Contributions of entrepreneurship and SMEs towards developing countries

Africa is world’s second-largest continent with abundant natural resources. Despite of this, many countries remain poor and underdeveloped. With the impact of globalization these underdeveloped and developing countries are emerging out of economic doldrums and meeting the challenge of becoming potential economic powerhouses. This positive drive has enabled potential indigenous people to open up micro, small, medium and large enterprises.

These enterprises have immensely contributed to the economic growth of both developed as well as developing countries. Most of the SMEs operate in countries that have low to middle level of income, thus the development of SMEs has gradually increased the rate of employment and income in many countries.

This research is a theoretical framework that introduces the concept of entrepreneurship, small and medium enterprises (SMEs) and their contributions towards the country. Along with that, it discusses on some of the developing countries in Sub-Saharan Africa, such as Nigeria, Zimbabwe and Tanzania.

1. INTRODUCTION

For hundreds of years entrepreneurship has been in existence around the world. Although this concept has been in existence in some of the countries, with the unstable economic situations in many parts of the world, entrepreneurship has become an alternative way of earning a living. In the importance perspective, SMEs play an essential role in the community. Small businesses have flourished in both developed and developing countries which have contributed in boosting the economy of many countries.

2. INTRODUCTION TO ENTREPRENEURSHIP

Entrepreneurship is a process allowing individuals to seek opportunities, be innovative, enable them to manage resources and create value. There are various reasons which encourage individuals to go into entrepreneurship, some of them being; enthusiasm towards ownership and economic and demographic factors.

1An entrepreneur can be defined as, “A person who assembles and then integrates all the resources needed to transform the invention into a viable business”. (Barringer and Ireland, 2008, p. 5).

2According to the Organization for Economic Co-operation and Development, “An entrepreneur is someone who creates and exchanges value through identification and employment of changes in resources, opportunities and/ or innovation”. (OECD, 2007)

3Joseph Schumpeter, one of the economist, wrote in his book, “The Theory of Economic Development”, whereby he defines, ‘An entrepreneur as a person who applies innovation as well as implements change in the economy’. According to Schumpeter, an entrepreneur plays a vital role in boosting the economy through introducing new products, opening new market. (Sobel R., 2008)

For an effective and successful business, it is important that entrepreneurs have the primary characteristics namely; Passion for the business, Product/ Customer focus, Tenacity despite of failure and Executing intelligence. Other characteristics include are; creativity, willingness to take risks, dedicated, enthusiastic, committed and motivated.

In today’s world many countries are encouraging entrepreneurship since it helps in generating economy through investment, job opportunities, variety in products and services.

SMALL AND MEDIUM ENTERPRISE (SME) PERSPECTIVE

3.1 Introduction to small and medium enterprise (SME)

An enterprise is a business segment that can either be micro, small and medium, or large, depending on the number of workers employed, their sales and assets. Small and medium enterprises are small businesses often founded by entrepreneurs. These can be found in almost all the countries. (Appendix 1). The SME sector can be categorized into two; micro enterprises as well as small and medium enterprises, hence some countries refer it as SME whereas others refer it as MSME that is; micro, small and medium enterprise. SMEs are also categorized in terms of formal – those which are registered or informal – those which are not registered.

There is no universal definition for small and medium enterprise given that the criteria used may differ between countries and international institutions. The criteria used when defining SMEs are number of employees, total assets and total annual sales.

4For example, in terms of employment, SMEs are classified according to their cut off. One country might define SME as having their cut off at 250 employees thus known as SME-250 whereas another country would define SME as having employees ranging from 100-500. However many countries define an SME to have a cut-off range between 0-250.

Alternative Definitions of small and medium enterprises

A number of economists and scholars have come up with various ways to define SMEs. [] According to the research done by Tom Gibson and H. J. Van der Vaartindeed they have suggested SME to be, “A formal enterprise with annual turnover, in US dollars, between 10 and 1000 times the mean per capita gross national income, at purchasing power parity, of the country in which it operates.” [Khrystyna Kushni, 2010]

6Beneath is a table showing other definitions by multilateral institutions.

International Institution

Number of Employees

Sales ($)

Assets ($)

Micro

Small

Medium

The European Commission (EC)

0-9

10-99

100-499

Less than

67 million

Less than

56 million

United Nations Industrial Development Organization (UNIDO)

Less than 5

5 -19

20 – 99

–

–

Multilateral Investment Guarantee Agency (MIGA) and International Finance Corporation (IFC)

–

Less than

50

Less than

300

Less than

3 million for small and Less than 15 million for medium

Less than 3 million for small and Less than 15 million for medium

Table 1

N.B the data used in the definition by UNIDO is with regard to developing countries.

3.2 Characteristics of SME

7Small and medium enterprises have their own characteristics as any other entity. Some of the characteristics include:

Owner being the manager having basic business skills, allows control over

its business and making decisions.

Normally around 250 employees or less work in an enterprise depending on the

size and location of the SME.

Due to the less number of employees, there is close relationship with the

customers.

Given that the size of SMEs being small, they have simple organizational

structures.

The vision is normally developed by the founder.

Their small size allows flexibility and can easily adapt changes in the

macro environment.

8The Bolton Committee has defined small business in terms of both “economic” as well as “statistical”. For economic definition, small businesses are those that have the following vital characteristics:

Owners manage the business in their own personal way.

Have a small share of their market.

The owner is independent thus having control over the business decision-

making.

In addition, the Bolton Report has also provided specifications for small businesses depending on the industry sector.

The manufacturing sector requires 200 or less employees whereas construction

sector needs 25 or less employees.

The road transport is based on 5 or less vehicles.

*For retailing and miscellaneous sectors turnover is required to be £ 500 000 p.a.

N.B for the * sectors, the figures refer to the 1971 records.

3.3 Forms of Small and Medium Enterprises

9There are many forms of SME ownership depending on the objective of the organization. These are; Sole trader, Partnership, Limited Company, Co-operative, and Franchise.

3.4 Role of SMEs

It is believed that small and medium enterprises play an essential role in assisting both developed as well as developing countries. As a result it has made a vast difference in terms of economy growth to the countries and to the people at large.

10The main function of SMEs is to stimulate the economic growth of the country. Together with that, it creates employment opportunities, development in rural areas, better usage of resources as well as economic growth and industrialization.

Employment Opportunities – With unemployment on an increase; most of the youths, school graduates and retired people are now opting to entrepreneurship. Thus unemployment is substantially decreasing through entrepreneurship in many countries. Along with that, government and other multilateral institutions are ready to educate people regarding entrepreneurial development. In many countries, women entrepreneurs are encouraged and supported.

Development in Rural areas – Many businesses have shifted to rural areas due to available resources in terms of land, cheap labor and raw materials. This has enabled development of the location in which these businesses operate. Through this, SMEs provide a path for generating income in terms of, contribution in economic activities such as agriculture, services and trading along with facilitating employment opportunities thus reducing rural-urban migration.

Utilization of local resources – With low capital required in establishing SMEs it is easy to utilize local resources such as untapped human as well as physical and convert it into a productive enterprise.

Economic Growth and Industrialization – SMEs are vital for a country’s economic growth and industrialization. This is because; majority of the countries depend on the entrepreneurs contribution towards its development. Through the growth of these small businesses, the nation is protected from cost-benefit multinationals.

11According to Ariyo (2000), SMEs assist in contributing 30% of the global gross domestic product (GDP) through generating employment; act as an income generator by providing employment opportunities resulting to rural development. Along with that, SMEs facilitate in the proper utilization of local resources as well as industrialization and economic growth. [Ozigbo and Ezeaku, 2009]

3.5 Importance of SMEs

12SMEs have been accepted as enterprises which generate growth; reduce poverty by allowing innovation and utilization of resources. The rise of many SMEs is gradually reducing the monopoly power of large firms.

13According to Organization for Economic Co-operation and Development (OECD), SMEs contribute to not only economic growth but also employment, social cohesion as well as local development. The statistics show that, small and medium enterprises generate more than 95% of the businesses, 60% – 70% employment, and provide large number jobs in OECD countries. [OECD]

3.6 Contribution of SMEs

14SMEs are now recognized world wide as being substantial contributors towards the country as well as community’s growth, as follows:

Contribute to the economy through output of goods and services.

They contribute to the community in various ways; by, facilitating job

opportunities and proper utilization of local resources.

Provide expansion opportunity for skilled and semi-skilled personnel.

They bring about diversity through enhancing entrepreneurial and managerial

talent.

Bridges the gap in income disparity.

Introduce appropriate technological advancement.

Bring about new products and services along with establishing new businesses.

SMEs have not only contributed in the economic growth but also in socially. Some of ways include:

Women are encouraged to run their own business.

Young adults are joining together to form alliances in business.

New innovative products are mushrooming to ease the life of people.

People are able to access goods and services close to their domicile.

Overall the lifestyle of people is transforming to be better ultimately raising their

standard of living..

15In the article, ‘Patterns and Trends in Entrepreneurship / SME Policy and Practice in Ten Economies’, Audretsch and Thurik, 2001a, pg. 32, it states that, “Entrepreneurship generates growth because it serves as a vehicle for innovation and change, therefore as a conduit for knowledge spillovers. Thus, in a regime of increased globalization, where the comparative advantage of OECD countries in shifting towards knowledge-based activity, not only does entrepreneurship play a more important role but the impact of that entrepreneurship is to generate growth”. [Swedish Foundation for Small Business Research, 2001]

SME Growth in Countries

16The income of a country is measured by using various variables such as gross domestic product (GDP), gross national income (GNI), employment rate. According to the studies, it is shown that, SMEs in high income countries contribute more than 55% of GDP and 65% of employment. In the low income countries, SMEs and micro enterprises contribute more than 60% of GDP and 70% of employment whereas in middle income countries they contribute 70% of GDP and 95% of employment. Hence this shows that, there has been a significant growth of small and medium enterprises lately in the low to middle income countries. The graph below explains growth of MSME in 60 economies against country income group from year 2000 to 2009.

17Figure 1

[Source: World Bank/ IFC, 2010]

4. SMALL AND MEDIUM ENTERPRISES IN DEVELOPING COUNTRIES

4.1 Introduction to Developing Countries

18In order to understand the world in a better way, countries are categorized as First World, Second World and Third World in terms of high and low economy level. With regard to country economic status, International Monetary Fund (IMF) classifies countries into two groups; 23 as Industrialized Countries and 138 as Developing Countries

19Third world countries are generally those that have low level of economies in terms of low Human Development indices, Gross National Product (GNP) and are usually known as developing countries. Below is a figure showing third world economic countries represented by orange and red colors.

Figure 2

[Source: Wikipedia, 2009]

20According to World Bank, the developing countries are divided in two groups; low income and high income countries. Below is a figure showing the level of income in the around the world.

Figure 3

     High income      Upper-middle income      Lower-middle income      Low income

[Source: Wikipedia, 2009]

4.2. SMEs in Developing Countries

21Small and medium enterprises, particularly the informal micro-enterprises in developing countries are not growth oriented. These enterprises are normally formed as a result of lack of jobs in the formal segment or are a product of individual traders or family businesses. These may expand to the limits of available workforce of the family or market-limits in the informal sales or sometimes end up in joint ventures.

4.3 Characteristics of SMEs in developing countries

22Fisher, E and Reuber, R 2000, suggested that, SMEs in developing countries are characterized under the following four main headings, namely; Labor Force Sectors of Activity, Sex of Owner, and Efficiency.

Labor Force – Most of the SMEs are one-person proprietor business. Over half of the SME employees especially in the developing countries belong to this group whereby, their families work actively in the enterprises without being paid which makes another quarter. The remaining segment is divided into hired employees and trainees.

Sectors of Activity – It is believed that most SMEs engage in retailing, varying from one country to another and among rural-urban regions. Other activity sectors include trading or manufacturing. However, retailing activity is rife in urban areas whereas manufacturing could be either in rural or urban areas depending on availability of resources.

Gender of Owner – A good number of the SMEs are owned by women entrepreneurs which are home-based compared to those owned by males. However, female entrepreneurs have a notion that they are not proficient in taking advantages of the scheme associated with the businesses as the administrative costs outweigh the profits.

Efficiency – Measuring the efficiency of the enterprises may differ within and across industries. Different enterprises have different competences depending on the size, managerial skills and technology. According to the studies, it is found that micro enterprises in developing countries are least efficient as compared to medium-scale firms. Conversely, SMEs are known to be more innovative than larger firms.

4.4 Importance of SME in Developing Countries

Small and medium enterprises have become an integral part of the developing countries, since it is through these activities that most of the economies depend. SMEs are therefore considered to be a vital part of countries’ growth

One of the prime objectives of any country is to eradicate or reduce its poverty level. The SMEs are playing a major role in achieving this objective. These businesses are considered as an engine in creating opportunities and income by providing employment and innovation.

Although many SMEs are run by males, many female entrepreneurs have emerged thus generating more employment, income and reduction in poverty.

4.5 SMEs and Small Businesses in Africa

23Africa is known to have the highest number of low income countries resulting to poverty and unemployment. Despite of that, SMEs in Africa are comprised of over 90% of the businesses hence contributing more than 50% of the employment as well as its GDP.

Most of the SMEs first start with small businesses (micro) that are operated by family businesses and there after gradually grow to become small and medium enterprises. However some do not manage to grow thus remain as small shops, kiosks, venders.

COUNTRIES AT A GLANCE

There are many countries in Africa where SMEs have contributed in the development of economy. This essay is focusing on three developing countries in Africa namely, Nigeria, Zimbabwe and Tanzania.

5.1 NIGERIA

General overview

24Nigeria is a country in West Africa with Abuja as its capital city. It has a population of 158.2 million (UN, 2010)

Trade –

25The country’s major industries include agriculture, oil and gas whereas it’s exports consists of Petroleum, Petroleum products, cocoa and rubber. However, most of the country’s income depends on the oil exports hence it is known as the largest oil producing along with exporting country in Africa.

Economic Performance

26Over the past five to eight years, Nigeria’s economy has gradually increased, and it is anticipated that the country will develop in a few years to come. For the year 2009, Nigeria’s GDP in terms of current US$ was 169 billions, its GDP per capital (current US$) was 1,092 and its GNI per capital was US$ 1,140. (The World Bank, 2009). According to the Nigerian Government, the annual growth of Nigeria in 2009 was 6.9%. (Foreign and Common Wealth office, 2010)

Small and Medium Enterprises in Nigeria

Defining SME in Nigeria

27In July 2001, during the 13th meeting of The National Council on Industry, the Small and

Medium Enterprises was defined according to the table below.

Industry Size

Labor Size

Total Cost

Micro/ Cottage Industry

Less than 10 workers

Less than N 1.50 million

Small Scale Industry

11 -100 workers

Less than 50 million

Medium Scale Industry

101 – 300 workers

Less than 200 million

Large Scale Industry

More than 300 workers

More than 200 million

Table 2

N.B. the total costs includes working capital but excludes cost of Land.

Characteristics of SME in Nigeria

28Based on the research by African Economic Research Consortium (1992), characteristics of SMEs can be categorized according to educational background, previous work experience, type of business, ownership structure and capital base as below:

Educational background -Majority of the people (84%) have primary and secondary level education whereas very few (16%) have tertiary education. The low level of education impacts the output of SMEs.

Previous work experience – Only 5% of the people have 15 years of experience whilst many people did not have experience in businesses, due to lack of proper managerial skills and low education.

Type of business – Many service-oriented businesses failed since they depend mainly on imported components.

Ownership structure – Most of the businesses are service – oriented thus, leading to sole proprietors and partnerships as the structure of ownership.

Capital base – Looking for short or long term capital is difficult, as an alternative, the proprietor depends on personal savings or loans from financial institutions, relatives and friends. Therefore these businesses end up having a small capital.

Mortality Rate – The idea of partnership in SMEs is not viable in Nigeria due to the mistrust between partners therefore the rate of its mortality is high. This is means that many want to work in an individual capacity. The other factors leading to high mortality is regulatory environment, instability in policies and poor infrastructure.

Importance of SME in Nigeria

29Small and medium enterprises are very essential in Nigeria since they are the backbone to the economy. They provide a path to growth of local entrepreneurs; create jobs for unemployed, act as a channel for mobilization of savings in real sector and boost in development of the nation.

SME Contribution to Nigerian Economy

30SMEs contribute immensely to the Nigerian economy through the following:

They are referred as an engine for economic growth through promoting

development of private sector as well as partnership.

They help in the growth of its economy

They provide an opportunity to improve the standard of living, along with

formation of local capital as well as high productivity and capability.

They bring about diversification in terms of both business and type of

entrepreneur. For business, new innovations are made resulting to variety in the business whereas in terms of entrepreneur, it includes different kind of people such as youth, women, and retired workers.

In most of the rural areas, SMEs offer high employment level.

Hence, small and medium enterprises in Nigeria play a pivotal role in uplifting the economy.

5.2 ZIMBABWE

General overview

31The Republic of Zimbabwe has its capital city Harare. It has a population of 12.6 million (UN, 2010).

Trade

32The country’s major industries are agriculture and mining, with agriculture being the most important sector. Its exports are mainly agricultural products – tobacco, cotton; gold, and minerals.

Economic performance

33Zimbabwe’s economy has been declining over the years, yet it is expected that in the years to come, the economy might progress. For the year 2009, its GDP in terms of current US$ was 3.4 billions, GDP per capital (current US$) was 274 and GNI was US$ 995 or less than that and is therefore referred to as low income, whereas the annual GDP growth has been the same in 2009. (The World Bank, 2009).

Small and Medium Enterprises in Zimbabwe

Defining SME in Zimbabwe

34Similar to other countries, SMEs are measured using number of employees, turnover, assets and investments as criteria. For the case of employment SMEs are defined in two categories namely; lower limit and upper limit. Small enterprises comprise of 5 -10 employees in lower limit and 50 -100 employees in upper limit whilst medium enterprises comprise of 100 employees in lower and 250 employees in upper limits.

Characteristics of SME in Zimbabwe

35Characteristics can be categorized according number of employees, capital base, enterprises registration and assets. Below is the explanation of the SME characteristics in Zimbabwe.

Number of Employees -This refers to the number of personnel working in an organization. For small enterprises, the number of employees is between 1 and 50 depending on the industry sector, whereas medium enterprises have about 500 employees.

Capital base – Every business will require different capital amount to start an entrepreneurship yet each one will require sufficient capital base. This capital should be made available to the entrepreneurs to easily begin their enterprise.

Enterprise Registration – In most cases, SMEs are referred as informal and are normally not registered nor do they pay tax yet according to the SME definition of Zimbabwe, SMEs should be registered and referred as formal.

Assets – According to the SME definition, asset base varies from country to country, however availability of capital should be there besides other resources.

Importance of SME in Zimbabwe

36SMEs in Zimbabwe are considered to be significant in order to achieve the development objectives. The objectives comprise of poverty reduction, employment growth in rural areas, to improve women’s situation and increase local investment ownership in the economy.

SME Contribution to Zimbabwean Economy

37SMEs contribute significantly in creating employment opportunities as well as to the economy. Due to fewer employment opportunities, SMEs have been the alternative way of investing and generating employment, thus small businesses in Zimbabwe are a means of lively hood. To the economy, SMEs development includes; competitiveness by stimulating prospective for entrepreneurship and facilitate creation of nation’s wealth.

5.3 TANZANIA

General overview

38Tanzania is a country with Dodoma as its official capital city and Dar-es-Salaam as its commercial capital city. It has a population of 45 million (UN, 2010).

Trade

39The country’s major industries include agriculture, trade, manufacturing, financial and business services, tourism and mining. However, most of the country’s income depends on the agriculture products such as sisal, cloves, cashew nuts, coffee, cotton and tobacco; along with mineral products such as gold, diamonds and tanzanite. Tanzania is known as the forth largest gold producing along with exporting country in Africa.

Economic performance

40Over the five to eight years, Tanzania’s economy has gradually increased, thus it is anticipated that the country will continue to develop in the years to come. For the year 2009, Tanzania’s GDP in terms of current US$ was 21.6 billions, its GDP per capital (current US$) was 509 and its GNI per capital was US$ 500 together with an annual of 5.5%. (The World Bank, 2009).

Small and Medium Enterprises in Tanzania

Defining SME in Tanzania

41Tanzania Small and Medium Enterprise Development Policy, 2002, define an SME according to the following categories:.

Category

Employees

Capital Investment in Machinery (TShs)

Micro enterprises

1 – 4 workers

Up to 5 million

Small enterprises

5 – 49 workers

5 – 200 million

Medium enterprises

59 – 99 workers

200 – 800 million

Large enterprises

More than 100 workers

More than 800 million

Table 3

[Source: Tanzania Chamber of Commerce, Presentation]

Characteristics of SME in Tanzania

42SMEs in Tanzania have similar characteristics as that of other countries. One of them is that, SMEs have simple organizational structures, small in size and they depend on few people. Further more, SMEs have closer relationships with the customers and businesses partners.

SME Contribution to Tanzanian Economy

43Like many other countries, SMEs in Tanzania play an essential role in the economy. One of the contributions of SME is to generate employment and income; hence help in reducing poverty. Another factor is that, SMEs create innovation and competitiveness in the economy, thus promoting dynamism. Additionally, SMEs are responsible for entrepreneurial development and contribute at least 50% towards the industrial products’ GDP.

CONCLUSION

The contribution of Small and Medium Enterprises (SME) depends on the enabling environment provided to them which includes; political, economic, social, technological, environmental, and legal; to function as well as on country to avail these SMEs to the maximum and to support and provide the necessary space to function The next essay will talk about SMEs in selected developing countries in the Sub – Saharan Africa, their contribution towards these economies and the challenges they face.