Contribution Of Small Medium Enterprises In Africa Economics Essay

Africa is worlds second-largest continent with abundant natural resources. Despite of this, many states remain hapless and developing. With the impact of globalisation these developing and developing states are emerging out of economic stagnations and run intoing the challenge of going possible economic human dynamos. This positive thrust has enabled possible autochthonal people to open up micro, little, medium and big endeavors.

These endeavors have vastly contributed to the economic growing of both developed every bit good as developing states. Most of the SMEs operate in states that have low to middle degree of income, therefore the development of SMEs has bit by bit increased the rate of employment and income in many states.

This research is a theoretical model that introduces the construct of entrepreneurship, little and average endeavors ( SMEs ) and their parts towards the state. Along with that, it discusses on some of the developing states in Sub-Saharan Africa, such as Nigeria, Zimbabwe and Tanzania.

1. Introduction

For 100s of old ages entrepreneurship has been in being around the universe. Although this construct has been in being in some of the states, with the unstable economic state of affairss in many parts of the universe, entrepreneurship has become an alternate manner of gaining a life. In the importance position, SMEs play an indispensable function in the community. Small concerns have flourished in both developed and developing states which have contributed in hiking the economic system of many states.


Entrepreneurship is a procedure leting persons to seek chances, be advanced, enable them to pull off resources and make value. There are assorted grounds which encourage persons to travel into entrepreneurship, some of them being ; enthusiasm towards ownership and economic and demographic factors.

An enterpriser can be defined as, “ A individual who assembles and so integrates all the resources needed to transform the innovation into a feasible concern ” . ( Barringer and Ireland, 2008, p. 5 ) .

Harmonizing to the Organization for Economic Co-operation and Development, “ An enterpriser is person who creates and exchanges value through designation and employment of alterations in resources, chances and/ or invention ” . ( OECD, 2007 )

Joseph Schumpeter, one of the economic expert, wrote in his book, “ The Theory of Economic Development ” , whereby he defines, ‘An enterpriser as a individual who applies invention every bit good as implements change in the economic system ‘ . Harmonizing to Schumpeter, an enterpriser plays a critical function in hiking the economic system through presenting new merchandises, opening new market. ( Sobel R. , 2008 )

For an effectual and successful concern, it is of import that enterprisers have the primary features viz. ; Passion for the concern, Product/ Customer focal point, Tenacity despite of failure and Executing intelligence. Other features include are ; creativeness, willingness to take hazards, dedicated, enthusiastic, committed and motivated.

In today ‘s universe many states are promoting entrepreneurship since it helps in bring forthing economic system through investing, occupation chances, assortment in merchandises and services.


3.1 Introduction to little and average endeavor ( SME )

An endeavor is a concern section that can either be micro, little and medium, or big, depending on the figure of workers employed, their gross revenues and assets. Small and medium endeavors are little concerns frequently founded by enterprisers. These can be found in about all the states. ( Appendix 1 ) . The SME sector can be categorized into two ; micro endeavors every bit good as little and average endeavors, therefore some states refer it as SME whereas others refer it as MSME that is ; micro, little and average endeavor. SMEs are besides categorized in footings of formal – those which are registered or informal – those which are non registered.

There is no cosmopolitan definition for little and average endeavor given that the standards used may differ between states and international establishments. The standards used when specifying SMEs are figure of employees, entire assets and entire one-year gross revenues.

For illustration, in footings of employment, SMEs are classified harmonizing to their cut off. One state might specify SME as holding their cut off at 250 employees therefore known as SME-250 whereas another state would specify SME as holding employees runing from 100-500. However many states define an SME to hold a cut-off scope between 0-250.

Alternate Definitions of little and average endeavors

A figure of economic experts and bookmans have come up with assorted ways to specify SMEs. Harmonizing to the research done by Tom Gibson and H. J. Van der Vaartindeed they have suggested SME to be, “ A formal endeavor with one-year turnover, in US dollars, between 10 and 1000 times the mean per capita gross national income, at buying power para, of the state in which it operates. ” [ Khrystyna Kushni, 2010 ]

Beneath is a table screening other definitions by many-sided establishments.

International Institution

Number of Employees

Gross saless ( $ )

Assetss ( $ )




The European Commission ( EC )




Less than

67 million

Less than

56 million

United Nations Industrial Development Organization ( UNIDO )

Less than 5

5 -19

20 – 99

Multilateral Investment Guarantee Agency ( MIGA ) and International Finance Corporation ( IFC )

Less than


Less than


Less than

3 million for little and Less than 15 million for medium

Less than 3 million for little and Less than 15 million for medium


N.B the informations used in the definition by UNIDO is with respect to developing states.

3.2 Features of SME

Small and medium endeavors have their ain features as any other entity. Some of the features include:

Owner being the director holding basic concern accomplishments, allows control over

its concern and devising determinations.

Normally about 250 employees or less work in an endeavor depending on the

size and location of the SME.

Due to the less figure of employees, there is close relationship with the


Given that the size of SMEs being little, they have simple organisational


The vision is usually developed by the laminitis.

Their little size allows flexibleness and can easy accommodate alterations in the

macro environment.

The Bolton Committee has defined little concern in footings of both “ economic ” every bit good as “ statistical ” . For economic definition, little concerns are those that have the undermentioned critical features:

Owners manage the concern in their ain personal manner.

Have a little portion of their market.

The proprietor is independent therefore holding control over the concern decision-


In add-on, the Bolton Report has besides provided specifications for little concerns depending on the industry sector.

The fabrication sector requires 200 or less employees whereas building

sector needs 25 or less employees.

The route conveyance is based on 5 or less vehicles.

*For retailing and assorted sectors turnover is required to be ? 500 000 p.a.

N.B for the * sectors, the figures refer to the 1971 records.

3.3 Forms of Small and Medium Enterprises

There are many signifiers of SME ownership depending on the aim of the organisation. These are ; Sole bargainer, Partnership, Limited Company, Co-operative, and Franchise.

3.4 Role of SMEs

It is believed that little and medium endeavors play an indispensable function in helping both developed every bit good as developing states. As a consequence it has made a huge difference in footings of economic system growing to the states and to the people at big.

The chief map of SMEs is to excite the economic growing of the state. Together with that, it creates employment chances, development in rural countries, better use of resources every bit good as economic growing and industrialisation.

Employment Opportunities – With unemployment on an addition ; most of the young persons, school alumnuss and retired people are now choosing to entrepreneurship. Thus unemployment is well diminishing through entrepreneurship in many states. Along with that, authorities and other many-sided establishments are ready to educate people sing entrepreneurial development. In many states, adult females enterprisers are encouraged and supported.

Development in Rural countries – Many concerns have shifted to rural countries due to available resources in footings of land, inexpensive labour and natural stuffs. This has enabled development of the location in which these concerns operate. Through this, SMEs provide a way for bring forthing income in footings of, part in economic activities such as agribusiness, services and trading along with facilitating employment chances therefore cut downing rural-urban migration.

Use of local resources – With low capital required in set uping SMEs it is easy to use local resources such as untapped homo every bit good as physical and change over it into a productive endeavor.

Economic Growth and Industrialization – SMEs are critical for a state ‘s economic growing and industrialisation. This is because ; bulk of the states depend on the enterprisers part towards its development. Through the growing of these little concerns, the state is protected from cost-benefit multinationals.

Harmonizing to Ariyo ( 2000 ) , SMEs assist in lending 30 % of the planetary gross domestic merchandise ( GDP ) through bring forthing employment ; act as an income generator by supplying employment chances ensuing to rural development. Along with that, SMEs facilitate in the proper use of local resources every bit good as industrialisation and economic growing. [ Ozigbo and Ezeaku, 2009 ]

3.5 Importance of SMEs

SMEs have been accepted as endeavors which generate growing ; cut down poorness by leting invention and use of resources. The rise of many SMEs is bit by bit cut downing the monopoly power of big houses.

Harmonizing to Organization for Economic Co-operation and Development ( OECD ) , SMEs contribute to non merely economic growing but besides employment, societal coherence every bit good as local development. The statistics show that, little and average endeavors generate more than 95 % of the concerns, 60 % – 70 % employment, and supply big figure occupations in OECD states. [ OECD ]

3.6 Contribution of SMEs

SMEs are now recognized universe broad as being significant subscribers towards the state every bit good as community ‘s growing, as follows:

Contribute to the economic system through end product of goods and services.

They contribute to the community in assorted ways ; by, easing occupation

chances and proper use of local resources.

Provide enlargement chance for skilled and semi-skilled forces.

They bring about diverseness through heightening entrepreneurial and managerial


Bridges the spread in income disparity.

Introduce appropriate technological promotion.

Bringing approximately new merchandises and services along with set uping new concerns.

SMEs have non merely contributed in the economic growing but besides in socially. Some of ways include:

Womans are encouraged to run their ain concern.

Young grownups are fall ining together to organize confederations in concern.

New advanced merchandises are mushrooming to ease the life of people.

Peoples are able to entree goods and services near to their legal residence.

Overall the life style of people is transforming to be better finally raising their

criterion of living..

In the article, ‘Patterns and Tendencies in Entrepreneurship / SME Policy and Practice in Ten Economies ‘ , Audretsch and Thurik, 2001a, pg. 32, it states that, “ Entrepreneurship generates growing because it serves as a vehicle for invention and alteration, hence as a conduit for cognition spillovers. Therefore, in a government of increased globalisation, where the comparative advantage of OECD states in switching towards knowledge-based activity, non merely does entrepreneurship play a more of import function but the impact of that entrepreneurship is to bring forth growing ” . [ Swedish Foundation for Small Business Research, 2001 ]

SME Growth in Countries

The income of a state is measured by utilizing assorted variables such as gross domestic merchandise ( GDP ) , gross national income ( GNI ) , employment rate. Harmonizing to the surveies, it is shown that, SMEs in high income states contribute more than 55 % of GDP and 65 % of employment. In the low income states, SMEs and micro endeavors contribute more than 60 % of GDP and 70 % of employment whereas in in-between income states they contribute 70 % of GDP and 95 % of employment. Hence this shows that, there has been a important growing of little and average endeavors recently in the low to middle income states. The graph below explains growing of MSME in 60 economic systems against state income group from twelvemonth 2000 to 2009.

Figure 1

[ Beginning: World Bank/ IFC, 2010 ]


4.1 Introduction to Developing States

In order to understand the universe in a better manner, states are categorized as First World, Second World and Third World in footings of high and low economic system degree. With respect to state economic position, International Monetary Fund ( IMF ) classifies states into two groups ; 23 as Industrialized Countries and 138 as Developing States

Third universe states are by and large those that have low degree of economic systems in footings of low Human Development indices, Gross National Product ( GNP ) and are normally known as developing states. Below is a figure demoing 3rd universe economic states represented by orange and ruddy colourss.

Figure 2

[ Beginning: Wikipedia, 2009 ]

Harmonizing to World Bank, the development states are divided in two groups ; low income and high income states. Below is a figure demoing the degree of income in the around the universe.

Figure 3

A A A A A High income A A A A A Upper-middle income A A A A A Lower-middle income A A A A A Low income

[ Beginning: Wikipedia, 2009 ]

4.2. SMEs in Developing States

Small and medium endeavors, peculiarly the informal micro-enterprises in developing states are non growing oriented. These endeavors are usually formed as a consequence of deficiency of occupations in the formal section or are a merchandise of single bargainers or household concerns. These may spread out to the bounds of available work force of the household or market-limits in the informal gross revenues or sometimes stop up in joint ventures.

4.3 Features of SMEs in developing states

Fisher, E and Reuber, R 2000, suggested that, SMEs in developing states are characterized under the undermentioned four chief headers, viz. ; Labor Force Sectors of Activity, Sex of Owner, and Efficiency.

Labor Force – Most of the SMEs are one-man owner concern. Over half of the SME employees particularly in the development states belong to this group whereby, their households work actively in the endeavors without being paid which makes another one-fourth. The staying section is divided into hired employees and trainees.

Sectors of Activity – It is believed that most SMEs engage in retailing, changing from one state to another and among rural-urban parts. Other activity sectors include trading or fabrication. However, retailing activity is rife in urban countries whereas fabrication could be either in rural or urban countries depending on handiness of resources.

Gender of Owner – A good figure of the SMEs are owned by adult females enterprisers which are home-based compared to those owned by males. However, female enterprisers have a impression that they are non adept in taking advantages of the strategy associated with the concerns as the administrative costs outweigh the net incomes.

Efficiency – Measuring the efficiency of the endeavors may differ within and across industries. Different endeavors have different competencies depending on the size, managerial accomplishments and engineering. Harmonizing to the surveies, it is found that micro endeavors in developing states are least efficient as compared to medium-scale houses. Conversely, SMEs are known to be more advanced than larger houses.

4.4 Importance of SME in Developing States

Small and medium endeavors have become an built-in portion of the development states, since it is through these activities that most of the economic systems depend. SMEs are hence considered to be a critical portion of states ‘ growing

One of the premier aims of any state is to eliminate or cut down its poorness degree. The SMEs are playing a major function in accomplishing this aim. These concerns are considered as an engine in making chances and income by supplying employment and invention.

Although many SMEs are run by males, many female enterprisers have emerged therefore bring forthing more employment, income and decrease in poorness.

4.5 SMEs and Small Businesses in Africa

Africa is known to hold the highest figure of low income states ensuing to poorness and unemployment. Despite of that, SMEs in Africa are comprised of over 90 % of the concerns therefore lending more than 50 % of the employment every bit good as its GDP.

Most of the SMEs first start with little concerns ( micro ) that are operated by household concerns and at that place after bit by bit turn to go little and average endeavors. However some do non pull off to turn therefore remain as little stores, booths, sellers.


There are many states in Africa where SMEs have contributed in the development of economic system. This essay is concentrating on three developing states in Africa viz. , Nigeria, Zimbabwe and Tanzania.


General overview

Nigeria is a state in West Africa with Abuja as its capital metropolis. It has a population of 158.2 million ( UN, 2010 )

Trade –

The state ‘s major industries include agribusiness, oil and gas whereas it ‘s exports consists of Petroleum, Petroleum merchandises, chocolate and gum elastic. However, most of the state ‘s income depends on the oil exports hence it is known as the largest oil bring forthing along with exporting state in Africa.

Economic Performance

Over the past five to eight old ages, Nigeria ‘s economic system has bit by bit increased, and it is anticipated that the state will develop in a few old ages to come. For the twelvemonth 2009, Nigeria ‘s GDP in footings of current US $ was 169 one million millions, its GDP per capital ( current US $ ) was 1,092 and its GNI per capital was US $ 1,140. ( The World Bank, 2009 ) . Harmonizing to the Nigerian Government, the one-year growing of Nigeria in 2009 was 6.9 % . ( Foreign and Common Wealth office, 2010 )

Small and Medium Enterprises in Nigeria

Specifying SME in Nigeria

In July 2001, during the 13th meeting of The National Council on Industry, the Small and

Medium Enterprises was defined harmonizing to the tabular array below.

Industry Size

Labor Size

Entire Cost

Micro/ Cottage Industry

Less than 10 workers

Less than N 1.50 million

Small Scale Industry

11 -100 workers

Less than 50 million

Medium Scale Industry

101 – 300 workers

Less than 200 million

Large Scale Industry

More than 300 workers

More than 200 million


N.B. the entire costs includes working capital but excludes cost of Land.

Features of SME in Nigeria

Based on the research by African Economic Research Consortium ( 1992 ) , features of SMEs can be categorized harmonizing to educational background, old work experience, type of concern, ownership construction and capital base as below:

Educational background -Majority of the people ( 84 % ) have primary and secondary degree instruction whereas really few ( 16 % ) have third instruction. The low degree of instruction impacts the end product of SMEs.

Previous work experience – Merely 5 % of the people have 15 old ages of experience whilst many people did non hold experience in concerns, due to miss of proper managerial accomplishments and low instruction.

Type of concern – Many service-oriented concerns failed since they depend chiefly on imported constituents.

Ownership construction – Most of the concerns are service – oriented therefore, taking to exclusive owners and partnerships as the construction of ownership.

Capital base – Looking for short or long term capital is hard, as an option, the owner depends on personal nest eggs or loans from fiscal establishments, relations and friends. Therefore these concerns end up holding a little capital.

Mortality Rate – The thought of partnership in SMEs is non feasible in Nigeria due to the misgiving between spouses therefore the rate of its mortality is high. This is means that many want to work in an single capacity. The other factors taking to high mortality is regulative environment, instability in policies and hapless substructure.

Importance of SME in Nigeria

Small and medium endeavors are really indispensable in Nigeria since they are the anchor to the economic system. They provide a way to growing of local enterprisers ; make occupations for unemployed, act as a channel for mobilisation of nest eggs in existent sector and hike in development of the state.

SME Contribution to Nigerian Economy

SMEs contribute vastly to the Nigerian economic system through the followers:

They are referred as an engine for economic growing through advancing

development of private sector every bit good as partnership.

They help in the growing of its economic system

They provide an chance to better the criterion of life, along with

formation of local capital every bit good as high productiveness and capableness.

They bring about variegation in footings of both concern and type of

enterpriser. For concern, new inventions are made ensuing to assortment in the concern whereas in footings of enterpriser, it includes different sort of people such as young person, adult females, and retired workers.

In most of the rural countries, SMEs offer high employment degree.

Hence, little and average endeavors in Nigeria play a polar function in elating the economic system.


General overview

The Republic of Zimbabwe has its capital metropolis Harare. It has a population of 12.6 million ( UN, 2010 ) .


The state ‘s major industries are agribusiness and excavation, with agribusiness being the most of import sector. Its exports are chiefly agricultural merchandises – baccy, cotton ; gold, and minerals.

Economic public presentation

Zimbabwe ‘s economic system has been worsening over the old ages, yet it is expected that in the old ages to come, the economic system might come on. For the twelvemonth 2009, its GDP in footings of current US $ was 3.4 one million millions, GDP per capital ( current US $ ) was 274 and GNI was US $ 995 or less than that and is hence referred to as low income, whereas the one-year GDP growing has been the same in 2009. ( The World Bank, 2009 ) .

Small and Medium Enterprises in Zimbabwe

Specifying SME in Zimbabwe

Similar to other states, SMEs are measured utilizing figure of employees, turnover, assets and investings as standards. For the instance of employment SMEs are defined in two classs viz. ; lower bound and upper bound. Small endeavors comprise of 5 -10 employees in lower bound and 50 -100 employees in upper bound whilst medium enterprises comprise of 100 employees in lower and 250 employees in upper bounds.

Features of SME in Zimbabwe

Features can be categorized harmonizing figure of employees, capital base, enterprises enrollment and assets. Below is the account of the SME features in Zimbabwe.

Number of Employees -This refers to the figure of forces working in an organisation. For little endeavors, the figure of employees is between 1 and 50 depending on the industry sector, whereas medium endeavors have approximately 500 employees.

Capital base – Every concern will necessitate different capital sum to get down an entrepreneurship yet each one will necessitate sufficient capital base. This capital should be made available to the enterprisers to easy get down their endeavor.

Enterprise Registration – In most instances, SMEs are referred as informal and are usually non registered nor do they pay revenue enhancement yet harmonizing to the SME definition of Zimbabwe, SMEs should be registered and referred as formal.

Assetss – Harmonizing to the SME definition, plus base varies from state to state, nevertheless handiness of capital should be at that place besides other resources.

Importance of SME in Zimbabwe

SMEs in Zimbabwe are considered to be important in order to accomplish the development aims. The aims comprise of poorness decrease, employment growing in rural countries, to better adult females ‘s state of affairs and increase local investing ownership in the economic system.

SME Contribution to Zimbabwean Economy

SMEs contribute significantly in making employment chances every bit good as to the economic system. Due to fewer employment chances, SMEs have been the alternate manner of puting and bring forthing employment, therefore little concerns in Zimbabwe are a agencies of lively goon. To the economic system, SMEs development includes ; fight by exciting prospective for entrepreneurship and facilitate creative activity of state ‘s wealth.

5.3 Tanzania

General overview

Tanzania is a state with Dodoma as its official capital metropolis and Dar-es-Salaam as its commercial capital metropolis. It has a population of 45 million ( UN, 2010 ) .


The state ‘s major industries include agribusiness, trade, fabrication, fiscal and concern services, touristry and excavation. However, most of the state ‘s income depends on the agribusiness merchandises such as sisal, cloves, Anacardium occidentale nuts, java, cotton and baccy ; along with mineral merchandises such as gold, diamonds and tanzanite. Tanzania is known as the Forth largest gold bring forthing along with exporting state in Africa.

Economic public presentation

Over the five to eight old ages, Tanzania ‘s economic system has bit by bit increased, therefore it is anticipated that the state will go on to develop in the old ages to come. For the twelvemonth 2009, Tanzania ‘s GDP in footings of current US $ was 21.6 one million millions, its GDP per capital ( current US $ ) was 509 and its GNI per capital was US $ 500 together with an one-year of 5.5 % . ( The World Bank, 2009 ) .

Small and Medium Enterprises in Tanzania

Specifying SME in Tanzania

Tanzania Small and Medium Enterprise Development Policy, 2002, define an SME harmonizing to the undermentioned classs: .



Capital Investing in Machinery ( TShs )

Micro endeavors

1 – 4 workers

Up to 5 million

Small endeavors

5 – 49 workers

5 – 200 million

Medium endeavors

59 – 99 workers

200 – 800 million

Large endeavors

More than 100 workers

More than 800 million


[ Beginning: Tanzania Chamber of Commerce, Presentation ]

Features of SME in Tanzania

SMEs in Tanzania have similar features as that of other states. One of them is that, SMEs have simple organisational constructions, little in size and they depend on few people. Further more, SMEs have closer relationships with the clients and concerns spouses.

SME Contribution to Tanzanian Economy

Like many other states, SMEs in Tanzania play an indispensable function in the economic system. One of the parts of SME is to bring forth employment and income ; hence aid in cut downing poorness. Another factor is that, SMEs create invention and fight in the economic system, therefore advancing dynamism. Additionally, SMEs are responsible for entrepreneurial development and contribute at least 50 % towards the industrial merchandises ‘ GDP.


The part of Small and Medium Enterprises ( SME ) depends on the enabling environment provided to them which includes ; political, economic, societal, technological, environmental, and legal ; to work every bit good as on state to avail these SMEs to the upper limit and to back up and supply the necessary infinite to work The following essay will speak about SMEs in selected developing states in the Sub – Saharan Africa, their part towards these economic systems and the challenges they face.