Sector or sub-sector according to industry classification
Size or class of enterprise
Total number of full-time or equivalent of paid
employees
Total annual turnover
Transport, Storage, and Communications
Small 11 – ≤ 45,0 million
Micro 0 – 10 ≤ 7,5 million
Finance and Business Services Medium 51 – 250 ≤ 85,0 million
Small 11 – 50 ≤ 35,0 million
Micro 0 – 10 ≤ 7,5 million
Community, Social and Personal Services
Medium 51 – 250 ≤ 70,0 million
Small 11 – 50 ≤ 22,0 million
Micro 0 – 10 ≤ 5,0 million
Source: Department of Small Business Development (2019)
contributors of employment but in respect to things like technical innovation and new product development (Ayandibu & Houghton, 2017). The European Commission (2020) also considers SMEs and the general practice of entrepreneurship as key for ensuring economic growth, innovation, job creation, and social integration.
SMEs are catalysts of the economy in both developed and developing countries (Erdin &
Ozkaya, 2020). In particular, SMEs also contribute to national income, productivity, employment, and entrepreneur training (Sawaean & Ali, 2020). Aside from such contributions, SMEs promote economic development by discovering new markets and establishing new ventures and/or sources of income through inventing new business ideas and promoting technological innovation (Prasanna et al., 2019).
Of further note is that SMEs create jobs, expand the tax base, contribute to innovation, enhance competition, and increase aggregate productivity (Myslimi & Kaçani, 2016) Hence, SMEs contribute to economic development, and enhance innovation, competition, efficiency, and productivity (Mallinguh, Wasike & Zoltan, 2020).
In the South African context, SMEs play an important role in the national economy.
Specifically, South African SMEs contribute to the country’s economy by creating employment opportunities, easily adapting to the changing economic realities, and contributing to national and local governmental tax (Rauch et al., 2018). SMEs also play an important role in local economic development, as they contribute significantly to employment creation, wealth creation, and poverty alleviation (Kowo, Adenuga & Sabitu, 2019).
The South African SME sector also creates a number of opportunities that can lead to greater levels of production, increase the export of goods, and develop new employment and entrepreneurial talents (Ngibe & Lekhanya, 2019). In a study conducted by Burns (2016) indicate that the SME sector in South Africa is estimated to contribute between 35% and 45%
towards the country’s GDP, and employs around 50-60% of the labour force. However, in the fourth quarter of 2019, the South African economy slipped into recession (StatsSA, 2019a).
However, that SMEs, when compared to larger corporations, are better able to adjust and manoeuvre quickly to meet the challenges of changing market conditions, particularly during adverse economic periods like a recession (Ngibe & Lekhanya, 2019). These capability of SMEs enables them to contribute to the growth and development of an economy through employment and revenue generation, even in times of economic downturn (Amoah & Amoah,
2018). The value of SMEs to the economy cannot, therefore, be underestimated (Nieuwenhuizen, 2019a). Indeed, SMEs are important as they are responsible for creating job, alleviating poverty, and contributing to innovation and the GDP of the country (Burns, 2016).
In research conducted by van Scheers (2016), who attempted to find a link between economic growth and SME success in South African, it was found that there is a positive relationship between SME success and economic growth. As such, Kumar and Ayedee (2018) found SMEs to be the backbone of economic growth and development. Furthermore, the author asserts that SME success could rapidly improve the South African economy and solve many of the social issues plaguing the country, such as unemployment (van Scheers, 2016). The recuperation of South Africa’s stagnating economy can also be determined by the effective growth and success of SMEs (Hlahane, 2018).
Erdin and Ozkaya (2020) similarly state that SMEs contribute to the economy through employment creation, speedy adaptation to new situations as a result of their flexibility, encouraging entrepreneurship, promoting product differentiation through boutique production, and working as sub-industries in and/or to larger businesses. The development of new SMEs can, furthermore, drive economic growth on a global scale – not only in developing regions, but in developed regions (Meyer & Meyer, 2017). At its core, then, the SME sector plays a vital role in both semi-peripheral and peripheral countries in respect to the growth and development of the economy. SMEs also represent over 90% of the business population, 60%- 70% of all employment, and 55% of all GDPs in developed economies (World Trade Organization, in Yang, Ma, Zhao, Cater, & Arnold, 2019). It is possible to assert, therefore, that SMEs do not merely significantly contribute to an economy, but that they are the economy (World Trade Organization, in Yang et al., 2019).
Aside from significantly contributing to creating jobs and reducing poverty, SMEs also assist in improving general socio-economic development (Windapo, Olugboyega, & Adediran, 2019). Dhaliwal (2016) states that the important role of SMEs and entrepreneurship in economic development can be best understood in a systematic and orderly manner. In particular, that SMEs:
• Create employment opportunities: SMEs provide employment opportunities to the unemployed, which is important in the South African context, as unemployment is one
of the country’s chronic social problems. Hence, the development of SMEs could hold great potential to generate employment and income creation.
• Promote balanced regional development: SMEs help to remove regional disparities through building businesses in rural and less developed areas. The growth of businesses and industries in these areas can, in turn, lead to larger numbers of public benefits, including the development of infrastructure facilities such as roads, power stations, and bridges; healthcare; education; and entertainment. Setting up SMEs in these areas could also lead to initiatives that better promotes balanced regional development.
• Promote capital formation: SMEs promote capital formation by mobilising the unused savings of the public and employing their own as well as borrowed resources for setting up their enterprises. Hence, SME activities can lead to value addition and the creation of wealth, both of which directly lead to economic development.
• Reduce concentration of economic power: Economic power is established by industry and business activity. The increase of SMEs reduces the concentration of economic power held by large firms and certain individuals; thereby eliminating monopolies.
• Increase gross national product and per capita income: SMEs main aim is to create, explore, and exploit new opportunities. Therefore, SMEs tend to combine resources in order to create new products and/or services that, in turn, create and develop markets for growth. The increase in gross national product, thus, directly relates to the proportional per capital income of individuals, which is the sign of economic growth.
• Promote innovation: SMEs tend to innovate, differ, and, thereby, remain active in a changing market. Thus, SMEs looking to innovate and/or build on new ideas, new strategies, and new combinations can promote new business operations and the new production of goods and services. In this way, SMEs can bring about new economic development through innovation.
• Promote a country’s export trade: SMEs provide new goods and services founded through innovation that can expand to larger markets – even those beyond the country’s borders. When SMEs produce goods and services in large-scale for the purpose of
growing profits through foreign exchange via exports and in order to combat import costs, it is possible to ensure greater economic independence and development.
• Facilitate overall development: SMEs are catalytic agents for change that can often result in chain reactions. Once an SME is established, the processes of industrialisation are set in motion. Hence, one SME in a certain field can create a demand for other SMEs in another, different sector as well as in its own. The increase of SME establishment in a certain area by extension then increases activities that promote overall development.
• Improve standards of living: SMEs provide employment to people; thereby directly increasing their standard of living. Increases in living standards is a characteristic feature of a country’s economic development (Dhaliwal, 2016).
Dhaliwal (2016) concludes that a balanced approach of nurturing SMEs could results in a positive impact on both a country’s economy and its greater society. Thus, SMEs serves as a catalyst of economic development (Dhaliwal, 2016).
2.4 Importance of Small and Medium-sized Enterprises in Achieving the