SMEs and Economic Development in Africa (Routledge Studies in Development Economics) [1 ed.] 1032536934, 9781032536934

Table of contents :
Cover
Half Title
Series Page
Title Page
Copyright Page
Table of Contents
List of Illustrations
Figures
Tables
Boxes
Acknowledgement
About the Editors
List of Contributors
Chapter 1: Role of SMEs in Economic Development in Africa
1.1 Introduction
1.2 Definition of SMEs
1.3 SMEs Foster a More Inclusive Growth
1.4 Barriers to the Development of SMEs in Sub-Saharan Africa
1.5 Policies to Unleash SME Potential
1.5.1 Improving Access to Global Markets and Knowledge Networks
1.5.2 Improve Information Communication Technology
1.5.3 Improve Business Environment
1.6 Conclusion
References
Chapter 2: SMEs and Equality in Africa
2.1 Introduction
2.2 Definition of Terms
2.3 Theories of Equality
2.3.1 Equity Theory
2.3.2 Egalitarianism
2.3.3 Rawls’s Theory
2.4 Contribution of SMEs to Equality
2.4.1 Employment Creation
2.4.2 Economic Development
2.4.3 SMEs Drive Innovation
2.4.4 SMEs Drive Competition
2.5 Forms of Equality
2.6 Benefits of Achieving Equality through SMEs
2.6.1 A Large Population is Covered
2.6.2 Financial Innovation
2.6.3 Competition
2.6.4 Expanded Tax Base
2.6.5 Financial Assistance
2.7 Challenges Associated with Achieving Equality through SMEs
2.7.1 Lack of Funding
2.7.2 Technology Deficiencies
2.7.3 Barriers to Entry
2.7.4 Constraints to Importing
2.7.5 Poor Management Practices and Poor Corporate Governance Structure
2.8 Determinants of SMEs to Achieve Equality
2.8.1 Location
2.8.2 Gender Equality
2.8.3 Education Background
2.8.4 Age
2.8.5 Behavioural and Personal Traits
2.8.6 Access to Finance
2.8.7 Innovation
2.8.8 Location
2.8.9 Entrepreneurship Training
2.8.10 Social Responsibility
2.8.11 Tax Rate
2.8.12 Inflation Rate
2.8.13 Competition
2.8.14 Government Policies
2.9 Relationship between SMEs and Inequality in Africa
2.10 Government Initiatives in Promoting Equality through SMEs
2.11 Lessons Learnt from Developed Countries
2.11.1 Training Ground for the Development and Growth of Indigenous Entrepreneurs
2.11.2 Strengthening Industrial Inter-Linkages
2.11.3 Transition Channel from Traditional to Modern Industrial Sector
2.11.4 Dispersal of Economic
2.11.5 Job Creation and Poverty Reduction
2.12 Conclusion
References
Chapter 3: African Women-Owned SMEs Post-COVID-19: Toward a Gender-Sensitive Policy Development Strategy
3.1 Introduction
3.2 Meaning of Women Entrepreneurs
3.3 Women-Owned SMEs in Africa
3.4 Women Entrepreneurs as a Catalyst for Economic Change
3.5 Factors Influencing African Women’s Entrepreneurship
3.6 The Impact of the Pandemic on Women Entrepreneurs
3.7 Challenges and Opportunities that COVID-19 has Actuated for Women Entrepreneurs
3.8 Post-COVID-19 and Gender-Sensitive Policies for African Women Entrepreneurs
3.9 Priority Areas for African Women Entrepreneurs Post-COVID-19
3.9.1 Access to Financial Service Support
3.9.2 Digital Financial Literacy
3.9.3 Information and Communication Technology Training
3.9.4 Capacity
3.9.5 Government Intervention Strategies
3.9.6 Elimination of Discriminative Policies against Women
3.9.7 Data Collection, Registration and Help Line
3.9.8 DFIs and NGO Intervention Strategies
3.10 Women-Owned SMEs Post-COVID-19 Support Model
3.11 Conclusion
Notes
References
Chapter 4: Fostering Global Competitiveness of SMEs in the Supply Chain Post-COVID-19
4.1 Introduction
4.2 COVID-19 and the Global Supply Chains
4.3 Global Disruption Accentuated by COVID-19
4.4 COVID-19 and Impact on SMEs in Africa
4.5 Consequence of COVID-19 Pandemic on SMEs
4.6 Global Supply Chain Strategies Post-COVID-19
4.7 Technology and Digitisation
4.8 Supplier Solvency
4.9 Diverse Supply Sources
4.10 Over-Dependence on Production Centres
4.11 Focus on Manufacturing Hubs
4.12 Development of Local Sourcing Capacity
4.13 Development of Low-Cost Sourcing Centres
4.14 Cost Competitiveness
4.15 Production Material
4.16 Conclusion
Notes
References
Chapter 5: SME Finances: Challenges and Policy Options
5.1 Introduction
5.2 Access to Finance as an Obstacle for SMEs
5.3 Access to Finance and Institutional Constraints
5.3.1 Transaction Costs and Interest Rates
5.3.2 Adverse Selection and Moral Hazard Issues
5.3.3 Role of Large Banks and Foreign Banks
5.4 Remedies
5.4.1 Role of Direct State Intervention
5.4.2 Role of Credit Guarantee Schemes
5.4.3 Alternative Financing Instruments
5.4.4 Use of Blended Finance
5.4.5 Role of Human/Managerial Capital
5.5 Conclusion
References
Chapter 6: Payment of Taxes: Challenges and Options
6.1 Introduction
6.2 Conceptualisation of SMEs and Taxes
6.3 Challenges in Tax Compliance
6.4 Reforms and Strategies Used to Foster Tax Compliance
6.4.1 Enforcement: Countering Avoidance and Evasion
6.4.2 Encouraging Quasi-Voluntary Compliance
6.4.2.1 VAT Regimes
6.4.2.2 Preferential Tax Regimes
6.4.2.2.1 The Rationale for Preferential Tax Regimes
6.4.3 Formalisation
6.5 Conclusion
References
Chapter 7: Global Supply Chain and SMEs
7.1 Introduction
7.2 Global Supply Chains – A Definition
7.3 Historical Evolution of Global Supply Chains
7.3.1 Supply Chain before 1900
7.3.2 Supply Chain from 1900s to 1940
7.3.3 Supply Chain in the 1950s (Standardisation and Containerisation)
7.3.4 Supply Chain from the 1960s to the 1980s (Digitisation and Efficiency)
7.3.5 The Supply Chain in the 1980s to Date (Shift to True Globalisation)
7.4 Globalisation – The African Experience
7.5 Growth within African Banks
7.6 Growth within the African Retail Sector
7.7 Telecommunication Growth in Africa
7.8 Impact of Global Supply Chains on SMEs during the Pandemic
7.9 Beyond the Pandemic
7.10 Proposing a Pathway for SMEs in the Post-COVID-19 Era
7.11 Conclusion
References
Chapter 8: Building Productive Capacities: The Role of Business Linkages
8.1 Introduction
8.2 The Profile of SMEs
8.3 SMEs and Their Contributions
8.4 Developing Productive Capacities in SMEs
8.5 Factors Affecting Productive Capacities in SMEs
8.6 What are Linkages?
8.6.1 Impact of Business Linkages in SMEs on Productive Capacities
8.6.1.1 Forward linkages
8.6.1.2 Backward linkages
8.7 Depth and Breadth of Linkages
8.8 Key Challenges in Building Productive Capacities
8.9 Policy Recommendations
8.10 Conclusion
References
Chapter 9: Skills Training by SMEs: Global Experience and the South Korean Consortium Approach
9.1 Introduction
9.2 Skills Gaps in SMEs
9.2.1 Leadership Skills
9.2.2 Creativity and Innovation Skills
9.2.3 Networking Skills
9.2.4 Goal-Setting Skills
9.2.5 Time Management
9.3 SME Training Funding Models
9.3.1 The Training Levy System
9.3.2 Training Levy Grant System
9.4 Special Challenges for SMEs in Training
9.5 International Experience in SME Training and Government Policies
9.6 System and Strategy of Implementation of Training Programmes
9.7 Achievements and Impacts of the Training Consortium Project
9.7.1 Promotion of SME Productivity
9.7.2 Prevention of Unemployment
9.8 Conclusion
References
Chapter 10: Access to Markets and Internationalisation of SMEs
10.1 Introduction
10.2 Challenges Faced by SMEs in Accessing Local Markets
10.3 SME Access to International Markets: Opportunities and Challenges
10.3.1 Export Promotion
10.3.2 Rationalising Production: Offshore Outsourcing and Acquisition of Strategic Assets
10.3.3 Integration into GVCs
10.3.4 Use of E-Commerce
10.4 Improving Access to Global Markets and Knowledge Networks
10.5 Mitigating Challenges Faced by SMEs in International Markets
10.6 Conclusion
References
Chapter 11: SMEs and the African Continental Free Trade Area
11.1 Introduction
11.2 Overview of AfCFTA
11.3 SMEs and AfCFA
11.3.1 Free Movement of People
11.3.2 Market Access
11.3.3 Reduced Trade Costs of NTBs
11.3.4 Reduced Trade and Transactions Costs
11.3.5 Expanded Value Chains
11.3.6 Improvement in Basic Trade Infrastructure and Facilities
11.4 Unleashing SME Potential in AfCTA
11.4.1 Capacity Building
11.4.2 Access to Finance
11.4.3 Access to Power
11.4.4 Network Infrastructure
11.5 Pathways that can be Used by African SMEs to Benefit from AfFCTA
11.6 Conclusion
References
Chapter 12: Fostering Business Ethics and Professionalism
12.1 Introduction
12.2 International Guidelines for Ethical and Professional Business Practices
12.3 Ethical Fibre of a Society
12.4 Theorising Ethics
12.5 Determinants of Business Ethical Fibre
12.5.1 Formation of Individual Ethics
12.5.1.1 Family influences
12.5.1.2 Peer influences
12.5.1.3 Life experiences
12.5.1.4 Personal values and morals
12.5.1.5 Situational factors
12.6 Influence of Societal Fibre on Business Ethics
12.7 Ethics and Professionalism: The Unconventional Practice
12.8 Professionalism in Business
12.9 Factors Mitigating Ethics and Professionalism
12.10 Need for Adherence to Ethics and Professionalism
12.11 The Impact of Fostering Ethical and Professional Culture on SMEs
12.12 Perpetuating a Dominant Ethical and Professional Culture among SMEs
12.13 The Way Forward
12.14 Conclusion
References
Chapter 13: Enhancing Quality and Standards among SMEs
13.1 Introduction
13.2 Economic Outlook: 2020–2021
13.3 SME Outlook: 2020–2021
13.4 Theoretical Background
13.4.1 The ISO
13.4.2 Need for the ISO
13.4.3 Diffusion Rate of ISO 14001 across Africa
13.4.4 Improving Quality and Standards of SMEs through ISO
13.4.5 Impact of Quality Standards (SANS 9001/ISO 9001) on the Performance of SMEs
13.5 Internalising QMSs among SMEs
13.5.1 Benefits of Internalising QMSs
13.6 Implication of QMSs
13.7 Adopting Good Quality and Standards
13.8 Establishing a Quality Control Process
13.8.1 Consequences of Non-Compliance with Quality Control Processes
13.9 Developing a Quality Control Process
13.10 Selecting a QMS
13.10.1 EFQM Business Excellence Model
13.11 Conclusion
References
Index

Citation preview

SMEs and Economic Development in Africa

Small and medium-sized enterprises (SMEs) are a driving force of the global economy, contributing up to 50% of gross domestic product in some instances. They also contribute to economic development through various channels such as employment creation, economic growth and poverty reduction, key elements of the Sustainable Development Goals. Furthermore, in many economies, the majority of jobs are provided by SMEs. However, despite their support of the economy, SMEs are prone to several binding constraints, such as access to finance and market entry, as well as exogenous shocks and crises, most recently the COVID-19 pandemic. Building on evidence from international experience, SMEs and Economic Development in Africa provides grounded solutions to challenges affecting SMEs, particularly in Africa, and offers guidance on how to build resilience to counteract future shocks. It also offers a number of policy measures governments in developing countries may need to consider in order to encourage economic growth and development, such as increasing productive capacities, training, enhancing business ethics and professionalism and improving competitiveness. What makes this book distinctive is the fact that it brings together the literature concerning SMEs in one place, and using case studies, it showcases how policymakers can overcome the challenges affecting SMEs. The book also provides tested and practical remedies for African economies with a view to making SMEs a springboard for economic prosperity. The book will appeal to advanced students, scholars and researchers, as well as policymakers, development agencies and non-governmental organisations. Gift Mugano is an adjunct associate professor of economics in the Faculty of Management Sciences, Durban University of Technology, Durban, South Africa. Nirmala Dorasamy is a full professor in the Faculty of Management Sciences, Durban University of Technology, Durban, South Africa.

Routledge Studies in Development Economics

179. Development as Swaraj Towards a Sustainable and Equitable Future Sumanas Koulagi 180. The Political Economy of Underdevelopment and Poverty in Nepal Sri Ram Poudyal 181. Post-Pandemic Green Recovery in ASEAN Edited by Farhad Taghizadeh-Hesary, Nisit Panthamit, Naoyuki Yoshino and Han Phoumin 182. Financial Literacy and Ageing in Developing Economies An Indian Experience Kshipra Jain 183. Finance for Sustainable Development in Africa Evolution, Impact and Policy Implications Edited by Nicholas Mbaya Odhiambo, Erasmus Larbi Owusu and Anutechia Simplice Asongu 184. State, Market and Society in an Emerging Economy Development and the Political Economy of Bangladesh Edited by Quamrul Alam, Rizwan Khair and Asif M Shahan 185. Capital Structure, Equity Ownership and Corporate Performance Evidence from Indian Manufacturing Firms Krishna Dayal Pandey and Tarak Nath Sahu 186. SMEs and Economic Development in Africa Edited by Gift Mugano and Nirmala Dorasamy For more information about this series, please visit: www.routledge.com/ Routledge-Studies-in-Development-Economics/book-series/SE0266

SMEs and Economic Development in Africa Edited by Gift Mugano and Nirmala Dorasamy

First published 2024 by Routledge 4 Park Square, Milton Park, Abingdon, Oxon OX14 4RN and by Routledge 605 Third Avenue, New York, NY 10158 Routledge is an imprint of the Taylor & Francis Group, an informa business © 2024 selection and editorial matter, Gift Mugano and Nirmala Dorasamy; individual chapters, the contributors The right of Gift Mugano and Nirmala Dorasamy to be identified as the authors of the editorial material, and of the authors for their individual chapters, has been asserted in accordance with sections 77 and 78 of the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical, or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without permission in writing from the publishers. Trademark notice: Product or corporate names may be trademarks or registered trademarks and are used only for identification and explanation without intent to infringe. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library Library of Congress Cataloging-in-Publication Data Names: Mugano, Gift, editor. | Dorasamy, Nirmala, editor. Title: SMEs and economic development in Africa / edited by Gift Mugano and Nirmala Dorasamy. Other titles: Routledge studies in development economics. Description: Abingdon, Oxon ; New York, NY : Routledge, 2024. | Series: Routledge studies in development economics | Includes bibliographical references and index. | Contents: Role of SMEs Economic Development in Africa -- SMEs and Equality in Africa -- African women owned SMEs post COVID-19: towards a gender sensitive policy development strategy -Fostering Global Competitiveness of SMEs in the supply chain post Covid-- SMEs Finance: Challenges and Policy Options -- Payment of Taxes: Challenges and Options -- Global Supply Chain and SMEs -- Building Productive Capacities: The Role of Business Linkages -- Skills Training by SMEs: Global Experience and South Korean Consortium Approach -Access to Markets and Internationalisation of SMEs -- SMEs and the African Continental Free Trade Area -- Fostering Business Ethics and Professionalism -- Enhancing quality and standards among SMEs. Identifiers: LCCN 2023016313 (print) | LCCN 2023016314 (ebook) | ISBN 9781032536934 (hardback) | ISBN 9781032536941 (paperback) | ISBN 9781003413172 (ebook) Subjects: LCSH: Small business--Africa. | Economic development--Africa. | Economic development--Africa--Citizen participation. Classification: LCC HD2346.A35 S64 2024 (print) | LCC HD2346.A35 (ebook) | DDC 338.642096--dc23/eng/20230411 LC record available at https://lccn.loc.gov/2023016313 LC ebook record available at https://lccn.loc.gov/2023016314 ISBN: 978-1-032-53693-4 (hbk) ISBN: 978-1-032-53694-1 (pbk) ISBN: 978-1-003-41317-2 (ebk) DOI: 10.4324/9781003413172 Typeset in Bembo by SPi Technologies India Pvt Ltd (Straive)

Contents

List of Illustrations x Acknowledgement xi About the Editors xii List of Contributors xiv 1 Role of SMEs in Economic Development in Africa

1

GIFT MUGANO

1.1 Introduction  1 1.2 Definition of SMEs  1 1.3 SMEs Foster a More Inclusive Growth  2 1.4 Barriers to the Development of SMEs in Sub-Saharan Africa  6 1.5 Policies to Unleash SME Potential  7 1.6 Conclusion  12 References 13

2 SMEs and Equality in Africa NYASHA KASEKE

2.1 Introduction  17 2.2 Definition of Terms  18 2.3 Theories of Equality  18 2.4 Contribution of SMEs to Equality  20 2.5 Forms of Equality  21 2.6 Benefits of Achieving Equality through SMEs  21 2.7 Challenges Associated with Achieving Equality through SMEs  23 2.8 Determinants of SMEs to Achieve Equality  24 2.9 Relationship between SMEs and Inequality in Africa  27 2.10 Government Initiatives in Promoting Equality through SMEs  28 2.11 Lessons Learnt from Developed Countries  29 2.12 Conclusion  30 References 31

17

vi Contents

3 African Women-Owned SMEs Post-COVID-19: Toward a Gender-Sensitive Policy Development Strategy

33

EMEM ANWANA

3.1 Introduction  33 3.2 Meaning of Women Entrepreneurs  34 3.3 Women-Owned SMEs in Africa  34 3.4 Women Entrepreneurs as a Catalyst for Economic Change  34 3.5 Factors Influencing African Women’s Entrepreneurship  35 3.6 The Impact of the Pandemic on Women Entrepreneurs  35 3.7 Challenges and Opportunities that COVID-19 has Actuated for Women Entrepreneurs 36 3.8 Post-COVID-19 and Gender-Sensitive Policies for African Women Entrepreneurs 37 3.9 Priority Areas for African Women Entrepreneurs Post-COVID-19  39 3.10 Women-Owned SMEs Post-COVID-19 Support Model  42 3.11 Conclusion  43 Notes 44 References 45

4 Fostering Global Competitiveness of SMEs in the Supply Chain Post-COVID-19 EMEM ANWANA

4.1 Introduction  47 4.2 COVID-19 and the Global Supply Chains  47 4.3 Global Disruption Accentuated by COVID-19  48 4.4 COVID-19 and Impact on SMEs in Africa  49 4.5 Consequence of COVID-19 Pandemic on SMEs  50 4.6 Global Supply Chain Strategies Post-COVID-19  51 4.7 Technology and Digitisation  52 4.8 Supplier Solvency  52 4.9 Diverse Supply Sources  53 4.10 Over-Dependence on Production Centres  53 4.11 Focus on Manufacturing Hubs  53 4.12 Development of Local Sourcing Capacity  54 4.13 Development of Low-Cost Sourcing Centres  54 4.14 Cost Competitiveness  55 4.15 Production Material  56 4.16 Conclusion  56 Notes 57 References 57

47

Contents  vii

5 SME Finances: Challenges and Policy Options

58

GIFT MUGANO

5.1 Introduction  58 5.2 Access to Finance as an Obstacle for SMEs  58 5.3 Access to Finance and Institutional Constraints  60 5.4 Remedies  62 5.5 Conclusion  66 References 67

6 Payment of Taxes: Challenges and Options

70

GIFT MUGANO

6.1 Introduction  70 6.2 Conceptualisation of SMEs and Taxes  70 6.3 Challenges in Tax Compliance  72 6.4 Reforms and Strategies Used to Foster Tax Compliance  73 6.5 Conclusion  81 References 82

7 Global Supply Chain and SMEs

85

EMEM ANWANA

7.1 Introduction  85 7.2 Global Supply Chains – A Definition  86 7.3 Historical Evolution of Global Supply Chains  86 7.4 Globalisation – The African Experience  92 7.5 Growth within African Banks  93 7.6 Growth within the African Retail Sector  93 7.7 Telecommunication Growth in Africa  94 7.8 Impact of Global Supply Chains on SMEs during the Pandemic  94 7.9 Beyond the Pandemic  95 7.10 Proposing a Pathway for SMEs in the Post-COVID-19 Era  96 7.11 Conclusion  96 References 97

8 Building Productive Capacities: The Role of Business Linkages DAVID DAMIYANO

8.1 Introduction  98 8.2 The Profile of SMEs  98 8.3 SMEs and Their Contributions  99 8.4 Developing Productive Capacities in SMEs  100 8.5 Factors Affecting Productive Capacities in SMEs  101 8.6 What are Linkages?  105 8.7 Depth and Breadth of Linkages  108

98

viii Contents 8.8 Key Challenges in Building Productive Capacities  109 8.9 Policy Recommendations  109 8.10 Conclusion  110 References 110

9 Skills Training by SMEs: Global Experience and the South Korean Consortium Approach

112

GIFT MUGANO

9.1 Introduction  112 9.2 Skills Gaps in SMEs  112 9.3 SME Training Funding Models  115 9.4 Special Challenges for SMEs in Training  117 9.5 International Experience in SME Training and Government Policies  118 9.6 System and Strategy of Implementation of Training Programmes  123 9.7 Achievements and Impacts of the Training Consortium Project  124 9.8 Conclusion  125 References 126

10 Access to Markets and Internationalisation of SMEs

129

GIFT MUGANO

10.1 Introduction  129 10.2 Challenges Faced by SMEs in Accessing Local Markets  129 10.3 SME Access to International Markets: Opportunities and Challenges  133 10.4 Improving Access to Global Markets and Knowledge Networks  138 10.5 Mitigating Challenges Faced by SMEs in International Markets  139 10.6 Conclusion  140 References 140

11 SMEs and the African Continental Free Trade Area

142

GIFT MUGANO

11.1 Introduction  142 11.2 Overview of AfCFTA  142 11.3 SMEs and AfCFA  144 11.4 Unleashing SME Potential in AfCTA  147 11.5 Pathways that can be Used by African SMEs to Benefit from AfFCTA 152 11.6 Conclusion  152 References 156

12 Fostering Business Ethics and Professionalism

158

NIRMALA DORASAMY

12.1 Introduction  158 12.2 International Guidelines for Ethical and Professional Business Practices  159

Contents  ix 12.3 Ethical Fibre of a Society  160 12.4 Theorising Ethics  160 12.5 Determinants of Business Ethical Fibre  162 12.6 Influence of Societal Fibre on Business Ethics  163 12.7 Ethics and Professionalism: The Unconventional Practice  165 12.8 Professionalism in Business  165 12.9 Factors Mitigating Ethics and Professionalism  166 12.10 Need for Adherence to Ethics and Professionalism  168 12.11 The Impact of Fostering Ethical and Professional Culture on SMEs  169 12.12 Perpetuating a Dominant Ethical and Professional Culture among SMEs 172 12.13 The Way Forward  175 12.14 Conclusion  177 References 177

13 Enhancing Quality and Standards among SMEs

183

NIRMALA DORASAMY

13.1 Introduction  183 13.2 Economic Outlook: 2020–2021  184 13.3 SME Outlook: 2020–2021  185 13.4 Theoretical Background  186 13.5 Internalising QMSs among SMEs  193 13.6 Implication of QMSs  194 13.7 Adopting Good Quality and Standards  196 13.8 Establishing a Quality Control Process  197 13.9 Developing a Quality Control Process  198 13.10 Selecting a QMS  199 13.11 Conclusion  200 References 201

Index 207

Illustrations

Figures 3.1 SME recovery strategy 12.1 Fostering ethics and professionalism

43 176

Tables 1.1 Reliability of Infrastructure for Business Sustainability, SSA (2013–2018) 9.1 Innovative Training Programmes to Support Training in SMEs 11.1 Reliability of Infrastructure for Business Sustainability, SSA (2013–2018) 13.1 Quality Control Processes

8 119 150 199

Boxes 1.1 The Role of SMEs in Job Creation in SSA 1.2 The Contribution of SMEs to Economic Development in South Africa 6.1 Challenges of Informal Sector Taxation: Evidence from the Presumptive Tax System in Zimbabwe 6.2 Brazil Presumptive Tax Regime for Micro-Entrepreneurs 6.3 The Benefits of Formalisation: Evidence from Vietnam 9.1 SME Training Consortiums in the Republic of Korea 10.1 Challenges Faced by SMEs in Botswana 10.2 Business Linkages in Zambia and Uganda 10.3 Offshore Outsourcing 10.4 Integrating SMEs into GVCs: Evidence from Uganda 11.1 Pathways that can be Used by African SMEs to Benefit from AfCFTA 12.1 Ethical and Professional Guidelines for Successful SMEs

3 4 75 77 80 120 130 130 134 136 153 171

Acknowledgement

This book was supported by the National Institute for the Humanities and Social Sciences, project ref no: BR122/1215.

About the Editors

Gift Mugano (PhD) is an adjunct associate professor of economics at the Durban University of Technology and visiting academic at Lund University’s (Sweden) Trade Policy Training Centre in Africa. He is a distinguished scholar, a technocrat and a global authority on international trade, finance and development with over 18 years of extensive experience including policy advisory, consultancy and academic work. He authored three books with renowned international publishers: Routledge, Palgrave Macmillan and AOSIS: Trade Liberalisation and Economic Development in Africa, Special Economic Zones: Impact on Economic Development in Africa, and Perspectives on Comprehensive Internationalisation of Higher Education. Professor Mugano supervised six PhD students to successful completion and other several postgraduate students in the field of international trade, finance and development and examined 10 doctoral theses and several postgraduate theses. He has published several articles in international journals and book chapters in the fields of international trade, finance and development. He has consulted for the Government of Zimbabwe, the private sector and international institutions, including the World Bank; the United Nations Economic Commission for Africa; the United Nations Office of the High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States; United Nations Development Programme, United States Agency for International Development; Foreign, Commonwealth & Development Office of the United Kingdom; Germany Agency for International Cooperation; International Labour Organization; National Opinion Research Centre at the University of Chicago (USA); COMESA; British Council; NIR Sweden; Adam Smith International (UK); IMC Worldwide LTD (UK); Cardno Emerging Markets (Belgium); KPMG (UK); the Palladium Group (UK); Ecorys (UK); Transparency International Zimbabwe; and Syngenta (Switzerland). Over the years, he has represented his country at various forums on trade negotiations and investment missions abroad (heads of state and government summits, Council of Ministers, senior officials of trade and technical committees) at bilateral, regional and multilateral levels in Belgium, Switzerland, South Africa, Swaziland, Zambia, Botswana, the People’s Republic of China and South Korea.

About the Editors  xiii Nirmala Dorasamy is a National Research Fund-rated full professor in the Department of Public Management and Economics at the Durban University of Technology. She has received several awards at the Durban University of Technology, including Top Senior Researcher (2014), Top Woman Researcher (2017) and Top Faculty Researcher (2021). She was nominated for and awarded an international staff exchange opportunity in the Faculty of Regional Development at Mendel University in the Brno, Czech Republic, Federation University in Australia and the Department of Forestry in Nepal. Her international associations involve collaborative research with the Swinburne University of Technology, Federation University and Monash University in Australia; the American University in Cairo; MUST University in Kenya; and Mendel University. The focus of this international collaboration is linked to governance, leadership excellence and ethical practices. She has successfully supervised and graduated several master’s and doctoral students while being recognised as a local and international examiner for postgraduate research. She has co-authored textbooks for senior secondary learners and books for higher education purposes, and she has published in local and international journals as well as presented papers at national and international conferences. She has been instrumental in initiating the establishment of the Centre for African Governance and Development at the Durban University of Technology.

Contributors

Emem Anwana (PhD) is a lawyer and senior lecturer in the applied law department of the Durban University of Technology. She is currently the faculty research co-coordinator in charge of postgraduate studies in the Faculty of Management Sciences. Her areas of expertise are in business law, commercial law, corporate governance, social justice, supply chain management, entrepreneurship and women/gender issues. Her interests also lie in research and higher education development in emerging economies. David Damiyano is an honorary research associate at the Durban University of Technology and a senior lecturer at the Bindura University of Science Education. He has substantial experience in teaching and learning, university policymaking through membership in university committees and spearheading commercialisation and innovation programmes. Knowledge of academic programme management and quality assurance, examination moderation and administration, module writing and university programme reviewing have formed the core of his usual tasks. In addition, he is an external academic promotions assessor, course and programme development specialist and an examination proofreader who has gained extensive academic leadership and management of higher education in these various positions. During his academic career, he has published many scientific articles, supervised and examined several BSc and MSc students and served as a reviewer and editor of many scientific journals. He is a member of the Institute for Sustainability Africa, the Young Scholar Initiative, the Partnership for Economic Policy and the International Journal of Development and Sustainability, among other organisations. He is also a government and private-sector consultant and was a visiting researcher at the University of Gothenburg, Sweden. He has participated and presented at many conferences in Zimbabwe and internationally. Nyasha Kaseke (PhD) is an honorary research associate at Durban University of Technology, the director of University of Zimbabwe Business School and a commissioner in the Zimbabwe Police Service Commission. He is a scholar, competitiveness expert and researcher with more than 18 years of experience in teaching and learning, researching and publishing. He has supervised three PhDs and is currently supervising a stream of PhD candidates from different

Contributors  xv institutions and several master’s degrees. Dr. Kaseke has published extensively in different areas of strategic management, finance and investment, economics, taxation and small business management. He has done consultancy work for Adam Smith International and IMC Worldwide Ltd in the United Kingdom; the United Nations Development Program; the Ministry of Land, Agriculture, Fisheries, Water and Rural Resettlement; the Ministry of Small and Medium Enterprises for the Government of Zimbabwe; the National Economic Consultative Forum; and within the private sector.

1 Role of SMEs in Economic Development in Africa Gift Mugano

1.1 Introduction The definition of small and medium-­ sized enterprises (SMEs) and respective parameters used to measure or determine the size of SMEs. SMEs are a driving force of the global economy. For example, the Organisation for Economic Co-­ operation and Development (OECD) argued that, on average, SMEs contribute 60% of the global gross domestic product (GDP). In advanced economies, as noted by Ayyagari et al. (2007), on average, formal SMEs contribute to 50% of GDP. SMEs also contribute to economic development through various channels, such as employment creation, economic growth and poverty reduction which are key elements of Sustainable Development Goals (SGDs). For example, studies by Beck et al. (2005) show that SME development is closely linked with growth. To be specific, Beck et al. (2005) find a robust, positive relationship between the relative size of the SME sector and economic growth, even when controlling for other growth determinants. Furthermore, in many economies, the majority of jobs are provided by SMEs. In OECD countries, for example, SMEs with less than 250 employees employ two-­thirds of the formal workforce (Beck et al., 2008; Dietrich, 2010). According to SME Performance Review (EC, 2009), between 2002 and 2008, the number of jobs in SMEs increased at an average annual rate of 1.9% while the number of jobs in large enterprises increased by only 0.8%. In absolute numbers, 9.4 million jobs were created in the SME sector in EU-­27 between 2002 and 2008 (EC, 2009). This chapter unpacks the various definitions of SMEs, showcases the contribution of SMEs to economic development and showcases the puzzle of SMEs’ nexus with economic development across the globe which will lay the foundation for the succeeding chapters.

1.2 Definition of SMEs Legislation across countries provides for different definitions of SMEs that pay specific attention to the dimensions of “small” and “medium” of a firm in relation to the size of the domestic economy. For example, in the OECD, SMEs are defined as firms employing up to 249 persons, which are broken down as micro (1–9 persons), small (10–49 persons) and medium (50–249 persons; OECD, 2017a). DOI: 10.4324/9781003413172-1

2  Gift Mugano However, the definition of micro, small and medium enterprises varies from country to country. In South Africa, as noted by Bhorat, Asmal, Lilenstein and van der Zee (2018), SMEs are classified as follows: own–account, that is, businesses made up of the entrepreneur only and employing no workers; micro (1–4 employees); small (5–9 employees); medium (10–49 employees); and large (employing at least 50 employees).

1.3 SMEs Foster a More Inclusive Growth In national economies around the world, by generating value-­added goods and employment, SMEs make diverse contributions to economic and social well-­ being. In the OECD area, 99% of enterprises are made up of SMEs (OECD, 2017a; OECD, 2016b). In the OECD area, SMEs are the main source of employment, accounting for about 70% of jobs on average, and are major contributors to value creation, generating between 50% and 60% of value added on average (OECD, 2016b). In emerging economies, SMEs contribute up to 33% of GDP and 45% of total employment (OECD, 2017a). In most countries, regardless of income levels, when the contribution of informal businesses is taken into account, SMEs contribute to more than 50% of GDP and employment (IFC, 2010). In addition, in resource-­rich countries which are vulnerable to commodity price fluctuations, SME development can contribute to economic diversification and resilience. Most important, SMEs contribute to innovation. In recent decades, as noted by OECD (2017a), the contribution of SMEs to innovation dynamics has increased, as more niche market demand, income growth and changing technologies have enabled SMEs to reduce the structural disadvantages stemming from resource constraints and limited ability to reap economies of scale and strengthen their comparative advantages. The new and small firms, because they can work outside of dominant paradigms, exploit technological or commercial opportunities that have been neglected by more established companies or enable the commercialisation of knowledge that would otherwise remain uncommercialised in universities and research organisations, are often observed as the main driving forces behind radical innovations that are important for economic growth (Baumol, 2002; OECD, 2010a). For example, in biotechnology-­related fields in Europe, SMEs account for about 20% of patents (Eurostat, 2014). Through incremental changes and by supplying new or niche products which respond to diverse customer needs, SMEs also contribute to value creation by adopting innovation generated elsewhere and adapting it to different contexts. The knowledge-­based economy, a rise in non-­technological innovation and the emergence of open or network-­based modes of innovation have also enabled new and small firms to increase their contributions to innovation (OECD, 2010a). Innovation by SMEs is largely influenced by knowledge spillovers, access to networks and opportunities to partner with other players, including larger enterprises. Globalisation has increased the importance of cross-­border collaboration in innovation – both in obtaining inputs for innovation (ideas, finance, skills, technologies) from abroad and in exploiting its outputs (products and services, patents, licenses, etc.) in foreign markets.

Role of SMEs in Economic Development in Africa  3 OECD (2017a) argued that because SMEs create job opportunities across geographic areas and sectors; help their employees with access to health care and social services; employ broad segments of the labour force, including low-­skilled workers; and provide opportunities for skills development, they foster a more inclusive growth. In developing countries, such as African countries, SMEs that generate jobs and are involved in value addition provide a channel for inclusion and poverty reduction (OECD, 2017a). In view of this, in order to achieve both economic growth and social inclusion objectives, including escaping from low productivity traps and improving the quality of jobs for low-­skilled workers, governments should upgrade productivity in a large population of small businesses, including in traditional segments and the informal economy (OECD, 2009, 2017c). In advanced economies such as the OECD, small businesses have been noted as effective vehicles which can address societal needs through the market and provision of public goods and services (EU/OECD, 2016). The case of social enterprises, in particular, fill gaps in general-­ interest service delivery through the provision of innovative solutions to the problems of poverty, social exclusion and unemployment, and economic growth (EU/OECD, 2016). In many countries, the economic weight of the social and solidarity economy, in which social enterprises operate, has increased steadily in recent years, including in the aftermath of the global crisis. For instance, in France, in 2014, the social economy accounted for 10% of the GDP. Between 2008 and 2014, in Belgium, employment in social enterprises increased by 12% and accounted, in 2015, for 17% of total private employment (EU, 2016). In 2015, in the United Kingdom, 41% of social enterprises had created jobs compared to 22% of SMEs (SEUK, 2015). In most African economies, SMEs constitute about 90% of all businesses in both urban and rural areas (Akugri et al., 2015). In Africa, SMEs provide an estimated 8% of jobs across the continent and contribute more than 50% of African GDP, representing an important driver of economic growth (Runde, Savoy and Staguhn, 2021; see Box 1.1).

Box 1.1  The role of SMEs in job creation in sub-Saharan Africa Evidence shows that, in Africa, SMEs are an integral part of economic development through job creation which is key in improving the quality of life of the poor (Abisuga-­Oyekunle and Fillis, 2016). This is particularly so because SMEs create new enterprises, new firm activities, innovations in firms and new economic sectors. Abisuga-­ Oyekunle and Fillis (2016) observed that SMEs produce goods and services for society, present new technologies and lower cost outputs and generate employment. As a result, SMEs can help in preserving a country’s foreign exchange through import substitution or expansion of exports (Carree and Thurik, 2002). Notwithstanding the fact that larger firms are more productive than SMEs, evidence shows that small firms create more jobs than large enterprises (Ayyagari, Demirgüç-­Kunt and Maksimovic, 2011).

4  Gift Mugano In the African continent, empirical evidence from Abisuga-­Oyekunle, Patra and Muchie (2019) shows that firms which are about two years old contribute about 9.3% of total employment on average. However, across the continent, firms which are more than five years old, that is, with 5–49 employees, have the highest share of total employment of 23% (Abisuga-­ Oyekunle, Patra and Muchie, 2019). Of interest is the fact that the large firms with employees ranging from 250 to 1000 have a small contribution to total employment in the sub-­ Saharan African countries yet, in developed countries, large firms have the highest share of total employment (Abisuga-­Oyekunle, Patra and Muchie, 2019). Abisuga-­Oyekunle, Patra and Muchie (2019) further argued that although SMEs contribut are high contributors to employment in all the countries, they contribute better to employment in SSA than in high-­income countries. Abisuga-­Oyekunle, Patra and Muchie (2019) Sub-­Saharan Africa alone has 44 million micro, small and medium enterprises, almost all of which are micro (Runde, Savoy and Staguhn, 2021). For these businesses to grow, create more jobs and generate economic growth, they need access to capital. With respect to the impact of SMEs on economic development in Africa, South Africa provides a classic example of the contribution of SMEs on economic development (see Box 1.2).

Box 1.2  The contribution of SMEs to economic development in South Africa The contribution of SMEs on economic development in South Africa is discussed from three perspectives: job growth, poverty reduction and GDP contribution.

Employment Creation Kalane (2015) argued that available evidence shows that SMEs contribute up to 91% of formal business enterprises in South Africa. In 2019, Small Enterprise Development Agency (SEDA, 2019) observed that in South Africa, the SME sector employed 10.8 million people in 2019, accounting for 66% of the country’s total employment (16.5 million). Saah (2021) argued that because SME operations in South Africa are traditionally more labour-­intensive, unlike large corporations, they have high potential and capacity for creating jobs for the country’s many unemployed. In support of Saah (2021), Oduntan (2014) acknowledges that SMEs create more jobs per unit of venture capital and per unit of energy consumed than large companies, which has helped in the reduction of high unemployment in most countries, including South Africa. Oduntan (2014) further argued that, by

Role of SMEs in Economic Development in Africa  5 creating employment, SMEs play an important role in reducing inequality and alleviating poverty among South Africans. Resultantly, by hiring both unskilled and skilled workers and providing them with a source of income, SMEs play a crucial role in resolving South Africa’s unemployment problem, which is critical for any country’s economic growth (Saah, 2021).

Contribution to GDP Labuschagne (2015), building on evidence from SEDA and the Department of Trade and Industry (DTI), argued that the contribution of SMEs to South Africa’s GDP in 2004 was around 40% and the same percentage in 2014. This places the SME sector at the centre of South Africa’s economic development matrix. The SME sector in South Africa is a vehicle that helps job seekers and employees earning low wages gain greater access to economic opportunities, contributing up to 40% to the country’s GDP growth (Stats SA, 2014). If given the right conditions, South African SMEs have the potential to contribute more than 40% of the country’s GDP (Saah, 2021).

Poverty Alleviation Saah (2021) argued that, by generating jobs through the expansion of existing businesses or the establishment of new ones whilst providing income to the poor in the communities employed by SMEs, SMEs help alleviate poverty. The intersection of SMEs and the poor is mainly driven by the SMEs’ role in the provision of access to markets to poor communities, the provision of infrastructural development to impoverished societies and the improvement of the livelihoods of indigenous populations, transferring skills to local communities where they operate and triggers socio-­economic development and economic transformation (Saah, 2021; Agupusi, 2007). In this regard, SMEs are making tremendous contributions by promoting stability, reducing poverty and increasing the living standards of local people in impoverished communities (Ndofirepi, 2016; Saah, 2021). Saah (2021) As is now the norm that corporate social responsibility (CSR) is increasingly viewed as a way for businesses to contribute to societal goals. At a local level, in particular, by committing to sound labour and environmental practices and good community relations, SMEs can contribute to inclusive and sustainable development (OECD, 2017a). In addition, in the wider ecosystem of firms, SMEs play an important role in job creation particularly the start-­ups and young firms, which are generally small or micro firms, are the primary source of net job creation in many countries (OECD, 2017a; OECD, 2016b). This is particularly so because high-­growth firms of different ages and sectors also contribute disproportionately to job creation (OECD, 2010b).

6  Gift Mugano In most OECD economies, established medium-­sized enterprises that innovate and scale up are the driving force behind growth, often ensuring the coordination, upgrading and participation in supply chains of smaller suppliers. In Switzerland, for example, 4% of the business population are medium-­sized enterprises (50–249 employees) and account for 23% of employment and 25% of value added (OECD, 2016b). Most importantly, in Switzerland, there are several viable small enterprises which are in the mid-­or low-­tech sectors which are embedded in competitive local production systems and generate innovation that is largely incremental and contributes to employment, social inclusion and territorial cohesion (OECD, 2016b). SME performance also varies across sectors. In services, SMEs account for 60% or more of total employment and value added in nearly all countries. In contrast, in manufacturing, although relatively few in number, large firms provide a disproportionate contribution to employment and value added, in large part reflecting increasing returns to scale from more capital-­intensive production, as well as entry barriers related to investment. In some countries, such as Germany and Mexico, large manufacturing groups capture a significant share of total employment and value added. However, OECD (2017a) and OECD (2017d) argued that there are some exceptions. These include smaller economies, such as Latvia and Estonia, as well as larger economies where SMEs have traditionally dominated manufacturing activity, such as Italy (OECD, 2017d).

1.4 Barriers to the Development of SMEs in Sub-Saharan Africa Oyekunle and Sirayi (2018) and Abisuga-­Oyekunle, Patra and Muchie (2019) argued that even though SMEs makes significant contributions to job creation, GDP and livelihoods, SMEs faces several binding constraints which inhibit their capabilities to unleash their potential. Oyekunle and Sirayi (2018) and Abisuga-­ Oyekunle, Patra and Muchie (2019) further argued that most SMEs in always in a survival mode because of four barriers, that is, ease of doing business, business development, poor access to finance and electricity. However, normally sub-­Saharan African countries are graded poorly, but business development in SSA is expected to stay strong, at about 5% in 2014 and 5.75% in 2015 (Regional Economic Outlook, 2014). This is because of several SMEs contending with sustaining a stable business, in particular within their first year of operation. Among the 18 economies with the most improvements on making it easier to do business in 2006–2014, seven in SSA stand out as having upgraded the most in performance on doing business indicators, that is South Africa, Ghana, Namibia, Kenya, Ethiopia, Botswana and Rwanda (Abisuga-­Oyekunle, Patra and Muchie, 2019). With respect to access to finance, World Bank (2015), Abisuga-­Oyekunle, Patra and Muchie (2019), African Development Bank (2014) and Oyekunle (2014) observed that banks hesitate to provide long-­term lending and working capital facilities to SMEs which are both vital for business development. A study by Abisuga-­Oyekunle, Patra and Muchie (2019) shows that, based on SMEs interviewed, Ghana (58%), Namibia (52.9%) and Mali (48.3%) have the highest share of access to finance as an obstacle to the growth of SMEs.

Role of SMEs in Economic Development in Africa  7 With respect to electricity supply, Abisuga-­Oyekunle, Patra and Muchie (2019) observed that regular power supply is one of the biggest challenges faced by SMEs in Africa. In fact, Abisuga-­Oyekunle, Patra and Muchie argued that Africa is the only continent on the globe where electricity is specified as the most significant hindrance to firms’ ability to innovate and develop. To be specific, in the study by Abisuga-­Oyekunle, Patra and Muchie, 23.3% of small firms interviewed indicated that access to electricity was their biggest problem. Likewise, the World Bank (2018) revealed that, on average, in sub-­Saharan Africa, 49% of SMEs consider electricity as a major constraint (see Table 1.1). In Africa, countries with the highest percentage of firms experiencing massive power outages inter alia include Benin (95.6%), Togo (93.8), Sudan (93.7%), Gambia (93.2%), Cameroon (92.5%), Kenya (89.4%) and Mali (86.6%; see Table 1.1; World Bank, 2018). Ironically, only 18.9% of firms in Malaysia experience power outages (World Bank, 2018). Similarly, countries with the highest percentage of SMEs identifying electricity as a major constraint are Gambia (69%), Mali (67.9%), Cote d’Ivoire (62.7%), Benin (60.4%), Cameroon (51.6%) and Togo (50.1%; see Table 1.1; World Bank, 2018). Overall, on average, evidence shows that SMEs experience power outages for 56 days per year (World Bank, 2018). With respect to key infrastructures such as access to water, an enterprise survey by the World Bank (2018) shows that countries with the highest percentages of firms experiencing water insufficiencies are Malawi (53.9%), Swaziland (47.9%), Lesotho (43.4%) and Ethiopia (38.3%; World Bank, 2018). Likewise, countries with the highest percentage of firms identifying transportation as a major constraint are Cote d’Ivoire (53.8%), Mali (51.0%), Guinea (36.8%) and Lesotho (32.4%; see Table 1.1; World Bank, 2018). In view of the fact that most African countries faces a drought of reliable infrastructure as well as key utility services which are essential for development, most SMEs in Africa are severely constrained. With respect to ease of doing business, evidence shows that countries with the highest number of days to obtain an electrical connection upon application are Ethiopia (194.3 days), Benin (193.2 days), Togo (71.9 days) and Chad (69.6 days; see Table 1.1; World Bank, 2018).

1.5 Policies to Unleash SME Potential In view of the contribution of the SMEs to economic development and the need to foster deeper role of SMEs in economic development, policies such as improving access to global markets and knowledge networks, improving access to information communication technologies, improving the business environment, training and access to finance should be considered by African governments. 1.5.1 Improving Access to Global Markets and Knowledge Networks International experience has shown that stronger participation by SMEs in global markets can help to strengthen their contributions to economic development and

Country

Percentage of firms experiencing power outages

Percentage of firms owning or sharing a generator

If a generator is used, average proportion of electricity from a generator (%)

Days to obtain an electrical connection (upon application)

Percentage of firms identifying electricity as a major constraint

Percentage of firms experiencing water insufficiencies

Percentage of firm identifying transport as a major constraint

Benin Burundi Cameroon Chad Cote d’Ivoire Ethiopia Gambia Guinea Kenya Lesotho Malawi Malaysia Mali Namibia Niger Nigeria Senegal

95.6 85.1 92.5 70.2 78.8 80.0 93.2 84.2 89.4 71.8 82.9 18.9 86.6 26.9 78.0 77.6 83.7

59.9 64.2 39.7 67.7 29.9 49.1 55.7 56.8 57.4 29.4 40.9 10.8 66.8 18.0 69.4 70.7 64.2

37.0 17.5 16.6 18.5 27.3 48.9 41.1 26.6 14.0 25.7 27.3 20.7 15.6 25.5 53.3 58.8 9.0

193.2 25.3 16.2 69.6 39.8 194.3 30.1 7.4 43.0 12.2 50.4 1.8 30.1 20.3 28.6 9.4 24.8

60.4 46.9 51.6 34.8 62.7 33.3 69.0 32.1 22.2 24.8 24.8 9.4 67.9 14.2 47.9 48.4 48.2

26.5 22.0 16.9 13.9 26.5 38.3 11.5 0 33.7 43.4 53.9 17.2 24.7 3.7 19.1 16.4 17.6

22.8 15.2 29.9 25.1 53.8 8.3 20.9 36.8 21.6 32.4 15.7 14.1 51.0 25.3 19.6 17.1 21.9

8  Gift Mugano

Table 1.1  Reliability of Infrastructure for Business Sustainability, Sub-Saharan Africa (2013–2018)

Percentage of firms experiencing power outages

Percentage of firms owning or sharing a generator

If a generator is used, average proportion of electricity from a generator (%)

Days to obtain an electrical connection (upon application)

Percentage of firms identifying electricity as a major constraint

Percentage of firms experiencing water insufficiencies

Percentage of firm identifying transport as a major constraint

Sierra Leone Sudan Swaziland Togo Zimbabwe

71.8 93.7 77.3 93.8 76.5

69.5 54.1 46.6 53.1 62.3

45.9 7.2 29.2 11.8 19.3

22.0 5.8 11.3 71.9 22.2

32.6 7.6 4.2 50.1 22.1

26.5 12.4 47.9 12.8 15.1

28.4 20.9 5.8 35.5 17.1

Source: World Bank (2018)

Role of SMEs in Economic Development in Africa  9

Country

10  Gift Mugano social well-­being because SMEs are exposed to massive opportunities which are key in scaling up businesses, facilitating the spill-­over of technology and managerial know-­how, accelerating innovation, broadening and deepening the skill set and enhancing productivity (OECD, 2017a). However, in international trade, African SMEs under-­ represented (OECD, 2017a; OECD, 2016b). Evidence shows that few SMEs export directly, and in most cases, relative to larger firms, the exports represent a lower share of trade turnover and generally target neighbouring countries (OECD, 2016b). In order to break this barrier, experience in OECD has shown that downstream and upstream linkages with larger companies can SMEs break into foreign markets (OECD and World Bank Group, 2015). The inter-­firm linkages provide mutual benefits for both SMEs and large firms. This is particularly so because the quality and responsiveness of specialised suppliers mainly from the SMEs are crucial for the competitiveness of entire supply chains, at both local and global levels, and of larger firms that are directly engaged in fierce global competition (OECD, 2017a). In this respect, close coordination and interdependence between SMEs and large firms have proven to be important sources of value and competitiveness along supply chains (OECD, 2017a). In order to develop policies that can support SMEs in making the most of the new opportunities offered by global value chains (GVCs), a better understanding is needed of the interaction of SMEs with larger firms and MNCs within different contexts and along different value chains, of the role of clusters for SME participation and upgrading, as well as of how GVCs are evolving, including as a consequence of the digital transition (OECD, 2017a). The participation of SMEs in global markets is undermined by trade and investment barriers. In addition, unlike large firms, due to their limited resources and management capacities, SMEs are less able to face the costs of engaging in international trade. In view of this trade facilitation, intellectual property protection, infrastructure and institutional quality are key to SME engagement in global markets. In order to reduce regulatory costs and burdens and promote SME competitiveness in global and emerging markets, there is a need for African governments to institutionalise transparency and reduce regulation. Likewise, in line with the view of OECD (2015a) and USITC (2014), as part of the strategies for lessening onerous administrative and financial burdens, there is a need for predictable and efficient customs procedures and logistics services for SMEs participating in international trade. OECD (2017a) argued that National Trade Facilitation Committees can draw guidelines for SMEs from the new World Trade Organization Facilitation Agreement. 1.5.2 Improve Information Communication Technology Evidence shows that SMEs operating efficiency and capacity to access international markets at competitive costs is inhibited by a drought of physical and information and communication technology (ICT) infrastructure (OECD, 2017a). Time is a crucial driver of competitiveness in this new era of the Fourth Industrial Revolution which is characterised by just-­in-­time delivery, which is

Role of SMEs in Economic Development in Africa  11 the standard, and in which transit is rapid and storage is expensive. In addition, other important key enablers for businesses desiring to participate in GVCs and enter foreign markets, inter alia, include the quality of physical infrastructure such as airports, roads and ports and the efficiency of the procedures followed in the operation of these facilities (BIAC et al., 2016; OECD, 2017b). In view of this, in order to improve access to global markets and facilitate information exchange and communication, as well as participation in e-­commerce platforms, developing an efficient ICT infrastructure and enhancing interoperability and standards are increasingly becoming important (BIAC et al., 2016; OECD, 2017b). Likewise, in view of the fact that digitalisation offers new opportunities for SMEs to participate in the global economy, and in order to allow SMEs to improve market intelligence, reach scale without mass and access global markets and knowledge networks at relatively low cost, African economies are encouraged to make use of digital technologies and big data and data analytics (OECD, 2017e). Digitalisation and the use of big data are associated with product or service innovation and improved production processes which are key in fostering the competitiveness of SMEs in both local and global markets. In addition, evidence shows that digitalisation facilitates the emergence of “lean start-­ups” that leverage the internet to lower fixed costs and outsources many aspects of the business to stay agile and responsive to the market (OECD, 2017e). While digitalisation offers new opportunities for SMEs to reach global markets, the reality is that a large number of SMEs have not been able to reap the benefits of the technological transition. Evidence shows that SMEs are lagging behind in adopting digital technologies. While, in most countries, the divide is narrow for simple connectivity and web presence, the gap broadens when considering participation in e-­commerce and, especially, more sophisticated applications. For instance, across OECD countries, enterprise resource planning (ERP) software applications to manage business information flows are popular among large firms (more than 75% adoption rate in 2014) but less used by SMEs (less than 20%). In many countries, a large adoption gap is also observed for cloud computing, that is the renting of computer power from an external provider, which can allow smaller firms to use big data while overcoming some of the barriers associated with the high fixed costs of ICT investment. 1.5.3 Improve Business Environment Establishing a favourable business environment is critical for effective participation of SMEs in an open and integrated economy (OECD, 2017b). In order to foster the participation of African SMEs in the global economy, a sound business environment and a well-­functioning entrepreneurial “ecosystem” is a priori requirement. In the current context which is characterised by increased competitive pressures and the fast pace of technological change demand agility; innovative behaviour, including in public governance; and ease of access to strategic resources, the need for a sound and favourable business environment is more important than ever (OECD, 2017b).

12  Gift Mugano The need for improvement of the business environment, for African economies, in particular, is coming on the backdrop of high regulatory uncertainty, complexity and inconsistency which disproportionately affect SMEs. For example, the current inefficient insolvency regimes in Africa limit business dynamism, restructuring of viable firms and access to external finance by SMEs (OECD, 2017a). Likewise, bankruptcy regulation that excessively penalises or stigmatises failure reduces incentives for the efficient exit of less productive firms and the reallocation of resources to more productive uses. In some countries, in the case of unincorporated micro and small firms, the treatment of individual defaulters is very severe, leaving full personal liability for many years beyond liquidation of the business (Bergthaler et al., 2015). Lengthy and complicated processes can significantly affect the capital and reputation of small entrepreneurs, drastically decreasing the chance of starting a business again. In addition, legal uncertainties increase risk to lenders and constrain the supply of finance to SMEs (OECD, 2017b). High costs of tax compliance fall disproportionately on small and young firms.

1.6 Conclusion In national economies around the world, by generating value-­added goods and employment, SMEs make diverse contributions to economic and social well-­ being. In the OECD area, 99% of enterprises are made up of SMEs (OECD, 2017a; OECD, 2016b). In the OECD area, SMEs are the main source of employment, accounting for about 70% of jobs on average, and are major contributors to value creation, generating between 50% and 60% of value added on average (OECD, 2016b). In emerging economies, SMEs contribute up to 33% of GDP and 45% of total employment (OECD, 2017a). In most countries, regardless of income levels, when the contribution of informal businesses is taken into account, SMEs contribute to more than 50% of GDP and employment (IFC, 2010). In addition, in resource-­rich countries which are vulnerable to commodity price fluctuations, SME development can contribute to economic diversification and resilience. Most importantly, SMEs contribute to innovation. In recent decades, as noted by OECD (2017a), the contribution of SMEs to innovation dynamics has increased, as more niche market demand, income growth and changing technologies have enabled SMEs to reduce the structural disadvantages stemming from resource constraints and limited ability to reap economies of scale and strengthen their comparative advantages. In Africa, using the South African case study, this chapter showed that SMEs make significant contributions to job creation, economic growth and poverty eradication. In view of the contribution of the SMEs on economic development and the need to foster a deeper role for SMEs in economic development, policies such as improving access to global markets and knowledge networks, improving access to information communication technologies and improving the business environment, training and access to finance should be considered by African governments.

Role of SMEs in Economic Development in Africa  13

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Role of SMEs in Economic Development in Africa  15 OECD (2009). Promoting Pro-­Poor Growth: Employment, OECD Publishing, Paris. OECD (2010a). SMEs, Entrepreneurship and Innovation, OECD Publishing, Paris. OECD (2010b). High-­Growth Enterprises: What Governments Can Do to Make a Difference, OECD Studies on SMEs and Entrepreneurship, OECD Publishing, Paris. http://dx.doi. org/10.1787/9789264048782-­en[accessed on 5 January 2023] OECD (2013a). Green entrepreneurship, eco-­innovation and SMEs, OECD Working Party on SMEs and Entrepreneurship, CFE/SME(2011)9/FINAL. OECD (2013b). Skills Development and Training in SMEs, OECD Publishing, Paris OECD (2015a). Policy Framework for Investment 2015 Edition, OECD Publishing, Paris. OECD (2015b). Skills and learning strategies for innovation in SMEs, Working Party on SME and Entrepreneurship, CFE/SME(2014)3/REV1. OECD (2015c). Taxation of SMEs in OECD and G20 countries, OECD Publishing, Paris OECD (2015d). New Approaches to SME and Entrepreneurship Financing. Broadening the range of instruments, OECD Publishing, Paris. OECD (2016a). The Productivity-­Inclusiveness Nexus, Meeting of the OECD Council at Ministerial Level, Paris, 1–2 June 2016 [C/MIN(2016)3]. OECD (2016b). Entrepreneurship at a Glance 2016, OECD Publishing, Paris. OECD (2016c). No Country for Young Firms?, Policy Note, Directorate for Science, Technology and Innovation Policy Note, June 2016. OECD (2016d). Fostering Markets for SME finance: matching business and investor needs, OECD Working Party on SMEs and Entrepreneurship, CFE/SME(2016)4/REV1. OECD (2016e). Job creation and local economic development, OECD Publishing, Paris. OECD (2017a). Enhancing the Contributions of SMEs in a Global and Digitalised Economy, Meeting of the OECD Council at Ministerial Level Paris, 7–8 June 2017, OECD, Paris. OECD (2017b). Small, Medium, Strong. Trends in SME Performance and Business Conditions, OECD Publishing, Paris. OECD (2017c). Increasing productivity in small traditional enterprises: Programmes for upgrading management skills and practices, OECD Working Party on SMEs and Entrepreneurship, CFE/SME(2016). OECD (2017d). Entrepreneurship at a Glance 2017, OECD Publishing, Paris. OECD (2017e). Key Issues for Digital Transformation in the G20, Report prepared for a joint G20 German Presidency/OECD conference, Berlin, 12 January 2017, https://www. oecd.org/g20/key-­issues-­fordigital-­transformation-­in-­the-­g20.pdf [accessed on 11 January 2023] OECD (Organisation for Economic Co-­operation and Development) (2004). Promoting Entrepreneurship and Innovative SMEs in a Global Economy: Towards a More Responsible and Inclusive Globalisation, Second OECD Conference of Ministers Responsible for Small and Medium-­Sized Enterprises (SMEs), Executive Summary of the Background Papers, Paris, France: OECD. OECD and World Bank Group (2015). Inclusive Global Value Chains. Policy options in trade and complementary areas for GVC Integration by small and medium enterprises and low-­income developing countries, Report prepared for submission to G20 Trade Ministers Meeting, Istanbul, Turkey, 6 October 2015. Oyekunle, O. A. (2014). “Building the Creative Industries for Sustainable Economic Development in South Africa,” International Journal of Sustainable Development 7(12), 47–72. Oyekunle, O. A. and Sirayi, M. (2018). “The Role of Creative Industries as a Driver for a Sustainable Economy: A Case of South Africa,” Creative Industries Journal 11(3), 225–244.

16  Gift Mugano Regional Economic Outlook. (2014). Sub-­ Saharan Africa Staying the Course. World Economic and Financial Surveys, International Monetary Fund (IMF), Washington, DC. https://www.imf.org/external/pubs/ft/reo/2014/afr/eng/sreo1014.pdf. [accessed on 20 December 2022] Runde, D. F., Savoy, C. M., and Staguhn, J. (2021). Supporting Small and Medium Enterprises in Sub-­Saharan Africa through Blended Finance, Center for Strategic and International Studies. Saah, P. (2021). “The Impact of Small and Medium-­Sized Enterprises on the Economic Development of South Africa,” Technium Social Sciences Journal, 24, 549–561. SEDA. (2019). SMMEs Quarterly 2019-Q1 Final Draft, SEDA, Pretoria. http://www.seda. org.za/Publications/Publications/SMME%20Quarterly%202019-Q1.pdf [accessed on 20 January 2023] SEUK (2015). Leading the World in Social Enterprises, State of Social Enterprise Survey 2015, Social Enterprise UK Publishing. Statistics South Africa (Stats SA). (2014). Quarterly Labour Force Survey: Quarter 4, Pretoria. The World Bank Group (2018). Enterprise Surveys. World Bank Database. http://microdata. worldbank.org/index.php/catalog/enterprise_surveys/about [accessed on 21 January 2023] World Bank Group. (2015). Doing Business 2015 Going Beyond Efficiency. 12th Ed., A World Bank Group Flagship Report. http://www.doingbusiness.org/data/exploretopics/ starting-­a-­business#sub-­menu-­item-­link (accessed on 20 January 2023) USITC (2014). Trade Barriers That U.S. Small and Medium-­sized Enterprises Perceive as Affecting Exports to the European Union, United States International Trade Commission, Investigation No. 332–541, March 2014, https://www.usitc.gov/publications/332/ pub4455.pdf. Wagner, J. (2015). A survey of empirical studies using transaction level data on exports and imports, CESIS Electronic Working Paper Series, Paper No. 416, The Royal Institute of Technology, Centre of Excellence for Science and Innovation Studies (CESIS), July 2015, https://static.sys.kth.se/itm/wp/cesis/cesiswp416.pdf. [accessed on 7 January 2023]

2 SMEs and Equality in Africa Nyasha Kaseke

2.1 Introduction Small and medium-sized enterprises (SMEs) play a crucial role in addressing the impediments to equality and economic development in many countries. It is noted that SMEs are a way of achieving Sustainable Development Goals laid in the agenda for transforming development to ensure that it is both environmentally sustainable and equitable – sharply reducing poverty and improving living conditions for all people around the world. Formal or informal SMEs are an opportunity for both males and females to have their own business or enterprise because these businesses are small and anyone can start them. SMEs are more inclusive and more equitable. As such, SMEs give all sexes the equality of becoming managers in enterprises as everyone has to manage their own operations. The World Bank added that SMEs provide opportunities for both men and women to make it into senior management. Even though there have been some positive developments and great strides towards gender parity and women’s empowerment, in the world, women and girls continue to suffer widespread discrimination, especially in economic and social aspects. This situation is even complicated in areas of conflict. Such discrimination has even affected women and girls’ business and managerial positions. As such, female-owned businesses are close to 40% of all SME enterprises, which is below their male counterparts (Gonzalez, 2016). This should be considered positively as this is a greater achievement than before. Female entrepreneurs are now making significant contributions to growth and poverty reduction worldwide even though they face greater obstacles than their male counterparts. Studies have shown that male businesses are dominant in those activities which require manual or physical effort while female businesses are typically smaller, employ fewer people and are concentrated in the smaller and informal retail sector. Due to equality posed by SMEs, both sexes are involved in economic activities, and this has been found to promote economic growth, reduce poverty and improve human development. Economic development and equality go hand in hand (Gonzalez, 2016). Societies in which income and gender inequality are lower not only offer better social-economic opportunities for women but also tend to grow faster (Gonzalez, 2016. In many countries, equality in SMEs is mainly affected by DOI: 10.4324/9781003413172-2

18  Nyasha Kaseke regulatory biases, procedural obstacles, cultural biases, time constraints on female managers, limited access to productive resources like finance and land and limited access to information and networks.

2.2 Definition of Terms (a) Enterprise According to the UNDP (2016), an enterprise is considered to be any entity engaged in economic activity, irrespective of its legal form. This includes, in particular, self-employed persons and family businesses engaged in craft or other activities and partnerships or associations regularly engaged in economic activity. (b) Equality The word equality comes from the French/Latin words aequalis, aequus and aequalitas. In those languages, these words mean “even”, “level” and “equal”. Therefore, equality is where every individual has an equal chance or opportunity to make the most of their lives and talents (ILO, 2016). That is, no one should have poorer life chances because of whether they are male or female or because of the place they were born or where they come from, their religion or what they believe in or whether they have a disability or not. Equality is considered as the state of being the same, in terms of status, rights and opportunities (World Food Programme, 2020). The National Youth Council of Ireland (2021) considers equality as treating people in such a way that the outcome for each person can be the same. As such equality is about putting things in place to support people to achieve similar outcomes. (c) Equitability Defining equitability in the simplest, most intuitive sense, equitability refers to the accrual of benefits to all members, or certainly more members of society. For example, economic growth is equitable if the outcomes and benefits associated are more evenly distributed across society. Equitability in economic growth implies that each member of society benefits identically from economic growth.

2.3 Theories of Equality 2.3.1 Equity Theory Equity theory focuses on ascertaining the fairness of resource distribution to both relational partners. It is measured by comparing the ratio of costs and rewards for each person. Equity theory was first developed in 1963 by John Stacey Adams, and it says that for an individual to be motivated need to perceive that the benefits they receive for their contributions are fair, and these benefits are similar to those received by their peers. If there are inequalities, individuals will feel unhappy and try to change things to create a sense of fairness. Equity theory proposes that there should be fairness and distribution of economic wealth, tax liability, resources and assets in society.

SMEs and Equality in Africa  19 Similar to other prevalent theories of motivation, such as Maslow’s hierarchy of needs, equity theory acknowledges that subtle and variable factors affect people’s assessment and perception of their standing relative to others. According to Adams, underpayment inequity induces anger, while overpayment induces guilt. However, Christopher (2017) highlighted the limitations of equity theory, which include its employing a unidimensional rather than a multidimensional conception of fairness. The theory conceptualises perceived justice solely in terms of a merit principle. Also, it considers only the final distribution of rewards. 2.3.2 Egalitarianism Egalitarianism focuses on income inequality and distribution, which are ideas that influenced the development of various economic and political systems. Karl Marx used egalitarianism as the starting point in the creation of his Marxist philosophy, and John Locke considered egalitarianism when he proposed that individuals had natural rights. Egalitarianism promotes economic growth and is based on ensuring equality of income and equality of opportunity among the various sections of society. A strong government is required to control distribution and achieve great equality. Furthermore, inequality of wealth may actually promote technological progress, because the relatively wealthy will buy new technologies while their prices are far too high for a mass market. The importance of egalitarianism is the idea that all people are created equal and should be treated equally and that access to wealth, in the case of economic egalitarianism, is the idea that everyone in a society should have similar levels of income and wealth. However, a few things that limit economic egalitarianism in a free-market society include money supply, inflation, lack of jobs, and consumer prices may limit economic activity for people who lack wealth (Christopher. 2017). 2.3.3 Rawls’s Theory Rawls based his theory on justice. The theory which is sometimes referred to as Rawls’s theory of justice noted that attaining equality in the distribution of rights is the basic principle of justice. According to the theory, everyone has the right to claim equal liberties with others and the authority should ensure justice for everyone. The authority must observe scrupulously the allotment of rights and liberties. If this aspect is violated, it means equality is violated and justice will not be achieved. This is because justice is heavily related to equality. However, the theory maintains that for the sake of justice, inequalities may be allowed to exist in society. As such, social and economic inequalities can be arranged so that they are both reasonably expected for society’s benefit. In any country, all the opportunities and positions shall be opened to all. As a result, there is no room for discrimination. Those inequalities created should not disadvantage anybody. If this prevails in any country, the equalities and inequalities build up the foundation for justice. Justice between male and female counterparts results in equality in terms of activities. Giving equal opportunities to females to undertake businesses through starting their own small businesses (SMEs) is considered a way of achieving equality in society.

20  Nyasha Kaseke

2.4 Contribution of SMEs to Equality Practically, there are several ways in which equality, as a result of equal opportunity due to SMEs, can contribute to the economy and to female or women emancipation. 2.4.1 Employment Creation It is apparent to note the important role played by SMEs in employment creation. SMEs account for 95–99% of the business population worldwide (Equality Authority, 2013). The World Bank (2022) notes that in emerging markets, 60% of all employment comes from SMEs and they create 7 out of 10 jobs. In Africa, SMEs create 80% of regions’ employment (Santos, 2015). The presence of many jobs created by SMEs means that there will be no or minimal bias and fairness in job recruitment; everyone gets the job that they are supposed to get, thereby leading to equality. 2.4.2 Economic Development The existence of SMEs helps boosts economies all over the world. Mostly in developing countries, SMEs constitute an integral part of imports and commodity prices, which generates global economic success. Krueger (2008) defines economic development as the process whereby simple, low-income national economies are transformed into modern industrial economies. In the worldwide economy, SMEs undertake a vital role through their critical commitment to gross domestic product (GDP). The World Bank (2022) notes that formal SMEs contribute up to 40% of national income (GDP) in emerging economies, and these numbers are significantly higher when informal SMEs are included. If there is economic development in a country there will be fair and unbiased developments in all areas regardless of political party, race, gender or religion. 2.4.3 SMEs Drive Innovation The European Medicines Agency (2014) notes that SMEs are a motor of innovation. Innovation is the introduction of something new. Innovation is about the continuous flow of ideas, in a free environment so as to stimulate creativity and spontaneity. For innovation to take place it does not require massive investment so as to create the conditions in which it will flourish. SMEs are a driver of innovation because they develop innovative problem solutions quickly. Wolfe-Murray (2020) states that the highly effective innovation mantra that drives innovation in SMEs is that they observe, orient, decide and act. Results brought by SMEs through innovation include improvement in the economy, increased communication and well-being, environmental sustainability and educational accessibility. Innovation in education and technology has the potential to enable a more just and equitable future.

SMEs and Equality in Africa  21 2.4.4 SMEs Drive Competition According to World Bank (2012), SMEs are thinking and acting globally, they are competing with rivals of all sizes such as larger firms. SMEs are conquering competition because they are investing aggressively in technology so as to improve operations and make themselves more visible. When there is competition in the market, it leads to efficiency and equity.

2.5 Forms of Equality (a) Horizontal Equality Everyone in a society is treated equally, and there is no scope for special treatment or discrimination. This is applicable among people belonging to the same level of income group where irrespective of gender or profession one must pay a certain amount of tax as defined by the taxation authority of a nation. For example, if two taxpayers earn $100, they should both be taxed at the same wealth rate since they both fall within the same income bracket. In business, SMEs owned by females treated the same as their male counterparts. (b) Vertical Equality It is more concerned with the process of redistributing the earned income from common people among the others in a society by means of tax and taxation rules. This means people who are earning more should also pay more tax or redistribute their income as tax. This type of equity calls for progressive taxation laws. An example can be drawn from the Zimbabwean income tax system, where high earners are more taxed than low-income earners. (c) Social Equality Social equity is concerned with justice and fairness of social policy. It takes into account systematic inequalities to ensure everyone in a community has access to the same opportunities and outcomes. According to the National Academy of Public Administration, social equity is the fair, just and equitable management of all institutions serving the public directly or by contract and the fair and equitable distribution of public policy and the commitment to promote fairness, justice and equity in the formation of public policy. Social policy and social equity include a variety of public contexts like education, policing, welfare, housing and transportation. Social equity recognises that each person has different circumstances and allocates needed to reach an equal outcome.

2.6 Benefits of Achieving Equality through SMEs 2.6.1 A Large Population is Covered There are multiple SMEs around the country, they are present even in some geographical locations which might be difficult to access due to poor road network; hence, a larger population is covered. SMEs create job opportunities across

22  Nyasha Kaseke geographic areas and sectors, thus employing different classes of the labour force, which include low-skilled workers, and the provision of opportunities for skills development. SMEs help support their workers’ access to health care services as well as social services. SMEs that generate jobs and value added are in essence an important channel for inclusion and poverty alleviation, particularly but not limited to emerging and low-income economies. In this vein, upgrading productivity in a big population of SMEs can help governments achieve both economic expansion and social inclusion objectives. 2.6.2 Financial Innovation SMEs drive financial innovation as financial institutions strive to do business with this sector. The calls for financial inclusion by the central banks of developing countries ensure that financial institutions, especially banks, come up with innovative ways of tapping into this sector. Established medium-sized SMEs that innovate and scale up their operations are the driving force behind growth in many economies, often ensuring coordination, upgrading and participation in the supply chains of the smaller enterprises. For example, in Switzerland, medium-sized SMEs (50–249 employees) represent about 4% of the business population but account for 23% of employment and 25% of value added. 2.6.3 Competition As SMEs compete against themselves and to a certain extent against established corporates, the monopolistic behaviour is eliminated, prices become competitive and quality of products to customers is better/guaranteed. 2.6.4 Expanded Tax Base Equitability through SMEs brings with itself an expanded tax base. The creation/ sprouting of SMEs is good, especially for countries that have good or better ways of taxing this sector. Countries like South Africa and Kenya seem to have been successful in tapping this sector while other developing nations like Zimbabwe are struggling to effectively collect taxes from SMEs. Despite the challenges being faced by other countries, the fact remains that these SMEs provide an expanded tax base to the country, resulting in improved tax earnings. More women may be targeted thus increasing women’s participation in production activities. SMEs may target more women for example, the birth of the Women’s Bank Zimbabwe with much focus on assisting women with the required funds in business start-ups. 2.6.5 Financial Assistance SMEs usually have two sources of funding, that is government funding and private/ donor funding. Equitability through SMEs means SMEs may benefit from donor funding which ultimately feeds into the country’s GDP. Small businesses can also

SMEs and Equality in Africa  23 represent an effective means to address the needs of society through the market and provision of public goods and services especially in remote geographic locations.

2.7 Challenges Associated with Achieving Equality through SMEs The challenges faced in trying to achieve equality through SMEs are discussed in the following subsections. 2.7.1 Lack of Funding It is hard to get equitability through SMEs due to a lack of funding. The intended beneficiaries may not benefit due to failure to access the funds because of several reasons among them qualifying criteria, security and availability/accessibility of funding (banks) in their locality. In addition, financiers have a general perception that lending to SMEs is high risk, an absence of track records as SMEs are informal businesses and high interest rates where a loan is accessed compound the challenges of SMEs leading to failure to address equitability. Thus, only a few people may end up benefitting while the majority cannot access funding, thus a failure to address equitability. 2.7.2 Technology Deficiencies Deficiencies in technology also make it hard to achieve equitability through SMEs. Technology helps SMEs to connect with customers through email, blogs, social networks and forums. SME owners can take advantage of this instant connection by obtaining customer feedback and using it immediately for their business. A lack of advanced technology thus leads to inefficiency, fewer opportunities are captured, poor customer loyalty and uncertain/lower profits. To this end, poor technology by SMEs is a constraint in achieving equitability. The state of physical infrastructure, for example roads, ports and airports, as well as the efficiency of the procedures that are followed in the operation of these facilities, is vital for businesses to enter or participate in foreign markets. In developing economies, these are the adverse factors signalled by SMEs seeking to seize global opportunities. 2.7.3 Barriers to Entry Barriers to entry also affect SMEs for example in the transport sector where a contractor will consider hiring someone with many trucks rather than an SME with one or two trucks. One ends up going through someone who may eventually pay lower than what was offered. SMEs have higher costs as they cannot benefit from economies of scale. 2.7.4 Constraints to Importing This limits the ability of SMEs to take advantage of benefits arising from more efficient sourcing. For example, in Southeast Asia, a region which has embraced

24  Nyasha Kaseke SMEs, these SMEs tend to source a lower share of their value added from abroad relative to larger firms. Regulatory uncertainty, inconsistency and complexity tend to affect SMEs disproportionately. SMEs are less efficient than large firms in scanning, screening the regulatory environment and asserting to the relevant norms. Since they might lack information or expertise, SMEs often incur indirect costs, which are paying for external advisors’ expertise or investing in specific training of employees to comply with new obligations. 2.7.5 Poor Management Practices and Poor Corporate Governance Structure These factors pose challenges to business transfer and management transition processes in most SMEs, especially family enterprises. Sometimes, management limitations are compounded by financing challenges, regulatory hurdles, administrative and tax burdens, as well as small markets for business transfer. Typically, this represents a growing policy concern in most countries, especially where the entrepreneur population is ageing rapidly. One of the other challenges is adverse macroeconomic conditions which include inflation or high interest rates. SMEs are equally affected and may fail to cope with these macroeconomic factors thus posing challenges to addressing equitability.

2.8 Determinants of SMEs to Achieve Equality Equality is derived from the idea of moral impartiality, and it is likely to be affected by several factors which include, but are not limited to, the following. 2.8.1 Location The location of an individual is one of the determinants of SMEs in achieving equitability. The geographical location is determined by income and the interrelated designing of economic resources and opportunity. Likewise, the ability to pay has always defined one’s residential choices as well as one’s capacity to afford certain goods and services and opportunities. The variation in size, choice and buoyancy of demand in particular markets and on the supply side, variation in the cost and availability of labour, premises and services play a crucial role when dealing with equitability. However, SMEs are often adjustable and they employ different strategies to deal with these local variables so that their impact is minimised. 2.8.2 Gender Equality The systematic deprivations of women relative to men has since posed an enormous gap in the problem of gender equity as women constitute half of the world’s population. Alemu and Dame (2017) concur and postulate that women turn out to be encumbered once they become housewives by caring for the children, cooking the meals and managing the family assigned to them, and when they become free from the previously mentioned cultural problem, they are smart enough to be risk-takers and hard workers, enhancing the saving of the business and increasing

SMEs and Equality in Africa  25 the welfare of the business. In an attempt to address this cultural problem, SMEs can help by providing on-site childcare, as well as flexible scheduling and promoting a more equitable distribution of caring and household duties between women and men. Moreover, SMEs ensure that all employees have equal access to promotions and higher-paid jobs within the enterprise, and women are actively encouraged to pursue those opportunities. When business owners are female, sales volume increases but not profitability. On the contrary, Aworemi et al. (2010) posit that gender has a positive influence on the overall success and growth of micro and small enterprises. 2.8.3 Education Background Education is a measure to transform the behaviour of the human race, and SMEs try to bridge the gap between education and employment in an attempt to achieve equitability. Small business owners who are well educated can help enterprises prosper and can reckon with the risks that will happen. Education matters for the survival of enterprises. Education is the factor that positively affects the growth of firms and helps small businesses in achieving equitability. Alemu and Dame (2017) concurs and states that educated business owners play a pivotal role in the allocation of scarce resources and the maximisation of profits and enhance the trust of the creditors to access a loan. In essence, education has a positive impact on SMEs in trying to achieve equitability. 2.8.4 Age Age is also another determinant of equitability among SMEs. As young entrepreneurs have courage and are risk takers in starting businesses rather than old people. This is because old people have too many responsibilities and may not have more time to spare for business activities. According to Yonis et al. (2018), there is a negative relationship between the performances of SMEs with the age of the owners. Young entrepreneurs have better access to resources and information, hence becoming more successful than the old ones. 2.8.5 Behavioural and Personal Traits The character of the business leader such as behaviour, personality and attitude can certainly have an impact on equitability. Moreover, their capabilities, including education and training, also create higher expectations in some industry sectors. Their knowledge or social capital influences their access to resources. Management experience, functional skills, critical thinking skills and relevant business knowledge are also important ingredients for business success. 2.8.6 Access to Finance Access to finance is another determinant of equitability. It is also the base for the success and growth of SMEs. The financial provision should be at a lower interest rate which can be afforded by the SMEs. The government tries to provide credit

26  Nyasha Kaseke for young enterprises and creative entrepreneurs through youth empowerment projects. Access to financing creates strong competition to implement technologies, skills and innovation. To access loans from financial institutions, collateral security and the high interest rates are challenging for SMEs. This is a major challenge for SMEs as they will not have collateral security to borrow from the banks so as to grow their business. 2.8.7 Innovation Business owners should be innovative so as to meet customers’ needs. If the business becomes old, its prices decline and customers will decrease, hence the need for innovative ideas that can save the business from shutting down. Small businesses should always be innovative in order to meet the ever-changing customer. 2.8.8 Location The location of the SME can be a major factor in the overall success of the business and equitability. When the operation area of SMEs is near the main road, they can display easily the products for the consumers and increase sales volume; the reverse is true for enterprises not near the main road. Location is important for the success or survival of the business. If the business location is near banks and or financial institutions, the credit access may be simple, and if nearby universities, hotels, government offices and bus stations, the growth of the enterprises will be more effective (Mersha and Ayenew, 2017). 2.8.9 Entrepreneurship Training Long- and short-term training are helpful for enhancing the skills of the new entrepreneurs and managing their future businesses. The entrepreneur should have critical thinking skills so as to make sound decisions in the organisation. In order to operate new technologies, show business opportunities, know new ways or methods and identify the treats, entrepreneurship training is compulsory. As far as the training quality is maintained, marketing skill training is also the best mechanism to communicate with customers about products produced by newly established and existing enterprises. 2.8.10 Social Responsibility Corporate social responsibility has become one of the core businesses of organisations. The organisations are responsible for providing different services for the community such as supporting vulnerable population groups, protecting the environment and providing different services, such as building schools and houses and paying school fees for the disadvantaged. The SMEs are responsible for their respected society during their operation. Social responsibility and SMEs have a positive relationship. Corporate social responsibility has an impact on the attractiveness of SMEs, thereby helping them in achieving equitability.

SMEs and Equality in Africa  27 2.8.11 Tax Rate High tax rates lead to a reduction in firms’ internal sources of finance. The high tax rate becomes a cost for the business. Heavy tax rates discourage small businesses from expanding their operations. The tax policy of the country affects the overall performance of SMEs. The tax rate hurts the growth of SMEs. Governments constantly review and alter their tax policies to promote the growth of small businesses. Lower corporate income taxes can be a great factor in the promotion of the growth of small businesses. 2.8.12 Inflation Rate The double-digit inflation rate affects the growth of SMEs. Due to inflation, workplace rentals are increased which leads to high operational costs for the business and the purchasing power of citizens diminished as they will not have more money to spend. This may affect the growth of small enterprises. The small-scale manufacturer’s input price may rise, and they may be affected by raising the inflation rate. 2.8.13 Competition Businesses have to make decisions that deal not only with business survival opportunities but also with business development in a changing environment under dynamic competitive conditions, where each competitor tries to do impossible things to survive. Competition and sustainability for SMEs involve factors such as changing market trends, changing technologies and emerging new management and organisational techniques. SME survival is increasingly dependent on several factors, including the elasticity of SMEs to rethink some of their strategies (Gunasekaran et al., 2011). 2.8.14 Government Policies The government helps SMEs in achieving equitability through putting policies that promote local products. The businesses that are into manufacturing benefit a lot from this policy as they will attract more clients.

2.9 Relationship between SMEs and Inequality in Africa Most African countries are considered to be less developed or developing countries, depending on the scale and approach of the source and author. As such, there are high levels of poverty and economic inequalities (Uzomah, 2020). The more inequality within the country, the less economic efficient the people are and the more socially unstable. Highly unequal African countries resemble huge gaps between the rich and the poor, with the non-existence of middle-income groups (World Bank, 2022). This makes it difficult for the poor to close the gap and move to the middle-income group.

28  Nyasha Kaseke As such, African countries which strive for equality have shown high levels of healthier people. These have positive signs of economic efficiency, which also translates to greater social stability.

2.10 Government Initiatives in Promoting Equality through SMEs In a bid to strengthen the SME sector the government of Zimbabwe in particular has set up an SME bourse to promote SME activities so that they will be listed on the Zimbabwe Stock Exchange (ZSE; Chitiyo et al., 2004). The government of Zimbabwe, through the Ministry of Industry and International Trade, and in conjunction with the Ministry of Youth Development, Gender and Employment Creation came up with a policy document for the support of small, micro and medium enterprises (SMMEs). The policy document is aimed at providing a shared of small businesses and providing an enabling environment for them to realise their full potential. According to Stanislous, (2012), the main objective of the developing countries’ governments’ SME policy is to generate sustainable employment, reduce poverty, stimulate economic growth and generate foreign currency hence contributing to the economic well-being of all citizens. The policy also attempts to define how the government, the private sector and other stakeholders can encourage and create an enabling environment for SMEs to grow and enhance the contribution of SMEs to national development. The policy is committed to SME growth over the long term rather than dependence on quick-fix solutions through prioritising SMEs and appropriate allocation of limited public resources (Chinembiri, 2011). Various government support programmes have been put in place in less developed countries for the SME sector to spread and grow in order to reduce unemployment. These programmes are supported by institutions such as the Small Enterprise Development Corporation (SEDCO), Zimbabwe Development Bank, Credit Guarantee Company of Zimbabwe, AFC Holdings, the Venture Capital Company of Zimbabwe and EMPRETEC in Zimbabwe for instance. EMPRETEC is an organisation which aims at empowering SMEs through training and the provision of support services with managerial skills and other skills which includes but are not limited to bookkeeping, human resource management and marketing and communicating skills (Musabayana and Mutambara, 2020). Also, in Zimbabwe, government support for the SME sector has been repeatedly articulated in various policy documents like the Framework for Economic Reform, the Zimbabwe Programme for Economic and Social Transformation (ZIMPREST) and the Economic Recovery Programme (Chigwenya and Mudzengerere, 2013). In less developed countries like Niger, Chad and South Sudan, the International Labour Organization (ILO) supports SME development. Recommendation 189 of 2008 agreed to assist member states of the ILO to develop policies that facilitate the startup, growth and promotion of SMEs. The ILO is actively involved in training SME entrepreneurs through programmes such as Start Your Business and

SMEs and Equality in Africa  29 Start and Improve Your Business. ILO is also funding the Expand Your Business training for SMEs and is providing seed money as startup capital for SMEs in less developed countries (On, National and On, 2019). In Zimbabwe, SEDCO focuses on the promotion and facilitation of the development of SMEs. It assists in the creation of employment through the establishment of income-generating projects which would also support viable enterprises as well as provide professional business management and entrepreneurship training in business management. SEDCO aims to foster self-reliance through the stimulation and increase of exports from the small enterprise sector (Chitiyo et al., 2004). Through SEDCO, a number of loan facilities have been channelled to the SME sector. These include the SME Revolving Fund, the Reserve Bank of Zimbabwe Productive Facility, the Loan Booth Programme, the People’s Shops Programme, the Business Infrastructural Development Programme and business management and entrepreneurship training (Chigwenya and Mudzengerere, 2013).

2.11 Lessons Learnt from Developed Countries 2.11.1 Training Ground for the Development and Growth of Indigenous Entrepreneurs SMEs act as a seedbed or nursery for the indigenous population. They serve as vehicles for the propagation and diffusion of ideas. SMEs were found to be more flexible and can easily adopt new ideas faster compared to large enterprises. In Italy, Ireland and Germany, SMEs contribute to research and development in order to enhance their specialisation along the value chain and become successful global service providers. 2.11.2 Strengthening Industrial Inter-Linkages SMEs contribute to the strengthening of industrial linkages by being actively involved in the production of intermediate goods which in turn are used as inputs by large enterprises. They also provide services by being contracted by big companies to provide services which are otherwise costly for big firms to hire employees for example maintenance contracts for plant and equipment. This has been adduced as one of the reasons for the increased interest which developing countries have shown in the promotion of SMEs since the 1970s. In the US, SMEs are given a position of prominence in their national policy as the “backbone” of the American economy and the path to success for many Americans. 2.11.3 Transition Channel from Traditional to Modern Industrial Sector If managed well, SMEs serve as a channel through which small or traditional industry transforms itself to a modern industrial hub. In essence, in developed countries like Germany, SMEs have acted as a springboard for launching the

30  Nyasha Kaseke Economy into a vibrant modern sector. This supports the United Nations’ (1984) view that a fledging SME sector can be a means of achieving a smooth transition from the traditional to the modern industrial sector. 2.11.4 Dispersal of Economic The SMEs assist in the dispersal of economic activities thus encouraging the modernisation of such activities outside the urban areas and, thus, providing an effective means of resource mobilisation and mitigation of rural–urban drift. 2.11.5 Job Creation and Poverty Reduction In developed countries, SMEs have been recognised as the engines through which growth objectives can be achieved. Manufacturing sector SMEs in the Republic of Korea contributed the highest at 81.9% among developed economies. In Brazil, SMEs represent 81.4% of 4.6 million enterprises, with 54% investing in social responsibility. In Brazil, SMEs have been classified as the real motors behind the country’s rapid economic growth.

2.12 Conclusion This chapter looked at how SMEs may result in equality in an economy. The chapter began by looking at the global perspectives on how SMEs contribute to equality, narrowing in from developed to developing economies. The chapter concluded the following: SMEs are important in reducing the level of poverty through employment creation; SMEs are an important source of employment, especially concerning young people, women and unskilled labourers; SMEs result in income generation, thus leading to wealth creation within economies; SMEs contribute significantly to the GDPs of both developed and developing countries and thus are a major driver of economic growth; and SMEs as businesses are a form of bringing equality between men and women as they result in equality business ownership and appointments to managerial positions. However, despite the importance of SMEs being a major contributor to equality, it has been noted that the SME sector faces a number of challenges in its operations as SMEs try to bring equality: funding constraints, inadequate business skills, constricted operating space, high operating costs and punitive tax regimes. From the lessons learnt from developed countries, the following are seen as critical in order to enhance or promote the role of SMEs in contributing to equality: improved government support to the SMEs sector through the formulation of economic and social policies that enhance the participation of SMEs in economic activities, collaboration with government by both civil society and the private sector in supporting SMEs, the creation of a global SMEs fund to finance SMEs, the adoption of a progressive tax system that relieves SMEs of some tax burdens, the creation of special economic zones earmarked for SMEs and increased advocacy for women participation in SMEs initiatives.

SMEs and Equality in Africa  31

References Alemu, K. S. and Dame, D. B. (2017). ‘Determinants of micro and small enterprises success: The case of Ambo Town, Ethiopia?’ Journal of Asian and African Social Science and Humanities, 3(1), 86–96. Aworemi, J. R., Abdul-Azeez, I. A. and Opoola, N. A. (2010). ‘Impact of Socio-Economic Factors on the Performance of Small-Scale Enterprises in Osun State, Nigeria.’ International Business Research, 3(2), 92. Chigwenya, A. and Mudzengerere, F. H. (2013). ‘The Small and Medium Enterprises Policy in Zimbabwe: A narrative of strides taken to mainstream the informal sector activities in urban local authorities in Zimbabwe’, International Journal of Politics and Good Governance, 4(4), 118. Chinembiri, T. (2011). ‘Exploring the role of SMES in Economic Development: SomePolicy Considerations for ZImbabwe’, pp. 1–34. Chitiyo, T. et al. (2004). ‘Giving Voice To the Unprotected Workers in the Informal Economy in Africa: The Case of Zimbabwe’, (22), pp. 1–55. Christopher, M. (2017). ‘John Stuart Mill.’ In The Stanford Encyclopedia of Philosophy, ed. Edward N. Zalta. https://plato.stanford.edu/archives/spr2017/entries/mill/ Equality Authority (2013). Equality Works for SMEs. https://www.ihrec.ie/app/uploads/ download/pdf/20141112182145.pdf European Medicines Agency (2014). Small and medium-sized enterprises: driving innovation in medicines. Netherlands. Gonzalez, A. (2016). How does gender affect the participation of SMEs in international trade? Keynote Speech, Queens University, Kingston, Canada. Gunasekaran, A., Rai, B. K. and Griffin, M. (2011). ‘Resilience and competitiveness of small and medium size enterprises: Empirical research.’ International Journal of Production Research, 49(18), 5489–5509. ILO (2016). Women at work: Trends 2016. International Labour Organization, Geneva. http://www.ilo.org/gender. Killeen, J. (2020). How SMEs can embrace equality and inclusion through coronavirus and beyond. How SMEs can embrace equality and inclusion through coronavirus and beyond | CBI. Krueger, A. (2008). https://www.britannica.com/topic/economic-development/ additional-info#history Mersha, D. and Ayenew, Z. (2017). ‘Does access to formal financial sources lead to growth of micro and small enterprises? Evidence from West Oromia region, Ethiopia.’ Developing Country Studies, 7, 61–69. Musabayana, G. T. and Mutambara, E. (2020). ‘Zimbabwe’s Indigenous SME Policy Framework, A Tool for Black Empowerment’, pp. 1–19. doi: 10.21203/rs.3.rs-33126/v1. National Youth Council of Ireland (2021). What is equality? Accessed on: https://www. youth.ie/articles/what-is-equality/ On, R., National, T. H. E. and On, D. S. (2019). ‘Report on the National Research and Develop- ment Survey on SMEs and Cooperatives’, (October). Santos, J. (2015). Why SMEs are key to growth in Africa. https://www.weforum.org/ agenda/2015/08/why-smes-are-key-to-growth-in-africa/ Stanislous, Z. (2012). ‘The influence of human investment on the performance of small and medium enterprises (SMEs) in the manufacturing sector of Harare, Zimbabwe’, African Journal of Business Management, 6(33), 655–667. doi: 10.5897/ajbm11.2387. UNDP (2016). Human Development Report 2016. pp. 12, 42.

32  Nyasha Kaseke Uzomah, S. (2020). The race against economic inequality witjin emerging markets – A Case of SMEs, Strategic Partnerships, Microsoft 4 Africa. Winterbotham, M., Oldfield, K., Stewart, G. and Rossiter, H. (2015). Fairness, dignity and respect in SME workplaces, Equality and Human Rights Commission Research Report Series, Equality and Human Rights Commission. Accessed on: https://www. equalityhumanrights.com/sites/default/files/research-report. Wolfe-Murray, E. (2020). How to Drive Innovation: Steps for SMEs. MillGens, UK. World Bank (2022). Poverty and Shared Prosperity 2022, IBRD, IDA. World Food Programme (2020). What does equality mean to me? WFP, Africa. Accessed on: https://www.wfp.org/stories/what-does-equality-mean-me Yonis, M. B., Woldehanna, T. and Amha, W. (2018). ‘Impact of public intervention on micro and small enterprises performance in Ethiopia: A firm level empirical evidence.’ International Journal of Emerging Markets, 13(5), 1108–1131. doi: 10.1108/IJoEM-10-2016-0259

3 African Women-Owned SMEs Post-COVID-19 Toward a Gender-Sensitive Policy Development Strategy Emem Anwana 3.1 Introduction Globally female entrepreneurs account for 37% of global gross domestic product (GDP). However, they were the ones hardest hit by the pandemic and continue to face obstacles post pandemic in reaching their full potential. According to the Mastercard Index of Women Entrepreneurs (MIWE, 2021), women entrepreneurs are critical to the expansion of the global economy, from owning local neighbourhood stores and market stalls to providers of health and childcare services to leaders of new technology companies and everything in between. In Africa, women entrepreneurs contribute to the GDP of their nations and have assisted in lowering family and children malnutrition and illiteracy rates (Anwana and Aroba, 2022). According to the United Nations, African women have made significant contributions to the economy of their countries through their involvement in agricultural and business activities. Women’s involvement in agriculture has helped increase food production and improve nutrition, while their involvement in business has helped create jobs and increase incomes. Additionally, women’s businesses have helped to reduce poverty levels and promote gender equality (UN Women, 2021). The COVID-19 pandemic has placed Africa in a situation in which it is facing a major public health and economic crisis, which has the potential to undo years of development progress, particularly in reducing poverty levels on the continent. Prior to COVID-19, the continent had already experienced a slowdown in overall growth and poverty reduction. The COVID-19 pandemic appears to have had a greater impact on women’s businesses than the 2008–2009 economic downturn and other global recessions. The pandemic’s impact is expected to be greater than previous economic shocks (OECD, 2020). There has been little research on the post-COVID-19 pandemic implications for African women entrepreneurs. The chapter facilitates a deeper insight on the topic of African women–owned small and medium-sized enterprises (SMEs) post COVID-19. The chapter seeks to highlight the impact of the pandemic on African women entrepreneurs while providing guidance and directives to African policymakers, international and national donor agencies, and traditional and governmental authorities within Africa, as well as business forums and nongovernmental agencies (NGOs) operating at the national and grassroots levels. The chapter commences with an exploration of the definitions of African women SME owners, DOI: 10.4324/9781003413172-3

34  Emem Anwana with the view of highlighting the gender implications attached to these definitions and the impact these may have on women-owned SMEs on the continent. The chapter can provide guidance to readers for developing business and economic strategies that could serve as a pathway for African governments in rebuilding their economies post COVID-19 through including of women-owned SMEs in their policy directives.

3.2 Meaning of Women Entrepreneurs Women entrepreneurship has been defined as “an act of owning a business which makes women economically independent.” (Chhabra et al., 2020). Similarly, there have been several attempts to define SMEs particularly as it pertains to sub-Saharan Africa (SSA); however, there has been no universal agreement on the subject. In Zimbabwe, the Government of Zimbabwe defines an SME as a business enterprise with 100 or fewer employees. Whereas in South Africa, SMEs are defined as an enterprise employing fewer than 200 employees, with an annual turnover of less than R64 million, and capital assets of less than R10 million.

3.3 Women-Owned SMEs in Africa According to the World Bank, Africa has the world’s highest percentage of entrepreneurs; it is also the only continent where women make up the majority of entrepreneurs (Ojong et al., 2021, World Bank, 2019). According to the Global Entrepreneurship Monitor report, Africa now has more female entrepreneurs than any other region of the world. SSA has the highest rate of female entrepreneurs (27%), as well as 58% of the continent’s SMEs, which contribute approximately US$300 billion to the continent’s GDP (Ebatamehi, 2022). Furthermore, according to the 2021 MIWE, Botswana, Uganda, and Ghana are reported to have the highest percentages of female entrepreneurs in the world, with 38.5%, 38.4%, and 37.2%, respectively (MIWE, 2021). In Africa, until the advancement of smartphones and internet connections, a majority of women entrepreneurs were in the agriculture sector, food retail, cloth making, beading, and hairdressing (Meyer, 2019). With the advancement of mobile phones and internet access, African women entrepreneurs have ventured into more technological and sophisticated aspects of business. The more educated women have ventured into high-tech businesses, which have required the formalization of their businesses. This formalization has led to the emergence of women-owned SMEs.

3.4 Women Entrepreneurs as a Catalyst for Economic Change Women entrepreneurs have the potential to be economic change agents in Africa, especially SSA (Anyansi-Archibong, 2021) The majority of the income generated by women-owned businesses is used to feed, clothe, and care for the household, thereby contributing to the continent’s reduction of extreme poverty and child malnutrition. According to UN Women (2021), “women make enormous

African Women-Owned SMEs Post-COVID-19  35 contributions to economies, whether in businesses, on farms, as entrepreneurs or employees, or by doing unpaid care work at home.” The UN also acknowledged that these activities limit women’s access to economic assets such as land and loans, as well as their ability to shape economic and social policies. According to the UN, women perform the majority of household tasks, leaving little time to pursue economic opportunities (UN Women, 2021). Although women-owned SMEs appear to be on the rise in Africa, the environment in which they operate has a significant impact on the performance and sustainability of their ventures (Juma and Sequeira, 2017). African women entrepreneurs face a number of challenges, including a lack of adequate support from both the government and their respective families, as well as a lack of access to finance and financial products and services. Witbooi and Ukpere (2011), speaking about women entrepreneurs in South Africa, mentioned that South African women entrepreneurs face challenges in the areas of access to finance, the cost of finance, access to markets, access to information on available support services, and access to training. Despite the fact that women make up 51% of the South African population, these issues persist (Stats SA, 2016). Also in South Africa, women-owned businesses are more likely to operate in the informal sector as compared to those owned by men. Women are less likely to have sophisticated and formalized businesses. According to Meyer (2019), female entrepreneurs would most likely establish businesses in lowbarrier-to-entry industries such as services, crafts, and education, which are not generally regarded as high-growth industries.

3.5 Factors Influencing African Women’s Entrepreneurship Most African women–owned SMEs are survivalist in nature, meaning that lack of opportunities in the formal sectors of their nations’ economies forced them into entrepreneurial endeavours. Studies have identified the ‘push and pull’ factor as some of the causes of women starting their own businesses. The ‘push and pull’ factor can be described as a situation in which one finds themselves unemployed or jobless, redundant, facing an economic downturn, financial reasons like insufficient family income, dissatisfaction with employment, or the need for independence. The need for time to perform other personal tasks, such as caring for children, a desire for profit and wealth, personal advancement, self-fulfilment or actualization, social position, and the ability to be a boss or authority figure. Research has also found that many female entrepreneurs may be more motivated by internal motives like greater independence, work–life balance, and making a difference in society, when compared with external goals like money creation and wealth acquisition (Meyer, 2019).

3.6 The Impact of the Pandemic on Women Entrepreneurs The outbreak of the COVID-19 pandemic caused major disruptions to the economies of African countries; most, if not all, countries were forced to close their borders and shut down their economies. The lockdown restrictions negatively

36  Emem Anwana affected many SSA women–owned SMEs, causing many women entrepreneurs to lose their start-up capitals and stocks (Gwatidzo and Chazovachii, 2020). Those operating in the agricultural sector were unable to access markets for their produce thus leading to severe losses for the affected women. It is widely believed that the effects of COVID-19 were exacerbated for women and girls simply because of their gender (Bahri, 2020). According to UN SecretaryGeneral Antonio Guterres, millions of women’s jobs vanished. Women were frequently more vulnerable to the pandemic’s effects, owing to their predominance in community-based activities, as primary caregivers and primary (formal and informal) health care providers, as well as their reliance on agriculture and services activities which were affected by COVID-19 (World Bank, 2020). As African women also play a dominant role in informal cross-border activities in Africa, these were affected by the closure of national borders thus setting back the progress made by the African Continental Free Trade Area (AfCFTA) regarding cross-border trading in Africa. The COVID-19 pandemic further, made it near impossible for women entrepreneurs on the continent to be able to obtain financing for their businesses in both the formal and informal economies, due to the liquidity constraints caused by the COVID-19 pandemic (Bilal et al., 2020). However, the COVID-19 pandemic, the lockdowns, and the devastating effects it has had on SMEs have inadvertently focused the spotlight on women entrepreneurs on the continent causing the United Nations, the African Union, and other donor agencies to call on governments to assist women-owned businesses recover from the COVID-19 pandemic.

3.7 Challenges and Opportunities that COVID-19 has Actuated for Women Entrepreneurs As observed by Muhammad et al. (2021), women’s entrepreneurship is a critical driver of societal economic development and prosperity. It helps raise living standards by alleviating poverty and creating job opportunities. However, COVID-19 had far-reaching economic consequences for women entrepreneurs. Nonetheless, the pandemic demonstrated the tenacity of female entrepreneurs in the face of cultural, economic, and institutional constraints. To this end, the United NationsWomen Strategic Plan 2018-2021,1 was slightly adjusted in 2020 to accommodate the impact of the pandemic on women and girls. The UN-Women called on governments and donor agencies when implementing the strategic plan to adjust activities to ensure they are relevant to the context and challenges, especially the pandemic’s impact on women and girls, and safeguard and secure hard-won development gains for women and girls. They also advised that women and girls be recognized as contributing to and having a greater influence on building sustainable peace and resilience and, therefore, should benefit equally from the prevention of natural disasters and conflicts and from humanitarian action. Similarly, Goal 17 of the African Union Agenda 2063, “Full gender equality in all spheres of life,” calls on African governments to ensure full gender equality in all spheres of life for African women and girls. The African Union praised interventions aimed at women’s empowerment that are supported by development

African Women-Owned SMEs Post-COVID-19  37 partners such as the African Development Bank (AfDB), which is dedicated to increasing women’s access to credit; the Affirmative Finance Action for Women in Africa (AFAWA) of the World Bank aimed at raising US$300 million and leverage US$3 billion by 2025 for financial and non-financial services to women in business as well as the World Bank’s Women Entrepreneurs Finance Initiative, which, in collaboration with AFAWA,2 is providing support for African women entrepreneurs recovery from the COVID-19 pandemic (African Union, 2022). It is believed that initiatives such as these, if judiciously applied, would assist African women entrepreneurs to restart their businesses after COVID-19.

3.8 Post-COVID-19 and Gender-Sensitive Policies for African Women Entrepreneurs The United Nations has advised governments to prioritize COVID-19 recovery efforts for women and girls. Prioritizing a gendered approach in a crisis and beyond necessitates adequate funding, which most African and developing-country governments do not have. Development partners, such as development finance institutions (DFIs) and multilateral development banks (MDBs) are required to increase their gender-smart financing to help uplift women who have been disproportionately affected by the pandemic. Through women-specific projects, DFIs’ presence in low- and middle-income countries has helped close the gender financing gap which has been a problem for women entrepreneurs. During COVID-19, DFIs in Europe and beyond committed to providing financial and technical assistance to developing-country private sectors, although most of these commitments lacked an explicit gender lens; however, some DFIs, such as the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD), as well as the AfDB, provide gender-specific financing to the private and public sectors (EIB, 2021). If African women entrepreneurs are to restart their businesses, more gender-specific policies and directives will be required from DFIs and other donor agencies. Prior to the COVID-19 pandemic, many women-owned SMEs in SSA were indebted or barely surviving. However, the pandemic and the resultant lockdowns exacerbated their economic situation forcing many to lose their business capital and close. The lockdown regulations had a significant impact on the vast majority of SMEs owned by women in SSA. Due to the strict lockdown measures, many of those involved in businesses such as hairdressing, hawking, street food vendors, subsistence farmers, and other related businesses were forced to stay at home. These forms of businesses were unable to operate remotely, and thus, their inability to work or offer services from their home meant that they could not generate income. In many cases, the lockdown restrictions resulted in structural unemployment, which later resulted in permanent unemployment because some of these women-owned SMEs were unable to resume operations even after the lockdown restrictions were lifted. The COVID-19 crisis exposed and significantly widened deeply ingrained gender inequalities, particularly in developing countries. According to the United Nations, women were more likely to lose their jobs or be driven out of business than men. They face greater financial barriers, as well as a greater burden

38  Emem Anwana of unpaid care work, domestic violence, and a failure to obtain basic health services for themselves and their households (United Nations, 2020, Adeola, 2021). During and post COVID-19, many African countries developed policies to provide palliatives to SMEs to enable them to restart their businesses. For example, the Kenyan government in addition to other COVID-19 pandemic containment measures, unveiled an eight-point economic stimulus package to mitigate the effects of economic recession, stimulate economic growth, and cushion households. However, this had minimal impact on gender equality and empowerment (Meru and Kinoti, 2021). In South Africa, the government intervened by releasing a historic US$26 billion economic relief package to help businesses affected by the pandemic; however, most of the COVID-19 stimulus and relief packages were marred by massive corruption, making most business entrepreneurs unable to access them (Magome, 2020, Odeku, 2020). In Nigeria, according to Adamu et al. (2021), the Nigerian government claimed to have spent billions of Naira on relief packages and COVID-19 palliatives for vulnerable citizens. In a study conducted to gauge the perception of Nigerians to this claim, the results were that 88% of those surveyed felt “disgust” about the claim, and a vast majority felt that because of corruption, there was no equity or transparency in the distribution process. Further to the preceding, Ahairwe and Bilal (2020) equally contended that due to poor management and planning, many businesses requiring government assistance did not benefit from them due to the bureaucracy and other administrative hurdles appended to obtaining the stimulus packages. For example, in some countries, before a business could receive government grants, it was required to submit a bank statement along with other documents proving its viability prior to the pandemic. This according to the authors resulted in, many women-owned SMEs being disqualified from applying for the grants (Ahairwe and Bilal, 2020). The COVID-19 pandemic exposed Africa to a dual public health and economic crisis. The pandemic overwhelmed Africa’s health care systems, destroyed livelihoods, and has slowed the region’s growth prospects for years to come. All the gains Africa had made toward the attainment of the Sustainable Development Goals (SDGs) seem to have been eroded by the pandemic. According to Fenner and Cernev (2021), if Africa is to achieve the 17 SDGs by 2030, global responses to the COVID-19 will be a factor. According to scholars, a long-term COVID-19 recovery will require a strong gender emphasis across all dimensions. DFIs and other funding agencies can play an important role in incorporating gender lens into their operations. Ahairwe and Bilal (2020) calls on all DFIs to endorse the principles of the 2X Challenge3 and the Gender Finance Collaborative (or similar principles) and increase the transparency and monitoring impact of their gender lens initiatives. Makurumidze and Mpofu (2021) call on African governments to introduce gender-stimulus packages that are specifically designed and distributed with a gender-focused lens. They call on governments to ensure the availability of an accessible, quick, and efficient funding framework for African women entrepreneurs and further contend that monetary institutions should accelerate financial inclusion strategies, as well as adopt a cultural shift that encourages female entrepreneurship on the continent.

African Women-Owned SMEs Post-COVID-19  39

3.9 Priority Areas for African Women Entrepreneurs Post-COVID-19 African women entrepreneurs are pivotal to Africa achieving the 17 SDGs, as well as achieving the Africa Agenda 2063. Prior to the COVID-19 pandemic, African women entrepreneurs faced several challenges, which include a lack of adequate government and family support, a lack of access to finance, and a lack of access to financial products and services. The chapter highlights the priority areas through which African women entrepreneurs can be assisted by governments and donor agencies post COVID-19 pandemic. 3.9.1 Access to Financial Service Support One of the barriers to the reactivation of women-owned businesses is a lack of access to productive resources such as assets and capital. According to the World Bank (2020), approximately 50% of women worldwide do not have bank accounts or access to other financial services. Only about 20% of bank account holders in low-income countries’ rural areas are women. Women entrepreneurs often face significant difficulties in obtaining credit to restart their businesses due to not having bank accounts for themselves or their businesses (Bahri, 2020, Anwana and Aroba, 2022). Women who do not have bank accounts have no credit history and less access to assets such as land or other properties that can be used as security for bank loans. The situation has prevented women entrepreneurs from obtaining credit to restart their businesses following the pandemic (Ahmed et al., 2016). 3.9.2 Digital Financial Literacy COVID-19 has made digital financing the new normal. The use of digital financing has been vital in protecting the masses from the novel coronavirus, which would have otherwise spread through the use of paper money and face-to-face contacts. Financial technology companies (fintechs), which use software, applications, and digital platforms to deliver financial services to consumers and businesses via digital devices, such as smartphones, have emerged as promising tools for promoting financial inclusion. However, this comes with its own risk, particularly for African women entrepreneurs seeking financing for their businesses. Risks such as phishing, when a hacker poses as an institution in order to obtain personal information, such as usernames and passwords, from a user via emails or social media; pharming, when a virus redirects a user to a false page, causing them to reveal personal information; spyware, when malicious software infiltrates a user’s computer or mobile phone and transmits personal data; and SIM card swap, when someone impersonates the user and obtains the user’s SIM card, gaining access to private data, are dangers which can pose great harm to African women entrepreneurs. Governments and NGOs are called on to provide digital financial education to women, through state radio and television programs, as well as other formal avenues, to educate its citizens on the potential risks associated with these

40  Emem Anwana technologies. Governments are also called on to adequately regulate fintechs operating within their jurisdictions (T20 Japan, 2021). 3.9.3 Information and Communication Technology Training Government and DFIs can provide funding for gender-equal digital services, innovations, and inventions aimed at increasing women’s use of digital services for financial inclusion, business operations, and technical training. The support of DFIs for a digital post-COVID-19 recovery in developing countries will empower women as bankers, entrepreneurs, employees, leaders, and green recovery agents. 3.9.4 Capacity The economic and social consequences of the COVID-19 pandemic have exacerbated existing gender inequalities and reversed the few gains made in women’s empowerment over the last few decades. The resultant global recession from the pandemic exposes vulnerabilities in social, political, and economic systems that may have a significant impact on women’s participation in trade and commerce (Belghitar et al., 2022). Addressing the pandemic and other socio-economic challenges on the continent requires strong governance and leadership. African governments are required to support women and increase their capacities in all dimensions by removing all cultural, traditional, religious, legal, administrative, and other barriers that operate to prevent women on the continent from participating in their country’s governance and economies. Girl children must have access to education, women entrepreneurs must be supported and their capacity increased in accessing finance and financial products and services, information and communication technology (ICT) training, access to health, agriculture, as well as micro-enterprises and SMEs (Ahairwe and Bilal, 2020). 3.9.5 Government Intervention Strategies As noted in this chapter, women-led businesses are more negatively affected by COVID-19 than men-led businesses; therefore, it is not surprising that governments the world over have been called on to take steps to assist women in dealing with the crisis (Belghitar et al., 2022). Western governments have implemented several schemes to support their SMEs during and post COVID-19, which seem to have worked. For example, the UK government developed and implemented two major policies aimed to support businesses. They were the Coronavirus Job Retention Scheme (CJRS, which covered the cost of furloughed employees during the crisis period) and the Bounce Back Loan Scheme (BBLS). The BBLS scheme helped businesses across the UK by allowing SMEs to borrow between £2000 and up to 25% of their turnover through a government guarantee for the entire loan up to £50,000, allowing firms to access credit when banks are unwilling to lend due to borrowers’ poor performance (KPMG, 2023). The French government established a solidarity fund for small businesses, micro-businesses, self-employed workers, and liberal professionals with an annual

African Women-Owned SMEs Post-COVID-19  41 turnover of less than €1 million and an annual tax revenue of less than €60,000 who had to close their doors or incur losses of up to 70% for their March 2020 turnover (White & Case, 2020). Although some African governments equally developed schemes to assist their SME operators, however, as noted earlier, corruption, a lack of adequate planning, and maladministration prevented these schemes from achieving their aims. As observed by Bahri (2020), to repair the damage caused by the pandemic, multiple interventions at the domestic and international levels will be required. International trade law and policies can play an important role in triggering changes at the domestic level. This crisis provides a once-in-a-lifetime opportunity to rebuild African economies in an inclusive manner and to investigate how trade policies can help in this regard through existing and future free-trade agreements (FTAs). FTAs have the potential to significantly reduce gender inequality. Countries can encourage their trade partners to create laws and procedures that eliminate or reduce the barriers that prevent women from participating in trade through FTAs. This is a ‘top-down’ approach to addressing gender inequality at the domestic level. Certain countries (such as Canada) are emerging champions of this approach, having provided market access to other countries by negotiating some of the world’s most gender-responsive trade agreements (Bahri, 2020). In Africa, the AfCFTA agreement can serve as the foundation for long-term, inclusive economic growth. As states implement the African Continental Free Trade Agreement, efforts must be made to ensure that the agreement promotes gender equality and women’s economic empowerment. The AfCFTA’s gender mainstreaming should then take a “whole agreement approach,” involving civil society and the private sector in national, regional, and continental consultations (Bayat, 2022). African governments need to encourage gender mainstreaming in trade agreements to ensure that these agreements do not perpetuate gender inequalities as they are implemented post COVID-19. The following are other areas which government should prioritize in assisting women entrepreneurs recover from the COVID-19 pandemic. 3.9.6 Elimination of Discriminative Policies against Women Women continue to be stereotyped and discriminated against around the world. Women in some developing countries do not have the right to inherit or control their assets. This deprives them of ownership of assets that are typically required as collateral security when obtaining credit from almost all financial institutions. In addition to directly supporting women-owned businesses, governments and DFIs should support women’s movements aimed at creating more spaces for inclusive policies and decision-making processes, as well as eliminating gender stereotypes in the post-COVID-19 recovery (Ahairwe and Bilal, 2020). Women should be given special consideration as employees and entrepreneurs in both the formal and informal economies (UN Women, 2021). It will be critical to ensure women’s liquidity access through dedicated credit lines and guarantees to the banking sector, as well as support for community-based financing, which many women rely on (World Bank, 2020, Bilal et al., 2020).

42  Emem Anwana 3.9.7 Data Collection, Registration and Help Line Government agencies must improve their transparency, accountability, impact measurement, and reporting on the gender dimensions of their activities by adopting common methodologies and reporting criteria, incorporating gender criteria into all transaction decisions, and setting clear targets and timelines for achieving results (Ahairwe and Bilal, 2020). 3.9.8 DFIs and NGO Intervention Strategies DFIs and MDBs must be gender-sensitive and take the lead in promoting gender equality and women’s empowerment in the aftermath of the COVID-19 crisis. Although the crisis has exacerbated gender disparities, it also provides an opportunity for donors, DFI, and MDBs to do more to support women and girls in developing countries through the following: Donor collaboration with local institutions: Donors, DFIs including MDBs, should work with local institutions to support and engage civil society organizations that can influence developing countries’ gender-equality policies in the post-COVID-19 era. Investment in sustainable energy from a gender focus perspective: More than 80% of commercial businesses in SSA countries experience frequent power outages, resulting in financial losses. The number of people who do not have access to clean cooking solutions is even higher, with approximately 2.8 billion relying on biomass solutions, which has serious health consequences and limits the time available for productive activities. Inefficient cooking practices, which primarily involve the use of kerosene, wood, charcoal, peat, and coal, among other things, cause approximately 4 million deaths per year due to household air pollution (mostly women and children). Women who own informal micro and small businesses, housekeepers, cooks, and expectant mothers who require health care are disproportionately affected by such energy shortages. (Ahairwe and Bilal, 2020). Donors, DFIs, and MDBs assist in investing in renewable clean energy sources to assist African women entrepreneurs post COVID-19.

3.10 Women-Owned SMEs Post-COVID-19 Support Model This section presents a conceptual design of a gendered specific model aimed at supporting African women–owned SMEs post COVID-19. The model outlines the role of three key role players, namely, the government, financial institutions/private sector/donor, and business forums. It is recommended that the government spearheads these efforts. Phase 1 requires the documentation/registration of all women involved in SMEs on a database. Such a database will grant governments the opportunity to make informed decisions while disseminating relief efforts amongst other uses. Also, countries within the SSA region that still have biased laws and policies should eliminate

African Women-Owned SMEs Post-COVID-19  43

Womenowned SME’s

Phase 1

Phase 2

Phase 3

Data collecon Registraon Help line Eliminaon of Discriminave policies

Financial service support ICT Training Financial literacy Capacitaon

Monitor services by government Best pracces Support marginalized women

Government

financial institution/donor Business forum/NGOs

Figure 3.1 SME recovery strategy.

such discriminative policies. More so, it would be needed that a helpline be provided where women-owned SMEs can seek advice on issues such as where and how to access loans, issues around gender-based violence, human immunodeficiency virus/acquired immunodeficiency syndrome, and mental health, among others. Phase 2 predominantly focuses on financial support and the capacities of women-owned SMEs. These are considered imperative, as the findings contained in earlier sections reveal that women often are not as ICT literate as their male counterparts. Phase 3 mainly focuses on monitoring and evaluation of the whole process. More so, it advocates that vulnerable and marginalized women involved in SMEs should continuously be supported, especially within their first five years in business. While implementing this model, the involvement of gender experts will be required, whilst it will be imperative to have credible political authorities, a supportive private sector and donor agencies as well as strong government institutions would ensure that women are not left out in the post-COVID-19 recovery strategies that are being developed. Furthermore, women-owned SMEs should be trained and educated on strategies that could bring dynamism and innovation into their businesses. Where possible, they should equally be trained on how to maximize the use of digital platforms in growing and developing their businesses. Such dynamism and innovation can possibly be a step toward mitigating business risk or failure.

3.11 Conclusion The COVID-19 pandemic presented far more challenges than opportunities to women-owned SMEs. The pandemic devastated all businesses but particularly African women-owned SMEs. Although the World Health Organization has declared the pandemic over, the various stimulus packages promised or put in place by various international and national agencies, donors, and African governments for women entrepreneurs must continue, and their effectiveness and efficiency must be adequately evaluated. The funds must be transparently accounted for. The pandemic’s impact on women-owned businesses and SMEs is still being

44  Emem Anwana felt, so agencies should continue to work with women entrepreneurs to put them in a better position than they were before the pandemic. International and national organizations, donors, and African governments should be more active in assisting female entrepreneurs. Access to funding should be made easier, and gender-specific policies should be implemented. The chapter provided insights and precautionary measures African governments, DFIs, NGOs, and donor agencies may take in the post-COVID-19 recovery of African women–owned SMEs. It extracted insightful and pertinent discussions from scholarly works relating to the subject of discourse. It also provides guidance to policymakers alongside the business forums on strategies to mitigate business risk. The business-innovativeness and viability approaches advocated in this work are imperative in SSA, in a post-COVID-19 era. Women entrepreneurs are not only beneficial to their communities, but they are also an important investment in their country’s economic future. The COVID-19 pandemic caused the world to shift faster to the use of digital technology tools; however, many women-owned SMEs were unable to benefit from such a move. It is therefore critical that female entrepreneurs benefit from the new digital economy. There should be increased public funding for women in business in economies around the world and, more specifically, in Africa. Protections should be extended to women working in both formal and informal sectors. Institutional and social barriers negatively affecting women entrepreneurs must be eliminated, and training and education for women, particularly financial training, must be increased, improved, and made accessible and available for women entrepreneurs. Additionally, at both levels of government, proper mechanisms should be put in place to collect gender-sector statistics to gauge gender imbalances and develop elaborate socioeconomic approaches to address them.

Notes 1 The UN-Women 2018–2021 Strategic Plan is as follows: 1. To ensure that a comprehensive and dynamic set of global norms, policies, and standards on gender equality and the empowerment of all women and girls is strengthened and implemented. 2. To ensure that women are allowed to lead, participate in, and benefit equally from governance systems. 3. To ensure that women have income security, decent work, and economic autonomy, 4. To ensure that all women and girls live a life free from all forms of violence (UN WOMEN. 2022). 2 The AFAWA received US$251 million in pledges to support African women entrepreneurs at the G7 Summit in August 2019 and is also collaborating with the World Bank’s Women Entrepreneurs Finance Initiative to mobilize resources to address the financial and nonfinancial constraints faced by African women–owned and –led SMEs (African Union, 2022). 3 The “2X Challenge” was launched at the G7 Summit 2018 as a commitment by DFIs to collectively mobilize $3 billion in private-sector investments to improve women’s access to leadership opportunities, quality employment, finance, enterprise support, and products and services that increase economic participation and access in developing countries. The original target was three times exceeded, with DFIs investing $6.9 billion and co-investments totalling $11.4 billion. Twenty global DFIs committed to a new target of $15 billion for the period 2021–2022 at the G7 Summit in 2021 (2X CHALLENGE, 2022).

African Women-Owned SMEs Post-COVID-19  45

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46  Emem Anwana Juma, N. & Sequeira, J. M. 2017. Effects of entrepreneurs’ individual factors and environmental contingencies on venture performance: A case study of African-American women-owned ventures. Journal of Small Business & Entrepreneurship, 29, 91–119. KPMG. 2023. United Kingdom: Government and institution measures in response to COVID-19 [Online]. Available: https://home.kpmg/xx/en/home/insights/2020/04/united-kingdomgovernment-and-institution-measures-in-response-to-covid.html [Accessed 2023]. Magome, M. 2020. South Africa warns COVID-19 corruption puts ‘lives at risk’. The Washington Post. Makurumidze, S. & Mpofu, T. 2021. The financial opportunities of COVID 19 In Zimbabwe: A case study of Harare women entrepreneurs. International Journal of Business Research and Management (IJBRM), 12, 51–73. Mastercard Index Of Women Entrepreneurs (MIWE) 2021. Unlocking sustainable, inclusive growth [Online]. Available: https://www.mastercard.com/news/insights/2022/mastercardindex-of-women-entrepreneurs-2021/ [Accessed 2022]. Meru, A. K. & Kinoti, M. W. 2021. Gender and covid-19 economic recovery: Towards policy recommendations and directions in Kenya. In O. Adeola (Eds.), Gendered Perspectives on Covid-19 Recovery in Africa. Springer. Meyer, N. 2019. South African female entrepreneurs’ business styles and their influence on various entrepreneurial factors. Forum Scientiae Oeconomia. Wydawnictwo Naukowe Akademii WSB, 25–35. Muhammad, S., Ximei, K., Haq, Z. U., Ali, I. & Beutell, N. 2021. COVID-19 pandemic, a blessing or a curse for sales? A study of women entrepreneurs from Khyber Pakhtunkhwa community. Journal of Enterprising Communities: People and Places in the Global Economy, 16(6), 967–987. Odeku, K. O. 2020. The plight of women entrepreneurs during covid-19 pandemic lockdown in South Africa. Gender & Behaviour, 18(3), 1606–1607. OECD. 2020. OECD policy responses to coronavirus (COVID-19): COVID-19 and Africa: Socio-economic implications and policy responses [Online]. OECD. Available: https://www. oecd.org/coronavirus/policy-responses/covid-19-and-africa-socio-economicimplications-and-policy-responses-96e1b282/ [Accessed 2023]. Ojong, N., Simba, A. & Dana, L.-P. 2021. Female entrepreneurship in Africa: A review, trends, and future research directions. Journal of Business Research, 132, 233–248. Stats SA 2016. Community survey 2016, statistical release P0301. Statistics South Africa. T20 Japan 2021. The need to promote digital financial literacy for the digital age [Online]. Available: https://t20japan.org/policy-brief-need-promote-digital-financial-literacy/ [Accessed 2023]. UN Women 2021. Facts and Figures: Economic Empowerment. 2018. New York: UN Women. UN Women 2022. Moving forward [Online]. Available: https://www.unwomen.org/en/ annual-report/2022 [Accessed 2023]. United Nations 2020. The impact of COVID-19 on women, policy brief In: UNITED NATIONS (ed.). New York, NY 10017. White & Case. 2020. Measures implemented in France to help companies dealing with liquidity problems and other financial difficulties [Online]. White & Case. Available: https://www. whitecase.com/sites/default/files/2020-04/covid-19-french-governmental-supportfor-companies-200429.pdf [Accessed 2023]. Witbooi, M. & Ukpere, W. 2011. Indigenous female entrepreneurship: Analytical study on access to finance for women entrepreneurs in South Africa. African Journal of Business Management, 5, 5646–5657. World Bank. 2019. Female Entrepreneurship Resource Point-Introduction and Module 1: Why Gender Matters, Washington, DC: World Bank. World Bank. 2020. Women, business and the law 2020. World Bank eLibrary The World Bank.

4 Fostering Global Competitiveness of SMEs in the Supply Chain Post-COVID-19 Emem Anwana

4.1 Introduction As the COVID-19 pandemic spread at an alarming rate around the world, nations scrambled to control and contain the spread of the infection, closing borders, prohibiting social gatherings, closing offices and businesses, including closing air, sea, and land borders; suspending all movements in and out of their territories; and, in many countries, imposing complete or partial lockdown and prohibition of movements except for essential services. These measures had a significant impact on the economies of countries all over the world. With all nations driven into self-isolation by the virus’s spread, the global economy ground to a halt, with international commerce and trade being severely disrupted or suspended. In terms of business and enterprise risk, the International Labour Organization (ILO) reported that, as a result of COVID-19, more than 436 million enterprises worldwide faced high risks of serious disruptions. They argued that these businesses were those in the hardest-hit economic sectors, which included 232 million in wholesale and retail, 111 million in manufacturing, 51 million in accommodation and food services, and 42 million in real estate and other business activities.

4.2 COVID-19 and the Global Supply Chains Looking closely at the global supply chains, it became clear quickly that the shutdown of factories and production centres in China, as well as the complete lockdown of many Chinese regions, followed by the shutdown of factories in other Asian countries, severely disrupted global supply capacity, and long-term orders and demands could not be met. Companies relied on their contracts for protection, and force majeure clauses were frequently invoked. As more countries closed businesses and government departments and imposed strict lockdown orders to contain or limit the spread of the virus, global logistics suffered significant disruptions because there were no goods or cargos to transport, and even where cargoes were available, ports and port operations were forced to close as national borders were closed. Global trade was estimated to fall by 25% to 35%, depending on the depth and scope of the global economic downturn. The situation compelled supply chain scholars and practitioners to urgently rethink and re-imagine better, smarter, more robust, and diverse supply chains DOI: 10.4324/9781003413172-4

48  Emem Anwana capable of surviving future global crises. This chapter highlights some of these ideas and proposals that can be described as elements of the global supply chain post COVID-19.

4.3 Global Disruption Accentuated by COVID-19 COVID-19 was declared a global health emergency by the World Health Organization (WHO) in January 2020. Thereafter it quickly evolved into a global public health and economic crisis that has had an unprecedented impact on the US$90 trillion global economy. As the COVID-19 pandemic spread across the world, nations took stringent measures to curtail the spread of the virus. To curtail the spread of the virus, countries closed their borders, prohibited social gatherings, and shut down offices alongside all non-essential businesses (Amit 2020). Governments also closed their respective air, sea, and land borders whilst suspending all movements in and out of their territories. In many countries, complete or partial lockdowns were imposed, while governments also prohibited the movement of their citizenry, except for personnel whose line of duty fell within essential services. The COVID-19 protocols and regulations adversely impacted economies across the globe (Altman 2020). With all nations having been driven by the spread of the virus into self-isolation, the global economy came to a neargridding halt, with severe disruptions in international commerce and trade greatly disrupted or suspended. These saw the closure of international commodity markets and the failure of stock markets across the world. The FTSE, Dow Jones Industrial Average, and the Nikkei all saw huge falls as the number of COVID-19 infections spiralled uncontrollably. The Dow and the FTSE saw their biggest quarterly drops in the first three months of the year since 1987. In an epic struggle to respond, central banks in many countries slashed interest rates to make borrowing cheaper and encourage spending to boost the economy. Employment and household incomes also fell significantly as unemployment and job losses increased. According to the International Monetary Fund (IMF), the proportion of people out of work due to COVID-19 increased by 10.4% at the early stages of the pandemic. The ILO portrays a gloomy picture of the global employment situation which it attributes to COVID-19. Unemployment and job losses increased significantly, and household income decreased. The proportion of people out of work due to COVID-19 increased by 10.4% in the early stages of the pandemic, according to the International Monetary Fund (IMF). The ILO painted a bleak picture of the global employment situation, attributing it to impact of the COVID-19. The ILO stated that the sharp decline in working hours portrayed a real danger of livelihoods being destroyed particularly to the 1.6 billion workers in the informal economy which represent nearly half of the global workforce. For full-time employment, the ILO estimates that over 10.5% deterioration was expected to be lost, the equivalent of 305 million full-time jobs (assuming a 48-hour working week). In terms of business and enterprise risk in relation to COVID-19, the ILO reported that over 436 million businesses worldwide faced a high risk of serious disruption to their business enterprises. The ILO noted that some 232 million of

Fostering Global Competitiveness of SMEs  49 these enterprises were operating in the hardest-hit economic sectors, which include wholesale and retail, manufacturing; 51 million in accommodation and food services; and 42 million in real estate and other business activities. As a result, it was obvious that the global economy would suffer as the health and human toll rose. Hence, COVID-19 would become the world’s largest economic shock in decades, as the virus had significantly slowed global economic growth. When examining global supply chains, it became clear that the imposition of the lockdown measures in China resulted in the closure of factories and production centres. A similar trend was observed in many other Asian countries as a result long-term orders and demands could not be met because global supply capacity was severely disrupted. Companies had to rely on their contracts for protection, and force majeure clauses were frequently invoked. As more countries closed their doors, due to government-imposed strict lockdown directives aimed at containing or limiting the spread of the virus, global logistics suffered significant disruptions because there were no goods or cargo to transport. Where cargoes were available, ports and port operations were forced to close, as were national borders. Global trade was estimated to have dropped by more than 50% at the height of the pandemic. An example of this disruption emerged in the supply and demand for personal protective equipment (PPE) required around the world to combat the pandemic. On March 27, 2020, the WHO’s director-general stated that the chronic, global shortage of PPEs was one of the most pressing threats to the collective ability to save lives from the novel coronavirus. The WHO estimated that 89 million medical masks, 76 million examination gloves, and 1.6 million medical goggles were needed each month for the COVID-19 response. The WHO had already shipped nearly 500,000 sets of personal protective equipment to 47 countries, but supplies were quickly running out. The WHO estimates that industry must increase manufacturing by 40% to meet rising global demand and urges governments to act quickly to boost supply. Rising demands, combined with panic buying, hoarding, and misuse of PPEs, disrupted global supplies as demands outstripped global production capacity. The dramatic increase in demand for surgical masks, goggles, gloves, and gowns depleted stockpiles, prompted significant price increases, and resulted in 4–6-month production backlogs in order fulfilment. The most difficult challenge was ensuring that critical PPE products were sourced and distributed to frontline health workers and other responders in affected countries, particularly those most vulnerable to coronavirus spread. According to the Asian Development Bank, the global economic impacts of the pandemic ranged from US$2 trillion to US$4.1 trillion.

4.4 COVID-19 and Impact on SMEs in Africa The COVID-19 pandemic has had an impact on both developed and developing economies. However, the financial consequences are more visible in less developed countries that were struggling prior to COVID-19. The pandemic exacerbated Africa’s ‘not-so-impressive’ economies, whose populations were frequently living

50  Emem Anwana below the global poverty line of less than US$1.9 per day. The discussion in this chapter focuses on the impact of COVID-19 on small and medium-sized enterprises (SMEs) on the African continent, as this is a sector whose financial buoyancy is predominantly unstable and employs more than 70% of the African labour force. African economies provided a variety of stimulus packages to alleviate the severe impact of the pandemic on businesses. However, due to the stringent requirements of qualifying for such loans, SMEs were frequently unable to obtain them. Given that SMEs were severely impacted in a variety of ways, the focus of this chapter is narrowed to measures that an efficient supply chain mechanism may be used to steer SMEs in the right direction in the post-pandemic era.

4.5 Consequence of COVID-19 Pandemic on SMEs At the height of the COVID-19 pandemic, the most severely affected SMEs were those in hospitality and tourism, accommodation, restaurants, air transport, and other non-essential service sectors. The magnitude of disruption was less severe in construction, manufacturing, real estate, and other professional services, such as law and medicine (Office for National Statistics 2020). Many small and medium-sized businesses were affected on both the demand and supply sides of the economy. In terms of demand, consumers had limited disposable income, so spending was drastically reduced. This had a direct effect on the revenue of SMEs (Doorley, O’Donoghue, and Sologon 2021). Revenue decline impacted businesses’ ability to maintain solvency and viability. Lower demand implied less demand for labour, which resulted in furloughs or layoffs (Möhring, Weiland, Reifenscheid, Naumann, Wenz, Rettig, Krieger, Fikel, Cornesse, and Blom 2021). On the supply side, a significant portion of the population became infected and had to be quarantined. Furthermore, the lack of childcare services impacted employee availability, as some parents were forced to care for their children who were not in school due to lockdown restrictions. Supply chain companies were also severely impacted on the supply side. This sector experienced disruptions, resulting in commodity and raw material shortages required by SMEs to provide services and goods. Most SMEs had to rely on a single supplier and were particularly vulnerable during the pandemic, as larger businesses were frequently given preference in terms of supply. The pandemic also highlighted the financial vulnerability of SMEs, as many of them had constrained resources or capital. The COVID-19 pandemic made it nearly impossible for SMEs to obtain financial assistance to restore liquidity or business stability (Eggers 2020). This complicated the financial situation of SMEs even more. Several SMEs went bankrupt as a result of falling sales and tight credit markets. Due to these concerns, governments and financial institutions have debated what specific interventions might be required to assist businesses (Liu, Lee, and Lee 2020). Several relief and stimulus packages were introduced by governments and financial institutions for businesses. However, many businesses would not qualify for these interventions as there were stringent measures attached to qualifying for such business loans (Altavilla, Barbiero, Boucinha, and Burlon 2020). For example, one of the requirements was that the business requesting the loan had to have been financially viable prior to the

Fostering Global Competitiveness of SMEs  51 COVID-19 pandemic. This resulted in many struggling businesses not being able to obtain the loans and had to shut down or downscale their services and workforces or suspend their operations in the interim. The bureaucratic processes involved also discouraged many businesses from applying for the loans.

4.6 Global Supply Chain Strategies Post-COVID-19 As earlier stated in the body of this chapter, the COVID-19 pandemic significantly disrupted economic activities and orchestrated economic uncertainties. This segment thus projects a post-pandemic business recovery of SMEs through the revitalisation of efficient supply chain strategies. In so doing, several supply chain strategies are discussed in the proceeding discussions. The World Bank June 2022, Global Economic Prospects describes both the immediate and near-term outlook for the impact of the pandemic and the longterm damage it had dealt to prospects for growth for both developed and emerging economies. The World Bank noted that COVID-19 had caused the deepest global recession since World War II and has placed the world economy in grave danger again. With high inflation and slow growth, it noted that even if the global recession were to be averted, the pain of stagflation could persist for several more years unless major supply increases were set in motion. The forecast envisioned a sizeable downgrade, with an estimated global growth slowing sharply from 5.7% in 2021 to 2.9% in 2022, due to the surge in energy and food prices, along with the trade disruptions occasioned by the war in Ukraine. Much of the global economic damage was attributed to the extent to which the virus was able to disrupt and damage global trade through the disruption of global supply chains. The novel coronavirus crisis clearly exposed the weaknesses, fault lines and fragility of the global supply chain, built on lean production and just-intime inventory management strategy. The pandemic had an unimaginable impact on global trade and investment. Several international companies, as well as governments, faced immediate stockouts as a result of supply chain failures. As the world’s factories shut down and orders for supplies were rejected or deferred, supply chains defaulted on their supply commitments to their local customers, resulting in a damaging global supply shock and chain of shortages of products, goods, and services. This was immediately followed by a global demand shock as more and more countries were unable to locate sources from which to order goods or products. Food, medicines, and PPE were all in short supply around the world. Data from Tradeshift, a global platform for supply chain management, revealed the magnitude of the impact of the pandemic on trade and demand and suggested that the effects of the initial shock may continue to linger for the coming months and years. While supply was dwindling globally, demand for basic goods, supplies, and materials went into overdrive, with companies and countries willing to pay any price to obtain them. Price inflation, hoarding, and mopping up global market products, materials, and goods are all examples of panic buying. Governments, businesses, and individual consumers were forced to confront the fault lines and fragility of the global supply chain as they struggled to obtain basic products and materials.

52  Emem Anwana

4.7 Technology and Digitisation The most important improvements and developments that businesses will need to put in place as a matter of real urgency post COVID-19 will be the adoption and implementation of technology to drive and support their international trade and supply chains. This should include but not be limited to the identification and deployment of an enterprise resource planning (ERP)1 system which will allow direct communication, engagement and transaction with their major providers and suppliers. This should incorporate effective digitisation of the technology or the ERP system. Despite the rapid advancement of technology prior to the COVID19 pandemic, the relationship between buyers and suppliers was predominantly paper-based, which had a significant impact on the buyers’ and suppliers’ ability to respond to the pandemic. Digitising the buyer–supplier relationship remains a critical component for the development and maintenance of robust supply chains, ensuring a strong and sustained process for identifying and recruiting new suppliers. Companies such as Ariba, SAP, and ORACLE, among others, have significantly improved supply chain processes and systems by developing robust ERP systems via cloud technology. These and other technologies, which were not widely used by supply chain practitioners prior to the COVID-19 pandemic, are expected to become more widespread globally and assist organisations and businesses if they face a crisis of this magnitude in the future.

4.8 Supplier Solvency Supply chain scholars have identified failure and insolvency of suppliers, medium and small-scale manufacturers, and businesses as major contributors to the deep disruption of the global supply chain. Necessitated mainly by unfavourable payment terms by major international companies. These payment terms range from 30 to 60 days, which are no longer sustainable for suppliers as a result of COVID19’s devastating effects. As the crisis worsened, many suppliers, medium and smallscale manufacturers faced cash flow problems, and many of these businesses went into insolvency. Post COVID-19, there must be a paradigm shift by major manufacturing firms in the payment terms and regimes they offer to their suppliers, parts, and component manufacturers. Best practices dictate that they propose terms that will ensure a positive cash flow of approximately 27 days to ensure the solvency of critical suppliers. It should be noted that if cash flow fails, the consequences will be severe, with a devastating impact on supply chains. Some international companies have already agreed to a smart financing arrangement in light of the crisis and secure their supplier base, which will need to be adapted among smaller suppliers. This will improve access to working capital for smaller suppliers. Accordingly, some of these entities have agreed to better payment terms with their suppliers, which may include advance payment in some cases, to provide them with reasonable cash flow leverage.

Fostering Global Competitiveness of SMEs  53

4.9 Diverse Supply Sources The destructive effect of the COVID-19 pandemic on established supply chains, especially as it relates to supply sources, has exposed the failure of the current thinking on supply sources. Current so-called best practice recommends that international companies should establish a close and firm relationship with a single supplier for a product, working on the principle of concentrating product requirements in a single supply source to achieve volume discounts and secure lower cost. While this approach may result in lower competitive costs for product supply, it also poses a significant risk of supply disruption and damage to a business if the sole supplier fails or defaults on its obligations for any reason. Unfortunately, the pandemic exposed the flaws and weaknesses in this school of thought, as numerous suppliers that were adversely affected by the pandemic defaulted on their contractual obligations, resulting in the complete collapse of their principal organisations’ supply sources. As a result, in the post-COVID-19 era, businesses would do well to establish at least three or four (if not more) supply sources for critical products that feed into their business’s production chain. They would have to treat and manage the relationships with the various suppliers with equal seriousness and provide the appropriate levels of scope to keep them interested in the company’s business. While it is acknowledged that the process of establishing multiple sources may take time and may increase the cost of supplies, however, its importance cannot be overstated or ignored because it will ensure the company’s long-term survival in the face of future crises. As a result, businesses must contend with two competing dynamics in the post-COVID-19 era. First, the increase in supply cost will be weighted against the increased supply chain resilience conveyed by additional sources. And the prospects of building stronger and smarter supply chains that will ensure long-term recovery from the devastations of the COVID-19 pandemic. The latter would ensure a more sustainable business environment for companies.

4.10 Over-Dependence on Production Centres Global supply chain weakness became even more apparent when the over-reliance of global demands on factories in China is considered. The impact of China’s lockdown, as well as its dominance in key manufacturing sectors, highlighted the challenges with post-COVID-19 supply chains. Due to a lack of flexibility in their supplier base, manufacturers struggled to source supplies and keep production going when Chinese factories closed. As a result, international companies must reconsider their supplier strategy towards the diversification of their supply chains in the future, rather than relying too heavily on Chinese factories.

4.11 Focus on Manufacturing Hubs Information gathered from international companies regarding the strength of their supply chains during the COVID-19 pandemic indicated that most companies adopted similar strategies and used the same mono-supplier approach for the

54  Emem Anwana procurement of production components. Evidence indicated that most companies sourced their production components from China and, in some cases, India. While their preference for these countries may be understandable from a cost perspective, logistically, especially in the face of a global crisis, it raises a fundamental question mark on the viability strategy particularly when the production components can be sourced through other proximate regional manufacturing hubs. Accordingly, supply chain practitioners emphasise that post COVID-19, international companies should seriously consider investing resources in closer regional manufacturing hubs to develop production capacities that will provide long-term support for their business and eliminate the need for extensive logistics. It should therefore be astounding to see major regional production hubs spring up in Eastern Asia, South America, Eastern Europe, and potentially Southern and Western Africa, which would boost the economies of these regions and assist them with the post-COVID-19 recovery, provided the various governments can ensure an enabling business environment through the provision of basic infrastructures post COVID-19.

4.12 Development of Local Sourcing Capacity Given the profound and devastating impact of COVID-19 on global supply chains, scholars have predicted an even lower level of decentralisation of manufacturing capacity, with companies looking to bring production back to their home countries, following the COVID-19 experience. They contend that the trend toward local production will be aided by increased automation and digitisation, which will encourage small-batch productions. They argue that in the long run, such domestic production lines could become cheaper, hence, encouraging more companies to begin moving parts of their supply chain back to their home countries. Governments and policymakers in many countries are increasing pressure on businesses to consider repatriating and manufacturing some, if not all, components of their products in their country or region. Legislation to this effect is being debated in parliaments across the world, financial incentives, soft loans, and special tax exemptions are some of the incentives being offered. As this trend becomes more popular among governments, and as a direct result of COVID-19, it would not be surprising if it became more widespread post COVID-19.

4.13 Development of Low-Cost Sourcing Centres Sourcing is one of the most important factors in determining whether a company succeeds or fails, and while many organisations choose to source materials, resources, and labour locally, others try to reduce operating costs by sourcing from other countries. Low-cost sourcing centres (LCSCs) are procurement, production, or manufacturing strategies in which a company sources materials, products, or goods from countries with lower labour and production costs in order to reduce operating expenses. To keep the cost of material and production expenses competitive, companies generally source from third-party countries, where the cost of labour and

Fostering Global Competitiveness of SMEs  55 resources are low. LCSS is a part of global sourcing services where materials and labour are procured from various nations all over the world. Low-cost country sourcing (LCCS) is a broad category of procurement efforts known also as global sourcing. An example of how LCSC works can be seen in the retail sector. Retail stores such as Shoprite and Checkers, for example, source most of the products and goods they retail from the Chinese market and import them directly into South Africa and other African countries to stock their retail outlets. Other high street fashion and retail chains, such as Edgars, Woolworths, and Marks & Spencer, have global outlets but still source most of their products from low-cost sourcing countries such as China and others. LCSC therefore refers to the specialised method of procurement, where the cost of sourcing is a major constraint. Several countries across the world are considered low-cost countries, with the necessary credentials for low-cost sourcing opportunities. It is interesting to observe that these countries are distributed evenly across the world. It does appear that the major factors motivating these credentials include political stability, a thriving economy, an educated population, a competitive cost of labour, technology, and production capacity. In Asia, it is not surprising that China and India are the leaders, followed by Vietnam, Thailand, and Malaysia. Some emerging economies such as the Philippines, Bangladesh, Sri Lanka, Myanmar, Sri Lanka, Pakistan, and Indonesia, as well as Nepal and Bhutan, are beginning to be more prominent. In Europe, the low-cost countries tend to be the Eastern Europe countries like Russia, Turkey, Hungary, Czech Republic, Greece, and Poland. In the Americas, these include Mexico, Peru, Ecuador, Chile, Bolivia, and Colombia. Southern and Western African countries have the potential to become LCSCs, with the additional advantage of possessing the required raw materials in those countries. Cost-saving is said to be the primary reason for Western countries’ focus on emerging markets. Although this reason remains valid, another emerging reason is the competitive advantage that Western countries can gain by carving out a significant market for themselves in emerging markets. While cost reduction and cost competitiveness have been identified as the primary drivers of the increased popularity of companies relocating to or sourcing from low-cost countries, experts have submitted and argued in favour of other factors that have combined to promote this global trend. The next section takes into account a number of such factors.

4.14 Cost Competitiveness Supply chain scholars have argued that the accelerated trend toward increased sourcing from low-cost countries has been driven mainly by the relentless competitive pressures that are driving companies to devise ways to continually reduce costs. Accordingly, the effort to reduce the cost of production is a major driver in this regard. It is therefore necessary to mention that these companies focus mainly on strategies to reduce most if not all factors of production. Take the cost of labour for example; most Western countries have stringent regulations governing labour practices and wages, thus making the cost of labour in most cases less competitive,

56  Emem Anwana which has an adverse impact on the cost of production. The exorbitant labour cost in many ways drives companies to source labour from overseas or indeed move their entire production process to countries with cheaper labour costs. This technique allows companies to source both unskilled and skilled labour at varying prices. This explains why major companies either manufacture or assemble their products in low-cost countries, simply to avoid the undue high cost of labour, and distribute them around the world including their home countries as finished products for sale. Skilled manpower in low-cost countries in Asia, such as China, India, and Thailand, can cost between 50% and 75% less when compared to Western nations, while unskilled manpower can be as much as 95% lower. It must be pointed out that the LCSC strategy delivers greater savings as other factors of production also deliver significant savings including production and tools which could cost more than 30% less in LCSC countries.

4.15 Production Material Aside from the savings that would ensue from low labour costs, it is also worth noting that significant savings would equally accrue from sourcing production materials from the same or other low-cost countries where such materials are more readily available. It is evident that not every country is endowed with a plethora of raw materials. Some countries have an abundance of one material while lacking in others. As a result, it becomes an integral part of the LCSC strategy for companies to seek and procure raw materials from countries where the raw materials are abundant and at a lower cost. There are numerous examples to support the claim that raw materials sourced from Asia and Africa are less expensive than those sourced from Europe, America, and other Western countries. Rubber sourced from Africa and Asia for rubber-based products and cocoa beans, for the production of chocolate and sweets, are two immediate examples. While several serious ethical concerns have been raised about sourcing raw materials from poor and vulnerable communities in Africa and Asia, it is critical that these raw materials are sourced in a sustainable manner for both the environment and people living in those vicinities.

4.16 Conclusion Many businesses across all industries and markets felt the impact of the recent global economic contraction caused by the COVID-19 pandemic. However, it can be argued that the global economic downturn spurred greater innovation in supply chain technology, including advancements in technological infrastructure through the global proliferation of internet access and Voice over Internet Protocol, which significantly improved communication speed while lowering the associated costs. This enabled a greater number of companies to establish and manage global trade relationships. Increased globalisation resulted in increased trade volume and discouraged trade restrictions and tariffs, thereby lowering the costs and inherent risks of doing business with low-cost countries. Furthermore, cross-border institutions such as the World Trade Organization and the IMF, as well as their coverage, have expanded rapidly to provide protection and transparency in developing regions.

Fostering Global Competitiveness of SMEs  57 This chapter provided an overview of the effects of COVID-19 on SMEs, as well as insights from a supply chain strategy for revitalising the supply chain system in the post-pandemic era. The pandemic’s massive economic disruption is thought to have reversed several decades of economic growth, caused unemployment, and created economic uncertainties at the micro, macro, regional, and global levels. This chapter proposes alternatives to the traditional supply chain system, as well as more sustainable strategies. It is hoped that the proposed strategies will be the first of many steps toward recouping the financial losses suffered by SMEs and making them more viable following COVID-19.

Notes 1 ERP software is used to manage a company’s day-to-day operations. Accounting, human resources, procurement, customer relationships management, supply chain, manufacturing, engineering, maintenance, projects, service, and other functions are aided by it. ERP ensures that the business runs as efficiently as possible, providing the organisation with a single source of information for better decision-making.

References Altavilla, C., Barbiero, F., Boucinha, M. & Burlon, L. 2020. The great lockdown: Pandemic response policies and bank lending conditions. Altman, M. 2020. Smart thinking, lockdown and Covid-19: Implications for public policy. Journal of Behavioral Economics for Policy, 4, 23–33. Amit, S. 2020. Long read: Coronavirus and the Bangladesh economy: Navigating the global COVID-19 shutdown. South Asia@ LSE. Doorley, K., O’Donoghue, C. & Sologon, D. M. 2021. The gender gap in income and the Covid-19 pandemic. Eggers, F. 2020. Masters of disasters? Challenges and opportunities for SMEs in times of crisis. Journal of Business Research, 116, 199–208. Liu, Y., Lee, J. M. & Lee, C. 2020. The challenges and opportunities of a global health crisis: The management and business implications of COVID-19 from an Asian perspective. Asian Business & Management, 19, 277–297. Möhring, K., Weiland, A., Reifenscheid, M., Naumann, E., Wenz, A., Rettig, T., Krieger, U., Fikel, M., Cornesse, C. & Blom, A. G. 2021. Inequality in employment trajectories and their socio-economic consequences during the early phase of the COVID-19 pandemic in Germany. Statistics, O. O. N. 2020. Coronavirus and the social impacts on Great Britain: 30 April 2020. Office for National Statistics.

5 SME Finances Challenges and Policy Options Gift Mugano

5.1 Introduction Although small and medium-sized enterprises (SMEs) make up a large part of the emerging private sector in most countries, they are also more constrained in their access to financial services than large firms (Ayyagari, Beck, and Demirgüç-Kunt, 2007; Beck, Demirgüç-Kunt, and Maksimovic, 2005). Thus, one reason for the mixed evidence on SMEs and growth may be that weak legal and financial institutions in developing countries prevent SMEs from growing into large firms. A large SME sector might therefore actually reflect inefficiencies in the system that do not allow for firm growth or make it optimal for firms to stay small (Beck, DemirgüçKunt, and Maksimovic, 2005). Ironically, the large finance and growth literature shows that finance is critical for growth. The first-generation studies (Levine, 1996; Rajan and Zingales, 1998; Levine and Zervos, 1998) used aggregate data to document that financial development affects economic growth on average. Recently, the increased availability of micro data sets at the firm level has allowed for a more detailed investigation of the channels and tighter identification to establish that this relation is causal. Levine (1997, 2005) and Popov (2018) provide an in-depth and comprehensive survey of this literature. An extensive literature has also shown that better access to external finance aids in innovation helps firms achieve larger equilibrium sizes, allowing them to choose potentially more efficient organisational forms (Demirgüç-Kunt, Love, and Maksimovic, 2006). This chapter discusses and assesses the current knowledge on the role of SME finance in developing countries. In addition, it takes a close look at available data to understand the extent to which access to finance is an obstacle for SMEs. Using existing data from firm-level surveys, this chapter unpacks both the supply and demand side issues in SMEs accessing bank finance. Furthermore, the chapter discusses other prevalent sources of non-bank sources of financing SMEs. Finally, the chapter discusses institutional constraints that affect access to finance and key recommendations.

5.2 Access to Finance as an Obstacle for SMEs Doran et al. (2018) and Runde, Savoy, and Staguhn (2021) underscored that challenges faced by SMEs entering into business in sub-Saharan Africa are premised on DOI: 10.4324/9781003413172-5

SME Finances  59 the fact that African SMEs are dominated by individuals who are forced by circumstances such as unemployment to start their own business These SMEs are typically not highly productive (Doran et al., 2018). Over and above this binding constraint, a lack of finance, poor market access, a lack of business skills, and a lack of operating space are the main challenges constraining SMEs’ contribution to local economic development of developing countries (Gebreyesus and Adewale, 2015; Endris and Kassegn, 2022). In the African context, challenges such as weak entrepreneurial attitudes, a lack of access to finance, government policies, regulations and practices for entrepreneurs, and training are the main constraints to SME development (Endris and Kassegn, 2022; Achtenhagen and Brundin, 2016; Herrington and Coduras, 2019; IFC, 2011). Accessing finance for entrepreneurship development in Africa has remained a permanent feature of the top challenges affecting SMEs in Africa (Endris and Kassegn, 2022; Atiase et al., 2017; Beck and Cull, 2014). In amplifying this observation, Atiase et al. (2017), Wang (2016), Brixiová et al. (2020), and Endris and Kassegn (2022) underscored that access to credit and limited access to finance through the banks currently fail to support entrepreneurship development in Africa. Atiase et al. (2017) noted that most financial institutions, when giving loans, place emphasis on established and large businesses because they have sound records and collateral but undermine SMEs. Most SMEs find it difficult to obtain formal credit because their capital is small, and as such, in a number of cases, it is lower than the critical collateral value required by creditors (Jin and Zhang, 2019). In addition, because the SMEs’ capital size is lower than the critical collateral value, SMEs are hit by high-risk premiums and higher transaction costs to banks (Quartey et al., 2017). As a result, evidence shows that access to finance remains the largest obstacle for SMEs in the Africa as only 10% of SMEs were financed through bank loans while 75% of SMEs were financed by internal funds (Leke and Signé, 2020). Similarly, Endris and Kassegn (2022) observed that 79% of informal businesses have never obtained loans, and only 21% utilised bank loans in South Africa. A number of scholars, who, inter alia, include Fowowe (2017), Endris and Kassegn (2022), Leke and Signé (2020), Atiase et al. (2017), and Beck and Cull (2014), have argued that growth of SMEs in Africa is inhibited by access to finance. Financially constrained firms, for example, have a 6.6% lower marginal revenue product of capital relative to unconstrained firms (Endris and Kassegn, 2022). In sub-Saharan Africa, evidence shows that constrained firms, in comparison to unconstrained firms, are also more inefficient and less productive relative to unconstrained firms in sub-Saharan Africa (Endris and Kassegn, 2022; Amos and Zanhouo, 2019). To be specific, due to borrowing constraints compared to unconstrained firms, in SSA, constrained firms are 15% less efficient (Amos and Zanhouo, 2019). Ayyagari, Demirgüç-Kunt, and Maksimovic (2017) observed that firms which were part of the World Bank enterprise surveys were asked to rank on a scale of 0 (no obstacle) to 4 (very severe obstacle) the extent to which the following factors were an obstacle to the current operations of the establishment – political instability, corruption, electricity, tax administration, tax rates, access to financing (both availability and cost), practices of competitors in the informal sector, access to land,

60  Gift Mugano street crime, inadequately educated workforce, customs and trade regulations, labour regulations, and business licensing and permits. The same firms were asked to report the major binding constraints amongst the listed obstacles. Firms interviewed singled out access to finance as a major obstacle adversely affecting SMEs. Earlier studies by Ayyagari, Demirgüç-Kunt, and Maksimovic (2008) and Beck, Demirgüç- Kunt, and Maksimovic (2005) show that access to finance was constantly observed as the most binding constraint for SMEs’ growth. In sub-Sahara Africa, of the 44 million SMEs, between a fifth and a third of the SMEs have access to finance (Runde, Savoy and Staguhn, 2021). From a gender perspective, a mere 10% of women in sub-Saharan Africa have access to financing (Runde, Savoy and Staguhn, 2021). Major binding constraints affecting women, as noted by Runde, Savoy and Staguhn (2021), inter alia, include social norms, legal discrimination, risk of gender-based violence, confidence and risk preferences, household allocation of production resources, limited access to networks, and time constraints. Evidence shows that 28.3% of SMEs in sub-Saharan Africa are fully credit-constrained (Runde, Savoy and Staguhn, 2021). Section 5.3 discusses the discourse on access to finance and institutional constraints.

5.3 Access to Finance and Institutional Constraints 5.3.1 Transaction Costs and Interest Rates Ayyagari, Demirgüç-Kunt, and Maksimovic (2017) argued that high transaction costs of processing, monitoring, and enforcing small loans, which increase breakeven interest rates for these loans, are some of the main problems in delivering credit to SMEs. Ayyagari, Demirgüç-Kunt, and Maksimovic (2017) argued that costs such as regulatory costs, legal services, costs of payment and settlement system and brick-and-mortar branch installations over computer systems are some of the fixed costs charged on an individual loan which are, in most cases, independent of the size of the loan. As a result of these fixed costs, a wedge is established between funding costs of financial institutions and the interest rate (Ayyagari, Demirgüç-Kunt, and Maksimovic, 2017). In addition, lending costs for SMEs are increased by high dependence on the relationship between lenders and borrowers in SME lending. Ayyagari, Demirgüç-Kunt, and Maksimovic (2017) argue that, unlike larger firms, SMEs in developing countries experiences greater risks as a result high interest rates and associated fees. In countries such as Sierra Leone, Malawi, and Uganda, Beck, Demirgüç-Kunt, and Martínez Pería (2008) show that the cost of maintaining a checking account per year varies widely, exceeding 20% of gross domestic product per capita. 5.3.2 Adverse Selection and Moral Hazard Issues Ayyagari, Demirgüç-Kunt, and Maksimovic (2017) argued that information asymmetry is one of the major binding constraints which exists between demanders and suppliers of funds. Unlike listed enterprises whose information is publicly available

SME Finances  61 because they list their shares on stock markets and issue securities in bond markets, SMEs don’t have readily available information which can be used by lenders. Because SMEs are not listed, the information asymmetry problem is exacerbated by the lack of information infrastructure. In line with Yoshino and Taghizadeh (2018), Ayyagari, Demirgüç-Kunt, and Maksimovic (2017) argued that the principal–agent problem, which is associated with information asymmetry, adverse selection, and moral hazards, also affects SMEs and is less salient among large firms. Moral hazard refers to the inability of the lender to enforce effectively the agreed credit contract ex post due to costly monitoring or incomplete contracting, while adverse selection refers to difficulties of choosing good credit risks ex ante in the absence of information on the project quality of the borrowers (Ayyagari, Demirgüç-Kunt, and Maksimovic, 2017). Ayyagari, Demirgüç-Kunt, and Maksimovic (2017) cautioned that, in instances where SMEs either do not have adequate documents and records to successfully apply for a loan, banks cannot effectively use interest rates as a screening tool because the pool of loans may be affected by interest rates either by adversely affecting the incentives of borrowers (moral hazard effect) or attracting high-risk borrowers (adverse selection effect). In the absence of credible information, it is difficult for lenders to estimate the creditworthiness of SMEs. In view of this challenge, collateral-based lending has been used by most financial institutions with a view of mitigating risks. 5.3.3 Role of Large Banks and Foreign Banks Ayyagari, Demirgüç-Kunt, and Maksimovic (2017) noted that SMEs’ capacity to access financing can be affected by differences in the organisational structure of banks. To be specific, existing literature on large banks shows that credit constraints on small businesses can be alleviated when decentralised banks act on available soft information, such as an established relationship with the SME. Decentralised banks have the capacity to lend to SMEs in markets with weak enforceability (Mian, 2006). On the contrary, Canales and Nanda (2012) argued, when decentralised banks are concentrated in specific markets, they can use their market power to exploit SMEs through higher interest rates. Ayyagari, Demirgüç-Kunt, and Maksimovic (2017) argued that foreign banks, due to their lack of familiarity with local culture and their large size, lose out to smaller local banks in relationship lending to small or otherwise opaque firms. This view is supported by Detragiache, Gupta, and Tressel (2008), who showed that the presence of foreign banks in the poorest low-income countries is associated with less credit being extended. Likewise, Mian (2006) shows that, in Pakistan, over the period from 1996 to 2002, 80,000 bank loans awarded by foreign-owned banks were less likely to lend to small firms which had no other banking relationships or SMEs were not part of business groups. Likewise, in line with the views of Canales and Nanda (2012), Gormley (2010) has shown that, in India, foreign banks cherry-picked and financed only a small set of profitable SMEs and established that credit access for smaller firms was lowered.

62  Gift Mugano In addition, evidence shows that, in Bolivia, different technologies and strategies were used by both foreign and local banks regarding SMEs applying for loans (Beck, Ioannidou, and Schafer, 2017). For example, as noted by Beck, Ioannidou, and Schafer (2017), domestic banks rely more on relationships and soft information as lending technologies in lending to the same borrower while foreign banks rely on collateral, credit ratings, and shorter maturity. This, as observed by Beck, Ioannidou, and Schafer (2017), suggests that, in countries where there are poor credit histories on firms and where collateral rights are not effectively created or enforced, foreign banks may not be able to lend to SMEs. In the succeeding section, remedies to binding constraints on access to finance for SMEs are presented.

5.4 Remedies 5.4.1 Role of Direct State Intervention Ayyagari, Demirgüç-Kunt and Maksimovic (2017) argued that in order to address the credit gap amongst SMEs, governments may need to play a role which, inter alia, include improving the regulatory environment and even providing financial services directly to the SMEs mainly through established development finance institutions. However, inasmuch as government intervention is key, in a number of cases, as shown by evidence, government intervention has been counterproductive and ineffective (Ayyagari, Demirgüç-Kunt and Maksimovic, 2017). For example, the Reserve Bank of India has used the branching regulations policy with a view of increasing outreach. A practical example is a case in point where a commercial bank in India was opening one new branch in a district that already had a bank presence, under the conditions that it should have opened four branches in areas where there is no presence of banks. Evidence shows that increase in bank branches and access to finance in the rural areas and ultimately decline in rural poverty. However, due to the subsidised interest rates and high loan losses, commercial banks incurred large losses, suggesting potential adverse consequences in the long term. Based on this experience, in developing countries in particular, government ownership of the banking sector has been considered problematic (Ayyagari, Demirgüç-Kunt, and Maksimovic, 2017). For example, La Porta et al. (2002) observed that there is no evidence to support the conventional wisdom which underscores that the presence of state-owned banks promotes financial development and economic growth. Several studies on individual countries by scholars such as Dinc (2005), Cole (2009), Carvalho (2014), and Sapienza (2004) show that in times of elections, state-owned banks fall into political capture as they are directed to lend to cronies and institutions linked to political parties. Ayyagari, Demirgüç-Kunt, and Maksimovic (2017) note that state-owned banks which are designated as development financial institutions or development banks with a view of promoting socio-economic goals which, inter alia, include capacity building and advisory programmes, provision of credit, and loan guarantees. Likewise, rigorous studies of the effectiveness of development banks by scholars

SME Finances  63 such as Klapper (2006) and Ayyagari, Demirgüç-Kunt, and Maksimovic (2017) show that development banks have developed new financial products that are less subject to political subversion and thus are effective in improving credit access to SMEs. A good example is the reverse factoring developed by the development banks in Mexico (Klapper, 2006). World Bank noted that government ownership of development banks has a positive impact on SMEs through depositary services where the wide geographic network of government post offices makes them the tool of choice for offering basic payment and savings products in hard-to-bank areas (World Bank, 2006). 5.4.2 Role of Credit Guarantee Schemes Credit guarantee schemes (CGSs) are measures used in both developed and developing countries to alleviate financial constraints by providing partial or full guarantees on bank loans to borrowers by covering a share of the default risk of the loan (Ayyagari, Demirgüç-Kunt, and Maksimovic, 2017). Beck, Demirgüç-Kunt, and Peria’s (2008) study shows that most banks view guarantee schemes as an effective government programme which can address financial constraints for SMEs ahead of interest rates or regulatory subsidies and directed credit. Honohan (2010) showcased three potential impacts of CGSs. First, CGSs help SMEs which don’t have collateral that bankers, especially those in poor remote areas, to access loans. Without CGSs, these individuals’ or SMEs’ scenarios would have been excluded from the lending market to access financing. Second, CGSs can help address market failure that is related to adverse selection that may result in undersupplied relative to the social optimum and lending being rationed. Finally, there are learning-by-doing or infant-industry arguments wherein CGSs can be used foster spillover of information especially in markets with information asymmetry and SME lending is underdeveloped. A review of existing literature on the efficacy of the CGSs in breaking the obstacles to SMEs financing by Ayyagari, Demirgüç-Kunt, and Maksimovic (2017), who focused on establishing if CGSs have led to additionality, that is, generating additional loans for targeted firms and allowing them to borrow at better terms shows that financial additionality as seen in the case of Canada (Riding, Madill, and Haines, 2007), Chile’s FOGAPE (Cowan, Drexler, and Yañez, 2015), the Special Credit Guarantee Program in Japan (Wilcox and Yasuda, 2008), the U.S. Small Business Administration (Hancock, Peek, and Wilcox, 2007), and the Small Firms Loan Guarantee in the U.K. (Cowling, 2010). In addition, Mullins and Toro (2017), using a regression discontinuity around the eligibility cut-off, analysed Chile’s credit guarantee scheme for bank loans to small and medium enterprises (SMEs) and found that and find that credit guarantees have large positive effects on firms’ total borrowing without large increases in default rates. In addition, Mullins and Toro (2017) found that the scheme has a strong amplification effect: firms receiving guarantees build new bank relationships; firms increased borrowing from other banks in the 18 months following a loan guarantee; and firms used the credit increase to expand their operations.

64  Gift Mugano Lelarge, Sraer, and Thesmar (2010), using a number of start-up firms between 1989 and 2000, evaluated the effect of the Oseo’s guarantee scheme in France and find that the scheme reduced interest payments of beneficiary SMEs and increased the volume of the loans. In addition, the firms registered impressive growth rates as a result of improved access to finance. On the contrary, evidence from Lelarge, Sraer, and Thesmar (2010) show that the French loan guarantee programme increased the probability of default, thus potentially reflecting that firms ventured into riskier investments, something they couldn’t have done in the absence of CGSs. Bach (2014) evaluated the impact of Codevi programme in France that provided targeted loans to SMEs. Rather than the CGCs, which operated as a public guarantee scheme only in time of default, the loan scheme worked as up-front financial aid to firms which are financially constrained. Bach (2014) shows that the loan scheme had positive effects on credit growth with no evidence of substitution between unsubsidised and subsidised finance. In addition, in contrast with evidence on the weaknesses of CGSs, the loan scheme shows no evidence of default risk in France as noted with the CGSs. 5.4.3 Alternative Financing Instruments Ayyagari, Demirgüç-Kunt, and Maksimovic (2017) outlined asset-based financing, such as factoring, asset-based lending, and leasing as instruments, which can be used by the firms to secure credit using the value that a particular asset it generates in the course of its business. Debt instruments, such as securitised debt, corporate bonds, and covered bonds where investors in capital markets provide financing for SMEs, were noted by Ayyagari, Demirgüç-Kunt, and Maksimovic (2017) as alternative instruments to bolster access to finance. One such innovation has been the emergence of “mini-bonds” in parts of Europe (e.g. Italy, Greece, etc.) where unlisted SMEs can issue debt traded on regulated markets or specialised trading faculties. However, according to the Organisation for Economic Co-operation and Development (OECD, 2015), few SMEs are able to issue corporate bonds due to the high costs of bond issuance and difficulties in meeting regulations, and thus while these are promising instruments for SME finance, they are yet to be widely adopted. In the case of SME loan securitisation, the originator bank extends loans to its SME customers, pools the loan in a portfolio and sells the portfolio to capital market investors through a special purpose vehicle backed by the loan portfolio. Through the securitisation process, assets are taken off the balance sheet of the originator, thus reducing the bank’s exposure to credit risk, which is transferred to the capital market. This also has important implications in light of Basel III regulations as it helps to improve the capital-to-risk-weighted asset ratios of the bank. Kraemer-Eis et al. (2010) noted that the securitisation of SME loans can be especially important for smaller banks, as they have a competitive edge in lending to smaller companies and transferring risk to capital markets increases their lending capacity. Equity finance could be another beneficial source of financing for SMEs especially during the early stages when debt finance is not an option. To enable this,

SME Finances  65 some developed and emerging markets have established second-tier SME stock exchanges, such as the Over-the-Counter-Exchange of India established in 1992, as a platform where SMEs could generate equity capital. However, a lack of institutional participation sees very few listed companies on these exchanges and in other cases, developing countries lack the necessary scale, demand, and infrastructure to establish these exchanges. 5.4.4 Use of Blended Finance With respect to access to finance, African SMEs face two significant financing challenges: accessibility and affordability (Runde et al., 2021). The situation is worsened by the fact that most SMEs in Africa are informal – meaning they are not formally registered as businesses –and this makes it difficult for them to access financing. In a number of instances, even formally registered SMEs frequently suffer from a lack of accessibility (Runde et al., 2021). Evidence shows that between a third and a fifth of SMEs in sub-Saharan Africa have a bank loan or line of credit and estimates 28.3% of firms in the region are fully credit constrained. (Runde et al., 2021). The total loan cost comprises not just the cost of the original loan but also the interest charged and transaction costs, like fees for lawyers to perfect collateral. This is a serious challenge in Africa because local interest rates from banks are often in the double digits, sometimes higher than 20–25% (Runde et al., 2021). Alternative finance providers, such as microfinance institutions or digital lenders (e.g., m-Shwari, Branch), can charge even higher rates, as much as 40–50% (Runde et al., 2021). High interest rates often deter SMEs from even trying to apply for financing. This lack of affordable financing seriously hinders SMEs in Africa. This situation undermines the capacity of SMEs to grow. Blended finance is one approach to providing SMEs with access to the capital needed to grow. Historically, development finance institutions (DFIs) and bilateral donors have focused on direct funding for projects. The World Economic Forum defines blended finance as “the strategic use of development finance and philanthropic funds to mobilize private capital flows to emerging and frontier markets.” Blended finance seeks to “de-risk” potential investments in such a way that private-sector actors will feel comfortable investing alongside or on top. Blended finance is one of the primary ways that official finance can “crowd in” or catalyse private investment from institutions that have a lower risk tolerance or seek a higher rate of return. Most blended finance continues to come from philanthropy and bilateral donors using their grant funding. To date, blended finance has mobilised approximately US$152 billion in private capital, roughly equivalent to annual Official Development Assistance (ODA) flows (Runde et al., 2021). Making true progress in addressing the needs of African SMEs requires a more widespread adoption of the philosophy of blended finance. To maximise the reach of blended finance to support SME growth, donors should consider the following recommendations: incorporate flexibility, map the investment ecosystem, develop a methodology to identify areas of investment, work with local markets, and engage in investment facilitation.

66  Gift Mugano 5.4.5 Role of Human/Managerial Capital While the discussion thus far has focused on access to external finance as an important determinant of entrepreneurship and SME growth, a number of recent papers argue that business skills or managerial capital is an important driver of firm growth and productivity (e.g. Bloom and Van Reenen, 2007, 2010, and Bruhn, Karlan, and Schoar, 2010). Improving managerial capital could lead to identifying better marketing or pricing strategies and improving the way firms use financing, leading to greater impacts of having access to finance. However, there is a large variation in the quality of managerial capital across countries, with firms in non-OECD countries scoring significantly below firms in OECD countries on a measure of management practices (Bloom and Van Reenen, 2010). Related to this, emerging literature argues that initial founding conditions are an important determinant of entrepreneurial success. Ayyagari, Demirgüç-Kunt, and Maksimovic (2017) use Indian census data and show that initial size (proxy for initial skills) is a key determinant of how large a firm is during the early life cycle. Ayyagari and Maksimovic (2017) also show that the initial skill of an establishment strongly predicts the future skill and growth of US manufacturing establishments. Business training has emerged as one of the most common forms of capacity building provided to small firms around the world, but until recently there has been very little rigorous impact evaluation of these training programs. Drexler, Fischer, and Schoar (2014) showed that for micro entrepreneurs, simple rule-ofthumb training had a bigger impact on firms’ financial practices and revenues compared to standard accounting training.

5.5 Conclusion This chapter argues that although SMEs make up a large part of the emerging private sector in most countries, they are also more constrained in their access to financial services than large firms (Ayyagari, Beck, and Demirgüç-Kunt, 2007; Beck, Demirgüç-Kunt, and Maksimovic, 2005). Thus, one reason for the mixed evidence on SMEs and growth may be that weak legal and financial institutions in developing countries prevent SMEs from growing into large firms. A large SME sector might therefore actually reflect inefficiencies in the system that do not allow for firm growth or make it optimal for firms to stay small (Beck, Demirgüç-Kunt, and Maksimovic, 2005). Ironically, the large finance and growth literature shows that finance is critical for growth. The first-generation studies (Levine, 1996; Rajan and Zingales, 1998; Demirgüç-Kunt and Maksimovic, 1998; Levine and Zervos, 1998) used aggregate data to document that financial development affects economic growth on average. Recently, the increased availability of micro data sets at the firm level has allowed for a more detailed investigation of the channels and tighter identification to establish that this relation is causal. Levine (1997, 2005) and Popov (2018) have provided in-depth and comprehensive surveys of this literature. This extensive literature has also shown that better access to external finance aids in innovation and helps firms achieve larger equilibrium sizes, allowing them to choose potentially more efficient organisational forms.

SME Finances  67 In addressing the drought of financing affecting SMEs, this chapter proposed the need for the state to intervene, the use of credit guarantees and the use of blended finance. However, the chapter noted that finance alone is not sufficient to guarantee the prosperity of SMEs, hence the need for skills development (see Chapter 11).

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SME Finances  69 La Porta, R., López-de-Silanes, F., & Shleifer, A. (2002). Government ownership of banks. Journal of Finance, 57(2), 265–301. Leke, A., & Signé, L. (2020). Spotlighting opportunities for business in Africa and strategies to succeed in the world’s next big growth market. Lelarge, C., Sraer, D., & Thesmar, D. (2010). Entrepreneurship and Credit Constraints: Evidence from a French Loan Guarantee Program. In: Lerner, Joshua and Antoinette Schoar (Eds.), International differences in entrepreneurship. Cambridge: NBER Books. Levine, Ross. (1996). Foreign banks, financial development, and economic growth. In Claude E. Barfield (Ed.), International financial markets, Washington DC: AEI Institute Press, pp. 224–254 Levine, Ross (1997). Financial development and economic growth: Views and agenda. Journal of Economic Literature, 35(2), 688–726. Levine, Ross (2005). Finance and growth: Theory and evidence. In P. Aghion and S. H. Durlauf (Eds.), Handbook of economic growth Vol. 1, Amsterdam: Elsevier, 865–934. Levine, Ross, & Zervos, Sara (1998). Stock markets, banks, and economic growth. American Economic Review, 88(3), 537–558. Mian, Atif (2006). Distance constraints: The limits of foreign lending in poor economies. Journal of Finance, 61, 1465–1505. Mullins, William, & Toro, Patricio (2017). Credit Guarantees and New Bank Relationships, University of Maryland Working paper. OECD. (2015). New Approaches to SME and Entrepreneurship Financing: Broadening the Range of Instruments. Popov, Alexander (2018). Evidence on finance and economic growth. In Thorsten Beck and Ross Levine (Eds.), Handbook of finance and development, Cheltenham, UK and Northampton, MA, USA: Edward Elgar Publishing. Quartey, P., Turkson, E., Abor, J. Y., & Iddrisu, A. M. (2017). Financing the growth of SMEs in Africa: What are the contraints to SME nancing within ECOWAS? Review of Development Finance, 7(1), 18–28. https://doi.org/10.1016/j.rdf.2017.03.001 Rajan, R. G., & Zingales, L. (1998). Financial dependence and growth. American Economic Review, 88, 559–587. Riding, A., Madill, J., & Haines Jr., G. (2007). Incrementality of SME loan guarantees. Small Business Economics. 29: 47–61 Runde, D.F., Savoy, C.M., & Staguhn, J. (2021). Supporting Small and Medium Enterprises in Sub – Sahara Africa through Blended Finance, Centre for Strategic and International Studies (CSIS), CSIS Brief, Washington DC Sapienza, Paula (2004). The effects of government ownership on bank lending. Journal of Financial Economics, 72(2), 357–384. The World Bank. 2006. The role of postal networks in expanding access to financial services. Washington, DC. Wang, Y. (2016). What are the biggest obstacles to growth of SMEs in developing countries?—An empirical evidence from an enterprise survey. Borsa Istanbul Review, 16(3), 167–176. https://doi.org/10.1016/j.bir.2016.06.001 Wilcox, J., & Yasuda, Y. (2008). Do Government Loan Guarantees Lower or Raise, Banks’ NonGuaranteed Lending? Evidence from Japanese Banks. Mimeo, World Bank Workshop on Partial Credit Guarantees, March 13–14, Washington, DC. Yoshino, N., & Taghizadeh-Hesary, F. (2018). The role of SMEs in Asia and their difficulties in accessing finance. ADBI Working Paper 911. Tokyo: Asian Development Bank Institute. Available: https://www.adb.org/publications/role-smes-asia-and-theirdifficultiesaccessing-finance (accessed on 23 February 2023).

6 Payment of Taxes Challenges and Options Gift Mugano

6.1 Introduction Taxes serve and operate as a political accountability mechanism (Ponorica and Al-Saedi, 2015). Taxes are the mainstream of revenue generation for developing countries, and these revenues are necessary for improving infrastructure, dealing with climate change and, most importantly, financing poverty reduction (Keen, 2012). Literature shows that, on average, there are 11 various taxes which are paid by SMEs which are income tax, capital gains tax, provisional tax, dividends tax, value-added tax (VAT), employees tax, employment-related levies, customs and excise duties, transfer duty, donations tax and stamp duty (Ponorica and Al-Saedi, 2015). However, small and medium-sized enterprises (SMEs) in developing countries, in particular, are largely not complying with paying taxes. Compliance requires a vast amount of administration and non-compliance may result in fines, penalties and interest. The complexity and compliance of these tax systems are considered to be an obstacle for small enterprises, and it is assumed that small businesses are generally uncertain about getting into the formal economy as they consider tax as a high legislative expense, and this discourages smaller entrepreneurs from embarking on business ventures. From the African perspective, the need to increase fiscal space is heightened by the need to cope with exogenous shocks emanating from climate change, the COVID-19 pandemic and the war in Ukraine. This chapter discusses challenges in tax compliance and successful strategies used by Latin American countries to enforce compliance in the payment of taxes by SMEs.

6.2 Conceptualisation of SMEs and Taxes Taxation, as noted by Osita (2004), is a compulsory levy which is implemented by government agencies on income and money spent on consumption. Omagor and Mubiru (2008) and Balunywa et al. (2010) underscored that tax is an instrument which is used to legally and compulsorily transfer money from economic agents, that is, households and the private sector to the government. Omagor and Mubiru (2008) and Balunywa et al. (2010) argued that tax is the main source of government revenue. In line with Omagor and Mubiru (2008), Mulooki and Mugisha DOI: 10.4324/9781003413172-6

Payment of Taxes  71 (2012) and Abraham and Ackah (2021), defined a tax as an expense that is paid involuntarily by an economic agent normally referred to as a taxpayer regardless of whether the taxpayer has received commensurate services from government or not. In this regard, taxes can be viewed as a statutory obligation which economic agents must comply with. Similarly, Naicker and Rajaram (2018) underscored that governments use taxes as one of the policy instruments which is used to define the business environment. Ponorica and Al-saedi (2015) underscored that taxes are also used as a mechanism for political accountability. Most importantly, taxes are a main source of revenue for most countries, especially the developing world, which is in dire need of money for poverty eradication and infrastructure development (Keen, 2012). Abraham and Ackah (2021) argued that economists such as Ali-Nakyea (2006) and Adam Smith provided grounded theories aimed at providing guidance on how to achieve equity and justice in taxation. In particular, Adam Smith in his famous book, The Wealth of Nations, presented the four attributes of a good tax system which he captured as the “canon of taxation.” The four main principles or theories are as follows: Benefit Theory: this theory argues that taxes levied on individuals should be in line with the benefits conferred on them. The premise of this theory is grounded on the view that individuals and private sector that derive benefits from activities funded by the government are likely to comply with tax payments. However, it is important to note that this theory has been subjected to massive criticism for three reasons. First, the basic principle of tax is violated when government maintains a connection between the benefits derived by economic agents. The principle of taxation, as noted by Omagor and Mubiru (2008), Mulooki and Mugisha (2012) and Abraham and Ackah (2021), is both a compulsory and statutory requirement which has no direct correlation with the service offered. Second, in most cases, revenue collected by the government is spent on the citizens and may not be targeting the taxpayers, that is, individuals and corporates. Third, the poor will pay the heaviest taxes if the principle is applied in practice. This is particularly so because the poor benefit more from government services. This will result in the violation of the principle of justice. The Cost-of-Service Theory: Economists such as Ali-Nakyea (2006) and Adam Smith are of the view that if the actual cost of the service provided by the state is equal to the cost of tax, then the principle of equity or justice in taxation is satisfied. However, in a number of cases, it is difficult to apply the cost-of-service principle to cases where the services are provided because most of the costs incurred by the government cannot be easily apportioned to the taxes paid. Ability-to-Pay Theory: a number of economists such as Adam Smith and Ali-Nakyea (2006) argued that, in line with the principle of equity and justice, the economic agents should be charged taxes in accordance with their ability to pay. This, if pursued by governments, appears very sensible and fair since taxes will be levied on the basis of the capacity of the

72  Gift Mugano economic agents’ capacity. For example, if economic agent A has more capacity to pay tax than economic agent B, economic agent A will be charged more taxes than the latter. A good example is the tax regime on income where the tax threshold is set according to the size of the individual’s income (Ali-Nakyea, 2006). The principle of justice will be achieved if the taxes are levied in line with the principle of ability to pay as demonstrated in the case of economic agents A and B. Predictability: economic agents must be able to determine their tax obligations with a fair degree of accuracy. At each point in time, taxpayers should be able to tell with accuracy their possible obligations. This therefore means that there should not be any ambiguities faced by taxpayers. Likewise, tax authorities and administrators must not exercise discretionary powers aimed at demanding exorbitant taxes from the taxpayers (Ali-Nakyea, 2006). In the same vein, as argued by Adam Smith, at the time of payment of taxes, the total tax obligation, the form of payment, the place of payment and all rights and obligations provided under legal provision must be known to both the taxpayer and tax authorities.

6.3 Challenges in Tax Compliance As noted by Naicker and Rajaram (2018), in most countries, SMEs come across eleven types of taxes which inter alia include income tax, capital gains tax, provisional tax, dividends tax, VAT, employee tax, employment-related levies, customs and excise duties, transfer duty, donations tax and stamp duty. SMEs are required to comply with these taxes by completing prescribed forms and making the necessary payments on time. Because of the complexity of these taxes and the fact that the vast amount of administration is required in order to comply with the tax regime, the compliance levels are generally low with the SMEs (Naicker and Rajaram, 2018). Some of the tax compliance costs as noted by Munnich (2007) and Schmidt et al. (2007) are • costs associated with filing, record keeping, receipts, invoicing and records sorting; • costs associated with the preparation and submission of the required tax returns; • time spend in ensuring tax compliance which is defined as opportunity cost; • costs of tax consultants which are normally hired to assist in meeting tax compliance and/or to resolve disputes with the tax authorities; • miscellaneous costs such as travel and accommodation expenditure in cases where SMEs have to resolve disputes in regional offices which are far away from their business premises; and • absence of relevant information for small businesses as most of the information relating to tax payments is normally posted on the internet, that is, on the website of the tax authorities. Information asymmetry can result in overly expensive compliance solutions whose net effect will be to further increase costs due to ignorance and misperceptions.

Payment of Taxes  73 In addition, most SMEs are not formalised. Evidence has shown that SMEs are reluctant to formalise because they consider tax which is paid by formalised businesses as a high legislative expense (Naicker and Rajaram, 2018).

6.4 Reforms and Strategies Used to Foster Tax Compliance In order to enforce compliance, enforcement, preferential tax regimes and simplified taxes have been used as effective measures globally (Marchese, 2021). 6.4.1 Enforcement: Countering Avoidance and Evasion Roel, Custers, Davenport and Prichard (2022) argued that due to the heterogeneity of the informal sector, success in tax enforcement has been recorded when targeted approaches are undertaken. As part of the targeted approach, a starting point for more effective revenue collection often lies in understanding the broad characteristics of particular businesses and estimates of tax gaps, that is, the difference between what should be collected and what is collected (Roel et al., 2022). The estimation of sectoral tax gaps presents opportunities for governments to target tax revenue at sectors which can be easily taxed and sectors representing the greatest revenue-generating opportunity. International experience has shown that sectoral targeting has been effectively used to enforce and improve tax revenue collection in private transport operators and market traders. In addition to the targeted approach, Roel et al. (2022) underscored that targeting high-value SMEs has a proven record of enhancing tax revenue collection. Roel et al.’s (2022) view is premised on the fact that the overall potential revenue from SMEs is both small and unequally distributed while at the same time, larger SMEs pose high risks of tax revenue losses, especially when they pretend to be small with a view to avoid taxes. For example, in Pakistan and South Africa, large SMEs placed themselves just below the tax thresholds of the countries’ tax threshold regimes. In South Africa, for example, large SMEs bunched themselves just below the threshold for VAT registration. In view of this, there is a need for the tax authorities to identify higher-value taxpayers within the SME sector on whom to focus resources. This would require the tax authorities to disaggregate SMEs and undertake data analysis designed aimed at larger and higher-risk SMEs for enforcement activities. Finally, as part of the strategies to counter tax evasion and improve tax revenue collection, Roel et al. (2022) advocate for the use of incentives. The use of higher salaries and commission reward payments for meeting set tax revenue targets have shown impressive improvements in tax collection as tax officials shun corruption (Roel et al., 2022). For example, evidence from the Kyrgyz Republic shows that linking tax inspectors’ rewards to anonymous evaluations submitted by inspected firms can reduce corruption. One of the key factors which led to the success of these incentives, which is a lesson for Africa, is the need to carefully calibrate and link them to set targets, empower tax authorities’ tax collection with digitalisation and strengthen the tax authorities’ monitoring system.

74  Gift Mugano 6.4.2 Encouraging Quasi-Voluntary Compliance Roel et al. (2022) argued that governments should invest quasi-voluntary compliance strategies with a view of mitigating the shortcomings of enforcement as a strategy for improving compliance and revenue mobilization among SMEs. In view of this, Roel et al. (2022) noted that in the past 20 years, the use of simplified tax regimes and positive incentives for compliance have been widely used. The most valuable and straightforward tax reforms which were tried and tested in fostering tax compliance and improving tax collection is the simplification of registration (Roel et al., 2022). Simplifying registration is part of the formalisation process undertaken by countries with a view of fostering tax compliance. This process involves streamlining tax registration and reducing the number of licences and permits required by SMEs to start their operations. As part of the reforms undertaken by countries such as Kenya and Uganda aimed at simplifying registration, inter alia, include establishing a one-stop shop for business registration and rolling out of e-tax systems (Roel et al., 2022). In order to reduce the cost of compliance, alongside facilitating registration, countries such as Zimbabwe, South Africa and Brazil have implemented simplified tax regimes (Roel et al., 2022). Examples of commonly used simplified tax regimes inter alia include VAT and preferential tax regimes. 6.4.2.1 VAT Regimes Most governments in Africa use VAT as an effective instrument to simplify tax regimes for SMEs by relieving them from paying tax duties using a threshold. International experience shows that most VAT regimes include a registration threshold below which registration for VAT is not compulsory thereby relieving SMEs from the need to file VAT returns and tax authorities from the need to cross-check all transactions. However, in order to retain the usefulness of VAT regimes, tax authorities must regularly update the real value of thresholds. 6.4.2.2 Preferential Tax Regimes Marchese (2021) argued that there are at least four different types of preferential tax regimes which are used by governments to tax SMEs. The first group includes “presumptive regimes” which allow SMEs to calculate their tax obligation using estimated income. Here, the estimated income is calculated using either financial or non-financial indicator factors such as capital assets, turnover, floor space, employment and electricity consumption. The second group of tax regimes is the “small business tax rate” (SBTR), which is tax reduction given only to businesses which are formalised. The third type of preferential tax regime is the VAT. Finally, the fourth type of preferential tax regime includes tax preferences that reduce the overall tax burden for SMEs such as research and development credits, investment tax credits and exemptions on capital gains taxation on the sale of SMEs shares. Subsequent sections discuss these taxes in detail.

Payment of Taxes  75 (a) Presumptive regimes Because presumptive tax regimes are simplified tax regimes and are associated with a reduction of income taxation, they are the most common form of preferential tax regime for SMEs (Marchese, 2021). In addition, because presumptive tax regimes normally target low-income business owners, individuals who work on a voluntary basis and self-employed people, the policy on presumptive taxes does not automatically apply to the eligible population who need to explicitly enrol in it. Evidence shows that presumptive taxes can take many forms, and in most cases, they are typically calculated based on taxable income. Factors which are assumed to be associated with income generation which, inter alia, include turnover, sales, size of the firm, number of employees and assets of the taxpayer are normally used to estimate the taxable income. In Ghana, for example, based on the sector and size of business, small businesses below a defined threshold are required to pay for a “tax stamp”, that is, a fixed rate every quarter in exchange for a stamp—a physical certificate of payment. In Ethiopia, a revenue-based tax calibrated by sector and size of the firm size is used to inform the amount of tax paid by SMEs (Joshi, Prichard, and Heady, 2014). If well designed, presumptive taxes ease the burden of administration and bookkeeping (see Box 6.1).

Box 6.1  Challenges of informal sector taxation: evidence from the presumptive tax system in Zimbabwe Recent research assessing Zimbabwe’s efforts to tax the informal sector illustrates that presumptive tax systems need to be designed carefully and administered effectively if they are to improve compliance. Zimbabwe operates a presumptive tax system consisting mostly of lump-sum taxes, or fixed fees, distinguished by sector. Although the country’s informal sector is large, little revenue is collected from it. Dube and Casale (2019) identify low tax morale, caused by concerns about equity and fairness, as the major hurdle to improving the compliance of informal firms in Zimbabwe. The Zimbabwean presumptive tax is characterized by both horizontal and vertical inequities. Horizontally, the effective tax rate for similarly placed firms is much higher under the presumptive regime than under the personal income tax regime— and, in some cases, higher than under the corporate income tax regime— because the fixed fee does not account for actual turnover or profitability. This also causes vertical inequalities because small firms end up paying proportionally more than larger ones. Small and medium enterprises further complain about the selective application of tax rules, while many are not taxed at all. In part because of a lack of resources, tax officers seem to target sectors that are highly visible, such as flea markets and hairdressers. However, in some instances, the targeting appears to be politically motivated because businesses with connections to the incumbent party are apparently protected from taxation. Design flaws in the presumptive tax system partly explain the equity outcomes. Fixed fees are largely based on guesswork by the Ministry

76  Gift Mugano of Finance about the profitability of different sectors in the informal economy. Research is important because sectors that have more credible estimates also have lower inequalities. Yet politics also plays a role. A lack of cohesion between the finance ministry (which designs the regime) and the revenue authority (which administers it) hinders the effective use of evidence. There also seems to be little political appetite for reforming the system because the selective application of its rules provides opportunities for patronage. Roel et al. (2022) Presumptive tax regimes come as a package which, inter alia, may include the following: (a) Contrary to the conventional tax regimes, a presumptive tax regime uses variables other than income as proxies of the tax base such as floor space of the establishment, turnover (revenues), electricity consumption, capital assets and employment. These proxies are used because of the difficulties associated with estimating the taxable income since most of the small businesses are highly informalised. (b) Depending on the legal nature of the business, presumptive tax regimes use a reduced income tax, which can take the form of a lump sum or corporate income tax or a lower rate on the personal. (c) VAT, social security contributions or still production and excise taxes are used as additional reductions or exemptions from other local or national taxes. In this regard, a taxpayer will complete forms which will submit a single tax form with the tax collection that is then distributed on a proportional basis to the different tax items by the national tax authority. (d) Simplified tax compliance requirements through, for example, a reduction in the number and frequency of forms to all over the fiscal year. Simplification may also concern other aspects such as bookkeeping requirements and online tax payment support. (e) Social protection for business owners and workers through the payment of social security contributions. In countries where the presumptive tax regime has been implemented as in Brazil, SMEs have been supported with financial support (e.g. preferential credit lines and loan guarantees) and skills development in business administration (e.g. training and coaching; see Box 6.2). (b) SBTRs The SBTR is also a common form of preferential taxation for SMEs. In practice, the SBTR is normally structured as a lower corporate income tax (CIT) rate given to businesses that comply with the set eligibility criteria. In many cases, SBTRs only apply to formalised businesses. In addition, income threshold, capital asset test and employment test are used as eligibility criteria (Marchese, 2021).

Payment of Taxes  77

Box 6.2  Brazil’s presumptive tax regime for micro-entrepreneurs Brazil implemented a presumptive tax regime beginning in 2009. The presumptive tax regime targeted self-employed people of employers hiring at most one person who earns an equivalent of US$15,000. The Brazilian authorities used a presumptive tax regime as a policy thrust for the formalisation of SMEs. The presumptive tax regime covered more than 400 types of business activities which are mainly in the personal services and retail trade. From a Brazilian perspective, the following were noted as benefits of the presumptive tax regime: • Payment of a fixed monthly fee aimed at covering taxes at both the municipal and state levels; • Federal taxes and federal income taxes were exempted thereby removing complexities in tax payments; • SMEs were compelled to pay 5% of social security of the minimum wage, something which was non-existent before; and • Taxes are paid on a monthly basis thereby resulting in an increase in tax revenue. An empirical assessment carried out by Rocha et al. (2018) shows that the presumptive tax regime resulted in a sudden decline in the cost of compliance by more than 50%. Likewise, Marchese (2021) noted that 9.8 million businesses were taxed under the presumptive tax regime, that is, 51% of the 19.2 million registered businesses. In the same empirical study by Rocha et al. (2018) noted that the Brazilian Small Business Agency (SEBRAE) revealed that 50,000 to 70,000 micro businesses graduated to small businesses mainly as a result of the positive dynamic effects caused by the new tax regime, that is, access to markets and capacity building programmes. This, as noted by the SEBRAE (2016), micro enterprises which used the presumptive tax regime witnessed a two-year enterprise survival rate of 91% in 2015, higher than the 77% survival rate for companies which operated under the mainstream tax regime. The presumptive tax regime had also notable shortcomings. For example, Marchese (2021) observed that, in order to keep eligibility, the tax regime was abused through a number of schemes which inter alia include fraudulent declarations of the main proxy used, such as turnover, splitting one business into units with a view of avoiding exceeding the maximum turnover limit and disguised employment relationships. International Labour Organization (ILO, 2019) noted that the financial sustainability of the pension system was under threat after the government dropped the social security contribution from 11% to 5%, with the aim of making the policy attractive to the target group.

78  Gift Mugano Overall, notwithstanding the observed weaknesses, the presumptive tax regime was found to be an effective tax policy instrument which can be used to foster both tax compliance and formalisation of small businesses (Marchese, 2021). This is particularly so in cases where the informal businesses are operating businesses which is mirrored with established formal large enterprises (Jessen and Kluve, 2019). Jessen and Kluve (2019) further underscored that the success of presumptive taxes can be achieved when they are implemented with a comprehensive package such as tax incentives, regulatory simplification, awareness raising and enforcement. Marchese (2021) In direct contrast with the presumptive regimes, the tax base in SBTRs is mainly taxable profits (Marchese, 2021). The main point of departure with the mainstream tax regime is the fact that the SBTRs use a lower rate at which profits are taxed. 6.4.2.2.1 THE RATIONALE FOR PREFERENTIAL TAX REGIMES

Although there are a number of taxes which can be used to tax SMEs, preferential tax regimes (PTRs) have been widely used worldwide as special fiscal regimes because of their characteristics of lowering the tax rate and simplifying tax compliance requirements as opposed to the mainstream tax regime (Marchese, 2021). Marchese (2021) identified the following as some of the reasons why PTRs are used. First, SMEs naturally finds it difficult to comply with tax requirement because tax compliance comes with fixed costs which result in the cost of compliance being more than six times more expensive for SMEs than for larger businesses (Munnich, 2007). In addition, although in absolute terms the total costs of tax compliance are higher for larger businesses, in relative terms, when juxtaposed to sales, the cost of tax compliance is higher in SMEs. Research on the cost of tax compliance in South Africa shows that, on average, firms with annual sales averaging ZAR245,000 spend 4.7% of their annual sales to outsource tax payment to professional consultants while 3.1% of sales is spend on hiring consultants to assist on payment of duties (Smulders, Stiglingh, Franzsen and Fletcher, 2012). As noted by Smulders et al. (2012), the cost figures drop to 1.4% and 1.9%, respectively, for firms with annual turnover between ZAR245,000 and ZAR525,000. Ironically, the costs were observed to be almost insignificant as they were noted to range between 0.3% and 0.1% for businesses with annual turnover above ZAR3 million (Smulders et al., 2012). In view of the foregoing observation, Marchese (2021) argued that PTRs may be used by governments because they are effective in dealing with higher-thanaverage tax compliance costs, thus creating a level playing field between larger businesses and SMEs. Second, evidence shows that, unlike larger businesses, SMEs struggle to receive external funding (Beck, Demirgüç-Kunt and Maksimovic, 2008). For example, 40% of formal SMEs, which is equal to 65 million firms, as noted by International

Payment of Taxes  79 Finance Corporation (IFC), have a financial gap of US$5.2 trillion annually, which is equal to 1.4 times the current level of global SME lending. In addition, with respect to access to formal credit, evidence shows that approximately 50% of formally registered SMEs do not have access to credit (Marchese, 2021). When the informal sector is taken into account, it is given that the percentage of SMEs without access to credit is even higher than 50%. In view of this foregoing observation, preferential taxation helps SMEs retain a higher proportion of their earnings, thereby reducing the need for SMEs to obtain external finance (Marchese, 2021). This approach helps policymakers to mitigate a problem that otherwise requires a much longer time to fix notwithstanding the fact that addressing an enterprise financing problem through tax policy is not orthodox policy (Marchese, 2021). Third, because the preferential tax regimes reduce the tax burden, especially presumptive regimes, provide an incentive for the SMEs and self-employed individuals to formalise. Evidence shows that when SMEs participate in the formal economy productivity-enhancing dynamics are triggered mainly through access to highly skilled workers and larger markets (Marchese, 2021). This normally happens if newly formalised SMEs are supported with managerial training and linked with the markets. Fourth, because preferential tax regimes simplify tax administration and broaden the tax base, that is, increasing the number of taxpayers, tax revenues increase. This is particularly so because evidence shows that presumptive tax regimes simplify the relationship between SMEs and national tax authorities, notwithstanding the fact that additional tax revenues collected through these regimes are generally thin (Marchese, 2021). Whilst the preferential tax regimes were noted to be a panacea to challenges associated with tax compliance, Marchese (2021) noted four grounds on which render the preferential tax regime to face fierce criticism which must be considered by national governments. First, the preferential tax regime is associated with the creation of the “threshold effects” or “growth traps” or “bunching effects”, that is, the preferential tax regime creates a disincentive for firms to grow beyond the size threshold after which the tax preference is lost. Second, the preferential tax regime violates the principle of tax equity and in many cases leads to a misallocation of resources in the economy. In many cases, firms with thresholds which are just above and just below the size threshold will pay totally different effective tax rates, notwithstanding the fact that they have similar levels of income. Likewise, if the tax regime is not based on income but on other variables which, inter alia, include employment or turnover, which is the case with presumptive regimes, it is possible that more profitable companies will pay fewer taxes than less profitable companies. Third, preferential tax regimes provide fertile ground for fraud. For example, large firms may break into smaller businesses, that is, horizontal company break-up, with a view to benefit from preferential taxation. Alternatively, within the framework of a presumptive regime not to pay their social contributions, disguised employment relationship, employers may request employees to register as

80  Gift Mugano self-employed. These observed situations can be worsened if government officers in charge of tax collection are corrupt as this may thwart the effectiveness of the preferential tax regime. Fourth, preferential tax regimes are blamed for distorting occupational choices because people are incentivised to enter into an entrepreneurial career, notwithstanding the fact they resource and/or lack the talent to grow their business. This argument aligns very well with the proposition that incentives for start-ups are not a good public policy because they attract unskilled people into an entrepreneurial career notwithstanding the fact that they don’t have the prerequisite skills (Shane, 2009). 6.4.3 Formalisation Formalisation provides a framework through which SMEs are enforced to pay taxes while at the same time are presented with an opportunity to engage with the state for reciprocal service provision and greater accountability in exchange for tax payments (Prichard 2015). Joshi, Prichard and Heady (2014) argued that formalisation can foster improvements of tax revenue, as well as promote pro-poor economic growth and improve governance. Most importantly, it can be argued that formalisation is key to improving tax morale and ensuring equity (Joshi, Prichard and Heady, 2014; Abdixhiku et al. 2017; Cowell 2003; DeBacker, Heim, and Tran 2015; Hanlon, Mills, and Slemrod 2007; Slemrod 2004). Formalization gives small firms greater access to important resources, such as legal protections, financing and new business opportunities, which is key in driving economic growth (Roel et al., 2022). This view was supported by various authors which inter alia include Demenet, Razafindrakoto and Roubaud (2016); Rand and Torm (2012); and Ulyssea (2018; see Box 6.3).

Box 6.3  The benefits of formalisation: evidence from Vietnam Vietnam presents a unique opportunity to study informal businesses. Not only has it made formalization, and registration in particular, a government priority, but it also is one of the few countries to systematically and periodically survey both registered and nonregistered firms. Studies have thus been able to assess the effects of formalization in Vietnam. Moreover, they all agree: firms gain from formalization. Rand and Torm (2012) find that registered firms have higher profits and investments than unregistered firms and use less casual labour, suggesting improvements in labour conditions. Demenet, Razafindrakoto and Roubaud (2016) show that formalization causes significant increases in value added, while Boly (2018) confirms that these effects persist over time. One prevailing view in the literature is that informal firms face barriers that prevent them from achieving their optimal size. If true, then

Payment of Taxes  81 formalisation can spur productivity and economic growth by allowing firms to reach their most efficient size. The evidence suggests that once they are released from informality, firms indeed grow quickly and considerably, which boosts productivity by allowing firms to take advantage of these new economies of scale. Formalisation makes firms more competitive and makes it easier for them to access key services, such as electricity and internet service (Demenet, Razafindrakoto, and Roubaud 2016). In addition, registered firms advertise more, thereby increasing their customer base. Formalisation also may make it easier for firms to voice their concerns and thus strengthen accountability because formal firms engage more with business associations (Boly 2018). However, these effects appear to be true only for the largest informal firms. Demenet, Razafindrakoto and Roubaud (2016) find that firms that formalize are already similar to the ones operating in the formal sector. They also show that the gains of formalization mostly benefit informal businesses that employ at least one person as opposed to the self-employed. This finding suggests that firms below a certain size may not benefit from legal existence. It may then be hard to persuade subsistence firms, in particular, to formalize because they may have no interest in doing so. Roel et al. (2022)

6.5 Conclusion In many respects, the taxation of SMEs in low-income countries frequently reflects the worst of all worlds: it raises little revenue, appears to be relatively inequitable, is politically contentious, diverts scarce administrative resources to low-value activities and formalization and, when it does happen, carries few benefits for taxpayers. Because SMEs are often transient and cash-based in their operations with limited record keeping, it is a daunting task to maintain accurate taxpayer rolls and estimate taxable revenue. SMEs’ limited financial and technical literacy also undermines tax compliance, leading to a reliance on face-to-face transactions with tax administrators that create opportunities for corruption and harassment of vulnerable firms. Meanwhile, efforts to expand the taxation of SMEs must also confront political and institutional challenges. The sheer number of SME operators can create a fairly strong (and even well-organised) constituency in favour of the status quo. Tax officials may also lack incentives to devote more effort to the relatively cost-intensive and low-prestige task of increasing SME collections, especially if they prefer to maintain avenues for demanding informal payments. Meanwhile, general arguments in favour of taxing SMEs appear to be frequently overstated, which suggests a need to distinguish between types of SMEs and target reform efforts accordingly. The larger informal SMEs are particularly likely to benefit from formalisation, present more meaningful revenue potential, and, for the largest such firms, benefit unfairly relative to their competitors by avoiding taxation. For these firms,

82  Gift Mugano formalisation may help long-term growth by opening the door to advantages such as legal protections, better access to utilities and financing and opportunities for business networking and advertising. Governments also have stronger incentives to target larger SMEs because they are more likely to make longer-term contributions to tax revenue and bringing them into the tax net may also increase equity. There seem to be good reasons for targeted government efforts to bring these larger firms into the tax net through a combination of targeted enforcement, easing the path to formalisation, and efforts to expand and publicize the benefits of formalisation. By contrast, the case for aggressively targeting smaller firms appears far less compelling. These firms are less likely to benefit from formalisation, and they are also more administratively difficult to tax, with a greater risk of harassment by tax officials. Reform experience across countries suggests that the realistic revenue potential from taxing these firms is generally very limited. At the same time, many smaller SMEs (including those unregistered) paradoxically already face a relatively heavy fiscal burden of various taxes, fees and demands for informal payments. In theory, expanding the tax net can benefit even these groups by increasing engagement between the government and these new constituencies, thereby strengthening accountability. Yet evidence is mixed on whether this happens in practice, or if it merely creates new channels for predation on vulnerable enterprises. For these firms, the best path for governments may be to rely less on the kinds of mass registration drives that have historically been common but often unproductive and more on encouraging quasi-voluntary compliance. Emerging evidence points to an alternative approach to SME taxation that emphasizes encouraging quasi-voluntary compliance by promoting trust and building political support for taxation. Such strategies are likely to reflect four key elements. First, differentiation: target specific groups of relatively larger, growth-oriented firms for enforcement efforts instead of relying on blanket approaches that generate unproductive and bloated tax registers. Second, simplification: complex systems are costly to administer and costly to comply with, and they undermine trust. A wide variety of reform options are available, including eliminating unproductive subnational payments, taxes, and levies; reducing the number of brackets, exemptions, and paperwork required; introducing one-stop shops and electronic ling and payment systems; and expanding taxpayer education programs, hotlines, and technical support. Third, fairness: reduce opportunities for harassment of taxpayers and create appropriate incentives for tax collectors. Fourth, reciprocity: highlight and expand the benefits of formality by, for example, improving legal protections, expanding key services that benefit SMEs and creating forums for direct engagement with government in ways likely to contribute to the progressive strengthening of the social contract.

References Abdixhiku, L., Krasiniqi, B., Pugh, G., and Hashi, I. (2017). Firm-Level Determinants of Tax Evasion in Transition Economies. Economic Systems, 41(3), 354–66. Abraham, A and Ackah, D. (2021). Factors that affect tax compliance by SMEs in Ga-West Municipality, Finance & Management Engineering Journal of Africa, 3(6), 53–64.

Payment of Taxes  83 Ali-Nakyea, A. (2006). Taxation in Ghana: principles, practice and planning, First Edition. Kanda-Accra, Black Mask Limited. Balunywa, W., Namatovu, R., Kyejjusa, S., and Dawa, S. (2010). Global entrepreneurship monitor (GEM) Uganda Report. Kampala, Uganda. Beck, T., Demirgüç-Kunt, A., and Maksimovic, V. (2008). Financing patterns around the world: Are small firms different? Journal of Financial Economics, 89(3), 467–87. Cowell, F. A. (2003). Sticks and Carrots. Research Paper No. DARP 68, Suntory and Toyota International Centres for Economics and Related Disciplines (STICERD), London School of Economics and Political Science. DeBacker, J., Heim, B. T., and Tran, A. (2015). Importing corruption culture from overseas: Evidence from corporate tax evasion in the United States. Journal of Financial Economics, 117(1), 122–38. Demenet, A., M. Razafindrakoto, and F. Roubaud (2016). Do informal businesses gain from registration and how? Panel data evidence from Vietnam. World Development, 84, 326–41. Dube, G., and Casale, D. (2019). Informal sector taxes and equity: Evidence from presumptive taxation in Zimbabwe. Development Policy Review, 37(1), 47–66. Hanlon, M., Mills, L., and Slemrod, J. (2007). An Empirical Examination of Corporate Tax Noncompliance. In Taxing Corporate Income in the 21st Century, edited by A. J. Auerbach, J. R. Hines, Jr., and J. Slemrod, 171–210. New York: Cambridge University Press. Jessen. J., and Kluve. J. (2019). The effectiveness of interventions to reduce informality in low and middle income countries. Geneva: ILO. Joshi, A., Prichard, W., and Heady, C. (2014). Taxing the Informal Economy: The Current State of Knowledge and Agendas for Future Research. Journal of Development Studies 50(10), 1325–47. Keen, M. (2012). Taxation and Develpment - Again, s.l: IMF Working Paper. Marchese, M. (2021), Preferential Tax Regimes for MSMEs: Operational Aspects, Impact Evidence and Policy Implications, International Labour Organisation, Geneva. Mulooki, A. E., and Mugisha, I. (2012). Business taxation, 1st Edition. Kampala: Swamp publishers. Munnich, M. (2007). The regulatory burden and administrative compliance costs for companies. Survey by the Confederation of Swedish Enterprise, Brussels office, Brussels, Belgium. Naicker, Y., and Rajaram, R. (2018). Factors that influence tax compliance of SMEs in South Africa, Acta Universitatis Danubius, 10(2), 94–111. Omagor, C., and Mubiru, M. (2008). Entrepreneurship: An integrated approach, 1st ed. Kampala: Kabali and business Books. Osita, A. (2004). Taxation and tax management in Nigeria. Enugu: Meridian Association Pitigala, N. & Hoppe, M (2006). Impact of Multiple-Taxation on Competitiveness in Nigeria. Africa Trade Policy Notes, 16. Ponorica, A.G., and Al-Saedi, A.H.J. (2015). The importance of taxation systems for SME tax compliance. Proceedings of the International Conference, Faculty of Management, Academy of Economic Studies, Bucharest, 9(1), 129–136. Prichard, W. (2015). Taxation, Responsiveness and Accountability in Sub-Saharan Africa: The Dynamics of Tax Bargaining. Cambridge, UK: Cambridge University Press. Rand, J., and Torm, N. (2012). The Benefits of Formalization: Evidence from Vietnamese Manufacturing SMEs. World Development, 40(5), 983–98. Rocha, R., Ulyssea, G., and Rachter, L. (2018). Do lower taxes reduce informality? Evidence from Brazil. Journal of Development Economics, 134, 28–49. Roel, D., Custers, A., Davenport, S., and Prichard, W. (2022). Innovations in Tax Compliance: Building Trust, Navigating Politics, and Tailoring Reform. Washington, DC: World Bank. doi:10.1596/978-1-4648-1755-7.

84  Gift Mugano Schmidt, R. A., Bennison, D., Bainbridge, S., and Hallsworth, A. (2007). Legislation and SMEs retailers—Compliance costs and consequences. International Journal of Retail & Distribution Management, 35, 256–270. SEBRAE (2016). Cincoanosdo Microempreendedor Individual–MEI: Umfenômenodeinclusãoprodutiva, Brasila. Shane, S. (2009). Why encouraging more people to become entrepreneurs is bad public policy. Small Business Economics, 33, 141–149. Slemrod, J. (2004). The Economics of Corporate Tax Selfishness. Working Paper No. 10858, National Bureau of Economic Research, Cambridge, MA. Smulders, S., Stiglingh, M., Franzsen, R., and Fletcher, L. (2012). Tax compliance costs for the small business sector in South Africa: Establishing a baseline. E-Journal of Tax Research, 10(2), 184–226. Ulyssea, G. (2018). Firms, informality, and development: Theory and evidence from Brazil. American Economic Review, 108(8), 2015–47.

7 Global Supply Chain and SMEs Emem Anwana

7.1 Introduction The crucial role small and medium-sized enterprises (SMEs) play in stimulating the economy of a nation, as well as their strategic importance, is often emphasised in research. A similar assertion is applicable to most regions within the African continent where this sector has generated employment and contributed significantly to the gross domestic product (GDP) of respective countries. Despite this positive, the growth of SMEs is often hindered by a lack of financial literacy skills, inaccessibility to financial capital and the inadequacy of infrastructure, among other issues (Prasanna, Jayasundara, Naradda Gamage, Ekanayake, Rajapakshe and Abeyrathne 2019). Studies centred on logistics have often shown the linkages between business success and external partners such as supply chain entities (Bär, Herbert-Hansen, and Khalid 2018). Some of these studies have focused on the asymmetric nature of the relationships between supply chain agencies and businesses such as SMEs. SMEs are usually at the receiving end and are unable to effectively manage the multiple or complicated engagements with their prospective clients and suppliers, nor do they possess the competence or resources to realise their full business potential. More so, SMEs are usually unable to adopt supply chain best practices due to their inability to incorporate “collaborative supply chain approaches” and usually tend to rely on traditional adversarial practices (Omoruyi and Akuoma 2020). Cragg and McNamara (2018) note that the engagements among SMEs alongside their downstream and upstream associates or partners were often associated with challenges such as performance monitoring, supply chain complexity, product specifications, supplier dependence, contractual design, and asymmetries. Due to the lack of autonomy among SMEs, big buyers could dictate or mandate specific supply chain management (SCM) practices they desire, in which SMEs need to adhere to in order to stay in business. In a bid to penetrate diverse economies or new markets whilst improving sourcing practices, SMEs seek consumers and suppliers in faraway regions or countries. This may invariably result in an improved customer base; however, such new engagements with global/international supply chain poses challenges of an agency nature (Cragg and McNamara 2018). However, research has demonstrated over the years the advantageous impact SCM has on SMEs’ overall performances. The most glaring advantages include business growth, knowledge transfer and innovativeness (Prasanna et al., 2019; Bär, Herbert-Hansen, and Khalid 2018). DOI: 10.4324/9781003413172-7

86  Emem Anwana

7.2 Global Supply Chains – A Definition Authors over the years have attempted to define global supply chain in a few words. While such attempts have been instructive and helpful, they have failed to capture the entire essence and ramifications of the scope of global supply chains. The Investment dictionary defines global supply chains as global networks between a company and its suppliers to produce and distribute specific product to the final buyer. These networks include different activities, people, entities, information, and resources. The supply chain also represents the steps it takes to get the product or service from its original state to the customer. The International Labour Organization (ILO) defined the term as referring “to the cross-border organization of the activities required to produce goods or services and bring them to consumers through inputs and various phases of development, production and delivery”. According to the ILO, foreign direct investment (FDI) by multinational enterprises (MNEs) in wholly owned subsidiaries or joint ventures where the MNE has the direct responsibility for the employment relationship is included in the definition. It also includes the increasingly common model of international sourcing in which lead firms’ engagement is defined by the terms and conditions of contractual or sometimes tacit agreements with their suppliers and subcontractors for specific goods, inputs, and services (ILO, 2016). Williams (2019) attempted to define global supply chain as “a worldwide system that a business uses to produce products or services. That sounds simple enough, yet a global supply chain can be anything but. There are so many facets that need to be in sync”. Indeed, while global supply chains do include the production of goods and services as an important component, as argued by Williams, it entails a whole lot more than production as the chain necessary leads from production to marketing, logistics and supply. In many respects, this definition seems to tick a reasonable number of required boxes that would bring it reasonably close to describing the global supply chain. However, it fails to address several very fundamental supply chain factors such as logistics and global customer base, not to mention production centres. It seems that this definition draws its essence from the definition of a typical organizational logistics or supply chain management process. From the preceding definitions, it would be prudent therefore not to attempt to define global supply chain; rather, one should take the more conservative approach of explaining what it is and its various components. To understand the concept of global supply chains, the next section takes a cursory look at its historical evolution.

7.3 Historical Evolution of Global Supply Chains Scholars have come to accept the concept of Logistics management being the forerunner of the concept of SCM, which, on its development and evolution, became the more comprehensive concept to describe the process of end-to-end resource and production management. Accordingly, the history of the two concepts is so inter-related that they are usually conveyed as one.

Global Supply Chain and SMEs  87 The word logistics first appeared in January 1810 in the Scots Magazine, and Edinburgh Literary Miscellany for January 1810. The word was first used in 1898 by Lummas and team in their 2001 article titled. Many writers have submitted that the word logistics is derived from the French word logistique, which was first used by Baron Henri de Jomini in his book The Art of War in 1838. It must also be mentioned that as illustrious as the work of Baron Henri de Jomini may be, researchers have also found that the word logistics was equally used in the January 1810 edition of the Scots Magazine, and Edinburgh Literary Miscellany for January 1810. The word was used in an article written by Dr. William Muller, who was the first public instructor of military science at the University of Gottingen, in a book he planned to launch named The Science of War in 1811. The term supply chain, by comparison, was not endowed with such noble beginnings, as history shows that it was first used in an article published in The Independent newspaper in 1905. This was followed by another use of the term in October 1912 in Glasgow Herald (now Herald Scotland) by a special correspondent who was assigned to cover the Balkan War. On 14 October 1912, the same newspaper used the word again in its context to describe troop mobilisation and military deployment. It is interesting to note that the two terms, logistics and supply chain, were both formulated and used for the first time in military-related contexts. For some reason, the word supply chain did not quite gain popularity as one would have expected considering the supreme position it now occupies in the world of business management. It only reappeared as a management concept in an article by Frankel and colleagues in 2008, where it was used as a defined term in business management. This was quickly followed by the use of the term in an article by Stock in 2009, where the word management was added to complete the concept as we know it today. The journey of evolution of the term would not be complete, without mentioning that some researchers believe that the term supply chain management was introduced by Keith Oliver of Booz Allan Hamilton in 1982 in an article in the Financial Times. Whatever the timing and sequence of the use of the term may be, one point holds true that, though SCM cannot yet be considered a “mature” practice, there exists an interesting supply chain history, full of milestones, which contributed to its formation. It is also true to assert that the global supply chain has seen unimaginable evolution and changes over the last 100 years. Everything about how we procure, process, design, develop, produce, manufacture, compose, package, market, transport and deliver goods has been dramatically transformed. Global supply chains have become more globally integrated, complex and yet a lot more efficient, following the introduction of new logistics processes to deployment of oceangoing vessels, and from containerization to computerisation. While the future of SCM will be focused on consolidation and expansion, it is necessary to carefully evaluate the historical antecedent of global SCM before we set the agenda for the future of the global supply chain post COVID-19. 7.3.1 Supply Chain before 1900 Prior to the industrial revolutions across the world, most supply chains especially elements relating to manufacturing were mostly local and restricted to the countries of their operations. Examples can be found in the United States and Europe

88  Emem Anwana that will support this assertion. For example, cattle were raised in certain parts of the countries, transported to various parts of the nations and sold to abattoirs and meat processing companies in various parts of the same localities. Markets for these commodities were largely local and always adequate to absorb all available products. This was mainly because sources of supply were few and mostly local. This supply chain structure was driven largely by the infrastructural situation, or lack thereof at the time; the underdeveloped global networks; and the non-availability of technology to support any effort at large-scale global supply chains. However, the supply chain structures began to change as the Industrial Revolution dawned through Europe and America, coupled with the advent of the railroads, which facilitated faster, easier and cheaper transportation of goods and services over longer distances, although the supply chains were still largely limited to national boundaries. International cross-national and cross-continental trade remained inefficient as shipments were still transported loosely in ship’s hulls and storage deck areas, with rudimentary and inefficient manual loading and offloading process. In the production and manufacturing phase of the supply chain, new rudimentary machines and production lines made possible by innovations engendered by the Industrial Revolution brought about increased productivity and improved manufacturing turnaround time. The latter part of the 19th century witnessed the start of organised supply chains. This was mostly driven by the arrival and extensive penetration of the railroad across vast lands in the United States. A similar trend was also taking place in Europe, with train lines crossing various European nations, it was now quite easy to move cargo and products from the seaports into the hinterland more efficiently and effectively. The greatest interest of this period therefore would possibly be the development of structured supply chains occasioned by the vast development and expansion of the railroads across Europe and the United States. Authors agree that in the United States, the railroads were vital to the country’s ability to move goods from the more developed eastern and midwestern markets to less developed southern and western markets. Accordingly, the growth of the railroad industry dominated the early years of supply chain development and contributed significantly to supply chain history during this period. It must, however, be mentioned that this general observation regarding local supply chains in the 19th century notwithstanding, there were certain commodities that were traded based entirely on the geographical sources of supply for such commodities and the locations where they were required. Based on such dynamics, such commodities had to be sourced and supplied from overseas. Commodities of international nature that were traded across the world within the time under reference are briefly discussed. (a) The Transatlantic Slave Trade The transatlantic slave trade had a significant impact on global supply chains. The demand for slaves created a vast network of traders and merchants involved in the buying and selling of slaves. This network stretched from Africa to Europe and the Americas, forming a complex web of economic and political ties. Profits from the slave trade were used to fund other industries

Global Supply Chain and SMEs  89 such as shipping, banking and manufacturing. This resulted in a global economy that was heavily reliant on slave labour. Writing on the transatlantic slave trade, from a global supply chain perspective, Martin Dackling and Paul Duedahl, contended that, between the 16th and 19th centuries, the transatlantic slave trade was a vital link between Europe, Africa, and the Americas, supplying Europe with products from the colonies and providing needed manpower (slaves) for plantations in the New World. In other words, the goal was to transport slaves to American colonies for future sale, then buy “raw materials” and export those materials to Europe while realising a comfortable added value along the way. Their article focused on analysing the triangular international trade from an original global supply chain perspective, including the role of the providers ensuring maritime logistics (shipping, auxiliary transporters) and the customers (farmers in the Americas, wealthy families in Europe, African warlords) and how they adopted the modern concept of supply chain management. The legacy of the transatlantic slave trade is still felt today, as its effects can still be seen in global supply chains. (b) International Trade in Silks and Spices across Europe and Asia In the same category as the international slave trade was the international trade across Europe and Asia in silks and spices – thus bringing into being the legendary Silk Route. The international silk and spice trade had a significant impact on both Europe and Asia. In Europe, it allowed for the growth of wealth and power for those involved in the trade. It also aided in the spread of new technologies such as papermaking and gunpowder, both of which had a long-term impact on both regions. The influx of money from trade allowed for the development of cities and the expansion of industry in Asia. The trade also aided in the spread of new ideas and knowledge, which shaped the modern world. Rosemary Coates, writing on the topic “The Silk Road – the First Global Supply Chain” in the Supply Chain Management Review, noted that the silk road trade was made up of agents and merchants who bought and sold goods along the route and consisting of great bazaars which opened at strategic points to serve as a meeting place for traders, such as the Istanbul’s Grand Bazaar, which still thrives today. According to Coates, “[m]erchants took their goods to the Grand Bazaar where they also traded ideas that drove innovation and the transition from the Middle Ages to the awakening of the Renaissance”. It can therefore be safely argued that although local supply chains dominated transactions within this time period, global or, at least continental, supply chains still existed and flourished on specific commodities as mentioned in this section.

7.3.2 Supply Chain from 1900s to 1940 With the railroad fully established and running across nearly all states and counties in America with connections to neighbouring Mexico and Canada, cities and towns grew exponentially as did commerce. The railroad started to see changes and innovations as the steam engine gradually gave way to internal combustion engines,

90  Emem Anwana thus making the trains faster and more efficient. This was mostly facilitated by discovery, exploration and production of crude oil. Historians have debated the impact of railroads on the pace of economic development in 19th/20th-century America. Robert Fogel tried to measure the impact of transportation innovations on American development using tools of new economic history and concluded that the contribution of railroads was crucial to the economic development of the era. Scholars agree that the advent of railroads brought about economic liberation, increasing mobility and speed across the continent. They provided employment for thousands of workers and were also to a great extent responsible for the settlement of the West but simultaneously helped destroy the Native American population. Following the invention of the internal combustion engine and cars in the late 19th century, trucks and caravans were developed to allow for the faster transport of goods by road to complement transportation by railroad. The first semi-trucks were invented at the very end of the 19th century, and Mack Trucks, the legendary US truck company, was founded in 1900. The trucks originally ran on gasoline, while diesel engines were introduced in the mid-1920s. Early concepts for the forklift were introduced in the early 20th century, with further improvements prior to 1930. The storage and transportation of goods became more efficiently and effectively handled with the development and use of pallets to consolidate and transport goods and store them more efficiently in warehouses from 1925. The introduction of pallets that could be stacked vertically saved space and made goods handling more efficient. With the advent of World War II, logistics became critically important regarding military organizations, mobilisation and deployment, thus the requirement for efficient supply chains in the United States, Europe and Asia to support the European and Asian campaigns. These supply chains were necessary for the manufacture of military hardware and supplies, and while overseas, it was essential to ensure supplies and support troops as efficiently as possible. The development of pallets, for handling and storage systems, also continued for the next decades, thus ensuring that warehousing storage space was more efficiently utilised through the optimisation of racking and layout. These changes started the process of structured warehousing and inventory management process. 7.3.3 Supply Chain in the 1950s (Standardisation and Containerisation) It is widely believed that the greatest revolution in global supply chains was the invention of the shipping container and the logistical requirements to support global transportation. The most important feature of the shipping container is that it is intermodal—it can be transported easily using several different types of transport. The same container can be pulled by road on a truck, carried on the railway or shipped overseas on a container ship. Standardisation makes transporting and handling these containers fast and easy. This has generated significant cost and efficiency savings across the supply chains. Thanks to the standardisation of modes of transportation, shipping containers could be transported by ship, rail and road seamlessly, and the success of the simple shipping container fuelled the effort on standardisation of global transportation of goods.

Global Supply Chain and SMEs  91 7.3.4 Supply Chain from the 1960s to the 1980s (Digitisation and Efficiency) In the 1950s, most businesses were small and individually owned, and their production processes were equally small and limited to the revolving process of acquisition of raw materials, manufacturing of products and distributing same to dealers, distributors and stockists, who, in turn, will supply them to retailers and retail outlets which included large supermarket chains as well as small corner shops. The supply and value chains were simple since the need to create downstream relationships was not considered relevant or important at the time. The focus of such businesses was to reduce cost and increase production and profit. It is important to mention that though businesses were predominantly small, or medium scale in nature, there were still large-scale businesses and corporations and mergers and acquisitions that were still taking place. In fact, it can well be argued that this era marked the start of rampant take-overs, mergers and acquisitions in the United States, Europe and indeed the global economy. In the 1960s, more companies were looking toward growth and expansions, this era witnessed large-scale franchises springing up in all sectors of the economy and even more daring and complicated take-over bids, mergers and acquisitions. The slogan in the business world became “the bigger the better”. Smaller competitors were quickly consumed by the conglomerates and the buyout frenzy was extended even to associated and incidental businesses. It was now possible to see a retail food franchise, own and run a fuel station, where it would establish food retail and restaurant outfits to attract motorists who visited the station for fuel. The word monopoly assumed a completely new meaning. However, the continued evolution of the pallets, the development of handling equipment and containerization meant that freight transportation became more reliable. This led to the efficient transport of raw materials, parts and products over longer distances. On the logistics front, the distribution of goods was balanced on a nearly equal basis between the railroads and trucking; this was greatly facilitated by the extensive development of the motorways across the countries of North America. Trucks could now easily and freely roll down from Canada through the United States to Mexico. This route became one of the busiest trade corridors in the world, helped by the successful negotiation and implementation of the free-trade agreement between Canada and the United States. This was closely followed by the execution of a free-trade agreement between the United States and Mexico – after Mexico had implemented fundamental economic and social reforms as a condition for the agreement. These bilateral agreements were the forerunners of the multilateral North American Free Trade Agreement (NAFTA) which was signed by Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994, and superseded the 1988 Canada– United States Free Trade Agreement and the United States–Mexico Free Trade Agreement. NAFTA trade bloc formed one of the largest trade blocs in the world valued at US$1.2 trillion in trade and investment. Just as the passage of NAFTA resulted in the elimination or reduction of barriers to trade and investment between the United States, Canada and Mexico, the formation of the European Union also saw the creation of an economic free zone across

92  Emem Anwana 27 European countries, thus setting up one of the most outward-oriented economies in the world, and undoubtedly the world’s largest single market area. This free trade arrangement has been so successful it doubled the volume of trade between the states between 1999 and 2010 and contributed to over 30% of the EU’s GDP. 7.3.5 The Supply Chain in the 1980s to Date (Shift to True Globalisation) In the 1980s, the term supply chain management was recognised as a defined term in business management, and accordingly, the 1980s saw supply chain practitioners and stakeholders capitalise and improve on the successes of the 1960s and 1970s. It also witnessed the democratisation of the personal computers, which further revolutionised the supply chain with the introduction and use of different computer tools and systems – remarkable amongst them being the innovative software covering functions from complex calculations, spreadsheets, planning, designing, drawing, mapping and analysis, thus making the entire SCM process more efficient, transparent and cost-effective. Efficiency, flexibility and profitability became the value proposition of supply chains. Computerisation, which gained popularity in the mid-1960s, grew and developed exponentially with the development of process-driven software specifically for the advancement of various aspects of supply chain, from inventory management and logistics to procurement and supply. It will, of course, be recalled that before the 1960s, logistics records and data were captured, sent and reported manually through paper. Data computerisation was simply the revolution that changed the face of SCM. With process and data computerisation, more accurate forecasting, better warehouse storage management, truck routing and better inventory management, through realtime warehousing, inventory, distribution, and efficient lead time management, became routine and commonplace. The introduction of barcoding and inventory scanning mechanisms added to the advancement of digitisation of the supply chain activities and processes. This was coupled with other advancements, including air freight optimisation, supply chain distribution networks and, most importantly, the introduction of enterprise resource planning (ERP) systems. The revolution of the ERP system brought with it two groundbreaking benefits. For the first time in the history of supply chains, the entire procure-to-pay process, all the way to warehousing and issuing to distributors, could be executed and efficiently carried out within one system and visibly seamlessly on a real-time basis. It also brought with it the system flexibility where owners, suppliers, warehouses, distributors and buyers could safely interact and transact from any location in the world. It can therefore be said that the innovations of the 1980s enabled supply chains to become truly global.

7.4 Globalisation – The African Experience Africa is rated as one of the fastest-growing regions in the world, as in 2017, the continent was forecasted to have a GDP annual growth of 5.5%. Over the next decade, it is expected that more than 100 million more people will join the African middle class. Records confirm that Africa’s growth was at 8.7% in real GDP terms between 2000 and 2010, making it the second-fastest-growing continent in the

Global Supply Chain and SMEs  93 world, only behind Asia. Third-party forecasts suggest that part of this rapid GDP growth relates to improved international trade and an accelerated pace of foreign direct investment, in particular from emerging superpowers, such as China and Brazil. While impediments to growth, such as road and rail infrastructure, electricity, political instability and corruption, still remain prominent issues, regional integration is progressing reasonably, all these elements are improving, with long-lasting impacts, thus creating a growing African middle class. Whilst there is a wide disparity among income levels across the continent, GDP growth is positively impacting individual earnings and private consumption, moving a significant number of people into the African middle class. Between 2000 and 2010, the number of people in Africa’s middle class grew by 130 million, and forecasts from the African Development Bank suggest that at least 100 million more people will have become middle class by 2020. In the last two decades, businesses across the continent have taken advantage of the growth opportunity in the continent to expand their businesses and brands across their national borders in an effort to seek greater profit and secure larger market share. This expansionist and market share–driven strategy has been witnessed in various sectors in Africa. For instance, major banks like Standard Bank from South Africa, First Bank, United Bank of Africa, Zenith Bank and Eko Bank all from Nigeria have expanded into many African countries with significant financial investments across the continent.

7.5 Growth within African Banks African banks are experiencing a historic acceleration that is lifting millions of its people out of poverty, creating an emerging consumer class, and propelling growth in many sectors of its economies. Between 2012 and 2017, African banking-revenue pools grew at a compound annual growth rate of 11 percent. Thus, making Africa the second-fastest-growing banking market (taking retail and wholesale banking together) in the world. Predictions suggest that the African banking market will remain a growth leader going forward, with growth estimated to be at 8.5 percent over the coming years. The European investment bank in its 2016 report on Banking in sub-Saharan Africa, arrived at the same conclusion that impressive regional expansion has been achieved by sub-Saharan African banking groups. They attribute the expansion to financial innovations such as the rapid diffusion of mobile banking, especially in East Africa with MPesa, and regulatory changes, notably the steady increase in minimum capital requirements imposed on banks by the regulator in many countries, especially the bank capitalisation in Nigeria. They further observed that access to financial services in sub-Saharan Africa has increased steadily in recent years.

7.6 Growth within the African Retail Sector The retail sector of the African economy has also witnessed these transnational expansions. For instance, in 2002, one of the biggest South African supermarket chains – Shoprite Checkers – expanded into southern Africa due to the obvious saturation in the retail supermarket space in South Africa, Shoprite took advantage

94  Emem Anwana of the investment opportunities in other southern African countries like Zimbabwe, Zambia, Botswana and Mozambique. It is on record that Shoprite invested about US$72 million within the period and established eighteen retail supermarkets, one wholesale shop, seven fast-food outlets and a sister company to handle the supply and delivery of fresh food in Zambia alone.

7.7 Telecommunication Growth in Africa An in-depth study and analysis by Deloitte indicate that the telecommunications industry across the continent was not left out of the drive to secure market shares on a continental basis. There has therefore been significant consolidation in the telecommunications sector, which, in turn, attracted significant inbound investments as the markets opened up, and the economic returns improved. Indigenous African companies, such as MTN, ECONET, and GLO, foreign investors, and global players, such as Vodafone and Etisalat, have all made significant investments in the continent. According to Deloitte, African governments are beginning to wake up to the opportunity to regulate and auction spectrum and licenses. Driven by improved economic conditions, the last ten years have seen Africa experience the fastest telecoms and subscriber growth worldwide, which has transformed fundamental aspects of social and business life on the continent. Africa’s telecommunications growth has positively impacted incomes, especially of its young techno-savvy population. Young entrepreneurs have sprung up all over Africa as a result of developments in telecommunications, they are operating in various sectors of their economies ranging from entertainment to manufacturing, agriculture, transportation, money transfers within the continent and a lot of other business ventures made possible due to the use of the smart mobile phones. Sub-Saharan African mobile revenues reached US$35 billion in 2011 representing the GDP contribution of approximately 3%. On average, mobile subscription penetration has reached 72% across Africa, but country penetration rates vary. Multi-SIM ownership is widespread, and actual penetration of individuals could be closer to 40% to 50% in some countries, potentially leaving room for further growth. For instance, in Nigeria, where mobile penetration is above 60%, however, human penetration is just above 26% with multi-SIM ownership. Further growth in subscriber levels is likely to be driven by lower call prices and overall cost of ownership of handsets to gain access to lower income segments, better network coverage in rural areas and operating models adapted to serving such remote connectivity needs, as well as mobile data connectivity. Mobile subscriber growth is maturing and could well saturate in the medium term in some markets if rural coverage does not increase.

7.8 Impact of Global Supply Chains on SMEs during the Pandemic Nearly every business entity, regardless of its location or industry, is adversely feeling the impact of the COVID-19 pandemic. Paradoxically, businesses in the information and communication technology (ICT) sector, health care and a few others have recorded a spike in sales or demand for their products or services. For the

Global Supply Chain and SMEs  95 majority, the pandemic has significantly dwindled their sales, creating issues around the supply of resources and individuals. Notwithstanding, every business is faced with supply chain–related issues. One of those heavily hit was SMEs on the African continent. The pandemic resulted in an unparalleled health crisis whilst disrupting every business across every region of the globe. Not only were the SMEs paralysed, but larger business entities also, in some instances, had to furlough or lay off their staff members. The economic impact of the pandemic was felt most by micro-, small- and medium-sized enterprises that often account for above 70% of employment opportunities on the African continent (Muriithi 2017). These small businesses have limited resources to ride out the storm. SMEs within small island countries or under-developed countries were considered the most vulnerable. The overall impact of the COVID-19 pandemic on SMEs is yet to be quantified or adequately measured; however, the scale of disruption it has caused within the supply chain is considered to be responsible for the crashed commodity prices such as metals and crude oil. Also apparent is the significant reduction in export for products such as clothing, footwear and leather products, alongside other similar products. The full/partial lockdowns in countries and regions such as the United States, the European Union and China had a global ramification on supply chains as they account for 64% of the global exports and 63% of global imports, respectively (Steinbock 2018). The appreciation of the US dollar by 9.5% during mid2020 further skyrocketed the costs of trade priced in dollars among African countries and other developing economies. According to the ITC (2020), the imposition of an export ban among 93 countries or restrictions in some cases on specific products severely impacted SMEs. The ITC (2020) also found that, more than two-thirds of SMEs were severely affected by the pandemic compared to 40% of larger business entities. While two-thirds of small businesses on the African continent were adversely affected during the pandemic, 54% of whom had “difficulty in accessing inputs”, and 75% complained of “reduced sales”. SMEs in sectors such as tourism, hospitality and food had to totally shut down in several countries. Having provided a summary of the consequences of the global supply chain on SMEs during the COVID-19 pandemic, a further discussion is put forth on approaches to mitigate such challenges.

7.9 Beyond the Pandemic As governments across the globe relax the lockdown measures, the new focus is on how governmental entities, businesses and non-business sectors intend to adapt to the post-pandemic realities. The pandemic has shown the frailties of several small businesses. From a business perspective, there are many who associate the challenges related to it. There is an urgent need for SMEs to redesign their strategies by taking collective action, increasing collaboration and splitting overhead costs with smaller suppliers. Of paramount also is the need for SMEs to incorporate more resilient approaches to their business models. This may be achieved through the diversification of business, having a futuristic approach to their business engagements, thinking beyond the normal business activities and connecting with business-support organisations

96  Emem Anwana that may provide capacitation, technical or financial support. It is also needful for SMEs to adapt to digital technologies, upskill and improve on available equipment and infrastructure. The supply chain–attributed challenges are often multi-layered and complex. It makes it rather challenging for SMEs to fully grasp the unpredictable dynamics and prepare for unforeseen shocks such as the COVID-19 pandemic. However, a good understanding of a “business’s exposure’, a thorough evaluation of current suppliers, renegotiating with manufacturing hubs such as those in Mexico and Vietnam instead of the reliance of those in China or the United States and finding domestic suppliers are possible measures SMEs may imbibe as a way to reducing the impact of the disruption. Furthermore, supply chain responsiveness, supply chain collaboration and information sharing are vital strategies towards enhancing the sustainability of SMEs post COVID-19 pandemic.

7.10 Proposing a Pathway for SMEs in the Post-COVID-19 Era In the post-COVID-19 era, SMEs will need to find new ways to operate and compete in the global marketplace. To survive and thrive in the new normal, SMEs will need to adapt and innovate. Although there is no fast-fix solution to the devastations of the pandemic on businesses, however, there are some general principles that all SMEs can follow to create a successful post-COVID-19 strategy: Technological adaptation: African SMEs will have to focus more on online sales and marketing. African customers are spending more time online than ever before in the post-COVID-19 era. SMEs must prioritise developing an online presence and selling their products and services online. Create a strong brand: Customers will be looking for brands they can trust in the post-COVID-19 era. A strong brand will be useful in gaining customer loyalty. As African customers begin to appreciate issues of climate change and environmental protection more, products and brands that conform to these ideals will attract younger customers. Innovate and differentiate: To succeed in the post-COVID-19 era, African SMEs must provide something unique that their customers cannot find elsewhere. This could be a new product or service or a new business model. Adaptable: The COVID-19 pandemic has shown that agility is the key to success in the post-COVID-19 era. SMEs will have to be able to quickly adapt to changes both in the market as well as political and social changes.

7.11 Conclusion The chapter commenced by describing the evolution of the global supply chain over several decades. The transition into globalisation from the 1980s until the current era was also described. The devastating impact of COVID-19 on the global supply chain and the effect it has on SMEs on the African continent was highlighted. The chapter proposed a pathway for SMEs in the post-COVID-19 era.

Global Supply Chain and SMEs  97 The chapter concludes by suggesting that SMEs can weather the postCOVID-19 storm by having a clear understanding of their financial situation post pandemic, building strong relationships with customers, diversifying their products and services, having the ability to adapt to the post-pandemic business models and having a plan for marketing and sales of their products and services. By taking these steps and more such as investing in skills development for both employees and managers and owners, SMEs can position themselves for success in the postCOVID-19 era.

References Bär, K., Herbert-Hansen, Z. N. L. & Khalid, W. 2018. Considering Industry 4.0 aspects in the supply chain for an SME. Production Engineering, 12, 747–758. Cragg, T. & McNamara, T. 2018. An ICT-based framework to improve global supply chain integration for final assembly SMES. Journal of Enterprise Information Management, 31, 634–657. International Labour Organization (ILO). 2016. Report IV. Decent work in global supply chains [Online]. International Labour Organization (ILO). Available: https://www.ilo.org/ilc/ ILCSessions/previous-sessions/105/committees/supply-chains/lang--en/index.htm [Accessed]. International Trade Centre (ITC). 2020. COVID-19: The Great Lockdown and its Impact on Small businesses [Online]. Available: https://www.intracen.org/uploadedFiles/intracenorg/ Content/Publications/ITC_SMECO-2020ExSummary_EN_web.pdf [Accessed 2021]. 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), 35–48. Omoruyi, O. & Akuoma, M. E. 2020. The influence of supply chain management on the performance of small to medium enterprises in Southern Gauteng. International Journal of Economics and Finance Studies, 12, 172–188. Prasanna, R., Jayasundara, J., Naradda Gamage, S. K., Ekanayake, E., Rajapakshe, P. & Abeyrathne, G. 2019. Sustainability of SMEs in the competition: A systemic review on technological challenges and SME performance. Journal of Open Innovation: Technology, Market, and Complexity, 5, 100. Steinbock, D. 2018. US-China trade war and its global impacts. China Quarterly of International Strategic Studies, 4, 515–542. Williams, G. 2019. What Is a Global Supply Chain? [Online]. Available: https://www. americanexpress.com/en-us/business/trends-and-insights/articles/what-is-a-globalsupply-chain/ [Accessed 2nd February 2021]

8 Building Productive Capacities The Role of Business Linkages David Damiyano

8.1 Introduction The first section of this chapter looks at the definitional aspects of small and medium-sized enterprises (SMEs), which are important for understanding the policy frameworks that support SME development. This is followed by an examination of the various modalities of enterprise linkages applicable to both developed and developing countries, as well as the potential benefits to SMEs, larger industries, and overall economic activity. The chapter also discusses the different types of linkages—forward and backward linkages—as well as key challenges in developing productive capacities. The chapter also identifies and investigates the role of government in facilitating these linkages by establishing the necessary institutional, regulatory, and policy frameworks. The chapter concludes by outlining the recommendations required for SMEs to develop productive capacities.

8.2 The Profile of SMEs SMEs have been classified based on their size, turnover, activity, ownership, and legal status. Given the diversity of enterprises in this sector, there is an emerging consensus that size (i.e., number of employees) may be the most appropriate defining characteristic. SMEs are thus firms with fewer than 100 employees, while microenterprises have fewer than 10 employees. Despite the fact that this sector is largely uncounted, available estimates indicate that SMEs in Africa account for roughly 60% of the workforce and 25% of industrial output in value terms (Elahe et al., 2015). SMEs in Indonesia have assets worth more than US$3 700 (Rp 50 million) but less than US$37 000 (Rp 500 million), and a turnover worth more than US$22 000 but less than US$185 100 (Canare et al., 2017). In the Malaysian economy, SMEs are determined to be those who employ between 5 and 19 people in the agriculture and services sectors and between 5 and 50 in the manufacturing sector. For Thailand, the definition differs as well, and SMEs are classified according to sectors. In the production and service industries, SMEs are determined to be those who employ 50 workers or less, 25 or less in the wholesale sector, and 15 or less in the retail sector. In Thailand, medium businesses are regarded as those with an employment number of close to 200 workers, with retail and wholesale having up to 30 and 50 employees, respectively. Over the DOI: 10.4324/9781003413172-8

Building Productive Capacities  99 world, specifically, about a third of businesses are identified as SMEs, employing less than or equal to 250 workers.

8.3 SMEs and Their Contributions SMEs continue to capture the attention of development practitioners, national leaders, and researchers because they are regarded as critical for boosting nations’ economic growth. SMEs, particularly in developing countries, play an important role in driving economic growth. The importance of SMEs can be seen in the positive effects that their growth has on productivity, job creation, and competitiveness. Various researchers also agree that SMEs have the potential to promote more inclusive growth and enable economies to adapt to the major trends of the new industrial revolution. According to the Organisation for Economic Co-operation and Development (OECD, 2016), small and medium-sized enterprises are the primary source of employment, accounting for approximately 70% of all jobs created, and they are the primary enhancers of value chain creation, accounting for 50% to 60% of total value added. In emerging countries, small and medium-sized businesses account for up to 45% of total employment and 33% of the gross domestic product (GDP). IFC (2010) also stated that SMEs are important drivers of economic growth because even informal businesses contribute more than half of employment and GDP in many countries, regardless of income level. Furthermore, the development of SMEs can lead to economic resilience and diversification. Despite their determination to be integral parts of the economy, micro, small, and medium-sized enterprises are frequently plagued by a variety of production challenges that always affect their production capacity and ability to accelerate the development of economies and enhance shared prosperity. Captivating and facilitating SMEs to increase productivity has been a key topic of concern among policymakers and managers in recent years, with a particular focus on understanding their innovation process. This is especially important because many countries are facing challenges such as low productivity growth, changing demographic trends and the nature of work, and a widening income or wage disparity. Increasing SMEs’ productive capacities is more important and critical, given their widely acknowledged contribution to economic growth. However, increasing the capacities and potential of small businesses in gaining benefits and participating in a digitalized and globalized economy is heavily dependent on healthy competition, a conducive environment, and linkages that foster growth. SMEs are largely experiencing market failure, constraints, and inefficiencies caused by the business environment and regulatory framework as a result of internal firm challenges. The ability of SMEs to contribute to national growth is also dependent on the availability of strategic resources, which include knowledge networks, skills, and finance. Their contribution is also influenced by public investments in areas such as innovation, infrastructure, and training and education. A favorable environment for transferring business ownership or management is a significant factor in ensuring the viability of businesses over time, with implications for jobs, investment, and growth for many, if not all, SMEs.

100  David Damiyano

8.4 Developing Productive Capacities in SMEs The frequent participation of SMEs in international markets can help strengthen their roles in economic growth and development by creating vast opportunities for growth, accelerating innovation, and the spillover of technologies to the third sector and improving managerial expertise and productivity. Furthermore, as former firms have done, high levels of flexibility and capabilities that differentiate product lines can assist SMEs in gaining a competitive advantage in international markets. This allows young companies to easily adapt to ever-changing global market conditions and cater to products with short life cycles. On the international market, the majority of niche markets are dominated by later firms, and those innovative infants are major partners of multinational cooperatives in emerging products and markets. Furthermore, the expansion of SMEs into global markets improves their competitiveness in domestic markets through increased market knowledge. In general, the latter firms have always turned a blind eye to global trade. In comparison to the former firms, which mostly trade with neighbouring countries, a small number of the latter firms export directly, and their exports represent a lower trade turnover (OECD, 2016). However, when considering the contributions of later firms to a country’s exports as suppliers to former firms on domestic markets or multinational corporations (MNCs) that export, infant firms can account for more than half of exports in OECD countries. Upward or downward linkages with well-established firms are regarded as critical for the later firms (OECD and World Bank Group, 2015). The benefits of the links between the firms can be realized on both sides through supply chains in both domestic and international markets. In this regard, close interdependence and coordination between large and small businesses can be an important source of value and competitiveness along supply chains. There are several major factors that facilitate SMEs’ participation in global markets, including free trade and trade facilitation, investment openness, infrastructure and institutional development, and intellectual property protection. Because of their limited resources in comparison to established giant firms, infant firms face numerous challenges in their efforts to engage in international trade. Tax breaks and institutional transparency, for example, can help infant firms grow by reducing the burden on production costs and thus increasing global competitiveness in new markets. While complying with various standards, technical regulations, and conformity assessment procedures is costly for larger firms, it is potentially prohibitive for SMEs because many of the costs of engaging in international markets are fixed and often sunk, regardless of a firm’s size or revenue. The predictability and efficiency of customs procedures are critical for later firms, as they may aid in better financial and administrative corporate governance. According to the World Trade Organization Facilitation Agreement, the National Facilitation Committee is critical to elevating SMEs. In a dynamic world where just-in-time production and delivery are the norm and transit and storage costs are prohibitively expensive, time is viewed as a competitive advantage. For a company to enter global markets and participate in global value chains (GVCs), the state of its infrastructure and the procedures it follows in

Building Productive Capacities  101 the operation of its facilities are critical. Better infrastructure is regarded as a prerequisite in developing economies for a firm to investigate opportunities to enter global markets (COMCEC, 2013). The advancement of information and communication technology infrastructure and standards, as well as electronic commerce platforms, are significant considerations that favour the entry of SMEs into the global market (BIAC et al., 2016). With technological advancement, infant firms can be equipped with the technological know-how and competence to reach global markets and networks at a low unit cost of production. Technological advancements enable SMEs to gain global competitiveness through product innovation. Furthermore, technology enables firms to reap the benefits of lean start-ups in the form of lower fixed costs and outsource many aspects of the business in order to remain competitive in a volatile market (OECD, 2017). Furthermore, the availability of large amounts of data on e-commerce platforms allows emerging firms to analyse and comprehend business trends in their fields of expertise in order to meet consumer demand. A favourable business environment with a diverse entrepreneurial ecosystem at the local level will encourage SMEs to participate in international markets. These business standards are critical in today’s context, where fast-moving technology and competitive pressure change product demand. While overall business investment, innovation, and growth are affected by framework conditions, some dimensions have a disproportionate impact on new and established SMEs (OECD, 2017).

8.5 Factors Affecting Productive Capacities in SMEs SMEs are not well connected to GVCs and are not as well capitalized as large businesses; their access to technology, networks, and inputs that make them more competitive and efficient is limited, resulting in low productive capacity. Furthermore, their regional and international connectivity networks are limited, which makes it difficult to access profitable markets. The African Development Bank (ADB) attributes this lack of connectivity to gaps in transportation infrastructure. SMEs have little or no access to capital markets in contrast to large companies, which have a large capital base as a result of listing and having shares on stock exchange markets as well as bond markets. This is a huge blow to SMEs in terms of loan access because banks use stock price information in conjunction with other financial indicators when evaluating loan proposals, exacerbating the advantage of large companies in terms of capital access at the expense of SMEs. Apart from access to capital, SMEs face difficulties in adopting e-commerce, information, and technology because they lag behind larger, established companies. Information, communication, and technology (ICT) is a powerful tool that can help SMEs catch up to larger corporations. Furthermore, e-commerce improves SMEs’ competitiveness against large firms by improving access to markets that were previously inaccessible. Many SMEs are missing out on this opportunity as a result of globalization and modernization, which now allow for internet-based consumption. Yoshino et al. (2016) agreed that more than 90% of Japanese people use the internet. To that end, only 10% of SMEs in Japan have an online store.

102  David Damiyano Other challenges faced by SMEs include a lack of know-how or capacity in business management, business organization, and human resources. SMEs are also constrained by a lack of sustainable entrepreneurial ideas, which leads to a very weak innovation culture for SMEs in developing countries, resulting in an overreliance on technologies brought in by foreign corporations. The ADB agreed that human resources pose a significant challenge to SMEs’ productive capacity. These obstacles impede SME participation in GVCs, and they are the same obstacles that impede growth and development. In addition, a lack of resources, particularly skilled labour, access to finance, technology, and information, access to networks that provide access to partnership opportunities and information, a lack of experience and expertise that allows them to compete with large firms, high transaction costs when compared to established and connected large firms, and these SMEs lag behind large firms in terms of research and development as well as knowledge possession tend to be another problem that constraint SMEs. The OECD identified the additional critical constraints that small firms face when attempting to link with large firms. These include, but are not limited to, search costs, a lack of information about available business opportunities, and uncertainty. The main cause of complaints that small local businesses are uninterested or unwilling to meet their needs is a lack of productive capacity. Instead, it is claimed that local SMEs are failing to meet the following market requirements: quality control, competitive pricing, speed and flexibility in changing production, timely delivery of products and the ability to design components and parts, and long-term commitment. It is alleged that local firms are more concerned with serving only local customers than with making significant managerial and technological acquisitions that would qualify them as qualified suppliers to larger firms. Relating to access to finance as a constraint, SMEs are deemed high-risk borrowers by financial institutions because they offer little in the way of collateral security. Over the years, it has been an area of discussion that financing a new and small enterprise using bank loans and other similar forms of capital is inappropriate. What can help in making finance available to SMEs is giving the financer a share of potential profits and equity participation? Capital sources for SMEs act as a guarantee of their export success. It was discovered that in Australia, better business growth is positively correlated to dependence upon external finance. In Indonesia, it was recently found that financial flexibility has a relationship with business success, either negative or positive. For a small business, another greater block in entering international markets is government policies and regulations, and this is the major reason why SMEs tend to be underrepresented in outward investments and in exporting. Their resources also constrain them in assessing potential markets that will exist in other economies. SMEs export only to closer foreign markets or countries, and if they make investments abroad, they tend to locate in closer neighbouring countries. Intraregional foreign direct investment (FDI) has been tremendously growing over recent years, but, despite that, a survey done for European SMEs found that only 3% of them had branches, joint ventures, or subsidiaries in other foreign countries.

Building Productive Capacities  103 SMEs are disproportionately impacted by regulatory complexity, uncertainty, and inconsistency. They are less efficient compared to larger firms in dealing with and screening the regulatory environment. Either due to a lack of information or experience and expertise, SMEs are often incurring some indirect costs through the hiring of external advisors and investing in training staff to comply with the new regulations. Hence, the conditions of regulatory compliance, in conjunction with the complexity of the regulatory procedures, are of greater significance to small firms. The OECD highlighted that SMEs in some countries are administratively burdened, which explains the widespread informality of these small businesses. Also, regulatory divergence across countries acts as a brick wall for SMEs’ participation in global value chains and markets. The reallocation of resources to their more productive uses and the incentives for an efficient exit of less productive firms from the market is always constrained by regulations regarding bankruptcy, which often excessively stigmatise or penalise failure. Bergthaler et al. (2015) indicated that in other countries, for unincorporated SMEs, the way individual defaulters are treated is very severe, and beyond the liquidation of the business, it leaves full personal liability for many following years. The reputation and capital of small businesses are significantly affected by the complexity and length of the process, and this largely decreases the chances of starting the business over again. Moreover, the supply of capital/finance to small businesses increased the risk to lenders because of legal uncertainties. In addition, SMEs are at a disadvantage as compared to big, established companies in terms of the requirements of tax regulations, especially the substantial fixed component and compliance costs, which include filing, record keeping, and payment processes that exist at the municipal, regional, and national levels. For new firms that are small, cash flow and resource challenges witnessed in those early stages of developing businesses are exacerbated by high compliance costs, which also stand as a formalization deterrent. The OECD and Eichfelder and Vaillancourt (2014) indicated that, in some situations, the tax payments for SMEs may be exceeded by tax compliance costs. In addition to this, other aspects of the taxation of businesses, such as the asymmetric treatment of losses and profits, the distribution of taxation between labour income and capital, as well as the design of incentives and research and development tax credits, sometimes disadvantage some SMEs unintentionally. Using multiple ways, businesses interact with the public administration, whose transparency, efficiency, and integrity impact business creation as well as growth. Compared to large, established firms, the costs that are associated with this red tape and administrative burdens are considerably higher for small businesses. Besides this, since public-sector corruption and a lack of transparency are a blow to both small and large businesses, they impact SMEs to a larger extent because SMEs mostly lack the capacities to cope with that opaque public sector, and they lack the capacity to design and implement strategies for anti-corruption. They also lack the capacity to lobby for their needs, especially in a situation where there is no established framework for their public decision-making participation. Under-collateralized SMEs and start-ups that have limited credit histories are often endowed with financial market failures because of information asymmetry

104  David Damiyano and problems with agents; according to the OECD (2013), small businesses may lack the required expertise in producing sophisticated statements of financial position. The issue of policy intervention to correct the failures is mostly recognized in this area. In low- and middle-income countries, credit constraints are severe, and the development of SMEs and their formalization are often barred by funding gaps. Due to the global crisis, credit conditions for most small businesses across non-OECD and OECD countries have deteriorated, hence exacerbating the constraints that had been long-standing, such as banks’ fixed costs in processing loan applications and a lack of collateral security. The gap that exists between the average rates of interest that are charged by large firms compared to those of SMEs has been increasing over the years compared to the pre-crisis period, though there had been a steady decrease over recent years in the cost of financing, hence this point about SMEs as higher credit risks. The low level of workforce training, internal management practices that are poor and skills shortages held back the participation of SMEs in an economy that is highly becoming knowledge-based. The OECD highlighted that the evidence suggests that there is a higher skills deficiency in SMEs as compared to large firms and efforts for employee training are very weak per employee in SMEs than in large established firms. The other challenges that exist in small businesses include the ability to retain highly qualified workers and skilled staff and attract them; hence, they face greater constraints in the identification of employees in the labour market that have sought-after skills. Moreover, the OECD indicated that in collaborating with training and education institutions and using company-level learning strategies such as the use of methods and managerial practices that promote autonomy and learning, SMEs are relatively lagging. However, their uptake and effective use of digital technologies to enhance productive capacity and market access is limited by the lack of investments in the mentioned areas. Entrepreneurs’ and SMEs’ participation in the new world of work, which comes with increased fragmentation and digitalization of production processes, is held back or hindered by a lack of entrepreneurial skills. The non-existence of an appropriate corporate governance structure in conjunction with poor management activities and practices creates greater challenges to business management and transfer in many small and medium-sized businesses, especially family businesses. In some situations, these management constraints are aggravated by regulatory hurdles, financial constraints, small markets for business transfer, and tax and administrative burdens. However, in many countries, this presents a growing policy concern especially due to the rapid ageing of the entrepreneur population, although limited business transfer evidence in many nations represents a hurdle to police action. Productive capacities of local SMEs require the establishment of linkages with foreign investors, and through this, a virtuous circle is sometimes achieved through foreign affiliates’ contributions, which result in increased local absorptive capacities, which have the tendency to create greater linkages that last. SMEs, mostly those that are in developing nations, are constrained by management skills, access to technology, and a lack of information on markets, which exacerbates their difficulty in meeting quality and safety requirements, scaling up rapidly, or changing

Building Productive Capacities  105 their service mix or product when a large corporation demands that. To make sure that local SMEs are partnership-ready, there is a need for targeted assistance in the form of training as well as non-training activities.

8.6 What are Linkages? Acquisitions, mergers, consortia, development contractual agreements, licensing of technology, manufacturing collaborations, marketing agreements, and supply agreements are examples of linkages. Linkages have occurred over the years in the biotechnology, automobile, electronic equipment, pharmaceutical, commercial aircraft, steel, telecommunications, and robotics sectors. Linkages are extremely important for SMEs to improve their competitiveness and acquire a variety of critical technologies and assets such as finance, international markets, management skills, technology, and specialized knowledge. Linkages are extremely important for SMEs to improve their competitiveness and acquire a variety of critical technologies and assets such as finance, international markets, management skills, technology, and specialized knowledge. Over the last decade, the globalization of industries has been a major driver of strategic linkages between companies that compete or operate in the same industry or sector. 8.6.1 Impact of Business Linkages in SMEs on Productive Capacities Canare et al. (2017) created a framework for analysing the relationships between small and large businesses. This framework provides a detailed analysis of the backward and forward linkages. 8.6.1.1 Forward linkages This is a situation in which SMEs traditionally act as buyers of large corporations' outputs. The business transactions that exist in this type of linkage are numerous, and they range from SMEs in the manufacturing sector purchasing capital equipment from large businesses or corporations to retailers selling products produced by international brand producers to SMEs gaining access to professional accounting and auditing services from large corporations or groups. Because this is a training issue for vendors, the actual business linkages, that is, the transactional relationships above trade, have been limited.

Example 1a  A win–win strategy: The case of Unilever Vietnam Unilever established a strong supply chain comprised of expansion-minded contract manufacturers, suppliers, and distributors. As a result, contract manufacturers accounted for 48% of Unilever Vietnam’s total production volume by 2001. Unilever was able to source 40% of its raw materials and

106  David Damiyano 80% of its packaging from local businesses. In turn, the enterprises benefited from increased turnover and employment. Unilever’s employment policy of recruiting, developing, and retaining local talent clearly benefited 7500 Vietnamese workers in four plants and nine contract manufacturers (of which 5500 were new jobs). Through its partnership with Unilever, DuyTan, a bottle supplier, increased its total revenue from US$900,000 to $6.67 million and its employment from 160 to 664 between 1996 and 2002. The transfer of technology to local businesses enabled them to meet international product quality standards and obtain ISO certifications. They were able to enter export markets and diversify their business partners because they were cost- and quality-competitive.

Example 1b Eagle Lager, Uganda and Zambia (SABMiller) South African Breweries was established in South Africa in 1895. In 2002, it purchased the Miller Brewing Company, the second-largest brewery in the United States in terms of volume. Eagle Lager was first introduced in Zambia in 2005 and in Uganda in 2002. The company has worked with 8,000 SMEs in Uganda and 2,500 in Zambia that specialize in sorghum production. Families involved in the Eagle Larger value chain now number over 10,000, which equates to 63,000 if each household has six dependents. Producing sorghum for this company will increase one’s earnings by more than 60%. 8.6.1.2 Backward linkages In addition to the immediate benefits of outsourcing, such as job creation, backward links with large corporations create pathways for sharing business information, training, market opportunities, and technology transfer with a small enterprise. Although it could be argued that only one party benefits from these connections, there are numerous potential benefits that SMEs provide when compared to other domestic enterprises. It is in the best interests of large corporations to engage in and compound backward linkages.

Example 2a  Linkages through enterprise development: The case of Zimele, South Africa Linkages through enterprise development: the case of Zimele, South Africa Zimele arose from Anglo American, a global leader in mining and natural resources, and the De Beers Small Enterprise Initiative, which was founded

Building Productive Capacities  107 in 1989. In 2000, a separate corporation called Zimele was formed, which means “to stand on one’s own feet” in Zulu or Xhosa. Anglo American recognized the potential for increased efficiency through increased SME outsourcing. It established a US$2.3 million investment fund, which is managed by its own board of directors and three permanent employees. Small specialist firms provide inputs into the MNC’s operations via Zimele, lowering Anglo’s costs through competition. Zimele provides financing through loans and taking a 20% stake in a company up to US$350,000. The latter is significant because Zimele acts as a partner or shareholder who shares the risk of the SME. SME shareholders must, however, make their own capital commitment. As Zimele seeks an exit strategy, its capital dependency decreases over time. As a shareholder, Zimele sits on the boards of various SMEs and can thus act as a force for good corporate governance while also protecting its investment.

Example 2b Minera Yanacocha, Peru, Newmont, and IFC It is the largest gold mine in Latin America, located in Peru’s northern province of Cajamarca. In 1993, the IFC made its first investment in the mine. It directly and indirectly created about 8,000 new jobs, making it the region’s largest employer and taxpayer. The partnership between IFC and the mine dates back to 1993 and 1994. In 2005, SMEs that competed for contracts with the mine and other businesses increased their total sales to a high of US$10.5 million. Over the course of 18 months, new sales increased by $4 million. The 150 entrepreneurs received training, and 25 SMEs became more competitive through the acquisition of modern digital technology and knowledge. Over the previous 15 months, a capacity-building program for agribusiness SMEs created approximately 54 new jobs and tripled aggregate sales to more than $2 million.

Example 2c  Economic linkage program in Rajasthan, India (Cairn India and IFC) Cairn India has been one of India’s largest private gas and oil exploration firms for over ten years. They conduct their operations in one of India’s most difficult states, Barmer. This company created a linkage program that focuses on developing the capacities of SMEs both within and outside of the company’s value chain. As a result of the discovery of hydrocarbons in the region, SMEs have been hampered in participating in economic growth due

108  David Damiyano to a shortage of skilled and semi-skilled labour and low operating capacities. This prompted Cairn India to establish an enterprise centre to strengthen the capacities of SMEs and assist dairy SMEs. The dairy project reached over 125 households in two months, which boosted the performance of SMEs in the Barmer State.

Example 2d  Anglo-Zimbrel, South Africa (Anglo-American) This company was founded in South Africa in 1917, and to date, the company is a global leader in gold, diamonds, and platinum group metals, extending its interests to base, coal, and ferrous metals; paper and packaging; and industrial minerals. Its activities fall into three primary sections: business development, procurement, and participation in the junior mining sector through the Anglo Khula Mining Fund. It has managed to identify SMEs that can participate in their value chain. In 2006, the company invested in 14 new and existing black economic empowerment SMEs in different categories, ranging from drilling consumables to corporate advisory services as well as engineering. That same year, 8.9 billion rand was used to procure from black-owned and managed SMEs, and the figure increased to 12.3 billion in 2006.

8.7 Depth and Breadth of Linkages Strategic linkages have both a qualitative and a quantitative component. This primarily refers to the depth and breadth of connections. The breadth of linkages is concerned with the number and scope of the linkages, whereas the depth of linkages is concerned with the extent of value added locally. Quantitative effects could, for example, be related to an increase in the volume and value of activities performed by the local alliance partner instead of collaboration with multinational enterprises. Qualitative effects could be related to the enhancement of local partner company capabilities as a result of collaboration with multinational enterprises. Job creation as a result of linkage with local partners can be used as a proxy measure for quantitative effects, and linkage-induced employee skill and qualification upgrading at local partners can be used as a proxy measure for qualitative effects. The usefulness of these proxies for linkage effects is enhanced by the fact that human capital and job creation are important reasons for developing countries to encourage linkages between multinational corporations and local firms. The latter refers to the scope and number of connections, such as the number of jobs created, whereas the former refers to the value added at the local level.

Building Productive Capacities  109

8.8 Key Challenges in Building Productive Capacities A lack of access to finance is a widely acknowledged and well-known challenge because SMEs frequently lack the necessary collateral and credit information to qualify for loans from formal financial institutions. It is also worth noting that some SME owners or managers lack the necessary knowledge and expertise in bookkeeping and finance. Apart from that, small business owners and managers lack knowledge of available opportunities and markets abroad, as well as new innovations and technologies that can improve their company’s growth, efficiency, and productive capacity. In spite of their inability to obtain loans from financial institutions, small businesses face significant challenges in obtaining other forms of financing, such as leasing, particularly in developing countries. SMEs are regarded as risky to lend to, exacerbating the difficulty in obtaining loans. Because of the same inability to obtain credit through all formal financial channels, small businesses rely primarily on internal profits, borrowing from relatives and friends, and large personal savings. Furthermore, in many developing countries, a lack of human resource skills and capacity to absorb the potential of linkage opportunities may be a constraint. The ability to negotiate contracts with international companies is also a key factor in establishing broad-based economic ties. Improving local linkage development may benefit local empowerment and participation in negotiations. This linkage could be established beyond individual nations through the identification and promotion of regional integration, allowing SMEs in all sectors to benefit from economies of scale.

8.9 Policy Recommendations It is recommended that governments around the world develop policies such as strong basic service provisions to attract investment rather than impose restrictive policies such as local content quotas. Furthermore, the most effective way to strengthen the ability and capacity of SMEs to engage in linkages with large corporations is to create a domestic environment that is healthy and thus conducive to investment. A company that competes on the global stage, employs cutting-edge technology and operates in an environment governed by the rule of law is capable of fostering links and reaping the economic benefits that come with such an action. While the policies should not be used to replace broad-based policies aimed at creating a favourable investment environment, more targeted policies may be approved. A compelling case can be made for enterprises to “lift” themselves to the educational and technological levels required by their potential business partners. Furthermore, governments should provide incentive packages to large corporations that form alliances with small businesses in order to increase their productive capacity and competitiveness. In most cases, international agreements permit obligations involving incentives. These incentives can also be based on performance, and they may include preferential treatment for expatriate employees, majority ownership, or import duties. Incentives can also take the form of duty exemptions, fewer restrictions on key personnel, full or majority ownership, a broader range of

110  David Damiyano dividend payments to the parent company and a reduction in imported components or those not manufactured in the receiving or hosting country.

8.10 Conclusion Business connections are not limited to the semiconductor industry. Many other industries, including mining, food and personal care products, textiles, and automotive accessories, have developed backward linkages. In the absence of comprehensive public–private partnerships, it is also possible to develop company programs. Advocates of business partnerships should be clear about whether they are promoting viable commercial ventures or charitable acts. The number of discussions and initiatives promoting “partnerships” has expanded to include a wide range of relationships, and the line between commercial ventures and philanthropy has become blurred. As a result of partnerships and/or business linkages, many philanthropic acts that have nothing to do with the TNC’s business strategy are promoted. The chapter demonstrated that SMEs face a number of inherent challenges that limit their productive capacity. Because SMEs are an essential component of industrialization in developed and developing countries, so their productive capacity should be increased. The chapter clearly stated the need to understand factors that affect productive capacities in order to improve them, such as participation in international markets through exports, which greatly improves productive capacities. Furthermore, by being flexible in their decision-making, orders, product characteristics, pricing, and any customer demands, SMEs have a great chance of improving their productive capacities. As a result of the challenges faced by SMEs, it is critical to establish business links, whether backwards, forwards, or lateral. SMEs are expected to analyse the depth and breadth of their links with other organizations in the ecosystem in addition to their general knowledge of business linkages. This business linkage ecosystem fosters the growth and development of SMEs, which has significant economic implications for economic growth.

References Bergthaler, W., Kang, K., Liu, Y., and D. Monaghan (2015). Tackling small and medium-sized enterprise problem loans in Europe. IMF Staff Discussion Note, March 2015, International Monetary Fund. BIAC, B20 China, World SME Forum, SME Finance Forum (2016). Financing growth; SMEs in global value chains, http://biac.org/wp-content/uploads/2016/06/FinancingGrowth-SMEs-in-Global-Value-Chains.pdf. Canare, T., Francisco, J.P., and N.A. Price (2017). An empirical analysis of SME and large business linkages: evidence from the Philippines RSN-PCC Working Paper, pp. 17–007. COMCEC (2013). Promoting the SMEs exports in the OIC Member countries, standing committee for economic and commercial cooperation of the organization of Islamic cooperation (COMCEC). Eichfelder, S., and F. Vaillancourt (2014). Tax compliance costs: A review of cost burdens and cost structures. Hacienda Pblica Espaola, 210(3), 111–148.

Building Productive Capacities  111 Elahe Kinai Harchegani, and P.F. Abolfazl Solati (2015). Identifying the factors affecting SME’s export performance (case study: sports equipment’s exporters). Engineering, Management, and Technology, 3(3), 390–400. IFC (2010). Scaling-up SME access to financial services in the developing world. Washington, DC: International Finance Corporation, World Bank Group, http://www.enterprisedevelopment.org/wpcontent/uploads/ScalingUp_SME_Access_to_Financial_Services. pdf. (accessed on 10 January 2023). OECD (2013). Skills Development and Training in SMEs, OECD Publishing, Paris. OECD (2016). Entrepreneurship at a Glance 2016, OECD Publishing, Paris. OECD (2017). Key issues for digital transformation in the G20. Report prepared for a joint G20 German Presidency/OECD conference, Berlin, January 12, 2017, https://www.oecd. org/g20/key-issues-for-digital-transformation-in-the-g20.pdf OECD and World Bank Group (2015). Inclusive Global Value Chains Policy options in trade and complementary areas for GVC integration by small and medium enterprises and low-income developing countries. OECD and World Bank Group report prepared for submission to G20 Trade Ministers Meeting, Istanbul, Turkey, 6 October 2015. www. oecd.org/trade/OECD-WBG-g20-gvc-report-2015.pdf. Yoshino, N., Taghizadeh-Hesary, F., Charoensivakorn, P., and Niraula, B. (2016). Small and Medium-Sized Enterprise (SME) credit risk analysis using bank lending data: An analysis of Thai SMEs. Journal of Comparative Asian Development, 15(3), 383–406. DOI: 10.1080/15339114.2016.1233821.

9 Skills Training by SMEs Global Experience and the South Korean Consortium Approach Gift Mugano

9.1 Introduction As noted in Chapter 1, small and medium-­sized enterprises (SMEs) makes a significant contribution to economic development through their contribution to output, employment, and growth. In South Korea, for example, SMEs account for about 99% of all enterprises, 88% of employment, and almost 50% of total outputs and exports (Lee, 2016). Building on this evidence, it is undeniable that SMEs are an important source of income and employment in South Korea, that is, a situation similar to developing countries in Asia and Africa (Lee, 2016). In view of this, as part of their economic development strategies, many governments have adopted targeted policy tools to promote SMEs. One specific policy strategy which has been used to promote SMEs’ growth is skills development. Ever since the human capital theory was advanced in the early 1960s (Schultz, 1961; Becker, 1964) and the multilateral development banks launched their lending for human resources development, governments of developing countries have increasingly emphasised human capital investment. South Korea and other developing countries which, inter alia, include Malaysia, China, Mexico and Chile provides grounded information policies which can be used by developing countries to foster SMEs’ development. The experience discussed here is expected to showcase lessons for African economies. This chapter is organised as follows: Section 9.2 discusses skills gaps in SMEs, Section 9.3 discusses SMEs’ training funding models, Section 9.4 discusses challenges facing SMEs’ training programmes, Section 9.5 discusses international experience on SMEs’ training and government policies, Section 9.6 discusses system and strategy for implementation of training programmes, Section 9.7 discusses the impact of training programmes and Section 9.8 presents the conclusion.

9.2 Skills Gaps in SMEs In order to guarantee the sustainability of their business ventures, SMEs require a set of skills which, inter alia, include networking, leadership, financial management, management, marketing and human resources (Mbuya, Bounds and Goldman, 2016; Pyysiainen, Anderson, McElwee and Vesala, 2006; Homer, 2001). Pretorius, Millard and Kruger (2005) argued that entrepreneurial performances are a combination of business skills, entrepreneurial skills and motivation. DOI: 10.4324/9781003413172-9

Skills Training by SMEs  113 According to Nieuwenhuizen (2008), entrepreneurial skills are skills that are linked to personal and interpersonal capabilities and conveyed in people’s behaviour. Proactiveness, achievement orientation and commitment to others are three groups of competencies are which are associated with entrepreneurial skills (Nieuwenhuizen, 2008; Botha, Nieman and Van Vuuren, 2006 and Mbuya, Bounds and Goldman, 2016). Based on the preceding three-­dimensional model developed by Botha, Nieman and Van Vuuren (2006), the skills which can help SMEs through entrepreneurial training and education, which are crucial for their performance are • • •

Entrepreneurial skills: Creativity, education, risk-­taking, goal setting and opportunity identification skills are the key attributes that will enhance entrepreneurial awareness. Business skills: These include human capital management, knowledge management and technical expertise crucial for an entrepreneur. Motivation as a skill: This skill includes personal factors such as leadership, networking and commitment to succeed and perform in the business environment.

The five skills identified by Mbuya, Bounds and Goldman (2016) which are essential in managing SMEs are leadership, creativity and innovation, networking, goal setting and time management for research. 9.2.1 Leadership Skills In any organisation, leaders are expected to set direction, provide motivation, align people and inspire others. Leadership competencies refer to the abilities, knowledge, skills and attributes required of leaders in order for them to perform their duties efficiently. In an economy that is evolving in a global village, leaders need to understand the global nature of their business and must have the skills to analyse the trends and market conditions (Das, Kumar and Kumar, 2010). 9.2.2 Creativity and Innovation Skills In order to spot the patterns and market trends which have a bearing on the business, leaders must have creativity and innovation skills (Pretorius, Millard and Kruger, 2005). Pretorius, Millard and Kruger (2005); Stokes et al. (2010); and Mbuya, Bounds and Goldman (2016) argued that creativity is not a useful or desirable component of entrepreneurship because creativity drives entrepreneurship. In line with this view, Stokes et al. (2010) underscore that in all situations, creativity provides the foundation of the initial process of entrepreneurship. In view of this, in order to develop entrepreneurial skills, education on the nexus between creativity and entrepreneurship is key. As part of the education guides, Pretorius et al. (2005) outlined the following as focus areas: critical thinking development, overcoming the barriers to becoming creative, training for enhancing creativity, creative thinking and personal attributes.

114  Gift Mugano With respect to innovation, in a more modern sense, innovation refers to the process of turning ideas into opportunities for value creation (Stokes, Wilson and Mador, 2010). The continued ability of an entrepreneur or SME to deliver products and services of high quality is caused by the intellectual and innovative capabilities of the entrepreneur (Kibet, Samuel and Bitange, 2010; Stokes, Wilson and Mador, 2010). Hence, factor for the successful development of products and improvement of the innovative performance of SMEs, there is a need for training of SMEs on critical thinking and innovative capabilities of entrepreneurs. 9.2.3 Networking Skills Sigmund, Semrau and Wegner (2015), defined networking as: the ability to develop friendships and build strong, beneficial alliances coalitions. Ring, Peredo and Chrisman (2009) assert that networking in business provides the following benefits: it improves access to the market, the ability to increase speed in the market; it augments the ability to share knowledge, easier access to technology, the safeguarding of propriety rights and the ability to share risks. Furthermore, Senik, Ladd, Entrekin and Adham (2011) underscore that, if SMEs create networks with businesses at an international level as they may provide “symbiotic” relationships with larger firms. This will help SMEs to learn about international opportunities and can motivate SMEs to penetrate the international market. Likewise, social networks were noted by Lacho and Marinello (2010) as having positive and negative influences on an SME’s success. Networking through social media such as Twitter, Facebook and LinkedIn can help SMEs to target a large audience of customers and keep in contact with them (Lacho and Marinello, 2010). 9.2.4 Goal-Setting Skills The effectiveness of goal setting assumes the existence of goal commitment. It is accepted that if there is no commitment to goals, then goal setting does not work (Dodd and Anderson, 1996). In order to attain assigned objectives successfully, it is important to first set targets first and then make decisions regarding acceptable shortfalls (Liccione, 2009). According to Liccione (2009), goal setting must be •

• •

Consistent: Goal commitment is maximised only if employees are held accountable for goals over which they have the most control. Employers must always ensure that their goals and objectives are fully understood and mastered by the employees and that they will be dedicated to their work. Attainable: It is the responsibility of managers to ensure that employees possess the knowledge, skills, abilities and personal motivation in order to participate fully in the vision and mission of the organisation. Clear: Goals must be clear and the objectives and sub-­objectives of the organisation, as well as the approach that will be used in order to attain those objectives, must be expressed in a simple way.

Skills Training by SMEs  115 9.2.5 Time Management Time management refers to an attitude of personal commitment and, more importantly, a dramatic reordering of priorities and work practices. Time management includes a combination of time assessment, goal setting, planning and monitoring of activities (Hafner and Stock, 2010). Time management is a critical skill for success in business. The notion of time in business is becoming crucial owing to the fact that expanding globally requires an improvement in the speed of telecommunications and pressure to get one’s services and products to market (Fisher and Lehman, 2005). Effective management of time increases the ability of employees to perform their duties within the allocated time and leads to job satisfaction. In today’s competitive environment, managers who misuse their time are at a distinct disadvantage. Time management does not provide solutions to management problems. It does, however, provide the discretionary time in which the manager can find those solutions, plan for the future and assess overall progress (Farooq, Rehmani and Afridi, 2010). Notwithstanding the importance of training on SMEs’ performance, African countries face a perennial drought of funding has been one of the key binding constraints affecting national governments in rolling out SME training programmes. In view of this, using international experience from South Korea and other developing countries, the succeeding section discusses the performance of various SMEs’ training funding models with a view of drawing lessons for Africa.

9.3 SME Training Funding Models The efficacy of the effectiveness of the training levy system and training grant system on the development of SMEs is discussed in this section. 9.3.1 The Training Levy System In order to mobilise funding for training SMEs, a number of countries such as France, South Korea, Brazil and Colombia launched innovative extra-­budgetary programmes, such as training levies, which imposed semi-­taxes (0.5%–2.0%) on the wage bills of enterprises, as in France in 1925 (Lee, 2016). In the 1940s, with the technical assistance of the International Labour Organization (ILO), Latin American countries established semiautonomous national training institutions, such as SENA in Colombia and SENAI and SENAC in Brazil (Lee, 2016). The social security authority collected the training levies and transferred to national training institutions (Lee, 2016). International evidence shows that the training levy system was successful in mobilising independent and extra-­budgetary resources for training (Lee, 2016). These extra resources were channelled mainly to the national training institutions and expanded public training programmes covering even the training needs of the unemployed, disadvantaged groups and small employers. However, in a number of cases, the training levy system failed to stimulate employers’ interest in worker training (Lee, 2016). In addition, in countries such as Kenya, Tanzania and Brazil, the expanded public training programmes crowded

116  Gift Mugano out non-­government training entities and programmes and become more supplier-­ oriented and less relevant to the needs of employers (Adams and Fretwell, 1997). To make matters worse, as the independent resources accumulated, the national training entities became complacent and authoritative in offering their training programmes. As in the case of Colombia, of concern is the fact that the national training institutions spent funds on non-­training programmes, that is, training programmes not related to the sectors or industries from which the revenues were levied such as construction, agriculture and the self-­employed (Glasskov, 1994). With the passage of time, the training levy system became bureaucratic and costly in collecting levies and operating training programs. When the system allowed exemptions or deductions of the levies for those enterprises carrying out training programmes for their workers, it even became a source of corruption for public officials (Lee, 2016). 9.3.2 Training Levy Grant System In order to adjust to the changing needs of the macroeconomic environment and to mitigate disadvantages of the training levy system developing countries such as South Korea and Malaysia transformed the levy system into a levy grant system (Lee, 2006). In this regard, in direct contrast with the old system, where payroll levy revenues were channelled into public training programmes, the new system reimburses training costs incurred by enterprises. The advantage of this system is that, because the new system rebates the enterprise’s training expenses through a grant, it encourages employers to voluntarily offer in-­service training for their workers through the use of external training programmes purchased from recognised training institutes or in-­house training programmes (Lee, 2016). The training levy presented direct benefits to firms paying for the training levies and as such training programmes became more demand-­driven and met the needs of the same businesses. In addition, under the grant levy system, the mobilisation of training levies has become more efficient. Undoubtedly, in comparison to the levy system, Lee (2016) argued that more businesses benefitted from this levy grant system and more workers have been trained on account of the levy grant system. In Singapore, for example, by 1991, the number of trained workers tripled and the number of enterprises benefiting from the fund more than doubled after the country established the Skills Development Fund in 1979 with a view of providing incentives for developing higher-­level skills needed for economic restructuring (Dar et al. 2003). Since all enterprises are obligated to pay the training levy first, irrespective of the existence of their plan for training workers and training expenses incurred are reimbursed from the training levy fund, corruption and irregularities were minimised significantly (Lee, 2016). This is particularly so because this new system does not provide for special exemptions or discounts in training levies which normally provide avenues for corruption. Moreover, since the training programmes are organised or purchased by the enterprises themselves in accordance with their needs, training programmes have become more relevant (Lee, 2016). Most importantly, because they now compete in the training market for the selection by enterprises, both private and public training institutes and programmes have become more efficient since.

Skills Training by SMEs  117 However, the levy grant system had its own disadvantages. First, the system resulted in a regressive situation between small and large enterprises. The large businesses which were undertaking in-­house training even before the establishment of the levy grant system received a windfall effect even though it produced no additional training (Lee, 2016). In this case, the levy grants became a deadweight loss. With respect to SMEs, they didn’t regard the levy grant as a sufficient incentive to compensate for all implicit costs incurred when training their workers. This is particularly so because SMEs usually do not have in-­house staff members who have experience and specialise in identifying training needs, organising training programmes inside or outside the enterprise, evaluating training effects and reimbursing training expenses (Lee, 2016). Lee (2016) observed that the training levy grant in most cases is not sufficient to hire additional staff members responsible for the SME’s training management. Therefore, in direct contrast with large businesses, SMEs do not actively train their workers and as such they do not benefit from training levy rebates in the same way big businesses benefit. This situation results in an inequitable situation between small and large enterprises (Lee, 2016). Evidence shows that, in Singapore, only 25% of the small enterprises with fewer than 50 workers claimed the training grants while all enterprises with more than 200 workers applied for the training rebate (Dar et al. 2003). In addition, smaller enterprises often did not bother to carry out training or file claims and regarded the training levy as a new tax because the procedures for claiming training rebates or reimbursements were usually cumbersome and time-­ consuming (Dar et al., 2003; Edwards, 1997). Also, SMEs in particular, assurances for the quality of training, which are part of the requirement for the training levy grant system, are weak. Under the training levy grant system, enterprises tend to implement training programmes that fulfil the minimum requirement, if there is one, and produce no additional training. South Korea streamlined the procedures for rebate claims and advanced the rebate at the time of approving training programmes with a view of alleviating the bureaucracy and delays in reimbursement (Lee, 2016). This required monitoring and supervision of the programmes’ implementation and quality, which could prove problematic and costly (ILO, 1998).

9.4 Special Challenges for SMEs in Training SMEs, compared with large enterprises, face special challenges in developing their human resources. The challenges faced by SMEs in training are located in the economic nature of trade, scale and institutional capacity (Lee, 2006). First, in terms of challenges associated with scale, because of their small number of employees, SMEs do not participate in training programmes as much as large enterprises. As a result of this, SMEs find it difficult to arrange suitable institutional training programmes outside the enterprise or organise in-­house training programmes (Lee, 2016). Therefore, compared with large enterprises, SMEs in general incur a higher training cost per worker compared, and merit compensation for their extra training costs in order to secure a level playing field for fair competition.

118  Gift Mugano In addition, due to the nature of the technology adopted in SMEs and SMEs’ small staff size, an SME worker generally possess a broader range of skills and carries out multiple roles (Lee, 2009). Because most of the training courses are standardised and supplier-­oriented, especially from the external training institutes, for an SME, organising a suitable training course or finding one suitable for its capacity and resources is difficult (Lee, 2009). Second, as a result of institutional inadequacy, SMEs do not have a dedicated person working exclusively on the planning, organisation and management of worker training (Lee, 2016 and Lee, 2006). In the absence of a dedicated and specialised training expert, SMEs even if they can identify training needs, are constrained to negotiate to enter into a contract, monitor their training processes, evaluate training effectiveness and/or handle the cumbersome administrative processes for reimbursement of their training expenses. These factors contributed to the low level of SME participation in job skills development programmes (Lee 2006). Due to their financial, human, and knowledge constraints, SMEs are, in general, constrained by their capacity to adjust to changing market conditions (demand, technology, prices, etc.) and therefore are disadvantaged in launching training programmes for their workers in time (Booth and Snower, 1996; Lepenies 2004). Evidence shows that information asymmetries inherent in training markets prevented SMEs from using the training vouchers effectively, even when subsidies were provided for SMEs (e.g., training vouchers; Lee, 2016; Lepenies, 2004). Third, like general education, skills training is a public or semi-­public good as it specifically falls in the category of a merit good and as such has both negative and positive externalities (Musgrave, 1959; Freedman, 1962). Hence, SMEs are reluctant to provide training using their own funds. In view of the fact that the socially optimal quantity of skills training is larger than the market-­determined equilibrium quantity of training, governments are justified to increase the quantity of skills training by subsidising SMEs. In addition, the return on investment in training can be realised in the long run due to the fact that investment in human capital has a long gestation period (Lee, 2016). This makes it difficult for SMEs with limited finances and credit to invest in their workers, albeit larger enterprises merit government assistance.

9.5 International Experience in SME Training and Government Policies The existing literature gives surprisingly little guidance on the actual efficacy of the most common forms of targeted SME support, either for direct beneficiaries or, more broadly, for markets and economies, much less on the appropriate sequencing and complementarities of interventions (World Bank, 2014). This chapter contributes to the review of the trajectory of government policies for training by SMEs. It is a fact that government policies aimed at promoting SMEs’ development role have evolved over time. In the last few decades, as noted by Lee (2016), most of the policies placed emphasis on the provision of financial services for SMEs. The extensive use of SME finance projects was launched in the 1960s and 1970s as a

Skills Training by SMEs  119 reaction to the highly inefficient “integrated” enterprise promotion measures which combined the provision of subsidised credit with obligatory training courses (Lee, 2016). The integrated projects failed to take into account the real preferences of the target group, and as such, they lacked acceptance (Lepenies, 2004). However, grounded evidence from Gulli and Berger (1999), Mosely and Hulme (1998), Gibson (1997), Goldmark (1999), Dowson (1997), Tanburn (2002) and Lee (2016) suggests that financing alone can’t foster SMEs’ growth, especially in circumstances in which SMEs lack entrepreneurial and occupational skills. In view of this observation, in a bid to compensate for the developmental shortcomings of SME-­finance projects, government policies in the 1990s placed emphasis on the provision of “business development services” (BDS; Gibson 1997; Goldmark, 1999; Dowson, 1997). The provision of BDS is influenced by the new institutional economics and attempts to overcome the shortage of entrepreneurial and occupational skills through the design of favourable institutional arrangements (see Table 9.1). In Asia, governments place an emphasis on the provision of occupational skills training in SMEs as part of government support for SME business creation and expansion. In Singapore for example, in order to help enterprises grow and build trust in Singaporean products and services, an agency called SPRING was established by the government with a view of promoting SME human capability development (Lee, 2016). Likewise, in Malaysia, as part of the SME development programmes, SME Corporation Malaysia provides skills upgrading and expert advisory programmes for SMEs (Lee, 2016). Table 9.1  Innovative Training Programmes to Support Training in SMEs Country/Region

SME Training Programme

Government Support Measures

Latin America Turkey

Voucher SMEs special support

Singapore

SPRING Singapore: Human Capability Improvement SME training projects

Financial support Financial support for human development projects as part of BDS Financial support for human capability improvement as part of BDS Financial support for management and training projects as part of BDS Financial support for management and occupational training projects as part of BDS Financial support for training costs Financial support for information and advisory services Organisation/management/ financial support

Malaysia People’s Republic of China

Start and Improve Your Business Program

Chile

Fiscal incentives

Mexico

CIMO

Republic of Korea

Training Consortiums Programme

Source: Lee (2016)

120  Gift Mugano In China, in 2003, through the support of ILO, the People’s Republic of China introduced ILO’s Start and Improve Your Business (SIYB) Programme. This programme provided SMEs with entrepreneurial advice, support services and occupational skills training services. Other innovative projects to support skills training by SMEs in harmony with the operation of the market systems include the fiscal incentive programme in Chile, which was also initiated with World Bank financial support in 2002 (World Bank, 2002); the Integrated Human Resources Quality Improvement and Modernization (CIMO: Calidad Integral y Modernizacion) Programme in Mexico, which was supported by the World Bank in 1987 and 1993 (World Bank, 1998); and the SME support programme in Turkey. The CIMO Programme in Mexico visited interested SMEs periodically to provide information on training and advisory services available from public organisations and private enterprises with a view of overcoming information and knowledge asymmetry and organisational weaknesses of SMEs (Lee, 2016). The Ministry of Labour and Social provided subsidies to specialists contracted by enterprise associations for the provision of information and counselling services. In Chile, the fiscal incentive programme offers an income tax exemption for training expenses incurred by SMEs. Just like other BDS models in Asia, as part of business development efforts, the SME Support Programme of Turkey provides financial support to SMEs for projects developed to solve human resource development problems specific to the enterprise (Lee, 2016). In South Korea, in 2001, the government initiated a unique SME support programme called the SME Training Consortiums Programme (Lee, 2016). In this programme, the Government of South Korea encourages geographically determined groups of SMEs and industry to organise a training consortium and provides it with financial support to hire training managers. These training managers provide consortium member SMEs with technical and institutional assistance to undertake voluntary occupational skills training (see Box 9.1). The system has become the main government-­supported training programme and, in 2012, was renamed the National Human Resources Development Consortiums Program.

Box 9.1 SME training consortiums in the Republic of Korea Objectives and Content The SME Training Consortiums programme aimed to combat unemployment and improve the productivity of SME workers by helping groups of SMEs organise themselves to launch and manage in-­service training of their workers. Each consortium formed an operating committee to manage its training tasks. The operating committee was composed of representatives of training consortium member enterprises, the local chamber of commerce, the Ministry of Labor field office and training experts and met periodically for the planning and management of the consortium member enterprises’

Skills Training by SMEs  121 training affairs. The project provided each consortium with two training specialists financed by a levy grant fund (one of three employment insurance funds) to relieve the organisational, informational and financial constraints that SMEs face in developing their human resources. Individually, each SME could not afford to recruit its own training specialist (Lee, 2006).

Background The pilot training consortium project was conceived in the wake of the Asian financial crisis of 1997/1998. The financial crisis quickly spread to the real sectors of the economy, which, in turn, devastated the labour market in 1998. The stable unemployment rate of 2.0% through 1996 rose to 2.6% in 1997, and then shot up to 6.8% in 1998 and 8.6% in 1999. The Government of the Republic of Korea was desperate to lower the high unemployment rate in the short run and encouraged enterprises to raise their international competitiveness in the long run. “It was against this background that the Korea Chamber of Commerce and Industry (KCCI) prepared a pilot project for SME training consortiums in 1999 and applied, through the government, to the World Bank/Asia and Europe Economic Meeting (ASEM), for a grant to launch it. The project was initially planned to be implemented only in Busan City, which was hit hardest by the economic crisis, from June 2001 through December 2002. With promising prospects, however, the Ministry of Labor provided additional funds to the KCCI for implementation of the project in two other cities (Incheon and Kwangjoo) in September 2001” (Lee et al. 2014).

Rationales The main justification for launching the pilot training consortium project was the role of SMEs in Korean economic development, the regressive situation generated by the training levy grant system, and the government’s realisation that SMEs have special challenges or jeopardies in human resources development due to their size and special characteristics.

The Pilot The pilot project focused on SMEs (enterprises employing fewer than 300 workers) because they were more adversely affected by the Asian financial crisis of 1997/1998, held greater capacity for employment and had lower productivity than larger enterprises. As in many other developing countries, SMEs in the Republic of Korea accounted for about half the national income and exports and 86% of total employment at that time. However, their labour productivity was much lower than that of large enterprises (about 41%; Kim, 2012). Therefore, in the aftermath of the financial crisis, the government

122  Gift Mugano wanted to develop the skilled workers of SMEs and improve their productivity and welfare. Since 1995, all firms, large and small, have been obligated by law to pay training levies and are entitled to get rebates of the training levies to recover the costs of training their workers. Although the levy grant system did serve as an effective incentive for enterprises to carry out job-­related skills training, it has worked regressively against SMEs. SMEs did not avail themselves of the training levy grant system as actively as large enterprises did. The regressive result occurred even though the system paid special attention to the SMEs’ jeopardies in training their workers and offered SMEs greater financial incentives. For example, the rate of training levies as a percentage of workers’ wages (which ranges from 0.1% to 0.7%) was lower for SMEs than for large enterprises. Moreover, the level of rebates for large firms was 80% of training costs, up to a total of 100% of training levies paid, while for SMEs, it was 100% of the training costs and up to a total of 200% of the training levies paid. As a result, for each worker trained, the financial benefit (i.e., the difference between training levies paid by enterprises and the rebates received by enterprises) was greater for SMEs than for large enterprises. The financial benefit or net training grant was 0.08%–0.14% of the average wage of workers for large enterprises; however, it was 0.10%–0.24% for SMEs (Lee and Yoo, 2011). Despite these special financial incentives, SMEs did not avail themselves of the financial incentive system as much as large enterprises did. Consequently, an inequitable situation developed in the training levy rebates. Both large firms and SMEs pay training levies, yet a disproportionate share of the total reimbursements went to large firms. Of the total 6.9 million employees who paid the training levy (actually paid by employers as part of employment insurance fees), SME workers accounted for 65% (or 4.5 million workers). However, only 4.2% (192,000) of them participated in training programmes and got the training levy rebated, and this number accounted for only 18% of the total workers who paid training levies and received training levies rebated (reimbursed) in 2002. In contrast, while workers of large enterprises accounted for only 35% (or 2.4 million) of total workers who paid the training levy, about 38% (904,000) of them participated in training programmes and got their training levy rebated, and this number accounted for as many as 82% of total workers who paid training levies and got training levies rebated (reimbursed) in 2002 (Lee and Kim, 2004). Thus, large enterprises were able to recover their training levies at a much higher rate than SMEs. While large enterprises as a whole got about 30% of their training levies reimbursed in 2002, SMEs recovered only 15% of their training levies. The recovery rate between rebates received per trained worker and the training levy paid per worker —the financial return—was higher among SMEs than large enterprises. While the recovery rate was between 66% and 100% for large enterprises in 2002, it was between 126% and 905% for different groups of SMEs by staff size. In other words, for each worker participating in training, the recovery rate was greater for

Skills Training by SMEs  123 SMEs than for large enterprises due to the more favourable financial incentive given to SMEs. Despite such a favourable system arranged for SMEs, it is striking that a regressive situation developed against SMEs compared with large enterprises. In sum, SMEs participated in training less enthusiastically than larger enterprises, and it was proven that a training levy rebate incentive system alone was inadequate to promote skills training by SMEs. Additional or different types of incentives should have been devised to compensate SMEs for their jeopardies in the training of their workers. Lee (2016)

9.6 System and Strategy of Implementation of Training Programmes The Ministry of Labour opted to launch the pilot SME in-­service training consortium project. However, the project implementation was entrusted to the Korea Chamber of Commerce and Industry (KCCI). The pilot project was launched in June 2001 and completed in December 2002. The Ministry of Labour and the KCCI selected three industrial cities for the project – Busan, Incheon and Kwangjoo – and the ministry’s field office and the local chamber of the KCCI in these cities were instrumental in the implementation of the project. Each local KCCI chamber helped a group of 30–50 SMEs in the same area and industry to organise themselves into a training consortium and financed two training managers for each consortium (Lee, 2016). The two training managers played a key role: they were to act as the training specialists for the member SMEs. They were to establish an information network among consortium members (e.g., home page, email systems, and periodic meetings); conduct a training-­ needs survey of each member SME through interviews with managers and workers, and through job analysis; plan and program training activities of member SMEs; contract outside training institutions to train workers collectively as much as possible; collaborate with training institutions to develop training programs and materials; monitor their training activities; and conduct an evaluation study upon completion of major training courses on behalf of the member SMEs. (Lee, 2006) In 1999, the Government of the Republic of Korea applied, through the Ministry of Labour, for a World Bank grant to launch the project. The World Bank was administering a technical assistance trust fund entrusted by the Asia and Europe Economic Meeting (ASEM) for Asian countries affected by the Asian financial crisis in 1997/1998. The grant amount sought by the Republic of Korea was

124  Gift Mugano US$730,000; however, the final approved amount was US$250,000, so this was allocated for the implementation of the pilot project in the Busan City area alone. In September 2001, the Ministry of Labour allocated its own fund of US$2.5 million for refurbishing the KCCI’s training equipment and facilities, and the KCCI decided to allocate US$103,000 for the recurrent expenditures of the training consortiums in the cities of Incheon and Kwangjoo (Lee, 2016). Therefore, altogether about US$353,000 was spent on the training consortium project during the 1.5-­year pilot project period.

9.7 Achievements and Impacts of the Training Consortium Project The project promoted SME worker productivity, solving the most critical SME problem of a skilled worker shortage and helping prevent unemployment. In addition, the project also motivated the government and training institutions to shift their training policy toward a demand-­driven system; developed new working relationships between SMEs and training institutions; and promoted a partnership between private sector associations and public/non-­ governmental organizations. (Lee 2006) 9.7.1 Promotion of SME Productivity This project enhanced the capability of SME workers and, as a result, most likely led to an increase in SME productivity. “For example, in the welding course, trainees scored only an average of 65 points on a skills test before the course; however, they scored 93 points on average after the course (Busan Chamber area)” (Lee, 2004). At an ex-­post evaluation through interviews with member SMEs, employers revealed that workers’ job performance and productivity improved sharply after training (81% of total responses); savings in maintenance and repair expenses resulted (67% of responses); factory machinery utilization factor increased (88% of responses); and waste or defective products declined (72% of responses) (Incheon Chamber area). Also, many employers indicated that workers’ attitudes towards their jobs changed most noticeably (88% of responses) (Kwangjoo Chamber area). (Lee, 2004) Ban (2013) also econometrically shows that government support for training in SMEs had positive effects on the growth of productivity, but this was not the case with large enterprises. Interestingly, the practice of poaching or scouting workers by other SMEs declined substantially since all SMEs of the same trade and area joined the

Skills Training by SMEs  125 training consortium. Industry-­wide collective action reduced the risks of training and poaching. Thus, workers stayed longer with the same SME and consequently, SME productivity was enhanced. (Lee 2004) 9.7.2 Prevention of Unemployment This pilot project helped prevent SME workers from becoming unemployed. This effect of the project was important in the aftermath of the Asian financial crisis, when the level of unemployment was unusually high (from the usual 2% to more than 8%; Lee, 2016). According to the training consortium survey conducted in June 2001, those member SMEs that participated actively in consortium training programmes were reluctant to lay off their workers and, in fact, slightly increased the overall employment level by 1.7% (81 persons). In contrast, those member SMEs that did not participate in consortium training programmes suffered a reduction in the total employment level by 8.8% (436 persons), aggravating the unemployment level of their workers (Lee, 2005). Although these statistics may be criticised on the basis of possible selection bias, there is no strong reason to suspect that training consortium members had sharply different business prospects since they all joined the same consortium voluntarily at the same time for a similar purpose.

9.8 Conclusion It has been clear that SMEs have a potentially important role in expanding employment and output and promoting equity and welfare. However, from empirical records, it has also become clear that SMEs are in general less active than large enterprises in training their workers and more broadly developing their human resources. The market system by itself cannot correct this imbalance between SMEs and large enterprises in developing human resources. To realise SMEs’ potentially important contributions to the economy and society as a whole and redress the imbalance between large and small enterprises, the government will have to intervene in the skills training market in favour of SMEs. Some of the innovative government policies and interventions in favour of SMEs inter alia include vouchers, fiscal incentives, special project financing, information dissemination and training consortiums. Financial assistance alone or redressing information asymmetry alone did not adequately achieve the objectives of redressing the imbalance between large and small enterprises or taking advantage of SMEs’ potential contributions to the economy. On the basis of the comparative review of the experiences with the innovative government interventions in favour of SMEs, it has become clear that a government should combine financial support with organisational, institutional and technical support for SMEs. In this sense, the experience with the SME Training Consortium in the Republic of Korea can serve as a role model. However, in the international context, one size does not fit all. A good experience in one country does not

126  Gift Mugano guarantee success in others with different social, historical, economic and political environments. The success model in one country will have to be adjusted to suit different contexts. For an SME training system to be successful, a government must establish a sound institutional framework for training by enterprises in general. The framework would include competent public and private training institutions competing in the training market with sound and flexible training programmes to meet the demands of enterprises, especially SMEs. The quality of training should be verified and certified by competency or qualification tests. The trainees should be supported by guidance, counselling and employment services for career development before and after the training programs. Since training is a public good, like basic education, a government should operate a sound training financing system, either with a sufficient government budget or a levy, a levy rebate system or an unemployment insurance system to support training by enterprises in a sustained manner.

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Skills Training by SMEs  127 Glasskov, V., ed. 1994. Alterative Schemes of Financing Training. Geneva: International Labour Organization. Goldmark, L. 1999. The Financial Viability of Business Development Services. Small Enterprise Development, 10(2), pp. 4–16. Gulli, H., and M. Berger. 1999. Microfinance and poverty reduction—Evidence from Latin America, Small Enterprise Development, 10(3), pp. 16–28. Hafner, A., and Stock, A. 2010. Time management training and perceived control of time at work, The Journal of Psychology, 144(5), pp. 429–447. Homer, M. (2001). Skills and competency management, Industrial and Commercial Training, 33(2), pp. 59–62. ILO. 1998. World Employment Report 1998/99. Employability in the Global Economy: How Training Matters. Geneva. Kibet, K.S., Samuel, C.K., and Bitange, R. 2010. Knowledge management as a source of sustainable competitive advantage: A comparative assessment of Egerton University farms and private commercial farms, African Journal of Business and Management, 1, pp. 70–82. Kim, J.H. 2012. Interpretation of the polarization between large and small enterprises, KDI Focus, 16, pp. 1–7. Seoul: KDI (in Korean). Lacho, K. and Marinello, C. (2010). How small business owners can use social capital networking to promote their business, The Entrepreneurship Executive, 15, pp. 127–133. Lee, K. W. 2004. A Pilot Project for the Training Consortiums in Korea: An Ex-­Post Evaluation. Presented at the APEC Symposium on the Human Resources Development, 10–11 May 2004, Jeju, Republic of Korea. Lee, B. H., and D. B. Kim. 2004. A Study of the Characteristics and Effects of the Support System for Enterprise Training. Seoul: Korea Labor Institute (in Korean). Lee, C., and G. Yoo. 2011. Training incentives in the Korean levy-­grant system and the performance: Evidence from the KLIPS data, KDI Journal of Economic Policy, 33(3), pp. 88–120. Lee, K. 2005. Training by small and medium enterprises in the knowledge economy: A case of South Korea. Seoul: Ewha Womans University Press. Lee, K.W. 2006. Effectiveness of government’s occupational skills development strategies for small-­and medium-­scale enterprises: A case study of Korea, International Journal of Educational Development, 26. pp. 278–294. Lee, K. W. 2009. Productivity Increases in SMEs: With Special Emphasis on In-­Service Training of Workers in Korea. Washington, DC: World Bank. Lee, K. W. 2016. Skills Training by Small and Medium-­Sized Enterprises: Innovative Cases and the Consortium Approach in the Republic of Korea. ADBI Working Paper 579. Tokyo: Asian Development Bank Institute. Available: http://www.adb.org/publications/ skills-­t rainingsmall-­a nd-­m edium-­s ized-­e nterprises-­i nnovative-­c ases-­c onsortium-­ approach-­korea/ Lee, K. W., Y. S. Ra, and C. H. Kim. 2014. In-­Service Training Policy in Korea, 2013 Modularization of Korea’s Development Experience. Seoul: Ministry of Employment and Labor and KDI School. Lepenies, P. 2004. Exit, voice, and vouchers: Using vouchers to train microentrepreneurs— Observations from the Paraguayan voucher scheme, World Development, 32(4). pp. 713–724. Liccione, W. (2009). Goal commitment, Performance Improvement, 48(7), pp. 26–30. Mbuya, J.M., Bounds, M., and Goldman, G. (2016), Selected skills required for sustainable small and medium businesses, Investment Management and Financial Innovations, 13(2), 1–11. Mosely, P., and D. Hulme. 1998. Microenterprise finance: Is there a conflict between growth and poverty alleviation? World Development, 26(5), pp. 783–790.

128  Gift Mugano Musgrave, R. A. 1959. The Theory of Public Finance. New York: McGraw Hill. Nieuwenhuizen, C. (2008). Entrepreneurial skills. Cape Town Juta and Co. Pretorius, M., Millard, S.M. and Kruger, M.E. (2005). Creativity, innovation and implementation: management experience, venture size, life cycle stage, race and gender as moderators, South African Journal of Business Management, 36(4), 55–68. Pyysiainen, J., Anderson, A., McElwee, G., and Vesala, K. 2006. Developing the entrepreneurial skills of farmers: Some myths explored, International Journal of Entrepreneur Behavior and Research, 12(1), pp. 21–39. Ring, J.K., Peredo, A. and Chrisman, J.J. (2009). Business networks and economic development in rural communities in the United States, entrepreneurship theory and practice. Available on: www.ebschohost.co.za, Accessed on: 25 January 2015. Schultz, T. 1961. Investment in Human Capital. American Economic Review, 51(1), 1–17. Senik, Z.C., Ladd, B.S., Entrekin, L., and Adham, K.A. 2011. Networking and internationalisation of SMEs in emerging economies, Journal of International Entrepreneurship, 9, pp 259–281. Sigmund, S., Semrau, T., and Wegner 2015. Networking ability and the financial performance of new ventures: Moderating effects of venture size, Institutional Environment, and Their Interaction, Journal of Small Business Management, 53(1), 266–283. Stokes, D., Wilson, N., and Mador, M. 2010. Entrepreneurship. United Kingdom: Cengage Learning. Tanburn, J. 2002. Developing commercial markets for business development services— Highlights of the Turin seminar, September 2001, Small Enterprise Development, 13(1), pp. 58–64. World Bank. 1998. Labor Market and Productivity Enhancement Project (Loan 3542-­ME) for the Republic of Mexico: Implementation Completion Report. Washington, DC. World Bank. 2002. Project Appraisal Document on a Proposed Loan to the Republic of Chile for the Lifelong Learning and Training Project. Report No. 23632-­Ch. Washington, DC. World Bank. 2014. The Big Business of Small Enterprises: Evaluation of the World Bank Group Experience with Targeted Support to Small and Medium-­Size Business, 2006–12. Washington, DC: Independent Evaluation Group.

10 Access to Markets and Internationalisation of SMEs Gift Mugano

10.1 Introduction Globalisation and trade liberalisation have market-access opportunities for small and medium-sized enterprises (SMEs). However, SMEs are often unable to take advantage of market opportunities that require large volumes of production, broad product range and regular supply. SMEs lack information and marketing skills and have little access to expertise and finance. Resultantly, SMEs are often unable to enter the global circuits of production and sale. International experience shows that these obstacles to growth can be overcome when small-scale enterprises join forces in collective endeavours. The recent and ongoing wave of global industrial restructuring, combined with technological advances (especially in information and communication technology [ICTs]), has been the major driving force for the rapid development of cross-border strategic alliances, mergers and acquisitions and inter-firm networking. Opportunities have emerged for SMEs to become (1) partners in international strategic alliances, (2) participants or targets in cross-border mergers and acquisitions, (3) specialised suppliers to multinational enterprises, (4) members of globalised informal networks and/or (5) participants in electronic networks (Sakai, 2002). This chapter discusses how such arrangements can confer any of a variety of benefits to SMEs which inter alia access to financial resources, pooled research efforts, product development, wider distribution channels and more.

10.2 Challenges Faced by SMEs in Accessing Local Markets In the local market, SMEs are hindered to access local markets as a result of a number of binding constraints which inter alia include long distance to markets, a lack of critical mass and consistency in supply, failure to meet quality and standards and high informality (see Box 10.1).

DOI: 10.4324/9781003413172-10

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Box 10.1 Challenges faced by SMEs in Botswana Many Botswana small, medium and micro enterprises (SMMEs) struggle with the market. For instance, the majority of beef farmers depend on Botswana Meat Commission (BMC) as a market for their produce. The BMC sells mainly to the European Market (EU), which is a major source of foreign currency for the nation. However, sometimes the EU condemns Botswanan meat whenever there is a foot-and-mouth disease for cattle. This negatively affects SMMEs involved in beef farming as their market temporarily shut down once in a while. In Botswana, with a growing population and a slowdown in economic growth, unemployment levels keep rising. According to the 2011 census, Gaborone, the capital city of Botswana, has a population of approximately 202 000 people. The surrounding areas of Gaborone, up to a 100-km radius, constitute the bulk of the Botswanan population. Looking at the rising unemployment of about 18%, it suggests more and more people looking to run businesses as SMMEs. The unemployment rate decreases with age. Those aged between 15 and 19 have the highest unemployment rate at 41.4%, followed by those aged between 20 and 24 years at 34.0%. However, the small population is a restricting factor as the market is small (World Fact Book, 2014). Another challenge for SMMEs is the vast distance between districts and cities. Botswana has a small population of about 2 million people, yet the land is a massive area of 600,370 square kilometres. Long distances between cities and villages make it difficult, mostly for entrepreneurs, to travel to the market to sell products. For instance, farmers in Maun growing tomatoes have found it hard as their market of South Africa proved an expensive option. This resulted in the SMMEs losing out as produce rotted (Sunday Standard Newspaper, 2012). Mutoko (2014) Jenkins, Akhalkatsi, Roberts and Gardiner (2007) argued that business linkages can be an effective vehicle which can be used to effectively address the binding constraints affecting SMEs in developing countries (see Box 10.2).

Box 10.2 Business linkages in Zambia and Uganda Background South African Breweries was founded in 1895 in South Africa. In 2002, it acquired the Miller Brewing Company, the second largest in the United States by volume. Today, SABMiller has a brewing presence in more than 60 countries on five continents. Twenty-nine of these countries are in Africa.

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Drivers Eagle Lager grew out of a business imperative to reduce the cost and price of beer, and in so doing, attract new customers and increase market share. In Uganda, where Eagle Lager was initially launched, approximately 60% of people live on less than $1 a day. Imported inputs, primarily barley, accounted for 15% of the retail price of beer – and taxation was an even bigger factor. SABMiller’s response was to substitute a local ingredient, sorghum, for imported barley, and to source the sorghum from small-scale farmers – allowing the company to achieve a tax cut from the government. The result, Eagle Lager, is slightly more expensive to produce than other beers, but its retail price is around a third less than that of lagers that use imported barley.

Activities Eagle Lager was launched in 2002 in Uganda and in 2005 in Zambia. The company now works with 8,000 small-scale farmers in Uganda and 2,500 in Zambia. It spends US$1.4 million on sorghum in each country, approximately 75% of which goes to farmers, with the balance going to post-harvest handling by third parties. To overcome initial mistrust, stemming at least in part from previous experiences of unfulfilled expectations around new products and markets, SABMiller’s local breweries had to invest in building trust, including by signing purchase agreements guaranteeing fixed farm– gate prices at levels considerably above market rates. In the case of Zambia, the company also protected farmers from a recent exchange rate appreciation. SABMiller has worked with three types of intermediaries in its work with small-scale farmers: farmer cooperatives, non-governmental organisations, and commodity brokers. Farmer cooperatives have simplified the process of communicating with, buying from and supporting large numbers of small farmers and have demonstrated strong leadership when representing the farmers’ interests. Non-governmental organisations, notably CARE International in Zambia, have been instrumental in providing financial and non-financial support to farmers, including training and provision of inputs. CARE is actively helping farmers to improve the quality of their produce and find new market opportunities beyond Eagle Lager, including export markets in Botswana. Commodity brokers have simplified the logistical process of purchasing raw materials and contributed important agricultural technical knowledge to the project team. The brokers have also helped to minimise post-harvest losses through the provision of effective storage.

Results Over 10,000 farming families are now involved in the Eagle Lager value chain. Assuming six dependents per household, this encompasses 63,000 people. Sorghum is drought- and flood-resistant, produces higher yields and has more

132  Gift Mugano stable prices compared to other local crops, and Eagle Lager provides a stable, long-term market for it. Studies by CARE International in Zambia and the SABMiller brewery in Uganda have shown that the average farmer producing sorghum in Eagle Lager’s value chain can expect to see his income rise by 50%. Eagle Lager has also been a success from the company’s business perspective, as the brand now has a 50% market share in Uganda and 15% in Zambia.

Lessons •

A clear business case ensures long-term commitment by the business and has a far greater chance of being sustainable than philanthropy-driven initiatives. • Government and business need to work in partnership to explore the scope for synergies between a company’s core business and the country’s development objectives. • Effective intermediaries are central to the success of supply chain projects, from both the farmers’ and the businesses’ perspectives. • Effort put into understanding the specific socio-economic and cultural factors driving the farmers, and into communicating with them, helps build trust and ultimately a more reliable supply chain. • As with many success stories, this one has been driven by a group of committed individuals using a multidisciplinary technical approach, clear allocation of responsibilities and strong leadership.

Challenges •

A lack of sufficient technical agribusiness knowledge and business skills among farmers, including understanding the quality requirements and marketing skills. In the Eagle Lager context, a practical first step would be to finance the distribution of CARE International’s guidance material on sorghum across the Eagle Lager supply chain. • Access to finance. Partnerships with NGOs and microfinance institutions can play an important role in enabling poor people to access new market opportunities and should be explored further in the Eagle Lager context. • Scale and effectiveness of intermediaries’ operations. Given the direct benefit that their activities are having for the breweries, the breweries should consider contributing to the costs of scaling up CARE’s activities. • Quality of governance, investment, and policy climate. There is a clear business case for promoting enabling business environments – with effective governance, investment and policy climates, particularly for smallscale enterprises. Companies can also play an important role in policy dialogue on infrastructure, a key constraint for small-scale farmers, and explore partnerships for supporting low-cost irrigation solutions. Jenkins, Akhalkatsi, Roberts and Gardiner (2007)

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10.3 SME Access to International Markets: Opportunities and Challenges However, SMEs are still relatively underrepresented in the global economy. SMEs only contribute between one quarter and one third of manufactured exports and account for a very small share, usually less than 10%, of foreign direct investment (FDI; Schreyer, 1996; Sakai, 2002). In most national economies, SMEs make up more than 95% of market participants and contribute about 50% of direct value added or production. The questions which always arise are, Why do SMEs make, proportionately, a much smaller contribution to value added in global markets, and why are fewer SMEs active on global markets? The reasons for this are manifold. Compared to larger firms, SMEs are exposed to international activities which are more complex and risky business environment and are both under-resourced and unprepared to deal with Organisation for Economic Co-operation and Development [OECD], 2004). In advanced economies such as the European Union, risks and complexities which are faced by SMEs, such as the risk of default, differences in the regulatory environment and policy environments are addressed by their respective governments through the provision of trade finance, insurance and rebates (OECD, 2004, 2008). However, notwithstanding the challenges facing SMEs to penetrate international markets, evidence shows that SMEs in advanced economies, such as China, Taiwan and the EU, use international strategies which, inter alia, include direct and indirect exports, alliances, outsourcing, networks, FDI and participating in regional and global value chains (GVCs; OECD, 2004, 2008). 10.3.1 Export Promotion Globalisation can open up new opportunities for SMEs, providing them with access to higher-quality factors of production and knowledge transfer, as well as new markets. However, it can also expose them to new challenges. Globalisation can heighten competitive pressures, as imports and foreign firms enter the domestic market, and SMEs can be affronted by a host of trade challenges as they seek to internationalise (OECD, 2018). Firm-level surveys suggest that SMEs are under-represented in export activity, which may support an argument for export promotion policies targeted at SMEs. SMEs have a lower propensity to export than larger firms and those that do export do so in lower relative volumes (OECD, 2018). A study by the OECD (2018) into the efficacy of trade promotion as an effective tool to foster market access for SMEs showed that Indonesia, Malaysia, the Philippines, Singapore and Thailand have relatively well-advanced policies and programmes in place to promote SME exports. These programmes are well funded and fully operational. As noted by the OECD, these programmes offer SMEs support across a wide range of areas, from trade policy information and market intelligence to complying with free-trade agreement rulings. Evidence shows that these countries not only facilitate SME participation at major trade fairs but also support them with marketing, product development and penetrating export

134  Gift Mugano markets (OECD, 2018). In order to promote SMEs’ export and access international markets, Indonesia and Thailand, for example, have established trade centres in major cities around the world in order to promote the products and services of local SMEs (OECD, 2018). These centres also provide market research and information on overseas markets and organise export promotion activities. 10.3.2 Rationalising Production: Offshore Outsourcing and Acquisition of Strategic Assets With the development of ICT technologies and the emergence of a global supplier base, outsourcing, including offshore outsourcing, has become a viable option also for small firms. As common with large firms, SMEs increasingly choose to outsource tasks when this allows them to gain competitiveness from the rationalisation of production and the optimisation of resource allocation. In many cases, it is the decision to follow the contractors abroad that determines the offshoring strategy (see Box 10.3).

Box 10.3 Offshore outsourcing While difficult to measure, the increased recourse to outsourcing and offshoring by SMEs has been recorded in recent SME surveys (2003 Observatory on European SMEs; and Japan’s 2004 and 2006 White Paper on SMEs). Recent studies from UNCTAD (2005) revealed that even SMEs in developing countries and economies in transition increasingly try to enhance their competitiveness through FDI that provides them with access to strategic assets, technology, skills, natural resources and international markets. A European survey carried out in 2003 found that more than one third of the surveyed SMEs with subsidiaries abroad had no exports (European Commission, ENRS Survey 2003). This suggests that the creation of foreign subsidiaries by SMEs is not always intended as a sales platform for the company’s products but can also be a platform for accessing cheap labour (e.g. via subsuppliers) or accessing knowledge and technology. The survey findings also indicated that internationalised SMEs are more prone to cooperation whether by formal (such as agreement or contract) or informal terms with other firms, both domestically and abroad, as compared to other non-internationalised small firms In Japan, the proportion of SMEs with overseas subsidiaries has increased constantly since the beginning of the 1990s, in particular in manufacturing. The purposes of establishing subsidiaries change according to region, with sourcing cheap products and cutting costs being the first reason in China and in newly industrialising economies (Hong Kong, Chinese Taipei, Korea). At the same time, the increase in foreign direct investment has also been accompanied by a rise in the number of withdrawn overseas subsidiaries of SMEs, with a higher share of withdrawal for joint - ventures than for independent ventures. This is probably a sign of the difficulties SMEs encounter in managing operations outside their domestic market.

Access to Markets and Internationalisation of SMEs  135 Typically, small firms estimate that the savings associated with offshore sourcing are likely to be outweighed by the cost and risk of establishing an offshore operation. The difficulty of managing the outsourcing of activities in countries with different languages and cultures may represent a barrier to SMEs. Despite these problems, recent empirical evidence showed that SMEs can be successful in outsourcing abroad (Value Leadership Group, 2005). These SMEs have adopted an overall strategy with respect to outsourcing that goes beyond cost-cutting. Indeed, it is not easy to gain a competitive advantage based solely on a cost advantage, because competitors soon or later are forced to follow an offshore strategy. SMEs that have been successful are those that choose overseas partners with complementary competencies and a qualified labour force, thus adding to their comparative advantage at home and that of their partners. Among European information technology (IT) SMEs, those successful in outsourcing offshore marked a step towards restructuring the firm’s business model that allowed it to stay in the market and even remain competitive. OECD (2008) The evidence presented in Box 10.3 demonstrates that the internationalisation of SMEs is a strategic approach for gaining access to international markets and raising their competitiveness (OECD, 2004). However, most developing countries in Africa are faced with a multiplicity of challenges which inter alia include drought of finance, lack of international markets exposure and experience, structural rigidities in supply and a lack of government support (OECD, 2008). 10.3.3 Integration into GVCs Developing and advanced countries are increasingly participating in GVCs. This has allowed firms to increase the volume and sophistication of exports without having to master every step required to produce a final product (Stamm, 2004; Baldwin, 2013). At a firm level, however, the benefits of GVC participation ultimately depend on the extent to which firms can use this position to obtain efficiency gains (Lopez Gonzalez, 2016). In particular, the OECD finds the sourcing of foreign value added to be associated with greater productivity, more sophisticated exports and less concentrated export structures (Kowalski et al., 2015). While it might not make sense for all SMEs to participate in GVCs, integration into global value chains may accord advantages to many. SMEs can benefit on both the buying side (via access to more sophisticated and competitively priced inputs) and on the selling side (via new opportunities to meet a supply niche and specialise; López González, 2017). Public policy can play an important role in building SME capacity and interest in linking up with GVCs, as well as attracting and targeting foreign firms and encouraging them to engage SMEs as suppliers.

136  Gift Mugano Research by the OECD (2018) which evaluated the sophistication and intensity of government programmes to promote linkages between SMEs and multinational corporations (MNCs) and/or larger exporters, and/or with external or intermediary suppliers and the level of policies and programmes in place to promote technology transfer from MNCs to SMEs showed that Singapore and Thailand appear to be the most advanced in this area. The OECD (2018) noted that Singapore has long promoted technology transfer and other linkages between MNCs and SMEs. To be specific, since the 1980s, its Economic Development Board has provided subsidies for local SMEs to employ engineers and technicians from MNCs over a period of two years. In Thailand, the Bureau of Supporting Industries Development (BSID), under the Ministry of Industry, and the Board of Investment Unit for Industrial Linkage Development (BUILD) have played a major role in fostering SME participation in GVCs. Associated initiatives have included a free sourcing service provided by BUILD, helping both Thai and foreign buyers source parts in Thailand, and business matching activities by BSID in coordination with SME banks (Vo, Nguyen and Bui, 2017). However, in Africa, Uganda made use of business linkages between MNEs and SMEs with a view of tackling challenges faced by the country in global value chains (see Box 10.4).

Box 10.4  Integrating SMEs into global value chains: evidence from Uganda The establishment of sustainable linkages between SMEs and multinational enterprises (MNEs) is one of the most effective ways to integrate domestic suppliers into GVCs. Not all developing countries, however, have been successful in promoting such linkages and in embedding foreign firms into the local economy in the long term. The analysis of successful business linkage programmes shows that building linkages is dependent on the broader economic, social and cultural environment. Additionally, it shows that the creation of SME–MNE linkages is neither easy nor automatic and that in developing countries, a systemic policy approach to linkage building has produced positive results. For example, the main objective of the business linkage promotion programme in Uganda is to promote the creation of durable and mutually beneficial partnerships between MNE affiliates and large local companies, on one hand, and SMEs, on the other, so as to enhance the productive capacity, efficiency, competitiveness and sustainability of their relationships. The programme is being implemented by a Business Development Services Centre as lead facilitator, namely Enterprise Uganda, in collaboration with the Uganda Investment Authority (UIA) and supported by United Nations Development Programme (UNDP), United Nations Conference for Trade and Development (UNCTAD) and the Government of Sweden. The key role of each partner is as follows: Enterprise Uganda identifies SMEs and brokers and facilitates the implementation of business linkage

Access to Markets and Internationalisation of SMEs  137 deals and defines SMEs’ capacity gaps. It also ensures the transfer of technology and know-how, including coaching and mentoring of SMEs by MNEs, and facilitates access to markets and finance. The UIA contributes to the improvement of the business policy environment and facilitates the initial brokering of the linkages with the MNEs. The project so far demonstrates that in spite of the productive capacity constraints of SMEs, MNEs were ready to upgrade their business relationships with SMEs into long-term relationships, provided SMEs committed themselves to remedying shortcomings in their business systems and upgrading their skills. Since its inception in 2005, the project achieved the following results: •

An agreement has been signed with Uganda Breweries, which will assist in the upgrading of the members of the barley growers’ association in Eastern Uganda, to benefit over 2 000 farmers. • In Western Uganda, Kinyara Sugar Works Limited under Booker Tate signed an agreement to strengthen its link with Kinyara Sugarcane Growers Limited, thereby benefitting about 2 500 local farmers. • In the telecommunications sector, two telephone companies have signed up to upgrade their distributor network. • In the real estate sector, the country’s biggest real estate developer has signed an agreement to support 15 local suppliers. UNCTAD, Developing Business Linkages (2006) 10.3.4 Use of E-Commerce The use of e-commerce is expanding rapidly, with online sales expected to account for more than 16% of total retail sales worldwide by 2021 (eMarketer, 2018). This development opens up important new opportunities for SMEs, which can use e-commerce to access non-traditional markets while bypassing some common size-related constraints. E-commerce is also becoming increasingly important in Southeast Asia. Significant growth is anticipated over the next ten years, with some analysts forecasting a compound annual growth rate of around 32% (Google-Temasek, 2017). Southeast Asia’s perceived potential in this space is attracting bullish investment. The region has already produced a number of internet “unicorns” (companies valued at over US$1 billion), with Chinese companies and investors such as Alibaba Group and JD.com particularly active. Perhaps the most notable business-toconsumer e-commerce company in the region is Lazada. As of April 2017, Lazada was registering about 41.4 million monthly page views in Thailand and 54.4 million in Indonesia alone (eMarketer, 2018). This robust private sector activity opens up new opportunities for public–private collaboration. For instance, Singaporean SMEs can now market themselves online, free of charge, by listing on the 99% SME website, thanks to a partnership among

138  Gift Mugano Singtel, DBS and Lazada Singapore. In Indonesia, the executive chairman of the Alibaba Group has stood as special advisor to the government’s steering committee on its e-commerce road map since 2017. Private-sector collaboration could be considered an important aspect of public programmes to promote the use of e-commerce. International experience has shown that stronger participation by SMEs in global markets can help to strengthen their contributions to economic development and social well-being because SMEs are exposed to massive opportunities which are key in scaling up business, facilitating spill-overs of technology and managerial know-how, accelerating innovation, broadening and deepening the skill set and enhancing productivity (OECD, 2017). In order to develop policies that can support SMEs in making the most of the new opportunities offered by GVCs, a better understanding is needed of the interaction of SMEs with larger firms and MNCs within different contexts and along different value chains, of the role of clusters for SME participation and upgrading, as well as of how GVCs are evolving, including as a consequence of the digital transition (OECD, 2017). The participation of SMEs in global markets is undermined by trade and investment barriers. In addition, unlike large firms, due to their limited resources and management capacities, SMEs are less able to face the costs of engaging in international trade. In view of this trade facilitation, intellectual property protection, infrastructure and institutional quality are key to SME engagement in global markets. In order to reduce regulatory costs and burdens and promote SME competitiveness in global and emerging markets, there is a need for African governments to institutionalise transparency and reduce regulation. Likewise, as part of strategies to lessen onerous administrative and financial burdens, there is a need for predictable and efficient customs procedures and logistics services for SMEs participating in international trade. The OECD (2017) argued that National Trade Facilitation Committees can draw guidelines for SMEs from the new World Trade Organization Facilitation Agreement.

10.4 Improving Access to Global Markets and Knowledge Networks International experience has shown that stronger participation by SMEs in global markets can help to strengthen their contributions to economic development and social well-being because SMEs are exposed to massive opportunities which are key in scaling up business, facilitating spill-overs of technology and managerial know-how, accelerating innovation, broadening and deepening the skill set and enhancing productivity (OECD, 2017). However, in international trade, African SMEs under-represented (OECD, 2017). Evidence shows that few SMEs export directly, and in most cases, relative to larger firms, the exports represent a lower share of trade turnover and generally target neighbouring countries. In order to break this barrier, experience in OECD has shown that downstream and upstream linkages with larger companies can help SMEs break into foreign markets. The inter-firm linkages provide mutual benefits for both SMEs and large firms. This is particularly so because the quality and responsiveness

Access to Markets and Internationalisation of SMEs  139 of specialised suppliers mainly from the SMEs are crucial for the competitiveness of entire supply chains, at both the local and global levels, and of larger firms that are directly engaged in fierce global competition (OECD, 2017). In this respect, close coordination and interdependence between SMEs and large firms have proven to be important sources of value and competitiveness along supply chains (OECD, 2017). In order to develop policies that can support SMEs in making the most of the new opportunities offered by GVCs, a better understanding is needed of the interaction of SMEs with larger firms and MNCs within different contexts and along different value chains, of the role of clusters for SME participation and upgrading, as well as of how GVCs are evolving, including as a consequence of the digital transition (OECD, 2017).

10.5 Mitigating Challenges Faced by SMEs in International Markets In order to encourage SMEs to internationalise and increase their market access, policymakers could prioritise the following steps going forward: •

Export assistance for SMEs tends must not be ad-hoc in nature. Rather, there is a need for a comprehensive assessment of the competitiveness gap of SMEs’ exports. This assessment would be a first step in creating more systematic and specific policy measures to support SMEs in exporting. This assessment should cover all factors affecting SMEs’ propensity to export, including those implied by regulations. • Providing support and infrastructure to promote linkage development between SMEs and MNCs. This will entail the provision of infrastructure which will ensure connectivity cross-country for the seamless movement of goods (whether final or intermediate). Connectivity is an important prerequisite for SME participation in GVCs. Good connectivity can reduce trade costs between firms within the country. The following are required to develop robust connectivity:

•

Establish well-connected hard infrastructure (i.e., roads, ports, industrial parks, urban amenities, etc.) within countries. In general, this ensures seamless movement of goods with an important impact on the development of networks between production chains/units. Reform trade and investment regime. An open trade policy can facilitate the supply flow of intermediate inputs, while a flexible investment regime can create demand for SMEs’ products through outsourcing.



•

•

Provisioning legal instruments to support the growth of e-commerce (e.g. on e-payments or consumer protection) are incomplete and there has been no clear strategy to enhance the use of e-commerce among SMEs. This will require alignment of regulations and investment policy in order to provide a conducive business environment for the development of e-commerce. This is a first step toward establishing a strong participation of SMEs in e-commerce. Investment policy needs to be flexible and open to major global investors.

140  Gift Mugano

10.6 Conclusion Globalisation and trade liberalisation have market-access opportunities for SMEs. However, SMEs are often unable to take advantage of market opportunities that require large volumes of production, broad product range and regular supply. As noted by OECD (2007), SMEs lack information and marketing skills and have little access to expertise and finance. Resultantly, SMEs are often unable to enter the global circuits of production and sale. International experience shows that these obstacles to growth can be overcome when small-scale enterprises join forces in collective endeavours. The recent and ongoing wave of global industrial restructuring, combined with technological advances (especially in ICT) have been the major driving force for the rapid development of cross-border strategic alliances, mergers and acquisitions and inter-firm networking. Opportunities have emerged for SMEs to become (1) partners in international strategic alliances, (2) participants or targets in cross-border mergers and acquisitions, (3) specialised suppliers to multinational enterprises, (4) members of globalised informal networks, and/or (5) participants in electronic networks (Sakai, 2002). This chapter discussed how such arrangements can confer any of a variety of benefits to SMEs which, inter alia, access to financial resources, pooled research efforts, product development, wider distribution channels and more.

References Baldwin, R. (2013), Global Supply Chains: Why They Emerged, Why They Matter, and Where They are Going, World Trade Organization, Geneva, https://doi.org/10.30875/3c1b338a-en. eMarketer (2018), Worldwide Retail and e-Commerce Sales, eMarketer's Estimates for 2016- 2021, https://www.emarketer.com/Report/Worldwide-Retail-Ecommerce-SaleseMarketers-Updated-Forecast-New-Mcommerce-Estimates-20162021/2002182. Google-Temasek (2017), e-Conomy SEA Spotlight 2017, http://apac.thinkwithgoogle.com/ reasearch-studies/e-conomy-sea-spotlight-2017-unprecedented-growth-southeastasia-50-billion-internet-economy-html. Jenkins, Beth, Anna Akhalkatsi, Brad Roberts, and Amanda Gardiner (2007), Business Linkages: Lessons, Opportunities, and Challenges. IFC, International Business Leaders Forum, and the Kennedy School of Government, Harvard University. Kowalski, P. et al. (2015), “Participation of developing countries in global value chains: Implications for trade and trade-related policies”, OECD Trade Policy Papers, No. 179, OECD Publishing, Paris, http://dx.doi.org/10.1787/5js33lfw0xxn-en. López González, J. (2017), “Mapping the participation of ASEAN small- and mediumsized enterprises in global value chains”, OECD Trade Policy Papers, No. 203, OECD Publishing, Paris, http://dx.doi.org/10.1787/2dc1751e-en. Lopez Gonzalez, J. (2016), “Using foreign factors to enhance domestic export performance: A focus on Southeast Asia”, OECD Trade Policy Papers, No. 191, OECD Publishing, Paris, http://dx.doi.org/10.1787/5jlpq82v1jxw-en. Mutoko, W.R. (2014), “Challenges of Access to Markets and Opportunities for Small, Medium and Micro Enterprises (SMMES) in Botswana,” European Scientific Journal, Special Edition, 28–38. OECD (2018), Access to Markets and Internationalisation, OECD, Paris. OECD (2017), Enhancing the Contributions of SMEs in a Global and Digitalised Economy, Meeting of the OECD Council at Ministerial Level Paris, 7-8 June 2017, OECD, Paris.

Access to Markets and Internationalisation of SMEs  141 OECD (2015), Policy Framework for Investment 2015 Edition, OECD Publishing, Paris. OECD (2008), Enhancing the Role of SMEs in Global Value Chains, OECD, Paris. OECD (2004), Facilitating SMEs Access International Markets, OECD, Paris. Sakai, K. (2002), “Global Industrial Restructuring: Implications for Smaller Firms”, STI Working Paper 2002/4, OECD, Paris. Schreyer, P. (1996), “SMEs and Employment Creation: Overview of Selective Qualitative Studies in OECD Member Countries”, STI Working Paper 1996/4. Stamm, A. (2004), Value Chains for Development Policy: Challenges for Trade Policy and the Promotion of Economic Development, GTZ, Eschborn, https://www.die-gdi.de/uploads/ media/Value_Chains_for_Development_Policy.pdf. Sunday Standard Newspaper (2012) Botswana’s unemployment rate among the worst. Available on: http://www.sundaystandard.info/article/php (30 April 2012) (Date accessed: 14 January 2023) UNCTAD (2005), “Internationalisation of Developing-Countries Enterprise through Outward Foreign Direct Investment”, Issue note prepared for the Expert Meeting on Enhancing Productive Capacity of Developing Country Firms through Internationalisation, Trade and Development Board, Commission on Enterprise, Business Facilitation and Development, Geneva 5-7 December 2005. Value Leadership Group (2005), “How European IT SMEs are leveraging offshore capabilities to reignite growth, improve financial performance, and capture new markets”, Frankfurt am Main. Vo, T., A. Nguyen, and T. Bui (2017), “Trade in Value-Added: The Case of Viet Nam”, in Ing, L. and F. Kimura (eds.), Production Networks in Southeast Asia, Routledge, Oxford, https://doi.org/10.4324/9781315406787. World Fact Book (2014) Population Figures: Botswana. Available on: https://www.cia.gov/ library/publications/the-world-factbook/fields/2219.html (Date accessed: 14 January 2023)

11 SMEs and the African Continental Free Trade Area Gift Mugano

11.1 Introduction In most Africa economies, small and medium-­sized enterprises (SMEs) constitute about 90% of all businesses in both urban and rural areas. In Africa, SMEs provide an estimated 80% of jobs across the continent, representing an important driver of economic growth (Runde, Savoy and Staguhn, 2021). Sub-­Saharan Africa alone has 44 million micro, small, and medium-­sized enterprises, almost all of which are micro (Runde, Savoy and Staguhn, 2021). The African Continental Free Trade Area (AfCFTA) provides market access to 1.3 billion people and US$3.4 trillion, which is a massive market for the African SMEs. In view of the fact SMEs are the major driver of the African economy, they are expected to stand out as the major beneficiary of the AfCFTA. This chapter presents a possible avenue which can be used by African governments to help SMEs benefit from the AfCTA. This chapter is organised as follows: Section 11.2 discusses the overview of the AfCFTA; Section 11.3 discusses SMEs and the AfCFTA; Section 11.4 discusses pathways through which SMEs can benefit from the AfCFTA; Section 11.5 discusses strategies which must be put in place to unleash the potential of SMEs in AfCFTA; section 11.6 presents some concluding thoughts.

11.2 Overview of AfCFTA The AfCFTA is a trade agreement which was signed by 54 of the 55 members of the African member states with a view of eliminating barriers to intra-­African trade and investment (Congressional Research Service, 2022). As of July 2022, the agreement was ratified by 43 of the 54 signatories (Congressional Research Service, 2022). In order to enable the intra-­regional free movement of persons AfCFTA, members seek to eventually create a single market for goods, services, and capital. Eventually, like the European Union (EU), the AfCFTA members seek to establish a single African customs union with a common external tariff in place. The implementation of the AfCFTA implementation, which took effect 1 January 2021, established a dispute settlement mechanism and aims to lower barriers to trade in goods and services. In this regard, over the next five years, AfCFTA members have committed to eliminating tariffs on 90% of tariff lines, or 10% for DOI: 10.4324/9781003413172-11

SMEs and the African Continental Free Trade Area  143 the least developed countries. Of the remaining 10% of tariff lines, 3% of lines may be excluded from trade liberalisation while 7% are for “sensitive” products and will be phased out over a longer period. In addition, in this first phase of the implementation of the AfCFTA, sanitary and phytosanitary (SPS) standards, trade facilitation, non-­tariff and technical barriers to trade, and trade remedies are covered. This agreement seeks to build on and complement existing integration efforts pursued by Africa’s eight African Union (AU)–recognized regional economic communities (RECs). Some RECs such as the East African Community (EAC), for example, have already formed full customs unions with a common external tariff among their members which provide for a unified tariff regime to the other AfCFTA parties. From a developmental perspective, World Bank (2022) estimates show that the AfCFTA, if fully implemented, can potentially boost regional incomes by US$571 billion, that is, a 9% increase. In the same process, 18 million more better-­quality jobs, most of them higher-­paying, with women workers seeing the biggest gains, will be created. Of interest, about 2.5% of the continent’s workers are expected to move into new industries. Resultantly, on the back of income growth and increased employment, by 2035, 50 million people are expected to exit extreme poverty (World Bank, 2022). With respect to potential gains which will accrue to women, the World Bank (2022) study shows that the implementation of the AfCFTA agreement would lead to larger wage gains for women and skilled workers. To be specific, according to the World Bank (2022), in 2035, in comparison to the wage level without the agreement wages of female workers are expected to be 11.2% higher, outpacing 9.8% growth of male workers’ wages. In addition, on the backdrop of a large market access of 1.3 billion people and a gross domestic product (GDP) of $3.4 trillion, by 2035, World Bank (2022) study revealed that the AfCFTA is expected to stimulate foreign direct investment (FDI) could which could propel Africa’s exports by 32%, with intra-­African exports growing by 109%, especially in the manufactured goods sectors. African countries which are likely to be major beneficiaries of the intra-­African exports increase, inter alia, include Tunisia (165%), Cameroon (144%), Ghana (132%), Tanzania (126%) and South Africa (61%). Export sectors likely to grow the most on the back of eliminating barriers to trade and investment are processed foods, textiles and apparel and chemical, rubber and plastic products (World Bank, 2022). The AfCFA is expected to deepen regional integration which is expected to lower trade costs and boost capital inflows, boosting exports from services sectors such as hospitality, transport, and communications. Most importantly, the AfCFTA offers greater access to new markets and positive spinoffs from economic transformation to SMEs in Africa. Because SMEs are central to economic development in Africa, potential benefits which may arise as a result of the AfCFTA, inter alia, include investment opportunities, technological development, employment opportunities, and promotion of specialisation and industrialisation (Southern African Trust, 2021). In addition, African SMEs are expected to enter new markets, expand their customer base, and create new

144  Gift Mugano products and services. The AfCFA is expected to make investing in innovation viable; increasing investments that drive capital to domestic businesses; reducing the manufacturing gap, thus creating more avenues for SMEs to create more well-­ paid jobs, especially for young people; easing the process of importing raw materials from other African countries and enabling SMEs to set up assembly firms in other African countries; and creating cheaper means of production (Southern African Trust, 2021). The AfCFA will also benefit SMEs, which are largely cross-­ border traders.

11.3 SMEs and AfCFA United Nations Development Programme (UNDP, 2022) argued that African countries can leverage SMEs to make AfCFTA transformative. As argued by the UNDP (2022), the combined effect of mainstreaming SMEs in the AfCFTA and expeditious implementation of the AfCFTA is expected to be a game changer for development ambitions in Africa. Of importance to note is the fact that the AfCFTA is being implemented at a time the African continent is faced with a marked increase in poverty, socioeconomic setbacks and exogenous shocks caused by the COVID-­19 pandemic, the war in Ukraine, climatic change and food crisis. The view that the AfCFTA can help drive the continent’s economic recovery from the recent pandemic and ongoing crisis while spurring transformation is grounded on the belief that the implementation of the AfCFTA is expected to deepen socioeconomic integration and improve cooperation that enables trade, investment and peoples’ mobility to support industrialization and the development of a dynamic services sector (UNDP, 2022). In view of the fact that SMEs are the backbone of production and trade on the African continent, if the AfCFTA is fully implemented, by 2035, 30 million people will be lifted out of poverty and the African GDP will be increased by US$450 billion (UNDP, 2022). Since SMEs constitute at least 50% share of Africa’s GDP, they will be the major beneficiaries of the surge in regional income. The AfCFA offers vast opportunities for SMEs in the cross-­border business specifically for collaborative action in regional trade, thus allowing Africans to trade with each, thus building and strengthening Africa’s resilience. Current evidence shows that vulnerable, small and unregistered traders largely constitute cross-­border traders in Africa (UNCTAD, 2021a, 2021b). Likewise, in Africa, most employees are employed in the informal economy with a large share of them engaged in cross-­border trading. Ironically, 40% in the Common Market for Eastern and Southern Africa (COMESA) and 30–40% of total intra-­ regional trade in the Southern Africa Development Community (SADC) are constituted by cross border traders (Nshibi and Moyo, 2017; Southern African trust, 2021; UNCTAD, 2021a, 2021b). At a country level, in 2011, informal exports to neighbouring countries in Rwanda and Uganda were estimated at 50% and 86% of official exports to the countries, respectively (Bugingo, 2018). This evidence demonstrates that cross-­border traders are significant actors in African trade.

SMEs and the African Continental Free Trade Area  145 Of concern is the fact that although goods traded by African cross-­border traders are varied, they are currently dominated by low-­quality and locally manufactured and re-­exported goods from Asia. Major players in the cross-­border trade are youths and women. To be specific, in Southern Africa, West Africa and Central Africa, 70%, 60% and 60%, respectively, of informal traders are women (Southern African Trust, 2021). Specific benefits of the AfCFTA on SMEs inter alia include free movement of people, market access, reduced transaction costs, improvement of basic trade infrastructure and facilities, expanded value chains and reduction in non-­tariff barriers (NTBs). 11.3.1 Free Movement of People The AfCFTA seeks to promote the free movement of people across borders within the African continent which will benefit SMEs involved in cross border trading. From a gender perspective, the AfCFTA is expected to unlock massive trade opportunities for African women, who constitute more than 80% of cross-­border traders (Southern African Trust, 2021). To be specific, the AfCFTA provides SMEs run by women and youth, in particular, with opportunities to improve their export capacity in both formal and informal trade. This is particularly so because the protocols established by the AfCFTA agreement on investment, trade in goods, trade in services, intellectual property rights, and competition policy offer clear guidelines to ensure the protection of infant industries, SMEs are shielded from stiff competition (United Nations, 2021). Through this incentive, the Agenda 2063 goals of gender equality, women empowerment, and youth development will benefit cross-­border traders. 11.3.2 Market Access The AfCFTA comes with an expanded market of 1.3 billion people and a GDP of US$3.4 trillion which provides vast trade opportunities for SMEs. Because SMEs constitute a significant share of cross-­border trade in Africa, they stand to benefit from this expanded market (United Nations, 2021). It is anticipated that once they tap into regional export destinations, they will build enough critical mass to expand into international markets (United Nations, 2021). Evidence shows that dairy products from East Africa are trades mainly in regional economies while at the same time, parts of the African continent heavily rely on imports of processed milk and cream from non-­African countries. This demonstrates that African markets for dairy products already exist, if tariffs and NTBs were removed as part of the trade liberalisation agenda of the AfCFTA, African manufacturers have the potential to substitute imports outside the African continent (UNDP, 2022). Equally, agro-­processed foods (sugar, cereals, cocoa products, edible oils) and textiles to cosmetics which are produced by SMEs are among several products which present massive potential for African SMEs (UNDP, 2022). Likewise, by harmonising regulatory frameworks and opening up the services sector for more trade, the AfFCTA is likely to boost intra-­African trade in SMEs’ dominated

146  Gift Mugano services sectors which, inter alia, include technology, transport and logistics, financial services, and education (UNDP, 2022). In these sectors, combined, evidence shows that AfCFTA can be a game changer for SMEs by providing opportunities for value chain integration and markets (UNDP, 2022). However, in order to harness these benefits, this requires African economies and African SMEs, in particular, there must build a deeper understanding of the AfCFTA instruments, rules and regulations particularly trade facilitation and rules of origin, certification requirements, services regulations, modalities of liberalisation of trade in goods and services, licensing and certification of service suppliers. In addition, the great awareness of the markets brought by the AfCFTA needs to be enhanced by trade exhibitions, trade fairs, and conferences. 11.3.3 Reduced Trade Costs of NTBs Several SMEs are inexplicably affected by awkward bureaucracies, corruption, lengthy clearance processes and unclear rules (UNCTAD, 2021a). The AfCFTA is anticipated to address NTBs and set up mechanisms and frameworks that can be used to report, monitor and eliminate specific NTBs. Already, the African Union, in collaboration with the United Nations Conference on Trade and Development (UNCTAD) has developed an online mechanism that is designed to improve intra-­African trade by offering a site that can be used to report and resolve NTB issues and experiences by businesses (Cazares, 2019). Going forward, by creating rules common for all participating countries in areas such as technical barriers to trade (TBT) and SPS, the AfCFTA can further help reduce trade costs associated with these barriers (Southern African Trust, 2021). 11.3.4 Reduced Trade and Transactions Costs As a result of the high level of informality which is associated with African SMEs, they face high costs and delays at the borders. These costs, inter alia, include unpredictable and complex regulations, strict immigration laws, high fees and duties, and extensive and centralized documentation requirements (UNWOMEN, 2019). In view of this, the AfCFTA trade protocols provide for preferential trade regimes for SMEs which include simplified measures that accommodate small-­ volume consignments. In addition, the simplified measures which come with the AfCFTA, inter alia, cover aspects such as implementing specific permits and visa regimes for small traders; reducing the trading costs of certificates and decentralising testing and certification services; expanding the common lists of products under the simplified trade regime and increasing the value thresholds; implementing an automated system for customs data fees under the ASTCUDA system; and reducing other tax heads such as value-­added tax, processing fees, and income tax (UNWOMEN, 2019). From a gender perspective, since more than 80% of cross-­border traders are women, the simplified measures are expected to reduce the costs associated with cross-­border trading, thereby raising the profitability of participating women-­run businesses. In addition, the proposed simplified system is expected to promote the

SMEs and the African Continental Free Trade Area  147 registration of informal cross-­border traders and contribute to the elimination of problems such as confiscation of goods, harassment, violence, and imprisonment due to a lack of knowledge (Southern African Trust, 2021). Through the efforts to integrate the informal sector into a single continental structure through the AfCFTA, all the challenges will be addressed. 11.3.5 Expanded Value Chains Promoting regional and global value chains with a view of enhancing competitiveness is part of the AfCFTA’s agenda. SMEs and cross-­border traders are expected to find it easier to supply inputs to larger regional companies in Africa that have the capacity to export to overseas markets (Southern African Trust, 2021). Already, in the Southern African Customs Union trading regime, large automobile manufacturers in South Africa, which actively export cars to overseas markets, source inputs, which, inter alia, include fabrics from Lesotho and leather for seats from Botswana, enhancing the concept of value addition and boosting local manufacturing and industrialisation. These inputs are largely supplied by SMEs. If this is replicated at the continental level, the AfCFTA will then scale up opportunities for SMEs to benefit from intra-­African trade. 11.3.6 Improvement in Basic Trade Infrastructure and Facilities At most African borders, there is a lack of basic infrastructure which is required to accommodate the needs of small-­scale traders. To be specific, major infrastructure deficits are in transport, electricity, storage, and telecommunications. In addition, proper infrastructure such as markets, health, and sanitary facilities (especially for women); decentralized SPS certification centres; accommodations; warehousing; security lighting; and pedestrian lanes are often lacking in border areas, making these places chaotic and unsafe for traders (Southern African Trust, 2021). The connection between traders and customers is often reduced by lack of market infrastructure near borders. In addition, traders are always forced to sell perishable stock at a loss to avoid spoilage or waste due to the absent warehousing or storage facilities. The AfCFTA is expected to address this situation through implementing the provisions under the Customs Cooperation annex, which aims to fill the infrastructure gaps with a view of enhancing interconnectivity for trade facilitation.

11.4 Unleashing SME Potential in AfCTA Despite its many benefits, the AfCFTA agreement may still need some improvements within the African continent. These areas include capacity building, improving access to finance, and establishing key trade infrastructures. 11.4.1 Capacity Building There is insufficiency in the human and technological capacity of SMEs in Africa. This puts informal cross-­border traders at a disadvantage as compared to larger

148  Gift Mugano established corporations when it comes to productivity and competition. There is a need to improve human and technological capacity on the continent. The UNDP (2022) underscored that, in order to help SMEs fully understand the AfCFTA, there is a need for capacity-­building programmes. Over and above skills development programmes which are key for SMEs’ development, as noted in Chapter 5, the following capacity-­building programmes are necessary if SMEs are to derive benefits from the AfCFTA: • Building the capacity of SMEs to fully understand the AfCFTA agreement. African governments can build on the already established momentum by the UNDP. In ECOWAS, for example, the UNDP has already developed simplified guides or manual titled: Understanding the AfCFTA: Guide for SMEs in the ECOWAS Region. This manual can be replicated in other regions; • Along with the development of the AfCFTA instruments to eliminate bottlenecks and facilitate and facilitate the full utilisation of the AfCFTA, there is a need to build the capacity of SMEs to advocate in favour of efficient export/ import processing mechanisms; and • Development partners, governments, business associations and trade promotion agencies must provide support to SMEs to participate in trade fairs, such as the Intra-­African Trade Fair. This is essential since this helps SMEs to get exposure to the market opportunities presented by the AfCFTA. 11.4.2 Access to Finance With respect to access to finance, African SMEs face two significant financing challenges: accessibility and affordability (Runde et al., 2021). The situation is worsened by the fact that most SMEs in Africa are informal – meaning they are not formally registered as businesses –and this makes it difficult for them to access financing. In a number of instances, even formally registered SMEs frequently suffer from a lack of accessibility (Runde et al., 2021). Evidence shows that between a third and a fifth of SMEs in sub-­Saharan Africa have a bank loan or line of credit and estimates that 28.3% of firms in the region are fully credit constrained. (Runde et al., 2021). The total loan cost comprises not just the cost of the original loan but also the interest charged and transaction costs, like fees for lawyers to perfect collateral. This is a serious challenge in Africa because local interest rates from banks are often in the double digits, sometimes higher than 20–25% (Runde et al., 2021). Alternative finance providers, such as microfinance institutions or digital lenders (e.g., m-­ Shwari, Branch), can charge even higher rates, as much as 40–50% (Runde et al., 2021). High interest rates often deter SMEs from even trying to apply for financing. This lack of affordable financing seriously hinders SMEs in Africa. This situation undermines the capacity of SMEs to grow. Blended finance is one approach to providing SMEs with access to the capital needed to grow. Historically, development finance institutions (DFIs) and bilateral donors have focused on direct funding for projects. The World Economic Forum defines blended finance as “the strategic use of development finance and

SMEs and the African Continental Free Trade Area  149 philanthropic funds to mobilize private capital flows to emerging and frontier markets.” Blended finance seeks to “de-­r isk” potential investments in such a way that private-­sector actors will feel comfortable investing alongside or on top. Blended finance is one of the primary ways that official finance can “crowd in” or catalyse private investment from institutions that have a lower risk tolerance or seek a higher rate of return. Most blended finance continues to come from philanthropy and bilateral donors using their grant funding. To date, blended finance has mobilized approximately $152 billion in private capital, roughly equivalent to annual official development assistance flows (Runde et al., 2021). Making true progress in addressing the needs of African SMEs requires a more widespread adoption of the philosophy of blended finance. To maximize the reach of blended finance to support SME growth, donors should consider the following recommendations: incorporate flexibility, map the investment ecosystem, develop a methodology to identify areas for investment, work with local markets and engage in investment facilitation. 11.4.3 Access to Power Unreliable and poor electricity supply limits operations and raises expenses for many SMEs. Modern technology relies on the supply of electricity which, when not enough, may limit production in the manufacturing sector. Abisuga-­Oyekunle, Patra, and Muchie (2019) observed that regular power supply is one of the biggest challenges faced by SMEs in Africa. In fact, Abisuga-­ Oyekunle, Patra, and Muchie argued that Africa is the only continent on the globe where electricity is specified as the most significant hindrance to firms’ ability to innovate and develop. To be specific, in the study by Abisuga-­Oyekunle, Patra, and Muchie, 23.3% of small firms interviewed indicated that access to electricity was their biggest problem. Likewise, World Bank (2018) revealed that, on average, in sub-­Saharan Africa, 49% of SMEs consider electricity as a major constraint (see Table 11.1). In Africa, countries with the highest percentage of firms experiencing massive power outages inter alia include Benin (95.6%), Togo (93.8), Sudan (93.7%), Gambia (93.2%), Cameroon (92.5%), Kenya (89.4%), and Mali (86.6%; see Table 11.1; World Bank, 2018). Ironically, only 18.9% of firms in Malaysia experience power outages (World Bank, 2018). In this case, Malaysia is used as a comparator country to the selected African countries (see Table 11.1). Similarly, countries with the highest percentage of SMEs identifying electricity as a major constraint are Gambia (69%), Mali (67.9%), Cote d’Ivoire (62.7%), Benin (60.4%), Cameroon (51.6%), and Togo (50.1%; see Table 11.1; World Bank, 2018). Overall, on average, evidence shows that SMEs experience power outages for 56 days per year (World Bank, 2018). With respect to key infrastructures such as access to water, an enterprise survey by the World Bank (2018) shows that countries with the highest percentages of firms experiencing water insufficiencies are Malawi (53.9%), Swaziland (47.9%), Lesotho (43.4%), and Ethiopia (38.3%; World Bank, 2018). Likewise, countries

Country

Percentage of firms experiencing power outages

Percentage of firms owning or sharing a generator

If a generator is used, average proportion of electricity from a generator (%)

Days to obtain an electrical connection (upon application)

Percentage of firms identifying electricity as a major constraint

Percentage of firms experiencing water insufficiencies

Percentage of firm identifying transport as a major constraint

Benin Burundi Cameroon Chad Cote d’Ivoire Ethiopia Gambia Guinea Kenya Lesotho Malawi Malaysia Mali Namibia Niger Nigeria

95.6 85.1 92.5 70.2 78.8 80.0 93.2 84.2 89.4 71.8 82.9 18.9 86.6 26.9 78.0 77.6

59.9 64.2 39.7 67.7 29.9 49.1 55.7 56.8 57.4 29.4 40.9 10.8 66.8 18.0 69.4 70.7

37.0 17.5 16.6 18.5 27.3 48.9 41.1 26.6 14.0 25.7 27.3 20.7 15.6 25.5 53.3 58.8

193.2 25.3 16.2 69.6 39.8 194.3 30.1 7.4 43.0 12.2 50.4 1.8 30.1 20.3 28.6 9.4

60.4 46.9 51.6 34.8 62.7 33.3 69.0 32.1 22.2 24.8 24.8 9.4 67.9 14.2 47.9 48.4

26.5 22.0 16.9 13.9 26.5 38.3 11.5 0 33.7 43.4 53.9 17.2 24.7 3.7 19.1 16.4

22.8 15.2 29.9 25.1 53.8 8.3 20.9 36.8 21.6 32.4 15.7 14.1 51.0 25.3 19.6 17.1

150  Gift Mugano

Table 11.1  Reliability of Infrastructure for Business Sustainability, Sub-Saharan Africa (2013–2018)

Percentage of firms experiencing power outages

Percentage of firms owning or sharing a generator

If a generator is used, average proportion of electricity from a generator (%)

Days to obtain an electrical connection (upon application)

Percentage of firms identifying electricity as a major constraint

Percentage of firms experiencing water insufficiencies

Percentage of firm identifying transport as a major constraint

Senegal Sierra Leone Sudan Swaziland Togo Zimbabwe

83.7 71.8 93.7 77.3 93.8 76.5

64.2 69.5 54.1 46.6 53.1 62.3

9.0 45.9 7.2 29.2 11.8 19.3

24.8 22.0 5.8 11.3 71.9 22.2

48.2 32.6 7.6 4.2 50.1 22.1

17.6 26.5 12.4 47.9 12.8 15.1

21.9 28.4 20.9 5.8 35.5 17.1

Source: World Bank (2018).

SMEs and the African Continental Free Trade Area  151

Country

152  Gift Mugano with the highest percentage of firms identifying transportation as a major constraint are Cote d’Ivoire (53.8%), Mali (51.0%), Guinea (36.8%), and Lesotho (32.4%; see Table 11.1; World Bank, 2018). In view of the fact that most African countries face a drought of reliable infrastructure as well as key utility services which are essential for development, most SMEs in Africa are severely constrained. With respect to ease of doing business, evidence shows that countries with the highest number of days to obtain an electrical connection upon application are Ethiopia (194.3 days), Benin (193.2 days), Togo (71.9 days), and Chad (69.6 days; see Table 11.1; World Bank, 2018). The previously mentioned challenges may militate against the capacity of SMEs to scale up their production and export to other African markets, thereby making it difficult for SMEs to fully benefit from the AfCFTA. 11.4.4 Network Infrastructure There is a need to improve travel and transport between African countries and regions via roads, rail, and air so that they become more efficient. There is a need to increase the road and rail network so that bulky goods reach many parts of the African countries, especially in rural areas. Poor road networks within some countries may limit the volume of trade. The recent completion of the multimillion-­ dollar Kazungula dam project is a step in the right direction in terms of upgrading infrastructure in Africa. This will help link rural–urban trade in Zambia and Botswana which is in line with the AfCFTA Agreement. Without the exception of digital infrastructure and stronger internet penetration, online trading may not be possible. For informal SMEs to take full advantage of the agreement, African countries should make sure that they improve the digital space to ensure that there is financial inclusion and access to market information by various people.

11.5 Pathways that can be Used by African SMEs to Benefit from AfFCTA African economies can draw lessons from the Organisation for Economic Co-­ operation and Development (OECD) experience on how SMEs benefitted from new opportunities which were brought by globalisation, which is synonymous with the AfCFTA (see Box 11.1).

11.6 Conclusion In most African economies, SMEs constitute about 90% of all businesses in both urban and rural areas. In Africa, SMEs provide an estimated 80% of jobs across the continent, representing an important driver of economic growth (Runde, Savoy and Staguhn, 2021). Sub-­Saharan Africa alone has 44 million micro, small, and medium enterprises, almost all of which are micro (Runde, Savoy and Staguhn, 2021). The AfCFTA provides market access to 1.3 billion people and US$3.4 trillion, which is a massive market for the African SMEs. In view of the fact SMEs are

SMEs and the African Continental Free Trade Area  153

Box 11.1  Pathways that can be used by African SMEs to benefit from AfFCTA Through GVCs GVCs allow SMEs to specialise in specific segments of production, rather than having to master all processes required to produce finished goods and thus integrate into segments of global production chains. In turn, this can be a pathway towards economic development through productivity growth, exporting more sophisticated products, and a less concentrated export basket (Kowalski et al., 2015). This integration can occur on the ‘output’ side, through direct cross-­ border exports and = indirectly, through upstream supplies to larger firms, which provides a vehicle to overcome trade-­related costs and challenges. But SMEs can also benefit on the ‘input’ side, through access to cheaper inputs and capital goods as well as through better sourcing or use of foreign technologies, products or know-­how (Lopez-­Gonzalez, 2017). Outward FDIs can also allow SMEs to access international markets and integrate into GVCs, often indirectly, as upstream suppliers to exporters (OECD-­WB, 2015). In fact, survey evidence indicates that proximity to global enterprises, as suppliers, is one of the main drivers of outward FDIs by small businesses, although this form of internationalisation is relatively uncommon among SMEs: in a 2009 survey of European SMEs, only 2% indicated direct investment abroad (European Commission, 2010). In this regard, empirical evidence suggests that public measures to support outward FDIs by SMEs are effective in enhancing firm performance in terms of domestic turnover and productivity growth, especially for smaller and younger firms (Bannó et al., 2014).

As Exporters Direct participation in global value chains (GVCs) takes place when SMEs export intermediate goods and services for further processing. Evidence from Southeast Asian countries shows that selling inputs is particularly important: manufacturing SMEs in these countries have a higher tendency than larger firms to export goods and services that are sold directly into GVCs. In Thailand, for example, 16% of the value added in the exports of manufacturing SMEs is sold directly to firms abroad for further processing versus only 6% for larger manufacturing firms. Opportunities for SMEs operating in service sectors might be even bigger. In Viet Nam, the share of exports by SMEs used by other countries to produce exports jumps from 5% (manufacturing only) to 26% when service firms are included (Lopez-­ Gonzalez, 2017).

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As Suppliers to Larger Firms That Export Another way for SMEs to benefit from GVCs is through indirect exports, or by supplying intermediate goods and services to typically larger firms – domestic or foreign-­owned – which then export. Recent evidence suggests that, in OECD countries, looking only at direct exports by SMEs under-­represents the actual engagement of small firms in a country’s gross exports. In Mexico, for example, SMEs account for less than 15% of gross exports, but for 30% of the total value added in the country's exports. In other terms, when the role of SMEs as suppliers of inputs to larger direct exporters is taken into account, the importance of SMEs as exporters double. The significance of indirect channels is especially important for independent SMEs (i.e. those not owned by a larger domestic firm or a foreign firm). For example, while only 3% of the total value added generated by independent micro-­ SMEs in Sweden is exported directly, an additional 18% of their value added is indirectly embodied in exports. Indirect exports by SMEs are particularly large in sectors where GVCs are important and where scale matters. In the transport equipment sector, for example, SMEs account for over 40% of total US value-­added exported, with nearly all that contribution reflecting upstream components and service suppliers to the transport equipment industry. This indirect mode of internationalisation provides SMEs access to foreign markets and new sources of growth but without incurring trade-­related costs. SMEs can strengthen and upgrade supply linkages by establishing specific contractual arrangements with multinational enterprises (MNEs), such as supply/manufacturing agreements, licensing, research and development agreements, technology transfer, and quality support, as well as by receiving inward FDI. The existence of industry clusters at the local level represents an important location factor for many MNEs as importers of competitively priced foreign inputs and technologies. Imports matter for export competitiveness and SMEs may also benefit from GVCs on the input, or buying, side (Lopez-­Gonzalez, 2016, 2017). Firms which use more imported goods and services are more productive and better able to face the costs of exporting (Bas and Strauss-­Kahn, 2014, 2015). SMEs, including non-­exporters, can increase their productivity by drawing on cheaper and more sophisticated imports, exploiting new technologies embodied in new and cheaper capital products, and through improved access to new technologies from engagement with internationally oriented firms, including through linkages arising from foreign investment. All these channels can also help target specialisation in parts of the value chain, where SMEs have comparative advantages and can in turn foster upgrading. Existing potential remains untapped, however. In Nordic economies, for example, SMEs consistently source a lower share of foreign goods and services to produce exports than larger firms. In addition, the evidence highlights that

SMEs and the African Continental Free Trade Area  155 dependent SMEs also have higher integration from an input (import) perspective than independent SMEs and so are able to leverage those links to overcome import trade barriers. This underscores the importance of policies that address constraints not only to exporting but also to importing for small firms, but these gains may vary by position as well by participation in GVCs. The benefits from GVC participation depend not only on the degree of integration or participation but also on the position within global production networks and on the characteristics of other participants in the value chain. Firms and industries positioned at the centre of complex production networks have access to a greater variety of foreign inputs, and potentially a broader range of technologies, compared to those at the periphery. Smaller firms display faster productivity growth in those sectors that have become more central to global production than those on the periphery and in sectors with stronger linkages to more productive foreign buyers/suppliers (Criscuolo and Timmis, forthcoming). In addition, certain risks may arise for SMEs that participate in GVCs, due to their typically weaker bargaining power vis-­à-­vis larger firms. In this respect, due diligence requirements and their implementation matter for creating a level playing field. The OECD Guidelines for Multinational Enterprises, which cover also relationships with subcontractors and suppliers, represent an important reference. OECD (2018) the major driver of the African economy, they are expected to stand out as the major beneficiary of the AfCFTA. This chapter shows that the AfCFTA offers greater access to new markets and positive spinoffs from economic transformation to SMEs in Africa. Because SMEs are central to economic development in Africa, potential benefits which may arise as a result of the AfCFTA, inter alia, include investment opportunities, technological development, employment opportunities, and promotion of specialisation and industrialisation (Southern African Trust, 2021). In addition, African SMEs are expected to enter new markets, expand their customer base, and create new products and services. The AfCFA is expected to make investing in innovation viable; increasing investments that drive capital to domestic businesses; reducing the manufacturing gap, thus creating more avenues for SMEs to create more well-­paid jobs, especially for young people; easing the process of importing raw materials from other African countries and enabling SMEs to set up assembly firms in other African countries; and creating cheaper means of production (Southern Africa Trust, 2021). Export sectors likely to grow the most on the back of eliminating barriers to trade and investment are processed foods; textiles and apparel; and chemical, rubber and plastic products (World Bank, 2022). The AfCFA is expected to deepen regional integration which is expected to lower trade costs and boost capital inflows, boosting exports from services sectors such as hospitality, transport, and communications.

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References Abisuga-Oyekunle, Oluwayemisi Adebola, Patra, Swapan Kumar, & Mammo Muchie (2019), “SMEs in Sustainable Development: Their Role in Poverty Reduction and Employment Generation in Sub-Saharan Africa”, African Journal of Science, Technology, Innovation and Development, 1–15. https://doi.org/10.1080/20421338.2019.1656428 (accessed on 2 February 2023) Bannó, M., Piscitello L., and Varum C. A. (2014), “The Impact of Public Support on SMEs’ Outward FDI: Evidence from Italy”, Journal of Small Business Management, 52(1), 22–38. Bugingo, E. (2018), Empowering Women by Supporting Small-­Scale Cross-­Border Trade. Geneva: ICTSD Bridges Africa. Bas, M. and Strauss-Kahn, V. (2014), “Does Importing More Inputs Raise Exports? FirmLevel Evidence from France”, Review of World Economics, 150(2), 241–275. Bas, M. and Strauss-Kahn, V. (2015), “Input-Trade Liberalisation, Export Prices and QualityUpgrading”, Journal of International Economics, 95(2), 250–262. Cazares, J. (2019), Rules of Origin, key to Success of African Continental Free Trade Area. https://unctad.org/news/rules-origin-key-success-african-continental-free-tradearea#:~:text=Rules%20of%20origin%20should%20neither%20be%20costly%20nor%20 complex&text=Equally%2C%20the%20status%20quo%20may,from%20consolidating %20the%20regional%20market. Accessed online August 20, 2019. Congressional Research Service (2022), African Continental Free Trade Area (AfCFTA): Overview and Issues for Congress in Brief. Washington DC: Congressional Research Service. European Commission (2010), Internationalisation of European SMEs, Directorate-­General for Enterprise and Industry, Brussels. Kowalski, P., Lopez-­Gonzalez, J., Ragoussis, A., and Ugarte, C. (2015), “Developing Countries Participation in Global Value Chains and Its Implications for Trade and Trade Related Policies”, OECD Trade Policy Paper, No. 179. Paris: OECD Publishing. Lopez-­Gonzalez, J. (2017), “Mapping the Participation of ASEAN Small-­and Medium-­ Sized Enterprises in Global Value Chains”, OECD Trade Policy Papers, No. 203. Paris: OECD Publishing. http://dx.doi.org/10.1787/2dc1751e-­en Lopez-­Gonzalez, J. (2016), “Using Foreign Factors to Enhance Domestic Export Performance: A Focus on Southeast Asia”, OECD Trade Policy Papers, No. 191. Paris: OECD Publishing. http://dx.doi.org/10.1787/5jlpq82v1jxw-­en Nshimbi, C. and Moyo, I. (2017), Migration, Cross-Border Trade and Development in Africa: Exploring the Role of Non-state Actors in the SADC Region, Palgrave Studies of Sustainable Business in Africa. Cham, Switzerland: Palgrave Macmillan. OECD (2018), Fostering Greater SME Participation in a Globally Integrated Economy Plenary Session 3. Paris: OECD. OECD-­WB (2015), “Inclusive Global Value Chains: Policy options in trade and complementary areas for GVC Integration by small and medium sized enterprises and low income developing countries”, OECD and World Bank Group. Report prepared for submission to G20 Trade Ministers Meeting Istanbul, Turkey, 6 October 2015. Runde, D.F., Savoy, C.M., and Staguhn, J. (2021), Supporting Small and Medium Enterprises in Sub-­Saharan Africa through Blended Finance, Washington, DC: Center for Strategic and International Studies. Southern African Trust (2021), Africa Continental Free Trade Area, How will it Benefit Cross Border Traders? Johannesburg: Southern African Trust. The World Bank Group (2018), Enterprise Surveys. World Bank Database. http:// microdata.worldbank.org/index.php/catalog/enterprise_surveys/about UNCTAD (2021a), Reaping the Potential Benefits of the African Continental Free Trade Area for Inclusive Growth. Geneva: UNCTAD.

SMEs and the African Continental Free Trade Area  157 UNCTAD (2021b), Informal Cross-­ border Trade for Empowerment of Women, Economic Development and Regional Integration in Eastern and Southern Africa. Geneva: Switzerland. UNDP (2022), Strengthening the Readiness of Small Businesses to Participate in AfCFTA Marketplaces, https://www.undp.org/africa/news/strengthening-­readiness-­small-­businesses­participate-­afcfta-­marketplaces (accessed on 12 January 2023) United Nations (2021), The AfCFTA promises to unlock the potential for African women to move from micro to macro businesses. Press Release No: 2020. Addis Ababa, Ethiopia. UNWOMEN (2019), Opportunities for Women Entrepreneurs in the Context of the African Continental Free Trade Area, UNWOMEN, New York. World Bank (2022), Free Trade Pact Could Help Lift Up to 50 Million Africans from Extreme Poverty, https://www.worldbank.org/en/news/press-­release/2022/06/30/ free-­t rade-­p act-­c ould-­h elp-­l ift-­u p-­t o-­5 0-­m illion-­a fricans-­f rom-­e xtreme-­p overty (accessed on 28 December 2022)

12 Fostering Business Ethics and Professionalism Nirmala Dorasamy

12.1 Introduction Numerous definitions of business ethics exist in literature. Robbins and De Cenzo (1998: 57) define ethics as “the rules or principles that define right and wrong conduct”, while Hisrich and Peters (1998: 23) define business ethics as “the study of behaviour and morals in business situations”. Although O’Flaherty (1986) reported a lack of conformity in the literature regarding the definition of business ethics and despite the obvious variations in what different authors believe is meant by business ethics, common threads are clearly evident. Behaving ethically is about going beyond mere compliance with laws. It is about acting responsibly in those “grey areas” where right and wrong are not clearly defined. Obeying the law is mandatory, but being legally right does not make something ethically right (Robbins and De Cenzo 1998). Many authors have highlighted the importance of conducting business ethically. Among them, Thompson and Strickland (2001) note that all businesses need to care about how they conduct business; otherwise, their reputation and ultimately their performance will be at risk. An unethical culture can undermine the businesses’ long-term strategic success. They further suggest that companies who behave ethically in accordance with a voluntary code may (Thompson and Strickland 2001): • Avoid additional government regulation; • Enable moderate elements in affected groups to reach reasonable solutions before radical elements impose unreasonable ones; • Create a positive public reputation and establish credibility. The King 11 report on corporate governance in South Africa (IoDSA 2002) has comprehensively researched and documented the best practices of corporate governance for businesses in South Africa. The report cautions that there are “few places where a company can hide its activities from skeptical consumers, shareholders or protestors” and that “in the age of electronic information and activism, no business can escape the adverse consequences of poor services” (IoDSA 2002). These authors leave no doubt that sound ethical behaviour is of paramount DOI: 10.4324/9781003413172-12

Fostering Business Ethics and Professionalism  159 importance for the long-term survival and prosperity of modern businesses. Collett, Van den Berg, Verster and Bozalek (2018) affirm that “ethics” and “professionalism” go hand in hand. Ethics are usually stated, whereas professionalism is cultivated by individuals personally. Professionalism is attained after a lengthy period of years in which individuals may have accrued a significant level of expertise (Remišová, Lašáková, Stankovičová and Stachová 2021); or defined as “the conduct, aims, or qualities that characterise or mark a profession or a professional person” (Boatright 2003: 108). Adhering to business ethics and professionalism is a recipe for business success and survival. Multinational businesses and large corporations largely explore these practices and may be considered as a driving force to their competitiveness (Lawlor 2021: 34). Sallem, Nasir, Nori and Che Ku Kassim (2017), in an analysis of Malaysian small and medium enterprises (SMEs), do report that little recognition or attention is paid to business ethics and professionalism by SMEs. Murigi and Kimutai (2019) explain that SMEs are so preoccupied with breaking even that they ignore business ethics and professionalism. Due to this predominance of laxity in adherence to business ethics and professionalism by SMEs, this chapter explores approaches to fostering business ethics and professionalism among SMEs, with particular reference to micro businesses that make less than a 20 000-rand revenue (US$1 300) on a monthly basis. The category of small businesses implied here is information businesses, which include salons and mini spas, internet cafes, mini restaurants, tuck shops, street vendors, laundromats and the like.

12.2 International Guidelines for Ethical and Professional Business Practices The International Ethics Standards has established ten global ethics principles for individuals operating within the natural and built environment sector. These principles ensure professionalism is delivered consistently and transparently throughout the world (RICS 2021). RICS was a founding member of the International Ethics Standards Coalition, which was established at the United Nations in 2014. The coalition behind the standard is composed of more than 120 professional bodies, all of which have committed to implementing the standards. Additionally, more than 100 academic, business and government supporters have signed up to endorse and demand International Ethics Standards (IES; RICS 2021). Likewise, Global Compact has been a force to reckon with, in its guide towards regulation of business operations. The Organisation for Economic Co-operation and Development (OECD) guidelines for multinational companies and the International Labour Organization’s tripartite declaration on principles concerning multinational enterprises and social policy have been renewed regularly. Management standards like the Global Reporting Initiative, the Social Accountability 8000, the ISO 14001 and ISO 26000 have been launched to measure and improve corporate social and environmental performance. Several codes of conduct have been issued by individual companies, industrial associations, chambers of

160  Nirmala Dorasamy commerce or different stakeholders. These codes and guidelines aim to translate the principles of business ethics into practical tools and at the same time exert pressure on companies by representing social expectations toward them (Boda and Zsolnai 2016). SMEs often do not comply with most of these international guidelines. Salder and Bryson (2019) link this non-compliance to poor monitoring at the local level and unregulated market spaces, especially among developing economies.

12.3 Ethical Fibre of a Society In South Africa, ethics is seen as a “cloud” of what ought to be done. Systems of moral principles hang up in the sky for everyone to observe, but not necessarily for drawing long-lasting positive inspiration. In the individualistic environment of modern societies, actually adhering to the standards boldly written in the clouds has become a mark of weakness or a living outside the realm of reality. Not only is most ethical behaviour, at best, based on the definition of the situation, but it is also fast becoming a matter of merely personal choice. The old-age moral advice that relates means positively to ends has been turned around. According to Nethonzhe (2002), communication is a matter of human interrelationships in a society. It is engaged in principally to confirm, solidify and promote communal social order and secondarily, to maintain or improve interpersonal relationships. Therefore, effectiveness in communication is an extremely important first step. But the greatest emphasis is placed on the way expected goals would affect current and future relationships. This is why, in communal societies, ethics is not a distant and loosely followed guideline for behaviour. It is, instead, synonymous with communication rules, that is, tacit understandings about appropriate ways to interact with others in given roles and situations. Nethonzhe (2002) pointed out that ethics in these societies is not a question of an individual’s choice but a matter of social and cultural demands. Individuals do not just say or do whatever they want; words and actions are based solely on what is considered appropriate within the social system. The overriding principle is not the individual’s comfort but society’s welfare. The inter-relatedness between society, business and individuals are so interwoven that, individuals or businesses operating within a specific business environment are influenced by their surrounding factors (Singh and Gaur 2020). The moral precedence may thus be highly influenced by societal factors. Kohlberg’s theory elucidates this principle in the conjoining section.

12.4 Theorising Ethics Moral development theories are based on the perception that individuals develop morally in a manner which is analogous with the way they grow physically, cognitively and linguistically (Killen 2018: 38). Just like infants acquire reciprocal leg motion before they begin to walk, an individual develops a sense of care for themselves before the needs of others are taken into consideration. Likewise, adults are able to understand how external authorities construe good or bad, before evaluating what they consider to be good or bad (Kohlberg 1984: 24).

Fostering Business Ethics and Professionalism  161 Kohlberg (1984: 20) advanced the moral development theory of Piaget. Piaget (1952: 16) recognised that children used a progressively more sophisticated manner of moral reasoning that complemented their intellectual and cognitive development. According to Kohlberg (1984: 21), there are three levels of development. The first is the pre-conditional level, where children respond to cultural rules and levels, in which they judge what is good or bad behaviour.; The second level, the conventional level, is where individuals live up to the expectations of their family, society or country. Irrespective of the immediate consequences of a particular action, individuals learn to conform to personal expectations and identify socially with the society involved. The highest level of moral development, “post-conventional, autonomous and principle level”, requires individuals to have a cognitive abstracting ability to see issues in shades of grey, rather than merely black-andwhite (Kohlberg 1984: 26). The inculcation of these levels of development can foster ethics and professionalism among business owners. This theory as propounded by Kohlberg serves as a learning curve towards teaching or training businesses on ethics. The moral development theory of Kohlberg as discussed in this section is important because moral development serves as the guide to all societal activities. Moreover, the three levels of development identify possible development individuals or business owners may undergo in attaining a moral transition. Ethical theories are backed by two main schools of thought, the teleological and the deontological (Browne 2003). The teleological theory also referred to as Utilitarianism, is determined mainly by a consideration that rightness to action is based on the amount of good consequence an incidence will result to. Action in this sense is based on the concept of goodness and virtue of the end result such action may achieve (Juvrud and Gredeback 2020). By implication, what an individual perceives to be good, or what is considered to be evil is a fundamental principle in this theory. Esfandiar and Zakeri (2020) note that any endeavour that makes an individual better off can be said to be good, while that which makes them worse off is considered evil. In general, this theory is based on consequences. Likewise, in the business sense, a consequence of an ethical practice or professionalism brings about a good act and vice versa. The deontological theory holds that “actions are right because of the nature of the actions and the rules from which they follow, rather than being right or wrong because of some benefit or harm caused by the action” (Koku 2021: 89). In general, this theory is subject to principles and not on consequences. Hence, duty and obligation are the guiding morals behind the deontological theories. The deontological view holds that bribery in all instances is wrong, regardless of the circumstances individuals may find themselves in. This opposes the teleological view, which maintains that bribery may be appropriate if it results in greater good than harm (Koku 2021). The teleological philosophy is based on the rightness of action and determined mainly by considering the outcome of an incident may produce, while deontological reasoning is based on principles and not on consequences. The earlier philosophy may not always be morally appropriate but accommodates flexibility in selective cases. Hence, considerations for both philosophies should be

162  Nirmala Dorasamy carefully looked into when policies and regulations on ethical standards are being set by regulatory authorities. In the case of small business owners, their reasoning should be more inclined to that of the deontological theory.

12.5 Determinants of Business Ethical Fibre The conduct or behaviour of business owners, like that of any other member of the community, is determined by various factors. It is necessary to identify these factors in order to be sensitive to the inherent differences in the way people react and behave. This sensitivity can go a long way towards avoiding potential conflict between business owners and prospective buyers. 12.5.1 Formation of Individual Ethics An individual’s ethics, or that of a business owner, is determined by a combination of family influences; peer influences; life experiences; personal values and morals; and situational factors (Nethonzhe 2002; Sroka and Szanto 2018). 12.5.1.1 Family influences Ethical standards are formed among children from an early age. This is shaped by what behaviour their parents condone or how the parents behave or react to situations. Children are quick to adopt ethical standards prevalent in their family and will adhere to these standards if they receive acknowledgements or rewards for adhering to these ethical practices (Yuli and Muafi 2021). 12.5.1.2 Peer influences As children attend schools and interact with their peers, they usually pick traits and habits which develop as they grow. This also applies to adults within a work environment. People are easily influenced by those they interact with frequently (Ermasova, Wagner and Nguyen 2017). 12.5.1.3 Life experiences The circumstances in which individuals find themselves often shape and influence their ethical practices and behaviour. The setting in which people interact, relax, or work largely influences their ethical practices also. For example, if an individual works in a business where the management is corrupt, this employee may also be inclined to give bribes. 12.5.1.4 Personal values and morals Morality and value have two distinct meanings. Not every form of value can be attributed as a moral value. Using bribery as an example, it is true that both individuals involved in offering and receiving bribes are both influenced by their moral

Fostering Business Ethics and Professionalism  163 values and morals. Hence, a business owner who pays law enforcement officers in order to secure permits or licences illegally has questionable values and morals. 12.5.1.5 Situational factors Sometimes, when individuals find themselves in difficult situations, they are tempted to tell lies or engage in other unethical practices or behaviour to save themselves at that instance. This practice usually occurs when individuals believe they have no alternatives. For example, a business owner who is yet to pay the municipal rates may bribe law enforcement officials in order not to get arrested or victimised. Jin, Pang and Smith (2018) also note that people’s religious beliefs or the community in which their business is being operated may be the deciding factor as to if they will engage in unethical practices or not. All these mentioned indicators can influence a business owner either positively or negatively as they operate their business.

12.6 Influence of Societal Fibre on Business Ethics Businesses, either small or large, do make efforts in fostering a harmonious relationship with their respective societies (Boda and Zsolnai 2016). In fulfilling their ethical obligation, they promote ethical values which are considered appropriate and acceptable. They recognise moral obligations and responsibilities for the wrongness or rightness of business conduct (Singh and Gaur 2020). Businesses abide by the laws and principles of the country where they operate. However, shrewd business owners are able to manipulate the system and codes of ethics guarding businesses (Sroka and Szanto 2018). This is usually perpetrated to maximise profit. Right and wrong then becomes a manifestation of diverse perceptions, which are motivated by individuals’ personal views and values (Boda and Zsolnai 2016). Soni (2020) posits that societal pressure is a major driver of business ethics. Salder and Bryson (2019) argue that this is often the case for SMEs in small towns or sparsely populated societies. Small businesses usually conform to social practices inherent in their operating communities, and thus, their business functionalities align with societal values. The manner small businesses relate to or greet their clients and their show of respect or courtesy are usually the prevailing practices in their domain (Bozzo-Rey 2020). For example, a district where law enforcement officials collect bribes for licences will negatively impact business ethics and eventually become a norm. Contemporary business ethicists are nearly unanimous in their agreement that Western business ethics is partly the product of Christianity and, to a lesser extent, Judaism or other faith groups (Calkins 1996; Mele and Fontrodona 2017). Societies where either of these religions are practised also emulate and base some of their principles on their religious beliefs. This, Hennekam, Peterson, Tahssain-Gay and Dumazert (2018) claim, is common in societies where religion is deeply rooted and not necessarily within secular states. Additionally, Calkins (1996) argues that some business ethicists neglect their religious beliefs and focus narrowly on solely social scientific and philosophical approaches to ethical

164  Nirmala Dorasamy dilemmas. In such cases, they fail to consider (or in dismissing as anecdotal or irrelevant) the rich and variegated religious histories. Religion provides a distinct approach to moral reasoning that differs from philosophical ethics in two different ways. First, religious ethics does not emphasise consequences, individual autonomy, voluntarism, reason, or rules to the extent that modern-day philosophical ethics do (Bozzo-Rey 2020). Moreover, there are powerful mechanisms which make the ethical efforts of businesses ineffective or even counterproductive. One mechanism is described as the ethics management paradox, while the other can be understood by the phenomenon of moral disengagement strategies. Philosopher Luk Bouckaert discovered the so-called paradox of ethics management (Giri 2017). He warns about the danger of reducing ethics to a management tool. Instrumental use of ethics may crowd out moral feelings and commitments of managers which, in turn, may result in more opportunistic behaviour in businesses. According to Bouckaert, cited by Giri (2017), the paradox is the following: by creating new regulations to temper opportunistic behaviour in and among businesses, we may temper the symptoms but often reinforce the underlying roots of opportunism. We introduce economic incentives like benefits, such as premiums or tax relief for those who respect the new regulations, but by doing this, we substitute moral feelings for economic calculations. Preaching moral concepts such as trust, responsibility, or democracy on the basis of calculative self-interest or as conditions of systemic functionality is not wrong but ambiguous. It opens the door to suspicion and distrust because calculations and systemic conditions can easily be manipulated. The mechanisms of moral disengagement enable people and businesses to commit transgressive acts and live with themselves without experiencing distress or moral shame (Boda and Zsolnai 2016). A detrimental corporate act can be morally justified if it is connected with a valuable social or moral purpose. As such, businesses displace their own responsibility by viewing their actions as a result of social pressures or as dictated by others (Giri 2017). Personal responsibility for harm caused by a business can be diffused by attributing the harm largely to the behaviour of other members of that business establishment. Businesses disregard or distort the consequences of their actions when they avoid facing the harm caused by them or try to minimise it through misrepresentation. Businesses may dehumanise stakeholders by divesting their human qualities or attributing bestial qualities to them. By attribution of blame, businesses view themselves as faultless victims driven to injurious conduct by the forcible provocation of others or by compelling circumstances (Boda and Zsolnai 2016). Moral disengagement is a universal psychological phenomenon. The question is whether there are external (social) and internal (organisational) mechanisms at work which may act as countervailing forces (Giri 2017). It is argued that some systemic features of today’s business environment do not let those countervailing forces work at the social level and weaken them at the organisational level. While these accounts are sometimes accused of presenting only occasional cases and “anecdotical evidence”, academic writers have also contributed to this genre, providing thorough and critical analysis of today’s business practices (Giri 2017). Businesses are embedded into an institutional system that systematically spreads and discounts responsibility. This institutional system and its corresponding value universe make ethical behaviour virtually

Fostering Business Ethics and Professionalism  165 impossible or contingent at best. Thus, the institutional setting of today’s mainstream business helps dilute responsibility and therefore leads to an aggravation of the tragedy of the masses happening on a global scale. It is a system in which the pursuit of profits is the ultimate goal and where the externalisation of costs upon society, future generations and nature is not an exception, but the rule. Businessmen caught by the logic of the system use moral disengagement mechanisms on a daily basis to cope with the tension between the expectation of everyday morality and the logic of the market (Giri 2017).

12.7 Ethics and Professionalism: The Unconventional Practice A succession of publicised ethics scandals has dominated the airwaves in South Africa and worldwide (Schoeman 2020; Holtzblatt, Foltin and Tschakert 2020). For example, the Enron ethics scandal, which ran between 2000 and 2004, affected the international business environment and, as a result, led to a new regulation, the second King Report on Corporate Governance (Rebeiz 2005). Similar cases in the United Kingdom and the United States resulted in prescriptive rulings such as the Smiths and Higgs and Sarbanes-Oxley Act in these countries, respectively (Chu and Hsu 2018). These rules were used to place emphasis on organisational practices, standards and conduct (Goosen 2004). These regulations envisaged creating value while protecting businesses, stakeholders and shareholders’ interests. The downside was that they were rather counterproductive as they were merely mechanical and superficial. This non-compliance was at the expense of inculcating true ethics, standards and values (Tormo-Carbó, Oltra, Seguí-Mas and Klimkiewicz 2016). Within the small business sector, unethical practices are often not as apparent as magnified in larger business corporations. Their activities are usually not brought into the spotlight, nor are they easily noticeable. So, oftentimes, small businesses are able to perpetuate unethical practices. Unethical practices are widespread in dealings between small businesses and corrupt law enforcement officers for issues such as the issuance of permits or licences. Also, there are issues such as the manipulation or falsification of records, th mistreatment of employees, unfair competition, misleading product information and lying to clients. According to Maqbool and Zamir (2021), when ethical practices are forgone in the name of profit and competition, the future of such businesses is bleak and endangered. When this form of practice becomes rampant, investors are sceptical about investing in such business environments. Parmitasari, Hamsah, Alam and Laba (2018) argue that unethical practices result in increased expenses and a more likelihood of poor services and can also ruin the integrity or reputation of businesses engaged in this practice. This can also cause untold damage to a business’s image and credibility.

12.8 Professionalism in Business Professionalism is often an apparent organisational culture among multinational corporations. This is observable in the manner of engaging with clients, fellow colleagues, or other shareholders (Main 2020). Much attention is paid to

166  Nirmala Dorasamy professionalism among large corporates, as a lack of professionalism may severely impact a business’s highly solicited reputation in a number of ways (Augier and March 2020). Professionalism goes beyond a checklist of requirements, as this also may include adherence to requirements of a business’s handbook, such as adhering to stipulated traits, compliance with dress codes and good behaviour (Waweru 2020). Professionalism also encompasses the respectful manner in which businesses deal with their competitors and partners such as supply chain companies or suppliers (Augier and March 2020). A study conducted among Chinese SMEs demonstrates that professionalism was not considered a major constituent of their business’s survival (Deng and Yan 2021). A similar trend was reported in Hong Kong, where the participants of a study also shared the same opinion (Ap and Wong 2001). However, many operators and owners of SMEs acknowledge the importance of professionalism, however, the implementation or practice was not envisaged (Nelson 2020). Ciulla (2020) argues that professionalism is the recipe for business success and growth. Furthermore, Larson (2017) contended that professionalism in business is essential, as it displays an outward attitude of a business to stakeholders and shareholders. This also reflects the responsibility, dependability and loyalty of a business to every client or business it relates with (Nelson 2020). However, little attention is paid to professionalism among SMEs. This is noted by Susanti and Sundiman (2020: 8), who claimed that “small business ventures largely underestimate the significance of professionalism”. They further explained that this is due to the non-expectancy of high levels of professionalism among their clients and inadequate monitoring from business bodies or regularity authorities (Susanti and Sundiman 2020). The homogeneity in the range of services offered by SMEs such as salons and mini spas, internet cafes, mini restaurants, tuck shops, street vendors and laundromats are highly identical, and as such, there is low competition in these highly saturated markets (Galdeano-Gómez, Pérez-Mesa and Aznar-Sánchez 2016). This impacts the desire to focus on professionalism, as survival becomes of paramount importance. In contrast, in the case of established multinationals, they continuously need to account to their shareholders and stakeholders; and as such, professionalism is non-negotiable among big businesses. Main (2020) argues that such ideology ought to be instilled among SMEs as well. This can help to improve the image of SMEs while providing an opportunity for them to grow into large businesses.

12.9 Factors Mitigating Ethics and Professionalism The basis of unethical practices and lack of professionalism are contextual and rooted in a country’s history, political development, bureaucratic traditions and policies (Mazibuko 2018). Dzeng and Wachter (2020) argue that “moral distress” has fast become a norm in the business environment. This terminology, “moral distress”, is often used in the health profession and implies a situation of emotional state that arises from a situation when a nurse feels that the ethically correct action to take is different from what he or she is tasked with doing (Dzeng and Wachter

Fostering Business Ethics and Professionalism  167 2020). This conundrum, dubbed “moral distress, can make health professionals feel depressed, anxious or powerless; due to common-placed unethical practices” (Guzys 2021). Moral distress is identified as a leading cause or threat to ethics, professionalism, identity and integrity and which been well documented within the health profession literature (Epstein, Whitehead, Prompahakul, Thacker and Hamric 2019). When defined from a business lens, moral distress is a situation in which business operators or owners are engulfed in an unethical environment and do not have a choice but to engage in unethical practices due to their high prevalence. To outshine a competitor, some fraudulent business owners will cut corners and engage in unscrupulous and nefarious activities (Rendtorff 2020). Remišová, Lašáková, Stankovičov and Stachová (2021) note that unethical behaviour and professionalism is not considered a thing of significance among Slovak business owners. In a similar study, Yun, Ebrahimpour, Bandyopadhyay and Withers (2020) allege that Indian business owners do not take ethical practices as a serious issue; rather, their daily priority is aimed at the survival of their business. Relatedly, small pharmaceutical business owners in Ghana had for long sold fake drugs and engaged in unethical practices due to poor monitoring by law enforcement officers and regulatory authorities (Hamill, Hampshire, Mariwah, AmoakoSakyi, Kyei and Castelli 2019). Additionally, Mayanja (2016) claimed that some SMEs in Uganda are accustomed to unethical practices as this sector lacks organisational systems and structures. Waweru (2020) propagate, ethics and professionalism are barely of concern among SMEs in the sub-Sahara region of Africa. The aperture to these is inadequate procedures, accountability and control (Mazibuko 2018). Moreover, Mazibuko (2018) posits that a soft-state syndrome may result in rampant lawlessness, where businesses take advantage of the system. To counter these, countries such as Singapore and Finland have strengthened their financial institutions and business sector and put a number of mechanisms in place to mitigate the risk of unethical practices among SMEs (Kusnadi, Leong and Suwardy 2016; Pučėtaitė, Novelskaitė and Lämsä 2016). To follow this example, in countries where unethical business practices are rampant, their institutional structures must be strengthened to deter unethical activities and implement a system for reporting unethical behaviour. Countries in the Middle East, for example, have established punitive punishments for businesses that do not comply with ethical practices. Many countermeasures, such as whistleblower hotlines and the establishment of ethics commissions of enquiry, have also been used (Akhtyamova, Panasyuk and Azitov 2015). Regulatory authorities and business chambers must therefore change the way ethics and professionalism are considered among SMEs. Rather than countering ethical and professional challenges faced by SMEs with complex policies or practices, which come with brittle places and blind spots, efforts should be made to instil ethical values and professionalism through direct and indirect means while ensuring businesses adhere to codes of conduct. While some of these measures are put in place, they are not precisely effective, as culprits are rarely reported when violating ethical practices as these often go unreported. These identified bottlenecks and delinquencies need to be resolved if ethical practices and professionalism are to be restored. Thus, the next section argues for this.

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12.10 Need for Adherence to Ethics and Professionalism Businesses regardless of their sizes, do need to interact with their immediate environment and stakeholders (Vartiak 2016). This coexistence lasts as long as the business operates, while a gradual interdependence and interest build between businesses and their neighbours (Darskuviene and Bendoraitiene 2014). Stakeholders in particular are particularly influential and may sway business decisions, policies, or day-to-day operations of a business. The domineering influence of clients may solidify business revenues and overall performance or cause a reversal effect (Vartiak 2016). Similarly, the influence of clients in ensuring compliance with business ethics, especially among SMEs is integral. According to Grimonpont (2016) and Weinstein (2012), the control of business dynamics and power no longer lies in the hands of sellers and manufacturers but those of consumers and buyers. Considering this dominance, SMEs need to recognise that they need to embrace their ethical responsibilities and professionalism when dealing with stakeholders (Davies 2017; Ciulla 2020). The call for ethics and professionalism has continuously grown, and business owners need to embrace “ethical reasoning” in all aspects of their business decisions, be it within their daily operations or processes and their dealings with supply chain or business partners or their customers (Rendtorff 2020). Ethical reasoning, as clarified by McFarlane (2013: 12), is a systemic process where a business owner “analyses an ethical issue and applies it to one more ethical standard in resolving problems. Ethical reasoning involves three phases: defining the problem, choosing the ethical standard and, finally, applying the ethical standard (Murphy et al. 2005). Embracing such ethical reasoning among SMEs is tantamount to good business practices and the potential for sustainable business. Batavia and Nelson (2019) also noted that ethical reasoning further entails examining the results or consequences while re-examining the processes in order to take corrective measures when required. SMEs are taking advantage of social media platforms to broaden their clientele. Although this has proven effective, it can also backfire should there be a negative review or remark passed on by a distraught client (Twomey and Jennings 2011; Edinger-Schons, Lengler-Graiff, Scheidler and Wieseke 2019). McFarlane (2013) highlighted three areas where ethics and professionalism are essential and could result in boasting or the tarnishing of a business’s reputation. McFarlane (2013) argued that adherence to good ethics will result in trust, enhanced financial performance and a good reputation. These are crucial pillars for the successful longevity of SMEs, especially during declining economic growth and the “survival of the fittest” in an uncertain business milieu. Neglecting ethical values can compromise the sustainability of SMEs as this could surmount to running into legal or non-legal issues with the supply chain, business partners, employees, clients or the legal system where the business is in operation (Adda, Azigwe and Awuni 2016). As a result, the business may face huge losses or suffer from a bad reputation, which may be difficult to erase. Once a business loses clients due to unethical business practices, the current clients will likely find alternative businesses offering the same or similar services (Prasad, Kumar and Kapoor 2020). Likewise, Gunz and Thorne (2020) argue that the adverse consequences attributed to unethical business practices are similarly placed

Fostering Business Ethics and Professionalism  169 when businesses are negligent of professionalism, however, on a lesser scale. SMEs need to adhere to ethical practices and professionalism “not because it represents the right thing to do or an exercise of good faith in business practices, but because businesses need good ethical behaviour to survive” (Kaawaase, Bananuka, Kwizina and Nabaweesi 2020).

12.11 The Impact of Fostering Ethical and Professional Culture on SMEs According to Sharma and Joseph (2020), fostering business ethics, professionalism and corporate governance is a non-negotiable imperative for the survival and growth of SMEs, which are confronted with multiple challenges that include financial scams, dying sentiments of investors, fixing accountability, transparency, independence in decision-making, the rule of law and fairness in deals from the different stakeholders in the present knowledge-based, global and competitive environment. The need for fostering and adherence to ethics and professionalism in the business environment is essential when forecasting to establish, develop, or grow a business. According to Macatopo (2016) and Twin, Drury and Perez (2022), business ethics represents a form of professional ethics that involves the rights, responsibilities and duties between a business and its workforce, suppliers and customers. Therefore, a well-planned business will have to align objectives and goals and operate consistently according to a robust code of business ethics. A key constituent/factor of business ethics and professionalism is transparency via good governance, through a code of good conduct/behaviour (governance), which integrates a system of self-confidence checks and balances between key players within the business environment (Sharma and Joseph, 2020). Transparency in turn requires the enforcement of the ethical and professional culture (right to integrity of the information produced at each level of the business). Therefore, fostering ethical and professional culture (the law) in the workplace, requires the compliance of the entire workforce to observe acceptable codes of conduct at all times (Macatopo, 2016). Consequently, the impact of fostering ethical and professional culture on SMEs may be positive if every act of unethical and unprofessional culture that can harmfully affect the sustainability of the business is avoided (Nicolaides, 2013). Sharma and Joseph (2020) postulated that corporate governance must be driven by ethical and philosophical concerns, as well as legal structural imperatives. This suggests that promoting corporate fairness, transparency and accountability are the hallmark of good corporate governance. Good corporate governance is a source of competitive advantage and critical for economic and social progress of any type of business. Macatopo (2016) emphasised that it is profitable for any business to foster good business ethics and professional culture first in order to gain the goodwill of key stakeholders, because “goodwill” appears to be the only asset that competition cannot undersell or destroy. In addition, fostering an ethical and professional culture among SMEs (good business practices) is expected to boost employees’ good behaviour in order to provide excellent and quality products and services (Macatopo, 2016). Furthermore, the best practice of ethical and professional culture among SMEs

170  Nirmala Dorasamy can enhance business reputation, competitive credibility/advantage and governance can become increasingly interwoven (Sharma and Joseph, 2020). In addition, it can protect the business and its employees from legal actions and avoid unfavourable wrong actions, because unethical business practices can negatively tarnish or destroy the reputation of a business (Peek, 2022; Sharma and Joseph, 2020; Macatopo, 2016 and Nicolaides, 2013). Accordingly, fostering good business ethics is imperative and significant because ethical breaches by employees can be very costly. For example, claims, complaints, lawsuits against the business for harassment, product defects, regulatory fees and fines and misrepresentation of products or service benefits can cost businesses millions (Macatopo, 2016). Therefore, fostering ethical and professional culture among SMEs is not only important for being moral, but it is also about avoiding unnecessary costs and preserving the reputation of the business. The case of ethics and governance within Nestlé Company, which is aligned to business practices that have been governed by integrity, honesty, fair dealing and full compliance with all applicable laws, is a clear example of best practice of ethical and professional culture by the entire workforce in the workplace (Macatopo, 2016). According to Macatopo (2016), Nestlé employees worldwide have upheld and pursued an ethical and professional culture as a commitment to their everyday responsibilities, and Nestlé’s reputation remains one of the company’s most important assets currently. This is because the Nestlé corporate business has vigorously implemented an ethical and professional culture that prescribes values and principles, aligned to the worldwide reputation of the corporate and to individual values and status recognition. In this regard, Sharma and Joseph (2020) supported the idea that the success of any business, like Nestlé corporate business, is largely dependent on maintaining a business model wherein all the stakeholders are made comfortable about being transparent in all the dealings/workings of the origination. This can further enhance the comfort level of the stakeholders. Thus, the success of Nestlé’s corporation in providing quality products and services can be associated not only with the ability and skills of its employees, but in recognising the Code of Business Conduct that specifies and helps the constant implementation of the Corporate Business Principles (leadership, accountability, integrity, respect for others, honesty, respect for laws, responsibility, transparency, compassion, fairness, loyalty and environmental concern). Thus, by establishing certain non-negotiable minimum standards of behaviour, efficient and effective sustainability may be strengthened (Twin, Drury and Perez, 2022). According to Macatopo (2016), the nature of Nestlé’s Code of Business Conduct is not meant to cover all possible situations that may occur. It is designed to provide a frame of reference against which to measure any activities. This suggests that SMEs’ employees in Africa should learn from the best practice of Nestlé’s Code of Business Conduct (ethical and professional culture) and seek guidance when they are in doubt about the proper course of action in a given situation, as it is the ultimate responsibility of SMEs and each employee to “do the right thing that promotes both the organisation and the individual employee”. According to Macatopo (2016), managers and employees of SMEs should always be guided by the following basic ethical and professional principles:

Fostering Business Ethics and Professionalism  171 • • • •

Avoid any conduct that could damage or risk organisational reputation; Act legally and honestly; Put the business interest ahead of personal or other interests; Comply with the ethical and professional culture governing the business.

Thus, fostering ethical and professional culture among SMEs requires additional guidelines that are represented in Box 12.1 (Twin et al., 2022; Sharma and Joseph, 2020; Scott and McQuerrey, 2019). Box 12.1 shows that being ethical or professional means being true to the chosen profession and trying to excel in any job assigned by means of being and doing what is right. Thus, it can be understood that ethical business operations are highly important for success, while unethical behaviour can negatively impact a business’s prospects and sustainability (Peek, 2022).

Box 12.1  Ethical and professional guidelines for successful SMEs Ethics guidelines • Laws and regulations to which the organisation must adhere: Identify traits that are representative of a highly ethical organisation. Identify what behaviours are necessary for building on the strengths, supporting weaknesses, taking advantage of opportunities and protecting against threats. Consider ethical values that stakeholders may think are important. It is important to consider suppliers, shareholders, members of the local community, employees and clients/customers, because the code of ethics will affect each of them as well. • Determine which ethical values are most important to the organisation. For example: Trustworthiness (honesty, integrity, promise-keeping, loyalty); Respect (autonomy, privacy, dignity, courtesy, tolerance, acceptance); Responsibility (accountability, pursuit of excellence); Caring (compassion, consideration, giving, sharing, kindness, loving); Justice and fairness (procedural fairness, impartiality, consistency, equity, equality, due process); and civic virtues and citizenship (law-abiding, community service, protection of the environment). It is important to associate each value with examples of behaviours that reflect the value, what employees are expected to abide by and the consequences if the code is not followed. • Distribute the code of ethics to every employee and post it throughout the business. After the code has been finalised and distributed, review it at least once each year and make any necessary revisions. This process will modernise and familiarise individuals with the codes and remind them of the importance of each value and expected behaviour.

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Professionalism guidelines •

The professional provides a service based on a special relationship with those whom they serve. This relationship involves a special attitude of beneficence, complemented by integrity. This includes fairness, honesty and a bond based on legal and ethical rights and duties authorised by the professional institution and legalised by public esteem. • To the extent that the public recognises the authority of the professional, they have the social function of speaking out on broad matters of public policy and justice, going beyond duties to specific clients. The professional should be educated rather than trained. This means having a wide cognitive perspective, seeing the place of his or her skills within that perspective and continuing to develop this knowledge and skills within a framework of values. • A professional should have legitimised authority. If a profession is to have credibility in the eyes of the public, it must be widely recognised as independent, disciplined by its professional association, actively expanding its knowledge base and concerned with the education of its members. • The attributes of professional values should include the following: Confidence, Service, Confidentiality, Competence, Contract, Community, Care and Commitment. Adapted from Twin et al. (2022); Sharma and Joseph (2020); Scott and McQuerrey (2019)

12.12 Perpetuating a Dominant Ethical and Professional Culture among SMEs Every business should establish an ethical culture that encourages good performance. Behaviour-supporting values like honesty, trust, integrity and loyalty should be part of this culture. Weaver (2006: 351) noted that an ethical identity leads to consistent ethical behaviour (Dorasamy and Pillay, 2011). Ethical behaviour should not be merely based on what is good for oneself but also on what is good for others (Van Vuuren, 2008: 63). Actions are pivotal for developing and institutionalising ethical behaviour. This pre-empts the establishment of a business culture where values are enacted rather than merely espoused. Businesses which foster ethical behaviour provide an enhanced opportunity for the development of a moral identity, likely leading to greater ethical behaviour among all stakeholders (Weaver, 2006: 352). Processes and strategies in businesses play a major role in developing and strengthening values. This implies that it cannot be assumed that employees will be naturally ethical or prone to behave ethically. Van Vuuren (2008: 63) argues that while this may be true, there are many genuinely ethical employees who often unknowingly commit wrongdoing and there can also be employees who wilfully

Fostering Business Ethics and Professionalism  173 behave unethically. In reality, it has to be accepted that legislation alone cannot prevent corrupt practices in businesses. For example, Vadera, Aguitera and Caza (2009: 560) used studies to show that moral identity associated with social justice influenced individuals to behave according to their moral mandates when such moral values are threatened. Therefore, businesses need to focus on the practice of values that can set standards that employees should adhere to. Establishing such an ethical culture, reflecting legitimate business-sanctioned behaviour enhances the efficacy of successful business practices. Based on a six-year research study on 18 visionary companies, Collins and Porras (1998: 205) identified the following mechanisms that can be used to enforce an organisational culture based on the identified core values: • Commitment of senior leadership to a specific organisational culture. • Promotion of employees who demonstrate behaviours congruent with the desired organisational culture. • Advancement criteria explicitly linked to corporate ideology. • Continuous articulation of organisational values in communication and documentation. • Public recognition for those who support the organisational ideology and visible penalties for those who do not. • Orientation programmes with ideological and practical content. • Investments to “buy-in” support for enacted values and appropriate behaviour. Thus, it can be argued that identifying mechanisms to establish the desired ethical business culture is imperative for successful performance and the integration of values into the core business of SMEs. Van Vuuren (2008: 63–66) suggested that enacted values can be perpetuated through a system of codifying ethical standards and institutionalising ethics. Van Vuuren (2008: 64) argued that a code of ethics should explain organisational values to guide and promote ethical behaviour. More so, such initiatives must be underpinned by a participative process, since a collective process can reduce variations in perceptions of what is the right thing to do. Furthermore, having a code of ethics that is seldom discussed, revised, or used is of little value, as its significance lies in it being a lived document. Merely complying with legislation is hardly likely to perpetuate a culture of practising values, since mere compliance diminishes the ethical discretion of employees. In contrast, by adopting an integrity approach to the enactment of values, ethical values are internalised. By moving beyond mere compliance and enforcement, businesses are inspired and committed to “live” organisational values (Van Vuuren, 2008: 65). Tsahuridu and Vanderckhove (2008: 116) argued that by institutionalising employees into the ethical culture of the business, employees are less likely to fear retaliation. A dominant organisational culture underpinned by the consistent practice of values will hardly be tolerant of retaliation towards the whistleblower. Therefore, the motivation to blow the whistle will be higher (Dorasamy and Pillay 2011). In this regard, Near and Maceli (1985: 6) use the motivation theory of Vroom and Skinner to argue that an individual’s motivation to blow the whistle is

174  Nirmala Dorasamy based on the expectancy of managerial attention to the complaint, recognition of the whistleblowers’ identity and changes in managerial practices will follow, ultimately leading to a further cessation of corrupt practices (Dorasamy and Pillay, 2011). Furthermore, the corruption setting reinforces the motivation to blow the whistle when consistent opposition to corrupt practices and positive managerial action is observed. The argument of Near and Maceli (1985: 6) shows that in a dominant value system, employees may be less likely to perceive retaliation and therefore are more inclined to blow the whistle. From the expectancy and reinforcement models of motivation, the business culture does play a role in influencing the whistleblower (Near and Maceli, 1985: 6). An organisational culture where ethical values are made “real” should have the following management systems in place (Van Vuuren, 2008: 66): •

Communication systems like ethics awareness campaigns, ethics helplines and safe reporting lines and ethics training initiatives (training in ethics competence for decision-making and management of subordinates) • Establishment of ethics committees that oversee ethics management interventions • Appointment of ethics officers/managers to coordinate ethics management initiatives • Reporting mechanisms on ethics management performance • Induction programmes (ethics orientation for new employees/promotees) • Human resource recruitment and selection of ethically sensitive individuals • Disciplinary processes The aforementioned elements are the acid test to show that management is serious about walking the talk in supporting ethical systems rather than merely paying them lip service. This can conjure the impetus for every employee to uphold the highest standard of ethics. The contingency model of Ferrel and Gresham (1985 in Hassink, de Vries and Bollen, 2007: 29) suggests that by implementing a comprehensive ethical management system, the highest level of ethical standards can be achieved. In addition to enforcement in maintaining such an organisational culture, Hellreigel, Slocum and Woodman (1998: 551) recommend powerful reinforcers as including the following: • Paying attention and commenting on processes and behaviours by management sends strong messages about what is important and expected. • The reward and punishment system conveys to employees the priorities and values of the organisation. • Organisational reaction to incidents and the manner in which it is dealt with can reinforce the existing culture or bring out new values to improve the culture. • Role modelling by management communicates cultural messages which can reinforce the dominant culture. The reinforcers can serve to promote responsibility by SMEs to take action against unethical conduct. This will not only increase the probability that employees will behave ethically, but also motivate potential whistleblowers to disclose unethical

Fostering Business Ethics and Professionalism  175 practices. While the implementation of the systems identified by Van Vuuren (2008: 68), Hassink et al. (2009: 29) and Hellreigel et al. (1998: 551) is important, the culture of ethics has to be maintained in a sustainable way. Such sustainability is dependent to a large extent on how the business can prove that its actions are fair, responsible, accountable and transparent (Dorasamy and Pillay 2011). This requires zero tolerance of corrupt practices, thereby contributing to higher levels of trust, honesty, loyalty, fairness and confidence in the business. Rainborn and Payne (1990: 887) further argue that if an organisation has accepted a basic level of conduct which is currently attainable as its goal, then punishment for deviation from this level should be extremely harsh since this has been accepted as the lowest acceptable level of conduct. This is reinforced by Hoivik’s (2002: 4) view that organisational systems can either impede or sustain ethical competence. Another consideration is embracing and nurturing whistleblowing can be influential in advancing ethical business interests. And creating a culture where individuals are free to exercise critical questioning. Such an approach contributes to a culture where values like loyalty and honesty are reciprocated by management and the whistleblower, since both parties are driven by the search for the truth. Evidence by the Ethics Resource Centre (2007: 165) showed that 61 percent of employees reported misconduct they observed in businesses with comprehensive ethics programmes. However, while such programmes are important antecedents for encouraging whistleblowing, it is insufficient to encourage employees to blow the whistle (Vadera et al., 2009: 566). It has to be reinforced by a strong business ethical culture, as shown in the study by the Ethics Resource Centre (2007: 169) that in businesses with a strong ethical culture and minimal organisational programmes, only 35 percent of the employees reported wrongdoing, whereas in businesses with a strong ethical culture and well-managed ethics programmes, 65 percent of employees reported observed misconduct. Such ethical programmes underpinning the dominant ethical business culture ensure enforceability, awareness, compliance, responsibility and accountability.

12.13 The Way Forward In assuming a small business is faced with an ethical issue, Kallman and Grillo (1996) have proposed that the following four-step process is appropriate to solve an ethical dilemma: S tep 1  – Understand the situation Step 2  – Isolate the major ethical dilemma Step 3  – Analyse the consequences of action to solve the dilemma Step 4  – Make a defensible ethical decision Within the parameters of this study, knowledge is contributed through the model illustrated in Figure 12.1. By implication, creating an awareness of the need for ethics and professionalism among SMEs by regulatory authorities is a starting point for establishing an ethical environment and practice. The continuous promotion of these practices through

176  Nirmala Dorasamy Ethics and professionalism (interventions)

Role players Regulatory authorities Business chambers

Awareness Training (skill) Reward system

SME

Ethical SME

Ethical decisions Professionalism in practice Trust among client Reputation Profit

Context

Ethical culture Ethical climate Ethics code Ethical website

Figure 12.1 Fostering ethics and professionalism.

rigorous approaches and mechanisms such as reward systems where SMEs who adhere to ethics are being compensated through an exemption of tax and other incentives is an important consideration. The regulatory authorities and business chambers/associations have a big role to play in this as well. They need to create a consistent channel for promoting awareness, monitoring and evaluating ethical practices among SMEs. Also, checks and balances should be in place, whereby whistleblowers and websites are dedicated to ethical practices and professionalism among SMEs. This model can be used to augment the existing ethics code for businesses. Currently, business ethics is based on an over-dependence and reliance on rules and regulations which threaten to foster a compliance mentality; it remains mechanistic and superficial. On the contrary, it is important to create a culture of value and integrity. This refers to the integrity approach to institutionalising business ethics. The creation of a culture of ethics does not exclude any formal compliance initiatives. As formal compliance structures increasingly become part of the local and international regulatory environment, South African businesses cannot afford to fall behind the rest of the world. However, it is critical that SMEs do not succumb to a minimalist or legalistic tick-box approach to corporate ethics management. Along with creating formal compliance structures, SMEs need to nurture a culture that provides the ethical commitment necessary to turn formal compliance into effective compliance.

Fostering Business Ethics and Professionalism  177 Creating a corporate ethics culture requires governing and managing three stages. First, SMEs need to develop a code of ethics that is integrated through training and awareness. Second, ethics need to be institutionalised and progress monitored continuously. Third, SMEs need to report on ethics performance.

12.14 Conclusion Ethics and professionalism provide businesses with models and frameworks for handling ethical situations or ethical dilemmas. Important in doing so is understanding one’s business and the different types of stakeholders and their power to influence and impact a business’s success and performance. There are several recommendations for small business owners to more effectively meet their ethical responsibilities toward stakeholders: know and obey the law; conduct business in good faith and make goodwill a broad philosophy of doing business; emphasise and value business relationships; engage in practices that will demonstrate that the business values and wants to retain customers and employees, as well as grow its customer base; and exercise moral courage by doing the right thing, even if its costs the business in terms of losses or decreased profits. More so, practising innovation and improvising with ethical and moral refrain when it comes to meeting the differing demands of customers and other stakeholders is critical. Innovation and improvisation are key to survival when done with ethical conviction. While striving for innovation, shortcuts should not be pursued as they may result in ethical compromise and cause damage to credibility and stakeholder trust. Developing a mission and strong strategic vision around ethics and social responsibility and working consistently and honestly to achieve them are important. Additionally, socially and ethically responsible actions and behaviours as a core function of business and educating employees and business partners on the value of these play a crucial role in “walking the talk”. Thus, developing and following a strong code of ethics that drives actions and decisions should be part of business as usual. Ethics and being ethical pays, but unfortunately, this only becomes apparent when businesses are already suffering or have already suffered from the consequences of unethical choices and decisions.

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13  Enhancing Quality and Standards among SMEs Nirmala Dorasamy

13.1 Introduction The year 2019 was marked with much uncertainty. Particularly, the anxiety caused by the US–China trade war, the US presidential elections and Brexit on the World Economy (Plummer 2019). On account of these events, the International Monetary Fund (IMF) had forecasted a moderate growth of 3.4% in the global economy (IMF 2020). Unexpectedly, at the onset of 2020, the COVID-­19 pandemic caused by SARS-­CoV-­2, a novel strain of coronavirus from the SARS species – changed the outlook (Barua and Barua 2021). Due to the economic uncertainty, consternation and anxiety and the rational assessment that the profits of businesses are likely to be lower due to the impact of COVID-­19, global stock markets erased about US$6 trillion in wealth in one week from 24 to 28 February 2020 (IMF 2020). The S&P 500 index lost over US$5 trillion in value in the same week in the US while the S&P 500’s largest 10 companies experienced a combined loss of over US$1.4 trillion (Yilmazkuday 2021). Some of the loss in value was due to rational assessments by investors that the profits of businesses would decline due to the impact of the coronavirus. Small and medium-­sized enterprises (SMEs) did not recover in the same manner (Gourinchas, Kalemli-­Ozcan, Penciakova and Sander 2021). Furthermore, the International Air Transportation Association (IATA) stated that the air travel industry would lose US$113 billion if the COVID-­19 outbreak was not quickly contained (Emamian and Mazlan 2021). The IMF downgraded its growth projection for the global economy, as the COVID-­19 outbreak threw its earlier projection into serious doubt. For example, the tourism industry was affected as the travel opportunities for Chinese tourists, who usually spend billions annually, were severely curtailed. There were increased flight cancellations, cancelled hotel bookings and cancelled local and international events worth over $200 billion (Adams, 2020; Hoque, Shikha, Hasanat, Arif and Abdul Hamid 2020). The flow of goods through global supply chains was vastly reduced significantly given that China was the world’s largest manufacturer and exporter, and the Chinese government ordered the closure of major factories in the country (Guan, Wang and Hallegatte 2020). Countries like France, Iran and Italy were among the first countries to issue nationwide stay-­at-­home policies to control the spread of the virus, which had already caused multiple deaths and was putting pressure on the DOI: 10.4324/9781003413172-13

184  Nirmala Dorasamy national public healthcare infrastructure. Such stay-­at-­home policies planted the seeds of recession in developed countries, and there was a consensus among economists that the coronavirus pandemic would plunge the world into a global recession. These stay-­at-­home policies became the norm for most of 2020 and 2021 across many countries. As such, SMEs were not excluded from such devastating impacts. Feher, Sirbulescu, Pascalau, Banes, Raicov, Bodnar and Privoczki (2021) asserted that the COVID-­19 pandemic resulted in the collapse of many SMEs, which may never recover. Likewise, Nseobot, Ikoroha, Anietie, Edidiong, Emmanuel and Okon (2020) hinted that SMEs in developing economies had struggled to stay afloat and work towards business survival daily. Confronted with economic uncertainties, quality and standards are likely not to be seen as prioritised issues among SMEs, who envisage a likely closure of their enterprise (Wang, Iqbal and Gong 2021). The purpose of this discussion is therefore to elucidate how quality and standards can be enhanced among SMEs. In the remainder of this chapter, readers’ attention is drawn to the economic outlook of 2020–2021, a theoretical review of the International Organization for Standardization (ISO), the need for the ISO, implications of non-­conformance to ISO and approaches the author recommends for improving quality and standards among SMEs.

13.2 Economic Outlook: 2020–2021 The severity of the COVID-­19 pandemic was felt across the world in 2020 (Baldwin and Weder di Mauro 2020). The imposition of lockdown measures resulted in a catastrophic contraction in real gross domestic product (GDP) in many economies. With the manufacture of the COVID-­19 vaccines, along with policy mixes that support economic viability, some economies in the Western hemisphere are beginning to show a sign of economic recovery (Das, Kumar and Shalini 2020; Matenda, Sibanda and Chikodza 2021). However, the outlook in less developed economies still remains uncertain, as many businesses are on the brink of insolvency (Makridis and Hartley 2020; Sansa 2020). Business bankruptcies were projected to increase as much as 55% in 2020 and then decline in 2021 (Matenda et al. 2021). Unlike in the past, most of the forecasted changes in business bankruptcies during 2020 and 2021 were related to the projected evolution of real GDP growth (Matenda et al. 2021). The economic outlook reveals the obvious disconnect that emerged between the near-­term expectations for the market-­ based indicators of corporate default risk and the real economy at the onset of the pandemic (Reinders, Schoenmaker and Van Dijk 2020; Vidovic and Tamminaina 2020). This invariably affects the performance of SMEs. To counter business bankruptcies, banks adjusted their loss provisions during the first and second quarters of 2021 in response to a decline in their credit quality in relation to loan portfolios (Barua and Barua 2021). Park, Villafuerte, Abiad, Narayanan, Banzon and Samson (2020) admits that, historically, economic activities, along with forward-­looking default indicators among equity markets, help in forecasting business bankruptcies. During an economic contraction such as the COVID-­ 19 pandemic, the relationship between economic activities and

Enhancing Quality and Standards among SMEs  185 bankruptcies is quite apparent. Businesses were forced to lower their overhead costs while, at the same time, servicing their debts through limited resources (Barua and Barua 2021). This in many cases triggered potential bankruptcies, insolvencies and defaults. In an attempt to lower costs, service existing debts and curtail bankruptcy to the minimal level, SMEs are often unable to provide similar quality of services or standards they provided before COVID-­19 (Baldwin and Weder di Mauro 2020; Feher, Sirbulescu, Pascalau, Banes, Raicov, Bodnar and Privoczki 2021). Hence, the bleak economic outlook among SMEs during the pandemic has pushed more for the survival of businesses rather than providing quality services or products (Aghababaei, Koliou, Watson and Xiao 2020; Feher, Sirbulescu, Pascalau, Banes, Raicov, Bodnar and Privoczki 2021; Barua and Barua 2021).

13.3 SME Outlook: 2020–2021 In Organisation for Economic Co-­operation and Development (OECD) economies, SMEs represent 99% of all businesses and yield about 60 % of the added value of their economies (Feher et al. 2021; Popkova et al. 2021). Small enterprises and microenterprises among OECD economies having up to 50 employees represent 43% of employees within OECD economies, while mid-­sized businesses employing 50–249 people represent 16% of the total workforce (Levashenko and Koval 2020). According to OECD statistics, many of these businesses were shut down at the peak of the pandemic, while the majority have barely recovered in 2021. This shows the fragility of SMEs in OECD economies (Levashenko and Koval 2020, de Villiers, Cerbone and Van Zijl 2020; He, Sun and Li 2020; Yang and Deng 2021; Yilmazkuday 2021). Similarly, millions of SMEs worldwide either shut their business activities temporarily or permanently at the peak of the COVID-­19 pandemic in 2020. This led to compromised work positions and a loss of revenues (Mann 2020; IMF 2020; ILO 2020). As larger and well-­established enterprises began their economic recovery in 2021, many SMEs did not manage to bounce back (Lu, Peng, Wu and Lu 2021; Yang and Deng 2021; Levashenko and Koval 2020). Relatedly, the pandemic-­induced unemployment caused disruptions in many African economies, as SMEs provided livelihoods to a majority of the working-­age group (de Villiers, Cerbone and Van Zijl 2020; Mennechet and Takoudjou-­ Dzomo 2020). Businesses were disconnected from the traditional work setting as experienced pre-­ pandemic, since office-­ based work was transferred to home offices as a result of lockdown measures and social distancing practices. Moreover, employment profiles were changed in order to comply with health standards while catering for critical functions and essential duties. Thus, the change in work schedules impacted standards, as most SMEs had to improvise while complying with COVID-­19 regulations in their respective countries (Haider, Osman and Gadzekpo 2020; de Villiers, Cerbone and Van Zijl 2020). The dwindling of resources continuously impacted services and goods provided by businesses. Moreover, businesses which depended on supply chains out of their countries suffered severely. They often had to ration resources, which was detrimental to the quality of services/products. The more these businesses depended on the economies affected by the pandemic, the more vulnerable they became (Lu,

186  Nirmala Dorasamy Peng, Wu and Lu 2021; Yang and Deng 2021). While the African Union (AU), the African Development Bank and global organizations such as the OECD and the IMF provided stimulus packages and other relief aids for African economies, with the aspiration of minimising regional economic disparities, these disparities only deepened between provinces, countries and regions (Yang and Deng 2021; Popkova, DeLo and Sergi 2021). Mennechet and Takoudjou-­Dzomo (2020) allege that the African continent as a whole has not prepared for scenarios of crisis development in the business environment, and this has been leading to a delay in implementing government-­issued measures aimed at supporting SMEs. In the absence of this, SMEs face growing challenges to survive during unprecedented crisis situations. Only a few studies have examined the effect of the pandemic on the business sector and the African economy since the inception of the pandemic (Yang and Deng 2021, Mennechet and Takoudjou-­Dzomo 2020). Conclusive economic impacts and their causal ties cannot be quantified at present, as the pandemic is still ongoing, even though most economies are gradually relaxing their lockdown measures, while businesses are making efforts to return to normalcy (Aghababaei, Koliou, Watson and Xiao 2020; Nseobot, Ikoroha, Anietie, Edidiong, Emmanuel and Okon 2020). The COVID-­19 pandemic has resulted in a new normal where only essential businesses were permitted to operate under strict compliance with COVID-­19 regulations (Yilmazkuday 2021; Nseobot et al. 2020). To comply with social distancing measures, there were measures imposed on business and non-­business sectors, which affected the number of individuals who could come to work. The temporary cutdown of staff negatively impacted normalcy in the workplace. For example, a business with 15 employees, only had 3 to 7 people on duty, while the others worked from home or were given a different shift (Matenda et al. 2021; Barua and Barua 2021). Reinders et al. (2020) note that businesses struggled to cope at the initial stages of the pandemic, but as they got accustomed to it, businesses gradually adapted to the new normal. A setback to all this was that while businesses were adapting to the new normal, they had to alternate their operations and improvise. Hence, businesses were unable to sustain their expected standards in some instances (Vidovic and Tamminaina 2020; Tyson 2020; Matenda et al. 2021).

13.4 Theoretical Background 13.4.1 The ISO The ISO was founded in 1947 to provide standardised international guidelines for organisations. According to Latimer (1997), the ISO is a derivative of the Greek word isos, which is translated to mean “equal”. The ISO is said to be the largest, most reputable developer and publisher of standards. Involved in the ISO are 161 national standards bodies. Each of these national bodies represents a country (ISO 2018). The establishment of the ISO was deemed necessary as contrasting standards may negatively impact international trade and result in unfair advantages to

Enhancing Quality and Standards among SMEs  187 some countries (Martincic 1997). Moreover, the ever-­changing business environment requires a regulator to create stability. The interconnectivity and interdependence among the international trading partners also highlight the importance of international standards (Kaziliūnas 2008). Earlier works have highlighted the benefits organisations gained by conforming to the ISO standards. According to ISO (2014) and Heras-Saizarbitoria and Boiral (2013), the main benefits of complying to ISO’s standards are that it creates confidence among clients, provides a competitive advantage to organisations and ensures compliance with regulations such as safety, health and environmental legislations. Earlier works have also identified deficiencies, which include ineffective implementation of the ISO, such as adopting it in a symbolic (conformance) based fashion instead of a substantive (performance-­based) manner, which reduces the benefits of conformance to the ISO standards (Vílchez 2017). Ince (2016) highlights issues such as, inter alia, concerns with non-­conformance reporting (NCR) and closing out of non-­conformances. However, businesses and organisations are fast adopting the ISO standards. As of 2017, 358,953 (ISO 14001) certificates had been issued globally. Of these certificates, 1,230 were issued in South Africa (ISO 2017). South Africa has adopted the SANS 14001:2015, which is an approval of the ISO 14001:2015 standard in line with the South African Bureau of Standards (SABS 2018; SABS 2015). The precedence of standards in South Africa is therefore set by the South African Bureau of Standards (SABS 2018). 13.4.2 Need for the ISO Vilchez (2017) explains that applying the ISO provides businesses and organisations with statutory and regulatory compliance guidelines. In addition, Jiang and Bansal (2003) and Castka, Prajogo, Sohal and Yeung (2015) note that the adoption of the ISO can advance a business’s corporate reputation, offer a competitive advantage and provide organisational and commercial benefits. A longitudinal study covering ten years in Slovenia also provided evidence of multiple benefits a business can derive through the adoption of the ISO. Javorcik and Sawada (2018) posted that adopting the ISO improves labour productivity and wages, improves profitability ratios, drastically improves sales, increases exports and creates employment opportunities. Considering these benefits, it is more likely that SMEs that adopt these into their daily routines and processes will likely benefit similarly, but the extent of benefit may depend on the extent of implementation of the ISO. This may be particularly useful for SMEs during a post-­COVID-­19 business recovery. 13.4.3 Diffusion Rate of ISO 14001 across Africa Every three years, certified businesses and organisations need to decide whether to withdraw or renew their ISO certification (Candido, Coelho and Peixinho 2019). Prior studies have not been able to identify the main reasons why organisations decide to decertify. Candido et al. (2019) believe the decision to decertify has no links with economic underperformance or no bearing on the economic situation

188  Nirmala Dorasamy (Candido et al. 2019). However, developing nations are fast adopting ISO management standards (Tayo-­Tene, Yuriev and Boiral 2018). By 2015, the number of certifications in Africa had grown to 19% for ISO 14001 and 20% for ISO 9001. The adoption of ISOs has continually grown across every region of the globe. However, studies on characterising and forecasting the diffusive process is mainly saturated in the western hemisphere, with particular reference to Europe. Lira Salgado, Beijo and Da Silva (2021) note that there has been an above-­90% increase in the number of certifications across every region. This saturation is, however, focused in a few countries within each region, with highlights for India and China. These countries have shown impressive gains (Lira et al. 2021; Taleb et al. 2021). Hence, it is forecasted that India and China will continue to grow, while countries like Australia and South Africa may likely lag behind in terms of ISO certification (Lira et al. 2021). Unlike the European continent, the Oceania, Asian and African regions do not have characterisation or forecasts for their industrial sectors and countries at large (Lira et al. 2021). The certification in Africa, however, only represents 1% of the global certification (Tayo-­Tene et al. 2018). Hence, the attention of readers is drawn here by highlighting possible obstacles to adopting ISO management standards within the African perspective and thereby analysing their appropriateness with specificities of African cultures and organisational practices. Several barriers have been found to be the cause of the poor diffusion of ISO in Africa. These include, but are not limited to, corruption, low involvement in the development of ISO management standards, the lack of financial and human resources, the ineffectiveness of donor-­funded programmes and weak institutional frameworks (Lira et al. 2021; Tayo-­Tene, Yuriev and Boiral 2018). Also, some specificities of the local cultures within the African continent, especially attachment to traditions, such as oral traditions, strong tolerance to uncertainty, collectivism, paternalism and hierarchical distance, may be in opposition to the values promoted by the ISO management standards (Lira et al. 2021). These specificities require an effort to adapt ISO management systems to African realities in order to promote their substantial rather than symbolic integration within organisations (Tayo-­Tene, Yuriev and Boiral 2018). These identified barriers are very significant, because if they are not resolved, SMEs may fail to provide optimal quality and standards expected (Taleb et al. 2021). Additionally, Sfakianaki and Kakouris (2018) have identified some factors which obstruct SMEs from obtaining ISO certification, namely bureaucracy, a lack of guidance by top management, demands on time and resources and reaction from employees. Thus, Demir (2021) argues that the right checks and balances will be required to improve the diffusion of ISO certification in Africa. If these obstacles affecting SMEs from obtaining their ISO certifications are not looked into, it will persistently constrain SME’s from giving their best substance. 13.4.4 Improving Quality and Standards of SMEs through ISO The COVID-­19 pandemic has exposed the fragility of SMEs, as many of these businesses temporarily or permanently shut down due to lockdown restrictions. Several SMEs in developing countries are unable to bounce back as the lockdown measures are

Enhancing Quality and Standards among SMEs  189 gradually being relaxed in several regions. A lesson learnt by business managers/SME owners is to prepare for a future crisis. Among measures proposed for future uncertainties is the adoption of ISO, as they provide numerous benefits for businesses. According to Javorcik and Sawada (2018) and Lira et al. (2021), adopting the ISO standards improves the quality of goods and services; strengthens market pitch; facilitates an export market for services or goods; helps drive growth, cut costs and increase profits; facilitates a competitive edge for a business; and improves credibility and secures confidence among investors/stakeholders/clientele, among other benefits. These benefits are discussed further: •

•

•

•

•

Quality of goods and services – adoption of ISO standards requires businesses to comply with a set of quality standards. For example, auditing firms need to comply with ISO 19011. With such compliance, they are able to augment the services offered to their prospective clients. Strengthens market pitch – adopting ISO standards also offers SMEs the leverage to enhance the value of their services/products. Complying with ISO standards provides prospective clients the leeway to grasp the value of services/ products an SME intends to offer to the public. For this reason, Wong (2015) explains, qualitative benefits could intrigue clients, while quantitative results can be used to close the deal. Export market – a chief advantage of the ISO is the exposure of a business to international markets. By implication, an SME’s clientele consists of the local and international markets. This form of exposure also improves sales and may result in having franchises or expanding the business to other countries. Improves business viability – earlier studies have emphasised how the adoption of ISO standards can be used to improve business viability (Javorcik and Sawada 2018; Latimer 1997; Martincic 1997; Mariotti, Kadasah and Abdulghaffar 2014; Lira et al. 2021). It is evident from these studies that the adoption of ISO standards can be used to drive business growth and reduce overhead costs of production, which literally widens the profit margin. Hence, ISO standards facilitate competitiveness among SMEs. Improves business credibility – clientele, investors and other stakeholders have more confidence in businesses adopting ISO standards. This form of credibility usually results in other advantages, such as client or word-­of-­mouth referrals among prospective clients.

As observed, SMEs are fast transiting from a traditional management practice to a quality-­oriented management philosophy through the implementation of ISO standards. However, before an SME implements the ISO, the following five critical factors must be considered: • • • • •

Commitment to quality, Employee training, Support of senior management, Continuous improvement and Internal and external customer focus.

190  Nirmala Dorasamy These five identified factors are critical and can contribute to quality and standards in a number of ways. Commitment to quality, for instance, ensures the provided services or products meet a set standard. Likewise, periodic training of employees instils the importance of quality and standards. This can only be met with continuous support from senior management/business owners. When subordinates/employees are continuously supported and motivated, they are able to give in their best performance. Also, continuous improvement of services or products being offered is key. By applying this approach, the (SME) workforce is able to identify flaws in their production process while the necessary improvements are made. This also limits error prevention within the production line. Also, paying closer attention to customers’ needs also ensures services or products are satisfactory to the end users. The customer-­centric approach not only improves preset standards but equally wins customers over and over as well (Wong 2015). Further mentioned is the third critical factor identified by Wahid and Corner (2009), which entails the continuous improvement of processes, people and systems. To facilitate the adoption of ISO standards among SMEs, regulatory bodies may need to enforce ISO certificates while SMEs are registering their establishments, or during the renewal of licences. Sensitization and awareness campaigns should also be made through a variety of platforms. This will further enlighten SMEs on the benefits of adopting the ISO standards. Also essential are training for SMEs on implementing ISO standards, the provision of incentives for SMEs implementing ISO standards and free renewals of ISO certificates. Considering the benefits aligned to ISO standards, SMEs adopting this will likely attain business viability and longevity. 13.4.5 Impact of Quality Standards (SANS 9001/ISO 9001) on the Performance of SMEs Over the years, SMEs have been required to align their business practices with quality standards in order to ensure that products, services or processes fit the purpose of compliance with quality standards, competitive advantage and constantly meeting customers’ requirements and enhanced satisfaction (Chili and Matsiliza, 2021). However, in Africa, businesses have been often criticised for non-­compliance with the quality standards (SANS 9001/ISO 9001) that require effective implementation of quality management systems (QMS) and specifically in the south, the African National Standards (SANS), which provides specifications for products/services quality (Chili and Matsiliza, 2021). Therefore, Chili and Matsiliza (2021) posited that the commonly used quality standards in African countries or in South Africa are ISO 9001 and the South African National Standards (SANS 9001), which make available requirements needed to comply or implement effectively a QMS. Unfortunately, in Africa, most SMEs do not achieve the envisioned or predictable performance goal because they fail to comply with the quality standards. This is because they produce and/or provide/deliver products/services that

Enhancing Quality and Standards among SMEs  191 cannot meet relevant quality standards; products/services that are less competitive, marketable, and profitable; and products/services that are unable to meet customers’ demand or satisfaction (Anifowose et al., 2022). Thus, quality standards on the performance of SMEs may be positive or negative. In other words, complying or not with quality standards could have an impact on business performance, growth and expansion (OECD, 2017). For example, Chili and Matsiliza (2021) and the OECD (2017) argued that in South Africa, the Small Enterprise Development Agency (SEDA) reported that the challenges of non-­compliance (as well as challenges related to the low level of logistics, marketing and competitiveness, skills, opportunities, finances, proper infrastructure, access to working capital, high energy prices, technological barriers, inefficient production costs, macro-­ economic factors, low management skills, low product quality, sales restrictions and limited raw materials) by South African SMEs continue to impact negatively on the success of businesses. Accordingly, one of the key challenges facing SMEs in Africa is linked to market-­ related trading of products and services that do not meet essential quality standards; and regulatory and statutory requirements that position them at a better competitive advantage (Chili and Matsiliza, 2021). This implies that compliance with quality standards enables the quality principles to be translated through a process into an effective QMS. Thus, these quality principles if adopted and practised by SMEs (SANS 9001/ISO 9001 standards) can strive toward continual improvement and promote best practices and, ultimately, engender an effective QMS. Customer focus, leadership, engagement of people, process approach, improvement, evidence-­based decision-­making, and relationship management are important principles to be considered by SMEs in ensuring their performance and the delivery of competitive products and services. These principles are discussed as follows (Chili and Matsiliza, 2021): •

Customer focus: It is expected that every employee within the value chain of the business should be motivated toward a customer orientation, thereby committing to meeting and exceeding the current and future requirements of the business. Customer-­orientated organisations consistently improve customer retention and satisfaction. Every business must aim for the best, and a good business focuses on customer satisfaction, because they are the main source of output. When a customer is retained and satisfied, this then leads to improved financial and business sustainability. • Leadership: This relates to the top management, which should demonstrate exemplary leadership and commitment in setting goals and strategic positions within SMEs and establish actions toward their achievement. These goals may possibly consist of improved financial and business sustainability, efficient and effective operations, compliance with relevant regulations and statutory requirements, products and services that are fit for use, safe products and security against climatic or other hostile circumstances. Chili and Matsiliza (2021) acknowledged that leadership selection criteria are indispensable in enhancing quality management within SMEs.

192  Nirmala Dorasamy •

People engagement: SMEs require input from every employee to pursue organisational goals in the right direction. When leadership engages employees by addressing their opportunities, threats, strengths and weaknesses, this exercise encompasses enterprise risk management, and such engagements may bring about positive outcomes. SMEs must recognise the importance of engaging with stakeholders to understand the context and maintain an increased competitive edge to ensure optimal market shares. Chili and Matsiliza (2021) supported the notion that leadership in quality promotion must recognize that few SMEs focus on the critical role individuals and communities play in being part and parcel of decision-­making in a business at the grassroots level. Considering the role of people’s engagement in the business confirms that competent, empowered and engaged people enhance the creation of value in SMEs. • Process approach: SMEs should manage all activities, tasks and interrelated resources to effectively realise the desired output, including well-­defined and controlled internal processes, which encompass compliance with quality standards. The process approach also allows SMEs that employ a process to identify their needs as inputs and convert them into outputs. • Improvement: SMEs must consistently assess the adequacy and effectiveness of their processes, policies and procedures and, where gaps exist, implement corrective actions to ensure all facets of the QMS contribute to continual improvement. According to Chili and Matsiliza (2021), a business must adopt quality management in order to gain a competitive advantage. With that understanding, implementing quality assurance tools such as quality improvement will ultimately lead to efficient and effective operations. It has been affirmed that quality is improved when such tools are entrenched in the processes and procedures of any business, leading to organizational improvement, managerial efficiency, effective management, and continuous improvement in productivity. • Evidence-­ based decision-­ making: The decisions by businesses like SMEs should be made based on the results of pertinent information that has been methodically examined. Drivers for change, such as managers, must be willing to share their proposals with their employees and their management team before making final decisions that will impact the sustainability of the business. Managers must provide valid evidence on how certain decisions can be applied in their organisations to incur the desired outputs. • Relationship management: For SMEs to ensure effective operations, they rely on suppliers, contractors and other stakeholders. Therefore, they should have controlled processes in place to manage them sustainably. Chili and Matsiliza (2021) indicated that SMEs shall determine the controls to be applied to internally and externally instituted processes, products and services. Constant interaction between organizations and stakeholders can be a platform to improve relations between the organisation and clients. In light of the previously discussed principles relating to quality standards, it is important to highlight that the impact of quality standards on the performance of SMEs requires the adoption of a quality management system as a strategic decision. This can enhance the performance of SMEs and provide a thorough basis for

Enhancing Quality and Standards among SMEs  193 sustainable development initiatives. Therefore, Chili and Matsiliza (2021) highlighted that the potential benefits of the ISO for SMEs in terms of implementing a quality management system may include the following: • The ability to consistently provide products and services that meet customer needs; • Applicable statutory and regulatory requirements; • Facilitating opportunities to enhance customer satisfaction; • Addressing risks and opportunities associated with the context and objectives; and • The ability to demonstrate conformity to specified quality management system requirements.

13.5 Internalising QMSs among SMEs Applying quality standards along with innovative quality initiatives is an important strategy for SMEs willing to augment their daily routine, competitiveness and processes (Razieri et al. 2018; AlMaian, et al. 2015). The assumption construed in earlier studies is that every business applies quality standards in the same fashion (Mak 2011; Djekic et al. 2017; Alonso-­Almeida et al. 2012). Earlier works explain the impact of quality standards but fail to explain the process of internalisation or heterogeneous adoption of quality standards as they only measure adoption in binary terms. The works that consider internalisation of quality standards such as ISO 13485 claim that ISO 13485–certified businesses meet the quality standard requirements differently (Boiral 2011; Ataseven et al. 2014). The way businesses adopt this standard can result in a lower or higher level of quality standards implementation. The extent of adoption is not looked into by studies that treat all quality standards adoptions as being equivalent. Thus, the internalisation concept indicates that businesses should apply the requirements of quality standards in their day-­to-­day functions as a method of integrating quality concepts into their business processes and seek to improve quality and standards continuously (Prajogo 2011; Allur, Heras-­ Saizarbitoria and Casadesús 2014). For example, if a business implements a quality standard, it often will document the procedures, fill specific details/records and define the role of each employee. This, however, is inadequate to internalise quality standard requirements. The requirements must form part of the daily routine and serve to reveal improvement opportunities. By indication, quality standard requirements may serve to create knowledge that can be used to support continuous improvement. This can be used by SME owners or business managers to improve current daily routines and performance (Garstenauer, Blackburn and Olson 2014). Earlier research works also fail to examine the benefits of QMSs which relate to social impact, employees and customers. Moreover, there is a prescribed view on how internalisation could be measured. Studies on internalisation use inconsistent approaches to measure quality standard adoption (Singh 2008; Naveh and Marcus 2005). Hence, how internalisation affects the dimensions of performance, how different actors play a role in this relationship and how internalisation can be

194  Nirmala Dorasamy measured remain relatively vague in literature (Tarí, Molina-­ Azorín, Pereira-­ Moliner and López-­Gamero 2019). 13.5.1 Benefits of Internalising QMSs The benefits of internalising QMSs for SMEs are as follows (Briz et al. 2005; Mendes 2010; Taleb et al. 2021): •

Continuous improvement - the most significant advantage for SMEs applying a QMS is continuous improvement. The application of a QMS creates knowledge that can be used to reinforce continuous improvement that will contribute to improving current processes and performance. This form of improvement gives the SME a competitive advantage. • Operational efficiency – applying a QMS creates operational efficiency in the day-­to-­day running of an SME. This thereby reduces costs, limits the chances of making errors and reduces business risks. The overall benefit results in profitability for the SME. Over time, the SME is able to build an organisational culture, where operational efficiency becomes a work culture. • Business expansion – QMSs also provide SMEs access to new markets. An SME is able to spread its tentacles and reach new prospective clienteles. This could result in the diversification of products or services. Moreover, applying QMS also results in customer satisfaction, as customers’ requirements will be met. Hence, the SME may potentially grow until it becomes a leading business in its sector, while it is able to increase market shares.

13.6 Implication of QMSs According to Feher et al. (2021), a QMS provides guidance for businesses in managing their core business functions, services and activities. Through a QMS, business owners are able to design a clear path either for managing their processes or producing products or services (Cai and Jun 2018). Demir (2021) explains that a QMS should include features of a product, guidelines, specifications and procedures businesses should comply with in order to attain the needs of their users and meet customers’ expectations. Heras-­Saizarbitoria, Dogui and Boiral (2013) identify the main purposes why SMEs need to internalise QMSs: first, to define and control the business’s in-­house processes; second, to comply with regulations; third, to ensure the safety and reliability of services or goods; and, fourth, to meet environmental needs. Usually, depending on the sector a business may be operating within, standards may be voluntary. However, there are specific instances in which stakeholders or customers may demand or expect conformity. Also, government agencies and organisations may request partners or their suppliers to conform to standards as a prerequisite for engaging them in business (Demir 2021). In Demir’s (2021) study, a clear distinction is made between a quality management system and quality standards. While quality standards are used mainly for minimal compliance to the regulation imposed in an industry; QMSs are tools used by businesses who desire to exceed expected standards (Demir 2021). QMSs are further explained as a framework used for improving compliance, preventing

Enhancing Quality and Standards among SMEs  195 losses and measuring and monitoring services, products, employees and processes (Demir (2021). The size or dynamics of a business may influence a business in choosing either to adopt Six Sigma, Continuous Quality Improvement (CQI) or Total Quality Management (TQM). These QMS compliance practices have been widely adopted across many industries (QMS Certification Services 2019). A brief explanation of these three QMSs in relation to SMEs follows: •

•

•

Six Sigma – Six Sigma is often recommended for businesses within the logistics or service sector (Klochkov, Gazizulina and Muralidharan 2019). According to Conger (2015), techniques and tools from Six Sigma serve as an orientation to error-­proofing. Irrevocably, it is used to spot ineffective and inefficient processes within the production line. Thus, through the application of Sigma, businesses are able to cut down on unproductive activities, thereby cutting down costs and improving overall business performance. CQI – continuous quality improvement is a process which involves the collection of information about a specific service in order to benchmark it against performance while tracking and validating indicators that affect outcomes. Through this process, problems are identified in the management process (Kennedy 2017). Continuous Quality Management (CGM) is a culture which promotes a never-­ending improvement of practices and processes within an organisation (Kahloun and Ghannouchi 2017). Daily practices and processes are continuously being improved based on available knowledge and resources (Taleb, Serhani and Bouhaddioui 2021). The postulation behind this management philosophy is that unless we acquire more information about what we are doing, we may not recognise the flaws or learn how to improve the process (Kennedy 2017). According to Jimoh, Oyewobi, Isa and Waziri (2019), businesses need to stress continuous improvement in order to stay in competition against rival brands or businesses. Jimoh et al. (2019) believe that continuous improvement may be used to improve services and products continuously while reducing the overhead cost per product. Jimoh et al. (2019) asserted that continuous improvement necessitates an organisational culture which promotes confidence, innovation and creativity among employees. TQM – the popularity of TQM grew exponentially between the mid-­1970s and the late 1990s through the competitive advantage the European and Japanese establishments derived through the use of this management theory (Dahlgaard-­Park, Reyes and Chen 2018). However, it gradually lost its appeal after the late 1990s (Dahlgaard, Reyes, Chen and Dahlgaard-­Park 2019). TQM is described by Dahlgaard, Chen, Jang, Banegas and Dahlgaard-­Park (2013) as a comprehensive management philosophy that was used in driving business excellence in the 1980s and 1990s. Studies emanating from companies and research institutions provide evidence as to the tremendous impact this comprehensive management theory has had on global brands/ companies (Dahlgaard-­Park et al. 2018). Prior to Dahlgaard’s et al. (2013) study of TQM in 2013, there were no studies on it after 1995. The re-­emergence of this management theory signifies its applicability in the current business environment (Dahlgaard et al. 2019).

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13.7 Adopting Good Quality and Standards SMEs devoted to QMSs are usually able to increase loyalty among clients and other stakeholders, improve their market penetration, improve competitiveness, reduce overhead costs and increase profit margins (Feher et al. 2021). QMSs may not be sufficient for SMEs trading in a very competitive sector. Hence, they may as well follow best practices practised by successful businesses within their sector, in which they embrace the operations of such successful businesses (Feher et al. 2021). The thinking is that with tried-­and-­tested business strategies, SME owners may attain their desired results in the most effective and prudent manner; usually with fewer complications or issues (Demir 2021). Brooks (2020) indicates that SMEs struggle with the concepts of QMS. SMEs believe this is a complex process and may only be relevant to large businesses. This form of misconception is usually due to the SMEs (owners) poor knowledge or lack of enlightenment on QMSs. Also, SMEs are likely to pay no attention to particularities relating to QMSs when they can barely settle their basic bills, for example monthly rental for storage and other associated costs (Demir 2021).QMSs may not serve their intended use if SMEs do not have the right knowledge or good clarity on how to it apply to their products/services. QMSs are supposedly meant to function as a framework on which SMEs still require to build walls, mount fixtures and lay floors (Brooks 2020). Quality and standards can be an obscure concept, since what an SME owner sees as quality and standards may not be considered the same by prospective customers. Hence, this is one of the reasons some industries have introduced standards which suit their specific industries. For example, the ISO 19011 was established for industries within the auditing management systems; ISO 13485 was introduced towards issues related to medical devices, while ISO/TS 16949 was also established for automotive-­related products (Demir 2021). These set of standards enables businesses to meet what their respective clients perceive to be of quality or acceptable standards (Feher et al. 2021). Adopting good quality and standards comes with several advantages and benefits including the following: •

High returns – compliance with high quality and standards provides leverage for financial and sustainability performance. A business conforming to quality and standards is likely to benefit from mitigating higher risks. Thus, the business becomes more resilient and will be able to wither economic-­inclined risks (Feher et al. 2021). • Aversion of corruption and unethical practices – through compliance with regulations and standards such as ISO, a business has a lowered chance of committing fraud or other unethical practices. Due to compliance, the business is often unable to evade the preset standards; thus, unethical practices become uncommon (Brescia 2017). Also, when a business avoids unethical practices and ensures transparency through the provision of a well-­documented and thorough yearly financial statement to its shareholders, more trust and loyalty are built (Ullah, Wei and Zhu 2021).

Enhancing Quality and Standards among SMEs  197 • Business reputation – when a business is accustomed to following best practices, it is able to create value and highly priced reputation among its clients and shareholders. It makes the business highly sought after, which results in a stronger customer base and more revenue (Geissdoerfer, Vladimirova, and Evans 2018). Business reputation is particularly significant for SMEs working towards growth and business expansion (Adams 2020). • Market penetration – compliance with good quality and standards often results in word-­of-­mouth referrals among clients. Through this goodwill, businesses are able to extend their clientele, without investing many resources into advertisements. Thus, this provides business competitiveness among competing firms (Geissdoerfer et al. 2018).

13.8 Establishing a Quality Control Process It is traditionally believed that quality control only deals with manufacturing firms that inspect their goods for flaws. Against this common stereotype, several non-­manufacturing businesses also use quality control processes within their operations. In reality, quality control processes are usable in every form of business, be it service based businesses or product-­based businesses (Taleb et al. 2021). A well-­run quality control process enables SMEs to deliver consistent services and products to clients at all times (Demir 2021). Moreover, a well-­established quality control process also enables the possibility of running the SME effectively without the presence or supervision of the SME owner. Thus, this presents the opportunity for SMEs to expand their venture to other locations. Failure to comply with quality control processes may result in poor quality of services or goods and eventually poor reputation. This essentially is a major concern for SMEs as they often do not make commercials as the larger businesses do. Often, SMEs grow through word-­of-­mouth referrals among customers who have had good experiences (Taleb et al. 2021). The consequences of non-­conformance to quality control processes are further discussed. 13.8.1 Consequences of Non-Compliance with Quality Control Processes • Flouting of regulations – a business environment characterised by high levels of corruption is usually associated with moral decadence (Ashforth, Gioia, Robinson and Trevino 2008), and when the perpetrators go unpunished and, by chance, record high profit margins, this unethical practice gradually becomes normalised and continues repeatedly. Perpetrators of these actions are often accustomed to flouting government regulations. Hence, they create a breeding ground to promote practices such as tax non-­compliance, bribing of government officials and so on. In a business setting where there are no checks and balances or any form of quality control processes, then there is a high chance of business owners flouting regulations in order to avoid costs such as periodic payments or payments for licences.

198  Nirmala Dorasamy •

Business failure – non-­compliance with quality control processes may increase the averted risk of a business failure (Montgomery and Borror 2017). The perceived risk of non-­compliance with quality control processes increases, based on the size and dynamism or sector within which a business operates (Sutduean, Singsa, Sriyakul and Jermsittiparsert 2019). Non-­compliance with quality control processes may suggest a business has no road map or specified route if it intends to proceed in achieving its business goal. With a lack of clarity in mission and vision, a business is set to be on a pathway to business failure (Kembauw, Munawar, Purwanto, Budiasih and Utami 2020). • Quality of goods and services – without compliance with quality control processes, employees are unable to continuously provide consistent goods/ services. This can become disastrous if this challenge arises within the service sector (Montgomery and Borror 2017). This can also result in non-­ standardization of goods/services. When this occurs repeatedly, clients may lose trust in the business’s credibility (Kembauw et al. 2020). • Corporate social performance – negligence of quality control processes can also result in lower levels of corporate social performance disclosures (Baldini, Dal Maso, Liberatore, Mazzi and Terzani 2018). This lack of transparency denies the prospective beneficiaries the privilege of the gains which may have materialised from corporate social responsibilities (Bryant and Javalgi 2016). • Inefficiency – a likely result of non-­compliance with quality control processes is wastage. This is because the business will be more likely unable to ration and allocate its resources adequately. Thus, the business is likely to suffer from unplanned expenditures (Mitra 2016).

13.9 Developing a Quality Control Process Durocher, Gendron and Picard (2016) advance six quality control steps for SMEs intending to improve their quality and attain acceptable standards as illustrated in Table 13.1. As highlighted in Table 13.1, a SME wishing to develop quality control processes is tasked to set its own quality standard, if the SME does not fall within a sector where ISOs or other measures are being used to benchmark their services/ products. While setting quality standards, measurable standards should be considered. Also, SMEs may not be able to achieve optimality in every aspect of their operations; hence, they should prioritise the most essential details. For example, delivering hot meals promptly in a restaurant through courteous waitresses may have more impact than prioritising the toilet cleanliness of the restaurant, although equally considered an important factor. To develop a quality control process, SMEs should create a phase-­by-­phase process that can easily be benchmarked. Moreover, a review of results is also very critical. This form of review will enable SMEs to ascertain if their predetermined quality standards are being achieved. The last two steps “Getting feedback” and “Making improvements” are very important as sound decisions can be made here in improving the quality of services/products.

Enhancing Quality and Standards among SMEs  199 Table 13.1  Quality Control Processes Steps

Development phase

Processes

Step 1

Set quality standards

Step 2

Set priority

Step 3

Set operational processes to deliver quality

Step 4

Review results

Step 5

Get feedback

Step 6

Make improvements

For sectors and industries without ISOs or no specific standards, SMEs will need to set a realistic standard they can benchmark their services against Priority should be set on services which will give customers the best experience and those which result in the highest profit SMEs create well-­designed processes, and continuously measure the results of the processes. Efforts should also be made to regularly enhance the operational processes A regular review should be made to observe a business’s compliance to set quality standards Feedback should be regularly obtained from employees and customers through avenues such as customer surveys Measures should consistently be made in ensuring improvement of services/products

Source: Adapted from Durocher et al. (2016).

13.10 Selecting a QMS Selecting a precise QMS is quite a tricky and speculative step (Taleb et al. 2021). Prior to selection, SMEs need to set out a clear mission and vision for their business. Understanding the mission and vision will give a sense of direction on what traits or features should be prioritised. Also important is the SMEs brand and what will the SME pride itself in. The SME also needs to identify its strengths and capitalise on them. In choosing a QMS, SMEs should also consult business experts and analysts, engage in market research and observe best practices from successful businesses producing similar services/products (Tayo-­Tene, Yuriev and Boiral 2018). The European Foundation for Quality Management (EFQM) Business Excellence Model is explored as a possible model to be adopted by SMEs.

13.10.1 EFQM Business Excellence Model The EFQM Business Excellence Model has been widely accepted among SMEs and the public sector, alongside a host of other sectors (Joubert 2018). This model is a self-­assessment tool with the option for external assessment. The EFQM is based on five enablers of excellence (Leadership, People, Policy & Strategy,

200  Nirmala Dorasamy Partnerships & Resources, and Processes) and the management of four results areas (People, Customers, Societal, Key Performance). In the jungle of management paradigms and theories, the EFQM stands out not only because it has been used by several thousands of businesses to identify opportunities for improvement or implement specific processes to achieve productivity, efficiency and excellence but due to its ability to develop human capital. In general, EFQM interprets quality more widely than ISO and allows greater flexibility. The key themes of the EFQM are innovation and learning. It is believed that through innovation and learning, SMEs can stay highly competitive and remain consistent with the quality of services/products being produced (Wongrassamee, Gardiner and Simmons 2003). Models of this type or adaptations of existing models have been developed in some quarters to address perceived inadequacies of the generic models (Joubert 2018). Through good leadership, SMEs are able to use enablers (People, Policy, Strategy, Partnerships, Resources) to achieve key performance results displayed in Table 13.1. The EFQM is applicable in nearly every form of business, and for this reason, it may be considered as an approach for enhancing quality and standards among SMEs.

13.11 Conclusion The aim of this chapter was to elucidate how quality and standards can be enhanced among SMEs. The study also elaborated on the need for SMEs to consider adopting the ISO, while attention was also drawn to the diffusion rate of ISO in Africa. The chapter threw light onto other drawbacks that are rarely discussed. An emphasis was placed on barriers regarding the adoption of the ISO among African SMEs. This chapter may enhance existing knowledge of SMEs and provide useful insight to managers/owners of SMEs wishing to pursue ISO certification and needing assistance in preparing for certification. Using this information, researchers can further their knowledge and acknowledge drawbacks. The literature highlights the motive for obtaining ISO certification was centred on gaining new clients and achieving market penetration and visibility rather than on only improving quality or reducing overhead costs. It is also expected that ISO certification may improve organizational documentation. Some of the reasons to abandon certification had to do with the lack of time for improvement efforts and questionable cost–benefits that could lead to higher prices (Javorcik and Sawada 2018). However, some SMEs considered ISO certification as unnecessary for achieving their organizational goals (Candido et al. 2019). A study of voluntary ISO certification abandonment appears to be relatively absent in the literature (Zimon and Dellana 2020). This chapter opens a new area of research into the assessment of the potential consequences of abandoning the certification. This chapter further contributes to the existing literature by analysing the institutional, economic and cultural barriers to the adoption of ISO management standards in Africa. Implications for both professionals and public authorities are also discussed. Literature also indicates that the commitment and motivation among SME owners, education, exposure, experience, time and cultural values were the main influencers of an effective ISO among SMEs that have

Enhancing Quality and Standards among SMEs  201 adopted the ISO (Demir 2021). However, several studies have analysed obstacles to ISO certification; however, there remains a clear need for empirical research, particularly for SMEs (Sfakianaki and Kakouris 2018). Thus, the governance system must change in order to increase the economic benefits that organisations can expect to gain from ISO (re)certification (Candido, Coelho and Peixinho 2019). The adoption of the ISO is considered paramount among SMEs, particularly in a post-­COVID pandemic era. Accordingly, it is the responsibility of governments to prioritise accreditation acquisition for SMEs’ development, as a measure to combat barriers associated with compliance and quality assurance. SMEs must monitor and evaluate their interventions supported by the government to ensure the sustainability of those interventions. The role of government must be visible in regulating quality standards to promote fair competition and sustainability of SMEs.

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Index

Pages in italics refer to figures, pages in bold refer to tables, and pages followed by “n” refer to notes. Abisuga-Oyekunle, O. A.: and Fillis, I. R. 3; Patra, S. K. and Muchie, M. 4, 6, 7, 149 Abraham, A., and Ackah, D. 71 Ackah, D., and Abraham, A. 71 Adams, J. S. 18–19 Adamu, H., et al. 38 advanced economies: SMEs as vehicles to address societal needs 3; SMEs employment 6; SMEs exports to 133 AFC Holdings 28 Affirmative Finance Action for Women in Africa (AFAWA) 37, 44n2 Africa: African banks growth 93; annual GDP growth 92–93; global supply chain and SMEs 92–93; impediments to growth 93; major banks and globalisation 93; telecommunication growth 94; women’s involvement in agriculture 33 African Continental Free Trade Area (AfCFTA) 142–155; African Union (AU) 143; agro-processed foods 145; automobile manufactures (South Africa) 147; capacity building 147–148; Common Market for Eastern and Southern Africa (COMESA) 144; COVID-(19) 36, 144; Customs Cooperation annex 147; e-commerce 152; electricity supply problems 149–152, 150, 151; expanded value chains 147; export sector growth 143; financial access 148–149; free movement of people 145; gender mainstreaming 41; global value chains (GVCs) 153, 155; market access 145–146; non-tariff barriers (NTBs) 145, 146; OECD’s economic le ssons 152; overview 142–144; physical

infrastructure quality 149–152; preferential trade regimes for SMEs 146; reduced trade/transaction costs 146–147; regional integration 155; road/rail network 152; sanitary and phytosanitary (SPS) standards 143, 146; single African customs union 142; skill development 148; small volume consignment simplification 146; SMEs 144–147; SMEs and exporters 153; SMEs as suppliers to larger firms that export 154–155; SMEs benefit pathways 152–155; SMEs unleashing potential of 147–152; Southern Africa Development Community (SADC) 144; sub-Saharan Africa (SSA) 152; technical barriers to trade (TBT) 146; trade infrastructure/facilities (improvement) 147; United Nations Development Programme (UNDP) 144, 146, 148; water access 149, 150, 151; women workers’ gains 143; World Bank 143 African Development Bank (ADB) 37, 93, 101, 102; COVID-19 stimulus packages 186; sub-Saharan Africa (SSA) 6 African economies: digitalisation opportunities 11; SMEs share of all businesses 3 African middle class 93 African National Standards (SANS) 190 African retail sector growth 93 African Union Agenda (2063) 36, 39 African Union (AU): COVID-19 stimulus packages 186; regional economic communities (RECs) 143 African women-owned SMEs (post COVID-19) 33–44; access to finance 35;

208 Index capacity increase 40; catalyst for economic change 34–35; challenges and opportunities (COVID-19) 36–37; COVID-19 impact 35–37; COVID-19 recovery phase 43–44; data collection/ regulation/help line 42, 43; database of all women involved in SMEs 42–43; digital financial literacy 39–40; discriminative policies against women (elimination) 41; factors influencing 35; financial access 39; gender-sensitive policies 37–38; gender-smart financing 37; Global Entrepreneurship Monitor report 34; government intervention strategies 40–41; government palliatives to SMEs 38; ICT literacy 43; informal sector 35; intervention strategies (DFIs and NGOs) 42; meaning of women entrepreneurs 34; ownership of assets 41; post-COVID support model 42–43, 43; primary caregivers (women) 36; priority areas 39–42; sub-Saharan Africa (SSA) 34; sustainable energy investment 42; women-owned SMEs 34 agricultural sector: agro-processed foods 145; barley growers’ association Uganda 137; fixed farm-gate prices 131 Aguitera, R.V., Caza, B.B. and Vadera, A.K. 173 Ahairwe, P.E., and Bilal, S. 38 Al-saedi, A.H.J., and Ponorica, A.G. 71 Alemu, K.S., and Dame, D.B. 24 Ali-Nakyea, A. 71 Anglo American 106, 108 Anglo Khula Mining Fund 108 Anwana, E. 33–44, 47–57, 85–97 Art of War, The (Jomini) 87 Asia and Europe Economic Meeting (ASEM), SME Training Consortiums Programme 123–124 Asian financial crisis (1997–1998), SME Training Consortiums Programme 121, 123–125 Atiase, V.Y., et al. 59 Aworemi, J. R., et al. 25 Ayyagari, M.: Demirgüç-Kunt, A. and Maksimovic, V. 59–64, 66; et al. 1 Bach, L. 64 Bahri, A. 41 Balunywa, W., et al. 70 Ban, G. 124 banking sector (gov. ownership) 62 bankruptcies, COVID-(19) 184–185

bankruptcy regulations (Africa) 12, 103 Bansal, P., and Jiang, R.J. 187 Batavia, C., and Nelson, M.P. 168 Beck, T.: and Cull, R. 59; Demirgüç-Kunt, A. and Maksimovic, V. 60; DemirgüçKunt, A. and Peria, M.S.M. 63; et al. 1; Ioannidou, V. and Schafer, L. 62 Berger, M., and Gulli, H. 119 Bergthaler, W., et al. 103 Bilal, S., and Ahairwe, P.E. 38 blended finance 65, 148–149 Boiral, O.: Dogui, K. and HerasSaizarbitoria, I. 194; and HerasSaizarbitoria, I. 187 Booker Tate 137 Botha, M., Nieman, G. and Van Vuuren, J.J. 113 Botswana: Kazungula dam project 152; local market access challenges 130; unemployment 130 Botswana Meat Commission (BMC) 130 Bouckaert, L. 164 Bounce Back Loan Scheme (BBLS) 40 Bounds, M., Goldman, G. and Mbuya, J.M. 113 Brazil: pension system stability and tax regime 77; tax regimes (preferential) 76–78 Brazilian Small Business Agency (SEBRAE) 77 Brixiová, Z., et al. 59 Brooks, B. 196 Bryson, J., and Salder, J. 160, 163 business ethics and professionalism 158–177; adherence (need) 168–169; bribery 162–164; business dynamics power (customers’) 168; business ethical fibre (determinants) 162–163; Chinese SMEs 166; counter-measures (unethical practices) 167; definition of business ethics 158; economic calculations 164; Enron ethics scandal 165; ethical breaches by employees (costly) 170; ethical fibre (society) 160; ethical fibre (society) and business ethics 163–165; ethical/professional culture (perpetuating) 172–175; ethical/ professional guidelines for successful SMEs 171–172; ethical reasoning 168; ethics management paradox 164; Ethics Resource Centre 175; factors mitigating 166–167; fake drugs 167; fostering ethical/professional culture 169–172, 176; Global Compact 159; “goodwill” asset 169; Guidelines for

Index  209 Multinational Enterprises 155, 159; individual ethics 162–163; institutional system 164–165; International Ethics Standards 159; international guidelines 159–160; International Labour Organization (ILO) 159; King Report on Corporate Governance 158–159, 165; legalist tick-box approach 176; Malaysia 159; Middle East countries’ punitive punishments 167; moral disengagement strategies 164, 165; “moral distress” 166–167; Nestlé Company Code of Business Conduct 170; non-compliance of SMEs 160; organisation core values 173; poor service (adverse consequences) 158; professionalism in business 165–166; recommendations for the future 175–177, 176; regulatory authorities/ business chambers/associations (role to play) 176; religious beliefs 163–164; RICS 159; situational factors 163; social media 168; soft-state syndrome 167; stakeholders (dehumanise) 164; stakeholders (types and responsibilities to) 177; sub-Saharan Africa (SSA) 167; theorising ethics 160–162; unconventional practice 165; unethical practices 165, 167; visionary companies (research on) 173; whistleblowing 173–174; zero tolerance (corrupt practices) 175 Business Infrastructural Development Programme 29 business linkages: Anglo Khula Mining Fund 108; Anglo-Zimbrel (South Africa) 108; backward linkages 106–108, 110; Cairn India 107–108; depth and breadth of linkages 108; Eagle Larger (Uganda and Zambia) 106, 130–132; foreign direct investment (FDI) 104; forward linkages 105–106; International Finance Corporation (IFC) 107–108; job creation 108; market access/ internationalisation 130–132, 136–139; Minera Yanacocha (Peru) 107; productive capacities 100, 105–108, 110; Rajasthan, India (Cairn India and IFC) 107–108; raw materials 131, 132; suppliers to larger firms that export 154–155; Unilever Vietnam 105–106; Zimele (South Africa) 106–107 business location 24, 26 business training 66; see also skill development

Calkins, M.S.J. 163 Canales, R., and Nanda, R. 61 Canare, T., et al. 105 Candido, C., et al. 187–188 CARE International, Zambia 131, 132 Carvalho, D. 62 Casale, D., and Dube, G. 75 Castka, P., et al. 187 Caza, B.B., Aguitera, R.V. and Vadera, A.K. 173 Cernev, T., and Fenner, R. 38 childcare services, COVID-(19) 50 Chile, skills training by SMEs 120 Chili, P.B., and Matsiliza, N.S. 190–193 China: International Labour Organization (ILO) 120; skills training by SMEs 120 Chrisman, J.J., Peredo, A. and Ring, J.K. 114 Christopher, M. 19 Ciulla, J.B. 166 Coates, R. 89 Cole, S. 62 Collett, K.S., et al. 159 Collins, J.C., and Porras, J.I. 173 Colombia, training levy system 116 Common Market for Eastern and Southern Africa (COMESA), African Continental Free Trade Area (AfCFTA) 144 competition (drive) 21, 22 Continuous Quality Improvement (CQI) 195 Corner, J., and Wahid, R.A. 190 Coronavirus Job Retention Scheme (CJRS) 40 corporate governance: Higgs Report 165; poor 24; productive capacities 104; Sarbanes-Oxley Act (2002) 165; Smith Report 165 corporate social responsibility (CSR) 5, 26 COVID-19: African Continental Free Trade Area (AfCFTA) 36, 144; African economies crisis 186; African gov. schemes/corruption 41; agricultural sector 36; bankruptcies 184–185; business loans 50–51; childcare services 50; developed countries 184; economic outlook (2020–2021) 184–185; economic relief packages (Africa) 38; employment (SMEs) 36, 95, 185; financial access 50–51; force majeure clauses 47, 49; fragility of SMEs 188–189; French gov. solidarity fund 40–41; gender inequality 37–38; global PPE shortage 49; global supply chain 94–95; government grant regulations

210 Index 38, 50; government intervention strategies 40–41; government palliatives to SMEs 38; hardest-hit sectors 49; hospitality and tourism 50; impact on SMEs 49–51, 94–95; impact on women entrepreneurs 35–36; International Air Transport Association (IATA) 183; International Monetary Fund (IMF) 48, 183; International Trade Centre (ITC) 95; ISO certification in post-era 201; lockdown restrictions 35–37, 49, 95, 183–184; new normal 186; OECD statistics (2020–2021) 185; office-based work to home-based 185; paradoxical business benefits 94; post-COVID support model 42–43; primary caregivers (women) 36; quality standards among SMEs 183–186; recovery phase 43–44, 95–96; stimulus package loans 186; stock market falls 48, 183; structural unemployment/ permanent unemployment 37; UK business support policies 40; Western gov. intervention 40; see also African women-owned SMEs (post COVID19); global supply chain competitiveness post-COVID-19 Cragg, T., and McNamara, T. 85 Credit Guarantee Company of Zimbabwe 28 credit guarantee schemes (CGSs) 63–64 critical thinking skills 26 crude oil 90 Dackling, M., and Duedahl, P. 89 Dahlgaard, J.J., et al. 195 Dale, B.G., and Hurk, A. 190 Dame, D.B., and Alemu, K.S. 24 Damiyano, D. 98–110 De Beers Small Enterprise Initiative 106–107 De Cenzo, D.A., and Robbins, S.P. 158 Demenet, A., Razafindrakoto, M. and Roubaud, F. 80, 81 Demir, A. 188, 194 Demirgüç-Kunt, A.: Ayyagari, M. and Maksimovic, V. 59–64, 66; Beck, T. and Maksimovic, V. 60; Beck, T. and Peria, M.S.M. 63 Department of Trade and Industry (DTI), South African SMEs and GDP 5 Detragiache, E., Gupta, P. and Tressel, T. 61 developed countries: COVID-(19) 184; dispersal of economic activities 30; growth of indigenous entrepreneurs 29;

industrial inter-linkages 29; job creation 30; lessons for African SMEs 29–30; poverty alleviation 30; transition traditional/modern industrial sector 29–30 developing economies: economic development 20; government SME policies 28; job creation and poverty reduction 3; skills training by SMEs 116 development finance institutions (DFI) 37, 42, 65, 148; 2X Challenge 38, 44n3 diesel engines 90 digital financial literacy 39–40 digitalisation opportunities 11 Dinc, S. 62 Dogui, K., Boiral, O. and HerasSaizarbitoria, I. 194 Doran, J., et al. 58–59 Dorasamy, N. 158–177, 183–201 Dowson, J. 119 Drexler, A., Fischer, G. and Schoar, A. 66 Drury, A., Perez, Y. and Twin, A. 169 Dube, G., and Casale, D. 75 Duedahl, P., and Dackling, M. 89 Durocher, S., Gendron, Y. and Picard, C.F. 198 Dzeng, E., and Wachter, R.M. 166 e-commerce: African Continental Free Trade Area (AfCFTA) 152; Indonesia 138; Lazada 137–138; market access/ internationalisation 137–139; platforms 101; Singapore 137–138; Southeast Asia 137 Eagle Larger (Uganda and Zambia) 106, 130–132 East African Community (EAC) 143 economic development, developing economies 20 Edinburgh Literary Miscellany for January (1810) 87 educational background 25 egalitarianism, equality in Africa 19 electricity supply problems: African Continental Free Trade Area (AfCFTA) 149–152; sub-Saharan Africa (SSA) 7, 8–9, 149, 150, 151 emerging economies: job creation 99; SMEs and GDP 2 employment (SMEs): advanced economies 6; COVID-(19) 36, 48, 95, 185; job creation 3–4; labour costs 54–56; manufacturing sector 6; OECD area 2, 6; segments of labour force 3; service sector 6; share of formal workforce 1, 12;

Index  211 skill development 3; skilled manpower in low-cost countries 56; SME Training Consortiums Programme 125; South Africa 4–5; start-ups and young firms 5–6; sub-Saharan Africa (SSA) 4; Switzerland 22 EMPRETEC (Zimbabwe) 28 Endris, E., and Kassegn, A. 59 Enron ethics scandal 165 enterprise, definition 18 enterprise resource planning (ERP) 11, 52, 57n1, 92 entrepreneurship training, equality in Africa 26 equality: definition 18; forms 21 equality in Africa 17–30; achieving through SMEs (benefits) 21–23; achieving through SMEs (challenges) 23–24; contribution of SMEs to equality 20–21; definition of terms 18; determinants of SMEs to achieve equality 24–27; distribution of rights 19; egalitarianism 19; equity theory 18–19; female-owned businesses 17; financial access 23, 25–26; financial assistance 22–23; financial innovation 22; forms of equality 21; gender equality 24–25, 30; gender parity 17; government initiatives 28–29; job creation 20, 21–22; less developed/ developing countries 27; lessons learnt from developed countries 29–30; poverty alleviation 22; Rawls’s theory 19; relationship SMEs inequality in Africa 27–28; stock exchange funding 28 equitability, definition 18 equity theory, equality in Africa 18–19 Esfandiar, H., and Zakeri, M. 161 Ethics Resource Centre 175 ethics (theorising) 160–162; deontological theory 161; moral development theory (Paiget) 161; teleological theory (Utilitarianism) 161; see also business ethics and professionalism European Bank for Reconstruction and Development (EBRD) 37 European Foundation for Quality Management (EFQM), Business Excellence Model 199–200 European Investment Bank (EIB) 37; report on sub-Saharan Africa banking 93 European Medicines Agency, SMEs innovation contribution 20 European Union (EU), economic free zone 91–92

Feher, A. 194; et al. 184 female entrepreneurs: global GDP 33; see also African women-owned SMEs (post COVID-19) Fenner, R., and Cernev, T. 38 Ferrel, O.C., and Gresham, L.G. 174 Fillis, I. R., and Abisuga-Oyekunle, O. A. 3 finances (SMEs) 58–67; alternative financing instruments 64–65; assetbased financing 64; blended finance 65; credit gaps 62; credit guarantee schemes (CGSs) 63–64; development banks effectiveness 62–63; development finance institutions (DFI) 65; direct state intervention 62–63; equity finance 64–65; firm level data 66; human/ managerial capital 66; institutional constraints 60–62; intitial founding conditions 66; local bank interest rates (Africa) 65; microfinance/digital lenders 65; remedies to problems 62–66; skills training by SMEs 118–119, 125; transaction costs/ interest rates 60, 65 financial access 58–62; adverse selection/ moral hazard issues 60–61; African Continental Free Trade Area (AfCFTA) 148–149; alternative financing instruments 64–65, 148; bank account holders 39; bank branches (increase) 62; bank loans (Pakistan) 61; banking sector (gov. ownership) 62; blended finance 65, 148–149; Bolivia 62; COVID-(19) 50–51; COVID-19 grant regulations 38; credit cherry-picking (India) 61; credit guarantee schemes (CGSs) 63–64; critical collateral value 59; default risk 63; development finance institutions (DFI) 37, 38, 42, 44n3, 65, 148; equality in Africa 22–23, 25–26, 39; equity finance 64–65; French loan guarantee programme 64; gender-smart financing 37; government funding 25–26; informal sector 65, 148; institutional constraints 60–62; loan application costs 104; loan securitisation process 64; market access/ internationalisation 140; multilateral development banks (MDBs) 37, 42; obstacle for SMEs 58–60; positive cash flow 52; productive capacities 102–104, 109; reverse factoring 63; role of large/ foreign banks 61–62; Small Enterprise Development Agency (SEDA) 29; smart financing arrangements 52; stock

212 Index exchange funding for SMEs 64–65; sub-Saharan Africa (SSA) 6, 65; tax regimes (preferential) 78–79; transaction costs/interest rates 60, 65, 104, 148; women’s SMEs 35 financial literacy skills 85 financial technology companies (fintechs) 39 Fischer, G., Drexler, A. and Schoar, A. 66 Fogel, R. 90 foreign direct investment (FDI): business linkages 104; global supply chain and SMEs 86, 93; global value chains (GVCs) 153; offshore outsourcing 134; productive capacities 102, 104 foreign exchange, import substitution 3 Fourth Industrial Revolution, just-in-time delivery 10–11 Fowowe, B. 59 France, training levy system 115 Frankel, R., et al. 87 funding access see financial access gender equality: cultural problems 24–25; determinants of SMEs to achieve equality 24–25; equality in Africa 24–25, 30; on-site childcare 25 Gendron, Y., Durocher, S. and Picard, C.F. 198 Ghana, fake drugs 167 Gibson, A. 119 Giri, A.V. 164 Glasgow Herald (Herald Scotland) 87 Global Compact 159 Global Entrepreneurship Monitor report, African women-owned SMEs 34 Global Reporting Initiative 159 global supply chain and SMEs 85–97; African banks growth 93; African experience of globalisation 92–93; African retail sector growth 93; brand identity 96; cattle 88; computerisation (barcoding/scanning) 92; COVID-19 impact 94–95; COVID-19 recovery phase 95–96; crude oil 90; definition of global supply chain 86; enterprise resource planning (ERP) 92; European Union (EU) 91–92; foreign direct investment (FDI) 86, 93; freight transportation 91; globalisation 92–93; historical evolution 86–92; Industrial Revolution 88; internal combustion engine (invention) 89, 90; large-scale franchises 91; logistics management 86; manufacturing hubs 96; military science 87; monopoly 91; North American Free

Trade Agreement (NAFTA) 91; pallets 91; post-COVID pathway for SMEs 96; railroads 88, 89; shipping containers 90; Silk Route 89; standardisation/ containerisation 90; storage/ transportation of goods 90; supply chain (1900 and before) 87–89; supply chain (1900s to 1940) 89–90; supply chain (1950s) 90; supply chain (1960s to 1980s) 91–92; supply chain (1980s to date) 92; supply chain management (SCM) 85–87, 92; technological adaptation 96; telecommunication growth 94; transatlantic slave trade 88–89; trucks 90, 91; World War II 90 global supply chain competitiveness post-COVID-19 47–57; childcare services 50; cost competitiveness 55–56; COVID-19 impact on SMEs 49–51; diverse supply sources 53; financial access 50–51; force majeure clauses 47, 49; global disruption 48–49; global supply and COVID-19 47–48; hospitality and tourism 50; International Labour Organization (ILO) 47; labour costs 54–56; local sourcing capacity 54; low-cost sourcing centres (LCSCs) 54–56; manufacturing hubs 53–54; production centres (over-dependence) 53; production materials 56; raw materials 56; recession/stagflation 51; stimulus package loans 50; stock market falls 48, 183; strategies post COVID-19 51; suppliers' solvency 52; technological infrastructure 56; technology and digitisation 52; Tradeshift data 51; Western countries’ focus on emerging markets 55 global value chains (GVCs): African Continental Free Trade Area (AfCFTA) 153, 155; foreign direct investment (FDI) 153; market access/ internationalisation 135–137; OECD 135; opportunities 10; physical infrastructure quality 11; productive capacities 100–102 globalisation, cross-border collaboration 2–3 goal-setting skills 114 Goldman, G., Bounds, M. and Mbuya, J.M. 113 Goldmark, L. 119 Gormley, T.A. 61 Gresham, L.G., and Ferrel, O.C. 174 Grillo, J., and Kallman, E. 175

Index  213 Grimonpont, B. 168 gross domestic product (GDP): SMEs global contribution 1, 12; SMEs in emerging economies 2; SMEs in South Africa 5; social economy 3 Gulli, H., and Berger, M. 119 Gunz, S., and Thorne, L. 168–169 Gupta, P., Detragiache, E. and Tressel, T. 61 Hassink, H., et al. 175 Heady, C, Joshi, A. and Prichard, W. 80 health care access, job creation 22 health sector: fake drugs (Ghana) 167; “moral distress” 166 Hellreigel, D., Slocum, J.W. and Woodman, R.W. 174–175 Hennekam, S., et al. 163 Heras-Saizarbitoria, I.: and Boiral, O. 187; Dogui, K. and Boiral, O. 194 Hisrich, R.M., and Peters, M.P. 158 Hoivik, H. (Von Weitzen) 175 Honohan, P. 63 horizontal equality 21 Hulme, D., and Mosely, P. 119 human capital theory 112 Hurk, A., and Dale, B.G. 190 Ince, M. 187 Independent, The (newspaper) 87 India, Rajasthan (business linkages) 107–108 Indonesia: e-commerce 138; market access/internationalisation 134 inflation rate 27 informal sector: COVID-(19) 48; financial access 65, 148; women's SMEs 35 information and communication technology (ICT): digital financial literacy 39–40; digital technology tools 44; digitalisation opportunities 11; enterprise resource planning (ERP) 11; improving for SMEs 10–11; Japanese SMEs 101; market access/ internationalisation 140; productive capacities 101; training 40, 43, 44; Voice over Internet Protocol 56 innovation contribution 2, 12, 20–21, 26 insolvency regimes (Africa) 12 internal combustion engine (invention) 89, 90 International Air Transport Association (IATA), COVID-(19) 183 International Ethics Standards 159 International Finance Corporation (IFC) 78–79, 99; Minera Yanacocha (Peru) 107

International Labour Organization (ILO) 47; business ethics and professionalism 159; global supply chain definition 86; less developed countries 28–29; market access/internationalisation 138; pension system stability (Brazil) 77; Start and Improve Your Business (SIYB) Programme 120; training levy system 115 international markets, productive capacities 102 International Monetary Fund (IMF), COVID-(19) 48, 183, 186 International Organization for Standardization (ISO): adoption post-COVID era 201; developing economies 188; diffusion rate of ISO 14001 across Africa 187–188; establishment 186–187; factors that obstruct in Africa certification 188; improving SMEs quality standards 188–190; ISO certification 106, 159, 187, 188; need for 184, 187; nonconformance reporting (NCR) 187; organisations that decide to decertify 187–188, 200; performance of SMEs with certification 190–193; South Africa 187; study in Slovenia 187; Unilever Vietnam 106 international trade: African SMEs 11–12; entrepreneurial “ecosystem” 11; inter-firm linkages 10; OECD guidelines for SMEs 10; participation barriers for SMEs 10; regulatory uncertainty 12; under-represented African SMEs 10 International Trade Centre (ITC), COVID-19 data 95 Ioannidou, V., Beck, T. and Schafer, L. 62 Istanbul’s Grand Bazaar 89 Javorcik, B., and Sawada, N. 187, 189 Jenkins, B., et al. 130–132 Jessen, J., and Kluve, J. 78 Jiang, R.J., and Bansal, P. 187 Jimoh, R., et al. 195 job creation: business linkages 108; developed countries 30; emerging economies 99; equality in Africa 20, 21–22; health care access 22; lowskilled workers 22; Small Enterprise Development Agency (SEDA) 29; social economy 3; sub-Saharan Africa (SSA) 3–4; women’s entrepreneurship 36; see also employment (SMEs) Jomini, A-H. 87

214 Index Joseph, M.A., and Sharma, V.P. 169, 170 Joshi, A., Prichard, W. and Heady, C. 80 Kakouris, A., and Sfakianaki, E. 188 Kalane, L. 4 Kallman, E., and Grillo, J. 175 Kaseke, N. 17–30 Kassegn, A., and Endris, E. 59 Kazungula dam project 152 Kimutai, G., and Murigi, G.N. 159 King Report on Corporate Governance 158–159, 165 Kinyara Sugar Works Limited 137 Kinyara Sugarcane Growers Limited 137 Klapper, L. 63 Kluve, J., and Jessen, J. 78 knowledge networks, access 138–139 knowledge spillovers 2, 100, 138 Kohlberg, L. 161 Korean Chamber of Commerce and Industry (KCCI) 121, 123 Kraemer-Eis, H., et al. 64 Krueger, A. 20 Kruger, M.E., Millard, S.M. and Pretorius, M. 112, 113 La Porta, R., et al. 62 Labuschagne, R. C. 5 Lacho, K., and Marinello, C. 114 Larson, M.S. 166 Latimer, J. 186 Latin American countries, training levy system 115–116 Lazada, e-commerce 137–138 leadership competencies 113 “lean start-ups” 11, 101 Lee, K.W. 116–118 Lelarge, C., Sraer, D. and Thesmar, D. 64 less developed countries: government support programmes 28; International Labour Organization (ILO) 28–29; see also equality in Africa Levine, R. 58, 66 Liccione, W. 114 Lira, J., et al. 188, 189 Loan Booth Programme 29 Locke, J. 19 logistics management 86 low-cost sourcing centres (LCSCs) 54–56 Lummas, R.R., et al. 87 Macatopo, E. 169–171 Maceli, M.P., and Near, J.P. 173–174 Mack Truck 90 Main, A.M. 166

Maksimovic, V.: Ayyagari, M. and Demirgüç-Kunt, A. 59–64, 66; Beck, T. and Demirgüç-Kunt, A. 60 Makurumidze, S., and Mpofu, T. 37 Malaysia: business ethics and professionalism 159; skills training by SMEs 119; SMEs 98, 159 management practices, poor 24 manufacturing hubs 53–54, 96 manufacturing sector: employment 6; OECD area 6 Maqbool, S., and Zamir, N. 165 Marchese, M. 74, 77–79 Marinello, C., and Lacho, K. 114 Marist philosophy 19 market access/internationalisation 129–140; African Continental Free Trade Area (AfCFTA) 145–146, 153; Botswana (local market) 130; business linkages 130–132, 136–139; e-commerce 137–138, 139; Eagle Larger (Uganda and Zambia) 130–132; export assistance 139; export promotion 133–134; financial access 140; foreign direct investment (FDI) 134; global value chains (GVCs) 135–137; globalisation/ trade liberation 140; improving access to global markets/knowledge networks 138–139; Indonesia 134, 138; information and communication technology (ICT) 140; international trade 135; knowledge spillovers 138; local market access challenges 129–132; marketing skills of SMEs (OECD) 140; Mexico 154; mitigating challenges in international markets 139; Nordic economies 154; OECD research on SMEs and MNCs linkage 136, 138; OECD study of trade promotion 133; offshore outsourcing (OECD) 134–135; opportunities/challenges 133–138; overseas subsidiaries reduction 134–135; physical infrastructure quality 139; public policy and GVCs 135; rationalising production 134–135; raw materials 131, 132; Singapore 136, 137–138; SMEs and MNCs linkages 136, 138, 139, 154–155; Southeast Asia 137; suppliers to larger firms that export 154–155; technological advances 129; Thailand 134, 136, 153; Uganda 130–132, 136–137; Vietnam 153; Zambia 130–132 Marx, K. 19 Maslow’s hierarchy of needs 19

Index  215 Mastercard Index of Women Entrepreneurs (MIWE) 33, 34 Matsiliza, N.S., and Chili, P.B. 190–193 Mayanja, J. 167 Mazibuko, G.P. 167 Mbuya, J.M., Bounds, M. and Goldman, G. 113 McFarlane, D.A. 168 McNamara, T., and Cragg, T. 85 Mennechet, F., and Takoudjou-Dzomo, G. 186 Mexico: CIMO Programme 120; market access/internationalisation 154 Mian, A. 61 Millard, S.M., Kruger, M.E. and Pretorius, M. 112, 113 Miller Brewing Company, Eagle Larger (Uganda and Zambia) 106, 130–132 Mosely, P., and Hulme, D. 119 motivation theories 19 Mpofu, T., and Makurumidze, S. 37 Mubiru, M., and Omagor, C. 70, 71 Muchie, M., Abisuga-Oyekunle, O. A. and Patra, S. K. 4, 6, 7, 149 Mugano, G. 1–12, 58–67, 70–82, 112–126, 129–140, 142–155 Mugisha, I., and Mulooki, A.E. 70–71 Muhammad, S., et al. 36 Muller, Dr. W. 87 Mullins, W., and Toro, P. 63 Mulooki, A.E., and Mugisha, I. 70–71 multilateral development banks (MDBs) 37, 42 multinational corporations (MNCs), linkages to SMEs 136, 138, 139 Munnich, M. 72 Murigi, G.N., and Kimutai, G. 159 Mutoko, W.R. 130 Naicker, Y., and Rajaram, R. 71, 72 Nanda, R., and Canales, R. 61 National Academy of Public Administration 21 National Trade Facilitation Committees 10, 138 National Youth Council of Ireland 18 Near, J.P., and Maceli, M.P. 173–174 Nelson, M.P., and Batavia, C. 168 Nestlé Company, Code of Business Conduct 170 Nethonzhe, T.A. 160 networking skills 114 Nieman, G., Botha, M. and Van Vuuren, J.J. 113 Nieuwenhuizen, C. 113

Nordic economies, market access/ internationalisation 154 North American Free Trade Agreement (NAFTA) 91 Nseobot, I.S., et al. 184 Oduntan, K. O. 4–5 offshore outsourcing 134–135 O'Flaherty, C. 158 Oliver, K. 87 Omagor, C., and Mubiru, M. 70, 71 online stores, Japanese SMEs 101 Organisation for Economic Co-operation and Development (OECD): companylevel learning strategies 104; COVID-19 stimulus packages 186; definition of SMEs 1; global value chains (GVCs) 135; Guidelines for Multinational Enterprises 155, 159; international trade for SMEs 10; ISO certification 191; marketing skills of SMEs 140; National Trade Facilitation Committees 138; offshore outsourcing 134–135; SMEs and employment 2, 6; SMEs and job creation 99; SMEs and MNCs linkages 136, 138; SMEs contribution to global GDP 1, 185; statistics (2020–2021) 185; stock exchange funding for SMEs 64; trade promotion study 133 Osita, A. 70 Oyekunle, O. A., and Sirayi, M. 6 Park, C., et al. 184 Parmitasari, R., et al. 165 Patra, S. K., Abisuga-Oyekunle, O. A. and Muchie, M. 4, 6, 7, 149 Payne, C., and Rainborn, D. 175 People’s Shops Programme 29 Peredo, A., Chrisman, J.J. and Ring, J.K. 114 Perez, Y., Drury, A. and Twin, A. 169 Peria, M.S.M., Beck, T. and DemirgüçKunt, A. 63 Peru, Minera Yanacocha (business linkages) 107 Peters, M.P., and Hisrich, R.M. 158 physical infrastructure quality 11, 23, 101, 139; electricity supply problems 149–152; Kazungula dam project 152; road/rail network 152; water access 149; World Bank data 149, 150, 151 Piaget, J. 161 Picard, C.F., Gendron, Y. and Durocher, S. 198 policies to unleash SMEs potential 7–12; access to global markets/knowledge

216 Index networks 7–10; business environment improvement 11–12; digitalisation opportunities 11; information and communication technology (ICT) 10–11; physical infrastructure quality 11 Ponorica, A.G., and Al-saedi, A.H.J. 71 Popov, A. 58, 66 Porras, J.I., and Collins, J.C. 173 poverty alleviation: developed countries 30; equality in Africa 22; South Africa 5; women’s entrepreneurship 36 Pretorius, M., Millard, S.M. and Kruger, M.E. 112, 113 Prichard, W.,, Joshi, A. and Heady, C 80 production centres (over-dependence) 53 productive capacities 98–110; African Continental Free Trade Area (AfCFTA) 147–148; Anglo American 108; Anglo-Zimbrel (South Africa) 108; business linkages 100, 104–108, 110; challenges in building 109; corporate governance structure 104; developing capacities in SMEs 100–101; e-commerce platforms 101; Eagle Larger (Uganda and Zambia) 106, 130–132; factors affecting (SMEs) 101–105; financial access 102–104, 109; foreign direct investment (FDI) 102, 104; global value chains (GVCs) 100–102; government incentive packages 109; information and communication technology (ICT) 101; infrastructure limitations 101; insolvency regimes 103; International Finance Corporation (IFC) 107–108; international markets 102; ISO certification 106; local firms/local customers 102; niche markets 100; policy recommendations 109–110; profile of SMEs 98–99; public-sector corruption 103; Rajasthan, India (Cairn India and IFC) 107–108; regulatory complexity/compliance costs 103–104; skill development 109; skilled staff retention 104, 124–125; SME Training Consortiums Programme 124–125; SMEs economic contribution 1, 99, 185; technological advancement/global competitiveness 101; Zimele (South Africa) 106–107 quality control process: developing 198–199, 199; establishing 197; non-compliance consequences 197–198 quality management systems: Continuous Quality Improvement (CQI) 195;

EFQM Business Excellence Model 199–200; implications of 194–195; internalising in SMEs 193–194; Six Sigma 195; Total Quality Management (TQM) 195 quality standards among SMEs 183–201; adopting good quality standards 196–197; African businesses noncompliance 190–191; African National Standards (SANS) 190; benefits to SMEs of adopting ISO standards 189; business failure and non-compliance 197–198; COVID-(19) 183–186, 188–189, 201; critical factors of QSM 189–190; diffusion rate of ISO 14001 across Africa 187–188; economic outlook (2020–2021) 184–185; EFQM Business Excellence Model 199–200; implications of QMSs 194–195; industry specific standards 196; internalising QMSs among SMEs 193–194; International Organization for Standardization (ISO) 184, 186–193, 200, 201; non-compliance consequences 197–198; nonconformance reporting (NCR) 187; OECD SMEs performance and certification 191; OECD statistics (2020–2021) 185; performance and competitive products/services 191–192; performance of SMEs 190–193, 198; periodic training of employees 190; QMS selection 199–200; quality control process (developing) 198–199, 199; quality control process (establishing) 197–198; quality of good and services 198; SME outlook (2020–2021) 185–186; stakeholders and organizations interactions 192; theoretical background (QMS) 186–193 Rainborn, D., and Payne, C. 175 Rajaram, R., and Naicker, Y. 71, 72 Rand, J., and Torm, N. 80 raw materials: business linkages 131; global supply chain competitiveness postCOVID19 56 Rawls’s theory of justice 19 Razafindrakoto, M., Demenet, A. and Roubaud, F. 80, 81 regulatory uncertainty: African SMEs 12; importing constraints 24 Reinders, H.J., et al. 186 Remišová, A., et al. 167

Index  217 Reserve Bank of India 62 Reserve Bank of Zimbabwe Productive Facility 29 retail sector, low-cost sourcing centres (LCSCs) 55 Ring, J.K., Peredo, A. and Chrisman, J.J. 114 Robbins, S.P., and De Cenzo, D.A. 158 Rocha, R., et al. 77 Roel, D., et al. 73, 74 Roubaud, F., Demenet, A. and Razafindrakoto, M. 80, 81 Runde, D.F., Savoy, C.M. and Staguhn, J. 58–59 Saah, P. 4, 5 Salder, J., and Bryson, J. 160, 163 Sallem, N., et al. 159 Sapienza, P. 62 Savoy, C.M., Runde, D.F. and Staguhn, J. 58–59 Sawada, N., and Javorcik, B. 187, 189 Schafer, L., Beck, T. and Ioannidou, V. 62 Schmidt, R.A., et al. 72 Schoar, A., Drexler, A. and Fischer, G. 66 Scots Magazine (1810) 87 Semrau, T., Sigmund, S. and Wegner, D. 114 Senik, Z.C., et al. 114 service sector, employment 6 Sfakianaki, E., and Kakouris, A. 188 Sharma, V.P., and Joseph, M.A. 169, 170 Shoprite checkers 93–94 Sigmund, S., Semrau, T. and Wegner, D. 114 Silk Route 89 Singapore: e-commerce 137–138; Economic Development Board 136; market access/internationalisation 136, 137–138; Skills Development Fund 116, 117; SPRING 119 Sirayi, M., and Oyekunle, O. A. 6 Six Sigma 195 skill development: African Continental Free Trade Area (AfCFTA) 148; company-level learning strategies 104; digital financial literacy 39–40; and employment 3; financial literacy 85; human/managerial capital 66; information and communication technology (ICT) 40; productive capacities 109; women's digital literacy 40, 43, 44 skills training by SMEs 112–126; Asian governments 119; “business

development services” 119; business skills 113; Chile 120; China 120; creativity and innovation 113–114; developing economies 116; entrepreneurial skills 113; finance projects 118–119, 125; goal-setting 114; human capital theory 112; implementation system/strategy 123–124; income tax exemption for training expenses 120; innovative training programmes 119; international experience/government policies 118–123, 119; International Labour Organization (ILO) 120; lack of worker training planning 118; leadership competencies 113; Malaysia 119; Mexico 120; motivation as a skill 113; networking 114; in-service training 116; Singapore 116, 117, 119; skill/ competency testing (quality of training) 126; skills gaps in SMEs 112–115; South Korea 112, 117, 120–125; special challenges for SMEs 117–118; system/ strategy of implementation 123–124; time management 115; training funding models 115–117; training levy system 115–117; workers' broad skill range/ multiple roles 118; World Bank financial support 120, 123–124; see also SME Training Consortiums Programme Skinner, B.F. 173–174 Slocum, J.W., Hellreigel, D. and Woodman, R.W. 174–175 small and medium-sized enterprises (SMEs): contribution to global GDP 1, 99, 185; definition/no. employees 1–2, 98–99; underrepresentation in global economy 133, 138 Small Enterprise Development Agency (SEDA) 191; financial access 29; job creation 29; South Africa 4, 5; Zimbabwe 28, 29 SME Performance Review 1 SME Revolving Fund 29 SME Training Consortiums Programme: achievement/impacts 124–125; Asia and Europe Economic Meeting (ASEM) 123–124; background 121; larger enterprises 122, 123; objectives 120–121; pilot 121–123; productive capacities 124–125; rationales 121; skilled staff retention 124–125; skills testing 124, 126; system/strategy of implementation 123–124; training levy payments (by all firms) 122; training

218 Index managers 123; unemployment prevention 125; World Bank financial support 123–124 Smith, Adam 71 Smulders, S., et al. 78 Social accountability (8000) 159 social economy 3 social enterprises 3 social equality 21 social media: business reputation 168; networking skills 114 societal needs 3 South Africa: Anglo-Zimbrel (business linkages) 108; automobile manufactures 147; case study 4–5, 12; contribution to GDP 5; Department of Trade and Industry (DTI) 5; ethics as “cloud” of what ought to be done 160; ISO certification 187; King Report on Corporate Governance 158–159; livelihoods of indigenous populations 5; poverty alleviation 5; Small Enterprise Development Agency (SEDA) 4, 5; tax regimes (preferential) 78; Zimele (business linkages) 106–107 South African Bureau of Standards 187 South Korea: Asian financial crisis (1997–1998) 121, 123; Ministry of Labor 120, 121, 123; skills training by SMEs 112, 117, 120–123; SME Training Consortiums Programme 120–125; unemployment prevention 125 Southeast Asia: e-commerce 137; importing constraints 23–24; market access/internationalisation 137 Southern Africa Development Community (SADC), African Continental Free Trade Area (AfCFTA) 144 Sraer, D., Lelarge, C. and Thesmar, D. 64 Staguhn, J., Runde, D.F. and Savoy, C.M. 58–59 Stanislous, Z. 28 Start and Improve Your Business (SIYB) Programme 120 stock market: COVID-19 falls 48, 183; funding for SMEs 28, 64–65 Stokes, D., et al. 113 Strickland, A.J., and Thompson, A. 158 sub-Saharan Africa (SSA): access to finance SMEs 6; African Continental Free Trade Area (AfCFTA) 152; banking 93; barriers to development of SMEs 6–7; business ethics and professionalism 167; electricity supply problems 7, 8–9, 149,

150, 151; financial access 65; job creation 3–4; mobile phones 94; number of SMEs 4; SMEs (post COVID-19) 34; SMEs share employment 4; water access 7, 8–9, 149, 150, 151 Sundiman, D., and Susanti, S. 166 supply chain management (SCM) 85, 86, 92; logistics (word origin) 87; military science 87 Susanti, S., and Sundiman, D. 166 Sustainable Development Goals (SGDs) 1, 17, 38, 39 sustainable energy investment 42 Switzerland, employment (SMEs) 22 Taghizadeh, F., and Yoshino, N. 61 Takoudjou-Dzomo, G., and Mennechet, F. 186 Tanburn, J. 119 tax payments 70–82; ability-to-pay theory 71–72; accountability 82; administration (SMEs limited records) 81; administration to comply 72, 79; benefit theory 71; compliance 70; compliance challenges 72–73; compliance costs 71–72; compliance (reforms and strategies to foster) 73–81; conceptualisation of SMEs and taxes 70–72; cost-of-service theory 71; enforcement 73; formalisation benefits 80–82; heavy burden smaller SMEs 82; income tax exemption for training expenses 120; Kyrgyz Republic 73; low-income countries 81; political accountability mechanism 70; predictability (of tax obligation) 72; preferential tax regimes 74–80; progressive laws 21; quasi-voluntary compliance 74–80, 82; sectoral tax gaps 73; simplifying registration/regimes 74; tax base 22; tax thresholds 73; types of taxes 72; VAT registration 73; VAT threshold 74; Vietnam (formalisation benefits) 80–81; Wealth of Nations, The (Smith) 71–72 tax regimes (preferential) 74–80; Brazil 76, 77–78; corruption 75–76; criticism of 79–80; estimated income 74; Ethiopia 75; fixed costs 78; fraud 79–80; fraudulent declarations 77; Ghana 75; informal sector 75–76; level playing field SMEs larger businesses 78; microentrepreneurs Brazil 77–78; package of measures 76; presumptive regimes

Index  219 74–76; rational 78–80; reduction of tax burden 79; simplification of administration 79; small business tax rate (SBTR) 74, 76, 78; SMEs struggle for external funding 78–79; South Africa 78; tax collection officers’ corruption 80; “tax stamp” 75; “threshold effects” 79–80; Zimbabwe 75–76 telecommunication: growth in Africa 94; mobile phones sub-Saharan Africa 94 Thailand: Bureau of Supporting Industries Development (BSID) 136; market access/internationalisation 134, 136, 153; SMEs 98 Thesmar, D., Lelarge, C. and Sraer, D. 64 Thompson, A., and Strickland, A.J. 158 Thorne, L., and Gunz, S. 168–169 time management skills 115 Torm, N., and Rand, J. 80 Toro, P., and Mullins, W. 63 Total Quality Management (TQM) 195 training levy system: Colombia 116; France 115; International Labour Organization (ILO) 115; Latin American countries 115–116 transport sector, barriers to entry 23 Tressel, T., Detragiache, E. and Gupta, P. 61 Tsahuridu, E., and Vanderckhove, W. 173 Twin, A., Drury, A. and Perez, Y. 169 Uganda: agricultural sector 137; Business Development Services Centre 136; Eagle Larger (business linkages) 106, 130–132; Enterprise Uganda 136–137; integrating SMEs into GVCs 136–137; SMEs and MNCs linkages 136; Uganda Investment Authority (UIA) 136, 137 Uganda Breweries 137 Ukpere, W., and Witbooi, M. 35 Ulyssea, G. 80 Unilever Vietnam, business linkages 105–106 United Nations: African women’s contribution to economy 33–35; gender inequality and COVID-(19) 37–38; transition traditional/modern industrial sector 30; Women Strategic Plan 2018–2021 36, 44n1 United Nations Conference on Trade and Development (UNCTAD) 146 United Nations Development Programme (UNDP): African Continental Free Trade Area (AfCFTA) 144, 146, 148; definition of enterprise 18

Vadera, A.K., Aguitera, R.V. and Caza, B.B. 173 value-added goods, generating 2 Van Vuuren, J.J. 172, 173, 175; Botha, M. and Nieman, G. 113 Vanderckhove, W., and Tsahuridu, E. 173 Venture Capital Company of Zimbabwe 28 vertical equality 21 Vietnam: informal firms 80–81; market access/internationalisation 153; tax formalisation benefits 80–81; Unilever (business linkages) 105–106 Vilchez, V.F. 187 Vroom, V.H. 173–174 Wachter, R.M., and Dzeng, E. 166 Wahid, R.A., and Corner, J. 190 Wang, Y. 59 water access, sub-Saharan Africa (SSA) 7, 8–9, 149, 150, 151 Waweru, N. 167 Wealth of Nations, The (Smith) 71–72 Weaver, G.R. 172 Wegner, D., Semrau, T. and Sigmund, S. 114 Weinstein, A. 168 whistleblowing 173–174 Williams, G. 86 Witbooi, M., and Ukpere, W. 35 Wolfe-Murray, E. 20 Women Entrepreneurs Finance Initiative (World Bank) 37, 44n2 Women’s Bank Zimbabwe 22 Wong, D. 189 Woodman, R.W., Hellreigel, D. and Slocum, J.W. 174–175 World Bank: African Continental Free Trade Area (AfCFTA) 143; development banks effectiveness 63; emerging market employment 20; enterprise surveys 59; Global Economic Prospects (June 2022) 51; skills training by SMEs 120; SMEs contribution to GDP (emerging markets) 20; SMEs drive competition 21; SMEs opportunity for female owners/managers 17; SMEs (post COVID-19) 37, 44n2; sub-Saharan Africa (SSA) 6, 7; Women Entrepreneurs Finance Initiative 37, 44n2 World Economic Forum, blended finance 65 World Health Organization: COVID-19 as global health emergency 48; COVID-19 recovery phase 43–44

220 Index World Trade Organization Facilitation Agreement 10, 100, 138 Yonis, A. Y., et al. 25 Yoshino, N.: et al. 101; and Taghizadeh, F. 61 Yun, G., et al. 167 Zakeri, M., and Esfandiar, H. 161 Zambia: CARE International 131, 132; Eagle Larger (business linkages) 106, 130–132; Kazungula dam project 152

Zamir, N., and Maqbool, S. 165 Zimbabwe: government support programmes/institutions 28; income tax system 21; meaning of women entrepreneurs 34; Small Enterprise Development Agency (SEDA) 28, 29; SME bourse 28; stock exchange funding for SMEs 28; tax payments and corruption 75–76; Women’s Bank 22 Zimbabwe Development Bank 28