Small firms may not be SA's saviours

Small firms may not be SA’s saviours

WHAT do Clem Sunter and Julius Malema have in common? They share the policy goal of creating a million small businesses in South Africa.

The arithmetic is seductive: by creating the businesses, jobs and new assets come into existence. If these outcomes were achieved, the results would be spectacular.

For Malema and his supporters, a substantive change in ownership patterns would have been achieved. For Sunter and his supporters, more open and transparent markets would provide evidence of successful market-based reforms.

The pair obviously differ on how the million new jobs would be created, but the agreement on a target is useful and rare in an increasingly polarised South Africa.

Small business as a creator of jobs and wealth is an influential idea and, some would say, one whose time has come.

To arrive at this outcome, important assumptions must be true — the most important being that small businesses need to survive beyond 36 months, which is when they could be described as “established businesses”. As important is that the growth of small business will be labour intensive or, at the very least, require additional labour.

But an article published on the website Econ3X3 asks us to confront a world in which neither of these assumptions hold true today. The authors, Andrew Kerr, Martin Wittenberg and Jairo Arrow, who are academics at the University of Cape Town or Stats SA, use Quarterly Employment Survey data to estimate the contribution of big and small firms to job creation and job destruction. Their major finding is that large firms have higher rates of net job creation than small ones.

It is important to remember in interpreting the findings that the authors are measuring both job creation and destruction.

Traditionally, in South Africa we have measured only job creation and assumed that about 50% of new jobs are created by small business.

The problem with this assumption is that we tend not to measure the loss of jobs over time. In fact, it is more correct to say that small businesses destroy lots of jobs, because the majority of these firms fail before their third year. Kerr and his co-authors argue: “Firm death as a cause of job destruction is stronger among smaller firms: only 7% of the 37 000 job losses of the largest firms has been due to closures, as against 34% for the smallest firm category. (The 34% entails thousands of small firms.)”In fact, they suggest that a firm with 500 employees is a threshold for positive net employment creation. The arithmetic of a million new businesses each employing a couple of people thus needs to be questioned, because very small firms do not have the cash flow to employ people.

However, the deeper question remains: Why do small businesses contribute so little to net job creation? Kerr and his co-authors do not provide a definitive answer, but point to the possibilities of setting wages by collective bargaining, although they also hint that labour legislation may not be as onerous to firms as is widely believed.

A deeper look at structural factors could reveal constraints to the survival of small businesses, such as the pricing of steel or the availability of high-quality bandwidth. More research needs to be undertaken in this regard.

The core lesson for setting policy targets is twofold. First, the idea of creating a million new small businesses has gained ground and plays a useful role as a rallying cry.

Second, if we are serious about small businesses contributing to job creation, a different target needs to be developed. That target would focus on the number of successful small businesses after three years. It is a target that Sunter and Malema need to pay attention to if small business is to play a meaningful role in contributing jobs and creating new wealth.

• Hassen is a public policy analyst who writes about small business. See zapreneur.com

• This article was first published in Sunday Times: Business Times

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