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SMEs in Africa: Opportunities Challenges

SMEs are important to development.... ...but they face a number of challenges (which are more nuanced than research shows) ....... and are symptoms of systemic issues in their host countries.. SMEs

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SMEs in Africa: Opportunities Challenges

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    1. SMEs in Africa: Opportunities & Challenges Alberto Lemma & Peter Davis, Addis Ababa, 17th November 2011

    2. SMEs are important to development.... ...but they face a number of challenges (which are more nuanced than research shows) .... ... and are symptoms of systemic issues in their host countries. The promise of SMEs is to fill the missing middle - The promise of SMEs is to fill the missing middle -

    3. SMEs & Development Globally, 90% of enterprises are SMEs, accounting for 50% of jobs. Their importance is Africa is also high: 80% of businesses in Congo 55% of jobs in S. Africa, 70% in Nigeria 20% of Kenyan GDP Importance of SMEs for development   Context of the debate ·         In the context of discussion of ‘graduation’ from ODA, the African private sector, which in the past played a modest role in development, is now being recognised as an – if not the - engine of growth and development. (UNECA/draft report via Senyo) ·         “Africa’s ability to break out of its current non-impressive economic performance, would, to a large, extent, depend on its ability to harness the entrepreneurial potential visible in its streets, market places and SMEs.” (UNECA/draft report) – probably a bit value driven for the purpose of the presentation ·         SMEs tend to constitute a large part of the economy (UNECA/draft report via Senyo) o    in Congo 80% of business are SMEs, o   in South Africa about 55% of jobs and 26% of GDP are created by SMEs o   in  Kenya SMEs constitute about 20% of national GDP and employ 3.23 million people (Kenya trade directory 2003) o    SMEs account for 70% of jobs in Nigeria ·         SMEs key not only to developing but also developed economies. Benefits of SMEs ·         Labour-intensive nature  (UNECA/draft report via Senyo) o    SMEs are more labour intensive and as a result contribute to more employment than larger firms (Beck et al. 2005) o   Are labour-intensive, providing more opportunities for low-skilled workers (Newberry, D. 2006)   ·          Income-generating possibilities  (UNECA/draft report via Senyo) o   Are correlated with lower income distribution inequality (Newberry, D. 2006) o   Are necessary for agriculture-dependent nations transitioning to an industrial- and service-oriented economy (Newberry, D. 2006) o   SMEs critical to help countries transition from agriculture led to industry led economies as they can provide the basis for industry by supporting agricultural activities, such as through agro-processing activities (UNIDO 2002) o   SMEs improve income equality as well as reducing income disparities between urban and rural areas (UNIDO 2002)   ·         Capital-saving capacity  (UNECA/draft report via Senyo) o   Don’t understand what this is supposed to mean.   ·         Potential use of local resources and reliance on few imports  (UNECA/draft report via Senyo) o   Are an important part of the supply chain for large MNCs (Newberry, D. 2006 referencing Luetkenhorst, 2004)   ·         Flexible and innovative  (UNECA/draft report) o   SMEs have economy-wide benefits through their capacity to enhance competition and entrepreneurship (Beck et al. 2005) o   SMES promote innovation and risk taking within economies, which in turns sets the bases for long term dynamism and entrepreneurship in developing countries, attributes which can help attract foreign investment. (UNIDO 2002) o   Are excellent "beta-sites" for innovation and sustainable initiatives due to their inherent flexibility and risk-taking ability (Newberry, D. 2006 referencing Raynard and Forstater, 2002) ·         Social cohesion o   SMEs tend to be less mobile than large corporations, and are more likely to have ties of dependence and familiarity to their communities as a result. (Newberry, D. 2006) Importance of SMEs for development   Context of the debate ·         In the context of discussion of ‘graduation’ from ODA, the African private sector, which in the past played a modest role in development, is now being recognised as an – if not the - engine of growth and development. (UNECA/draft report via Senyo) ·         “Africa’s ability to break out of its current non-impressive economic performance, would, to a large, extent, depend on its ability to harness the entrepreneurial potential visible in its streets, market places and SMEs.” (UNECA/draft report) – probably a bit value driven for the purpose of the presentation ·         SMEs tend to constitute a large part of the economy (UNECA/draft report via Senyo) o    in Congo 80% of business are SMEs, o   in South Africa about 55% of jobs and 26% of GDP are created by SMEs o   in  Kenya SMEs constitute about 20% of national GDP and employ 3.23 million people (Kenya trade directory 2003) o    SMEs account for 70% of jobs in Nigeria ·         SMEs key not only to developing but also developed economies. Benefits of SMEs ·         Labour-intensive nature  (UNECA/draft report via Senyo) o    SMEs are more labour intensive and as a result contribute to more employment than larger firms (Beck et al. 2005) o   Are labour-intensive, providing more opportunities for low-skilled workers (Newberry, D. 2006)   ·          Income-generating possibilities  (UNECA/draft report via Senyo) o   Are correlated with lower income distribution inequality (Newberry, D. 2006) o   Are necessary for agriculture-dependent nations transitioning to an industrial- and service-oriented economy (Newberry, D. 2006) o   SMEs critical to help countries transition from agriculture led to industry led economies as they can provide the basis for industry by supporting agricultural activities, such as through agro-processing activities (UNIDO 2002) o   SMEs improve income equality as well as reducing income disparities between urban and rural areas (UNIDO 2002)   ·         Capital-saving capacity  (UNECA/draft report via Senyo) o   Don’t understand what this is supposed to mean.   ·         Potential use of local resources and reliance on few imports  (UNECA/draft report via Senyo) o   Are an important part of the supply chain for large MNCs (Newberry, D. 2006 referencing Luetkenhorst, 2004)   ·         Flexible and innovative  (UNECA/draft report) o   SMEs have economy-wide benefits through their capacity to enhance competition and entrepreneurship (Beck et al. 2005) o   SMES promote innovation and risk taking within economies, which in turns sets the bases for long term dynamism and entrepreneurship in developing countries, attributes which can help attract foreign investment. (UNIDO 2002) o   Are excellent "beta-sites" for innovation and sustainable initiatives due to their inherent flexibility and risk-taking ability (Newberry, D. 2006 referencing Raynard and Forstater, 2002) ·         Social cohesion o   SMEs tend to be less mobile than large corporations, and are more likely to have ties of dependence and familiarity to their communities as a result. (Newberry, D. 2006)

    4. SMEs & Development SMEs are labour intensive Can help reduce income distribution inequality Can help nations transition away from agricultural dependency Reduce rural/urban income disparities Source of innovation & entrepreneurship

    5. Research shows that SMEs in Africa are constrained by: Lack of reliable infrastructure Access to finance Informal competitor practices High tax rates Corruption but.....

    6. This is for AfricaThis is for Africa

    7. Case Study SME Constraints .... the case studies show that the top 4 major constraints may actually be: Access to Finance Labour Skills Gap Access to Affordable Production Inputs The Business Environment Corruption is not mentioned at all in the case studies.Corruption is not mentioned at all in the case studies.

    8. Access to Finance 3 Major issues: High interest rates for loans High collateral requirements Unhelpful SME/bank relationships Low levels of access to finance: Lack of finance can inhibit growth opportunities for SMEs which may find themselves unable to take loans from financial institutions (including both banks and microfinance providers) due to high interest levels, high collateral requirements as well as lengthy and cumbersome bureaucratic procedures which SME managers are often not well prepared to deal with due to the high levels of financial illiteracy that is pervasive within SMEs. Low levels of access to finance: Lack of finance can inhibit growth opportunities for SMEs which may find themselves unable to take loans from financial institutions (including both banks and microfinance providers) due to high interest levels, high collateral requirements as well as lengthy and cumbersome bureaucratic procedures which SME managers are often not well prepared to deal with due to the high levels of financial illiteracy that is pervasive within SMEs.

    9. Labour Skills Gap Affects both SME employees and management/owners: Hinders managers from implementing good ideas Decreases productivity, efficiency & competitiveness High training costs = increased risks Labour skills gap: The skills gap for SMEs is pervasive for both low level employees and managers. The management skills gap prevents SMEs from drawing up sustainable business development plans, also preventing SME managers (and owners) from implementing potentially good business ideas. In terms of SME employees, outdated production skills and techniques also hinder SME growth as they lower their productivity and competitiveness. Labour skills gap: The skills gap for SMEs is pervasive for both low level employees and managers. The management skills gap prevents SMEs from drawing up sustainable business development plans, also preventing SME managers (and owners) from implementing potentially good business ideas. In terms of SME employees, outdated production skills and techniques also hinder SME growth as they lower their productivity and competitiveness.

    10. Access to Inputs SMEs have trouble accessing: Infrastructure (especially transport) Cheap & reliable utilities Cheap production materials

    11. The Business Environment Political economy issues + frequent changes to rules + complicated bureaucratic procedures = SMEs have to use resources to comply and keep up to date with regulations, this can drive some SMEs into informality = Potential revenue loss for governments & loss of competitiveness for formal SMEs

    12. Challenges reflect wider systemic failures Mismatch between education needs of the private sector & public education Lack of regulation promoting PS access to finance i.e. promotion of credit rating agencies Low levels of infrastructure investments

    13. Conclusion SMEs do contribute to the development process – labour intensity, innovation & income redistribution The challenges they face are multifaceted, reflecting wider systemic issues. They require solutions at both the individual SME level (i.e. Better business management) and at the institutional level (improved education) & regulatory environment.

    14. Thank You! Alberto Lemma – a.lemma@odi.org.uk Peter Davis – p.davis@odi.org.uk

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