Factors affecting the size of SMMEs: Evidence from Gauteng province, South Africa

Abstract

Background: It is estimated that small, medium and micro-enterprises (SMMEs) employ nearly half of South Africa’s labour force and account for approximately a third of the country’s Gross Domestic Product (GDP). The literature reveals that larger SMMEs tend to make a significantly larger contribution to employment creation and output growth than smaller SMMEs. It is, therefore, imperative to understand factors that affect SMME size. This calls for a study of the determinants of SMME size.
Aim: This study investigates the factors that explain different matrices of the size of SMMEs in South Africa.
Setting: The study uses data from a sample of 100 SMMEs in the Gauteng province, South Africa, that applied for funding or were funded by Development Finance Institutions.
Methods: The study employs an ordered logit model for analysis. Turnover, number of employees and loan size are used as proxies for SMME size.
Results: The study finds that equity capital positively predicts turnover, but it has the opposite effect on the workforce base; operational experience enhances SMME size in terms of both workforce base and turnover; and equity capital, effective use of funds and the accessibility of funding institutions positively predict loan size as a proxy for SMME size.
Conclusion: We also conclude that operational experience is necessary to accelerate SMME growth in terms of turnover and employment capacity.
Contribution: We argue that SMMEs’ access to credit is contingent on their savings, competence or experience in using borrowed funds and access to a variety of funding institutions.