The slow evolution of SMEs

Chris Chenga Open Economy  —
Global definitions of small to medium enterprises differ by region. Within the European Union, the category of SMEs consists of enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding 50 million euros, and/or an annual balance sheet total not exceeding 43 million euro.

According to the United Kingdom’s department of business, innovation and skills, an SME meets two of three criteria: It has a turnover of less than £25 million, it has fewer than 250 employees, or it has gross assets of less than 12,5 million pounds.

Essentially, how a territory categorises SMEs influences the interpretation of the regulatory structures allotted to SMEs. These may be tax compliance, economic zoning, municipality rates or formalisation requirements.

In Zimbabwe, it seems we have struggled to definitively categorise our SME sector, particularly at the lower end; at the micro-enterprise. We need clarity on the definitive composition of an SME for the purposes of creating complementary regulatory structures around them.

Largely culpable for this ambiguous nomenclature is a political posturing that struggles to accept that much of the economic activity that many individual business agents, especially vendors, are conducting is below an economic standard worth the recognition of a dignified enterprise.

Regrettably, we often over-extend our uniqueness as a nation in how we define the economy and the economic participants in it. This misguidance comes at the regulatory and protective detriment of the aforementioned business agents familiarised as micro-enterprises.

For instance, the suggestion to tax street vendors or charge them occupancy rates in designated zones resembles a misinterpretation of the lowest tier micro-enterprise and the regulatory structure that complements micro-enterprises.

Such regulatory obligations are, in fact, more of a burden on the economy and Treasury than they can sustainably stimulate national revenues.

A more astute structural category of street vendors would acknowledge their economic participation as being at a similar threshold to minimum wage employees, albeit vendors are actually excluded from formalised value chains.

The political contradiction of empowering street vendors and the resulting inclination to expense them for providing that empowerment, whether it is of availing designated space or operational facilitation, is that vending is actually a colonial residual effect of the dualised economies that were created in Africa through intentionally marginalising native demographics.

Consider that there is not a single developed country where a street vendor is recognised as a dignified economic agent, let alone one expected to contribute to the national economy.

Perhaps we can understand then; vending is an economic activity that cannot be empowered, or one that our governments should not feel entitled to impose charges on.

Instead, vending is beneath the dignity of micro-enterprises and all participants carrying out such activity must be assimilated into formalised value chains.

In more precise political rhetoric, it is not until the day that we do not have a single vendor on our streets and highways will socio-economic transformation be realised.

Indeed, our misinterpretation of business agents across the SME category is not only evident at the bottom tier of micro-enterprises.

Over the years, we have experienced slow traction in developing middle enterprises towards entering the space of large corporates that dominate locally, or multinationals that contest beyond our borders.

Nearly 70 percent of enterprises listed on the Zimbabwe Stock Exchange were founded as far back as 1965. Not to be interpreted that the time-tested enterprises should face morbid fate, but this composition does not resemble an evolving economy with adequate entry of new players and development of diverse sectors.

Instead, it hints at stagnancy in terms of competition and grooming of modernly diverse enterprises. In contrast, consider that globally, the biggest firms in the world today operate in sectors that were not prominent, or entirely did not exist just two decades ago, particularly through an emphasis on technology.

Accordingly, it should be suggested that perhaps the most significant barrier faced by many business agents trying to enter the space of large corporates is access to technology.

In response, Government should work to create regulatory structures that bring proximity to, and reward for implementation of technology in middle enterprise operations.

For instance, municipal and economic zones that surround middle enterprises with technology networks and infrastructure as well as tax regimes that offer incentives for the acquisition and operation of technology.

This is the simple blueprint followed in Germany which has the most dominant SMEs in the world, which are actually the greatest earners of foreign currency and capital account inflows.

In Zimbabwe, middle-tier enterprises are not provided such progressive regulatory structures. In fact, the acquisition and operation of technology is a regulatory burden on middle-tier enterprises.

Consider that in 2014, the Ministry of Finance offered a tax incentive on acquisition of capital equipment valued at over US$1 million. Middle-tier enterprises do not benefit from such a categorised threshold and are left with high duty expenses for technology that they use in the functions of their business.

Moreover, there is little enforcement of intellectual property across regulatory structures. Quite often, middle-tier enterprises either lose their competitive advantage in the intellectual capital, or simply give it up to larger corporates with the technology and infrastructure to make intellectual property operational.

There has been a slow evolution of our SMEs in Zimbabwe. The stagnancy, in some cases regression, is due to our incapacity to categorise enterprises with the purpose of matching them with the necessary regulatory structures that complement their intended growth.

It should be worrying that our economy keeps growing informal economic activity. We must formalise. A nomenclature of enterprises operating in an economy enables government to create the right structures that spur growth all the way from micro-enterprises, middle-tier enterprises, to large corporates and multi-nationals.

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