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Thought Leadership - Meaningful Enterprise Development
Meaningful Enterprise Development: What Does It Mean - And Where Are We In South Africa
By Livhuhani Mukhithi, Director: Broad-Based Black Economic Empowerment: Policy, Institutional Management and Advocacy - dtic
The growth and development of economies throughout the 20th and the 21st centuries have been built behind deliberate planning, and undertaking by State actors, private players and other social partners. These initiatives have been anchored around principles of broadening economic participation and inclusion across sectors in the economic mainstream. Support, development and participation of enterprises in the economic mainstream should be premised on the interconnectivity between MSMEs, existing multi-national corporations (MNCs), and original equipment manufacturers (OEMs) within their global value-chains (GVCs).
In the South African context, a recently commissioned study on Enterprise and Supplier Development (ESD) by the B-BBEE Commission (2022: 18) hammers on the imperative that Enterprise and Supplier Development forms part of the B-BBEE legislation. The ESD programme’s goal, according to the B-BBEE Commission, is to “create a conducive environment for the building of sustainable relationships between corporate South Africa and black entrepreneurs to facilitate access and transformation of value chains.”
B-BBEE is a government programme that aims to correct past wrongs and spread the nation’s wealth among all races and genders, as well as promote growth, development, and entrepreneurial development. B-BBEE is the policy implementation through the B-BBEE Act (as Amended) and the Codes of Good Practice, which provide the foundation for ESD policies for big corporations.
As ESD development and support has proven to nurture and consolidate technological development and uptake amongst MSMEs globally, Lee (2017: 03) contends that private companies (locally-owned companies) need to be able to move up the value-chain to higher-value added goods, based on continued upgrading and improvement, and technological innovation. This stands to effect structural transformation and inclusive participation in the mainstream economy.
In praxis, a study on Enterprise and Supplier Development (ESD) by the B-BBEE Commission (2022: 17) qualifies the posture that holds that the ESD is not just a South African notion; it’s a global movement that has proved to boost economies, diversify supply chains, and create jobs. The bulk of businesses and a sizeable share of employment in both developed and emerging economies are SMMEs.
These enterprises, however, face many obstacles that prevent expansion, such as poor technological capabilities, limited human resource capacity, and restricted access to capital. Furthermore, the GIBS White Paper on Enhancing Enterprise and Supplier Development Ecosystem Effectiveness in South Africa (2024: 8) contends that there is more consensus in the implementation challenges of ESD programmes such as limited resources, misalignment of corporate and MSME programme participants, and inadequate monitoring and evaluation. These challenges are at the core of botched ESD programme implementation.
South Africa’s effort to increase participation of MSMEs in the economic mainstream hinges upon a plethora of support mechanisms. According to the report on the State of the Small and Growing Business Sector by ANDE (2024: 04) the South African entrepreneurial ecosystem requires innovative solutions to increase the available finance, improve access to markets, reduce bureaucratic burdens, and strengthen the capacity of small businesses and startups.
The report also examines the state of the Small and Growing Businesses (SGB) sector in South Africa as of 2023 by assessing the amount and type of financial support available to enterprises, the type of capacity development offered, and trends in the policy landscape that affect the entrepreneurial ecosystem. It is also vital to acknowledge that the legislative ecosystem that is in existence to support entrepreneurship, enterprise and supplier development requires updating and review to provide a blueprint for the building of a vibrant MSME sector.
The GIBS report concedes that South Africa has a relatively robust financial and capacity-related development landscape for MSMEs. The report State of the Small and Growing Business Sector identified 197 active funding sources offering financing in the form of loans (43%) and equity (41%), with the remainder made up of grants (16%), quasi-equity (7%), and guarantees (5%). Nevertheless, the credit gap among MSMEs continues to be significant.
Additionally, the South African economic mainstream’s relationship with MSMEs is characterised by relationships that are both progressive to the country’s re-industrialisation efforts and the ones that are only driven by the compliance imperative (informed by the tick-box approach for compliance purposes). The magnitude to which MSMEs are connected, or not connected, to the GVC of MNCs differs significantly and varies from strategic high value chain integration to non-core value chain integration.
On one end, certain MNCs conduct extensive value chain and supplier opportunity analysis to inform the identification of supplier opportunities. At the other end of the scale, other MNCs and corporates link MSMEs to less strategic, non-core supply opportunities. Some corporates have a mixed ESD approach in terms of linking MSMEs to both core and non-core supply opportunities.
As contained in the study commissioned by the dtic (2019), the five most common benefits reported by 65 MSMEs surveyed and participating in Enterprise Development programmes are in order of frequency:
Business management skills & systems (31%);
Networking and business opportunities (14%);
Market access (12%);
Financial support (9%);
Company (marketing /brand) exposure (6%).
On the Supplier Development (SD) side, the 5 most common benefits reported by 29 MSMEs surveyed and participating in SD programmes are, in order of frequency:
Business management skills & systems (17%);
Marketing skills (17%);
Access to markets (17%);
Financial management skills (10%);
Company (marketing/ brand) exposure (10%).
The B-BBEE Commission Study (2022) gives us a sense of where we are currently are as a country in relation to B-BBEE ESD compliance. The report underscored a low level of compliance on ESD spending by measured entities. According to the B-BBEE Commission, “in 2021 only 61% of the set targets was achieved for ESD, which is a continuing trend over the past five years (2017: 44%; 2018: 60%; 2019: 51%; 2020: 61%)”. The matter to point at on ESD and its application exceeds the compliance imperative as obligatory legislatively by all economic actors, it is about releasing its might in driving economic inclusion and participation.
As matters stand, it is imperative to concede that the funds raised through ESD contributions do not have a positive impact on marginalised groups as envisaged within the B-BBEE legislation, more especially the MSME sector which is under serviced and underfunded.
Although there are challenges of unleashing the potency of ESD in optimising its contribution to the efforts of structural transformation, economic redress and re-industrialisation of South Africa, MSMEs remain critical in playing the role of drivers of innovation and economic inclusivity in the mainstream and sunrise industries that are changing the production paradigm driven by 4IR, automation, AI, services industries, e-commerce, etc.
The dtic study (2019) acknowledges that through market access benefits, some suppliers have grown where their revenue has grown ten times and employment levels have grown by a factor of 200%-300% during their three-year participation in the SD Programme.
In the same realm, common challenges in accessing corporate procurement opportunities continue to persist: where buyers perceive new suppliers as risky, and small suppliers facing cost disadvantages due to their purchasing power and economies of scale being smaller than established suppliers. Effective ESD programmes lean towards the dual objectives of promoting both economic transformation as well as supplier diversity, while less effective ESD programmes are primarily driven by economic transformation.
It should be a prerequisite for private and public sector leadership to approach ESD as a means to achieving organisational profitability, competitiveness and supplier diversity as part of promoting economic growth.
To ensure impact of ESD programmes in South Africa, a consideration should be given on the creation of a singular ESD support vehicle that will be anchored on the country’s vision of re-industrialisation (through MSME participation in value chains and technical capability development) and taking advantage of high impact productive and services industries. Hence it is imperative to acknowledge that ESD impacts positively on the sustainable growth of MSMEs, thus contributing to economic redress and inclusive economic participation.
