SIGNIFICANCE OF SMEs TO EMPLOYMENT CREATION IN AFRICA.doc.doc
EMPLOYMENT- CREATION THROUGH SMEs IN SUB-SAHARAN AFRICA: EMERGING
INSIGHTS AND CHALLENGES FROM BOTSWANA
Thando D. Gwebu
Department of Environmental Science
University of Botswana
Central governments in Sub-Sahara Africa have been failing to cope with the worsening
unemployment and employability crisis over the last three decades. However, a number of
spontaneous attempts are being made by their citizens to provide home- grown solutions to the
problem. This study is a SWOT analysis on the current need for and challenges to employment-
creation, outside the formal sector on the Africa subcontinent, using Botswana as a case study. It
is demonstrated that opportunities do exist for promoting small and micro enterprises. However,
threats in the form of local structural and globalization factors, need to be addressed in order to
facilitate the success of such efforts.
Keywords: Botswana, Employment, Small and Micro enterprises, Human Development
Most Sub-Saharan Africa economies are currently either stagnant or experiencing negative
growth rates. For a majority of them, economic growth rates continue to lag behind rates of
population increase. The causes stem both from internal factors such as poor economic
management, civil strife, rapid population growth and environmental hazards; and external ones
associated with low Foreign Direct Investment (FDI),globalization and structural adjustment
programs. Small and micro enterprises (SMEs) have assumed a significant role in galvanizing
the self-help efforts of the marginalized and vulnerable groups such as the unemployed youth,
female- headed households, and the disabled in both urban and rural areas to meet their basic
needs. Unfortunately, most governments have either ignored, harassed or grudgingly tolerated
this crucial economic sector. Globalization and increasing competition also continue to
accentuate the volatility of the environment in which SMEs operate. They require better quality
standards, access to inputs and markets. The risks surrounding these prerequisites combine to
threaten the production, productivity and long term viability of the small and micro enterprises.
Economically, Botswana has emerged as a global success story, with a sustained annual
economic growth rate of over 5 percent. In terms of the Human Development Index, it ranks
higher than almost all the African countries, in spite of the high prevalence of the HIV/AIDS
scourge. Because of an honest bureaucracy and political stability, Transparency International
ranks it among the least corrupt countries in the world. However, Botswana is having to address
HIV/AIDS, income inequalities and unemployment in order to meet its national development
goals and vision for a healthy, just and productive society (Government of Botswana 1999).
One of the most prominent national strategies for realizing income redistribution and social
justice is through its support for small and micro-scale enterprises (SMEs). The Government of
Botswana appreciates the importance of this sector in meeting the national development
objectives of rapid economic growth, social justice, economic independence and sustainable
development. Such recognition is a bold step indeed for a nation whose citizens have always
depended on formal sector employment and government support in times of natural crises such as
periodic droughts. In response to the high costs associated with the AIDS scourge, central
government is increasingly emphasizing cost recovery and self reliance in its provisioning of
opportunities for economic growth.
This brief paper is a desk analysis on the current SMEs experiences in Botswana.
It is divided into six main sections. After this introduction ,the significance of SMEs for
employment creation on the African sub-continent is assessed. The national socio-demographic
and macroeconomic context is then presented. Thirdly, the national, regional and international
institutional environment within which Botswana’s SMEs operate is discussed. Then the
configuration of SMEs describes their characteristics. Fifth, a situational analysis of the
strengths, weaknesses, opportunities and threats to SMEs towards employment creation is made
before concluding the study.
2.0 SIGNIFICANCE OF SMEs TO EMPLOYMENT CREATION IN AFRICA
Since independence, most sub-Saharan African countries have experienced slower economic
relative to population growth. Most of this growth derives from primary activities and urban
industrialization. Whilst urbanization promotes secularization, modernization and agglomeration
economies ; it has generated in its wake a shortage of social services, environmental degradation,
unemployment and misemployment.
In response to globalization, secularization and modernization; innovations have diffused from
the modern towns and cities to the most tradition-bound peripheries of the national space
economies, through trade, the mass media, formal and informal education. The rural areas are
overpopulated and offer very limited employment opportunities. The result has been the
education of the youth “out of” the rural milieu, by preparing them for blue and white collar
urban employment . The youth and the uneducated are consequently forced to relocate to the
enclaves of modern economic and commercial activities, particularly the main metropolitan
areas, in search of better socioeconomic opportunities, further fuelling the dilemma of over-
The employment profile of sub-Saharan African has been dominated by the government sector,
commercial enterprises, and capital- intensive manufacturing industry (United Nations
Development Report 1997:Table 16). Between the 1960s and 1990s the labour force in the
service sector doubled from 12% to 25%. Structural factors such as unfair pricing and other
market distortions continue to work against the agricultural sector whose labour force share
declined from 81% to 66%. Furthermore, the apparent changes in climate within the tropics has
made arable agriculture, the most labour- absorptive rural activity, to become a very risky
enterprise even for the traditional farmers. Industrial employment share grew at a sluggish pace,
from 7% to 9%, due to high capital-labour ratios, lack of spare parts to service machinery, and
plant underutilization due to their inefficiency and competition from trade liberalization.
Since the 1980s, the modern sector, in tropical Africa, has become subjected to economic
streamlining, prescribed by international structural adjustment regulations. Moreover, the hostile
global economic order has caused protectionism of foreign markets, high debt service ratios and
negative balance of trade. Globalized competition continues to either place numerous workers on
the continent at risk of exclusion from formal sector employment or segregation into low paying
and insecure segments of the labour market.
The above scenario therefore strongly suggests that the emergence of the informal and quasi-
formal sectors is a rational response to the unfolding socioeconomic crisis facing Africa. The
sectors are ideal for those skilled workers who have been retrenched from formal sector
employment, apart from providing apprenticeship to both the illiterate adults and young school-
leavers with no skills to sell in the labour market.
An ILO Report prepared for the 1997 International Labour Conference estimated that 61% of the
African labour force, outside agriculture, was now employed in micro-enterprises (ILO
1997).The ILO World Employment Report of 1998-99 noted that the lack of jobs in the formal
sector of the economy as well as the lack of skills among a large part of the labour force has
resulted in the growth of a substantial informal sector in which most workers are engaged in
low-paid employment, under unregulated and poor working conditions. Very small enterprises
are defined by the Organization for Economic Cooperation and Development (OECD) as having
less than 20 employees, while small enterprises engage between 20 and 99 employees.
According to the ILO Report, among the different categories in the informal sector, small and
micro enterprises represent the economically stronger and more dynamic element. The growth of
SMMEs portrays aspects of economic and commercial changes such as the declining importance
of centralized mass production, and the growth of the service sector which can be accommodated
by their flexibility and specialization. Part of the sector is connected to the formal sector, through
subcontracting arrangements. Santos has conceptualized these linkages and itemized some of the
key elements of flexibility which make the informal sector strategic for creating employment in
developing countries (Santos 1979:22).
The ILO has initiated various programmes to help improve the formulation of employment
policies and to facilitate the creation of small and micro-enterprises throughout the continent.
Such programmes, conceived within the framework of the UN system-wide Special Initiative on
Africa, seek to ensure that employment generation is given central importance in national
macroeconomic policies and that smaller enterprises realize their job creation potential. Mary
Chinery - Hesse, ILO Deputy Director-General for Development and Technical Cooperation has
observed that, in southeast Asia, with the right types of policies and institutional support, the
informal sector can expand and develop to generate large numbers of productive and
remunerative jobs from those micro-enterprises and self-employment activities which have
strong production and marketing linkages with the formal sector (ILO/96/7).Case studies on the
significance of this sector has also been noted in Thailand where, for example, micro and small
scale enterprises served as a major employer for the unemployed during the Asian economic
crisis of the late 1990s (Dickhoven, Bucherieder 2000).
Wallace shares these views and affirms that SME enterprise development has been considered
key to economic development throughout the so-called Third World for several decades
(www.sbaer.uca.edu/research/1999). He remarks that, with unemployment ranging from 25 to 45
percent in most developing countries,” self-employment” and micro-enterprise development is
seen by many donor agencies as the only way to reach the” poorest of the poor” who feel that
without strong private enterprises, in the form of SMEs, Third World countries cannot hope to
enter international trading systems. Donor agencies see SME development as central to social
and economic development, on a continent plagued by exceedingly high levels of unemployment
Although SMEs are regarded as fundamental to employment generation, innovation, and
improved standards of living; serious challenges continue to confront the business ventures.
These include the unfavourable regulatory environment in which they operate such as
complicated registration/licensing procedures (Janssen, Sedaca 2000), restrictive zoning,
crippling sales taxes, complex company laws; lack of marketing and management skills including
record- keeping, inventory control and tendering procedures, negative customer relations
( Rwigima, Kerunju 1999);weak backward and forward linkages (Havers 1999); and precarious
support financing (Manu 1998). There is moreover an overall need for them to develop a culture
of entrepreneurship (Nnadozie 2000). In spite of the ongoing efforts to promote this since the
early 1970s (Van Rensburg 1974), the school system has continued to nurture the development of
an employee rather than a self-employment culture. The concept of education with production
therefore needs to be assimilated and internalized to promote entrepreneurship among school
pupils. A recent study on the service, trade, manufacturing and construction industries in
Botswana, for example, revealed that most of the enterprises that had such problems mentioned
labour deficiency features including laziness of workers, theft and frequent absconding from
work (Dithato 2003).
3.0 THE NATIONAL SOCIO-DEMOGRAPHIC AND MACROECONOMIC CONTEXT
The Republic of Botswana has a population of 1.68 million and an annual natural growth rate of
2.7%, in spite of the HIV/AIDS pandemic (Sanderson, Hellmuth, Strzepek 2001). Only 3.5% is
over 65 years of age. 40% of the population is below 15 years of age. Because of the
youthfulness of the population, the momentum for future growth remains relatively high, in
spite of an apparent decline in fertility.
The broad occupational profile of Botswana between 1960 and 1990 indicates that the
agricultural labour force dropped precipitously from 93% to 46% (United Nations Development
report 1997:Table 16). Today this sector contributes barely 4 percent to the GNP. The labour
force employed in the Services sector expanded by close to 85 percent between 1960 and
1990.This has been closely linked with the mercurial expansion of government services,
domestic services and the commercial sector. During the 1994/95 financial year, Government,
Finance, Business and Business Services, and Trade contributed close to 44 % of the GNP
(ROB,NDP8:2). Industrial labourers increased ten fold between 1960 and 1990.This could have
been due to mining, the establishment of the Botswana Meat Commission and the opening up of
the Hyundai Motor assembly plant. By the mid-1990s, the employment profile of Botswana by
sector was Government (46%),Commerce (39%),and Manufacturing (15%) (Botswana Atlas
Sanderson and others have reported that in spite of the HIV/AIDS scourge, Botswana has been
experiencing exceptional economic growth. Over the last decade, economic growth (adjusted for
inflation) has averaged 5.5 % per year and there is no suggestion of a near-term economic
collapse (Sanderson, Hellmuth, Strzepen 2001). During 2000/01 the economy registered a growth
rate of 9.2%, compared to 8.2% in 1999/00. Real GDP growth was expected to average 6.5%
during National Development Plan 8, an improvement over the original plan forecast of 5.2%.
The international sovereign rating company Standards & Poor (S&P) has affirmed its long and
short-term local currency rating of A+ and A- respectively on Botswana. S&P emphasized that
Botswana’s ratings continue to be underpinned by its balance sheet strength, prudent economic
policies and a stable political environment. Looking ahead, Botswana’s stable market-friendly
environment, sound macro-economic policies, and investment in education and infrastructure
should help attract the investment needed to secure medium term real GDP growth of 3-4% says
the press release from the Bank of Botswana.
It is however undeniable that this impressive economic growth record cannot be sustained
indefinitely because of the HIV/AIDS scourge (BIDPA 2000). S&P has cautioned that the
HIV/AIDS crisis could require extra health and social spending of 3-4% of GDP annually. With
nearly 30% of the adult population estimated to be infected by HIV/AIDS, cases continue to rise
sharply, and will increasingly affect GDP growth, domestic savings, and public finance
negatively over this decade. Gross Domestic Product is projected to be 24-38% less than it would
be without HIV and AIDS in 2021. Also, in spite of rapid economic growth, 36% of the
population currently lives below the poverty datum line although this was a significant
improvement compared to the poverty levels of 47% in 1993/94 and 59% in 1985/86 (UNDP
1998 ) .
4.0 THE CONFIGURATION OF SMMEs IN BOTSWANA
4.1 Types and Distribution of Units
There continues to be uncertainty over the numbers of units and the significance of the SMME
sector to the national economy. Dithato, referring to the recent study , however claims that
SMMEs are the country’s largest employer (Dithato 2003:11). It has been estimated that SMMEs
account for 50% of private sector employment and 15-20% of national GDP
Self employment has increased steadily from 3.1% in 1981 to 7.5% in 1991 and 9.6% in 2001
(CSO 1987,1995,2001).It has been estimated that there are 56 000 small, medium and micro
enterprises (SMMEs) in Botswana (Briscoe 1998), which employ about 125 000 persons. Recent
BIDPA estimates of employment in Botswana, by type, suggest the following breakdown
;Government (36%),Large firms (32%) and SMMEs (32%) (http;//www.bidpa.bw/Bbrief3.PDP).
Employment contribution by the various SMMEs sub-categories are ; Micro (14%), Small (14%)
and Medium (4%).The Citizen Entrepreneurial Development Agency (CEDA) approved 1042
loan applications valued at P581 million for SMMEs by September 2003 which was expected to
create 7000 jobs. In terms of sectoral distribution, 45% of the projects were in the service sector,
28% in retailing,7% in agriculture,12% in manufacturing, and 8% in property development.
The SMME Policy Task Force of Botswana has categorized the entrepreneurial entities as micro,
small and medium, mainly on the basis of their of their labour force size and annual turnover
(ROB 1998: 9-10). The smallest units are micro enterprises which employ one or two persons,
including the owner, with an annual turnover of less than P60 000. About 50 000 of these operate
in Botswana. Functionally, 65% of micro enterprises are involved in trading whereas 25% are
small scale manufacturers.Close to 70% of these are located in the rural areas and about three
quarters of them are owned by women. Most lack formal registration and operate from residential
Small scale enterprises, on the other hand employ about 6 paid employees, including the owner,
and have an annual turnover of between P60 000 and P1.5 million. Some 6 000 such enterprises
are operational in the country. They span a broader occupational spectrum compared with the
micro-enterprises. 40% operate in the service sector, 20% in manufacturing, 16% in retailing,
10% in transport, 8% in agriculture and 6% in construction. Close to 80% are urban-based.
About 300 medium-sized enterprises are found in Botswana. These units employ less than 100
paid employees each and have an annual turnover ranging between P1.5 million and P5 million.
Most are involved in manufacturing. According to Task Force findings, a majority of these have
no particular need for government assistance.From the preceding discussion,it is apparent that
SMEs constitute the most important national employment base. Also, it is the SMEs which seem
to be confronted by many operational hurdles. This subsector will therefore be the focus of this
4.2 Human and Capital Resource Base
SMEs employ single youthful persons below 25 years of age. Proprietors have low levels of
education, at most five years of primary schooling. This implies that most operate on the basis of
informal and self-learnt skills. Working hours are longer for less wages relative to the formal
sector. The wage differential between the two sectors is as high as 58% (Anand, Sunny 1993).
Apart from taxi-drivers, formal institutions play an insignificant role, compared with formal
apprenticeships and family tradition, in providing potential entrepreneurs with the requisite start-
up training. Such training would shorten the learning curve and significantly improve prospects
for business survival.
SMEs depend mainly on internal financing for both initial investment and capital expansion. For
instance 51% of them rely on owner savings for initial investment whereas 41% relied on loans
from relatives and friends. Similar figures have been noted for capital expansion programmes
(Anand 1993).Government Financial Assistance Policy (FAP) took the form of a grant to
support feasibility studies, subsidize their wage bill and provide free basic skills training. In spite
of this, only 1.3% of the SMEs availed themselves of this facility. For their part, commercial
banks and non-bank financial institutions are reluctant to lend money to SMEs mainly because:
• they give them low credit rating since they lack appropriate business skill
• they regard them as a high cost risk; and
• they concentrate on lending for short term and overdraft financing rather than
for projects with a long gestation period in order to realize better profits.
Non-bank financial institutions were established strictly to meet needs other than those pertaining
to SMEs. For example, the National Development Bank was established to cater for the farming
sector whereas Building Societies are designed to finance the construction of residential and
The new SMME policy is intended to establish a micro credit scheme for providing small loans
and a credit guarantee fund to assist SMME access to bank credit by providing partial loan
guarantees. Entrepreneurs are also expected to benefit from help provided for the preparation of
funding applications to financial institutions.
4.3 Capacity Utilization
There exists a large discrepancy between the fixed costs and variable costs incurred by SMEs.
Fixed overhead costs account for 77% of the total costs whereas direct/variable costs account for
the remaining 23% (Anand, 1993). This wide disparity implies excess capacity or under
utilization. SMEs therefore appear to neither optimize their production levels nor their
employment generation efforts.
5.0 INSTITUTIONAL ENVIRONMENT FOR SMEs OPERATIONS IN BOTSWANA
Both the Central Government and the private sector have been instrumental in initiating
programs designed to promote small and micro enterprises. This section will consider the
national, regional and international institutional environment within which SMEs operate.
5.1 Local level institutions
The first Government approach towards the creation of an indigenous cadre of entrepreneurs was
the Botswana Enterprise Development Programme, operated by the Botswana Enterprise
Development Unit (BEDU).Set up in 1974, it was meant to provide integrated support for citizen
entrepreneurship development. Perhaps the most important limitation of BEDU was that it
became too paternalistic to the extent that a dependency syndrome on the Government
developed (Dewah 1995). Subsequently, the Integrated Field Service unit(IFS) was established in
1987 to support the initiatives of entrepreneurial cadre. It sought to merge three extension service
units that used to operate more or less independently. These were the Botswana Enterprises
Development Programme, the Rural Industrialization Programme (RIP) and the Business
Advisory Service (BAS).
IFS aims at increasing both the number and scale of manufacturing enterprises throughout
Botswana by providing assistance to prospective as well as existing entrepreneurs who want to
expand their businesses. Its main strategy for promoting the development of SMEs consists of
training programs designed to improve the management and production skills of entrepreneurs.
Management skills courses include record-keeping, costing, business planning, marketing,
buying and stock control. Production related courses are provided by IFS technical staff. They
include metal work, carpentry, garment manufacturing, pottery, leather work and concrete
products. Its construction unit trains small citizen contractors in construction, management,
estimating and tendering.
IFS works in partnership with parastatals and the private sector. The Rural Industries Innovation
Centre (RIIC) of Rural Industries Productions, a parastatal organization of the Ministry of
Commerce and Industry, cooperates with IFS in promoting small industrial ventures in
Botswana. For example it operates a Village Artisans Training programme in carpentry, skin-
tanning, blacksmithing and wire mesh production. The Food Technology Research Services
which collaborates with the Botswana Technology Centre is another such parastatal . It is
primarily concerned with the development of food processing enterprises in Botswana. IFS also
employs the services of some private sector entrepreneurs to impart some knowledge and skills to
SMEs. These are expected to offer subsidised short courses relevant to entrepreneurship and
Government provides premises and equipment to assist set-up SMEs. Such premises include
factory shells and workshops equipped with machinery. Such support seems to subsidize the
SMEs because such premises and equipment would be too expensive for them. Unfortunately
SMEs eventually become reluctant to vacate such premises because they are cheaper than the
rented premises. Another problem is that workshops are not easily accessible to all the potential
In the past Government used to provide financial assistance to the entrepreneurs who either
wished to go into business or expand their enterprises, through the Financial Assistance Policy
(FAP). Unfortunately such grants have not always been optimally utilized for productive
investment but for the purchase of conspicuous consumption non-durable goods. Also, such
grants and micro-credit schemes, while seemingly helpful to the beneficiaries, make the ventures
permanently dependent upon subsidies and undermine their long-term sustainability.
Finally, the Government attempts to encourage citizen involvement in Business though a
Reservation Policy in areas such as the manufacture of school uniforms, protective clothing,
school furniture, burglar bars, cement bricks and sorghum milling. Although this may prima
facie be assumed to promote citizen empowerment, it represent a serious distortion on market
forces which will be analysed later.
Government has now instituted a Small Business Act to raise the profile of SMMEs and provide
a legal framework for its support services. The Act will also establish an autonomous advisory
body, the Small Business Council, supported by the Small Business Agency, to oversee the
development of the SMME sector. The latter will need staff with right training, experience and
business management attitudes to be effective.
It is in the national development context that central government has established the SMME
policy which is aimed at:
• creating an enabling environment within which SMMEs will flourish and grow;
• providing an integrated approach to SMME development which ensures cohesion and
linkages between the various programmes;
• ensuring that the SMME policy is implemented effectively and assessed against measurable
• discouraging dependency upon Government.
The most important objectives of the SMME Policy include:
• fostering citizen entrepreneurship and empowerment;
• achieving economic diversification;
• promotion of exports by small and medium enterprises;
• development of an efficient competitive and sustainable SMME community;
• creation of sustainable employment opportunities, development of vertical and horizontal
linkages between SMMEs and primary industries in agriculture, mining and tourism; and
• improved efficiency in the delivery of services to businesses.
The private sector is involved in assisting SME development.The Botswana Confederation of
Commerce, Industry and Manpower (BOCCIM), which has extended its functions to include the
promotion of Small Business Divisions, was originally formed to spearhead the aspirations and
address special problems of SMEs. BOCCIM runs a two-pronged outreach business extension
and the Botswana Management Assistance Programme (B-MAP). Between 1991 and 1993
BOCCIM managed to train, with support from USAID, 2373 small business owners in such
fields as productivity improvement , bookkeeping and accounting , computing, marketing and
sales promotion, personnel management, taxation, business record keeping, and responding to
The Small Enterprise Promotion Trust (SEPROT) is an association of agencies providing
support to micro, small and medium enterprises (SMMEs). It exists to lobby and advocate for
the interests of SMMEs. It also builds an integrated agency network in sharing information on
small business development. SEPROT was formed in 1993 as a member organisation with
representation of Government, Non- Government and private sector institutions involved in the
development and promotion of micro, small and medium enterprises in Botswana. Its mission is
to "strengthen capacity through information exchange and co-operative action to provide quality
service to SMME's".
5.2 Regional level institutions
The Small Enterprise Promotion Advisory Council SEPAC was established in November 1996,
at a conference in Gaborone as a multi-country support agency in the Southern Africa
Development Community SADC. Membership consists of delegates from SADC countries,
representing governments (ministries or parastatals), private sector (chambers of commerce or
business associations), and NGOs providing business services.
The objectives of SEPAC, are to:
• Facilitate the exchange of information on SME promotion between SADC
• Act as a reference/advisory body for the SADC Secretariat in matters
relating to SME promotion;
• Promote capacity building of institutions in the SADC region concerned with
• Facilitate other activities in support of SME development (as e.g. research).
Small enterprises can benefit from SEPAC's support in many different areas:
• Access to information, advice and mentors relevant for business decisions;
• Access to finance at reasonable conditions;
• Access to modern technology and IT;
• Access to markets, export opportunities and public procurement;
• Physical infrastructure facilities related to informal markets, light industrial
parks, and incubators;
• Streamlined regulations and legal controls;
• Specific sector support; and
• Improved access to business networking and lobbying.
Currently, SEPAC is in the process of transforming itself from an advisory council to an
implementing SADC Agency that will incorporate best practices into its management activities
and serve as a regional voice for SMMEs.
5.3 International level institutions
At the international level,the Southern Africa Global Competitiveness Hub or more commonly
called the TRADE Hub supports governments, public,and private sector associations, and
businesses in their efforts to improve the efficiency of regional markets, be more competitive in
global markets, and to increase exports.(Vodraska 2003).The U.S.Africa Growth and
Opportunity Act (AGOA) has created unprecedented opportunities for expanded exports to U.S.
In 2002,duty free exports from Southern Africa to the US under AGOA were $1.9 billion.
The African Growth and Opportunity Act is intended to prime the development of the apparel
industries. The largest number of jobs have been created in the textile and apparel sector
as a result of AGOA. In 2002,AGOA exports from Botswana increased almost
four-fold over the previous year, driven by an increase in apparel exports. The Trade
Hub is facilitating AGOA business linkages. For example, it developed a program
with the International Cotton Council to introduce US buyers of apparel to
Botswana manufacturers. This included factory visits to communicate buyer expectations
as well as to provide recommendations on quality and productivity improvements.
It has assisted local businesses with market research, US buyer identification, and export
investment services. In other words, the TRADE Hub provides assistance to get goods
and services to market by establishing standards, creating and promoting business
linkages, and facilitating trade. Its competitiveness strategy will also strive to mitigate
the impact of HIV/AIDS on profitability, productivity and markets for goods and services
for governments, private sector associations and business development service providers
to develop methodologies to implement their economic growth strategies.
Botswana and the European Union (EU) have identified and agreed on about P218 million
development programme aid, under the Indicative Programme (IP) (Mmegi Business Week,vol
20,10,1). The IP is part of the Cotonou Agreement between the African Caribbean and Pacific
countries and the EU for the 2002-2007 period. An additional 52 million Euro (about P291
million) is also available for use in cases of emergencies as well as to cushion Botswana against
export earning fluctuations, should the need arise.
6.0 A SITUATIONAL ANALYSIS OF SMEs IN BOTSWANA
6.1 Survival Rate
Unfortunately, little is known about the conditions under which SMME projects succeed or fail.
There has been little systematic collection of data on new entrants in each category of enterprises,
their survival and growth, numbers of business failures and job creation potential. Available
evidence nonetheless shows that a majority of SME’s in Botswana are of recent origin because
most are less than 10 years old (Briscoe 1993, Daniels and Fisseha 1992).There seems to be a
high failure rate among start-up businesses. 80-85% of enterprises disappear within five years of
start up (ROB 1998:4 ). A substantial proportion of micro-enterprises however neither disappear
nor grow. They survive because the proprietors have no alternative or other potential source of
income. It has been estimated that although many small business owners try to expand, only
about 2% actually succeed in significantly expanding their business, beyond the typical very
marginal existence (ROB 1998: 11), to the extent of progressing from micro to small scale
6.2 Human and Capital Resource Base
A University of Botswana recent study, conducted by the Economics Department, mentions low
productivity due to lack of skills, non-repayment of debts, lack of finance, competition from
large firm or foreign chain stores, low demand for products, lack of storage facilities, and costly
utilities such as water, electricity and phone charges (Dithato 2003:11). Although physical
infrastructure are well developed to minimize transaction costs, the prices of utilities such as
electricity and telecommunications tend to be high .
In an earlier survey of SMMEs, sectoral variations in success factors were observed among them
(Duncombe,Heeks 2003). The need for finance was regarded as 'critical' or 'very important' by
88% of non-exporting manufacturers, compared with 30% of service-based enterprises and 26%
of manufacturing exporters. For the service-based enterprises, the three commonly- stated
critical success factors were increasing the volume of sales, increasing the skill level of the
workforce, and making improvements in the marketing of services. For manufacturing exporters,
increasing skill levels was considered the number one critical factor, and increasing sales through
entering new export markets was the second critical factor for success.
A range of priority factors, shown in Figure 1, has been deemed most critical for the business
success of SMEs (Duncombe,Heeks 2001).
Source: Duncombe and Heeks (2001)
Access to skills, markets and finance are seen as the key factors for SMME success in Botswana.
They are self, or family financed and obtain their skills training through informal apprenticeships
or the family tradition. One notable exception are taxi drivers who have to attend driving
schools. Lack of financial resources is usually viewed as a major problem facing SMMEs.
Evidence from consultations conducted in 1998 and from other earlier empirical studies
indicated lack of finance as the greatest constraint reported by SMMEs. Daniels and Fisseha
(1992) found that 53% of the micro and small business proprietors cited lack of finance as a start-
up constraint and 24% of those facing expansion problems attributed this to lack of finance.A
study by Rempel etal. on micro-enterprises, reported that 74% of business owners cited lack of
finance as the greatest constraint to business development. Specific aspects of this constraint
included lack of information on source of finance (35%), inadequate capital (20%), security
(14%) and complicated lending procedures (10%). Several reasons may account for why SMEs
shun external finance, particularly from banking and non-banking institutions. These include
(Babikayisa , Anand 1993):
• lack of collateral;
• lengthy formalized screening and appraisal of prospective applicants;
• requirement for prefeasibility studies to establish the viability of projects;
• mandatory maintenance of books and accounts;
• repayment obligations, regardless of performance of the project;
• high handling and interest rates which make external funds expensive; and
• and lack of awareness of the existence of such schemes.
Accessing finance has been a major problem. Applicants for finance from banks will
henceforth be assisted by government.The Citizen Entrepreneurial Development Agency (CEDA)
is also increasingly playing a pivotal role in providing finance for SMEs. The major complaints
from SMEs are, however, that the project proposal preparation procedures, demanded by CEDA,
are too complicated for the expected beneficiaries. These need to be simplified. Secondly, there
is poor monitoring of projects due a shortage of human resources. This underscores the need to
involve the private sector when such programmes in order to ensure their cost-effectiveness.
Thirdly, training for the entrepreneurship portfolio must be broadened to include business units
in the productive sector. Currently, applications have been skewed in favour of the service sector.
As a result there has been a suspension of applications in the trucking, general dealership and
supermarket businesses. Alternatively, the commercial sector could focus on other lucrative sub-
sectors such as eco-tourism,etho-tourism and urban agriculture in which few Batswana are
It has been noted that a perceived lack of finance was mostly a symptom of other problems such
as poor management or a lack of entrepreneurial skills. Respondents most often stated poor
existing management skills, lack of access to improved management skills, the inability to
acquire and retain skilled workers, and the lack of access to skills training as their most
significant constraints. The main constraint to SMME growth is lack of entrepreneurial and
management skills and experience, compounded by problems in accessing finance, restrictive
regulations and a shortage of business premises (http;//www.bidpa.bw/Bbrief3.PDP).
Although attempts have been made to improve skills by Integrated Field Services, the process
has traditionally been too generalized and supply-driven and sometimes delivered by ill-qualified
people in inappropriate top-down teaching styles, with insufficient awareness of cost control and/
or the need to encourage trainee commitment and follow up to apply on the job what is
learned .However, recently there appears to be a realization that there should be a shift towards
demand-led, market-oriented training programmes. The overall inculcation of an entrepreneurial
culture, in the context of the Revised National Policy on Education,should assist in the provision
of requisite skills for business acumen. Hopefully central government will increasingly play the
role of facilitator and allow more active involvement of NGOs and the private sector to
independently impart business management skills in such key areas as strategy planning,
marketing and financial management.
The biggest threat to the human resource base is HIV/AIDS. Although the government has
invested in social capital in terms of health, education and nutrition, with particular emphasis on
primary education and preventive healthcare, there are however serious challenges such as the
impact of the AIDS epidemic on the economically active population.
Fortunately, in its competitiveness strategy, the Trade Hub will strive to mitigate the
impact of HIV/AIDS on profitability, productivity and markets for goods and services
of governments, private sector associations and business development service providers
to develop strategies to implement their economic growth strategies. Also Botswana is
at the forefront of implementing programmes to reverse the impacts of this pandemic.
However, real progress will only come when there is genuine behaviour change.
6.2 Linkage Effects
Locally, most SMEs supply their goods and services directly to individual and household
consumers, rather than to manufacturers (Daniels and Fisseha 1993). In this way, they have a
strong output non-production link but weak production linkage. Conversely, SMEs source their
inputs directly from intermediaries and government agencies. Procurement policies discriminate
against smaller firms e.g. only large firms can supply large orders and can afford the payment of
security bonds.This indicates that SMEs have a strong backward production linkage but a weak
non-production link with the rest of the economy (Anand , Babikanyisa 1993).
Daniels and Fisseha found that forward linkage effects had a significant effect on the growth rate
of respective SMEs. Those selling to the final consumer experienced an average annual growth
rate of 8% whereas those selling to other firms showed average growth rates of 25%. This
differential tends to underscore the important role of inter industrial linkages for SMEs growth.
SMEs are unable to compete with larger companies either in supplying goods to the public or in
meeting Government tenders. Marketing constraints could be due to; lack of transportation,
inadequate facilities, lack of advertisement, complicated marketing procedures, locational
difficulties and stiff competition (Anand 1993).
Regionally, SEPROT and SEPAC are increasingly facilitating SME linkages. BEDIA is at the
forefront of attempting to establish and strengthen global linkages; based on an openness to trade,
investment, technology and ideas, low trade barriers, and by encouraging exports through a
realistic exchange rate. The role of the Southern Africa Global Competitiveness Hub has also
been mentioned.Formal Trade Agreements such as AGOA and the Cotonou protocol are
strengthening linkages with markets in the developed countries.
There is still a broad scope for the private commercial entities to act as “brokers” to buy inputs or
sell outputs from The SME sector. According to Wallace, such brokers have become major
market players through activities, which are sometimes designed to offer “fair “ conditions,
including prices, to producers in Africa who export to industrialized nations (Ibid.). Such
business linkage interventions through subcontracting, franchising, and business clusters could
help overcome the commercial isolation of African SMEs.
Biggs and his colleagues at the World Bank studied how European and North American firms in
garments and handicraft home products developed commercial linkages with African firms
(1996). Of special promise are linkages between North American firms in the handicrafts and
“Afro-centric” garment sectors (Biggs etal. 1994).According to Wallace,firms such as
J.C.Penney,Montgomery Ward,K.Mart.and Dayton Hudson,have been especially active in
“Afrocentric” garments imported from Africa since 1992(Ibid).Companies such as Pier 1 and
Associated Merchandise Corporation have been active in importing African Handicrafts for
several decades. Their performance provides strong evidence that African firms can compete in
the industries that developing countries traditionally use to break into global trade.
Four areas however still need to be addressed if they are to reach their full potential. First,
attention needs to be paid to pioneering buyers, especially through commercial attaché sections
of embassies. Most agencies ignore these key linkages where maximum leverage could be
attained in improving export performance. Second, the biggest barrier is the difficulty and high
costs that buyers face in identifying reliable suppliers of garments and handicrafts. The focus
should be on reducing these search costs for importers. Third, stable economic and political
environments are prime concerns for buyers. Finally, agents must take a long term view of
business linkages because once an African firm enters the export market, it can quickly be
swamped by international demand. Botswana needs to pay particular attention to the last issue,
by improving the supply side of the process, in its attempt to strengthen linkages with
competitive external markets.
6.3 Enabling Environment
The political and economic climate in Botswana is ideal for SME development because the
country has a democratic and stable economy, prudent financial discipline and management and
low inflation. There exists a regulatory framework which guarantees legal and property rights
which facilitate the enforcement of contracts .Prices and markets provide clear signals to
producers and consumers.
There have, however, been inherent biases against SMEs development due to the absence of clear
government policies which govern this sector. Like most states in the Southern African sub-
region, the country has, until very recently, lacked clear Government policies aimed at creating
an enabling environment in terms of clearly defined SMME development objectives and the
required institutional mechanisms to guide and implement such policies. What has been
characteristic is a proliferation, complexity and rigidity of Government laws and regulations
which often impeded the development of SMEs. Such an excessively regulated environment has
either imposed unnecessary costs on them or forced them to operate illegally. In this context,
abolition of licence requirements for hawkers and vendors, the discontinuation of sales tax for
businesses with a turnover of less than P75 000, and the introducing a simplified form of
incorporation for small companies are welcome developments. Start-up business often find the
process of registration time-consuming and burdensome, and small businesses, in particular, have
limited administrative resources to deal with these procedures. Many countries in Asia and Latin
America have brought about reforms to make the registration procedures of these enterprises
much simpler. Botswana could draw useful lessons from their experiences
Judicious deregulation and legal relaxation ,subject to health and environmental considerations ,
could go a long way towards creating a suitable climate for SMEs to flourish. In the sub-region,
it is becoming clear that of zoning regulations that prohibit SMEs from operating in residential
areas are unnecessary and allowing vendors and hawkers to operate in public areas permits them
to have ready access to their customers. Slow space allocation procedures have often forced
proprietors to squat. Therefore developments to carter for their land requirements such as those at
the Broadhurst Mall are steps in the right direction.
The economic environment for SMMEs tends to be less competitive because of Botswana’s
Reservation Policy. The Government attempts to encourage citizen involvement in
entrepreneurship through a such a policy in areas such as the manufacture of school uniforms,
protective clothing, school furniture, burglar bars, cement bricks and sorghum milling. Although
politically expedient, the practice will preclude individuals from elsewhere who could otherwise
enter the sector and generate the much needed jobs. The practice distorts the market processes by
reducing competition and leading to higher prices and less choice among consumers. It also has a
tendency of restricting the market for potential buyers into the reserved activities thus lowering
value of such businesses. Finally, it encourages “fronting”, a corrupt practice by which the
foreigners who are excluded from participating in reserved activities, but have the requisite
capital, bribe the locals to register and operate the units on their behalf.
Ideally joint ventures would create a situation in which there is joint transfer of skill and capital
to up-coming local entrepreneurs.
Government has indicated its willingness to provide a facilitating environment rather than being
paternalistic. Such a removal of the invisible overprotective hand, through privatization, will go a
long way towards promoting an entrepreneurial culture and the establishment of cost-effective
and efficient business units.
The paper has examined the significance of SMEs for employment creation on the African sub-
continent, using Botswana as a case study. Although the sector provides an attractive option
towards creating jobs and improving livelihoods among the economically vulnerable, the study
has shown that there are threats and weaknesses to be overcome before sustainability can be
There are several compelling reasons why self-employment in the form of SMEs is of crucial
importance to national development. Diversion of funds from productive sectors by central
government to the social sectors is inevitable, due to the HIV/AIDS threat. First, in the case of
Botswana, expenditure on health and social welfare is set to increase by 7- 18%. Government
revenue will, as a result, shrink by 10%. The implications are that free government handouts will
no longer be affordable because of more urgent health demands.National development strategies
which promote income redistribution effects need government, donor, private sector and non-
Secondly, the declining competitiveness of Botswana in the rapidly globalizing world has been
undermining investor confidence. Indications are that in the mid- 1990s, Botswana was ranked
the 23rd most attractive economy for investment, by 2002 it has slipped precipitously to 123rd
position. Therefore, most of the country’s economic growth will have to be endogenously
generated. Thirdly, apart from the fact that minerals, which earn most of the foreign currency, are
a finite resource; the sector remains susceptible to price fluctuations in the international market.
Moreover, mining is capital intensive and thus has relatively weak linkages with the rest of the
economy. Mining cannot therefore generate adequate employment to carter for the growing
labour force. Formal sector employment is growing at only about 1.5% annually whilst the
labour force is expanding at over twice that rate. The official unemployment rate has remained
almost stagnant since the mid-1990s, fluctuating between 20% and 24%.
Fifth, for economic and political reasons, South Africa has been trying to restrict the Migratory
Labour System (MLS) from neighboring countries in order to stabilize its local mining workforce
by offering better working conditions in terms of wages, housing, career advancement and longer
contracts. Consequently, the number of seasoned mine labour recruits from Botswana dropped
from 40 390 in 1976 to 19 648 in 1986 and the proportion of novices among all recruits declined
from 25 percent in 1976 to only 1.6% in 1985 (Taylor 1990). South Africa is attempting to
address its own unemployment situation. 4.2 million people out of a possible economically
active population of 14.32 million are unemployed (Republic of South Africa,1996:48). This
means that South Africa’s unemployment figure stands at 32%.The growth of its labour force is
about 2.8% per annum. An average real economic growth rate of approximately 6% per annum
will be required to keep pace with labour force growth. A growth rate of only 3.2% was expected
for 2000 . This was well below the required sustainable rate.Under such conditions, Botswana
labour should expect increasing exclusion from the South African market.
Finally, self employment creates a culture of self-reliance, self-determination and economic
independence among the population and curbs the dependency syndrome on the state. The
enterprises are predominantly owned by citizens and therefore ensure economic empowerment of
nationals. It is the most certain way ensuring income redistribution and social justice. The sector
is the main source from which future entrepreneurial and managerial skills are likely to emerge.
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