2.4 D ETERMINANTS OF E NTREPRENEURSHIP WITHIN THE CONTEXT OF SME DEVELOPMENT
2.4.1 Regulatory Framework
The regulatory framework includes the administrative burdens for entry, administrative burdens for growth, bankruptcy regulation and court legal regulations (Storey and Greene, 2010:376, Autio and Fu, 2015:70). Ayyagari, Beck and Demirguc-Kunt (2007:421) and Wach (2015:14) highlight the importance of easy entry and exit, sound contract enforcement, effective property enforcement, effective property rights registration and access to external finance as the focus areas for an effective regulatory framework for SMEs. These can foster a thriving and vibrant SME sector with high turnover and the operation of successful firms unconstrained by rigid regulations. According to Cardoza, Fornes, Farber, Duarte and Gutierrez (2015:2031) SMEs that benefit from sound government policy frameworks, favourable environmental conditions, and well-designed assistance programmes are more likely to expand internationally. Therefore, the regulatory environment is an important determinant of the development of SMEs in a country.
However, the regulatory environment often presents a challenge for SME development thus necessitating the formulation of SME policy. Cardoza et al. (2015:2031) identified institutional
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barriers to business growth which include the quality of laws and regulations and institutional constraints related to intervention by authorities and regulatory bodies. Abe and Dutta (2014:15- 16) also highlighted some of the hurdles faced by SMEs which include lengthy licensing and permit procedures and a hostile regulatory environment. All of these challenges can be addressed by government intervention through a unified SME policy once again proving that government regulations are an important determinant of SME development.
Storey (2008:5) is of the view that public policies to promote SMEs are normally justified on the grounds of market failure. Market failure occurs when resources are inefficiently allocated due to the imperfections in the market mechanisms in which case there is need for government intervention (Margetts, 2011:192; Eslava and Freixas, 2016:5). In such instances, the government would have to develop regulatory frameworks that address the market failure in order to restore the functioning of the market. Wach (2015:14) argues that SME policy priorities include improving government regulatory measures to be more favourable to small businesses.
By improving the regulatory framework, the government addresses market failure, making the business environment more conducive for small businesses.
The importance of the regulatory framework is such that it has an impact on SMEs decision to register. Mourougane (2012:11) notes that a heavy regulatory burden can influence firms’
decisions to become formal. Buckley (2016:129-130) also argues that SME policies are important to increase the ease of doing business by addressing the barriers or obstacles to doing business. There is therefore need to lighten the burden of entry for small businesses. Evidence from Mexico, Colombia and Malaysia suggests that the simplification of business registration procedures can lead to an increase in the number of businesses that register (Mouragane, 2012:11). In this light therefore reducing the burden of entry is important for the formalisation of small businesses.
Bartlett (2001:200) and Mouragane (2012:13) suggest that throwing money at SMEs will produce little effect if the institutional structure is ineffectively developed: the critical dimensions of the institutional structure are the tax, legislative and regulatory environment within which firms operate. Aggregate demand, interest rates and taxation are key factors
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influencing the development of SMEs (Smallbone and Welter, 2001:65; Cant and Wiid, 2013:707). For the development of SMEs it is important for the government to create an SME friendly regulatory framework.
Furthermore, (Storey, 2008:4) macro policies (immigration policy, competition policy, tax and benefit regimes, and regulation) are more effective than micro policies (training, information, advice, cultural change programmes) in promoting SMEs. According to Dosi, Fagiolo, Napoletano, Roventini and Treibich (2015:166) this is so because with the correct mix of fiscal policy and monetary policy the government can target economic growth oriented activities.
Smallbone and Welter (2001:64) concur with this view and point out government can influence SME development in any economy through its influence on the macroeconomic environment in which business is conducted. These assertions show that there is a need for government to focus on macroeconomic policies and make them friendlier to SMEs. Evidence from most Eastern European countries shows that the institutional frameworks (bureaucracy and tax laws) are perceived as impediments to the growth of SMEs (Bartlett, 2001:200), hence, government should influence the institutional framework to make it more conducive for small businesses. Therefore, countries need to develop their institutional frameworks to facilitate the development of small businesses.
Beck and Dermiguc-Kunt (2006:2937) note that institutional development is the most significant country characteristic that can explain cross country variations in firm financing; firms in countries with higher institutional development report significantly lower financing obstacles in comparison to those in countries with lower institutional development. The development of institutional frameworks that promote SMEs is valuable. The Zimbabwean government can focus on the regulatory framework in order to close the gap between SMEs in Zimbabwe and those of other countries.
Kyambalesa (1994:23) in a study conducted in Ghana argues that neither business acumen nor ingenuity among entrepreneurs can yield any better than marginal results unless the government provides an enabling environment. Mwena (2005:18), in a study on SMEs in Zambia points that government support for SMEs includes enactment of policies and programmes to encourage
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small businesses. Kyambalesa and Mwena’s studies highlight the timeless relevance and primacy of an enabling environment created by the government through regulatory framework to resolve market failure is still paramount to the development of SMEs. Divanbeigi and Ramalho (2015:2) in their study on business regulation and growth found out that an improvement of 10 points in the overall measure of business regulation is linked to an increase of around 5 percent new businesses per 1 000 adults. The number and productivity of businesses improves when there is less business regulation.
The regulatory framework is critical to the development of small businesses as it demarcates the environment in which SMEs can operate. It either hampers or promotes the operation of small businesses. Firm level data from Western and Eastern Europe shows that entry regulations (measured as the cost of registering a firm) hamper the creation of new firms, while regulations fostering property rights protection and access to finance enhance entry (Beck and Dermiguc- Kunt, 2006:2933; Mariott and Shepherd, 2015:8). If the registration process for companies is rigorous and cumbersome there are chances that fewer SMEs will be willing to register their businesses. Failure to register implies losses in tax revenues for the government. It therefore, benefits the government to improve the regulatory framework so as to make it easy for small businesses to register and operate.
Regulations have been identified as the stumbling block to the development of SMEs due to their complexities as well as the multiplicity of bureaucratic requirements (Zindiye et al., 2012:658;
Autio and Fu, 2015:70). Bureaucratic red tape act as a disincentive for small businesses to register, and this, therefore necessitates reduction and simplicity in the procedures for registration. Bartlett (2001:200) argues that a state bent on exploiting and thus inhibiting the newly emerging SME sector through high taxation, licence requirements, extortion, violence and the breakdown of law and order (the grabbing hand of the state) will inevitably inhibit the growth of SMEs. The regulatory framework should guarantee the security of SMEs and make sure that there is the rule of law. The propagation of small businesses lies in the government’s ability to protect and promote this sector through a sound regulatory framework.
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Bartlett (2001:201) noted that in countries such as Ukraine and Albania corruption led to a reduction in business activity due to the increased risk and uncertainty of doing business there. A corrupt society therefore impedes the development of SMEs by increasing the risk and uncertainty of doing business. Cant and Wiid (2013:707) point out that in South Africa corruption is among factors in an SME’s external environment that has adverse on the businesses and can be an obstacle to the growth if new SMEs. Regulatory frameworks should, therefore, take into account the negative impact of corruption and put in place measures to stamp out corrupt tendencies.
Van den Berg and Noorderhaven (2016:114) in a study on corruption and SMEs in Kenya found that corruption is seen as the biggest threat to firms in developing nations with small and medium enterprises being particularly vulnerable. In another study on the impediments to youth entrepreneurship in Zimbabwe Chimucheka (2012:10392) points out that corruption by local authorities was mentioned by 60 percent of the participants as affecting access to resources provided by the state. Entrepreneurs or small business owners take risks in operating their businesses amidst uncertainties, however, there are conditions wherein the level of risks and uncertainty are increased due to a breakdown of law and order as well as the rule of law. In conditions where there are high levels of corruption risk and uncertainty is such that doing business becomes unsustainable.
Furthermore, imprecise regulations that are difficult to implement can leave too much scope for interpretation and the use of discretion by local officials which in turn contribute to corruption (Smallbone and Welter, 2001:65). There is a need, therefore, to develop precise legislation so as to encourage the propagation of SMEs in Zimbabwe. Mourouhane (2012:7) in a survey carried out in Indonesia, found that SMEs are more likely to pay a bribe than large firms with a greater share of respondents expecting to have to bribe officials to obtain a license. Stringent regulatory frameworks can facilitate the propagation of such corruption. By lessening the regulatory burden government will also be dealing with corruption.
Storey and Greene (2010:377) note that the rate of business entry was directly associated with the incidence of political upheavals. The Peruvian crisis of 1999 led to a fall of business start-ups
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of more than five (5) percent (Storey and Greene, 2010:377). This factor shows that the environment in which regulatory frameworks are to be implemented is equally important as the regulatory frameworks themselves. In this case political stability is a contributing factor to the rate of start-ups thus regulatory frameworks need to be accompanied by a conducive political environment. China promulgated the SMEs promotion law in 2002 which saw the removal of institutional barriers that hinder the development of SMEs and creation of a level playing field for SME development (Chen, 2006:140). China is, therefore, a good illustration of the yields and rewards of government influencing the regulatory environment in an effort to develop small businesses.