This section provides a brief overview of the literature of the economy and of SMMEs in the South African and global contexts. The broad discussions of the literature are explored in chapter two. A literature review is the text in a scholarly paper which includes current knowledge comprised of substantive findings, as well as theoretical and methodological contributions to a particular topic (ais.up.ac.za/med/tnmwritingliteraturereviewlie.htm).
This assertion links to the view of Bless, Higson-Smith and Kagee (2006:24) that a literature review can be defined as a critical evaluation of previous scholarly writings that are relevant to the research topic. According to Mouton (2001: 86) it is of paramount importance that every research project begins with a review of the existing literature in its particular field of study.
A good literature review makes the researcher aware of what has already been written, in order to avoid duplication of study and unnecessary repetition (White, 2014:2). Such a review helps the researcher to consolidate the theoretical foundation of the study. It is also through a literature review that a researcher discovers whether the study has significance or whether it will lead to new knowledge (Hofstee, 2006:91). Moore (1995:9) also agrees that a study of literature forms a fundamental and integral part of the planning and undertaking of a research project.
In a broader context, Hart (1998) lists the following purposes of the literature review:
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Distinguishing what has been done from what needs to be done;
Discovering important variables relevant to the topic;
Synthesising and gaining a new perspective;
Identifying relationships between ideas and practice;
Establishing the context of the topic or problem;
Rationalising the significance of the problem;
Enhancing and acquiring the subject vocabulary;
Understanding the structure of the subject; and
Relating ideas and theory to applications.
The section below reviews the existing literature evidence as to whether SMMEs boost growth and reduce poverty.
1.7.1 THE ROLE AND CONTRIBUTIONS OF SMMEs IN ECONOMIC DEVELOPMENT
To accelerate growth and reduce poverty, the World Bank Group and other international aid agencies such as the OECD and the International Labour Organisation (ILO) provide targeted assistance to small, medium and micro enterprises (SMMEs) in developing economies. For example, the World Bank Group has provided financial assistance to support SMMEs since 1998 (World Bank, 2009).
This pro-SMMEs financial support policy is based on three core arguments (World Bank, 1994, 2002, 2004).
Firstly, SMME advocates argue that SMMEs enhance competition and entrepreneurship and hence have external benefits on economy-wide efficiency, innovation, and aggregate productivity growth. From this perspective, direct government support of SMMEs will help countries exploit the social benefits from greater competition and entrepreneurship.
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Secondly, SMME proponents frequently claim that SMMEs are more productive than large firms, but that financial markets and other institutional failures impede SMME development. Thus, pending financial and institutional improvements, direct government financial support to SMMEs can boost economic growth and development.
Thirdly, some argue that SMME expansion boosts employment more than large firm growth because SMMEs are more labour intensive. From this perspective, subsidising SMMEs may represent a poverty alleviation tool.
While the international community channels a large amount of aid into subsidising SMMEs, four sceptical views question the efficacy of this policy, for example:
First, some authors stress the advantages of large firms and challenge the assumptions underlying the pro-SMME’s views. Specifically, large enterprises may exploit the ‘economies of scale’ and may more easily undertake the fixed costs associated with research and development (R&D) with positive productivity effects (Pagano and Schivardi, 2001; Pack and Westphal, 1986). Also, some hold the view that large firms provide more stability and therefore perform higher quality jobs than small firms, with positive ramifications for poverty alleviation (Rosenzweig, 2008; Brown et al., 2013).
A second set of sceptical views directly challenges the assumptions underlying pro-SMME arguments. In particular, some research finds that SMMEs are neither more labour intensive, nor better at job creation than large firms (Little et al., 1987). Furthermore, recent work finds that under-developed financial and legal institutions hurt many types of firms besides SMMEs. Indeed, research finds that under-developed institutions constrain firms from growing to their efficient sizes (Beck et al., 2003; and Kumar et al., 2001).
A third set of sceptical views questions the validity of considering firm size as an exogenous determinant of economic growth. From the industrial organisation literature, natural
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resource endowments, technology, policies, and institutions help determine a nation’s industrial composition and optimal firm size (Kumar et al., 2001). For instance, some countries may have endowments that give the country a comparative advantage in the production of goods that are produced efficiently by large firms, while other countries will have a comparative advantage in goods produced most economically by small firms (Young, 2013).
A fourth sceptical view regarding the efficacy of pro-SMME policies, which is termed the business environment view, doubts the crucial role of SMMEs, but instead, stresses the importance of the business environment encompassing all firms, big and small. Low entry and exit barriers, well-defined property rights and effective contract enforcement characterise a business environment that is conducive to competition and private commercial transactions.
In Sub-Saharan Africa, Biggs and Shah (1998) find that large firms are the dominant source of net job creation in the manufacturing sector. Furthermore, empirical evidence suggests that firm size is not a good predictor of labour intensity, and that labour intensity varies more across industries than across firm-size groups within industries. Many small firms are more capital intensive than large firms in the same industry (Little et al, 1987; Snodgrass and Biggs, 1996). This suggests that SMMEs are not necessarily more suitable to the labour abundance and capital shortage characteristics of developing countries.