Innovation is key to support all SMEs in South Africa

Is it better to help the tens of thousands of struggling informal-sector firms or a few promising entrepreneurs with ideas that could grow to become win-big businesses?

The Minister of Small Business Development Lindiwe Zulu’s budget speech delivered yesterday focused almost wholly on the first kind. But will this help South Africa to create the millions of jobs it badly needs? Likely not.

From a political point of view, it’s often more attractive to support struggling informal-sector firms, than to support a few entrepreneurs with bright ideas (who often come from better-off families). Yet research shows few micro firms grow big (see this earlier post).

The Small Enterprise Development Agency (Seda) in its last annual report said it had prioritised the upper end of the small enterprise sector — businesses employing between 21 and 200 people — for interventions, as this segment offers the greatest job creation potential in line with several studies (such as a much quoted study by US entrepreneurship expert Scott Shane) .

Last year Seda supported 10 619 clients. About 250 or 2.4% of these employed between 21 and 200 people. Hardly a big number, but the figure is up from 1.3% the financial year prior to this. Helping to scale more such firms will only be possible if the agency ramps up the quality of its personnel and programmes.

The ‘i’ word
Other than aiming more support at small businesses of this size, the most important thing the government needs to do is to help more small firms to become innovative.

It’s a priority in a number of emerging economies. Brazil relies on a large incubator system partly funded by its small business agency Sebrae.

The agency also runs a programme called Agentes Locais de Inovação (local innovation agents) where officials visit small business owners and run a quick diagnostic on their firms, suggesting ways that they can become more innovative. Mentors, subsidised by the agency, step in where necessary.

Chile’s small business agency Corfo and venture capital funds co-fund innovative businesses, while the agency also helps fund the set up of angel investor groups. It’s famed Start-Up Chile programme provides grants and follow-up funding to entrepreneurs with bright ideas that relocate temporarily to Chile.

Four innovation fixes
For South Africa’s Department of Small Business Development it means more focus on funding new and innovative ideas, for example:

• Ensuring that the venture capital tax incentive (amendments came into affect last month) and the research and development (R&D) tax incentive work.
• That the troubled Technology Innovation Agency gets its seed funding programme back up and running (see this recent article by the author for FM magazine)
• That new applications for funding to Support Programme for Industrial Innovation are re-opened, following a notice in February by the Department of Trade and Industry temporarily closing the fund.
• Support be given to develop an angel investing community and groups of angel investors (see this earlier post on lessons from Chile and Malaysia).

Innovation is for all
Innovation should not be equated with the richer and more educated. In its drive to fund and support more township entrepreneurs the department needs to fund ways to ensure that small businesses located there focus on innovation.

Finding ways to work with the private sector and getting experienced entrepreneurs from both inside and outside townships (who have capital and experience) to help out, will be key.

It also means vamping up the quality of personnel at Seda and the Small Enterprise Finance Agency (Sefa), by employing the services of those with business experience and partnering more with the private-sector.

Gazelle hope
To its credit Zulu did mention in her budget vote speech, one promising intervention that could foster innovation — its Gazelles programme. The idea is to back 200 “high-potential” businesses annually with “best practice support”. It plans to launch the programme next month.

The programme success will likely be dependent on how these entrepreneurs are chosen and on whether accelerators, funders and others in the private sector are drawn on to assist in selecting them.

Candidates’ ideas must also be able to attract funding and business support from accelerators and funders and be able to find a market that will help their businesses to scale and create jobs.

The risk however is that the government’s renewed vigorous drive to focus on economic transformation (justly so) will deter it from focusing on something arguably far more important — innovation. This may be far more important than another area the department appears to have neglected — cutting red tape.

em>This is an edited version of an article which originally appeared on Small Business Insight, a Burn Media publishing partner. Stephen Timm writes on small business and is presently in Cape Town, South Africa. Click here to sign up to his monthly newsletter. Follow him on Twitter at @Smallbinsight and on Facebook.