SMEs - are African governments doing it right

The current trend in many developing countries is to spend vast amounts of money increasing the the start up rate of SMEs. Many of these efforts are furthermore focused on providing start up finance.

The question that must be considered is whether or not the desired outcomes are being achieved ie increased employment and poverty alleviation. I am beginning to believe that the reverse is true. Why?

Firstly they are creating large numbers of new businesses. However the new businesses are not establishing themselves because of increased demand. They are simply being shoehorned into the market. The nett result I believe is that they, together with the incumbent SMEs, are now having to share a pie that is not growing fast enough to accommodate the new entrants. The result is business failure for firstly the new SMEs and a while later the existing SMEs. The market is suffering from excess supply and in current times poor to no growth in demand. This is stimulating decreases in prices which in turn is exacerbating the situation.

I believe the current efforts are in fact counterproductive and we need to think counterintuitively. I believe we should be focusing on growing our bigger businesses so that we can develop our supporting industries (Porter)and also work at bringing in FDI so that we increase the base of large businesses in the country. This will stimulate demand for SMEs in supportive industries and lead to the creation of sustainable businesses and employment.

This requires urgent attention, because sustained efforts at SME creation without the underlying demand can only result in economic failure at the SME level with knock on effects at the large business level.

To learn more about this author, visit Rob Smorfitt's Website.

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