Small and medium enterprises (SMEs) have a significant role in the economies of both developing and developed countries. According to Nieuwenhuizen (2019), SMEs make a large contribution to countries’ GDP, ranging from 16% in low-income nations to 51% in high-income ones. Although it is difficult to determine the exact contribution of SMEs to South African GDP because of a great number of unregistered or informal businesses, it is estimated that SMEs contribute about 35-45% to GDP and provide 50-60% of jobs (Nieuwenhuizen, 2019). Thus, the significance of SMEs in the South African economy is hard to underestimate. This paper aims to propose a study, the purpose of which will be to investigate the challenges facing SMEs in South Africa. The identification of issues encountered by business owners will help to guide policy development to facilitate running a business in South Africa, which will positively affect the country’s economy.
Research Context: Background
Although South Africa’s economy is growing, the country experiences a range of economic issues. For example, it has one of the highest unemployment rates in the world, which amounts to 24.30%, and ranks fourth among the nations with the worst youth unemployment (Bushe, 2019). SMEs could provide a solution to the problem of unemployment, as well as make a large contribution to the country’s economic growth. However, South African SMEs have high failure rates, with 40% of new businesses failing in the first year after the establishment, 60% of them closing in the second year, and 90% of them failing during the first ten years of operation (Bushe, 2019). In addition, South Africa has experienced low growth in the business sector. Despite the government’s efforts directed toward stimulating the growth of SMEs, only 933 new formal businesses were established between 2008 and 2015, and a vast majority of the country’s SMEs are informal businesses (Nieuwenhuizen, 2019). This evidence suggests that South African SMEs are faced with substantial barriers causing business failures and discouraging entrepreneurs from establishing formal businesses.
The Research Problem
The proposed study will deal with the research problem of challenges faced by South African SMEs. As the extant literature shows, there are high rates of business failures among South African SMEs, and informal businesses outnumber formal enterprises. Some scholars have addressed the question of what factors lead South African businesses to fail (Bushe, 2019). However, the question of what challenges prevent entrepreneurs from establishing formal businesses in the country has not received scholarly attention. Therefore, the proposed research will aim to identify issues encountered by entrepreneurs in South Africa to gain insight into the possible causes of the above-mentioned problem and inform policy development.
Aim of the Study
The aim of the proposed study is to identify challenges faced by SMEs in the business environment of South Africa. Special attention will be given to challenges faced by the owners of informal businesses, preventing them from establishing registered businesses in South Africa. In addition, recommendations for policymakers will be given as to what policy changes should be introduced to encourage entrepreneurs to establish formal businesses in South Africa.
The research will have several objectives; first, it will intend to identify and understand challenges encountered by SMEs in South Africa. Second, the study will assess the role of the government in establishing and operating SMEs. The next objective is to identify the main reasons for Southern African entrepreneurs to establish informal businesses instead of formal enterprises. Finally, the research will aim to formulate recommendations for policymakers and entrepreneurs that will help to overcome the identified challenges.
The research questions that the proposed study plans to investigate include:
- What challenges are SMEs faced with in South Africa?
- How does the government aggravate or alleviate the challenges faced by South African SMEs?
- What are the primary reasons for South African entrepreneurs to establish informal SMEs rather than registered ones?
- What recommendations may be given to entrepreneurs and policymakers to address the identified challenges?
Significance of the Study
The study will contribute to the existing body of knowledge about entrepreneurship and SMEs by providing insights into current challenges faced by SMEs and reasons for the prevalence of informal SMEs in South Africa. Understanding these challenges is important because SMEs represent “the engine that drives world economies” and account for more than half of all businesses in developed countries and 99% of enterprises in developing countries (Muriithi, 2017, p. 36). Identifying the reasons why entrepreneurs avoid establishing formal businesses is also significant because it will inform policy changes. Although informal businesses contribute to GDP, their exact contribution is difficult to estimate. In addition, such businesses usually survive by violating regulations and avoiding taxes, which negatively affects economic indicators and government income (Nieuwenhuizen, 2019). With regard to this problem, the research will have practical implications for entrepreneurs and provide policymakers with directions for policy change to encourage business owners to establish formal businesses.
There are many studies investigating SMEs; however, few of them have devoted significant attention to challenges that these enterprises encounter in their operation. The extant literature on challenges faced by SMEs in South Africa and other countries distinguishes several categories of such issues. The first challenge identified in most studies is access to funding, which is common in most countries and in various industries (Moos and Sambo, 2018; Muriithi, 2017; Ngota, Mang’unyi and Rajkaran, 2018; Razak, Abdullah and Ersoy, 2018). SMEs across the globe lack access to formal credit and rely on cash from family or internal funds (Razak, Abdullah and Ersoy, 2018). This contributes to the fact that many SMEs fail during the first years after the establishment.
The next common category of challenges identified in the literature is management issues. SMEs in various countries suffer from poor management, which stems from business owners’ lack of training and experience (Bushe, 2019; Meyer, Molefe and De Jongh, 2018; Muriithi, 2017; Mxunyelwa and Vallabh, 2017; Ngota, Mang’unyi and Rajkaran, 2018). This is particularly relevant for South African SMEs established by immigrants who are usually too small for hiring competent managerial staff (Ngota, Mang’unyi and Rajkaran, 2018). Skilled managerial staff is necessary for strategic planning, employee motivation, and the productivity and sustainability of the business.
Another key challenge found in several studies is government support and the regulatory environment. Complicated regulations, unfair competition, unfavorable tax systems, and the penal environment disrupt the growth of SMEs (Muriithi, 2017). In South Africa, SMEs have problems with regulations regarding taxes, labor laws, skill development, and South African Revenue Services (SARS) (Nieuwenhuizen, 2019). In addition, SMEs are usually excluded from policy development, so they should comply with regulations designed with large businesses’ interests in mind (Bushe, 2019). Overall, government support plays an important role in encouraging entrepreneurs to establish SMEs and facilitating business growth, and it is necessary to identify the role of government in entrepreneurs’ motivation to set formal SMEs in South Africa.
Other challenges encountered by the owners of SMEs vary in different studies. For example, Moos and Sambo (2018) identified such issues as a lack of business development services, a lack of infrastructure, and a lack of access to advanced technologies. Muriithi (2017) found that African SMEs experience problems with electricity supply, corruption, access to reliable information, and political instability. Meyer, Molefe, and De Jongh (2018) divided the challenges into external and internal; the first category includes strict regulations, corruption, and economic conditions, and the second group involves challenges related to finances, managerial skills, and location. Based on the literature findings, it is suggested that the proposed research should use the three main categories of challenges, namely, access to funding, management issues, and government support. The research will identify to which extent these challenges are relevant to the South African environment and what other issues are common among this country’s SMEs.
Research Design and Methodology
The study will use a qualitative research design because it intends to get an in-depth insight into challenges faced by SMEs in South Africa. The proposed research will use both primary and secondary data. Secondary data will be retrieved from relevant scholarly articles and journals. Primary data will be collected by means of semi-structured interviews with business owners. Participants will be selected using purposive sampling to gain an understanding of the unique experiences of small and medium business owners of informal enterprises in South Africa. During the data collection process, the interviews will be recorded to ensure the correctness of responses when preparing transcripts. The transcripts will be analyzed and interpreted using thematic content analysis to establish common themes in participants’ responses.
In order to ensure that the research is conducted in an ethical way, the researcher will obtain informed consent from all the participants before initiating the study. The researcher will make sure that the respondents’ and their organizations’ privacy, confidentiality, and anonymity are maintained during and after the study. Finally, the participants will not be provided with misleading information about the research purposes, and the researcher will avoid a biased representation or interpretation of primary data.
The planned dissertation will contain five chapters: introduction, literature review, methodology, results, and discussion. In the introduction, the researcher will establish the significance of the problem, include the problem statement, and state research questions. In the literature review, the background for the research problem will be discussed, along with theories used by other scholars and findings of existing studies on challenges faced by SMEs in South Africa. In the methodology section, sufficient details about the research process will be described, including participants, sampling, research design, procedures, and data analysis and interpretation. The results section will discuss common themes found in the interviews with participants regarding challenges encountered by SMEs. In the last section, the results will be summarized and synthesized with the current literature, and recommendations will be given as to how policymakers may help entrepreneurs overcome the identified challenges to improve the survival and growth of SMEs.
Table 1 shows the proposed timetable for completing the dissertation.
Table 1. Proposed timetable for the dissertation.
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Bushe, B. (2019) ‘The causes and impact of business failure among small to micro and medium enterprises in South Africa’, Africa’s Public Service Delivery and Performance Review, 7(1), pp. 1-26.
Meyer, N., Molefe, K. and De Jongh J. J. (2018) ‘Managerial challenges within SMEs: the case of a developing region’, Polish Journal of Management Studies, 18(2), pp. 185-196.
Moos, M. and Sambo, W. (2018) ‘An exploratory study of challenges faced by small automotive businesses in townships: the case of Garankuwa, South Africa’, Journal of Contemporary Management, 15(1), pp. 467-494.
Muriithi, S. M. (2017) ‘African small and medium enterprises (SMEs) contributions, challenges and solutions’, European Journal of Research and Reflection in Management Sciences, 5(1), pp. 36-48.
Mxunyelwa, S. and Vallabh, D. (2017) ‘Skills as impediment to small and medium tourism enterprises (SMTEs), Eastern Cape, South Africa’, African Journal of Hospitality, Tourism and Leisure, 6(4), pp. 1-8.
Ngota, B. L., Mang’unyi, E. E. and Rajkaran, S. (2018) ‘Factors impeding African immigrant entrepreneurs’ progression in selected small and medium enterprises: evidence from a local municipality in South Africa’, South African Journal of Business Management, 49(1), pp. 1-9.
Nieuwenhuizen, C. (2019) ‘The effect of regulations and legislation on small, micro and medium enterprises in South Africa’, Development Southern Africa, 36(5), pp. 666-677.
Razak, D. A., Abdullah, M. A. and Ersoy, A. (2018) ‘Small medium enterprises (SMEs) in Turkey and Malaysia: a comparative discussion on issues and challenges’, International Journal of Business, Economics and Law, 15(3), pp. 1-10.