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November 27, 2009
Move support needed for small enterprise

by Steven Giddings 27.NOV.09

Most developing countries’ governments around the world have a number of support programmes for small enterprise creation and development. The rationale being that small and medium sized enterprises are key job creators; that they are flexible and can take advantage of niche opportunities; and because their income is usually spent locally, that they support and help create other economic opportunities or multipliers and thereby contribute to local development.{{more}}

Job creation is particularly important to governments. Besides jobs contributing to economic growth and revenue, jobs also help to reduce social tensions and increase political stability. Good news for governments and not surprisingly, there is hardly a government in the world that doesn’t have a strategy for job creation in its economic policy.

The question is, are small enterprises the best at creating jobs with all the positive spin-offs that such jobs bring to an economy? Looking at the statistics from around the world, more jobs are certainly created by small and medium enterprises than large enterprises. So yes, a focus on small enterprise is warranted.

But if it were so simple, Uganda with a higher number of small enterprises per 1000 members of the population than say South Africa, would be flying economically… but the statistics say otherwise. The reality is that the mere presence of jobs cannot guarantee economic wellbeing because it is not so much the job itself, but the nature of that job…and the type of business that created it that determines the economic impact. Let’s look at this in just three ways.

First we need to look at the sustainability of the job created. Small enterprises usually don’t last very long. Global statistics show that around 80% of new businesses fail within three to five years. What happens to the employees and how successful are we in job creation if all we support is the recycling of these jobs? Very few development agencies are able to show that the jobs they helped create three years ago…are there today.

Second, we must examine just how substantive the salaries and wages associated with these jobs are. Start-ups and small enterprises usually don’t have the resources to pay their workers well. So while they have jobs, in many cases they may barely meet minimum wage levels. Staff accepts this because they know job seekers exceed demand and that there are 20 more waiting for their job. So having a job and significantly expanding the local economy may not be linked – less so if we accept that many jobs are recycled.

Third, we need to look at whether these jobs add capacitative value. In other words, is staff in these jobs being trained to be more skilled, productive and efficient workers? Perhaps, but generally they are not exposed to formal training due to time and financial constraints in small enterprise, and so the opportunities to grow are generally limited. Again, having a job and adding value to the economy may not be sufficiently related to make a significant impact.

When we add in the second part, “the type of business” that created the job, we start to get an insight about what may be missing in many government policies for economic development.

If we look at a start-up business, or very young businesses, we see a generic picture of a potentially unsustainable business with lean salaries and low capacitative value. Contrast that with a business that has been there for five years, and we see one that has proven it can survive; is probably employing more skilled workers; and is reliant on the personal growth of staff to take it forward.

Both are needed in a developing economy and both must be aggressively supported by government policies. Start-ups are needed to provide the transient jobs that cycle in the “start-survive-close down” cycle and then for every ten that do this, two will break out of the cycle and grow. It is then that they start accumulating the resources to upskill and expand, and at that point these jobs become much more valuable to the economy. Such attrition, and such limited success, is not a pleasing statistic to any government, but that is the nature of the business life cycle from Australia to Zambia.

So while governments must focus on supporting the start-up entrepreneur in their development agendas, they must also have mechanisms to encourage the growth of stable small enterprises into medium sized companies. This is where business incubation plays such a vital role – it can support both.

Business incubation is a support mechanism that seeks out companies that can grow, and then provides the necessary conditions to support that growth. Linkages to new markets, financial institutions, angel investors, technical and business experts, mentors and other entrepreneurs etc are all part of incubation. Incubation, as in the medical term or in chicken farming, takes companies past the point (faster) than they could have reached on their own. For start-ups this is past the point where unaided, they may have perished and for established companies, it is to a new level that may include the implementation of standards, internationalisation, outsourcing, collective procurement and the like.

In doing so, and in the context of job creation, it mitigates against the three points raised above. Furthermore, as companies grow, they create their own supply chain needs, allowing other small companies or start-ups to secure new markets and the more medium sized companies that emerge, the stronger the pull.

So business incubation is not just for start-ups and it certainly isn’t just about subsidised rental space. Established companies, from plumbers to manufacturers can be supported through virtual incubation that allows the company to be assisted in its own premises to achieve growth past the capacity of its own resources. Facilitation of access to expansion capital, trade show visits, advanced training and mentoring by successful business persons, implementation of hygiene or management standards etc, are just some of the services that can be accessed from a business incubator in the pursuit of growth.

The ultimate aim of business incubation is to generate sustainable companies and that implies sustainable jobs. We would therefore do our economies an injustice if we forget to support both new and established small enterprises. For that reason the Centre for Enterprise Development Business Incubator (CEDBI), supported by the Government of SVG, is looking to reach out to small enterprises that are new or already trading and have been growing for a number of years. Interested companies, wanting to reach the next level of growth, are encouraged to contact CEDBI.

As success is relative, no business can say it has reached its full potential and by striving for even better success, job growth can not only be sustainable, but can be of higher value and contribute substantially to the upskilling of the business community. A win-win for both the public and private sectors and ultimately for individual citizens of SVG.

Steven Giddings is an international business incubation consultant currently working with the CED Business Incubator