LITERATURE REVIEW
2.4 Informal SME Definitions
Although the significant role of the SME sector and the informal sector have been acknowledged internationally, coming up with a universally accepted definition of an SME has become a challenging task with the majority of countries in developing and developed countries formulating their own definition of SMEs globally (Storey, 1994).
The Bolton Committee (1971), transpired with an ‘economic’ and ‘statistical’ definition of a small firm. According to the Bolton Committee (1971), under ‘economic’ a firm is defined as small if it meets the following three given criteria:
When it has a relatively smaller share of its marketplace.
When it is controlled and managed by its owners and/or part-owners in a personalised way.
When it is independent, implying it is not forming part of a large enterprise.
On the other hand, the Bolton Committee (1971), proposed the following under the statistical definition:
The size of the small enterprise sector and their contribution to employment, gross domestic product, poverty alleviation and exports.
The extent to which the small firm sector’s economic contribution will have changed over time.
Apply a statistical definition in a cross-country comparison of the small enterprises’ economic contribution.
The Bolton Committee (1971), defines the small firms in different ways: the manufacturing, construction and mining sectors were defined in terms of the number of employees; those in the retail, services, wholesale sector were defined in terms of monetary turnover.
According to the European Commission (EC) (2010), SMEs are defined largely regarding the number of workers as follows:
Micro-enterprises (ME) : Firms with 0 to 9 employees
Small enterprises (SE) : 10 to 99 employees
Medium enterprises (ME) : 100 to 499 employees
Criticisms of the EC (2010), definitions argue that it is based solely on a single variable which is employment rather than a multiplicity of different variables. Therefore, researchers would have to adopt a definition for an SME that is more appropriate and suitable to their ‘target’ group.
Weston and Copeland (1998), laments that the definition of SMEs suffers from a lack of universal applicability across the globe.
According to UNIDO (1999), SMEs are defined regarding the number of workers. However, a clear differentiation is made between industrialised and developing nations. Industrialised countries’ definition is given by the following variables:
Large – with 500 or more employees
Medium – with100 to 499 employees
Small – with 99 or less than 100 employees
Developing nations’ definition is given by the following variables:
Large – with 100 or more employees
Africa. In addition, the National Small Business Act of South Africa (NSB Act of 1996) (SA, 1996), classifies small businesses in South Africa into five (5) main distinct groups as shown in Table 2-1.
Table 2-1: Categories of SMMEs as per the National Small Business Act
Category of SMMEs Details
Survivalist Enterprises Operates in the informal economy. Mainly undertaken by those who are unemployed and income generated is usually below the poverty datum line. Little start-up capital and training is required. Provides a reasonable income to keep the families alive. Low growth opportunities
Micro Enterprises 1-5 employees, traditionally being the owner and his/her family
Informal operations with no formal business premises, no trading license, no adherence to labour legislation
Turnover should be below the Valued Added Tax (VAT) registration level of R300 000.00 per annum. Have basic business skills and training potential for progression into a viable formal small business
Very Small Enterprise It’s part of the formal economy with some using technology
Less than ten (10) fully paid employees inclusive of self-employed plumbers, electricians, painters and professionals in different fields.
Small Enterprises Less than 100 employees
These are more established than very small enterprises, but they are formally registered and operate on fixed business premises. Normally owned by one individual but with a more complex structure.
Medium Enterprises Up to 200 employees
Still, mainly owner managed; however, it has a decentralised management structure with division of labour in its operations and operates from designated fixed premises with all formal requirements
Source: National Small Business Act of South Africa (NSB Act of 1996) (SA, 1996)
Finscope (2010), observed that the SME economy in South Africa sits on an estimate of 5.6 million small enterprises which generates an estimated 11.6 million job opportunities. However, this economy is positively skewed towards micro-enterprises, with research estimating that 82%
of South African enterprises are categorised as micro or very small (NSB Act of 1996) (SA,1996).
According to Statistics South Africa (SSA, 1997), the informal sector is defined as, “including all
Accounts but are grossly underestimated or not measured at all, as a result of the informal businesses that are not known officially. It is made up of those economic activities which generate factor incomes, that is, salaries, wages and profits which arise from the production of goods and services which cannot be determined from statistical sources used to compute income measures of the GDP.
The term SME entails various types of enterprises, from fragile zero growth micro-firms to fast medium-sized growth firms (Fjose, Grunfeld and Green, 2010). Abor and Quartey (2010) conclude that there are various definitions and no consensus over what constitutes an SME with different definitions across industries and also across countries. In the USA the term small and medium businesses (SMB) is used for SMEs. The word ‘SMEs’ is extensively used in the EU with international organisations such as United Nations (UN), World Bank (WB) and the World Trade Organization (WTO) using it similarly. In Africa, the commonly used term is ‘MSME’ for micro-small and medium enterprises, with South Africa using the term ‘SMME’ for small, medium and micro-enterprises and Zimbabwe using the term ‘SME’ for small, medium enterprises. The researcher will now examine the definitions of SMEs given in the context of Zimbabwe.