LIST OF ACRONYMS AND ABBREVIATIONS
CHAPTER 2: SMEs IN THE GLOBAL WORLD
2.5 CHALLENGES CONFRONTED BY SMEs IN THE GLOBAL WORLD
2.5.6 Macro-environment
The nature of the external business environment in terms of its stability and predictability is closely linked to the growth of SMEs (Brasoveanu & Balu, 2014). A business environment must be predictable, transparent and stable if it is to promote SME development. Operations of SMEs are influenced by the environment in which they exist (Okwu et al., 2013).
Therefore, a supportive macro-environment enhances the development of SMEs. The macro- environment, which is characterised by burdensome government regulations, the economic climate, the political environment, and social factors such as corruption and bribery, militate against the growth of SMEs globally (Okwu et al., 2013; Brasoveanu & Balu, 2014).
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2.5.6.1 The regulatory environment: Burdensome government regulations
Regulations are important as they create order in an economy, assist government in the realisation of goals, protect citizens and the environment, and facilitate the development of an economy (World Bank, 2003, cited in Chittenden & Ambler, 2011). SMEs are expected to comply with a multiplicity of regulations that are imposed by different government offices (Chittenden & Ambler, 2011). However, the regulations impose compliance and other costs on SMEs (Chittenden & Ambler, 2011; Republic of Turkey, 2012; UK Government, 2013).
SMEs have to pay for operating licenses or permits, which are sometimes too costly for the emerging businesses (Govori, 2013a). Stringent government laws and regulations have often discouraged the registration and establishment of SMEs (Republic of Turkey, 2012; Govori, 2013a). In the EU approximately 50 % of SMEs are exposed to stringent regulations, and these regulations have been identified as obstacles to SME growth (Arasti et al., 2014).
In Ghana the cost of licensing a business is high and the registration requirements are prohibitive (Ahiawodzi & Adade, 2012). Bureaucracy converts simple processes, such as business permit renewals, into long and discouraging processes (Africa Centre for Open Governance, 2012). Therefore, businesses spend a lot of time and money in their attempts to comply with regulations (Chittenden & Ambler, 2011; UK Government, 2013). The WBG (2013a) notes that in Kenya it takes about 33 days to complete the licensing of a business and there are 10 steps to be followed. In the U.S. it takes less six days to complete the registration process of a business (WBG, 2015).
Table 11 illustrates that the process of registering a business in Kenya is long and discouraging for entrepreneurs. Thus, many entrepreneurs tend to be informal or do not start businesses at all (Govori, 2013a).
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TABLE 11. STEPS IN COMPANY REGISTRATION IN KENYA
Step Procedure Time to
complete
1 Registration of the business with government and tax registration with Centre for Public Registration
3 days
2 Stamping of the memorandum and articles as well as the statement of the capital
5 days
3 Payment of stamp duty at bank 1 day
4 A declaration of compliance form is signed before a Commissioner of Oaths or notary public
1 day
5 Filing of the deed and company details with the Registrar of Companies at the Attorney General’s Chambers in Nairobi
Maximum 14 days 6 Registration with the Tax Department for a company identification
number, value-added tax and Pay as You Earn online
1 day
7 Business permit application 5 days
8 Registration with the National Social Security Fund (NSSF) 1 day 9 Registration with the National Insurance Fund (NHIF) 1 day 10 After the issuing of the Certificate of Incorporation, a company seal is
made
2 days
Source: WBG (2013: 21–23a)
Owners and managers of SMEs find it difficult to spend their time dealing with paperwork and regulatory authorities (UK Government, 2013). Compliance costs for SMEs are higher than those of large companies (Chittenden & Ambler, 2011; UK Government, 2013). Costs for SMEs with fewer than 20 employees are at least 35 % more than for large businesses (Small Business Service, 2002, cited in Ireland Government, 2008). The EC (2007), cited in Ireland Government (2008), reports that where a large business spends €1 per employee to comply with a regulation, a medium enterprise spends about €4 and a small business spends up to €10. Therefore, barriers created by regulations tend to impact negatively on SMEs.
Owners and managers of SMEs spend a great deal of time away from their core businesses activities in trying to keep up to date with new regulations and in seeking to interpret and implement these regulations. As SMEs seek to understand new regulations, they incur costs.
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Chittenden and Ambler (2011) note that SMEs also incur costs as they seek specialist services related to filing tax returns, preparing financial statements and implementing new regulations.
In developed and emerging economies, the increasing tax rates have been cited as a challenge for SME growth (Dun & Bradstreet, 2012). In developed economies, 83 % of the SMEs mention tax as a challenge while 87 % of the SMEs in emerging economies indicate that tax has slowed down their development (Business Innovation, 2012; Dun & Bradstreet, 2012).
Unfavourable government regulations discourage SMEs from operating as licensed and registered entities. Thus, they often exist as informal SMEs (Hashi & Krasniqi, 2010)
2.5.6.2 Economic environment
Every business operates within the dictates of the macro-economic environment and SMEs are vulnerable to economic instability (Okpara, 2011; Government of Canada, 2013). A volatile economy becomes highly unpredictable and stifles SME development. The poor economic environment in countries such as the DRC (AfDB & ADF, 2013), Burundi (EAC, 2009), Mozambique (Dos Santos, 2008), and Malawi (UNECA, 2012) makes it difficult for SMEs to flourish. Economic factors such as inflation, interest rates and foreign exchange rates influence the demand for goods and services as well as the development of SMEs (Ehlers &
Lazenby, 2007, cited in Olawale & Garwe, 2010). In South Africa there is a low consumption rate, high inflation rates, dwindling foreign exchange rates and high unemployment rates (Olawale & Garwe, 2010). These economic variables stifle the growth of SMEs as they affect sales, revenues and market growth.
2.5.6.3 Political environment
Political stability is critical for SMEs to commit their financial and human resources in their businesses (Caner, 2010). The growth of SMEs in Malaysia, for example, is partly attributed to political stability (NST, 2006, cited in Senik et al., 2010). An unstable political environment, however, threatens the growth of SMEs, and there are numerous examples that attest to this.
A study conducted by the IFC and Fransa Bank in 2011 in Syria revealed that most firms cited political uncertainty as a challenge to SME growth due to the spillover effects of the war in Syria. Lack of political cohesion and incessant wars in the DRC have had a negative impact on the economy, resulting in SMEs failing to grow (AEO, 2005; AfDB & ADF, 2013). In the
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DRC, Rwanda and Uganda, civil wars have stifled the development of SMEs. In the DRC most businesses closed shop in the 1990s due the looting that took place in 1993 and 1996 during the civil war (Ene & Ene, 2014). A decade of war in Burundi led to the underdevelopment of the manufacturing sector as well as SMEs (EAC, 2009). Mozambique experienced 16 years of civil war, resulting in an economic recession and poor development of SMEs (Dos Santos, 2008). The political instability in Egypt (German Development Institute, 2013) and Libya (Mejia, 2012) in 2011 brought economic activities to a halt and negatively affected the operations of SMEs. The economy of Egypt was on the brink of collapse after the 2011 uprising against the government (German Development Institute, 2013). Afghanistan has experienced more than 30 years of political instability and violence, and this has destroyed important infrastructure, has made it difficult for people to be educated, and has led to economic recession (USAID, 2009). Such a political climate has made it difficult for SMEs to develop
2.5.6.4 Social environment: Corruption and bribery
Corruption is the abuse of entrusted power for personal benefit (Transparency International (TI), 2013). Bribery is the seeking or offering of payments or gifts as private companies and government officials interact, for personal or collective gain (Rune, 2011; TI, 2012). Bribery is the most common form of corruption affecting SMEs (UNIDO& UNODC, 2007, cited in TI, 2013), and bribes are offered to influence the actions of an individual entrusted with power or an official holding a public office. Corruption and bribery have been cited as challenges confronting SMEs globally (Okpara, 2011). Approximately 70 % of SMEs in emerging economies view corruption as an obstacle to growth (ACCA, 2013).
There are numerous examples of the negative effects of bribery and corruption on SMEs, and on business in general. In Pakistan 40 % of businesspeople perceive corruption to be a challenge to business development (Sheraz et al., 2013). The payment of bribes has been identified as one of the major obstacles to SME growth in South East Europe (World Bank, 2012, cited in Govori, 2013b). Bribery consumes a portion of the income that could be used for business expansion, and research has revealed that if bribery rates go up by one percentage point, the growth of a company is reduced by 3 % (Africa Centre for Open Governance, 2012). The World Bank (2012a) reports that the level of corruption in Kosovo is so high that it has stifled the growth of SMEs.
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According to the 2013 Corruption Perceptions Index, Korea, Somalia and Afghanistan are the countries with the highest levels of corruption in the world (TI, 2013). The 2014 Corruption Perception Index indicates that Kosovo and Albania are the most corrupt countries in South East Europe (TI, 2014). Transparency International (2012) observes that Algeria, Armenia, Bolivia, Gambia, Mali, Mexico and the Philippines are other countries where corruption is rife. On the other hand, the 2013 Corruption Perception Index reveals that Denmark and New Zealand are the least corrupt nations in the world (TI, 2013).
UNIDO and the United Nations Office on Drugs and Crime (UNODC) (2007), cited in ACCA (2013), observe that where SMEs pay bribes to government officials, they are likely to pay a large portion of their annual income. SMEs fall prey to bribery for the processing of official documents for tenders (ACCA, 2013). They lack resources in general and are more reliant on outside support than larger businesses; therefore, it is difficult for them to avoid corruption and bribery since they need resources (Rune, 2011; UNIDO & UNODC, 2012;
ACCA, 2013).
UNIDO and UNODC (2012) report that SMEs lack the bargaining power and influence to refuse to pay bribes because they often do not have strong connections with high-level government officials or politicians. In Thailand SMEs find it difficult to resist demands for bribes, and usually they are not aware that bribes can be resisted (Grimsholm & Poblete, 2010). This has compromised the growth of Thai SMEs. SMEs get involved in corruption because they view it as ‘normal’ way of doing business and the quickest way of getting what they want by avoiding the administrative obstacles caused by bureaucracy (Rune, 2011;
Gbetnbom, 2012). According to Gbetnbom (2012), SMEs view corruption as a way of saving time and resources. Therefore, the owners and managers of SMEs are fully convinced that corruption is part of normal everyday business, and that they cannot successfully operate without being involved in it (UNIDO & UNODC, 2012).
A study conducted by Gbetnbom (2012) in Cameroon revealed that 90 % of the respondents had been solicited for bribes on the part of government officials so that their documents could be processed quickly. This is confirmed by UNIDO and UNODC (2012), Transparency International (2013), and the Africa Center for Open Governance (2012), who report that SMEs have been asked to pay bribes in order to get operating licenses and permits. A survey by the World Bank and the IFC in 2010 reveals that 38 % of the SMEs surveyed indicated that corruption was a constraint to the growth of their businesses, and about 18 % reported having been expected to give gifts in order to obtain construction permits (TI, 2013). In South Africa SMEs are forced to become involved in corrupt activities in order to win contracts or tenders, and feel compelled to give ‘gifts’ to people who influence decisions on the awarding
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of tenders (Business Unity South Africa, 2009). In Kenya 79 % of SMEs report that they are expected to pay bribes to government officials in order to get their required business documentation (Africa Centre for Open Governance, 2012).
2.5.6.5 Access to appropriate technology
Acquiring the appropriate technology is important for SMEs, as it enables them to produce high-quality products and services, and to thus gain a competitive edge (Nieman &
Nieuwenhuizen, 2009; Subrahmanya et al., 2010; Sidik, 2012; Mwangi & Namusonge, 2014).
Efficiency is improved, and operational and production costs are reduced (Nieman &
Nieuwenhuizen, 2009; Bhushan & Sanghvi, 2011). SMEs are able to enter new markets if they are able to offer competitive and distinctive products and services (Subrahmanya et al., 2010; Bhushan & Sanghvi, 2011; Sidik, 2012; Mwangi & Namusonge, 2014), and as a result they are able to build sustainable revenue streams. Therefore, there is a close relationship between technology and the development of SMEs (Mwangi & Namusonge, 2014). For example, in India access to the latest technology on the part of SMEs is a challenge and has compromised the growth and internationalisation of SMEs (RBI, 2012). SMEs in China often make use of poor-quality and outdated production technology and equipment (IFC, 2012b).
South African SMEs mention the lack of appropriate technology as one of their major challenges, especially those in the manufacturing sector (Nieman & Nieuwenhuizen, 2009).
In the developing countries of Zambia, Malawi, Zimbabwe, Nigeria, Kenya, Tanzania and Uganda, access to technology is a challenge for SMEs. In general, African countries lag behind in terms of technological development (Ekeledo & Bewayo, 2009; Mwega, 2011).
Accessing the appropriate technology is often prohibitively expensive for SMEs; hence, the availability and affordability of technologies present a challenge (Heather & Banham, 2010).
Such a scenario impacts negatively on SME growth. Figure 5 presents a summary of the macro-environmenatl factors influencing SME development.
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FIGURE 5. MACRO-ENVIRONMENTAL FACTORS INFLUENCING SME DEVELOPMENT
Source: Hashi & Krasniqi (2010: 462)