Saturday, 28 January 2012

SMMEs - more research needed

This week I came across  a number of mentions of the importance of small business and entrepreneurship for economic growth, employment creation etc. At the ERSA workshop policymakers (Treasury, dti) presented it as received wisdom that SME's create the jobs. There was also a discussion to and fro on Twitter:

And finally, Grant Thornton released the results of their Q4 International Business Report. The survey shows that over-regulation is a key constraint to business expansion in South Africa. 

Academics, of course, would like to know more. The 2010 Grant Thornton report indicates that 350 firms are surveyed and they are mostly medium to large (100-399 workers). My questions are what kind of regulation is limiting growth? Is it ownership regulations, labour regulations, tax regulations, environmental regulations? Are the impacts different for smaller and larger firms, younger and older ones? Are there differences between exporters and non-exporters? Complying with regulations, or not having to comply with them, is often closely linked to paying bribes to corrupt officials, but the report makes no mention of whether firms also consider corruption when they are asked about regulations. What are the costs of regulation in terms of money and time and what do firms do to minimise them?

The last study that was able to answer these type of questions was Neil Rankin's 2006 paper: The regulatory environment and SMMEs. He described data from the 2003 World Bank Investment Climate Assessment (ICA) survey and provided a comprehensive analysis. He concludes that: 
Labour regulations are the most commonly mentioned regulatory constraint to growth. Exporting firms and those with a higher proportion of unskilled workers are more likely to mention labour regulations as a constraint than other types of firms. The response to labour market regulations differs by firm size. Larger firms are more likely to outsource or sub-contract whilst smaller firms are more likely to do nothing. It is unlikely that this is because they are not constrained by these regulations but rather because they lack the resources to respond.
Rankin also finds that small firms face higher costs in tax compliance, which is particularly worrying considering this week's reports that South African firms face high effective tax rates (2nd highest among the biggest 60 economies according to Mike Schussler's analysis).

The piont is that we need to know more about SME's, what obstacles they face and whether they generate growth and create employment. Following Neil's 2006 paper, using 2003 data, only the 2007 ICA survey contains enough information for detailed analysis, but that is rather dated already. What has happened since the global recession started in 2008? Now if only someone like Grant Thornton would involve a couple of academics in the next round of the survey...

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