves

as an alternative to selecting a random sample with the aid of computer software, a table

of random numbers or a calculator with a random number generator. Care had to be taken

not to duplicate firms that appeared in both the lists. The Industrial Council list showed

that approximately 100 firms had ceased to exist. The final total of Clothing SMMEs in

the two lists was 109 firms (N=109). It was decided to use the survey method and target

the entire sample frame because of its small size. The precoded questionnaires were

initially mailed and constant follow ups with gentle reminders saw the collation of some

57 returns equating to a 52.29% response rate. The response rate seemed adequate to draw

meaningful inferences when compared to the results depicted in the following surveys:

The response rate of 29.6% in a study conducted by Sullivan and Kang (1999)

explains that this return rate is comparable with other published studies of apparel

manufacturers.

Wijewardena and Tibbis (1999) attribute the low response rate of 28.4% of their

study with the nature of small firms and the response usually associated with most

mail surveys.

For similar reasons an 18.3% response rate to an SMME study conducted in Kobe,

Japan (1995) was considered adequate (Wijewardena and Cooray, 1995).

ANALYSES OF THE DATA

Once the data were edited and cleaned they were captured on the computer by the

researcher for statistical analysis (Babbie and Halley, 1994). The questionnaires were

collated and numerically referenced to facilitate the process of data capturing. The

relevant statistical techniques were then applied to test the various hypotheses.

Descriptive statistics facilitates initial data analysis, but the researcher is also interested in

making statistical inferences about the population from the sample (Babbie, 1991;

Saunders, Lewis and Thornhill, 2000). Hence, the use of inferential statistics is introduced

to present the data in statistical format so that important patterns, relationships and

analysis become more meaningful (Bailey, 1994; Babbie and Halley, 1994).

The Microsoft Word and Excel programmes were used to present the graphics. For this

study the use of descriptive statistics as well as the less robust tools of non-parametric

tests were also used to analyse the empirical data.

KEY FINDINGS AND RESULTS

The statistical programme used for the analyses and presentation of data in this paper is

the Statistical Package for the Social Sciences (SPSS) Version 11.0 for Windows. This

section consists of descriptive statistics which uses frequency tables and display charts to

provide information on key demographic variables in the study. The nature of the data

accessed in this study was in a nominal and ordinal form. The descriptive statistics of the

sample profile and its characteristics facilitate integration with the more pertinent

findings of the research hypotheses. The analysis of the empirical findings shows strong

support for the hypotheses tested. Meaningful results are also conceptualised within the

context of the study. In order to enhance the quality of the research, significant trends

emerging in the data analysis are also highlighted. The following section uses inferential

statistics for the presentation and analyses of the empirical data. The analyses involved

the use of non-parametric tests, utilising chi-square and binomial methods where

applicable.

SKILLS TRAINING: There is a significant difference in perception towards skills

training provided by Government and the targeted growth of the SMME clothing sector.

Table 2 Provision of training support (n=57)

SMME Response

Frequency %

Yes 22 38.6

No 35 61.4

Total 57 100%

Table 2 reveals that 61.4% of the respondents were negative in the belief that government

had provided support with regard to skills training. Only 38.6% of the sample had

received training support. A binomial test produced a non-significant result (p=0.112)

for SMMEs who had receiving training support. These data may imply that SMMEs see

a role for government in facilitating and promoting provision of skills training. The

World Bank survey (2001:26) survey conducted by Chandra, Moorty, Nganou,

Rajaratnam and Schaefer (2001) shows that while around 40% of firms face difficulty in

finding skilled labour, less than 25% of firms engage in any form of training. Due to

resource constraints within SMMEs, it is not surprising that most firms perceive they are

not able to adequately respond to a skills shortage without some government assistance.

Government has to determine what role is most appropriate, and how best to ensure that

the gains from training efforts are realised quickly, and focused on efforts to achieve

faster growth at the SMME level. Rogerson’s (1999) study found that emerging

enterprises do most of their employee training in house but that 40% of established firms

used external courses linked to Training Boards. These Training Boards have since

ceased to exist and have been replaced by the Sector Education and Training Authorities

(SETAs). Martins and Tustin (1999) found that just over two-thirds of SMMEs in their

survey indicated that they needed training, of which management training is perceived as

most important, followed by book-keeping and marketing. The same survey pointed out

that, business advisors should visit owners/managers to help with implementation of

training. According to Autio and Klofsten, (1998) a gap often exists between the actual

business support delivered and how the firms themselves perceived this support.

MENTORING ASSISTANCE: There is a significant relationship between mentorship

assistance and the productive growth of SMMEs in the clothing sector.

Table 3 Provision of mentorship support (n=57)

SMME Response

Frequency %

Yes 9 15.8

No 48 84.2

Total 57 100%

Table 3 indicates that only 15.8% of the sample had received mentorship support. 84.2%

of the respondents did not receive mentorship support. A binomial test yielded a highly

significant result (p<0.001) for non-support. Many organisations have set up formal

mentoring programmes often as part of their affirmative action or orientation efforts. In

the case of SMMEs the mentor may provide coaching by suggesting work strategies,

which will result in productivity improvements. The KZN MAC previously (DUMAC)

advertises a Mentorship Programme to SMMEs (DUMAC News, 2001:7). The

newsletter indicates that the pool of experts available to them, are hands on and get

directly involved in the business. The net result is that the entrepreneur develops the

capacity to deal with business related challenges with more confidence. According to the

August 2001 statistics in the DUMAC newsletter, 23% assistance was offered to the

clothing and textile industries. This assistance is based on subsidised projects. Clients

are requested to fill in a subsidy matrix for which points are scored. Factors taken into

consideration are turnover, number of workers, new company etcetera. Based on the

points scored the KZN MAC will pay a percentage to the service provider and the client

will pay the balance. For example, if the KZN MAC pays 70% then the client has to pay

30%. Service providers offered by the KZN MAC to SMMEs are for productivity

improvement, marketing, human resources development, skills training, access to finance

and quality systems.

TARIFFS ON IMPORTED INPUTS: There is a significant relationship between duty

levels imposed on SMMEs and their ability to generate employment and growth. Textile

manufacturers are unable to meet the local demand of clothing manufacturers as noted in

Table 4. This inadequacy on the part of the textile mills forces clothing manufacturers to

import fabric inputs. 82.5% of the respondents in Table 4 agreed that the duty levels

have adversely affected the SMME clothing manufacturer. This yielded a highly

significant result (x²=62.842, df=2, p<0.001) for inefficiencies caused by duties resulting

in higher garment costs. By imposing high duties on fabric inputs, protection is offered

to the local textile mills and this will have the opposite effect on job creation in the

clothing firms.

Table 4 The detrimental effect of high duty levels on imported inputs (n=57)

Response to duty levels Frequency

%

Yes 47 82.5

No 8 14.0

CMT firm therefore not applicable 2 3.5

Total 57 100%

GOVERNMENT TENDER CONTRACTS: There is a significant relationship between

application rates for Government tender contracts by SMMEs and policy initiatives to

build capacity among SMMEs in the clothing sector. Table 5 reveals that only 3.5% of

sample respondents tendered for government contracts. A chi-square test pointed to a

highly significant result of (x²=49.281, df=1, p<0.001) for SMMEs that had not applied

for government contracts. Supporting SMMEs in the tendering process is the mandate of

Tender Advisory Centers (TACs). SMMEs in the World Bank Survey (2001:44)

indicated that increased contracts from government and large firms were needed for them

to expand their employment.

Table 5 Clothing SMMEs tendering for Government contracts (n=57)

SMMEs tendered for contracts Frequency %

Yes 2 3.5

No 55 96.5

Total 57 100%

Low application rates for tenders were also noted in the World Bank Survey (2001:42),

which were in contrast to the high importance that SMMEs attached to increased

government support for their growth through improved procurement policies. Only 5-6%

of SMMEs obtain business from government in the World Bank Survey (2001:44).

These data suggests that improved efforts to expand procurement to SMMEs and build

entrepreneurial capacity among SMMEs in the clothing sector for government tenders

should be accelerated. However, low application occurs perhaps because firms are either

not aware of the programs, or find the application process tedious, or because some (such

as post-apartheid or Black firms) may lack business expertise, or find inadequate

government support systems (World Bank Survey 2001:42). This suggests that

government promotion and procurement policies could be improved to boost growth in

the SMME level, as could efforts to promote networking and sub-contracting

arrangements between large firms and SMMEs. In this respect contracts given to large

firms could specify subcontracting to SMMEs.

CONCLUSION AND IMPLICATIONS

The findings arising from the empirical evidence have been contextualised within the

broader framework of the study. The findings clearly indicate that Government’s

intentions for SMMEs development as a vehicle for job creation have not materialised.

Programmes need to be rationalised and advertised to reach the SMME. Reducing the

administrative burden of compliance for established small firms will encourage

businesses to enter the formal sector. High priority areas needing attention as indicated

by respondents were access to finance, control of imports, trade union interference, cost

of raw materials and the quality of labour.

The implications of the foregoing for SMMEs in South Africa can be summarised as

follows:

• South Africa’s SMME sector is expected to fulfill a number of roles ranging

from poverty alleviation and employment creation to international

competitiveness. These are very different policy objectives and the policy

instruments introduced to meet these objectives can be equally different,

ranging from literacy training to skills training, from productivity

improvement to technological advice. Therefore, determining clear

government policies and goals is imperative to negate barriers for sustainable

SMME development and growth.

• After many years of isolation South Africa has rejoined the family of nations.

Commitments have been made by South Africa to the World Trade

Organisation that quantitative barriers be removed and tariffs be reduced.

Trade liberalisation and tariff reduction on ready-made apparel has impacted

on the growth of clothing SMMEs. While many firms are concerned and fear

for their future survival others are being proactive and taking the necessary

steps to reorganise, retrain and modernise production to meet international

standards. Numerous firms have indicated their desire to expand into

international markets to increase their market share. However, government

objectives are too broad and over ambitious. In this respect government

programmes need to be targeted to offer focussed support to assist in the

growth and development of these enterprises.

• The priority areas for accelerating SMME growth need to be identified for

government decision-makers if success is to be achieved. Survey results

indicate that the two major areas of concern for clothing SMMEs are access to

affordable finance and clothing imports. Following in close proximity, in

ranking order of concerns are: the trade union movement with its stricter

labour policies; duty levels on imported inputs; raw material costs; and the

quality of labour. According to the respondents of this study, lack of financial

assistance and legislation are seen to be the two most important factors

contributing to failure of clothing SMMEs. Evidence in this report indicates

that SMMEs have received minimal support from the Government to grow

their businesses. There is an urgent need to sustain the survival of SMMEs in

the long run so that they can make a meaningful contribution to economic to

economic growth. Narrowly targeted programmes such as the National

Manufacturing Advisory Centre programme tend to be more focused on

productivity improvement and are more successful. It is important that these

programmes remain targeted and do not come under pressure to deliver on

broader fronts, thus undermining the source of their original success.

• Empirical evidence suggests that insufficient demand for SMME products

(that is, market conditions); legal and illegal imports, labour and capital

market constraints were key reasons for a decrease in employment growth.

Shortage of skilled labour, labour legislation and labour market regulation

were seen as deterrents to employment creation. Lack of access to capital and

high interest rates to SMMEs were reasons for the diminishing growth of

SMMES. Evidence indicates that SMMEs would like Government to provide

cheaper financial assistance, increased government promotion of SMMEs,

followed by more contracts from government and large business.

FUTURE RESEARCH DIRECTIONS

Future research can also examine the extent of procurement activities offered to SMMEs

to date. Decisions with regard to resource allocation and the commitment of Government

to SMME development in South Africa could also be further scrutinised. It would also be

useful to conduct a parallel study of SMMEs in the footwear industry. This industry is

also prone to the volatility of exchange rates, dumping, tariffs and duty as well as

government support interventions for encouraging sustainable development of SMMEs.

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