How policy shifts can make SMEs compete effectively

It is no secret that small and medium enterprises (SMEs) play a major role in spurring economic growth and development.

The SMEs, often owned by a single or a small team of entrepreneurs, are a driving force in job creation and local economic development in emerging economies.

They are key sources of originality, dynamism, innovation, and flexibility. According to a World Bank publication, SMEs account for the majority of businesses worldwide.

SMEs represent about 90 percent of businesses and more than 50 percent of employment worldwide.

In emerging markets, most formal jobs are generated by SMEs, which account for seven out of every 10 jobs created. Formal SMEs contribute up to 40 percent of gross domestic product (GDP) in emerging economies.

These numbers are significantly higher when informal SMEs, Mama Mbogas and the Jua Kali sectors are included. According to World Bank estimates, to absorb the growing global workforce, 600 million jobs will be needed by 2030, which makes SME development a high priority for many governments around the world.

Being small and vulnerable, the SME sector has felt disproportionate negative effects of the Covid-19 pandemic with the ability to win contracts, access credit, remain liquid, innovate, and remain afloat significantly compromised.

Against this backdrop of disproportionate effects lies the importance of SMEs in terms of sheer numbers, their capacity to spur economic growth, impact national income and alleviate poverty.

There is an ongoing discussion on the proper role of the government in SME growth and this discussion is healthy. It has now pushed most governments to begin to ask themselves what they can do to encourage the growth of SMEs, enabling them to contribute sustainably to the national economies. With all these efforts and mainstreaming, there is still quite a large gap between the intentions of governments and their understanding of the needs and challenges facing SMEs.

This gap can be bridged by making policy shifts, enacting enabling legislation and providing operational support to SMEs. Government can make deliberate policy shifts — deliberate actions to level the playing field and mainstream the development of the SME sector.

The policy shifts mark a departure from the norm, intended at eliminating barriers SMEs face in their effort to provide goods and services, some traditionally performed by established entities.

Some of the policy initiatives include institutional capacity development, incentives, training, funding and reserving business opportunities for SMEs. The first policy intervention is the need to establish a government institution to deal exclusively with SME development and growth.

Currently, there is no such institution. Required services are strewn all over government departments.

Also, no institution is dedicated to training and capacity building for SMEs. It is often difficult for SMEs to find and train the right people, including the entrepreneurs themselves.

The government should provide free or subsidised training for SMEs to increase productivity and ease the investment in training personnel. To optimise the existing training infrastructure, the government should consider converting or expanding the mandate of the Kenya Institute of Administration, a government institution providing free training to senior government officials, to offer free management training to entrepreneurs in Kenya. Procurement rules and policies are still stifling and a threat to SME growth. The deliberate policy shift is, therefore, necessary to encourage and support doing business with SMEs. Often the government wish to encourage doing business with SMEs, but they do not do enough business with SMEs.

The government can legislate for a portion of all goods and services to be reserved for SMEs, just as it has allocated 30 percent of all procurements to be reserved for women and youth. Public tenders frequently demand financial requirements that are rarely realistic for SMEs, leaving them out of the tenders.

The requirements of big bank transactions, security and detailed request for proposals are a hindrance to SME growth as they are more about a statement of might than the ability to deliver.

Additionally, governments often delay payments, which might be tolerable to big businesses but could be disastrous for some SMEs.

Developing supportive legislation for SMEs is critical to the survival and vibrancy of this sector. There should be a one-stop comprehensive law on SMEs that deals with registration, licensing, operations, taxation, incentives and trade associations that is simple to administer.

This involves the development and implementation of basic business rules, such as business-related legal systems, government regulations, and business practices that enable firms to conduct free and fair business activities and facilitates the entry or withdrawal from markets.

Inadequate development and operation of basic business rules is a serious barrier as it creates a compliance risk to SMEs that do not have the resources to engage professionals. For example, the Companies Act No 17 of 2015 is such a gigantic complex piece of legislation covering some 500 odd pages and 1,026 sections and six schedules.

How an SME is required to pick what is applicable and ensure compliance is anyone’s guess.

Add to the other tax laws in their numbers and you have a compliance nightmare for SMEs operational support: One of the greatest challenges SMEs face is obtaining funds for growth.

Small businesses are disadvantaged, as the risk of lending is difficult to evaluate due to limited records. This limits the amount available for lending to the sector. Therefore, it is necessary to develop and operate a system that remedies these deficiencies.

There are several funds the government operates, which target the same group but are scattered across youth and women, among others.

These funds could be collapsed and properly channelled through an SME fund where the yardsticks for growth are more quantifiable and thus sustainability would be better assured.

Intellectual rights protection for businesses innovations is also required for SME growth. Intellectual rights protection may include patents, utility models, industrial designs and technological innovations.

The government should make the process of registering patents simple, eliminate any tariffs in the registration process, and publicise this.

Such initiatives, whether industry-specific or general, can be very effective in helping SMEs attract customers and business partners.