CHAPTER 2 REVIEW OF RELATED LITERATURE
2.5 Support for SMMEs in developed and developing countries
As stated by Van Stel (2007) and Moos (2015), there are various direct and indirect ways of supporting SMMEs that can be used by governments and other institutions. The promotion of SMMEs by governments has compelled the development of strategies and economic programmes that lead to the creation of jobs for people to improve their lives while positively contributing to the economy (Elhiraika & Nkurunziza, 2006; ILO, 2015a). The European Commission (cited by Röhl, 2017) indicates that the first European Charter for Small Enterprises was passed in 2000.
The main aim of this charter was to reinforce the sustainability of SMMEs by providing them with support (European Commission, 2002). SMMEs in EU countries receive support from the EU, such as grants, loans, and, in some cases, guarantees (European Commission, 2014).
The support granted to SMMEs in EU countries can either be direct support or delivered through programmes run at national or regional levels, such as the EU’s Structural Funds that promotes balanced development of ventures (Mbedzi, 2011). Maloka (2013) emphasises that the European Council provides strong support to start-up businesses and those that are in the expansion phase.
Karjalainen and Kemppainen (2008) explain that the adoption of the Small Business Act in 2008 in Europe focused on promoting entrepreneurship through the “Think Small First” principle that motivates the public to start businesses. The aim is to address challenges they encounter that affect their development. Mbedzi (2011) and Röhl (2017) posit that to achieve the objectives of the SMME policy of the Small Business Act, there are 10 basic principles and a series of steps to be followed, which are:
1) promoting entrepreneurial spirit;
2) The principle of a second chance for unsuccessful entrepreneurs;
3) legislative rules according to the “Think Small First” principle;
4) responsive administration for SMMEs (e.g., e-Government);
5) improved access to public procurement and state aid for SMMEs;
6) facilitated access to funding options and a better business environment;
7) improved chances of success in the European Single Market;
8) promoting access to knowledge formation and innovation;
9) ecological innovation/opportunities for environmental technology; and 10) more assistance for exploiting opportunities in foreign markets.
The Small Business Act also focuses on the development of a one-stop shop that makes registration of companies less time and cost consuming. The EU has legislation such as the General Block Exemption Regulation on State Aid, which makes it easy for members to assess support programmes that help SMMEs to promote job creation and boost competitiveness (Lopriore, 2009). Furthermore, the European Commission (2008; 2018) found it necessary to improve the conditions for SMMEs in the following areas: improving market entry, promoting a culture of entrepreneurship, supporting entrepreneurship, improving framework conditions in all sectors, intelligent regulation, and simplified administrative procedures (Röhl, 2017).
This support boosted the growth and sustainability of SMMEs in EU countries, which reduced unemployment and increased the economic growth of the region. Developed countries support SMMEs by reducing tax and reviewing business laws and regulations so that SMMEs can contribute to economic growth (Khoase & Govender, 2013). Furthermore, in developed countries such as Canada and Australia, there are several initiatives that promote the establishment of
SMMEs. These initiatives include the purchase of 32.8% of goods and services from SMMEs by the government of Canada. This is done by all tiers of government of Canada (OECD, 2015).
Newly established SMMEs are exempted from paying tax, which assists businesses to meet competitive challenges. Start-ups are also tax exempted in Australia (Khoase & Govender, 2013).
On the other hand, the Tanzanian government is focusing on industrialisation and pro-poor growth, which is based on its Five-Year Development Plans (FYDPs) running up to 2025 (Gamba, 2019).
The FYDPs address supply constraints in key sectors with higher multiplier effects for SMMEs.
Tanzania is an example of how developing countries can support the growth of SMMEs. The development policy of Tanzanian SMMEs entails strengthening the seven pillars that promote the development and growth of SMMEs (Gamba, 2019). The National Economic Empowerment Policy serves as a guide for the contribution of most of the citizens of Tanzania to all economic sectors (Government of Tanzania, 2015). The main aim of this policy is to empower Tanzanian citizens who hold more than 50% shares in local companies. The policy incorporates all economic sectors and various individual traders’ employees, including livestock keepers, who participate in economic activities (Mzomwe & Pelagia, 2015).
The policy further provides guidelines for establishing strategies that are suitable for various SMME sectors, depending on the prevailing circumstances. In this respect, each sector is enjoined to develop concrete implementation strategies (Government of Tanzania, 2015). Tanzania’s Sustainable Industrial Development Policy (1991-2020) promotes SMMEs by supporting them by simplifying taxation, licensing, and registration of SMMEs, and improving their access to financial services (Argidius Foundation, 2017).
The Tanzanian government further identified key institutions that developed different programmes to support SMMEs. These included institutional frameworks such as the Ministry of Industry, Trade and Marketing and the National Economic Empowerment Council (NEEC). The main objective of the NEEC is to develop strategies for the mobilisation and utilisation of resources for economic empowerment activities. The Small Industries Development Organization is responsible for policy formulation and provides direct support to industries and handholding of SMMEs that are established in both rural and urban areas (Argidius Foundation, 2017).
Tanzania also receives international support from the African Development Bank, which assists with infrastructure development and strengthening governance and accountability by monitoring the financial management of SMMEs (United Republic of Tanzania, 2016). There is also the
Danish Development Cooperation, whereby Denmark has strong bilateral relations with Tanzania, with the focus on addressing issues of poverty and inequality to promote inclusive green growth and employment, and strengthening democracy, good governance, the rule of law, and respect for all human rights (Argidius Foundation, 2017). The Danish Development Cooperation provides funds to SMMEs in Tanzania to promote the growth and development of such ventures with the purpose of reducing poverty and creating employment through SMMEs. Tanzanian SMMEs receive financial support from the United Kingdom, Finland, the Netherlands, the United States African Development Foundation, the United States Agency for International Development, and the World Bank. A specific number of projects are targeted that will improve the sustainability of SMMEs to enhance the economic growth of Tanzania (Argidius Foundation, 2017).
Another example how SMMEs are supported in developing countries is Ghana. In Ghana, structures have been established that aim to create a conducive environment for SMMEs to contribute to the economic growth of the country (Khoase & Govender 2013; Ntiamoah et al., 2016). The Ghana Enterprise Development Commission (GEDC), which was formed in 1970, was an initial structure that provided financial and technical support to SMMEs. The GEDC mainly focused on helping to strengthen small-scale industries in general in Ghana (Ntiamoah et al., 2016). Thereafter, in 1981, the National Board for Small-Scale Industries (NBSSI) was established with the aim of addressing the concerns of small-scale businesses, which encompassed organising training programmes for entrepreneurs, advising them on business operations, and providing financial assistance in the form of loan schemes (Ntiamoah et al., 2016). The NBSSI established the Entrepreneurial Development Programme, which trained and assisted persons with entrepreneurial abilities to develop their skills (Musah, 2015).
Thereafter, the Regional Appropriate Technology Industrial Service was established in 1987 under the Ministry of Environment, Science and Technology with the purpose of providing job opportunities and creating a conducive environment for small-scale industries at the grassroots level through technology upgrading (Ntiamoah et al., 2016). In 1998, the Bank of Ghana obtained US$28 million credit from the International Development Association of the World Bank for the establishment of the Fund for Small and Medium Enterprises Development (FUSMED). FUSMED was to provide funding through appropriate participating institutions such as commercial banks, development banks, and additional financial institutions to SMMEs in all sectors (Musah, 2015).
The major weakness associated with this policy was that the lending risk fell directly on the participating bank as SMMEs were often unable to pay back the loans.
The government of Ghana has a keen interest in developing rural enterprises and thus set up the Rural Finance Project aimed at issuing long-term loans to small-scale farmers (Musah, 2015). The government further implemented several direct lending schemes to SMMEs either out of government funds or with funds sourced from donor agencies (Musah, 2015). The government of Ghana, having observed the inability of SMMEs to repay loans, introduced credit guarantee programmes to promote the development of SMMEs. The government of Ghana further set up a venture capital trust fund through the Venture Capital Trust Fund Act 2004, which provided financial support for the establishment and promotion of SMME in priority sectors (Musah, 2015).
The Philippines is a non-African country that is yet another example of how SMMEs can be supported in developing countries. The government of the Philippines started supporting SMMEs in 1980 while opening its domestic economy to international trade through the adoption of trade liberalisation programmes. Thereafter, the Republic Act 8289 of 1997, called the Magna Carta for Small Enterprises, was developed to unite all the programmes of the government for the advancement and establishment of SMMEs into an amalgamated framework (OECD / Economic Research Institute for Association of Southeast Asian Nations [ASEAN] and East Asia [ERIA], 2018). The aim of the Act was to support and strengthen SMME development, particularly those that were in rural areas and agriculture-based (Miranda & Miranda, 2018).
The Act covered the creation of the Small and Medium Enterprise Development (SMED) Council, which served as the centre for incentives available to SMMEs. There was also the Small Business Guarantee and Finance Corporation (SBGFC), which addressed the financial needs of SMMEs (Aldaba, 2012; OECD/ERIA, 2018). The SBGFC provides funds for exporting products, funds for working capital for both temporary and permanent employees, and short-term and long-term loans.
It further assists SMMEs by purchasing equipment or building/warehouse construction through long-term loans (OECD/ERIA, 2018).
In addition, there is the Micro, Small and Medium Enterprise Development (MSMED) Council, which is a body that is responsible for formulating SMME policy. The MSMED Council encourages public-private partnerships through the establishment and management of Negosyo Centers. Negosyo Centers are centres for simplifying business establishment and easing the access to services for micro, small, and medium enterprises (MSMEs) in the Philippines. They further stimulate entrepreneurship development as MSMEs contribute to the economic growth of the Philippines. The MSMED Council is led by the secretary of Trade and Industry and its members are the secretaries of Agriculture, Interior and Local Government, Science and Technology, and
Tourism (Hampel-Milagrosa et al., 2014). The National Competitive Council, which was formed in 2006, is the body responsible for reviewing policies in the Philippines. The National Competitive Council launched “Project Repeal: The Philippines Red Tape Challenge” in March 2016. The aim of the project was to cancel all outdated rules and encourage reducing the cost of doing business, whereby 4 837 regulations were reviewed by Project Repeal. To ensure that the regulations are implemented and that they achieve their purpose, the National Economic and Development Authority (NEDA) is the overseeing body of Project Repeal.
According to the Department of Trade and Industry (2018) in the Philippines, other important elements of the legal and regulatory frameworks that govern the policy for SMME development include the following:
• Republic Act 9501 of 2008: Small and Medium Enterprises Act (as amended, Republic Act 6977 of 1991): This Act promotes entrepreneurship, supports and encourages the establishment of SMMEs, and is intended to ensure their viability and growth and thereby attaining country-wide industrialisation.
• Republic Act 9178 of 2002: Barangay Micro Business Enterprises (BMBEs) Act of 2002:
This Act aims to assimilate enterprises in the informal sector with the standard economy through the rationalisation of bureaucratic limitations that promote the development of BMBEs by allocating incentives to their beneficiaries. “BMBE” means any venture involved in agro-processing, trading, and services with total assets to the value of P3 million excluding land (50.41 Philippine peso = 1 US dollar). The BMBE Act was promulgated in 2002 with the aim of helping local people to start small businesses in manufacturing, production, processing, trading, and services by providing them incentives not exceeding P3 million (equivalent to US$59.682). Small businesses are exempted from income tax, while the employees receive social security and healthcare benefits.
• Republic Act 10644 of 2014: Go Negosyo Act: This Act encourages the creation of jobs and all-encompassing growth through the establishment of MSMEs and authorising the establishment of Negosyo Centers in all cities, municipalities, and provinces. These centres are in charge of creating an enabling environment and facilitating access to services for SMMEs.
• Republic Act 10679 of 2015: Youth Entrepreneurship Act: This Act promotes entrepreneurship and financial education among Filipino youths.
• Republic Act 9485 of 2007: Anti-Red-Tape Act: This Act is responsible for improving the delivery of government services relating to the establishment of SMMEs by reducing
bureaucratic red tape, preventing corruption, and providing penalties to officials found to be taking bribes.
• Joint Memorandum Circular No. 1 Series of 2011: These are guidelines used in executing the legalisation and licensing of ventures in all cities and municipalities.
The NEDA ensures that the above regulations are implemented and that they continue to meet their objective of supporting SMME development in the Philippines. The foregoing discussion shows that both developed and developing countries have programmes and institutions that support the development of SMMEs because they are a vehicle for socioeconomic development in all countries.