Creativity and Innovation for Entrepreneurs in the Circular Economy

Background Into Economic Implications Of Smes In South Africa

The discussion will explore the economic relevance of SMEs in the South African economy. The South African economy is made up of large businesses and small and medium term businesses. SMEs within South Africa and the world at large have a direct impact on the economy. According to Statistics South Africa (Stats SA, 2015), the SMME sector currently contributes approximately 42% of South Africa’s gross domestic product (GDP) and accounts for 60% employment, as well as provides an incubator and breeding ground for entrepreneurship and innovation. According to The World Bank (2010) they have introduced a pro-SME policy and this is based on three fundamental pillars. Firstly, SMEs have benefits to the economy such as efficiency, innovation and productivity growth; this is due to the enhanced competition and entrepreneurship that the SME sector brings with it. Secondly, SMEs are more productive than larger companies, despite this fact, the financial market and other institutional failure obstruct SME development.

South Africa has urban and rural SMEs. The statistics above relate to all SMEs that are registered business entities in South Africa. The statistics above clearly articulate the importance of SMEs in South Africa as they drive economic growth, and stimulate employment. The researcher would like to add that the government of South Africa believes in transforming both rural and urban SMEs landscape in South Africa. According to SEDA (2007) South Africa is equally promoting the growth and development of rural small businesses. Bates et al. (2005) argues that there are various government-initiated structures that contribute to the development and promotion of SMEs. Some of these structures are SEDA, Khula Enterprise Finance and the Umsobomvu Youth Fund to name but a few.

There are many challenges that are faced by SMEs in South Africa, but despite these constraints, SMEs which are growing have become successful and have been seen to be making a vital contribution to the government’s policy objectives of poverty alleviation, employment creation and the promotion of economic growth (Rogerson, 2008). Research evidence by Hein (2010) further shows that rural SMEs have great potential and value in creating employment, achieving equitable income distribution, alleviating poverty, building a local technological base, promoting participation of vulnerable groups, providing training ground for entrepreneurial and managerial skills and providing opportunities for use of own capital resources.

A challenge that globalization has created is in regards to the economies of scales and research and development. These two factors are of utmost importance in order for a firm to be competitive in the global economy. It may seem as though SMEs are at a great disadvantage for both of these instruments of competitiveness, and many experts have predicted the demise of SME competitiveness as globalization increases as the years go by (Organisation for Economic Co-operation and Development, 2000).