6.0 Constraints to small business growth: Entrepreneurship and Small Business Enterprise Growth in Uganda
6.0 Constraints to small business growth: Entrepreneurship and Small Business Enterprise Growth in Uganda
• Lack of market opportunity
In the poor countries, effective demand and consequently market opportunity is a constraining factor for small business and indeed beg business development. This may not be the case in the developed countries. Incomes are low in Uganda and there is low purchasing power. Consequently, even if there is opportunity to exploit, it may be difficult to realise because of lack of market.
Another aspect is the fragmentation of African markets both physically and culturally. For instance selling in Uganda with over 40 languages becomes a nightmare for salesmen. Whereas in the developed countries, the commonality of culture and language eases the selling process. The level of development itself imposes additional constraints to small enterprise growth. Because of usage of low level technology, small enterprises cannot compete with large enterprises that have benefits that arise from economies of scale.
• Lack of access to finance
Most studies (Ngobo, 1995; Kibera and Kiberam, 1997; Chijoriga and Cassiman, 1997), point to finance as one of the key constraints to small enterprise growth. This is worsened by the absence of financial markets in the developing countries. Small enterprise owners cannot easily access finance to expand business and they are usually faced with problems of collateral, feasibility studies and the unexplained bank charges. This means that they cannot access finance to enable them to grow. In a study by Ngobo (1995), he makes a detailed analysis of finance as a constraining factor and includes collateral, interest rates, extra bank charges, inability to evaluate financial proposals and lack of financial management skills as hindrances to small enterprise growth. Under developed financial markets impose additional constraints. There are no financial instruments and no independent financial sources that is market driven.
• Low level technology
Because of their smallness these enterprises end up using a cheap technology which is usually not top of the range. This results into high costs of production and un- competitiveness. For instance small enterprises cannot afford to use computers or even where they have a computer, to continuously upgrade their equipment. Therefore they cannot compete with large enterprises. This may not be the case in the developed countries where because of market opportunity and likely success due to environmental enabling factors, it is easier to secure new technology. Besides, this technology originates from the developed countries and unlike in the developing countries where it must be imported, it is relatively cheap.
• Enabling environment
While many countries have acknowledged that small enterprises have an important role in their economies, not much effort has been done to facilitate their growth. They have to compete for finance, markets, personnel, and utilities like any other business unit (Mutazindwa, 1997), In a few countries especially India, there has been affirmative action to promote small enterprises over a long period. In Uganda, the Government has only paid a lip service. In fact, the Uganda Investment Authority (UIA) which was set up to promote investments in Uganda was not attractive for the small entrepreneur. The UIA would only support proposals from companies with more than US$50,000 to invest. The development banks in the country did not have programmes for small enterprises.
It is only the non-governmental organisations and specialised financial institutions that have come in to assist small enterprises (Balunywa and Sejjaaka, 1997). It is easier for a large enterprise to get land for industrial development and a licnece to operate the business than the small operator. Large enterprises get easy access to utilities than small enterprises. Consequently there is no enabling environment to promote small operators.
• Managerial Skills
Many studies have pointed to managerial skills as the most important constraint faced by small business. At the formation stage a small owner is able to run a business but as it grows and ages, managerial demands arise. These are in the form of operational managerial requirements like production, sales, and finance, and most important is the ability to deal with them. Some owners have a hunch over these but in the long run they need to employ people. Some people believe (Harper, 1994) that entrepreneurial skills are part of managerial skills. I would wish to differ and go beyond that. Entrepreneurship is beyond management and not all managers are entrepreneurs.
60 Constraints to small business growth Entrepreneurship and Small Business Enterprise Growth in Uganda - To learn more about this author, visit Makerere University Business School's Website.
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We recognise that small business has an important role to play in many economies. We must therefore understand what constrains them to be able to support them. Various studies (Kibera and Kibera, 1997; Thembe et al, 1997; Alila and McCormick, 1994) have enumerated the factors that are generally agreed on as the constraints to the growth of small business especially in the African setting. These include lack of market opportunity, access to finance, enabling environment, market information, and managerial skills. We have submitted that these are important, but probably not the only ones. We think entrepreneurship and culture are more important. We discuss some below.
• Lack of market opportunity
In the poor countries, effective demand and consequently market opportunity is a constraining factor for small business and indeed beg business development. This may not be the case in the developed countries. Incomes are low in Uganda and there is low purchasing power. Consequently, even if there is opportunity to exploit, it may be difficult to realise because of lack of market.
Another aspect is the fragmentation of African markets both physically and culturally. For instance selling in Uganda with over 40 languages becomes a nightmare for salesmen. Whereas in the developed countries, the commonality of culture and language eases the selling process. The level of development itself imposes additional constraints to small enterprise growth. Because of usage of low level technology, small enterprises cannot compete with large enterprises that have benefits that arise from economies of scale.
• Lack of access to finance
Most studies (Ngobo, 1995; Kibera and Kiberam, 1997; Chijoriga and Cassiman, 1997), point to finance as one of the key constraints to small enterprise growth. This is worsened by the absence of financial markets in the developing countries. Small enterprise owners cannot easily access finance to expand business and they are usually faced with problems of collateral, feasibility studies and the unexplained bank charges. This means that they cannot access finance to enable them to grow. In a study by Ngobo (1995), he makes a detailed analysis of finance as a constraining factor and includes collateral, interest rates, extra bank charges, inability to evaluate financial proposals and lack of financial management skills as hindrances to small enterprise growth. Under developed financial markets impose additional constraints. There are no financial instruments and no independent financial sources that is market driven.
• Low level technology
Because of their smallness these enterprises end up using a cheap technology which is usually not top of the range. This results into high costs of production and un- competitiveness. For instance small enterprises cannot afford to use computers or even where they have a computer, to continuously upgrade their equipment. Therefore they cannot compete with large enterprises. This may not be the case in the developed countries where because of market opportunity and likely success due to environmental enabling factors, it is easier to secure new technology. Besides, this technology originates from the developed countries and unlike in the developing countries where it must be imported, it is relatively cheap.
• Enabling environment
While many countries have acknowledged that small enterprises have an important role in their economies, not much effort has been done to facilitate their growth. They have to compete for finance, markets, personnel, and utilities like any other business unit (Mutazindwa, 1997), In a few countries especially India, there has been affirmative action to promote small enterprises over a long period. In Uganda, the Government has only paid a lip service. In fact, the Uganda Investment Authority (UIA) which was set up to promote investments in Uganda was not attractive for the small entrepreneur. The UIA would only support proposals from companies with more than US$50,000 to invest. The development banks in the country did not have programmes for small enterprises.
It is only the non-governmental organisations and specialised financial institutions that have come in to assist small enterprises (Balunywa and Sejjaaka, 1997). It is easier for a large enterprise to get land for industrial development and a licnece to operate the business than the small operator. Large enterprises get easy access to utilities than small enterprises. Consequently there is no enabling environment to promote small operators.
• Managerial Skills
Many studies have pointed to managerial skills as the most important constraint faced by small business. At the formation stage a small owner is able to run a business but as it grows and ages, managerial demands arise. These are in the form of operational managerial requirements like production, sales, and finance, and most important is the ability to deal with them. Some owners have a hunch over these but in the long run they need to employ people. Some people believe (Harper, 1994) that entrepreneurial skills are part of managerial skills. I would wish to differ and go beyond that. Entrepreneurship is beyond management and not all managers are entrepreneurs.
60 Constraints to small business growth Entrepreneurship and Small Business Enterprise Growth in Uganda - To learn more about this author, visit Makerere University Business School's Website.
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