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January 19, 2019

SMEs are the building blocks for industry

The government count on SME's as key drivers of vision 2030
The government count on SME's as key drivers of vision 2030

SMEs are the building blocks for the growth of the industrial sector and are core to Vision 2030. A key growth strategy is to support SMEs to produce quality products that can compete with imports both locally and in the export market. This involves building institutional support systems and incentives towards the theme to encourage domestic manufacturing.

This is important because industry growth is mostly driven by the gradual and consistent growth of small firms to sizeable producers. It is also a means of promoting domestic-led growth in new and existing industries, and increases the resilience of the economy. Due to their numbers, size and nature of operations, SMEs have the highest potential to create employment.

One focus area is technological improvement. Research has shown that successful SMEs are those that have superior technology to their rivals. It is also difficult to maintain high output and increase quality with low technology levels.

Presently, most SMEs cannot increase output with the present level of technology, either because it is aged or the current capacity is fully utilised. New technology is also needed to improve quality to competitive levels. To succeed, SMEs may, therefore, need to purchase new machinery. Renting may also be an option, where the machinery is sophisticated or very expensive. By renting, the business reduces the need for large borrowings or cash outflows. It can also spreads costs across several production periods, which is good for tax planning. To incentivise SMEs to acquire new technology, customs and excise duty may be lowered to make such technology cheaper for a large number of SMEs.

A second area of focus is ownership. As SMEs grow, they need to graduate from sole proprietorships to limited liability companies. This requires addressing the factors that discourage formalization of businesses, be it ease in registration or the cost of compliance with various operating rules. Some family owned SMEs may need to reduce control to a more diverse ownership. This reduces succession issues while the separation of ownership from management increases accountability. A wide ownership can attract more skilled staff and private finance. It can also reduce the cost of credit.

A third area of focus is in-house research and development. The aim is to introduce new products on a regular basis, to meet the changing needs of the market, and to widen output. Most successful SMEs continuously research new products and hold recognized patents and quality certificates for their main products.

The truth is dealing with problems that face SMEs is becoming even more complex and demanding as globalization proceeds. The impact of efforts towards a domestic-led industrial growth is felt when a sizeable proportion of SMEs achieve a level of competitiveness that enable them to be part of the global value-chain.

Kandie is the MD of IDB Capital



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