LITERATURE REVIEW
2.9 Linkages of Informal Enterprises with Formal Firms
Chen (2012) and Amara (2016) point out that few informal SMEs operate in total isolation from the formal firms. Competition locally has a positive and significant effect on both the formal and informal economies for all the activities. Most of the informal SMEs procure their inputs from and/or supply finished and semi-finished commodities to the formal economy either directly or through other middleman and mostly are informal enterprises. Manyati (2014:285), observed that there is limited interaction among the formal sector manufacturers and the informal manufacturing SMEs in Zimbabwe. Distinguin et al. (2016:18) also note that weak institutional environment tends to strengthen the inter-linkages between the formal and the informal economies by decreasing the benefits enjoyed by formal firms and reducing the costs linked to informality.
Linkages that exist between the informal enterprises and formal firms can best be understood by considering the type of the production processes through which they are connected (Devey, Skinner and Valodia, 2006). The nature of the connections especially the allocation of authority and risk profiles between the informal and formal firms tends to differ according to the type of production processes and systems.
2.9.1 Individual Transactions
A situation where informal enterprises also are known as own account operators are involved in trade with formal enterprises in a market that is characterised as open or pure market exchange where independent units are transacting with each other (Chen, 2012). Dominant firms are defined in terms of marketing skills, knowledge and power in the majority of the cases, usually formal enterprises have control over the transaction.
2.9.2 Sub-sectors
Informal enterprises manufacture commodities in an exchange with formal enterprises in what has become known as sub-sectors. Sub-sectors are described as networks of independent units that are involved in production and distribution of commodities in a particular sector. Transactions in the sub-sectors are governed largely by the dominant firm and also by ‘laws of the game’ for the complete sub-sector which to a large extent are determined by the firms being very dominant in the network.
2.9.3 Value Chains
All the informal enterprises’ sub-contracted employees manufacture products within a value chain. The terms and conditions in the economic activities are largely determined by the leading firm, in the domestic chains, a large national organisation and the global value chains by large transnational companies. The terms and conditions of sub-contracts between the informal firms and workers down the chain are determined by major suppliers to the lead firm who in most cases are the formal enterprises (Chen, 2012).
2.9.4 Empirical Studies
2.9.4.1 Informal Manufacturing Sector in India
In India, the informal manufacturing sector is one of the major shares of the economy. The informal manufacturing sector in India provides a large number of people with employment and also contributes positively towards the gross domestic product (GDP) (Mukherjee, 2004:1).
The informal manufacturing sector in India is assumed to be composed of three segments - Own Account Manufacturing Enterprise (OAMEs), Non-directory Manufacturing Establishments
there has always been a vibrant and growth-oriented sector within the informal manufacturing sector.
Overview of growth pattern
The informal manufacturing SMEs’ growth is characterised by a mixed trend. Statistically, SME numbers and employment have significantly been on the decline during the first two quinquenniae but went on the increase in the last one with total jobs in 2000-01 surpassing the 1984-85 threshold. Important to note has been the marked increase in the urban informal manufacturing SMEs showing a positive trend from 1984 to 2000.
Conclusion
The growth dynamism in the informal manufacturing sector in India proves that it is not distress driven phenomena or a dynamic alternative economic avenue in general. The informal manufacturing sector has provided a significant number to jobseekers and has also expanded significantly to offset the slackening employment opportunities in the formal sector. The important role regarding employment generation can never be ignored. There are, however, strong agreements that the growth of the informal manufacturing sector is linked to a distressed economy and also the ability to sustain it, in the long run, is debatable.
In addition, owing to the above fact, there are strong links to the informal manufacturing sector, and the formal sector scholars have lamented that the informal manufacturing sector is likely to act as the engine of economic growth and development.
Recommendations
Mukherjee (2004:13), recommends adoption of distinct sets of well-crafted policies to be provided for the different categories of the informal manufacturing sector. It was recommended that the vibrant categories be aggressively treated with ‘push policies’ in an attempt to strengthen their symbiotic relationship with the macroeconomic environment, assisted by providing tertiary and ancillary support and encouraging them to formalise their enterprises.
Serious consideration can be given to stimulate the production levels of the informal manufacturing sector so that it can become viable and be transformed into formal entities. Strong
policy regime in addressing the use and application of up-to-date technology, fulfilling the resource requirements for productivity upgrade and further strengthening and promoting formal and informal linkages should be considered as the central need for that situation.
2.9.4.2 Manufacturing, SMMEs Contributions to the Formal Sector Employment in South Africa
Globally, developing economies share the notion that viable employment opportunities to millions of the economically active population that is unemployed can be created, if government provides an enabling and supporting environment to all the small, medium, micro enterprises (National Planning Commission, 2011; Small Business Project Alert, 2013). The rationale attributed to this is that SMMEs are considered to be labour-intensive while operating at a low- capital and because of their ability to absorb adverse macroeconomic instabilities more than large corporations (Kayanula and Quartey, 2000; National Planning Commission, 2011; Small Business Project Alert, 2013).
SMMEs Support in South Africa
The Department of Trade and Industry (DTI) (2005, 2008) in the post-apartheid era implemented different policies and institutions including the Centre for Small-Business Promotion (1995), the White Paper on the National Strategy for Development and Promotion of SMMEs in South Africa (1995), National Small Business Act (1996), Khula Enterprise Finance Limited (1996) and National Small Business Council (1996) and the National Development Plan (NDP) (2011). The policies and instruments were aimed at the promotion and development of SMMEs in South Africa with an estimated 11 million jobs being anticipated to be created by the year 2030, which will effectively reduce unemployment to 14/% and 6% for 2020 and 2030 respectively (National Planning Commission, 2011).
Furthermore, SMMEs in the manufacturing, tourism and business services failed to generate new employment opportunities due to lack of skills to do business plans, lack of knowledge to understand complex labour, and limited access to financial resources and decline in performance due to a poor economic climate in South Africa (National Planning Commission, 2011).
Conclusions
The results obtained using Gibrat’s Law confirmed that when using the number of employees as a measure of size, SMMEs businesses grow faster than the larger businesses. The study by Malepe (2014), is consistent with the proposed specifications of the National Development Plan of 2030 as stipulated in the NPC (2011) that increased government support to SMMEs will generate more employment in South Africa. This is the justification for the creation of the national Department of Small Business Development and the Ministry of Small to Medium Enterprises Development in South Africa to assist SMMEs to benefit from globalisation through exporting their commodities to the European Union (EU).
Recommendations
This is the justification for the creation of the National Department of Small Business Development and the Ministry of Small to Medium Enterprises Development in South Africa to assist SMMEs to benefit from globalisation through exporting their commodities to the European Union (EU). More financial and non-financial support and services need to be provided to SMMEs in South Africa