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Constraints to Growth and Employment in South Africa

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					                                          DISCUSSION PAPER




              Constraints to
         Growth and Employment
             in South Africa
                            REPORT NO.2:
  EVIDENCE FROM THE SMALL, MEDIUM AND MICRO ENTERPRISE FIRM SURVEY


                                                   Vandana Chandra
                                                        Lalita Moorty
                                                 Jean-Pascal Nganou
                                                    Bala Rajaratnam
                                                    Kendall Schaefer



                                                           June 2001



THE WORLD BANK                          INFORMAL DISCUSSION PAPERS
SOUTHERN AFRICA                                  ON ASPECTS OF THE
DEPARTMENT                                ECONOMY OF SOUTH AFRICA
                     PREVIOUS WORLD BANK PAPERS ON SOUTH AFRICA


Previously published in the World Bank series of informal discussion papers on South Africa:

Levy, B. January 1992. "How Can South African Manufacturing Efficiently Create Employment? An analysis of the
Impact of Trade and Industrial Policy".

Kahn, B., Abdel, S. and Walton, M. May 1992. "South Africa: Macroeconomic Issues for the Transition".

Fallon, P. October 1992. "An Analysis of Employment and Wage Behavior in South Africa".

Southern Africa Department, May 1993. "An Economic Perspective of South Africa".

Belli, P., Finger, F., Ballivian A., August 1993. "South Africa" A Review of Trade Policies".

Riley, T., November 1993. "Characteristics of and Constraints Facing Black Businesses in South Africa: Survey
Results".

Southern Africa Department, February 1994. "South African Agriculture: Structure, Performance and Options for the
Future".

Fallon, P., Pereira da Silva, L., April 1994. "South Africa: Economic Performance and Policies".

Southern Africa Department, April 1994. "South Africa: Financing the Metropolitan Areas of South Africa".

Southern Africa Department, June 1994. "Reducing Poverty in South Africa".

Southern Africa Department, December 1995. "South Africa: Natural Resource Issues in Environmental Policy".

Southern Africa Department, December 1995. "South Africa: Education Sector Strategic Issues and Policy Options".

Levy, B., February 1996. "Southern Africa: The Business environment for Industrial Small and Medium Enterprises".

Fallon, P., Lucas, R., November 1998 (revised). “South Africa Labor Markets Adjustment and Inequalities”.

Tsikata, Yvonne M., July 1999. ”Liberalization and Trade Performance in South Africa”.

Chandra, V., Moorty, L.,Rajaratnam, B., Schaefer, K., June 2001. “ Constraints to Growth and Employment in South
Africa, Report No. 1: Statistics from the Large Manufacturing Firm Survey”.


In addition, a number of technical and seminar papers prepared by World Bank staff and South African counterparts
in key sectors have been discussed in the country.
     CONSTRAINT S TO GROWTH AND EMPLOYMENT IN
                    SOUTH AFRICA

   REPORT NO. 2: EVIDENCE FROM THE S MALL, M EDIUM AND M ICRO ENTERPRISE FIRM
                                     SURVEY




                                      Vandana Chandra
                                        Lalita Moorty
                                     Jean-Pascal Nganou
                                       Bala Rajaratnam
                                       Kendall Schaefer




The findings, interpretations and conclusions expressed in this report are entirely those of the
authors. They do not necessarily represent the views of the World Bank Group, its Executive
Directors, or the countries that they represent and should not be attributed to them.
                                                            CONTENTS
Foreword......................................................................................................................................... i

Executive Summary ..................................................................................................................... iii

1.     Introduction........................................................................................................................... 1
       Motivation and Objectives...................................................................................................... 1
       Central Themes ....................................................................................................................... 3
       Outline..................................................................................................................................... 4

2.     Demographics ........................................................................................................................ 5
       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 Turnover............................................................................................................... 16
       Investment Trends................................................................................................................. 18
       Conditions for Expansion ..................................................................................................... 19
         Necessary Conditions for Creating 10 Additional Jobs .................................................... 19
       What Would SMMEs Like Government 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 Constraints.......................................................................................................... 33
       Sources of Capital................................................................................................................. 33
       Low Bank Borrowing: Limited 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................................................................................. 52
       Subcontracting ...................................................................................................................... 52
       International Trade ................................................................................................................ 53

9.     Central Theme s 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 firm 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 firms 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.................................................................... 11
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 firms 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 formal 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 SMME promotion programs ................................................. 40
Chart 6.2    Awareness and use of other SMME 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    SMMEs 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 SMME firms ........................................................................... 31
Table 5.1    SMME use of formal loans in last five years.................................................................. 35
Table 5.2    Reasons for not undertaking planned investment in 1998................................................ 36
Table 6.1    SMME programs and the sponsoring agency................................................................. 39
Table 6.2    SMMEs that applied and were awarded government contracts in 1998-99 ....................... 42
Table 6.3    Number of licenses needed for operations ..................................................................... 43
Table 6.4    SMME ratings of various government departments ........................................................ 44
Table 6.5    How the recent tax cut will affect SMME after-tax profits .............................................. 45
Table 7.1    Rand expenditure on security guards and devices in 1998............................................... 51
Table 8.1    Share of exports and exporters in main regional markets ................................................ 53
Table 8.2    SMME top competitors in export markets ..................................................................... 54
Table 8.3    Number and share of SMMEs that use export promotion programs ................................. 54
Table 8.4    SMMEs complaining about customs clearing procedures ............................................... 55
Table A1.1   SMME sample by sector and size-class......................................................................... 63
Table A1.2   PDI ownership in SMMEs–number & percent owned, relationship to age, 1999 .............. 63
Table A1.3   Sectoral breakdown of SMMEs within racial groups (percent), 1999............................... 64
Table A1.4   SMME sample by legal status (percent) ........................................................................ 64
Table A1.5   Racial distribution of sectors across SMMEs, 1999 ........................................................ 64
Table A2.1   Rates of employment growth in new entrants, 1998-99................................................... 65
Table A2.2   Breakdown of new entrants by race and sector (frequencies), 1999 ................................. 65
Table A2.3    Investment in new machinery and equipment, 1998 ....................................................... 65
Table A2.4    Tracking employment for 116 SMMEs born in 1998...................................................... 66
Table A2.5    Investment in new machinery and equipment by sector .................................................. 66
Table A2.6    Changes in employment, 1997-98 and 1998-99.............................................................. 67
Table A2.7    Necessary conditions to employ 10 more workers by size class....................................... 67
Table A2.8    Necessary conditions to employ 10 more workers by sector............................................ 68
Table A2.9    Necessary condition to employ 10 more workers by race................................................ 68
Table A2.10   SMME firm births and deaths – international evidence................................................... 69
Table A2.11   Survival rates for U.S. small firms 1978-1986 ............................................................... 72
Table A2.12   Survival rates for U.S. small firms by sector, 1976-1986 ................................................ 72
Table A2.13   Firm births and deaths in Japan..................................................................................... 73
Table A2.14   Survival Rates in OECD countries ................................................................................ 73
Table A2.15   Firm births and deaths in Taiwan.................................................................................. 73
Table A2.16   Firm births and deaths in developing countries .............................................................. 74
Table A3.1    How many unions SMMEs work with by size ............................................................... 75
Table A3.2    How many unions SMMEs work with by sector ............................................................ 75
Table A3.3    Level at which collective agreements are reached.......................................................... 75
Table A3.4    Implicit costs of doing business with labor .................................................................... 76
Table A3.5    Impact of labor regulations ........................................................................................... 77
Table A3.6    Reasons for subcontracting........................................................................................... 77
Table A4.1    Sources of investment capital by firm size, 1998-99....................................................... 78
Table A4.2    Sources of investment capital by age, 1998-99............................................................... 78
Table A4.3    Sources of investment capital by race, 1998-99.............................................................. 79
Table A4.4    Sources of working capital, 1998-99 ............................................................................. 80
Table A4.5    Sources of working capital, 1998-99 by size-class.......................................................... 80
Table A4.6    Sources of working capital, 1998-99 by age................................................................... 80
Table A5.1    Percentage of SMME exporters as a share of total SMMEs............................................. 81
Table A5.2    Exports as a percent of annual sales estimates by size .................................................... 81
Table A5.3    Exports as a percent of annual sales estimates by race .................................................... 81
Table A5.4    Exports as a percent of annual sales estimates................................................................ 82
Table A5.5    Main countries of destination for exports....................................................................... 82
Table A5.6    Awareness to exports incentives programs .................................................................... 82




  This report was prepared by Vandana Chandra (Task Manager), Lalita Moorty, Jean-Pascal Nganou, Bala
  Rajaratnam, and Kendall Schaefer. We are indebted to Junaid Ahmad (AFCO1) and Ketso Gordhan (City
  Manager, GJMC) for initiating the LED Project. We thank Jeff Lewis and Hassan Zaman (AFTM1) for
  reviewing the document. In South Africa, we received financial and logistical support from M. Maganlal, R.
  Seedat, and B. Shibambu (Strategic Planning Unit, GJMC). A special note of thanks to Professor J. Martins,
  and D. Tustin (BMR) for expert survey management and to the survey teams in South Africa who were drawn
  from RAU, University of Pretoria, UNISA, Wits, Vista and the BMR staff. We also thank B. Smit (BER), I.
  Macun (DOL), C. Rogerson, R. Tomlinson, and hosts and participants of seminars held at GJMC, DTI,
  Durban Metro Council, University of Cape Town, DPRU, University of Stellenbosch and Urban Forum
  (Washington D.C). The views expressed here do not reflect those of the World Bank or its members and we
  accept responsibility for any remaining errors and omissions.
                                           FOREWORD
In an urbanized context like South Africa, the role of cities in economic growth and poverty reduction is
of national interest. In South Africa, over 80 percent of national GDP is contributed by the urban sector
and about 60 percent of the population resides in urban conurbation. Nowhere is the urban economic and
demographic concentration more visible than in South Africa’s large metropolitan areas – Cape Town,
Durban, Pretoria, East Rand and Johannesburg – which together account for 35 percent of the national
economic pie and an equally large portion of the national population. In South Africa, therefore, the cities
and the nation share a destiny that is intertwined. The policy question that naturally arises in this context
is what are the mechanisms through which a metropolitan center can contribute to national targets of
growth and poverty reduction?

       Traditionally, the answer has focused on mechanisms of fiscal stability, provision of local
infrastructure and market efficiency. To begin with, a city capable of raising its own revenues and
financing its own needs, contributes to the national objective of macro fiscal stability, a prerequisite for
economic growth and poverty reduction. Similarly, a city capable of providing municipal infrastructure
                                                                  h
in an efficient and equitable manner contributes directly to t e national economy. Households and
businesses receiving reliable and affordable services can in turn meet the consumption and production
needs of the economy. In this context, cities that select innovative partnerships in the financing and
             n
delivery of i frastructure by involving public -private-and community organizations act as national pilots
of innovation. Such partnerships are often an important source of employment generation and direct
foreign investment. Finally, by making sure that urban markets for land and transport are not impeded by
local policies, cities establish the micro foundations for economic growth by permitting, for example,
housing to be delivered more effectively or by facilitating the mobility of households.

       In taking forward the iGoli 2010 framework, Johannesburg has adapted and innovated on the
global best practices of fiscal management, infrastructure delivery and making basic municipal markets
work. The iGoli framework for better economic management of cities is thus Johannesburg’s response to
the divisions and dysfunction of the apartheid city. IGoli is also Johannesburg’s contribution to national
goals of economic growth and poverty.

       But, in formulating the IGoli plan, the Johannesburg leadership also asked whether in addition to
the routes of fiscal sustainability, infrastructure provision, and efficient markets, the city could directly
influence employment generation. Cognizant of the trap of trying to pick “winners and losers” in the
economic sphere, Council is seek ing to assess its potential role in employment generation by
understanding the urban economy of Johannesburg and its dynamics. The underlying philosophy of the
approach was simple. Systematic and complete information was needed to gain an understanding of the
pulse of Johannesburg’s economy and, in particular, to assess the critical barriers to the growth of formal
and informal economic nodes. Only this form of an information base – comprehensive and in depth in
nature -- would allow the decision-makers to identify the areas of policy intervention.

      Equally important, the information system would also allow the policy makers to understand
whether the impediments to growth and employment generation and the possible policy solutions were
national or local in nature. In other words it would delineate the roles of national and local governments
in meeting the challenges of economic growth and employment generation. This is an important point.
Too often it has been assumed that macro instruments of fiscal and monetary control are the main levers
of economic growth. Yet, in reality, these are necessary but not sufficient policy instruments.
Intervention at the micro level in the operation of labor, land, and capital markets may also be needed in
conjunction with macro level instruments. With cities playing such a national role in South Africa’s



                                                      i
economic structure, economic analysis at the city level is therefore a pre-requisite to understanding the
microeconomics of macro growth strategies. In addition, with Johannesburg representing 42 percent of
national manufacturing firms, the analysis even at the Johannesburg level by itself will provide important
insights for national level policy makers.

       The comprehensive economic information base was established under the joint partnership of a
team comprising of staff members from the City of Johannesburg and the World Bank. The task team
leader from the City’s side was Mr. Rasheed Seedat and from the World Bank side, Dr. Vandana
Chandra. Primarily drawing on local expertise and in collaboration with the Bureau of Market Research,
UNISA, the study undertook six primary surveys. To its credit, the team trained local students from all
corners of Johannesburg including Soweto, Alex, and the Northern Suburbs. These students undertook
the survey under supervision of senior staff from the World Bank and BMR. The growth of local
capacity in the area of urban economic surveying was itself a very valuable contribution of the exercise.
As a result, the work was completed in record time – design, implementation of the surveys and data
cleaning all happened in less than 12 months – and at record cost savings.

       The information system will also serve as the base of the city’s “Economic Intelligence Unit.”
Council was cognizant that information of the form being collected in the surveys will need to be updated
periodically, analyzed continuously, and the assessments will need to be fed into the policy process in real
time. The development of such institutional capacity was also an important achievement of the survey
process. The data is available to the public through the City’s website and will be updated automatically
as new data is entered over time. Council’s intention is to honor its commitment to transparency and to
invite debate and analysis of its policies based on actual data collected in real time.

       Finally, through the surveys a methodology was devised to enable Council to track the impact of its
expenditure patterns on access to services by the poor. Poverty monitoring is analytically and logistically
a very demanding task. Yet, for policy makers dedicated to the improvement of the welfare of the poor –
a commitment that drives the Council’s policy process – it was important that ultimately the City is
capable of assessing the impact of its polices on the access by the poor of municipal services. But, such
tracking would have to be undertaken in real time to inform the policy process regularly. Reliance on
annual household surveys did not seem to respond to this need. The team rose to this challenge and has
contributed a process that is analytically stringent and logistically manageable and will support the
Council’s objective of assessing access to services.

      Ultimately such a comprehensive and ambitious task could not have been undertaken without the
collaboration and support of many organizations. We would like to thank Agence Fraincaise
Development Propario (AFD) and Inca-French Fund for financial support, NBI and JCCI for logistical
support with surveys and most importantly, CEOs of firms, the real participants of the survey, for their
time and dedication to their City.

Ketso Gordhan, City Manager,
Greater Johannesburg Metropolitan Council, South Africa

Junaid Ahmad, Deputy Resident Representative
World Bank Resident Mission Office, South Africa

August 2000




                                                     ii
                             EXECUTIVE SUMMARY
The main findings of the 1999 GJMC-World Bank SMME survey cover the responses of
approximately 800 SMME owners across 8 manufacturing and service sectors. These are
summarized below.

      Who is the Typical SMME Entrepreneur?

The SMME cluster is frequently perceived as the solution for South Africa’s long term
unemployment and poverty problem. However, the Survey shows that over 70 percent of the
SMME owners had formal sector work experience and chose to start their own firm when they
perceived a lucrative business opportunity; another 12 percent became SMME owners when they
joined the family business, and about 5 percent came with similar business experience from
another country. Less than 5 percent were unemployed and tired of searching for their first job
when they started their own SMMEs. Since the majority of the unemployed today are comprised
of either young entrants who have never held a first job, or the long-term unemplo yed with non-
transferable skills, this entrepreneurship pattern suggests that the SMME cluster may not provide
such a strong engine of job creation for the poor and unemployed.

      Employment Creation and Growth Within the SMME Cluster

Raw employment statistics from the Survey are deceptive at first glance. They suggest that
between 1997 and 1999, employment grew by 23 percent, defying trends in the overall
manufacturing sector during the same period. However, much of this growth in aggregate
employment occurs because of the birth of new firms within the period. Closer inspection of the
firms that were established in 1997 or earlier (73 percent of the sample) suggests a different
picture. For these firms, during 1997-99, there was job creation in 41 percent of these firms (in
retail, tourism and IT sectors), job-losses in 27 percent, and no change in employment in the
remaining 32 percent. Overall, net employment in these existing firms declined by 7 percent
during 1997-99.

      Although between 26-30 percent of firms invested in excess of 10 percent of their capital
stock during 1998-99, only 13 percent of SMME firms both invested and increased employment
by more than 5 percent. SMME owners were asked the main reasons for not undertaking planned
investments in 1998-99, and the most important factors that would cause them to increase
employment. The primary reason for slow investment and employment growth was identified as
“insufficient demand” for their products/services, thereby ranking market conditions as more
important than labor or capital market constraints. “No need/desire,” “lack of access to capital”
and “high interest rates” were the other main reasons for low investment. Similarly, in listing the
main obstacles to increasing employment, 80 percent of firms “insufficient demand” as the most
important constraint. Next most important for 40–45 percent of firms were three factors ranked
equally: “fall in real interest rates”, “increased business visibility” and “increased government
promotion of SMMEs”, followed by “more contracts from government/large business.”




                                                iii
      Other Critical Constraints: Shortage of Skills

African labor constitutes the majority of SMME semi-skilled employment. However, whites
dominate skilled occupations and women are still under-represented. Despite the presence of
African labor in semi-skilled occupations, the legacy of apartheid and its impact on skills
development suggests that SMMEs face an important skills shortage.

       The most critical labor market issue that emerges from this Surve y is the shortage of skills
and the steps being taken to address it. 30–45 percent of SMMEs reported a skills shortage in
1999, when the majority of firms were not expanding. However, only about 24–30 percent of
firms with over 5 employees, and less than 10 percent of firms with less than 5 employees
undertook formal skills training in 1998. For those that trained, the median amounts invested in
training per employee decreased sharply from R1700 per annum for the micro firms to R938 and
R400 per annum for the larger ‘very small’ and ‘small’ SMMEs. The higher expenditures
undertaken by micro firms reflect the high fixed costs of training. The amount spent on training
is generally less than the amount per employee spent on crime prevention. Low magnitude of
training by firms could result from resource constraints and/or lack of awareness to training
programs. In fact, SMMEs do report that they would like national authorities to improve
education and training. So firms could be treating skills training as a public good and looking to
government for assistance.

       Survey results also suggest that labor regulations are not a sizable constraint for most
SMMEs, particularly micro firms. SMMEs in the IT and tourism sectors appear to be the least
affected by these regulations. When small SMMEs do incur higher implicit costs of doing
business with labor, they respond in ways quite similar to larger firms with over 50 employees:
they create fewer jobs, and the jobs they do create are more likely to be non-permanent.
Nevertheless, it would appear that most critical labor market problem for SMMEs remains the
skills scarcity, rather than the degree of regulation. If skills development can be effectively
promoted, the SMME cluster may be able to move towards faster growth and job creation.

      Inadequate Access Or High Cost of Capital

The most critical issues in the capital market are related to access to credit and its cost. Private
savings consisting of family and individual savings and retained earnings finance the majority of
firms’ investment capital. An examination of the survey data revealed that SMMEs are not
severely constrained by lack of access to bank loans. However, where access is an issue, it is
related to the firm size, age, and race of the owner.

      In addition to the issue of access to capital, high interest rates were also noted as a
constraint. Although the share of bank loans used to finance start- up or working capital is low
compared to the share of savings, approximately one-half of firms surveyed did report using
formal credit in the last five years to meet their business needs. Firms that borrowed from banks
confirmed that high interest rates had a negative effect on their business, although 24 percent of
firms reported that the recent decline in interest rates had made little difference to their business.
While this suggests that interest rates may still be too high, it also indicates that the cost of
capital is not the sole factor inhibiting investment and growth in SMMEs.




                                                 iv
      Insufficient Government Support

SMME firms perceive government to have a vital role in their development, and identified a
number of interventions government can take to increase SMME competitiveness, marketability,
and visibility. First, SMME firms want improved support systems. The support programs are of
two types: DTI programs and programs administered by its apex institutions, Khula and Ntsika.
The Survey indicates that awareness of DTI programs is about 7-34 percent; usage is even lower
in the range of half percent for many progr ams. No more than 20 percent of SMMEs were aware
of Khula and Ntsika programs, with the exception of the quality standards program offered by
the South African Bureau of Standards. Less than 10 percent of firms that have heard of these
programs have used them.

       Government support systems also exist in the form of export promotion programs to
facilitate entry into international trade. The survey reveals that the 3 most well-known programs
were tax exemptions, export credit guarantees and forward foreign exchange cover, all three
indicating that direct monetary returns were preferred to other types of export assistance. With
the exception of these three programs, no more than 4 percent of SMME exporters used any of
the numerous other programs in place. Low awareness and even lower usage of the different
programs raises the issue of whether it might not be more efficient to rationalize them to create
more effective programs with a higher usage.

       In addition to promotion and procurement, SMMEs were asked to prioritize government
policies that would facilitate their growth. The two most important actions for local government
were identified as safety and security on the streets and infrastructure development. The two
most important actions for national government were policy stability and following closely
behind, four other actions: lower interest rates, prioritize education and training, promote
efficient and flexible wages, and promote SMME participation in publicly provided service.

      Opportunities and Challenges

Greater Johannesburg appeared to be a popular location for the majority of the existing investors
in 1998-99: 87 percent of the firms indicated that they would prefer to expand within Greater
Johannesburg. This underscores the advantages and opportunities that the local authorities enjoy
in terms of attracting more investors. Firms’ choice of location indicated that 85 percent enjoyed
close proximity to product and input markets; 74 to 86 percent of the SMMEs reported that
reliability of water supply, electric supply, and telecommunication services was either fair or
excellent. However, on costing, between 25-50 percent of firms flagged their dissatisfaction
with the cost of telecommunication services, electricity, and water. All three ratings indicate that
pricing is perceived as more of a problem than reliability.

      Additional challenges for local authorities emerged in the incidence and costs of crime
prevention for SMMEs in Greater Johannesburg. 61 percent of the firms indicated that they were
victims of crime in 1998-99. In general, firms spent R600-700 per employee on crime
prevention in 1998-99 with the costs decreasing with firm size. Expenditure on crime prevention
is higher than the expenditures on skills training.




                                                 v
     The Role of Race

The Survey indicates that race, size and age were important markers of SMME development in
the 1990s. For example, the smallest micro firms display the usual handicaps or advantages
found in most countries, such as weaker access to credit or being subject to fewer labor
regulations. Similarly, post-apartheid firms display the handicaps of younger firms in other
countries such as poorer export penetration. However, the race of the SMME owner appears to
capture a unique feature of the South African business environment, reflecting the handicaps that
categories of entrepreneurs have regardless of size, age or location. Black-owned SMMEs appear
the most disadvantaged – typically, they experience all drawbacks of micro and post-apartheid
firms (but to a greater extent), and possess few of their advantages. For instance, about 50
percent of black SMMEs could not borrow from a bank because of lack of collateral, the right
credit history or some similar reason.

      There are a few encouraging trends revealed during 1998-99 (altho ugh apparent trends in
the data must be interpreted with care). First, the share of black entrepreneurs among new
entrants rose to 9 percent, up from 6 or 7 percent in the full sample that includes older SMMEs.
Second, in 1999, when the overall economy was sluggish, the share of black SMMEs that
increased investment and employment above the critical minimum shot up from 15 percent in
1998 to over 30 percent. Black SMMEs also appeared to have more optimistic expansion plans
than most other groups. But black SMMEs were also the only category that assigned the number
one policy priority to education and training, a fact that is consistent with the low skills base
among blacks, and the limited share of black SMME owners in general.




                                                vi
                                       1.     INTRODUCTION

                                       M OTIVATION AND OBJECTIVES

This report evolved out of a partnership between the City of Greater Johannesburg and the World
Bank during 1999-00 on the theme of local economic development (LED). It focuses on formal
small, medium, and micro enterprises (SMMEs) and is the second in a series of reports 1 on local
economic growth, job creation and poverty reduction. In this report, results are presented from
the 1999 Greater Johannesburg Metropolitan Council (GJMC)-World Bank SMME survey of
firms with less than 50 employees interviewed in the Greater Johannesburg metropolitan area
(GJMA). Many of these results have wider implications for the larger South African economy.

       Macroeconomic performance in South Africa during the 1990s has been disappointing.
Since 1996, in spite of a strong commitment to sound macroeconomic policy, the anticipated
surge in private investment has not occurred, and economic growth has remained slow. Job
creation was elusive, and the reason for continuing formal sector job losses in manufacturing and
other industrial sectors throughout the 1990s remains unclear. While additional fine-tuning of
existing macroeconomic policies might produce limited additional growth, it is increasingly
                                                                         o
obvious that such efforts need to be complemented with measures t address the structural
constraints to investment and employment creation.

       Structural factors include the prominence of the SMME firm tier, inter- industry linkages,
spatial location of markets, shortages of skilled labor, access to capital markets, insufficient
infrastructure, etc. In the current South African economic context, these factors are viewed as
perhaps more important than the broader price-related macroeconomic constraints. The
motivation for this report, and the broader process of studying LED, is rooted in the need to
understand the structural factors that constrain growth, job creation, and hence poverty reduction
at the level of the South African firm. 2 Alternatively stated, the report uses firm survey results to
determine the extent to which micro-evidence from SMME firms can explain some of the
existing macroeconomic trends.




1
  Other surveys focused on large manufacturing firms, large service sector firms, informal sector firms, informal
households, training and credit providers and production-level workers in GJMA. The large firm survey results are
presented in Chandra, Moorty, Rajaratnam, and Schaefer (2001).
2
  Since there is a direct link between job creation and sustained poverty reduction, the emphasis in this report is on
factors and policies that bear directly on SMME job creation and that, through the channel of employment creation,
affect poverty. Other channels of poverty reduction include job creation through the growth of large firms, the
informal sector, improved skills training, credit and better service delivery.


                                                          1
                                  Box 1.1 Macroeconomic background

 South Africa's post-apartheid government faced the challenge of promoting growth and employment
 while ensuring the country’s transition in an environment of macroeconomic stability. Seven years
 later, the government's economic policies have achieved mixed results. Table 1.1 summarizes key
 economic trends. Declining fiscal deficits, low and falling external deficits, and the lowest inflation in
 decades are among the macroeconomic success stories. In the last several years, the government has
 taken steps to address other macroeconomic concerns. In particular, bank-lending rates have been
 brought down to a current level of 14.5 percent (they averaged 20 percent from 1996-98).

 Table 1.1 Key economic indicators
                                              1994       1995   1996     1997     1998      1999     2000

 GDP [growth, percent]                         3.2       3.1     4.2      2.5      0.7       1.9      3.1
 Non-agricultural private sector employment
                                              -0.9       0.5     -2.6     -2.5     -4.8     -1.2     -2.7*
 [growth, percent]
 Exports, GNFS [percent of GDP]               22.2       23.0    24.5     24.6     25.9     25.9     29.1
 Merchandise exports
                                              14.5       15.8    16.8     17.3     18.4     18.9     21.9
 [net of gold, percent of GDP]
 Merchandise exports
                                              19.6       23.9    20.0     13.6     14.6     11.4     27.1
 [net of gold, growth in current Rand mls.]
 Gross fixed capital formation by private
                                              11.1       11.6    11.7     11.8     11.3     10.5     10.7
 business enterprises [percent of GDP]
 CPI [growth, percent]                         9.0       8.6     7.4      8.6      6.9       5.2      5.3
 Interest rate [lending rate]                 15.6       17.9    19.5     20.0     21.8     18.0     14.5
 Exchange rate [R/$, end-of-period]            3.5        3.6     4.7      4.9      5.9      6.2       7.6
 Current account balance [percent of GDP]      0.1       -1.5    -1.3     -1.5     -1.8     -0.4      -0.3
 Source: South African Reserve Bank
      *First three quarters

 Despite various Government initiatives, sustained economic growth has not ensued. Of concern is the
 lackluster growth (averaging 2.7 percent during 1994-00) which, combined with tight fiscal and
 monetary policies, has resulted in job losses. While overall employment in the non-agricultural sectors
 declined by 6 percent, the private sector witnessed a 15 percent reduction in jobs during 1994-00.
 Gross fixed capital formation by private business enterprises fell by 3.6 percent in 1999. The sharp
 Rand depreciation in 1996 and again in 1998 did not result in sustained export growth. Formal sector
 jobs continue to be shed, especially in manufacturing and mining.


      The area surveyed in this report covered GJMA in the province of Gauteng. Given that
GJMA is South Africa’s largest industrial area, and contains the largest black townships, a study
of GJMA’s SMMEs is useful for understanding local economic development in South Africa.
Further, research by the Department of Trade and Industry (DTI) suggests that Gauteng has the
highest density of SMME firms, accounting for 34 percent of the national total (DTI, 1997). In
light of the South African economy’s level of urbanization, and the fact that Johannesburg
represents an integral part of South Africa’s industrial sector, lessons from the Johannesburg
LED pilot are likely to be applicable to South Africa’s other metropolitan areas and the broader
national economy.



                                                     2
      As an integral output of the LED effort, the GJMC plans to use the SMME survey data to
establish a local economic development information unit (EIU). 3 As part of the GJMC - World
Bank research project, the SMME survey report will facilitate policy interventions permitting
Johannesburg to compete for foreign capital and jobs, not only with South Africa’s other
metropolitan areas, but also with other cities in the global marketplace.

      Finally, in the absence of any recent sources of statistical information on Johannesburg’s
economy, it was necessary to engage in surveys that generated data for the study. Since
Johannesburg was the pilot, the surveys were designed to be replicable in other metros. The
analysis in this report is based on the 1999 SMME firm survey and yields information reflecting
the perceptions of firm entrepreneurs as well as hard data from the firms. Since time series data
is not available, the scope of the report is limited to the recent past. However, because an urban
economy is inherently dynamic, it is hoped that future studies will encourage tracking of key
economic indicators and updates of the baseline data.

                                           CENTRAL THEMES

This report identifies several themes that cover both macroeconomic constraints, as well as
structural factors. The policy implications related to perceived constraints were elicited through
several lines of inquiry. First, firm owners were directly asked to list what local and national
government could do to facilitate their growth. Second, available government programs for
SMME development were listed and firm owners were asked to identify which ones they were
aware of and used, how helpful they had been, and how relevant they found them to be. Third, in
the context of macro price (interest and exchange rate) variables, firm owners were asked to
identify how related policy changes had affected their operations. Fourth, possible areas for
government action are identified as firm owners rate location-specific variables such as
infrastructure and service delivery, crime and its costs to firms, labor regulations, etc.

      One of the first themes is the issue of how investment and employment growth have
performed over the last three years in the set of 800 SMMEs surveyed. Closer analysis reveals
how the behavior of firms that have existed for three or more years differs from that of new
entrants. In light of the rapid turnover among SMMEs, this issue is critical in suggesting the
importance of policy actions that nurture existing and struggling SMMEs rather than just
promoting the birth of new ones. Another theme examines the characteristics of SMMEs that
have undergone sustained growth in both investment and employment in recent years. These
results suggest that the capacity of the SMME sector to become the engine of growth and job
creation in South Africa may be limited.

      Another theme pursues issues of skills scarcity, firm training and whether recent labor
regulations constrain SMME growth. Patterns of recruitment are also examined. The
characteristics of the “typical” SMME entrepreneur are analyzed, revealing that the majority of
firm owners previously had a formal sector job and joined the SMME sector because they
perceived a more lucrative opportunity for profits.


3
  Creation of a metropolitan EIU makes sense against the backdrop of South Africa’s move towards fiscal and
financial decentralization and Johannesburg’s national leadership in city restructuring.


                                                     3
       Capital market related themes center on two main issues: access to capital and its cost.
The important role attributed to aggregate demand in determining the need for credit suggests
that interest rate policies alone are unlikely to provide powerful incentives for SMME growth.

       An analysis of the local environment points to high crime and fairly good quality
infrastructure and services, and also reveals the opportunities and challenges that the local
government faces. Sitting in one of the prime locations of South Africa, the local authorities of
GJMC face the challenge of bringing crime under control to exploit their locational advantage in
attracting new investors.

      Race, age and size variables run throughout the report as important markers, underscoring
the fact that South Africa’s apartheid heritage cannot be overlooked in the Government’s effort
to promote the SMME sector. Race appears to be particularly critical from the perspective of
inequality and poverty reduction.

                                             O UTLINE

Chapter 2 continues with a discussion on firm demographics for the 800 SMME firms surveyed.
Characteristics such as age, race, size, and legal status of the firm are presented along with a
brief description of the entrepreneurs’ motivations for starting their SMME.

       Chapter 3 provides information on the degree to which firms in this survey have been
expanding or contracting employment and investment levels, followed by a discussion of factors
limiting further expansion. This section of the report also contains ratings indicating the policies
SMME firms would like local and national government to implement or improve.

       The remaining chapters contain more detailed analyses of each of the main constraints
identified. Chapter 4 discusses the skills shortage as well as the degree to which SMME firms
are hindered by inflexible labor arrangements. Chapter 5 analyzes the capital constraint, both
with regard to access and cost. Chapter 6 illustrates the insufficient progress made by
government promotion and procurement programs.              Chapter 7 discusses the business
environment within which SMME firms must operate, paying particular attention to location
ratings and crime. Finally, Chapter 8 evaluates the extent to which the SMME tier is linked to
the international economy.




                                                 4
                                         2.     DEMOGRAPHICS
The SMME survey covers 792 4 firms across 8 sectors in Johannesburg. With approximately 100
firms each in 4 manufacturing (clothing and garments, metals and metal products, furniture, and
food and beverages) and 4 service sectors (tourism, construction, retail, and information
technology), the survey is designed to permit sector- level analysis. 5 All surveyed firms are
registered to pay VAT and vary in size from 1 to 49 employees, revealing ample heterogeneity
across each sector. Since firm behavior may vary by firm size, firms are disaggregated further
into the following categories: micro or size 1 (1 – 5 employees), very small or size 2 (6-20
employees) and small or size 3 (21 – 49 employees). 6 The distribution of firms across these size-
classes is also consistent with the limited available data on the national distribution: around one-
half very small firms (size 2), and one-quarter each of micro (size 1) and small (size 3) firms.

                     Table 2.1 SMME Sample by sector and employme nt size -class

                                         Number of          Sectoral         Micro         Very small    Small
                                           firms             share          (Size 1)         (Size 2)   (Size 3)
                                        interviewed           (%)             (%)              (%)        (%)
Clothing and Garments                        98                12             21.4            40.8        37.8
Metals and Metal Products                    93                12             28.0            50.5        21.5
Furniture                                    92                12             15.2            51.1        33.7
Food and Beverages                          115                15             15.7            62.6        21.7
Tourism                                      92                12             26.1            56.5        17.4
Construction                                 92                12             21.7            48.9        29.3
Retail                                      116                15             40.5            39.7        19.8
Information Technology                       91                12             35.2            48.4        16.5
Total                                       789               100             25.5            49.9        24.6

      In terms of capital, the sample reveals that 63 percent of SMMEs have a replacement value
of their capital stock under R0.5 million, 16 percent fall in the R0.5–1.0 million category,
another 15 percent in the R1-5 million category, and 3 percent over R5 million. About 1 percent
could not answer this question. Across sectors, between 60-80 percent of SMMEs in all but
clothing and garments, metals and furniture sectors fall in the R50,000 – 500,000 range; no more
than 12 percent of firms in metals and 6 percent in clothing have a replacement value in excess
of R5 million. In all other sectors, the share of firms in this category is less than 3 percent. Size-
class as measured by employment levels and the replacement value of a firm’s capital are
positively related.




4
    Of the 792 firms, 789 belong to the 8 selected sectors while 3 fall in the “other” category.
5
 In the absence of a nationally registered sample frame, it was not possible to determine an appropriate sample. As
an alternative, a sufficiently large number of firms in each sector were randomly chosen.
6
    These categories are consistent with DTI definitions.


                                                             5
                          SMME EMPLOYMENT – WHERE ARE THE JOBS?

In 1999, the SMMEs surveyed in Johannesburg employed an average of 14.7 workers per firm,
representing total employment of 11,600 across all firms in the sample. Three manufacturing
sectors (textiles, furniture, and food and beverages) created the most jobs, with each accounting
for 14–16 percent of total employment in the sample. In comparison, IT generated the fewest
jobs (9 percent).


                      Chart 2.1 Sectoral distribution of employment in
                                    SMME sample, 1999

                                IT                                   1100
                            Retail                                              1418
                      Construction                                              1436
                          Tourism                                       1221
            Prepared food/beverage                                                      1698
                         Furniture                                                     1630
                     Metal workers                                       1244
                 Clothing/garments                                                            1855
                                     0   200   400   600   800   1000 1200 1400 1600 1800 2000
                                                                             Number employed




                                     G ENERAL FIRM CHARACTERISTICS

Besides employment size, the SMME survey also captures firm characteristics such as sector
type (manufacturing or services), age and legal status, owners’ ethnicity, ownership role of PDIs
(previously disadvantaged individuals), and export status (Details are presented in Annex 1).

Age

The age of a SMME reflects its market experience and affects its ability to grow and move to the
next size class. Both market experience and firm size also affect access to credit markets. Post-
apartheid firms may face a different set of constraints than pre-apartheid firms. In the sample, 30
percent are post-apartheid firms established since 1995, and are less than 4 years old. Another 30
percent of firms are between 4 and 10 years old. The remaining 40 percent are older firms split
equally between those that are aged 11- 20 and those over 20 years. Age and size-class are
closely related - about 40 percent of the micro firms (1–5 employees) are less than 4 years old
compared to only 20 percent of the small firms with 21-49 employees. Younger firms are more
prevalent in the service sectors than in manufacturing.




                                                       6
                                               Chart 2.2 Age of firms in sample, 1999

                              100
           Percent of firms


                               80

                               60

                               40

                               20

                                0
                                      Size 1           Size 2        Size 3            ALL       Manufacturing   Services

                               Less than 4 years old      4-10 years old       11-20 years old   More than 20 years old



Race and PDI Ownership

PDI ownership is still relatively small - only 18 percent of the sample firms have an average PDI
ownership of 8 to 10 percent. Among PDI-owned firms, a majority (63 percent) have been
partially owned by a PDI for less than 4 years. From an alternative perspective, within the class
of younger or post-apartheid firms (aged 4 years or less), about 24 percent have PDI ownership
compared to only 16 percent among older or pre-apartheid firms. 7 Among sectors, a higher share
of younger PDI firms are located in food and beverages, tourism, retail and IT sectors (see Table
A1.2 in Annex 1). These also happen to be the sectors that have grown relatively fast in recent
years.

       Given high levels of unemployment and poverty among blacks in South Africa, it is useful
to further disaggregate the PDI category by race. The low representation of blacks in the SMME
sector is striking: while representing 77 percent of South Africa’s population, they account for
only 7 percent of SMME owners, in contrast to 9 percent SMME owners for Asians (2.6 percent
of the population) or 56 percent SMME owners for whites (11 percent of the population). From
a different perspective, there are 0.14 SMMEs owned by blacks for every 100,000 blacks,
compared to 6.3 for Asians and 9 for whites. 8




7
    This result is statistically significant at the 5 percent level.
8
  Shares of firms by race computed using 727 firms as the total number in the sample, since 65 firms did not indicate
their race. These missing firms are treated as a “Race not indicated” category. The share of black firms would be 6
percent if 792 firms were considered.


                                                                           7
                                 Chart 2.3 Sample SMMEs by race
                         South African -
                                                       Black
                            no race
                                                        7%           Coloured
                           indicated
                              17%                                      2%
                                                                        Asian
                                                                         9%
                       Foreign - no
                      race indicated
                            9%


                                                                     White
                                                                     56%




       The racial distribution across sectors is quite variable. The share of white-owned firms
ranges from 10 percent in clothing to 19 percent in tourism. Asian SMMEs are concentrated in
clothing and garments (30 percent), furniture (15 percent), food and beverages (14 percent) and
retail sectors (23 percent). Colored SMMEs are concentrated in furniture (58 percent) and IT (22
percent) sectors. Among black owners, the sectoral distribution suggests a greater service
orientation that typically requires less business experience, shorter gestation and investment
capital. About 64 percent of black-owned SMMEs are concentrated in the service sectors, with
retail dominating at 23 percent (see Table A1.3 in Annex 1.).

      The distribution of young and old firms in the sample across racial groups reflects South
African apartheid history. Consistent with discriminatory policies that restricted blacks from
owning businesses, 60 percent of the black-owned SMMEs are post-apartheid firms (as
compared to less than 30 percent for whites and Asians, 35 percent for colored, and only 25
percent for foreign SMMEs).

     In recent years, many policies have focused on the development of non-white SMMEs.
However, as Chart 2.4 shows, in 1999, among all the post-apartheid SMMEs in the Johannesburg
sample, the share of black firms remained disproportionately small at 13 percent. 9




9
 About 17 percent of the firms in the sample noted they were South African but did not indicate the race of the
owner.


                                                       8
                        Chart 2.4 Post-apartheid firms by race, 1999

                              Asian                         White
                              10%                           53%



                           Coloured
                             2%
                             Black
                             13%                             South African -
                                                                no race
                                                               indicated
                                Foreign Non-                      15%
                                  African
                                    7%


Legal Status

The majority of the SMME sampled are registered as domestically owned independent units.
Approximately 60 percent of the small firms and 75 percent of the micro firms are registered in
this manner. For the remaining very small firms, 20 to 30 percent are head offices or holding
companies, 4 to 6 percent are branch offices or subsidiaries, and 2 percent are foreign owned (for
details, see Table A1.4 in Annex 1).

Trading Orientation

The survey reveals that the majority of the SMMEs produce for and cater to the domestic rather
than the global market. This could be attributed, in part, to the inland location of Johannesburg
and, in part, to the relatively new emergence and small size of a multi- racial SMME tier in the
South African economy.

      In contrast to the results of the 1999 GJMC-World Bank Large Manufacturing Firm
Survey that showed that between 60–90 percent of the large manufacturing firms (with over 50
employees) in Johannesburg engage in international trade, only 22 percent of the sampled
Johannesburg SMMEs trade. Of those engaged in trade, 64 percent are exporters. Propensity to
trade is positively related to the size of a firm – about 8 percent of the micro firms trade
compared to 16–17 percent of the very small and small SMMEs. Further details regarding
SMMEs and international trade issues are elaborated in Chapter 8.


                                  THE SMME ENTREPRENEUR

In addition to the demographic characteristics of any particular firm, the characteristics of the
person who started the SMME are important. Specifically, the SMME survey sought to identify
features of the “typical” SMME entrepreneur in Johannesburg, and discover how these
entrepreneurs got started doing business.




                                                9
       Three-quarters of the SMME entrepreneurs held a formal sector job before starting the
business, and moved when they saw a good business opportunity to make more money (Chart
2.5).10 Excluding retrenched workers, less than 5 percent of SMME entrepreneurs were
previously unemployed individuals, a finding that suggests that promoting SMME
entrepreneurship among unemployed individuals may not be an easy goal for policymakers.


                           Chart 2.5 Main motivations for starting an SMME


                                                         Other

                     Had similar bus.exper.in another country

                                  Joined the family business
                        Got tired of long term unemployment

                            Got tired of searching for first job
                                Retrenched from informal job

                        Retrenched from non-ming.formal job
                                 Retrenched from mining job

                        Had formal job exp.& saw opportunity

                                                                   0    10   20   30   40    50    60   70   80
                        Black   ALL                                           Percent of respondents


      Much of the prior research on SMMEs in Sout h Africa has found that the primary
motivation for starting an SMME was unemployment. This line of research, which includes
Martins and Tustin (1999a), Rogerson (1997a, 1998), and Rwigema and Karungu (1998), tends
to show that 40 to 60 percent of entrepreneurs formed their business as a result of being
retrenched or unemployed. The second leading motivation found by these researchers was to
explore a profitable opportunity.

      A strict comparison between the results in this survey and those found in other South
African research is not statistically feasible. However, the reasons for an apparent discrepancy
between past research and this survey may lie in the timing of the survey, in the geographical
area (Rwigema and Karungu focused on the Southern MLC and Martins and Tustin surveyed
firms all over South Africa), the definitions used (did other samples include informal firms
among SMMEs?) or the age of the firm on which the studies focused. For example, while
Rogerson’s research is focused on SMMEs that emerged in the post-apartheid era, our survey
includes a large number of pre-apartheid firms. 11



10
     See Annex 2 for the actual percentages by size-class.
11
  To explore the role that the age of a firm plays, the data in Chart 2.5 was analyzed to see if young firms responded
differentially than old firms. No significant differences were found. At 75 percent, the vast majority of young firm
owners still responded that they had prior formal sector work experience and saw a profitable opportunity in forming
an SMME.


                                                                   10
      The SMME survey also asked entrepreneurs to list the main reason they chose their
particular sector for starting a business. These results are shown in Chart 2.6. Again, the
majority of SMME entrepreneurs answered that they had previous work experience in that
sector, while the next most important reason was “business in the sector was growing fast.”


                                          Chart 2.6 Motivation for choosing a particular sector
         Percent of respondents




                                  80
                                  70                                                                                           All
                                  60                                                                                           Black
                                  50
                                  40
                                  30
                                  20
                                  10
                                   0
                                       I had previous work This industry does       A family         Business in this   It was easy to get a   Other
                                         experience in this not require too     member/friend had     industry was          loan for this
                                              sector          many skills       a business in this     growing fast           business
                                                                                    industry




      In sum, a characterization of the typical SMME entrepreneur indicates that she started this
business voluntarily because she had formal sector job experience and saw a profitable
opportunity. The motivations also drove the choice of sector, as did the absence of too many
special skill requirements.




                                                                                          11
                       3.     EXPANSION OF THE SMME TIER
In recent years, political economy considerations in the South African economy have led to the
perception of SMME development as a social imperative. This has, in turn, contributed to the
notion that SMME promotion can become an important source of employment and income
generation, and thus advance the goal of poverty and inequality reduction. An alternate
perspective has raised concerns regarding the feasibility of SMME promotion – does the SMME
tier have the potential to serve as a source of sustained economic growth? Can its promotion lead
to significant and sustained employment growth, or do the real sources of growth still lie in
larger firms that have traditionally been the largest employers? The primary objective of both
the 1999 large ma nufacturing firm survey and the SMME surveys was to focus on the main
constraints to growth and employment. Each survey provides a snapshot of the recent
employment and investment dynamics in its tier, and can be useful in shedding light on some of
these complex issues. This chapter first discusses recent trends in employment and investment as
revealed by survey data before focusing on constraints. 12

      An important issue emerging from this chapter is the fact that growth in SMME
employment over the past two years has occurred mainly because of the emergence of new firms,
while firms that have existed for as little as year or more have been laying off workers. In fact,
during the mild economic recovery that occurred in 1999, only about 30 percent of SMMEs
increased employment above a 5 percent cut-off and only about 26 percent of firms increased
investment in excess of a 10 percent cut-off. No more than 13 percent of SMMEs did both – i.e.
increased investment by more than 10 percent and created jobs by 5 percent or more.

       For those firms that have not expanded through either the employment or investment
channel, the SMME survey identifies insufficient demand as the key economic constraint. Other
factors perceived as hindering firm growth are lack of firm competitiveness, access and cost of
capital, and insufficient government support and promotion of the SMME industrial tier. SMME
firms perceive governments to have a vital role in their development and rank improving the
business environment, both through safety and security and infrastructure provision, as the most
important priority for local authorities. While the majority of established SMMEs ranked policy
stability as the most important priority for national authorities, black SMMEs considered
prioritized education and training to be the most important.

The key questions examined in this chapter are as follows:

     •   Are the SMMEs sources of employment growth? What are their characteristics by size?
         By race? By sector? By age?

     •   What is going on in older established firms? Who are the new entrants? What are the
         implications of rapid turnover?

     •   Are the SMMEs sources of investment growth? In which sectors and how much?


12
  Note that, while the SMME survey can illuminate factors affecting expansion for the firms interviewed, it is not
possible to extrapolate from these results to generate trends in employment or investment for the entire SMME tier.


                                                        12
     •                      What are SMME firm expansion plans and growth potential? What conditions do they
                            consider necessary conditions for increasing employment?

     •                      What can government do to help SMME growth at the local and national levels?

                                                        EMPLOYMENT D YNAMICS IN R ECENT YEARS

Has the SMME cluster been a source of employment growth in the recent past? Where have
SMMEs created new jobs? Have jobs been created by new or existing firms? The SMME survey
allows us to examine these issues in the Johannesburg area.

                                                   Chart 3.1 Total Employment and growth by sector, 1997-99

                            2000
         Total Employment




                            1500

                            1000

                             500

                              0
                                   Clothing etc.    Metal workers   Furniture   Prep.food    Tourism       Construction   Retail   IT
                                         12%             -3%           23%       54%               61%          -12%      50%      53%

                                                                                1997        1998         1999



      The SMME survey asked firms to list their total full-time employment levels for 1997,
1998 and 1999. In the 792 SMMEs in the Johannesburg sample, total employment grew by 23
percent, from 9,400 jobs in 1997 to 11,600 jobs in 1999. Chart 3.1 portrays sectoral employment
over the three years (the number below each sector group shows total growth between 1997 and
1999).

       Except for the metal products and construction sectors, employment growth was
significant across all sectors, with increases of 50 percent or higher occurring in three service
sectors – tourism, IT and retail. 13 At face value, these numbers seem to suggest that the SMME
tier generated substantial new employment, especially at a time when larger firms in
manufacturing were shedding jobs. However, this conclusion rests on a critical issue: was the job
growth generated by existing SMMEs that expanded and created new jobs, or through the
emergence of new SMMEs? Since SMMEs are known globally to experience high turnover
rates, from a policy perspective it is crucial to identify the actual source of employment growth,
which we do by focusing on the employment dynamics in firms that have existed since 1997.




13
  Of course the survey does not track firms that have ceased production and thus omits an important potential
source of job losses.


                                                                                       13
Employment Changes in Existing Firms

This section focuses on 582 SMMEs (73 percent of the sample) that have existed since 1997.
Since these firms are at least 2 –3 years old, we can evaluate whether the y have contributed to
job creation. The survey results (shown in Table 3.1 and Chart 3.2) for this group of firms show
that:

   •   From 1997-99, total employment declined by 7 percent, from 9,500 workers to 8,800.
       Average employment per firm declined from 16 to 15 employees.

   •   27 percent of firms decreased employment, 41 percent of firms increased employment,
       and 32 percent of firms had no change in employment. Since overall employment
       declined, job losses in firms with decreasing employment more than offset employment
       gains in the firms that created jobs.

                     Table 3.1 Employment Growth in Existing SMMEs

                                         Net change in employment 1997-99 (%)
                All firms                                  -7
                Clothing and textiles                      -14
                Metal products                             -18
                Paper & furniture                          -1
                Prep. Food & beverages                     -2
                Tourism                                     9
                Construction                               -28
                Retail                                     10
                IT                                         25
                Black                                      -3
                Asian & Colored                             4
                White                                      -5
                Foreign                                    -17


   •   Existing firms in all four production sectors and construction cut jobs, a trend consistent
       with the job losses recorded for the entire manufacturing sector in South Afr ica for the
       same period. The three emerging service sectors recorded employment gains of 9-25
       percent, although from relatively low 1997 base levels.




                                               14
                    Chart 3.2 Employment growth in existing firms by sector and race, 1997-99

                      Foreign

                        White
               Asian+Coloured                                                                   Percent of firms
                                                                                                with increased
                         Black                                                                  employment


                            IT
                        Retail
                                                                                                Percent of firms
                  Construction                                                                  with decreased
                                                                                                employment
                      Tourism

                Prep.Food/bev.
                     Furniture
                 Metal workers
                  Clothing etc.


                              -40      -20          0            20         40    60
                                                     Percent of firms




      The aggregate net employment loss of 7 percent between 1997-99 raises doubts over the
SMME tier’s potential to create sustained employment and incomes over the longer term. For the
purposes of public policy geared to promote sustainable employment, this outcome suggests that
SMME development policies are needed to support existing SMMEs, as well as emerging
entrepreneurs. Moreover, given that many unemployed individuals lack the resources to become
SMME entrepreneurs themselves, a large proportion of the unemployed need to become workers
in labor-intensive businesses operated by SMMEs. 14 As such, policies to facilitate and promote
growth in employment per firm may be essential for affecting unemployment in Johannesburg
and South Africa in general.

New Entrants

In the 1999 Johannesburg SMME survey, there were 210 “new entrant” firms that emerged in
1998 or 1999, comprising 27 percent of the sample. The share of black-owned SMMEs among
the new entrants was 9 percent (up from 5 percent for existing firms), while new white-owned
firms fell to 42 percent (down from 55 percent), and foreign firms were 8 percent. 15 Table 3.2
illustrates that 50 percent of the new entrants were very small firms with 6–20 employees.




14
  This point is confirmed by Chapter 2, which illustrated the low percentage of SMME entrepreneurs that were
unemployed prior to starting their business. Most SMME entrepreneurs tend, instead, to have been previously
employed in the formal sector.
15
     The reminder of the firms did not report the identity of the owners.


                                                            15
                                                                     Table 3.2 New entrants by size and sector

                                                                                         Number of firms                                   Share of new entrants
                                          Size 1                                               68                                                    32
                                          Size 2                                              102                                                    49
                                          Size 3                                               40                                                    19
                                          All firms                                           210                                                   100

                                          Clothing/garments                                               20                                                      10
                                          Metal workers                                                   15                                                       8
                                          Furniture                                                       25                                                      13
                                          Prepared food/beverage                                          47                                                      19
                                          Tourism                                                         30                                                      16
                                          Construction                                                    15                                                       8
                                          Retail                                                          35                                                      14
                                          IT                                                              23                                                      12


                                                         Chart 3.3 Employment in firms that started in 1998
       Absolute employment levels




                                    800
                                    700
                                    600
                                    500
                                    400
                                    300
                                    200
                                    100
                                      0
                                                                                                          Metal Products




                                                                                                                                                                       Construction
                                                                       White



                                                                               Foreign


                                                                                           Clothing and




                                                                                                                           Furniture




                                                                                                                                                                                      Retail
                                            Black




                                                                                                                                                        Tourism




                                                                                                                                                                                               IT
                                                                                                                                            Beverages
                                                    Asian+Coloured




                                                                                                                                            Food and
                                                                                            Garments


                                                                                                           Metals and




                                                                                         Employment 1998                               Employment 1999



      These new entrants were not inherently more dynamic than existing firms. Employment in
the 116 firms emerging in 1998 grew negligibly in all racial/sectoral categories (Chart 3.3), with
only 25 new jobs representing employment growth rate of 1.5 percent.


SMME Turnover

So it appears that new entrants, whose turnover rate cannot be determined from the survey data,
drive the rapid employment growth rate recorded for the full sample in Chart 3.1. Whether or not
existing SMME enterprises are able to grow and expand their workforce remains problematic in
South Africa today. Since 1997-99 was a period of overall sluggish economic growth, it is not
possible to judge whether existing firms are likely to generate more robust and sustained
employment when the economy picks up at a higher growth rate.



                                                                                                          16
      Findings from Levy (1996) and Rogerson (1999b) show that young, small firms grow
more rapidly than older firms. Levy argues that the age distribution of firms, as such, will have
an impact on the growth of the SMME tier as a whole. He states that, while many of his survey’s
“high- flying” SMMEs tend to be disproportionately located among younger firms, since South
Africa’s SMMEs are skewed toward older firms, and since older firms tend to be larger,
underperformance by older firms complicates the employment challenge. However, there is
ample international evidence to show that births and deaths among SMMEs tend to be
concentrated among younger and smaller firms. 16 Annex 2 provides a variety of evidence
suggesting that globally, SMME turnover rates range around 50 percent during the first three
years in the life of small businesses (see Box 3.2).

      As noted earlier, the South Africa SMME tier is often characterized as having vast
potential to increase employment, given the labor- intensive orientation of SMMEs. However, if
the SMME tier is characterized by a high degree of turnover, so that firms emerge, survive for a
few years, then die off, then the SMME tier may lack an element of dynamism necessary for
sustained and significant job and income creation.


                  Box 3.1 The issue of SMME firm turnover – firm births and deaths

      Winter (1995) studies SMME enterprises in economic development. He identifies a number of stylized facts
      related to the issue of firm turnover in the SMME tier: 1) small firms tend to have short average lifetimes; 2)
      rates of disappearance relative to the current firm population at a given age decrease with size; 3) gross rates
      of entry tend to be large relatively to net rates, but more so in some industries than others; and 4) some
      turnover rates may be as high as 50 percent.

      With regard to South Africa, prior research on the SMME firm tier confirms many of these stylized facts and
      suggests that a small number of micro-enterprises graduate to become successful, growing businesses. Some
      excerpts from these studies are included below:

      “Moreover, in the early 1990s most growth in the Gauteng SMME manufacturing economy occurred through
      the replication of micro-businesses, a pattern of involution, rather than the evolutionary expansion of existing
      enterprises which would result in the increase in the number of employees.” (Rogerson, 1998, p. 283,
      referencing Manning and Mashego, 1993).

      “The picture painted above of a community of increasingly successful black entrepreneurs in Johannesburg’s
      inner city must be qualified by an appreciation of the extraordinarily high death rate which occurs amongst
      these emerging businesses. Property brokers and managers suggested that, of the new black businesses, which
      opened in the inner city, between 50 and 60 percent failed to survive. The high death rate was emphasized in
      one interview, in which it was observed that “If a hundred companies moved in, 40 percent would have died
      within two months.” (Rogerson and Rogerson, 1997, p. 95).




16
     Picot and Dupuy (1995).


                                                            17
                         Box 3.2 Survival rates among European SMMEs
  The OECD researched survival rates among SMME firms (as defined by employment) in Western Europe in
  the early 90s and found the following:

                              France              Netherlands           United Kingdom       Finland
     Beyond 1 year               74                     82                     88              79
    Beyond 3 years               65                     67                     62              69
    Beyond 5 years               51                     60                     48              51
  As shown, approximately 50 to 60 percent of firms survived past five years. Among the remaining firms that
  died off, between 12 to 26 percent exited within the first year of business.
  Source: Benassi (1995) for the OECD.


                                          INVESTMENT TRENDS

Whether SMMEs can be sources of sustained income and employment growth depends in part on
whether they attract new investment. The survey asked firms to report on capital investments
such as new machinery and equipment in 1998 and 1999. Approximately 60 percent of the
sampled firms reported such investments in each year. Since some investment is required merely
to cover depreciation, we can also examine whether SMMEs generated “net” investment. Using
a 10 percent cut-off for depreciation allowances, 45-52 percent of the SMMEs made no
investments, 17 percent invested less than 10 percent of their fixed capital levels, and 32-38
percent of firms were “investment-expanding” in 1998 or 1999 (see Chart 3.4).

      In sum, survey statistics on “investment-expanding” firms in 1998-99 suggest that no more
than a third of the SMMEs were a source of some new investment growth in the recent past.
From a policy perspective, an important issue is whether the truly “investment-expanding” firms
were also a source of job creation, or whether they were cutting back on employment. Using a 5
percent threshold for employment growth, we can identify the SMMEs that “employment-
expanded” in 1998 and 1999. When juxtaposed with the “investment-expanding” firms, this
yields a smaller set of more dynamic SMMEs that expanded through both investment and
employment creation.

   •   The share of SMMEs that “employment-expanded” in 1998 was 23 percent and 30
       percent in 1999.

   •   The share of SMMEs that “investment-expanded” was 30 percent in 1998 but dropped to
       26 percent in 1999.

   •   The share of “jointly-expanding” SMMEs was only 13 percent in both years. This result
       compares closely to the large manufacturing firm survey result, where the corresponding
       figure was 14 percent (Chandra, Moorty, Rajaratnam, and Schaefer, 2001).




                                                     18
                                             Chart 3.4 Investment-expanding SMMEs

                            Foreign
                             White
                    Asian+Coloured
                              Black


                                 IT
                             Retail
                       Construction
                           Tourism
             Prepared food/beverage
                          Furniture                                              1999
                      Metal workers                                              1998
                  Clothing/garments


                           All firms
                             Size 3
                             Size 2
                             Size 1

                                       0      10   20        30    40       50      60   70   80
                                                              Percent of firms



                                           CONDITIONS FOR EXPANSION

Relative to their investment patterns in 1998, about 50 percent of the surveyed SMMEs revealed
their plans for expansion. They appeared to have fairly optimistic plans for expansion over the
next 1-3 years. Slightly less than half of all SMMEs surveyed expected to expand during the
following year, 2000. This was true even for firms that did not expand in 1998. Between 50 to 60
percent of all firms had expansion plans in the next 2 to 3 years.

Necessary Conditions for Creating 10 Additional Jobs

The discussion in earlier sections of this chapter indicates that in 1999, 30 percent of all SMMEs
increased employment by at least 5 percent. Of these, 57 percent either did not invest at all or
increased investment less than the cutoff of 10 percent. Only 43 percent increased investment in
excess of the cutoff. Similarly, the share of “investment-expanding” SMMEs was 26 percent of
all SMMEs. Of this group, more than half did not create significant new jobs. The survey also
asked SMME owners what the necessary conditions were for them to create 10 additional jobs in
the following year. Their responses reveal what they considered the impediments to expansion.




                                                        19
      Chart 3.5 shows that almost 80 percent of SMMEs reported that they are most constrained
by insufficient demand. 17 Ranked as second most important by almost 40–45 percent of firms
are three factors: a fall in real interest rates, increased business visibility, and increased
government promotion of SMMEs. Ranked third are more contracts from government/large
business. Fourth is a set of conditions ranked equally by about 15 percent of SMMEs: fall in real
wages, increased exports, cheaper imports and a decline in foreign competition. While the low
importance accorded to international trade is perhaps not surprising, given that only 10 to 15
percent of the SMMEs export or import, the equal rank given to lower real wages is more
surprising.

                       Chart 3.5 Necessary conditions for employing 10 more worders

              Decline in foreign competition
                           Cheaper imports
                          Increased exports
                            Fall in real wage
             More Govt/large bus. Contracts
          Government promotion of SMMEs
                Increased business visibility
                   Fall in real interest rates
                        Increase in demand

                                                 0   10   20     30         40       50      60   70   80   90
                                                                          Percent of firms


       Responses across SMMEs for creating 10 additional jobs varied by size and sector. Fewer
micro firms required a fall in real interest rates or real wages or increased exports, but more
required increased government promotion of SMMEs. In contrast, a greater share of the
relatively larger or ‘small’ SMMEs pointed to the macro conditions: an increase in aggregate
demand and exports, fall in real interest rates and real wage, and an increase in contracts from
government. By sector, firm responses reveal interesting insights into key constraints to the
creation of 10 additional jobs. For example, construction seemed relatively more constrained by
high interest rates and high wages than any other sector while IT seemed least constrained by
these factors. A large share of IT firms required an increase in aggregate demand. Clothing and
garments seemed more affected by foreign competition, lower exports and cheaper imports and
emphasized the positive role that government could play in SMME promotion more than any
other sector. Both construction and IT considered increased contracts from large business and
government more important, emphasizing yet another source of domestic demand but placed
relatively little weight on foreign competition (for details, see Annex 2).

      The survey also examined firm responses to questions which focus on reasons for not
expanding, reasons why firm stopped production temporarily, and reasons why sales declined.
Responses confirm the sizable role that firms attribute to market demand; interest rates are
perceived as the next most important reason, but by a much lower proportion. For example, the


17
     All rankings are statistically significant at the 5 percent level.


                                                               20
primary reason for not expanding investment in 1998 identified by over 30 percent of SMMEs
was lack of sufficient demand followed by lack of access to capital and lack of desire to expand
which may be a proxy for lack of market opportunities.

      Throughout the survey results, lack of demand, competitiveness, visibility, interest rates
and access to capital emerge as the main economic challenges faced by SMME firms. Increases
in demand and in business visibility both suggest that SMMEs need a larger customer base to
expand employment, which is largely constrained by aggregate demand conditions in the
economy. As such, the SMME tier is not necessarily any less constrained by low aggregate
demand than the large firm tier, and will not be able to expand rapidly in a weak economic
environment.

                               WHAT WOULD SMMES LIKE GOVERNMENT TO DO?

SMME firms do perceive that there are a number of interventions government can take to
increase SMME competitiveness, marketability, and visibility. In response to the economic
constraints that firms face, the SMME survey asked firms to rank in order of importance the
contributions that both local government and national government can make to facilitate firm
growth. Chart 3.6 illustrates these rankings for the local government of the GJMA. Without
exceptio n, firm owners noted that safety and security was the number one priority for local
government, signaling that crime and violence in GJMA are imposing economic costs on SMME
growth. With the exception of micro, black and post-apartheid firms, the second most important
rating was accorded to infrastructure development. Micro and black firms considered the second
most important factor to be targeted financial incentives whereas post-apartheid firms considered
special incentives to female entrepreneurs to be important.

                                    Chart 3.6 Local authority measures to promote SMME growth


    Special incentives for female entrepreneurs

                                Public transport                                               Very Important

                  Targeted financial incentives
                                                                                               Second most important
             Ethical standards of local officials

               Imroved attitude of local officials                                             Third most important
                             Investment support

                                   Infrastructure

                                 Safety/security

                                                     0.0   0.5        1.0              1.5              2.0       2.5   3.0
                                                                            Weighted ratings of firms



      Chart 3.7 shows the ratings accorded to the various actions or policies that national
government can undertake to promote SMME growth. The most important area for national
government is providing policy stability; following closely behind are four other actions: lower
interest rates, prioritize education and training, promote efficient and flexible wages, and
promote SMME participation in publicly-provided services. Many of these factors also emerged
in firm responses to related questions in the survey. And, each of these factors directly addresses



                                                                 21
the issue of SMME competitiveness and confirms that SMMEs are directly looking to national
government to facilitate their growth and development.

                          Chart 3.7 National authority measures to promote SMME growth

                                                                  Very Important    Second most important         Third most important


                             Prioritize education and training

                 Promote efficient and flexible exchange rate

                        Promote efficient and flexible wages

                                 Promote lower interest rate

    Promote SMME participation in publicly provided services

                                Provide business information

                                               Policy stability

                                                                 0.0          0.2   0.4          0.6        0.8          1.0             1.2
                                                                                     Weighted ratings of firms



      In sum, the rankings of the SMMEs underscore the fact that neither tier of government can
act alone to improve the business environment for SMMEs and expect that the SMME tier will
respond in terms of significant investment and employment creation. For policy makers, the
message that emerges from these rankings is that both tiers of government must act in concert to
promote a healthy business environment that is attractive for domestic and foreign investors.




                                                                               22
                                         4.   LABOR MARKETS AND SMMES

The inter-relationship between SMME firms and the labor market is fundamental to the
employment and income- generation potential of this tier of industry. The survey suggests that
SMME firms: (1) face a labor skills shortage; (2) are affected relatively less than large firms by
recent labor market regulations; 18 and (3) engage in substantial use of flexible labor
arrangements. All of these dynamics affect the way that firms recruit labor, the conditions of
employment, and the number of unemployed that can be absorbed by SMME firms.

       This chapter first examines the skills constraint within the SMME tier. It reports that
African labor constitutes a majority of semi-skilled SMME employees, but many firms still have
difficulty in finding skilled and semi-skilled labor. Additionally, firms are not responding to the
skills shortage by providing adequate training. Next we present evidence on how firms have
responded to the four labor market regulations legislated in the post-1995 era. Relative to the
large- firm tier, the survey data suggest that SMME firms are less affected by labor market
regulations. When they are affected, their response has adverse implications for permanent long-
term employment. We conclude with evidence on SMME firms’ use of temporary labor and
subcontractors.

                                                     THE S KILLS CONSTRAINT

Data from the Large Manufacturing Firm Survey19 suggest that a primary factor constraining
employment growth for larger firms in South Africa is the scarcity of skilled labor. The SMME
survey sought to verify whether the same applied to firms with less than 50 employees.


                                          Chart 4.1 Employment of skills by race, 1999

                                   100
                                    90
           Percent of employment




                                    80
                                    70                                                    Whites
                                    60
                                                                                          Indians
                                    50
                                                                                          Coloureds
                                    40
                                    30                                                    Africans
                                    20
                                    10
                                     0
                                          Skilled        Semi-skilled         Unskilled




18
  Strict statistical comparison between SMME and large firm survey data has not been done, so the comparisons
made here are intended to be suggestive only.
19
     See Chandra, Moorty, Rajaratnam, and Schaefer (2001).


                                                                23
      Chart 4.1 illustrates employment of skills by race in 1999. Both semi- skilled and unskilled
occupations are dominated by Africans while skilled occupations are dominated by whites.
Relative to employment in the large firm tier, the SMME tier is characterized by a much higher
percentage of Africans in the semi-skilled category. 20 Such data suggests that it has been easier
for semi-skilled Africans to find jobs in SMME firms than in larger firms.

                                                    Chart 4.2 Gender and skill composition of SMME employment, 1999
        Female employees as percent of total




                                               70

                                               60

                                               50

                                               40                                                                     Skilled
                                                                                                                      Semi-skilled
                                               30                                                                     Unskilled

                                               20

                                               10

                                                0
                                                       African       Coloured          Indian         White



      Chart 4.2 displays the skill and gender composition of employment in the sampled
SMMEs. Despite the higher share of Africans employed in semi-skilled occupations, whites still
dominate skilled occupations and women are still under-represented in SMME employment. The
legacy of apartheid and its impact on skills development would suggest that SMMEs, as in the
case of larger firms in the Large Manufacturing Firms Survey, face an important skills shortage.
Data from the survey supports this assumption. In fact, it shows that 30 to 45 percent of firms
reported difficulty in finding skilled labor. 21 As in the case of the larger firms, SMMEs with
over 5 employees faced more difficulty than micro firms with less than 5 employees.

     Table 4.1 lists the proportion of firms by sector that reported difficulty in finding skilled
workers. Except for the retail sector, the skills constraint appears fairly uniform. With over 30–
45 percent firms reporting a skills shortage, it is important to determine how SMMEs in GJMA
respond to this perceived skills shortage through private provision of training. The SMME
survey found that a fairly small proportion of SMMEs provide training for their workers (in
comparison to 43 percent of the larger firms). 22



20
   In the Large Firm Manufacturing Survey, the approximate share of Africans in semi -skilled categories is: 30
percent of clerical and service labor; 50 percent of craft and trade labor; and 80 percent of plant operators (Chandra,
Moorty, Rajaratnam, and Schaefer, 2001).


22
  Both international and South African research on SMME development emphasizes the importance of improving
both human capital and access to financial capital as ingredients for success. Inadequate training in the SMME
sector has been noted by Rogerson (1998), Martins and Tustin (1999a), and Rwigema and Karungu (1998).


                                                                                  24
         Table 4.1 Difficulty in finding skilled workers by sector, GJMA sample 1999

                                                               Percent of firms
                                Furniture                           56.5
                                Metal workers                       48.4
                                Clothing/garments                   39.8
                                Prepared food/beverage              35.7
                                Construction                        44.6
                                IT                                  42.9
                                Tourism                             42.4
                                Retail                              20.7


      Table 4.2 lists the share of SMMEs investing in formal skills training and the median
investment per employee in 1999. Roughly 24–30 percent of firms with over 5 employees and
less than 10 percent of firms with less than 5 employees undertook formal skills training in
1998.23 For those that trained, median spending per employee decreased as firm size increased.

                    Chart 4.3 Proportion and amounts SMMEs invested in formal skills training by
                                                   sector, 1999


                               IT                                                                       1250
                            Retail                            240

                     Construction                       419
                         Tourism                                                          1667
          Prepared food/beverage                              182
                        Furniture                             341
                    Metal workers                        733
               Clothing/garments                                     349

                                     0   5      10     15       20     25    30      35      40       45       50

                                                                                                  Percent of firms




              Table 4.2 SMMEs that invested in any formal skills training in 1999
                          Percent of firms Rands per employee (median)
                   Size 1       9.9                     1667
                   Size 2      23.7                      938
                   Size 3      30.1                      400



23
   This question was analyzed to see whether firms that export also invest relatively more in skills provision. The
sample data shows that 32 percent of exporting firms provide training compared to 17 percent for non-exporting
firms. This result is consistent with the findings discussed in Tan and Batra (1995).


                                                        25
       Chart 4.3 shows that between 10-20 percent of firms provided training, with the exception
of the tourism and IT sectors in which 30-40 percent of firms trained. The number to the right of
each bar is the average training expenditure per employee. Except for the tourism and IT sectors,
training expenditure per employee is generally less than crime prevention spending. 24

       The survey also asked firms to rank the training providers they preferred or used. Table
4.3 shows that government institutes are not perceived to be the most important agency for skills
provision, as in the Large Manufactur ing Firm Survey. 25 As noted in Chapter 3, SMME firms
noted a desire for national authorities to improve education and training; it may be that firms that
cannot provide any skills training look to government for assistance. Or, these data may suggest
that firms see a role for government in facilitating and promoting private provision of skills
training. In any event, in a business environment constrained by the scarcity of skilled labor, it is
natural for firms to view the provision of training as a public good. In that sense, government
must determine what role is most appropriate, and how best to ensure that the gains from training
efforts are realized quickly, and focused on efforts to achieve faster growth in the SMME tier.

                  Table 4.3 Percent of firms rating each training source as important

                                                                  Percent
                                   In house                        71.5
                                   Private training schools        30.1
                                   Vocational/technikons           29.6
                                   Business partners               23.1
                                   Industrial training boards      22.0
                                   University                      15.6
                                   Government institutes           13.4
                                   Church/community based training 2.7

      The SMME survey shows that while around 40 percent of firms face difficulty in finding
skilled labor, less than 25 percent 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. However, given the
magnitude of the skills shortage in South Africa, the role of government in pursuing an
aggressive skills strategy is particularly important. 26 Moreover, such efforts would reinforce a
strategy that assists not only emerging entrepreneurs in starting a new SMME but also assists
existing enterprises in expanding their employment levels through growth and increased
placement of workers in skilled jobs.



24
     Data for crime prevention expenditures is presented in Chapter 7.
25
   Rogerson (1999b) analyzed training by SMMEs and found that emerging enterprises do most of their employee
training in house but that 40 percent of established firms use external courses linked to Training Boards.
26
   Martins and Tustin (1999a) 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 bookkeeping and marketing.
Also, they find that business advisors should visit owners/managers to help with implementation of training.


                                                           26
                                RECRUITMENT PRACTICES BY SMMES

In addition to skills availability, the types of recruitment practices that SMMEs engage in also
shape the potential for employment growth. If firms primarily recruit through networks or hire
family labor, then chances for the long-term structurally unemployed to find jobs in the SMME
tier will ultimately depend on personal connections to SMME entrepreneurs. Likewise, the
extent to which SMME entrepreneurs are able to locate skilled labor will depend on persona l
connections. The SMME survey asked firms what channels of recruitment they use for skilled,
semi-skilled and low skilled labor. Chart 4.4 depicts these results.


                 Chart 4.4 Recruitment practices for skilled, semi-skilled,
                                 and low skilled workers


        Low-skilled

       Semi-skilled

            Skilled

                      0    10        20   30       40     50       60     70      80      90        100
                                                                           Percent of respondents



                 Word of mouth                 Family networks           Public advertisements
                 Employment bureaus            Current workers           Direct applications
                 Recalling layoffs             In house database         Other


      Between 50-65 percent of all workers are recruited through informal networks, with “word
of mouth” the most prevalent practice. Family networks are more important for recruitment of
skilled workers; while for semi or low-skilled workers, word of mouth and hiring through current
workers are relatively more important. Approximately 7-25 percent of workers are recruited
through public advertisements and employment bureaus, depending upon skill level.

                                          LABOR RELATIONS

Evidence from the Large Manufacturing Firm Survey suggests that firm managers are less
concerned about the direct costs of hiring labor, but more affected by the implicit costs of doing
business with labor. These implicit costs consist of such factors as the number of unions that
firms must work with, the number of disciplinary inquiries per annum, the number of strikes, the
level of collective agreement, etc. The SMME survey also sought to determine the extent to
which SMMEs were affected by recent labor market regulations. 27 The survey suggests that
these labor market constraints are far less binding in the SMME tier than in the large firm tier.




27
  The four main pieces of legislation enacted in the post-1994 period are: Labor Relations Act (1996), Basic
Conditions of Employment Act (1997), Employment Equity Act (1998) and Skills Development Levy (1998).


                                                     27
Labor Market Environment

The survey asked firms about union membership, collective agreements, strikes, workdays lost,
and disciplinary inquiries. The survey found that the extent of union membership among SMME
employees is significantly lower than among large manufacturing firm employees. 28 In general,
employees in 73 percent of the firms have no union membership, those in 23 percent do business
with 1 union, and those in 4 percent of firms do business with 2 or more unions. Significant size-
class and sectoral differentials mark this general picture and are shown in Chart 4.5. Notable is
the fact that employees in 92 percent of micro or size 1 firms do not belong to any unions. This
could be due to the prevalence of family labor networks in micro firms. As size increases
(especially in firms with over 20 employees in the manufacturing and construction sectors), firms
have to work with at least 1 or 2 unions. IT and tourism stand out as the two emerging sectors in
which union membership remains relatively limited.


                   Chart 4.5 Number of unions SMMEs do business with in GJMA,
                                               1999

                             IT
                         Retail
                   Construction

                       Tourism
         Prepared food/beverage
                      Furniture
                 Metal workers

             Clothing/garments


                         Size 3

                         Size 2
                         Size 1

                                  0   10   20    30   40       50     60   70   80     90     100

                              No unions     1 union        2 unions             Percent of firms




      Collective wage-setting agreements in South Africa play an important role in employment
creation, by affecting the degree of flexibility to respond to local market conditions (such as the
extent of unemployment or lack of work experience of new entrants). In this context, the SMME
survey reflects sharp contrasts with the large firm survey (see Chart 4.6). 29 Strong size-class


28
  In the large firm survey, the share of firms working with no unions ranged from 1 percent (for firms with 200
employees or more) to 7 percent (for firms with 50-99 employees).
29
   The Large Firm Survey (Chandra, Moorty, Rajaratnam, and Schaefer, 2001) showed that overall 13 percent of the
firms had no collective agreements while 46 percent were subject to industry-wide agreements.


                                                      28
differences emerge - 90 percent of Size 1, 72 percent of Size 2 and 42 percent of Size 3 SMMEs
are currently not bound by any collective agreement. Among the other SMMEs, agreements set
at the sector or industry level predominate, covering as many as one third of Size 3 firms. In the
two emerging sectors, IT and Tourism, over 80 percent of firms are not subject to any agreement,
while in clothing, less than 50 percent of SMMEs enjoy such flexibility.

                                 Chart 4.6 Level of collective agreement for SMME firms

                        Size 3
                        Size 2
                       Size 1                                                              No agreement


                            IT                                                             Establishment/plant
                                                                                           level
                        Retail
                  Construction                                                             Company level

                      Tourism
                                                                                           Sector/industry level
        Prepared food/beverage                                                             (bargaining council)
                     Furniture
                                                                                           Wage Determination
                 Metal workers                                                             Board

             Clothing/garments                                                             Other

                                 0   10   20   30   40   50   60   70   80    90    100

                                                                        Percent of firms




Response to Labor Regulations

The SMME survey also asked firms to describe how they have been affected by recent labor
market regulations. Firms were asked how they have responded to particular pieces of
legislation, and to the set of regulations as a whole. For example, when the survey asked
SMMEs how the Bargaining Council System as a whole has affected their employment levels,
around 1 percent of firms reported an increase, 12 percent of firms reported a decrease, and 40
percent of firms reported no change in employment. Approximately 42 percent of firms said they
were unaffected by the Bargaining Council System.

      The response to how specific labor market regulations h    ave affected employment levels
was quite similar. As Chart 4.7 shows, 5 percent or less of the SMMEs increased employment as
a result of the LRA, BCEA, Employment Equity Act, or Skills Development Act. Between 10-15
percent of firms lowered employment in response to these regulations. However, about 50
percent of the SMMEs reported being largely unaffected, while 20-22 percent noted these
regulations were not applicable to them. Another 7-14 percent of firms were not familiar with
them, especially those introduced more recently. In the case of each regulation, firms with over
20 employees were significantly more affected than the smaller firms.




                                                         29
                                              Chart 4.7 Effect of labor market regulations on employment

                               Raise it            Lower it              No effect         Not familiar with it            Not applicable
                             100
                              90
          Percent of firms

                              80
                              70
                              60
                              50
                              40
                              30
                              20
                              10
                               0
                                  Labor Relation Act (LRA)    Basic Conditions of  Employment Equity Act of Skills Development Act of
                                          of 1995           Employment Act (BCEA)          1998                       1999
                                                                    of 1997



      While the majority of SMMEs reported that their employment levels are relatively
unaffected by any specific labor market regulation (Chart 4.7), their responses to how they
adjusted to all four regulations as a whole suggests a preference for more flexible labor
arrangements. Chart 4.8 summarizes what actions were taken in response to the full range of
recent labor legislation. As with Chart 4.7, these results show that 10-15 percent of the sample
reduced employment in response to some labor regulations. But firms (especially larger than 20
employees) also reported hiring fewer workers (23-38 percent), substituting machinery for
workers (11-23 percent), hiring additional temporary workers (19-31 percent), and sub-
contracting (18-24 percent). All of these actions adversely affect permanent job creation. More
favorable outcomes (such as increased productivity or improved labor relations) were noted by
12-15 percent of the larger SMMEs.

      Relative to large manufacturing firms, SMMEs appear to be less affected by the
unintended consequences of labor market regulations, although when they are affected, SMMEs
respond to the restrictions in ways similar to those of large firms with over 50 employees. 30
Consequently, the unintended adverse impact on employment could still be substantial,
especially in the 20-49 employee firms, where the scope for job creation is more significant. For
example, while capital- labor substitution may not be as feasible for SMMEs as for large firms,
they may instead respond by hiring fewer workers. As SMMEs are supported and encouraged to
expand, care must be taken to ensure that labor market regula tions do not become more binding.




30
   This finding is consistent with research undertaken by NTSIKA (1998) that analyzed the impact of the BCEA on
small enterprises. NTSIKA found that there is a low degree of compliance among small enterprises and that
emerging enterprises have more difficulty in complying. Low compliance is generally due to low awareness, rather
than willful evasion, although new requirements related to employment termination are perceived as a hindrance.


                                                                          30
                                     Chart 4.8 Response to labor regulations by size

        Saw labor relations and/or
          productivity improve

          Rely on sub-contracting

                Hire workers on a
                 temporary basis
         Substitute machinery for
                 workers

               Hire fewer workers

                                     0       5        10        15      20    25   30    35         40

                                                                                        Percent of firms
                  Size 1                     Size 2                  Size 3




                                USE OF FLEXIBLE LABOR ARRANGEMENTS

The previous section suggests that roughly one- fourth of the SMMEs surveyed are responding to
labor market regulations by pursuing more flexible labor arrangements. Another critical factor
encouraging the increased use of flexible labor arrangements (non-permanent job creation)
during 1998-99 could have been low aggregate demand, identified by the sampled SMME
owners as a constraint to firm growth. The survey shows that between 33 percent (Size 1) and
60 percent (Size 3) of SMME firms hire temporary labor (see Table 4.4). By sector, the
construction and furniture sectors have the highest share of firms using temporary labor and IT
and retail have the smallest shares. Between 37-42 percent of SMMEs engage in subcontracting.
The prepared food and beverage and retail sectors outsource the least (between 15-22 percent)
while construction and IT sectors outsource the most (62 percent).

                         Table 4.4 Use of flexible labor by SMME firms
                                          Temporary workers Subcontractors
                         Size 1                      33              37
                         Size 2                      50              39
                         Size 3                      61              42
                   Clothing/garments                 49              40
                     Metal workers                   42              48
                        Furniture                    57              45
                 Prepared food/beverage              51              15
                        Tourism                      45              30
                      Construction                   66              62
                         Retail                      40              22
                           IT                        37              62




                                                           31
      A variety of factors could determine why a firm engages in flexible labor arrangements:
firm size, product type, market size, extent of labor market regulations, variability in demand,
etc. The SMME survey asked firms for the reasons they hire temporary workers (Chart 4.9).

                            Chart 4.9 Reasons for hiring temporary workers


                   Temporary workers are easier to lay-off

                           Flexibility to expand or contract

           Non-wage costs of temporary workers are lower

                   Wages of temporary workers are lower

                                                               0    10   20   30   40   50   60   70   80   90 100
                                                               Percent of firms that employ temporary workers




      Flexibility to expand or contract is by far the most important reason why 95 percent of
firms hire temporary workers, which supports the finding that SMMEs are most constrained by
changing conditions in aggregate demand and are quite vulnerable to the business cycle or other
variability in their customer base. 40 percent of firms hire temporary workers because they are
easier to lay-off, while just over 20 percent of firms used temporary workers because they are
cheaper.

       In conclusion, data from the SMME survey reveal that firms with less than 50 employees,
as with large firms, face a skills shortage. Moreover, provision of skills training to this industrial
tier is currently inadequate. Recruitment of both unskilled and skilled labor takes place generally
through personal networks. Finally, though SMME firms appear to be relatively less affected by
labor regulations, they respond to this constraint by hiring fewer workers and moving toward
flexible labor arrangements.




                                                               32
                           5.     FINANCIAL CONSTRAINTS
This chapter examines the extent to which SMMEs were constrained by high interest rates and
by lack of access to credit. Survey findings indicate that the majority of SMMEs finance their
capital requirements through private savings from individuals and family as well as retained
earnings. A smaller proportion of SMMEs rely on formal credit such as bank loans. Both cost
and access to capital are examined to determine their role in limiting bank financing. Survey
data suggests that most SMMEs are not severely constrained by lack of access to credit. But
where access is an issue, it is related to firm size, age, and the race of the owner.

      Of the SMMEs surveyed, 50 percent borrowed from the banks to finance their investment
capital in the last 5 years. For these firms, declining interest rates will most likely lead to an
increase in investment. Since lending rates averaged around 20 percent during 1996-98, firms
that used bank capital reported being adversely impacted by the high cost of credit. 31 45 percent
of firms surveyed noted that lower interest rates are necessary for them to add another 10
employees and expand employment. However, the low level of overall demand was identified as
a more important reason than high interest rates for limited borrowing and investment in 1998.
Continued depressed demand will likely remain a critical constraint to reviving the SMME
sector, and suggests that high interest rates may not be the only limiting factor to SMME
investment and growth.

      This chapter first examines the profile of start-up and working capital. The main reasons
advanced by firms for choosing not to use formal credit are then explored. The issue of whether
the SMME sector is constrained by access to capital is examined, followed by a discussion of
how interest rates affected firms in 1998. Comparisons with the large manufacturing firms sector
are presented where relevant.

                                           SOURCES OF CAPITAL

The SMME survey indicates that the main sources of investment capital are:

•    Private savings, consisting of family savings, are used by 29 percent of firms (19 percent use
     this source for all their financing); individual savings are used by 49 percent of firms (32
     percent use them for all financing); and retained earnings from a previous business are used
     by 10 percent of firms (6 percent use them for all financing).

•    In 1999, 24 percent of firms borrowed from local South African banks to finance investment
     capital (7 percent use them for all of their financing). 32




31
  Rates at which banks lend to the private sector. These rates are differentiated by the creditworthiness of the
borrower and by purpose of the loan.
32
  Rogerson (1999a) surveyed 135 SMMEs in inner city Johannesburg and found that nearly half preferred to remain
independent of small business support structures with high interest rates cited as a prime reason.


                                                      33
•   All other sources of start-up capital (church and community groups, retrenchment packages,
    and government agencies) play a minor role and finance less than 5 percent of all firms.


                                  Chart 5.1 Sources of start up capital, 1999


                             Church/other
                   Retrenchment package
                Govt credit/equip. supplier
                   Small business agency

                 Loan from foreign partner
                     Loan fr. parent comp.
                   Loan from a local bank

        Retained earnings fr.prev.business
                        Individual savings
                           Family savings

                                              0   10        20       30         40            50        60
         1-49%         50-99 %         100%
                                                                                     Percent of firms

       Chart 5.1 shows a profile of these sources for all firms. In terms of size, the sources of
start-up capital available to micro firms with less than 5 employees are skewed away from the
general profile reflected in Chart 5.1. On the one hand, almost 25 percent of micro firms resort to
family savings and 5 percent use retrenchment packages to finance all of their investment. The
corresponding figures for la rger SMMEs are closer to 17 and 1 percent respectively. On the other
hand, no more than 15 percent of micro firms use bank capital (5 percent use it for all financing)
compared to about 28 percent of larger SMMEs. Many black firms are micro firms, and their
financing patterns resemble micro firms in these ways (for details, see Annex 4). Additionally,
less than 4 percent of black firms also received credit from small business agencies, government,
equipment suppliers and even foreign banks. Like the black SMMEs, the Asian and colored
SMMEs relied more heavily on family savings and retrenchment packages for investment
capital. Moreover, almost 12 percent used capital from community groups for financing.

       Post-apartheid firms are distinct from micro firms or any other category. Their reliance on
family savings is significantly less -- only 15 percent rely on this source to finance all of their
start-up costs. However, at 3 percent, while the numbers remain negligible by any standard, this
category of SMMEs also benefited from small business promotion agencies by receiving as
much as 100 percent of start-up capital. Annex 4 provides details for size class, age and race.

      To the degree that the share of bank financing signals access to capital markets, this survey
implies that size-class and race play a role in determining such access, in that micro firms and
black SMMEs may be more constrained than larger SMMEs in obtaining bank loans. However,
post-apartheid firms do not appear to be bound by this constraint.

      It is interesting to compare sources of start-up capital for South African SMMEs with those
of larger South African firms and similar firms in other countries. International experience shows


                                                       34
that larger (over 50 employees) firms typically tend to use more bank financing than smaller
firms, which rely more on retained earnings. 33 The SMME and Large Firm34 Surveys both show
that South African firms generally rely more heavily on retained earnings compared to bank
loans than is the norm in other countries. But some of the size differences among firms in South
Africa are significant. For example, as many as 67 percent of large firms use retained earnings,
compared to only 10 percent of SMMEs. However, as Chart 5.1 shows, 78 percent of SMMEs
use individual and private savings in addition to retained earnings to finance start-up capital.
Summing all three sources of private savings, South African SMMEs do seem to validate
international experience.

      In general, the majority of the South African SMMEs finance their working capital through
private savings. Over 85 percent use capital from retained earnings, 23 percent from cheaper
loans extended by partner or parent establishments, 5 percent from bank loans and about 7
percent from other sources. Greater reliance on private savings could also reflect a preference for
cheaper loans relative to more expensive bank capital at a time when interest rates were at record
high levels. Categories of SMMEs that seem to have limited access to cheaper loans from partner
or parent establishments are micro firms and black firms (details are provided in Annex 4). For
example, only 8 percent of black firms enjoyed access to such loans. Further, relative to other
racial or size categories, fewer micro and black firms used more expensive bank loans. In
comparison, more post-apartheid firms resorted to bank loans to satisfy their working capital
needs, perhaps because of limited access to cheaper parent company loans from parent firms.

                      LOW BANK BORROWING: LIMITED ACCESS OR HIGH COST?

Prior research in South Africa on the extent to which SMMEs are constrained by lack of access
to capital yielded conflicting evidence. Levy (1996) found that access to finance was not a major
constraint. However, Rwigema and Karungu (1998) and Rogerson (1997) and Rogerson (1996b)
and (1999b) found that up to 85 percent of emerging SMMEs complained about lack of access to
credit. Common in all the past research, however, is that lack of access to credit becomes less
binding as a firm becomes older and larger. 35 This idea, as well as the issue of access to capital
in general, is explored in this section using evidence from the current survey.

                   Table 5.1 SMME use of formal loans in last five years (percent)
                       Size 1 29 All              50 Black                 33
                       Size 2 52 Pre-apartheid 53 Asian & Colored 48
                       Size 3 66 Post-apartheid 43 White                   51




33
  This finding is consistent with other South African research as well as international experience. See Biggs et al
(1999), Rogerson (1999b), and Webster (1991).
34
     Chapter 4 of the Large Firm Survey Report (Chandra, Moorty, Rajaratnam, and Schaefer, 2001).
35
   Levy (1996) states that access to capital is less prevalent for younger, smaller firms, and that once ethnicity is
incorporated into the analysis, access to financing emerges as a more binding constraint. Rogerson (1999b) shows
that access to capital is a constraint for 50 percent of his sample, but rises to 83 percent when considering new, black
entrepreneurships.


                                                          35
      Although interest rates touched record high levels in 1998 when the Rand crisis occurred,
they had been much lower in previous years. To control for the effect of higher interest rates in
1998, this survey asked firms to describe their borrowing behavior over the previous five years.
As Table 5.1 indicates, 50 percent of the SMMEs surveyed in 1999 had used a bank or other
formal credit agency loan in the previous five years (henceforth, “bank loans” are used to denote
loans from banks or formal credit agencies). The proportion of firms that used bank capital
increases more than two-fold as firm size grows from micro to small. Only 33 percent of black
firms had used a bank loan between 1994 and 1999, compared to about 50 percent of white,
Asian and colored SMMEs. Fewer new, post-apartheid firms used bank loans.


                               Chart 5.2 Reasons for not using formal bank loans in the last 5 years

                     100
                     90
                     80
  Percent of firms




                     70
                     60
                     50
                     40
                     30
                     20
                     10
                      0
                           Micro          Very small           Small      Pre-apartheid     Post-apartheid       Black        Asian+Coloured      White


                              I do not need a loan                     I do not have right security/collateral   I do not have the right papers
                              I do not have a credit history           I do not meet other loan requirements     Interest rates are too high
                              Other



      To determine whether low use of bank financing explains access to credit, the survey asked
firms who had not borrowed in the previous five ye ars to explain the main reasons for not doing
so. Chart 5.2 shows the reasons for not borrowing given by 50 percent of SMMEs that reportedly
did not use bank credit in the previous five years. The leading reason across all categories of
firms for not borrowing from banks was that they did not need a loan. Size and race mark most
of the differences among categories displayed in a stepwise manner in the chart. From 60 percent
of the micro firms that gave this reason, the proportion rises to almost 80 percent of the small
SMMEs. Firms associated low borrowing with market conditions rather than access to credit or
its cost. An explanation for this response could be the low economic growth prevailing during
the 1994-99 period.

      The two other reasons for not borrowing provided by 10-12 percent of firms were “do not
have the right security/collateral,” and “interest rates were too high.” While the lack of a
collateral is directly related to lack of access to credit markets, high interest rates as the
explanation for not borrowing signal that the cost of credit is the problem. In each response, the
problem affected more micro firms compared to small or larger SMMEs.

      Among black SMMEs, the reasons for not borrowing are equally associated with market
conditions leading to the lack of need to borrow bank loans, and poor access to formal credit
markets. 34 percent of black SMMEs noted that the two predominant reasons for not borrowing


                                                                                  36
were “did not need a loan” and “do not have the right security/collateral.” Another 15 percent of
black firms identified “do not have the right papers” and “do not meet other loan requirements,”
both of which can block access to credit markets. Aggregating these responses, for roughly half
of black SMMEs, lack of access to formal bank credit is a critical problem. High interest rates
seem to affect only 3 percent of black firms.

      In another context, the SMME survey asked firms how many had planned a new
investment, had not implemented it and the main reasons for the latter. Approximately 30 percent
of micro firms and 54 percent of black firms considered new investments in 1998; of these 37
and 50 percent respectively could not undertake them. The main reasons they provided for not
implementing planned investment in 1998 are shown in Table 5.2. In the case of micro firms,
the most important reason was general market conditions, especially if we combine “insufficient
demand” with “no need.”

             Table 5.2 Reasons for not undertaking planned investment in 1998

                                         Size 1 Size 2 Size 3 Black        Asian + White
                                                                           Colored
      Lack of access to capital            26        26     14      59       32     16
      Interest rates were too high          7        11     16       6        7     10
      Insufficient demand                  28        28     37      16       32     30
      No need/desire                       18        16     16      12       11     21
      Insufficient business experience     14        12      2       6       12     10
      Business costs too high               1         1      2       0        2      1
      High labor costs                      1         1      3       0        0      2
      Other                                 5         6      9       0        4      9

      While survey data show that only half of the firms borrow from banks, except for black
and to some extent Asian and colored SMMEs, the majority of firms that do not use bank finance
are not necessarily limited by lack of access to capital. On average, poor business conditions that
preempt the need for capital investment seem to be a far more critical explanation than limited
access to capital markets or the high cost of credit. As such, the current SMME survey
corroborates findings from Levy (1996) that access to financing is only a moderate constraint
and that the financial system is indeed accessible for most SMMEs. Nevertheless, for the 10-12
percent of firms that reported that insufficient access to capital markets prevented them from
expanding, as well as the post-apartheid and micro firms who are relatively more constrained by
collateral requirements, and half the black SMMEs who do not qualify for bank loans, the issue
of facilitating access to bank financing mandates continued attention.

                           EFFECT OF I NTEREST RATES ON SMMES

      In 1998, interest rates rose significantly as the Reserve Bank of South Africa raised them
to arrest capital flight in the wake of the Rand crisis. The average nominal interest rate SMMEs
paid on short-term liabilities was around 23 percent and 22 percent on long-term liabilities. The
interest rate hike of 1998 (and an earlier more prolonged period of high rates) is considered one
factor underlying continuing low growth in the South African economy. Approximately one-half



                                                37
of the SMMEs surveyed reported using formal credit for business needs in the last five years and
noted that interest rates had a negative effect on their business. 36 Other SMMEs who could have
borrowed, but did not, were also affected when the opportunity cost of capital rose. Chart 5.3
shows the response of all SMMEs to the interest rate increase. On average, for 26 percent of
firms, this question was not applicable; 24 percent said they did not have any problems. 20
percent noted that they could not undertake planned new investment while 11 percent had
difficulty in obtaining new debt. Between 6-8 percent of firms had problems in accessing
sufficient working capital and/or repaying old loans. Another 22 percent had other problems.

                                                  Chart 5.3 Effect of 1998 interest rate hike on SMMEs, 1999

                        120
                        100
     Percent of firms




                        80
                        60
                        40
                        20
                         0
                              Micro           Very small      Small      Pre-apartheid   Post-apartheid      Black       Asian+Coloured   White

                                      Not a problem                                         Made it difficult to get new debt
                                      Could not repay loans                                 Not enough working capital
                                      Could not undertake/reduced new expansion             Other




       Size, age and race introduce differentials in the average profile illustrated in Chart 5.3.
Small and pre-apartheid firms were more affected than others in their class, especially in terms of
ability to undertake new investment. This was probably because more of them use formal credit
relative to others in their category (see Annex 4). In contrast, since fewer black firms use bank
capital relative to other racial classes, there were also affected in other significant and negative
ways, such as difficulties in obtaining new debt and sufficient working capital.

      As such, this section indicates that one of the primary effects of the 1998 interest rate hike
was indeed on SMME growth. The hike directly constrained firms’ ability to undertake new
investment across the board, but especially in the case of those classes that rely more on formal
credit as a source of investment capital. Other effects of high interest rates in 1998 manifested
themselves in firms by making it difficult for firms to obtain new debt and sufficient working
capital. The latter effects were particularly exacerbated in black SMMEs.




36
       See Chapter 3. Also, in Levy (1996), between 40 to 60 percent of firms complained about the cost of credit.


                                                                                    38
        6.    GOVERNMENT PROMOTION PROGRAMS AND
                       PROCUREMENT

In June 1996, the Government announced the macroeconomic framework for growth,
employment and redistribution (“GEAR”). The promotion of SMMEs was a key element in the
Government’s strategy for employment creation and income generation. However, the SMME
sector does not appear to have responded in line with expectations. Relevant legislation has been
under review and various programs and institutions have been established to make the SMME
development strategy more effective.

       The White Paper of 1995 proposed the creation of an enabling environment for SMMEs.
The White Paper was followed by the National Small Business Act of 1997, which established
two apex institutions and an umbrella network of SMME service providers to support the goals
of the new legislation. Ntsika Enterprise Promotion Agency is an apex institution that supports
non- financial needs of SMMEs, while Khula Finance Agency provides financial services. Both
institutions work at the SMME level through their retail counterparts, namely Local Business
Service Centers (LBSCs) and Retail Financial Intermediaries (RFIs). The DTI coordinates the
SMME effort. In addition to promotion programs initiated and executed by DTI and its affiliated
organizations and networks, government has also tried to support procurement policies favorable
to SMMEs. In particular, government has established an affirmative procurement strategy
designed to assist SMMEs owned by PDIs.

       This chapter first examines the awareness and use of SMME promotion programs among
the firms in our sample. Data shows that most programs have not been effective at reaching
SMME firms. Next, the issue of direct government procurement is discussed. Again, data
suggests that improved efforts to expand procurement to SMMEs can be made. Finally, the
impact of taxes, licensing requirements, and the relationship with local and national authorities is
reviewed.

                   Table 6.1 SMME programs and the sponsoring agency
                  DTI                              Ntsika                 Khula
   Competitiveness fund            Local Business Support Centers (LBSC) RFI
   Sector partnership fund         Tender Advisory Centers (TAC)
   Economic empowerment scheme Technopreneur programs
   SMME development program        Training and Capacity building
   Emerging Entrepreneur scheme
   Venture capital scheme

                         THE USE OF SMME PROMOTION PROGRAMS

Table 6.1 shows SMME programs initiated by DTI and its implementing counterparts, Khula and
Ntsika. Chart 6.1 shows the percent of firms that are aware of DTI programs (dotted line
measured on the right- hand axis) and the percent of firms that use DTI programs (bars graphed
on the left-hand axis).



                                                39
                                             Chart 6.1 Awareness and use of DTI SMME promotion programs




                                                                                                                                                                             Percent that are aware of it
                                                                Percent that have used it                                Percent that are aware of it
     Percent that use it



                           20                                                                                                                                           60
                           18
                           16
                           14                                                                                                                                           40
                           12
                           10
                            8                                                                                                                                           20
                            6
                            4
                            2
                            0                                                                                                                                           0
                                Competitiveness




                                                  Partnership




                                                                                                                                  Other
                                                                                 Venture Capital




                                                                                                                                            Programs
                                                                  Entrepreneur




                                                                                                                 Empowerment
                                                                                                   Development




                                                                                                                                                        Loan Programs
                                                                                                                                            Training
                                                                   Emerging




                                                                                                                   Economic
                                                                                                     Program
                                                                    Scheme
                                                    Sector

                                                     Fund




                                                                                                                   Scheme
                                                                                                      SMME
                                                                                    Scheme
                                    Fund




      Awareness of DTI programs ranges between 7-34 percent. However, except for the
residual “other” training and loan programs, the figure is closer to 20 percent. Usage is even
lower, in the range of one percent or less for most programs. 37 Clearly, both awareness and use
of DTI programs are low, certainly below what Government aimed to achieve when these
programs were initiated. Among black and post-apartheid SMMEs, even though 60-90 percent
had heard of these programs, only 3 black firms had approached these programs for help and 2
had actually used them. 38

      Chart 6.2 illustrates awareness and use of the programs initiated by DTI affiliates Ntsika
and Khula (the percentages that used the program are based on the number of firms that had
heard about the program). Unlike DTI programs, no more than 20 percent of SMMEs had even
heard about these programs, except for the South African Bureau of Standards program, which is
more of a quality/standards approval agency than a provider of direct assistance to firms. Use of
programs remains low (although higher than for the DTI programs): usage rates varied from 3-10
percent. The most popular options are the Tender Advisory Center and Bureau of Standards,
each used by around 10 percent of the firms that had heard of it. Despite limited SMME access
to capital markets, no more than 3 percent of SMMEs use the retail financial intermediaries
(RFI) set up by Khula, and less than 10 percent know about them. Despite the tight skills
constraint in SMMEs overall and among black and post-apartheid SMMEs in particular, the
picture is similar for training and capacity building programs. Nevertheless, these programs seem
to offer useful assistance and are being used relatively more actively on the ground, once they
are known to SMMEs.




37
  For example, only 1 firm out of the 792 surveyed is using the Venture Capital Scheme and only 1 firm is using the
Economic Empowerment Scheme. The only program used by more than 10 firms is the (combined) loan program,
used by 46 firms. The loan program mentioned most was the Small Business Development Centers (SBDC).
38
   SMME promotion programs were analyzed to see if post-apartheid firms were relatively more aware or used
programs more. Analysis revealed no statistically significant differences between these two groupings.


                                                                                                       40
                              Box 6.1 SMMEs and Government Assistance – Research in South Africa

Recent studies on the SMME tier in South Africa sugges t that while government assistance has been perceived
as an important tool for SMME growth, few firms have benefited from efficient or effective government
programs (i.e. Rogerson, 1999b; Rogerson and Rogerson, 1997; and Rwigema and Karungu, 1998). Martins and
Tustin (1999a) found that only 10 percent of SMME firms had benefited from the SBDC programs. Failure of
government assistance programs has been attributed to uneven geographical coverage, an inadequate number of
service providers and/or programs, the top-down approach to service delivery, low awareness, and gaps between
the needs of entrepreneurs and the types of services offered. Weak local government support initiatives have
also been highlighted as a major problem.

       In terms of what services SMME firms desire, Rogerson (1999b) reports that most SMME firms in his
survey sought government assistance for training and access to finance. However, when firms were asked what
type of support they would want, the overwhelming majority wanted marketing and niche marketing assistance
(70 percent), exporting assistance (58 percent), Internet (54 percent), and human resource development (53
percent). Another study by Rogerson (1998) found that the most important needs of entrepreneurs not being met
are technical assistance in project preparation and design, legal assistance and effective technology transfer
services. For the study by Martins and Tustin (1999a), 50 percent of firms they surveyed said financial support
would be most important for improving business. Other needs included marketing assistance, more skilled
workers, own transport, transparency of tender billboards and improved premises.




                                        Chart 6.2 Awareness and use of other government SMME
                                                         promotion programs
                                                                    Have used it                                 Have heard of it




                                                                                                                                                                Percent that are aware of it
                              12                                                                                                                          100
        Percent that use it




                              10                                                                                                                          80
                               8                                                                                                                          60
                               6
                               4                                                                                                                          40
                               2                                                                                                                          20
                               0                                                                                                                          0
                                                                                                                             assistance



                                                                                                                                          South African
                                                    Tender advice




                                                                                                             Training and
                                   Local business




                                                                          Retail financial




                                                                                             Technopreneur
                                   service center




                                                     center (TAC)




                                                                                                                              Training
                                                                           intermediary




                                                                                                                                           Bureau of
                                                                                                                                           Standards
                                                                                                               capacity
                                                                                              programme




                                                                                                               building
                                      (LBSC)




                                                                               (RFI)




       Chapter 3 illustrated that SMMEs in GJMA rate government promotion programs as one of
the leading contributors to growth. Data from this section confirms low awareness and even
lower use of existing programs, and reinforces the case of SMMEs in GJMA that are seeking
more effective government promotion programs. Awareness of promotion programs needs to be
increased and targeted to firms in the sectors and size-classes where the programs are most
relevant. Moreover, quality and user- friendliness of programs needs to be improved to ensure
that usage follows awareness. For some DTI programs, the survey suggests that awareness is
relatively high and usage is still relatively low. Whether or not such programs are characterized
by design problems is an issue that needs investigation. On the other h    and, Ntsika programs,
once known to SMMEs, are being used more frequently once awareness is raised, so that these
programs may instead gain more from an aggressive dissemination and marketing strategy.


                                                                                                    41
                                         PROCUREMENT

Government procurement from SMMEs in our sample is characterized by a very low proportion
of firms applying for government contracts, an average of 3-4 contracts being submitted and one
out of every 3 or 4 being awarded a contract. For example, except for black SMMEs, less than 20
percent of SMMEs in any size, age or racial category submitted tenders in 1998 or 1999 (see
Table 6.2). Among black SMMEs, between 22-30 percent of firms applied in 1998-99. These
low application rates are in contrast to the high importance that SMMEs attached to increased
government support for their growth through improved procurement policies.

    Table 6.2 SMMEs that applied and were awarded government contracts in 1998-99
                       (Based on a 15-20 percent response rate)
                        Percent     Percent       Total    Number        Total    Number
                        of firms    of firms    Number     awarded     Number     awarded
                          that        that     submitted   (median)   submitted   (median)
                        applied     applied     (median)     1998      (median)     1999
                        in 1998     in 1999       1998                   1999
        Micro firms         8         4.5         3           1          5           1
        Small Firms        17         19          5           1          4          1.5
        Black firms       31.3       22.9         5           1          5           1
      Asian + Colored      8.4        7.2         3          1.5        3.5          1
           White          10.3        7.6         3           1          3           1
       Pre-apartheid      11.7        8.6         2           1          3           1
       Post-apartheid      11         8.9        6.5          1          4           1

      Table 6.2 displays application rates, and the median number of contracts submitted and
awarded in 1998 and 1999 for a variety of size-classes, racial and age categories. Response rates
for this question were low and varied between 15-20 percent for most categories. Among the
responses, size plays an important role. Almost 20 percent of small SMMEs applied for
government contracts, while only 4-8 percent of micro firms applied. While a large proportion of
black firms applied for government contracts, they were awarded 1 out of every 5 submitted. The
other racial categories seemed to do better despite their low application rates.

      Supporting SMMEs in the tendering process is the mandate of Tender Advisory Centers
(TACs). However, survey data suggests that despite the SMME procurement strategy in place,
few firms apply for tenders. This could perhaps occur 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.




                                               42
                          Box 6.2 Procurement to SMME firms in South Africa
Recent South African studies find that expanding procurement is of key importance to SMME firm growth but
that only a meager volume of government tenders reaches the emergent SMME economy. For example,
Rwigema and Karungu (1998) find that only 27 percent of firms they surveyed knew about tendering procedures
and only 6 percent actually tendered. Rogerson (1998) argues that reform initiatives spelled out in the Green
Paper on Procurement Reform, 1997 and Tender Advice Centers have not been able to increase participation by
emerging SMMEs. Martins and Tustin (1999a) argue that SMMEs have not been able to successfully compete
in hard-entry industries such as construction and manufacturing where large established enterprises dominate.

       In response to poor tendering performance by SMME firms, Martins and Tustin (1999b) surveyed 16
public institutions and 22 private establishments that assist in government procurement. Their study finds that
tender documentation is often seen as lengthy and cumbersome to complete. SMMEs would prefer to find out
about all relevant tenders through a single source and, as such, a national information database is necessary.
Training by these institutions should be more general and target legal aspects, claim procedure, procurement
policies, adjudication systems, tendering procedure, management skills, business skills, money management, and
marketing and technical skills.




                                 LICENSING R EQUIREMENTS AND TAX RATES

The SMME survey asked firms to report on the various licenses, permits and regulatory
requirements needed for operations. For existing SMMEs, the number of licenses required to
avoid fines are reported in Table 6.3. About 70 percent of SMMEs need no more than 1 – 3
licenses. The number of licenses needed was considered reasonable by 85 percent of firms and
excessive by the remaining 15 percent. However, time costs to obtain licenses were rated as
marginally more excessive than financial costs (see Chart 6.3). 39

                            Table 6.3 Number of licens es needed for operations

                        No. of licenses needed to avoid fines              Percent of all firms
                                           1                                       38
                                          2-3                                      32
                                         4-10                                      24
                                        11-20                                       4
                                    More than 20                                    2




39
     This finding is consistent with the time costs firms spend to prepare a tender submission.


                                                            43
                       Chart 6.3 Firm ratings on licensing and regulatory
                                          requirements

                               very costly             Reasonable/not costly

                                                                                Other costs (bribes
                                                                                       etc.)


                                                                                Money Costs


                                                                                Time costs


           -30   -20   -10    0    10        20   30     40    50    60    70
                                   Percent of firms

      The Survey also asked SMMEs to report on how cumbersome they found various
government departments (Table 6.4). These rankings are based only on a 15 percent response
rate. The Johannesburg local authorities were ranked number 1 by all categories of firms, with
the exception of black firms that considered the Department of Finance to have the most
cumbersome procedures (and the Johannesburg authorities to be second).

   Table 6.4 SMME ratings of various government departments (based on a 15 percent
                                    response rate)
                                     All Black Asian + White         Pre-      Post-
                                                   Colored        apartheid apartheid
Department of Health                  5     4         4      5        5          5
Department of Trade and Industry      4     3         4      4        4          4
Department of Finance                 3     1         3      3        3          3
Department of Labor                   2     3         2      2        2          2
Local authorities of Greater          1     2         1      1        1          1
Johannesburg
Department of Transportation          7     4         5
Department of Home Affairs            6               5      6        6
Department of Public Works            9
Department of Tax and Revenues        8
Department of Liquor Licensing        8



                                  IMPACT OF THE 1999 TAX CUT

In 1999, in an effort to boost investment, the Minister of Finance announced a reduction in the
company tax rate from 35 to 30 percent. Firm surveys generally find that the common response
to questions regarding the level of present tax rates is that the levels are too high. Instead of this
leading question, the SMME survey asked firms what effect they thought the latest company tax
rate cuts would have on their after-tax profits. The results are shown in Table 6.5.


                                                   44
                                 Table 6.5 How the recent tax cut will affect SMMEs’ after-tax profits
                                                                                Significant                                            Moderate                          No difference                                                NA
                Size 1                                                                              12                                                    42                              31                                            15
                Size 2                                                                              17                                                    41                              35                                             8
                Size 3                                                                              22                                                    46                              26                                             6
                All                                                                                 17                                                    42                              32                                             9
                Pre-apartheid                                                                       16                                                    41                              35                                             9
                Post-apartheid                                                                      20                                                    46                              25                                             9
                Black                                                                               10                                                    56                              27                                             6
                Asian + Colored                                                                      7                                                    42                              28                                            23
                White                                                                               21                                                    43                              30                                             6
                SA-no race                                                                          13                                                    37                              43                                             7
                Foreign                                                                             21                                                    32                              32                                            16


      On average, 17 percent of firms expected the tax rate cut would significantly affect their
profits, 42 percent felt it would have only a moderate effect, and 32 percent felt it would have no
effect (9 percent must be exempt or not pay tax because they noted that it did not apply to
them). 40

                                                                                Chart 6.4 Impact of tax cut on expansion plans


                          50
                          45
       Percent of firms




                          40
                          35
                          30
                          25
                          20
                          15
                          10
                           5
                           0
                               Micro




                                                                                Metal workers




                                                                                                                            Tourism




                                                                                                                                                           Retail




                                                                                                                                                                                                          Black




                                                                                                                                                                                                                                             SA-No race
                                                                                                                                           Construction




                                                                                                                                                                                                                                    White
                                                                                                                                                                    IT




                                                                                                                                                                                                                                                          Foreign
                                                    Small




                                                                                                            food/beverage




                                                                                                                                                                                                                  Asian+ Coloured
                                                                                                Furniture
                                       Very small




                                                            Clothing/garments




                                                                                                                                                                         Pre-apartheid


                                                                                                                                                                                         Post-apartheid
                                                                                                              Prepared




      The survey also asked firms if the tax cut would positively affect their expansion plans
over the next two years. Chart 6.4 shows that more than 35 percent of SMMEs in furniture, food
and beverages, retail and IT sectors said the tax cut would influence their expansion plans. Post-
apartheid and black firms also indicated a positive impact on expansion plans. Since these
categories and sectors comprise key target groups for government support, the data provide
preliminary evidence that tax cuts may have a positive impact on expansion plans.



40
     All surveyed firms are registered for VAT, but some of them could be exempt from the company tax.


                                                                                                                                      45
                    7.     LOCATION AND INFRASTRUCTURE

Efficient service delivery, good infrastructure and safety and security are three of the leading
factors that contribute to an attractive location and influence an investor's decision to locate in a
certain area. This chapter takes a closer look at the SMME ratings of infrastructure, service
delivery and crime in GJMA to evaluate whether GJMA’s location indeed provides an attractive
location for domestic and foreign investors.

      Analysis of SMME responses reveals that, although a majority of firms gave a positive
rating to infrastructure and service delivery, there is room for improvement. Around 20 to 40
percent of SMMEs rated reliability and cost of services as poor. This might explain why firms
noted in Chapter 3 that local authorities had a role to play in improving infrastructure provision.
Also, an unambiguous message that emerges from this survey, as in the Large Manufacturing
Firm Survey (Chandra, Moorty, Rajaratnam, and Schaefer, 2001), is that crime is a major
deterrent to businesses. In fact, safety and security was ranked as the number one policy priority
for local governments. Together the combination of safety and security and infrastructure and
service provision present a set of challenges and opportunities for the local authorities of GJMC.

      This chapter examines how SMMEs rate their present location in terms of proximity, cost,
reliability and availability of services and infrastructure. It then discusses the prevalence of crime
in GJMA by firm attributes and by type of crime, as well as the financial cost of crime. The
chapter concludes by reporting on firms’ choice of location for expansion.

                                        FIRM RATINGS OF LOCATION

SMMEs were asked to assess their present location based on proximity to input and product
markets. 41 In particular, firms were asked to rate their location based on closeness to road, rail
and air transport to determine if government can improve public transport and infrastructure, two
key ingredients of a good location. Chart 7.1 summarizes the responses. Around 85 percent of
firms regard their proximity to product markets favorably. Because of GJMA’s inland location,
proximity to SADC markets did not receive favorable ratings from many firms. Between 65-90
                                                                       a
percent of SMMEs rated their proximity to input markets from f ir to excellent. However, in
terms of proximity to main transport facilities, only main road links scored high points from the
85 percent of firms of which, 65 rated them as excellent. Factors that GJMC’s local authorities
and national government should extend and improve emerged in the relatively low but positive
ratings assigned to airport (45 percent of firms) and rail transport (25 percent of firms) facilities.




41
  Firms were offered four choices: "Excellent," "Fair," "Poor," and "Not Applicable." The firms that answered "Not
Applicable” and those that chose not to respond to the question are not shown in the charts, so the bars do not add to
100. Note that a shorter bar does not necessarily denote poor service; it may mean that more firms reported that the
service is not applicable or that they chose not to answer.


                                                         46
                       Chart 7.1 Firm ratings on proximity to markets and infrastructure

                                                                                                                         Excellent
                         Proximity to seaport/harbor
                                                                                                                         Fair
                         Proximity to airport facilities                                                                 Poor
                         Proximity to main road links
                            Proximity to rail transport
      Proximity to suppliers of parts and machinery
             Proximity to raw material and supplies
                  Proximity to professional services
                 Proximity to SADC export markets
                        Proximity to product markets

                                                           -20         0              20        40             60        80          100
                                                                                           Percent of firms


      Firms were asked to rate their present location based on reliability and cost of services. In
general, firms rated cost of services less favorably than their reliability. As seen in Chart 7.2,
around 74 to 86 percent of the SMMEs reported that reliability of water supply, electric supply,
and telecommunication services was fair to excellent. However, almost 25 percent of firms also
rated reliability of telecommunication services as poor, pointing to an important factor that local
authorities need to improve. Tax rates and the costs of phones and electricity were rated poorly
by over 40 percent of firms. SMMEs also signaled the economic costs that crime inflicts on
them because of their GJMA location. Both crime affecting staff and company property were
rated negatively by over 50 percent of firms while only 40 percent assigned a positive rating to
these factors.

                          Chart 7.2 Firms ratings on reliability and cost of services

                                                                                                                         Excellent
              Low crime affecting property
                                                                                                                         Fair
                  Low crime affecting staff
                                                                                                                         Poor
                         Low local tax rates
                  Low cost of office spaces
      Reliability of phones and fax services
      Low cost of phones and fax services
                Reliability of electric supply
                      Low cost of electricity
                 Reliability of water supply
                          Low cost of water

                                             -80           -60   -40            -20      0       20       40        60        80     100
                                                                                      Percent of firms




                                                                           47
                                     Chart 7.3 Firm ratings on availability of services


                        Availability of industrial land

             Availability of industrial waste facilities

                     Availability of trucking services

         Availability of containter/shipping services

           Availability of courier/marketing services

                       Availability ofPublic transport

                          Availability of skilled labor

                Excellent          Fair        Poor        -30   -20   -10   0   10 20      30      40   50   60   70   80
                                                                                   Percent of firms


      Firm responses to the availability of services are shown in Chart 7.3. Public transport is
widely used by firms and their employees; it received a positive rating from 65 percent but a
negative one from 25 percent of the SMMEs, a negative rating matched only by their assessment
of skilled labor availability. 42 Overall, in terms of infrastructure to support SMME growth, firm
ratings indicate that there is significant room for improvement in addressing concerns over
property and staff related crime in GJMA, reliability and pricing of telecommunication services,
pricing of water and electricity, and improved public transport for firms and employees.

                                                                   CRIME

As discussed in Chapter 3, SMMEs ranked safety and security as the top policy priority for local
government. As many as 94 percent of the firms noted that tackling crime should be given
priority by the local governments. Of these, 77 percent noted it was the most important action
local government should take. Although these priority ratings may be driven largely by
perceptions rather than hard data on the prevalence and incidence of crime, these perceptions
may plan an essential role in an investor's decision to locate a firm in (or move away from) a
certain area.

      Chart 7.4 displays the percent of firms subject to crime by firm attributes. Approximately
61 percent of SMMEs indicated that suffered from some type of crime in 1998-99. 43 The
incidence of crime increased with firm size: more small than micro firms reported being
subjected to crime. Differences in the prevalence of crime by age (pre-apartheid firms
experienced higher crime than post-apartheid firms) or race (white-owned firms had higher
crime) may be linked to locations patterns of firms over the late 1990s (see Boxes 7.1 and 7.2).




42
     Firms reported that 55 percent of their employees used public transport. Of these, 38 percent use taxis.
43
  Of course even firms that did not report any crimes during 1998-99 could still be adversely impacted by the high
prevalence of crime in GJMA.


                                                                       48
                     Chart 7.4 Percent of firms subject to crime, 1998/99

            Post-apartheid
               Pre-apartheid
                      White
          Asian+Coloured

                      Black
                         All
                      Small
          No     Very small
                      Micro
          Yes
                               0   10        20       30         40         50     60        70       80
                                                           Percent of firms




                        Box 7.1 Black SMME firms in inner city Johannesburg
Rogerson (1999a) and Rogerson and Rogerson (1997) emphasize the important role of the inner-city in
Johannesburg as a business location for emerging black enterprises. An excerpt from Rogerson (1999a) is
included below:

       “Beginning in the late 1980s, a new phase of black enterprise development was marked by the exodus of
businesses from the violence-wracked townships of metropolitan Johannesburg, most notably Soweto. Former
home-based enterprises engaged in light manufacturing (particularly clothing production and sewing) activities
spearheaded the advance of new micro-enterprise development into the Johannesburg inner city. Initially, such
enterprises were narrowly focused and tended to be similar in their production profiles; after a period of time in
the inner city, an observed trend was for a greater diversity of production operations to be established…

        Particularly since 1993, a noticeable upturn occurred in the number of black-owned enterprises
establishing within the inner city. Although township violence was the initial trigger for an influx of black
entrepreneurs into Johannesburg inner city, post 1993 this has been replaced by the pull of several economic
advantages of inner city locations for developing small enterprises. By the mid-1990s the expansion of black-
owned enterprise had reached the point that it was recognized by the institutional property sector as an
established feature of the Johannesburg inner city. Despite recognition from the property sector, however, it was
disclosed that the majority of black owned enterprises in inner city Johannesburg were overlooked by the leading
small business support organizations.

       The perceptions of emergent black entrepreneurs towards their location choice of the inner city were
highly revealing. Questioned as to the advantages of an inner city location, issues concerning the importance of
enhanced market access or proximity to suppliers were paramount considerations. The role of the inner city as a
potential zone for enjoying economies of agglomeration was recognized in the majority of responses.
Entrepreneurs stressed the vital attractions of the inner city as a market for both black and, in some cases, white
consumers, accessibility in terms of transport facilities and, finally, its advantages regarding access to suppliers
of inputs for production and retail types of enterprises.” (p. 3-4).




                                                       49
                                    Box 7.2 Geographical Clustering of Black SMME firms
“Overall, three sets of factors shape the broad geographical patterns of emergent black businesses in
Johannesburg’s inner city. First, the location of black enterprises within the inner city reflects the patterns of
available low-rental C and D grade office accommodation. Second is accessibility of surplus C and D grade
space in relations to key black transport termini. Thirdly, the heavy geographical clustering of black enterprises
in specific zones of the inner city is linked to a process of informal networking of black entrepreneurs which
results in a growth of businesses in a spatial pattern akin to that generated by chain migration..

       Once initial black businesses are located in a particular building, the entrepreneurs function as a first
information point for friends or neighbors wishing to set up other businesses in the city. From contact with these
‘pioneer’ business migrants into the inner city, new prospective black tenants glean information – before
speaking to landlords and formally inquiring about lettable space; the result of this process of ‘informal
networking’ is a snowball effect that reinforces a spatial concentration of black-owned enterprises in particular
clusters and buildings.

Source: Rogerson and Rogerson, 1997, p. 97


      Of the firms that were subject to crime in 1998-99, around 63 percent of the firms
experienced break- ins and property theft while 40 percent reported employee theft. Around 35
percent of the firms reported that their employees were victims of crime while arriving or leaving
from work.



                                             Chart 7.5 Types of crime experienced by SMMEs, 1998/99
                         70
                         60
      Percent of firms




                         50
                         40
                         30
                         20
                         10
                          0
                               Break-ins      Vandalism   Employee   Arson   Extortion   Other        Crime
                              and property                 Theft                                  arriving and
                                 theft                                                           leaving from
                                                                                                      work



      The direct economic cost imposed by crime and violence on SMMEs was computed using
firms' expenditure on security guards and devices as well as their total expenditures on crime per
employee. Expenditure incurred by SMMEs on security guards and devices by size, race and
age is shown in Table 7.1.

      Table 7.1 indicates that expenditure on safety devices and guards was positively related to
firm size and varied from a median of R 6500 for micro firms to R 24000 for small firms in
1998. Since expenditure on security is a fixed cost, Size 1 firms with fewer employees appear to
bear the highest burden. Black-owned firms spent the most among all racial groups. Post-
apartheid younger firms spent less than older firms, which may reflect different size distributions


                                                                     50
as well as the impact of location. To put the cost incurred on crime prevention into perspective,
the median amount spent per employee on skills training in 1998 or 1999 by micro firms was R
1700 and by small firms R 400 (Chapter 4). Comparing skills training expenditures with
expenditures on security in Table 7.1 reveals that firms are spending nearly as much (or in some
cases more) on security than skills, an allocation with a high opportunity cost.

                  Table 7.1 Rand Expenditure on security guards and devices in 1998

                     Security guards     Security devices     Total security        Median
                                                                                 Rand/employee
Size 1                     3,500              3,000               6,500              1,200
Size 2                     6,000              5,000              11,000               600
Size 3                    16,000              8,000              24,000               450
Black                     10,500              3,000              14,500               800
Asian + Colored            7,000              4,000              11,000               600
White                      6,000              5,000              11,000               650
Pre-apartheid              8,000              5,000              13,000               620
Post-apartheid             5,500              3,750               9,250               700

                             CHOICE OF LOCATION FOR EXPANSION

Despite the crime situation, an overwhe lming proportion of SMMEs indicated that if they were
to expand, they would prefer to locate within GJMA. Good infrastructure and service delivery
make it a preferred location for investors. The fact that SMMEs prefer to remain within GJMA,
despite the prevalence of crime, is a positive sign for the area. It also highlights the importance
of government moving quickly to address firms’ concerns and create a stronger business
environment, which will both promote existing firms and attract potential investors.

                        Chart 7.6 Choice of location for expansion
                                   Outside                    No response
                                   Gauteng                        5%
                                     3%

                  Within Gauteng
                        5%



                Within Joburg
                    14%                                              Same premises
                                                                         60%

                           Within same
                             suburb
                               13%




                                                51
               8.      SUBCONTRACTING AND TRADE LINKAGES

                                              SUBCONTRACTING

In keeping with global trends, South African industry seems to be relying more on out-sourcing
various functions, which has meant an increase in the extent of subcontracting relationships
among firms. This trend could provide an important stimulus to the SMME tier, to the extent
that existing or new SMME firms are able to strengthen or create linkages with other firms (both
large and small) that are engaged in out-sourcing. This section examines evidence from the
SMME survey on the extent of subcontracting among the SMME tier.

                    Chart 8.1 SMMEs that act as subcontracters to other SMMEs

                    Training
                Production
           General services
                 Marketing
                 Transport
     Maintenance and repair
             Administrative

                               0   2      4         6          8           10   12       14        16
                                                        Percent of SMMEs


      Chart 8.1 shows the percentage of SMMEs that subcontract to other SMMEs. Less than 16
percent of firms act as subcontractors within their own tier for any of the above activities.
Production, administrative services, maintenance and repair services, and transport services are
contracted out by most SMMEs.

       Chart 8.2 shows the percentage of SMMEs working as subcontractors to large firms by
activity. In Chapter 3, SMMEs indicated that increased contracts from government and large
firms were needed for them to expand their employment. Chart 8.2 confirms the low prevalence
of subcontracting (at less than 7 percent of firms) from the large firm tier to the SMME tier. 44
Moreover, as noted earlier, only 5-6 percent of SMMEs obtain business from government. This
suggests that government promotion and procurement policies could be improved to boost
growth in the SMME tier, as could efforts to promote networking and sub-contracting
arrangements between large firms and SMMEs.




44
   This data can be compared to that of Rogerson (1999b) who found that 46 percent of firms subcontracted work
out and 36 percent acted as subcontractors themselves, with emerging enterprises involved in relatively more sub-
contracting arrangements. Also, Martins and Tustin (1999a) found that SMMEs tend to be a contractor rather than a
subcontractor and that less than 10 percent of firms were subcontractors.




                                                         52
                  Chart 8.2 SMMEs that act as subcontractors to large firms

                Training

              Production

        General services

              Marketing

              Transport

  Maintenance and repair

          Administrative

                           0   1     2       3          4           5   6     7     8
                                                 Percent of SMMEs




                                         INTERNATIONAL TRADE

Only 22 percent of SMMEs engage in international trade. 14 percent are exporters and 8 percent
reported they were direct importers, although it is quite plausible that many more purchase
imported inputs from retailers who are importers. The share of exporting SMMEs rises from 8
percent for micro firms to 17 percent for small firms. The share of exporters among post-
apartheid firms is below the norm at 11 percent, and the share of black SMME exporters even
lower at 6 percent (see details in Annex 5).

     In addition to the low overall share of exporters in the SMME tier, the share of output
exported is also very low. The median share of output exported by all SMME exporters declined
from 20 percent in 1997 to 15 percent in 1999, a finding similar to the Large Manufacturing Firm
Survey. Although the four industrial sectors exported a low proportion (11 percent) of their
output, all except clothing and garments maintained their shares between 1997-99.

               Table 8.1 Share of exports and exporters in main regional markets

                                Number Mean (% of exports) % of all exporters
           SADC                   71          75.8                63.4
           Rest of Africa         23          47.5                20.5
           Western Europe         29          37.5                25.9
           Central//East Europe   13          33.7                11.6
           Asia                   16          35.3                14.3
           Australasia            18          20.1                16.1
           N. America             21          33.3                18.8
           Rest of the Americas    6          26.3                 5.4


      Table 8.1 lists the mean percentage of exports and share of SMME exporters exporting
                                                                                         a
their products and services in the different international markets. SADC represents the l rgest
market in Africa: 63 percent of SMME exporters export an average of 76 percent of their exports


                                                  53
to SADC countries. The rest of Africa (comprised mainly of east African countries) is the
second most common market destination, with 20 percent of all exporters selling 47 percent of
their exports. Among the industrial economies, a quarter of SMMEs export to Western Europe.

                    Table 8.2 SMME top competitors in foreign markets

               Foreign Markets                     Top 3 Competitors

             SADC                   Zimbabwe         Botswana     Mozambique
             Western Europe         Germany          France       United Kingdom
             Rest of Africa         Tanzania         Nigeria
             Asia                   Singapore        Hong Kong    Thailand
             North/South America    United States    Canada       United Kingdom

       Table 8.2 lists the top 3 competitors for SMMEs in the foreign markets where they sell
their goods, providing an indication of the level of foreign competition that SMMEs believe they
face in foreign markets. The absence of low- income industrial competitors such as China and
India indicates the potential competition that South African firms would have to face were they
to diversify into more labor- intensive product ranges in which these economies are strong.

      Low penetration of foreign markets may be due to insufficient SMME cost-
competitiveness or it may be due to SMMEs’ need for government support systems to facilitate
entry into international trade. The actual number of firms in the survey that have used export
promotion programs are shown in Table 8.3:

       Table 8.3 Number and share of SMMEs that use export promotion programs

                     Do firms use available export incentive programs?

                                                       Yes Share of exporters
               Export finance guarantee                 5              4.5
               Export marketing and investment           5           4.5
               Export credit and reinsurance (ECRS)      2           1.8
               Life scheme                               2           1.8
               Motor industry development program        3           2.7
               Export credit facility-pre-shipment       2           1.8
               Export credit facility-post-shipment      2           1.8
               Export credit guarantee                   5           4.5
               Forward Forex cover                      17          15.2
               Transport subsidies                       4           3.6
               Tax exemptions (including VAT)           35          31.3
               Other                                     1           0.9

     As a share of all SMME, no more than 13 percent of fir ms were aware of the various
export promotion programs in place for them. The 3 most well known programs were tax


                                              54
exemptions, export credit guarantees, and forward foreign exchange cover, all three of which
provide direct financial relief, rather than marketing or other assistance. With the exception of
tax exemption and forward cover programs, no more than 4 percent of SMME exporters use the
numerous programs in place, raising the possibility that efforts to rationalize and re- focus
existing programs could be pursued.

              Table 8.4 SMMEs complaining about customs clearance procedures
                         (percent share of all importers and exporters)

                                                           Serious Moderate Not a problem                 N/A
 Domestic dumping of cheap imports                          22.2      7.4        24.4                     43.2
 Foreign dumping of cheap imports                            1.1      5.7        36.9                     52.8
 Barriers to imports imposed by foreign countries            2.8      7.4        34.1                     52.3
 Illegal customs control procedures                         16.5     10.2        34.7                     35.2

      With regard to non-tariff trade barriers, the survey found that among the 22 percent of
firms that trade internationally, 22 percent believed domestic dumping of cheap imports to be a
serious problem, and 16 percent identified illegal customs control procedures as a serious
concern. The bulk of these firms were in the clothing and garments, metals, and furniture sectors.
Fewer than 10 percent of exporting SMMEs complained about barriers to imports or anti-
dumping charges imposed by foreign countries.

      In sum, South Africa’s SMMEs are not relying on foreign markets as a significant source
of demand, especially when considered relative to firms that employ more than 50 workers. 45
And although exchange rates play an important role in determining South African firms’ cost
competitiveness, what may be of more importance to the SMME tier in particular is a stable
policy environment and a set of export promotion programs that can effectively reach the
majority of exporters and assist them to increase their business visibility and enter unexploited
foreign markets. The survey data suggest that such programs have not been greatly utilized by
SMMEs, primarily due to low awareness and perhaps because not all of them are useful.




45
   For large manufacturing firms, between 70 to 80 percent of firms engage in exporting. See Large Manufacturing
Firm Survey report (Chandra, Moorty, Rajaratnam, and Schaefer, 2001).


                                                      55
                 9.    CENTRAL THEMES AND FINDINGS
The main findings of the 1999 GJMC-World Bank SMME survey cover the responses of
approximately 800 SMME owners across 8 manufacturing and service sectors. These are
summarized below.

      Who is the Typical SMME Entrepreneur?

The SMME cluster is frequently perceived as the solution for South Africa’s long term
unemployment and poverty problem. However, the Survey shows that over 70 percent of the
SMME owners had formal sector work experience and chose to start their own firm when they
perceived a lucrative business opportunity; another 12 percent became SMME owners when they
joined the family business, and about 5 percent came with similar business experience from
another country. Less than 5 percent were unemployed and tired of searching for their first job
when they started their own SMMEs. Since the majority of the unemployed today are comprised
of either young entrants who have never held a first job, or the long-term unemployed with non-
transferable skills, this entrepreneurship pattern suggests that the SMME cluster may not provide
such a strong engine of job creation for the poor and unemployed.

      Employment Creation and Growth Within the SMME Cluster

Raw employment statistics from the Survey are deceptive at first glance. They suggest that
between 1997 and 1999, employment grew by 23 percent, defying trends in the overall
manufacturing sector during the same period. However, much of this growth in aggregate
employment occurs because of the birth of new firms within the period. Closer inspection of the
firms that were established in 1997 or earlier (73 percent of the sample) suggests a different
picture. For these firms, during 1997-99, there was job creation in 41 percent of these firms (in
retail, tourism and IT sectors), job-losses in 27 percent, and no change in employment in the
remaining 32 percent. Overall, net employment in these existing firms declined by 7 percent
during 1997-99.

      Although between 26-30 percent of firms invested in excess of 10 percent of their capital
stock during 1998-99, only 13 percent of SMME firms both invested and increased employment
by more than 5 percent. SMME owners were asked the main reasons for not undertaking planned
investments in 1998-99, and the most important factors that would cause them to increase
employment. The primary reason for slow investment and employment growth was identified as
“insufficient demand” for their products/services, thereby ranking market conditions as more
important than labor or capital market constraints. “No need/desire,” “lack of access to capital”
and “high interest rates” were the other main reasons for low investment. Similarly, in listing the
main obstacles to increasing employment, 80 percent of firms “insufficient demand” as the most
important constraint. Next most important for 40–45 percent of firms were three factors ranked
equally: “fall in real interest rates”, “increased business visibility” and “increased government
promotion of SMMEs”, followed by “more contracts from government/large business.”




                                                56
      Other Critical Constraints: Shortage of Skills

African labor constitutes the majority of SMME semi-skilled employment. However, whites
dominate skilled occupations and women are still under-represented. Despite the presence of
African labor in semi-skilled occupations, the legacy of apartheid and its impact on skills
development suggests that SMMEs face an important skills shortage.

       The most critical labor market issue that emerges from this Survey is the shortage of skills
and the steps being taken to address it. 30–45 percent of SMMEs reported a skills shortage in
1999, when the majority of firms were not expanding. However, only about 24–30 percent of
firms with over 5 employees, and less than 10 percent of firms with less than 5 employees
undertook formal skills training in 1998. For those that trained, the median amounts invested in
training per employee decreased sharply from R1700 per annum for the micro firms to R938 and
R400 per annum for the larger ‘very small’ and ‘small’ SMMEs. The higher expenditures
undertaken by micro firms reflect the high fixed costs of training. The amount spent on training
is generally less than the amount per employee spent on crime prevention. Low magnitude of
training by firms could result from resource constraints and/or lack of awareness to training
programs. In fact, SMMEs do report that they would like national authorities to improve
education and training. So firms could be treating skills training as a public good and looking to
government for assistance.

       Survey results also suggest that labor regulations are not a sizable constraint for most
SMMEs, particularly micro firms. SMMEs in the IT and tourism sectors appear to be the least
affected by these regulations. When small SMMEs do incur higher implicit costs of doing
business with labor, they respond in ways quite similar to larger firms with over 50 employees:
they create fewer jobs, and the jobs they do create are more likely to be non-permanent.
Nevertheless, it would appear that most critical labor market problem for SMMEs remains the
skills scarcity, rather than the degree of regulation. If skills development can be effectively
promoted, the SMME cluster may be able to move towards faster growth and job creation.

      Inadequate Access Or High Cost of Capital

The most critical issues in the capital market are related to access to credit and its cost. Private
savings consisting of family and individual savings and retained earnings finance the majority of
firms’ investment capital. An examination of the survey data revealed that SMMEs are not
severely constrained by lack of access to bank loans. However, where access is an issue, it is
related to the firm size, age, and race of the owner.

      In addition to the issue of access to capital, high interest rates were also noted as a
constraint. Although the share of bank loans used to finance start- up or working capital is low
compared to the share of savings, approximately one-half of firms surveyed did report using
formal credit in the last five years to meet their business needs. Firms that borrowed from banks
confirmed that high interest rates had a negative effect on their business, although 24 percent of
firms reported that the recent decline in interest rates had made little difference to their business.
While this suggests that interest rates may still be too high, it also indicates that the cost of
capital is not the sole factor inhibiting investment and growth in SMMEs.




                                                 57
      Insufficient Government Support

SMME firms perceive government to have a vital role in their development, and identified a
number of interventions government can take to increase SMME competitiveness, marketability,
and visibility. First, SMME firms want improved support systems. The support programs are of
two types: DTI programs and programs administered by its apex institutions, Khula and Ntsika.
The Survey indicates that awareness of DTI programs is about 7-34 percent; usage is even lower
in the range of half percent for many programs. No more than 20 percent of SMMEs were aware
of Khula and Ntsika programs, with the exception of the quality standards program offered by
the South African Bureau of Standards. Less than 10 percent of firms that have heard of these
programs have used them.

       Government support systems also exist in the form of export promotion programs to
facilitate entry into international trade. The survey reveals that the 3 most well-known programs
were tax exemptions, export credit guarantees and forward foreign exchange cover, all three
indicating that direct monetary returns were preferred to other types of export assistance. With
the exception of these three programs, no more than 4 percent of SMME exporters used any of
the numerous other programs in place. Low awareness and even lower usage of the different
programs raises the issue of whether it might not be more efficient to rationalize them to create
more effective programs with a higher usage.

       In addition to promotion and procurement, SMMEs were asked to prioritize government
policies that would facilitate their growth. The two most important actions for local government
were identified as safety and security on the streets and infrastructure development. The two
most important actions for national government were policy stability and following closely
behind, four other actions: lower interest rates, prioritize education and training, promote
efficient and flexible wages, and promote SMME participation in publicly provided service.

      Opportunities and Challenges

Greater Johannesburg appeared to be a popular location for the majority of the existing investors
in 1998-99: 87 percent of the firms indicated that they would prefer to expand within Greater
Johannesburg. This underscores the advantages and opportunities that the local authorities enjoy
in terms of attracting more investors. Firms’ choice of location indicated that 85 percent enjoyed
close proximity to product and input markets; 74 to 86 percent of the SMMEs reported that
reliability of water supply, electric supply, and telecommunication services was either fair or
excellent. However, on costing, between 25-50 percent of firms flagged their dissatisfaction
with the cost of telecommunication services, electricity, and water. All three ratings indicate that
pricing is perceived as more of a problem than reliability.

      Additional challenges for local authorities emerged in the incidence and costs of crime
prevention for SMMEs in Greater Johannesburg. 61 percent of the firms indicated that they were
victims of crime in 1998-99. In general, firms spent R600-700 per employee on crime
prevention in 1998-99 with the costs decreasing with firm size. Expenditure on crime prevention
is higher than the expenditures on skills training.




                                                58
     The Role of Race

The Survey indicates that race, size and age were important markers of SMME development in
the 1990s. For example, the smallest micro firms display the usual handicaps or advantages
found in most countries, such as weaker access to credit or being subject to fewer labor
regulations. Similarly, post-apartheid firms display the handicaps of younger firms in other
countries such as poorer export penetration. However, the race of the SMME owner appears to
capture a unique feature of the South African business environment, reflecting the handicaps that
categories of entrepreneurs have regardless of size, age or location. Black-owned SMMEs appear
the most disadvantaged – typically, they experience all drawbacks of micro and post-apartheid
firms (but to a greater extent), and possess few of their advantages. For instance, about 50
percent of black SMMEs could not borrow from a bank because of lack of collateral, the right
credit history or some similar reason.

      There are a few encouraging trends revealed during 1998-99 (although apparent trends in
the data must be interpreted with care). First, the share of black entrepreneurs among new
entrants rose to 9 percent, up from 6 or 7 percent in the full sample that includes older SMMEs.
Second, in 1999, when the overall economy was sluggish, the share of black SMMEs that
increased investment and employment above the critical minimum shot up from 15 percent in
1998 to over 30 percent. Black SMMEs also appeared to have more optimistic expansion plans
than most other groups. But black SMMEs were also the only category that assigned the number
one policy priority to education and training, a fact that is consistent with the low skills base
among blacks, and the limited share of black SMME owners in general.




                                               59
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                                           62
                      ANNEX 1: DEMOGRAPHICS
                   Table A1.1 SMME sample by sector and size -class
                              Total number of   Percent        Percent   Percent
                             firms interviewed   Size 1         Size 2    Size 3
  Clothing and Garments              98           21.4           40.8      37.8
  Metals and Metal Products          93           28.0           50.5      21.5
  Furniture                          92           15.2           51.1      33.7
  Food and Beverages                115           15.7           62.6      21.7
  Tourism                            92           26.1           56.5      17.4
  Construction                       92           21.7           48.9      29.3
  Retail                            116           40.5           39.7      19.8
  Information Technology             91           35.2           48.4      16.5
  Total                             789           25.5           49.9      24.6

  Table A1.2 PDI ownership in SMMEs – number & percent owned, relationship to age,
                                       1999
                           Number with     Mean share    4 years or     5 or more
                          PDI ownership     owned (%)   less of PDI years of PDI
Size 1                          39             9.6           26             13
Size 2                          71             8.5           47             24
Size 3                          35             7.5           19             16
Total                          145                           92             53
Clothing & Garments             20             9.4            6             14
Metals and Metal Products        5             9.8            3              2
Furniture                       25             8.8           13             12
Food & Beverages                19             9.5           16              3
Tourism                         11             7.6            8              3
Construction                    12             7.1            9              3
Retail                          32             9.3           19             13
Information Technology          22             7.3           18              4




                                         63
        Table A1.3 Sectoral breakdown of SMMEs within racial groups (percent), 1999

                            Black     Colored    Asian White     SA no   Foreign     Foreign
                                                                  race   African      non-
                                                               indicated             African
Clothing & Garments             11       0        30      8        10       0          17
Metals and Metal Products        8       6         1     11        17       0           9
Furniture                        9      58        15     10        13       0           5
Food & Beverages                 7       0        14     10        15       0          15
Tourism                         10       6         6     15         4      100          8
Construction                    16       7         5     13         7       0          12
Retail                          23       0        23      9        10       0          13
Information Technology          14      22         5     12         4       0          20
Other                            0       0         0     13        20       0           0

                       Table A1.4 SMME sample by legal status (percent)

                                     Micro      Very Small     Small         All
          Sole proprietorship        35.3          20.8          4.7        20.6
          Partnership                 7.0           5.3          5.7         5.8
          Family business             5.5           3.8          1.6         3.7
          Closed corporation         40.3          46.2         40.4        43.3
          PTY limited                10.9          23.6         43.5        25.3
          Cooperatives                0.5           0.0          2.6         0.8


            Table A1.5 Racial distribution of SMMEs across sectors (percent), 1999

                            Black     Colored    Asian White     SA no   Foreign     Foreign
                                                                  race   African      non-
                                                               indicated             African
Clothing & Garments              6       0        23     43        17       0          12
Metals and Metal Products        4       1         1     58        29       0           7
Furniture                        5      10        11     49        21       0           4
Food & Beverages                 4       0        10     51        25       0          10
Tourism                          5       1         4     76         7       1           6
Construction                     9       1         4     66        12       0           9
Retail                          12       0        17     45        17       0           9
Information Technology           7       4         4     64         7       0          14




                                                64
                      ANNEX 2: SMME EXPANSION
            Table A2.1 Rates of employment growth in new entrants, 1998-99
                                   Employment      Number of          Absolute
                                  growth rates,   new entrants, employment
                                     1998-99         1998-99        levels, 1999
      All new entrants                65.95            210             2788
      Clothing/garments                34.0             20              437
      Metals and products              37.6             15              183
      Furniture                        98.1             25              315
      Prepared food & beverages       128.5             47              617
      Tourism                          54.5             30              394
      Construction                     35.9             15              261
      Retail                           74.6             35              379
      IT                               57.8             23              202

     Table A2.2 Breakdown of new entrants by race and sector (frequencies), 1999

                            Black Coloure d White        SA no   Foreign     No race
                                      +                   race              indicated
                                   Asians              indicated
Clothing & Garments           0       4       6             5       3              2
Metals and Metal Products     1       0       4             9       0              1
Furniture                     1       6       9             2       1              6
Food & Beverages              2       5      23             9       4              4
Tourism                       3       2      21             1       2              1
Construction                  2       1       4             3       1              4
Retail                        6       6      12             4       3              4
Information Technology        3       1       9             3       3              4

             Table A2.3 Investment in new machinery and equipment, 1998

                           Median investment in Rands Percent of firms that invested
 Size 1                              30,000                        40.1
 Size 2                              60,000                        50.9
 Size 3                             120,000                        60.0
 Metals and metal products          100,000                        45.2
 Tourism                             80,000                        46.7
 Retail                              80,000                        46.6
 Prepared food/beverage              80,000                        37.4
 Furniture                           68,000                        53.3
 Construction                        60,000                        64.1
 IT                                  50,000                        68.1
 Clothing/garments                   30,000                        45.9




                                          65
     Table A2.4 Tracking employment for 116 SMMEs born in 1998 (percent)

                                       Employment growth 1998-99
             All                                  1.5
             Black                               22.1
             Asian + Colored                     -7.2
             White                                0.6
             South African – No race             -7.7
             Foreign                             16.1
             No indication                       11.8
             Clothing and Garments              -10.1
             Metals and Metal Products            3.8
             Furniture                           15.1
             Food and Beverages                   9.6
             Tourism                            -12.2
             Construction                        10.4
             Retail                              12.9
             Information Technology             -10.9

        Table A2.5 Investment in new machinery and equipment by sector

                             1998 Median investment    1999 Median investment
                                  (1000 Rands)              (1000 Rands)
Black                                  45                        50
Asian + Colored                       100                        50
White                                  72                        70
South African – No race                70                        40
Foreign                                78                        55
Clothing and Garments                  30                        40
Metals and Metal Products             100                        45
Furniture                              68                        50
Food and Beverages                     80                        93
Tourism                                80                        60
Construction                           60                        46
Retail                                 80                        65
Information Technology                 50                        72




                                     66
               Table A2.6 Changes in employment, 1997-98 and 1998-99

                                   1997-1998                       1998-1999
                              No      Less   10% or         No       Less    10% or
                            change    than    more        change     than     more
                                      10%                            10%
Size 1                        36       14      50           51        14       35
Size 2                        26       18      56           47        14       40
Size 3                        17       23      60           29        17       54
All                           25       19      56           43        14       43
Clothing & Garments           33       22      44           57         9       35
Metals and Metal Products     25       25      50           50        11       39
Furniture                     23       36      41           43        22       35
Food & Beverages              37       21      42           42        12       46
Tourism                       35       15      50           50        19       31
Construction                  15        8      77           33        26       41
Retail                        39       22      39           59        11       30
Information Technology         6        3      90           18         5       77
Black                          0       33      67           47        11       42
Asian + Colored               30       15      55           54         7       39
White                         28       14      59           37        15       49
Foreign                       36       18      45           43        24       33

   Table A2.7 Necessary conditions to employ 10 more workers by size class (percent)

                                                  All   Size 1     Size 2    Size 3
  Increase in demand                              78      75         77        85
  Fall in real interest rate                      44      37         44        51
  Increased business visibility                   46      50         46        42
  Government promotion of SMMEs                   39      43         36        41
  More contracts from Gov/large businesses        32      30         29        38
  Fall in real wage                               17      11         17        24
  Increased exports                               15       7         15        24
  Cheaper imports                                 15      13         14        18
  Decline in foreign competition                  14      13         12        19




                                             67
          Table A2.8 Necessary conditions to employ 10 more workers by sector (percent)

                 Clothing   Metals & Furniture           Food &        Tourism Constr-            Retail IT All
                 &          Metal                        Beverage              uction
                 Garment    Product
Increase in         82         78       76                  75            78           83          87      87    78
demand
Fall in real        42         41             43            43            42           61          34      34    44
interest rate
Increased           55         35             52            45            45           33          63      63    46
business
visibility
Government          46         41             40            31            39           43          40      40    39
promotion of
SMMEs
More contracts      32         32             28            15            32           43          54      54    32
from
Gov/large
businesses
Fall in real        21         19             23            14            14           28          7       7     17
wage
Increased           26         27             21            9             14           7           14      14    15
exports
Cheaper             21         16             14            8             11           12          19      19    15
imports
Decline in          33         18             12            11            13           7           4       4     14
foreign
competition

           Table A2.9 Necessary condition to employ 10 more wo rkers by race (percent)

                                                   Black        Asian +        White    SA no          Foreign
                                                                Colored                  race
   Increase in demand                                75           77             81          70          83
   Fall in real interest rate                        46           36             49          34          39
   Increased business visibility                      6           17             21          15           8
   Government promotion of SMMEs                     54           52             46          40          45
   More contracts from Gov/large businesses           8           22             16          11          11
   Fall in real wage                                 10           25             15          11          14
   Increased exports                                 77           49             42          25          30
   Cheaper imports                                   46           39             32          27          28
   Decline in foreign competition                     8           25             14          15           8
   Other                                              0            7             13          15          16
   Total                                            100          100            100         100         100




                                                    68
                                   Table A2.10 SMME Firm Births and Deaths – International Evidence

Study                    Type of Firms                       Time Period            Survival Rates (percentages)               Other Findings
OECD – U.S.
Agarwal (1998)           2213 small firms from Thomas        Historical – 1912 to   Low tech: 90.43 for 1st year, 61.01 for
                         Register of American                1950s on average       5 years, and 45.37 for 10 years.
                         Manufacturers as defined by
                         asset size and technological                               High tech: 93.87 for 1st year, 68.50 for
                         activity.                                                  5 years and 50 for 10 years.
Phillips and Kirchhoff   Small Business Administration       1978-1986              See Table 2.                               Firms that grow have survival
(1988)                   Establishment Longitudinal                                                                            rates of 66.3 percent, but only 10
                         Microdata files for firms with                             On average, 39.8 survive 6 or more         percent of firms show growth in
                         less than 500 employees.                                   years.                                     the first four years.
Audretsch (1991)         11,154 small firms from Small       1976-1986              See Table 3.                               New firm survival is promoted by
                         Business Data Base.                                                                                   extent of small-firm innovative
                                                                                                                               activity and discouraged by high
                                                                                                                               capital-labor ratios.
Winter (1995) on study   327 small firms in Wisconsin that   1979-1986              50 percent of manufacturing firms          The mean employment size of
by Pakes and Ericson     started operations in 1979.                                survived 6 years and 40 percent of         survivors was 2.7 times larger
                                                                                    retailing firms survived 6 years.          than the mean employment size of
                                                                                                                               the original cohort.
Winter (1995 on study    Small firms in 387 U.S.                                    Less than 50 percent over five years
by Dunne, Roberts, and   manufacturing industries from                              and less than 35 percent over ten.
Samuelson (1988)         the Census of Manufactures
OECD
Everett and Watson       Surveyed 51 shopping center         1961-1990              50 percent survived the period.            Economic factors accounted for
(1998)                   managers providing data on                                                                            between 30 to 50 percent of small
                         5,196 small firms in Australia                                                                        business failures.
                         where small firms are defined as
                         having only one or two persons
                         making critical management
                         decisions.
Koshiro (1990)           Small firms in Japan’s Census of    1966-1981              See Table 4.
                         Establishments defined by
                         employment and assets.
Study                    Type of Firms                       Time Period            Survival Rates (percentages)               Other Findings
OECD – Europe
Benassi (1995)           Small firms as defined by                                  See Table 5.



                                                                              69
                         employment using Eurostat data.
Fotopoulos and Louri     209 firms established in 1982-84     1982-1992           Year 1 = 79.2    Year 6 = 45.0          Location in Greater Athens
(2000)                   and having an average size of 46                         Year 2 = 69.2    Year 7 = 38.3          positively affected survival rates.
                         employees. 120 out of the 209                            Year 3 = 62.3    Year 8 = 33.7
                         were located in Athens and the                           Year 4 = 54.1    Year 9 = 32.3
                         others were located in other areas                       Year 5 = 51.2
                         of Greece.
Callejon and Segarra     Spanish manufacturing firms in       1980-1992           Generally 40 to 60 percent over 5       Find that new firms are users of
(1999)                   the Registry of Industrial                               years:                                  innovations and not producers of
                         Establishments.                                          1980-85 = 8.15 per year exit            innovations.
                                                                                  1986-1992 = 7.64 per year exit

                                                                                  95 percent survival over 1st year, 90
                                                                                  percent over 2nd year and 85 percent
                                                                                  over 3rd year in early 1990s.
Middle Income
Winter (1995) on study   Medium and large manufacturing       1975-1985           Mean years of survival after
by Behrman and           firms with over 20 employees in                          1975 is 6.4 and only 45 percent
Deolalikar (1989)        Indonesia.
                                                                                  of firms survived through 1985.
Aw et al. (1997)         Manufacturing firms from             1981, 1986, 1991    See Table 6.
                         Taiwan’s Census of
                         Manufacturers                                            In general, over 80 percent of firms
                                                                                  that existed in 1981 did not exist 10
                                                                                  years later.




                                                                             70
Study                   Type of Firms                         Time Period          Survival Rates (percentages)           Other Findings
Low Income
Mead and Liedholm       Small firms in commerce and           1990-1993            See Table 7.                           In Kenya, of those who closed, 60
(1997) on various       manufacturing that sell at least 50                                                               percent opened a new business.
surveys in Africa and   percent of output to market and
                                                                                   Retail trading firms face highest
Dominican Republic.     employ 50 or less people.                                                                         Over 50 percent of closures take
                                                                                   closure risks and are 30 percent       place within first 3 years of start-
                                                                                   more likely to close than              up. Urban firms have a 25 percent
                                                                                   manufacturing counterparts.            greater chance of survival.
Kapoor et al. (1997     GEMINI studies by USAID of            1991 and 1993                                               Mortality rates show that 48
                        5000 microenterprises in                                                                          percent of closures take place
                        Zimbabwe of which 69% were in                                                                     within the first three years.
                        manufacturing and 23% were in
                        the commercial sector. Small
                        firms have less than 50 workers.
Kesper, Anna. (2000)    120 successful (experienced           2000                 Firm closures between 1998 and 2000:
                        growth from 1994-98) SMME                                  Clothing = 25%
                        firms in Gauteng/Witwatersrand                             Furniture = 5%
                        in clothing, furniture and metal                           Metal working = 12.5%
                        working. Small firms have less                             Total = 14%
                        than 50 workers and medium
                        firms have 50-200 workers.
Rogerson and Rogerson   85 small black enterprises in                              Informal interviews with property      One said “If a hundred companies
(1997)                  Johannesburg inner city                                    brokers and managers yields estimate   moved in, 40 percent would have
                                                                                   that 50-60 percent fail to survive.    died within two months”.




                                                                              71
         Table A2.11 Survival Rates for U.S. Small Firms 1978-1986

                                             Percent surviving 6 years

          By number of employees at birth
                1 to 4                                 37.2
                5 to 499                               49.2
                All firms                              39.8
          By degree of employment growth
                Zero growth                            27.5
                Low growth                             66.3
          By sector
            Construction                               35.3
            Manufacturing                              46.9
            Wholesale trade                            44.3
            Resale trade                               38.4
            Services                                   40.9
         Source: Phillips and Kirchhoff (1988).




    Table A2.12 Survival Rates for U.S. Small Firms by sector, 1976-1986

Sector                     Number of                  Survival Rates
                          Firms in 1976 2 yrs      4 yrs 6 yrs 8 yrs     10 yrs
 Food                          474      71.7       58.4 42.8 32.1         30.4
 Textiles                      308      73.1       53.6 36.0 28.6         27.3
 Apparel                       864      72.0       55.2 38.4 29.6         27.3
 Lumber                        794      75.7       64.7 44.0 33.6         32.2
 Furniture                     531      74.0       58.4 36.9 30.3         28.4
 Paper                         126      78.6       63.5 53.2 46.0         45.2
 Chemicals                     322      77.0       61.2 45.3 37.0         35.4
 Leather                       124      71.8       60.5 33.1 26.6         24.2
 Fabricated metals             962      78.8       66.3 51.2 43.0         41.0
 Non-electrical machinery     1519      81.8       69.4 54.0 46.6         44.4
 Electrical machinery          635      77.0       59.5 40.8 33.1         30.9
Source: Audretsch (1991).




                                       72
                 Table A2.13 Firm births and deaths in Japan

                            1966-69 1969-72 1972-75 1975-78 1978-81
      Construction
         Birth rate        5.4        6.4      5.4      4.6      4.7
         Mortality rate    0.8        0.5      2.2      1.1      1.1
      Manufacturing
         Birth rate        6.0        5.6      4.3      3.4      3.7
         Mortality rate    2.5        3.2      3.4      2.3      2.5
      Wholesale Trade
         Birth rate        6.2        7.7      7.9      6.6      6.3
         Mortality rate    6.5        4.1      5.3      3.8      3.9
      Retail Trade
         Birth rate        5.0        4.8      4.3      4.9      4.4
         Mortality rate    2.1        3.6      3.6      3.3      4.0
      Services
         Birth rate        6.3        6.7      6.1      6.1      6.4
         Mortality rate    3.9        4.0      3.8      3.3      3.1
     Source: Koshiro (1990)

                Table A2.14 Survival Rates in OECD countries

                       France Netherlands      United Kingdom Finland
      Beyond 1 year      74       82                  88        79
      Beyond 3 years     65       67                  62        69
      Beyond 5 years     51       60                  48        51
     Source: Benassi (1995)

                Table A2.15 Firm Births and Deaths in Taiwan

                             Share of firms in 1991  Share of firms in 1981
                             1986 Entry 1991 Entry 1986 Exit 1991 Exit Cohort
                               Cohort      Cohort   Cohort
Textiles                        23.8         59.4    60.9          17.8
Clothing                        22.1         63.5    73.7          13.8
Chemicals                       19.8         64.0    56.4          14.2
Plastics                        21.5         64.8    62.2          16.1
Basic Metals                    16.2         74.3    67.1          14.9
Fabricated Metals               21.7         66.4    65.5          16.7
Non Electrical Machinery        19.3         66.6    61.1          16.1
Electrical Machinery            20.0         68.6    58.8          16.0
Transportation Equip ment       20.1         66.9    62.0          15.7
Source: Aw et al. (1997)




                                       73
Table A2.16 Firm Births and Deaths in Developing Countries

                         Closure Rates Birth Rates
     Botswana                  6.0        32.0
     Kenya                    15.9        19.7
     Malawi                   15.0        24.6
     Swaziland                10.5        22.0
     Zimbabwe                 11.5        23.5
     Dominican Republic       26.0        27.1
      Source: Mead and Liedholm (1997)




                           74
                           ANNEX 3: LABOR MARKETS
                Table A3.1 How many unions SMMEs work with by size (Percent)

                                       No Unions    1 Union 2 Unions
                            Size 1        86.6         6.9     0.5
                            Size 2        73.4        20.5     2.0
                            Size 3        46.2        41.0    10.8

               Table A3.2 How many unions SMMEs work with by sector (Percent)

                                              No unions 1 union 2 unions
                    Clothing & Garments         50.0      37.8     9.2
                    Metals and Metal Products   66.7      25.8     1.1
                    Furniture                   46.7      40.2    10.9
                    Food & Beverages            72.2      25.2     0.0
                    Tourism                     84.8       7.6     4.4
                    Construction                69.6      21.7     2.2
                    Retail                      78.5      12.9     3.5
                    Information Technology      90.1       6.6     0.0

                  Table A3.3 Level at which collective agreements are reached

                   No      Establishment      Company         Sector /          Wage        Other
               agreement    / Plant level       level      Industry level   determination
                                                            (Bargaining         board
                                                              Council)
Clothing &        44.3           8.2                2.1        42.3              4.1         1.0
Garments
Metals and        70.8           9.0                3.4        18.0              1.1         2.2
Metal
Products
Furniture         59.6           5.6                4.5        24.7              5.6         5.6
Food &            72.8           5.3                7.0        11.4              3.5         1.8
Beverages
Tourism           81.5           5.4                3.3         4.3              4.3         2.2
Construction      64.1           8.7                4.3        15.2              4.3         6.5
Retail            81.1           5.4                6.3         5.4              2.7         1.8
Information       92.0           2.3                1.1         2.3              0.0         2.3
Technology




                                                   75
                       Table A3.4 Implicit costs of doing business with labor

                Clothing    Metals &     Furniture      Food &    Tourism Constr-     Retail    IT
                   &         Metal                     Beverage           uction
                Garment     Product
Strikes/Stay-
aways
None              22            24           37           38         26         24     31       16
1-3 strikes       12             7            7            3          0          6      4        1
More than 3        2             1            0            0          0          2      0        0

Workdays lost
None              24            23           37           35         25         23     27       15
1-3 strikes       10             3            6            4          1          7      8        1
More than 3        2             5            1            2          0          2      0        1

Disciplinary
inquiries
None              26            22           16           26         18         23     22       13
1-3 strikes        9             8           27           12          7          9     13        3
More than 3        1             2            1            3          1          0      0        1

Dismissal
time (months)
Median             3             1            2           2         1.5          1      1       1
number of         10            13           10           5          6          13     10       3
respondents

Cost of
dismissal
Median           1750          2500        1500          1000      3000         695   1000     5500
number of         14            18           7             9         7           14    11        3
respondents




                                                  76
                              Table A3.5 Impact of labor regulations

                 Clothing   Metals Furniture       Food &     Tourism Construction Retail            IT
                    &       & Metal               Beverage
                 Garment    Product
Hire fewer         29.5      32.9    28.9              21.1     14.6           46.1         12.7    14.9
workers
Substitute         10.4      20.9         18.9         11.5     6.7            25.8          2.7     5.8
machinery for
workers
Hire workers       26.8      18.7         23.1         16.8     10.1           45.5         15.3    12.9
on a temporary
basis
Rely on            15.8      25.3         27.8          2.8     8.9            46.1          9.9    16.8
subcontracting
Saw labor          16.8       6.6         10.0          8.0     7.8            19.3          8.1     5.9
relations
and/or
productivity

                              Table A3.6 Reasons for subcontracting

                             Wages of       Non-wage costs of    Flexibility to         Temporary
                            temporary          temporary         expand or to           workers are
                            workers are     workers are lower      contract           easier to lay off
                              lower
Clothing & Garments             8.8                   11.8             95.8                 43.2
Metals and Metal Products        4.4                  18.2              97.4                25.0
Furniture                       21.4                  21.4              94.1                54.8
Food & Beverages                28.9                  18.4              89.3                28.6
Tourism                         26.7                  15.4             100.0                41.7
Construction                    26.8                  35.0              96.6                48.8
Retail                          42.3                  32.0              92.5                42.3
Information Technology           5.9                  20.0              93.8                31.6
Size 1                          11.4                  15.2              91.8                38.9
Size 2                          29.9                  28.9              94.2                43.7
Size 3                          12.7                  13.9              97.4                35.6




                                                 77
                             ANNEX 4: FINANCIAL ISSUES
                    Table A4.1 Sources of investment capital by firm size, 1998-99

                                    Size 1                       Size 2                   Size 3
                            1-49%     50-      100          1-     50-    100        1-     50-      100
                                     100%       %          49%   100%      %        49%   100%        %
Family savings                2        3        25           5      7      17         3      7         7
Individual savings            4        7        34           9     10      33         9     10        30
Retained earnings from        0        1         6           3      3       6         3      3         8
previous business
Loan from a local bank        3        7          5         5      13      9         6         15     6
Loan from a parent            0        0          0         1       1      0         1          1     1
company
Loan from a foreign           1        0          1         1      0       0         1         1      2
partner
Small business agency         0        0          2         1      1       2         1         1      1
Government                    0        0          0         1      0       0         1         1      0
credit/equipment supplier
Retrenchment package          1        1          5         1      1       1         1         1      1
Church/Other                  2        2          1         2      3       3         5         3      2


                       Table A4.2 Sources of investment capital by age, 1998-99

                                                  Pre-apartheid                Post-apartheid
                                             1-49% 50-100% 100%           1-49% 50-100% 100%

Family savings                                4              6      21          2          7        15
Individual savings                            4             10      34          8          8        29
Retained earnings from previous business      2              2       6          2          3         7
Loan from a local bank                        5             12       6          4         11         9
Loan from a parent company                    0              1       0          1          0         1
Loan from a foreign partner                   0              0       1          2          1         1
Small business agency                         1              1       1          0          0         3
Government credit/equipment supplier          1              0       0          1          1         0
Retrenchment package                          1              1       2          1          0         3
Church/Other                                  2              2       7          3          3         5




                                                      78
                      Table A4.3 Sources of investment capital by race, 1998-99

                                    Black                  Asian + Colored               White
                            1-49%     50-     100        1-      50-     100       1-     50-       100
                                     100%      %        49%     100%      %       49%    100%        %
Family savings               4.2     10.4     22.9       6.0     4.8     25.3     3.7       7.6    17.9
Individual savings           6.3      8.3     29.2      13.3     8.4     30.1     7.6      10.8    29.4
Retained earnings from       0.0      0.0      8.3       3.6     1.2      6.0     2.0       2.9     6.4
previous business
Loan from a local bank       2.1     8.3      4.2       4.8     13.3     2.4      5.9      12.3     8.6
Loan from a parent           0.0     0.0      0.0       1.2      0.0     1.2      0.5       0.7     0.7
company
Loan from a foreign          2.1     0.0      0.0       0.0      0.0     0.0      0.7      0.5      0.7
partner
Small business agency        0.0     2.1      2.1       0.0      1.2     1.2      0.2      0.2      1.5
Government                   2.1     2.1      0.0       0.0      1.2     0.0      0.5      0.2      0.0
credit/equipment supplier
Retrenchment package         0.0     2.1      4.2       3.6      1.2     1.2      0.2      0.5      0.7
Church/Other                 6.3     2.1      2.1       4.8      4.8     2.4      2.7      2.7      3.4


                                       Table A4.3 (continued)

                                                 SA-No race                          Foreign
                                            1-49% 50-100% 100%            1-49%      50-100%      100%

Family savings                              78.2          3.2     18.5     79.7          4.7      15.6
Individual savings                          56.5          9.7     33.9     53.1          4.7      42.2
Retained earnings from previous business    92.7          2.4      4.8     89.1          3.1       7.8
Loan from a local bank                      77.4         15.3      7.3     84.4         10.9       4.7
Loan from a parent company                  100            0        0      98.4          1.6        0
Loan from a foreign partner                 97.6          0.8      1.6     96.9          1.6       1.6
Small business agency                       97.6           0       2.4     100            0         0
Government credit/equipment supplier        100            0        0      100            0         0
Retrenchment package                        92.7          0.8      6.5     100            0         0
Church/Other                                100            0       2.4     100           1.6       1.6




                                                   79
                             Table A4.4 Sources of working capital, 1998-99

                                                                 All
                                                         1-49% 50-99% 100%
                       Retained/internal earnings          4.2   15.2 67.9
                       Loan from a parent/partner company 8.2     8.1  6.8
                       Loan from a local bank              2.0    1.4  1.1
                       Other                               2.1    2.1  2.7


                     Table A4.5 Sources of working capital, 1998-99 by size -class

                                     Size 1                        Size 2                   Size 3
                              1-      50-      100%          1-     50-     100%    1-       50-       100%
                             49%     100%                   49%    100%            49%      100%
Retained/internal earnings    3.0      8.4      77.2        4.3    16.2     65.6    5.1     20.0       63.1
Loan from a                   3.0      5.4       5.0        9.6     8.4      8.1   10.8     10.3        6.2
parent/partner company
Loan from a local bank        2.0      0.0       0.0        1.8     2.0      0.8   2.6       1.5        3.1
Other                         2.5      2.5       4.0        1.5     2.8      2.5   3.1       0.5        1.5


                         TableA4.6 Sources of working capital, 1998-99 by age

                                                   Pre-apartheid      Post-apartheid
                                              1-49% 50-100% 100% 1-49% 50-100% 100%

     Retained/internal earnings                4.5          16.5    67.6     3.4     11.9       68.6
     Loan from a parent/partner company        9.5           8.5     6.7     5.1      7.2        7.2
     Loan from a local bank                    1.6           1.1     0.9     3.0      2.1        1.7
     Other                                     2.5           2.2     1.4     1.3      2.1        5.5




                                                       80
                                 ANNEX 5: TRADE
            Table A5.1 Percentage of SMME exporters as a share of total SMMEs

                                         Percent of firms that export
                       All                            14.2
                       Size 1                          7.9
                       Size 2                         16.0
                       Size 3                         16.9
                       Black                           6.3
                       Asian + Colored                18.1
                       White                          15.9
                       SA – No race                    9.7
                       Foreign                        12.5
                       Pre-apartheid                  15.6
                       Post-apartheid                 10.6


              Table A5.2 Exports as a percent of annual sales estimates by size

                                  Size 1 Size 2 Size 3 Overall median
                 Estimates (1999)   30     20      7         15
                 Estimates (1998)   20     17      5         15
                 Estimates (1997)   40     26     10         20


              Table A5.3 Exports as a percent of annual sales estimates by race

             Black Asian +           White SA – No       Foreign Pre-             Post-
                   Colored                 race                  apartheid        apartheid
Estimates     40.0        8.0         20.0        12.5     10.0         10.0          30.0
(1999)
Estimates     30.0        12.5        20.0        15.0     12.5         13.0          30.0
(1998)
Estimates     25.0        20.0        30.0        10.0     12.5         15.0          45.0
(1997)




                                             81
                Table A5.4 Exports as a percent of annual sales estimates

          Clothing Metals Furniture          Food &         Tourism Constr- Retail IT
          &        &                         Beverage               uction
          Garment Metal
                   Product
Estimates    5.0    10.0    10.0                 11.5           55.0        5.0   30.0    10.0
(1999)
Estimates    5.0    13.0    10.0                 3.0            65.0        5.0   35.0    15.0
(1998)
Estimates   10.0    10.5    10.0                 11.5           60.0        5.0   35.0    25.0
(1997)

                  Table A5.5 Main countries of destination for exports

                SADC               Zimbabwe             Botswana       Namibia
                Rest of Africa     Kenya                Ghana          Nigeria
                Western Europe     United Kingdom       Germany        France
                Asia               Singapore            Guam
                Australasia        New Zealand          Australia
                North America      United States        Canada
                Rest of Americas   Argentina            Brazil



                  Table A5.6 Awareness to exports incentives programs

                                           Share of all firms    Share of exporters Yes
    Export finance guarantee                      6.1                   42.9         48
    Export marketing and investment               5.4                   38.4         43
    Export credit and reinsurance (ECRS)          4.0                   28.6         32
    Life scheme                                   2.0                   14.3         16
    Motor industry development program            2.1                   15.2         17
    Export credit facility-pre-shipment           4.2                   29.5         33
    Export credit facility-post-shipment          3.8                   26.8         30
    Export credit guarantee                       8.6                   60.7         68
    Forward Forex cover                          10.9                   76.8         86
    Transport subsidies                           4.7                    33          37
    Tax exemptions (including VAT)               13.5                   95.5        107
    Other                                         0.3                    1.8          2
    World Player Scheme (IDC)                     0.4                    2.7          3




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