Policy research and development think tank the Centre for Development and Enterprise (CDE) notes in a new report that there is limited empirical information on which to base policies to support the growth of small, medium-sized and microenterprises (SMMEs) and grow the inclusiveness of the economy.

The report, titled 'What role can small and micro businesses play in achieving inclusive growth?', states that the informal sector in South Africa is relatively small, employing only one-sixth of South Africa’s workers and contributing 6% to gross domestic product. The formal sector is, thus, more important for growth and inclusion.

Data from global surveys indicate that South Africa’s level of early-stage entrepreneurial activity ranks in the middle of international tables.

“The entrepreneurial orientation of South Africans, at least in terms of their readiness to start up new firms, is not as limited as numerous commentators have suggested. It might, therefore, be sensible to be less concerned with initiatives to push more South Africans to take risks and start innovative firms and to think more about what could be done to enable existing firms to grow and create more employment,” the CDE says.

The government, through the Department of Small Business Development, is responsible for numerous entrepreneurship support programmes and various forms of support for small, mostly formal businesses, including through legislated requirements.

It would be good to have a clear picture of the resources that have been sunk into these initiatives and what kinds of returns they have produced. Research on the impact of government’s interventions is sorely missing. In the absence of reliable assessments of impact, it is instructive that many small business representatives express frustration at government’s inability to provide sufficient assistance in the development of the sector, the CDE says.

“We urgently need more knowledge about the precise ways in which various constraints, particularly regulations and how they are applied locally and nationally, prevent the establishment and expansion of small businesses,” it adds.

“South Africa needs a more inclusive economic system, one where millions of excluded people can find jobs or space to start and grow firms. There is an important idea on the table that small and micro-businesses could somehow be strengthened and then form the basis of a more inclusive economy.

“However, before we can consider what an inclusive growth strategy would look like that harnesses the potential of smaller businesses, formal, informal, and those in-between, we need to establish what the state of knowledge in South Africa is, how experts define and think about the parts of the economy where these businesses are located, how much potential there is in this segment of the economy, and how connected or disconnected it is from the economic mainstream.”

Further, government attempts to formalise firms can have serious pitfalls unless the approach is dominated by incentives rather than penalties. Some experts argue that incentives should mainly come in the form of reducing the cost of doing business across the economy and providing the services and rule of law that would raise the benefits of operating formally.

“Specific incentives that could increase the visible benefits of operating formally include amnesties for unregistered firms and access to free marketing for registered firms.

"However, many local entrepreneurs and SMME experts believe there is little trust between small business owners and the South African State, which may undermine processes to encourage informal firms to register and become tax compliant,” the CDE report states.

Small and micro-businesses, especially those that can broadly be said to be part of the informal sector, have only limited potential to become engines of a new, more inclusive economy.

“Nevertheless, the core aim of any inclusive growth strategy must be to make it easier for firms of all sizes to eventually establish themselves in the formal economy, where, most importantly, they should have as many opportunities as possible to grow and to create new jobs,” the report says.

A core policy issue when it comes to small and micro-businesses is deciding to what extent these firms are being constrained by the institutional environment if they want to stay informal or become formal.

“When thinking about the right kind of regulatory mix for businesses in general, it is vital to recognise the central importance of economic growth.

"In a low-growth environment, the opportunities for establishing and growing a firm will always be much more restricted than they will be in a high-growth environment. Tweaking regulatory restrictions or providing various forms of direct support may, therefore, make little difference if the whole economy does not move onto a faster growth trajectory.”