SANE Views

Vol.6 No.17, 03 May 2006

Why Small Enterprise Fails

Margaret Legum

This article appeared in the Business Report on Tuesday, 2 May on page 2. Follow the link below.

http://www.businessreport.co.za/index.php?fSectionId=553&fArticleId=3226422

An elderly foreign visitor to our country, encountering the phenomenon of selling at intersections, is said – perhaps apocryphally – to have reported: ‘Hangers, grapes, black bags…. everything! Someone tried to sell me a gun!’ Picture the disappointment, not to say puzzlement, of the hijacker, whose the apparently easy victim declares that she NEVER buys anything at intersections.

There can be few less rewarding and more exhausting occupations than tramping up and down between polluting cars, competing with others for the irritated attention of motorists. Anyone who thinks intersection selling is an easy alternative to working should please imagine someone they love having to resort to such ‘work’.

Close behind it comes operating a small business that is not making it. The small and medium sized enterprise sector (SMMEs) carries the hopes of government, being advocated by conventional economists as the solution to unemployment in the global market. Millions are annually pumped into support for SMMEs – training, making a business plan, researching the market, learning accounting, plus support for the first year.

There is little reliable research on success rates. But it is known that some 80% fail in the first year, and most of the rest are gone in under five years. This is not apparent in the statistics because start-ups replace failures so that the number seems stable. I know no one who works in this sector who is not deeply discouraged. They see the only real benefit of their work as the regular income for a person and her/his family for a year.

Moreover, few small enterprises employ others except on a casual, family-style, basis: the ‘employee’ gets meals and some pocket money.

The reasons they do not work as job-creation fall into two categories. First, entrepreneurship is not easy or natural for most people. It is not something that can be learnt like a computer programme. It involves a competitive, focused, risk-taking mind-set that is not traditional in cultures that emphasize security and community over individual achievement and celebrity.

As a generalization, for instance, women will prefer to put small reliable income and food security for their family above risk for the sake of great reward; while the male culture will put the family home up as security for a risky loan. The American culture of competitive strife is very different from a peasant culture in which people rely on each other for support, and the community moves up and down together. Personal confidence and assertiveness are basic necessities for entrepreneurship – two qualities that were deliberately crushed in Black people during the overtly racist era of our history.

The fact that African women comprise a good proportion of small business start-ups is not a contradiction of this. Lacking employment, they have no alternative; and they tend to work in groups, retaining community support. But they mostly fail to achieve serious scale, mostly because there is virtually no demand in poor areas, which are cash deserts.

That is a result of the second reason: the global market gives huge advantage to size. If a small business succeeds, it is inevitably taken over by larger business. Even Mark Shuttleworth, perhaps our most successful small business start-up, could not resist the terms of the take-over. When that happens, jobs are lost because the larger entity remains competitive only by replacing people. Mergers and acquisitions dominate at the top.

The American economy is the epitome of the competitive entrepreneurial society, probably having the world’s highest proportion of successful SMMEs. It also has its highest rate of bankruptcy and repossessions. The outskirts of most American cities are a desert of vacant retail shop fronts, abandoned superstores and dead shopping malls. This is stark evidence of the failure of small business, as they get squeezed out of the market by larger enterprise. Ironically, the Americans are the first country to legislate against their own enterprise been acquired by foreign giants.

However, small businesses and livelihoods – whether individual or cooperative – are undoubtedly the way of the future. But for that to happen we need deliberate government policy intervention.

We need to emulate the Chinese, who have produced a plan that will ensure they come up smiling. That is because they are not bound by the theoretical models of the West. They have noticed the centralizing suction exerted by the global market – that wealth concentrates globally, regionally and nationally – and have determined to contradict the resulting depletion of rural and poor areas.

In those areas, they are deliberately investing in social services, subsidizing agriculture and giving preference to local economic activity. In a sense they are ring-fencing such areas from the effects of global competition. Unfettered market forces are not a sacred cow to the Chinese; large business does not dominate politics.

We could do the same. The South African version would be based on the understanding of the dual economy, one part of which is successful in the global market, while the other’s marginalization inevitably creates failure, including in small business. Government can create community investment trusts in poor areas, so that jobs and money invested there are recycled within those communities, rather than pouring out into the global sector.

For that to happen we must change the model. From expecting the rural areas and townships to climb the ladder to the global economy we should move to decentralizing, deliberately localizing economic activity.