South Africa has an anaemic medium-sized business sector, with some of these businesses closing and fewer small businesses growing into medium-sized enterprises than medium-sized enterprises growing into large enterprises, which means a more concentrated economy.

A more concentrated economy means lower levels of competition, which leads to lower levels of capital expenditure-to-assets ratios in such markets.

Firms in a competitive market tend to innovate and invest more, which creates more jobs and opportunities and drives economic growth, explained Competition Commission principal economist Dr Hariprasad Govinda.

In terms of the survival rates of companies in South Africa, a study by the commission in 2021 of the number of firms found that 60 000 fewer firms were registered in 2021 than in 2017.

The study also found that about 7% to 9% of medium-sized enterprises grow and transition into large firms, while only 5% to 7% of small enterprises grow and transition into medium-sized enterprises.

“Government needs to provide direct support to small and microenterprises,” he said during supplier development company Aurik's 'The Missing Middle' conference, in Melrose, Gauteng, on October 9.

“The aim must be to get the ecosystem – from small firms supplying medium-sized firms that supply large firms – working for all the participants. Small, medium-sized and microenterprises (SMMEs) must work for the ecosystem to survive.”

Govinda compared India's approach to supporting business development to illustrate some of the challenges the concentrated structure of South Africa's market creates.

In South Africa, 80% of firms are microenterprises, 13% are small firms, 4% of businesses are medium-sized firms and 3% are large enterprises. About 78% of South Africa's economic turnover is contributed by large firms.

This is far less than the 50% of national turnover contributed by SMMEs in developed economies that are part of the Organisation for Economic Cooperation and Development, he pointed out.

In India, SMMEs contribute 45% of total production, 40% to exports and 37.5% to the country's GDP, he said.

India's national employment generation programme is implemented from a national, to provincial to district level and, among others, provides a credit-guarantee trust for micro- and small enterprises and collateral-free loans.

SMMEs are also provided with eligibility certificates and participate in domestic and export promotion and market development schemes. They are provided with functional support, Govinda said.

There are also subsidies provided to SMMEs, and relevant firms participate in manufacturing competitiveness, as well as in technical skills and quality management programmes.

Further, manufacturing SMMEs in India are also supported to compete by building awareness of standards and tools, Govinda said.

However, in response to the challenges, representatives from government and business proposed ways that government and procurement processes can support the development and growth of SMMEs in South Africa.

Aurik CEO and co-founder Carien Engelbrecht and Broad-Based Black Economic Empowerment Commissioner Tshediso Matona each proposed better feedback loops to strengthen policy and the capabilities of SMMEs.

Engelbrecht noted that, with 78% of national turnover generated by large firms, procurement managers had a significant role that they could play in creating effective supplier companies.

However, Aurik's study of 500 SMME suppliers that supply to large enterprises showed that SMMEs are not given reasons for a decision nor feedback on areas the businesses are lacking when large enterprises decline their bids for work.

“If I get a score of 50%, please tell me why. This practice is everywhere in South Africa. This may partly be because of fears that giving reasons may lead to legal actions, but feedback can help potential suppliers to improve their companies,” she said.

“Fixing a business is a job that belongs to the business owner, but they can only fix it if they know it is broken. This is a big issue. Why have a scorecard if it does not provide useful information?” she asked.

SMMEs need to understand what they need to get through the door. The role of communication is important, and corporate enterprises can do more to support them.

Once the SMMEs understand what they need to do, they then need to do more to meet those requirements, she said.

“Government then needs to put in place not large-scale Transformation Funds, but stepping stones that make a difference,” said Engelbrecht.

Meanwhile, Matona offered a similar solution, stating that South Africa should institutionalise monitoring and evaluation across its policy frameworks to ensure a mechanism for continuous feedback of their effectiveness is created to then tweak and reform policies to ensure they succeed in their intended outcome.

“Government needs a two-way relationship, so that we know what you are doing and what the main challenges are, and so that you know what we are considering in terms of policy,” he said.

“It will require hard work to foster trust and create a free flow of information to ensure that regulations are agile and responsive and focused on resolving the frictions businesses face,” Matona said.