2019

Why small companies are disadvantaged in the developing world

Some of the challenges typically faced by start-ups and micro-businesses operating in developing countries and emerging economies have recently been highlighted in a report commissioned by the Small Enterprise Development Agency (SEDA). 

Banks and other lenders are often resistant to lending to start-ups in developing economies because they are perceived as a risky investment.

Emerging economies are more likely to be high-risk environments, so it makes sense for lenders to be cautious. 

Small business owners often also lack the financial and management knowledge to demonstrate their potential value using traditional business methods. Many first-time entrepreneurs have never pitched their business idea to funders, conducted market research or produced a business plan.

Limited research and development

Running a small business in a developing country is often just another way to subsist, and they’re seldom born out of innovation or entrepreneurial spirit, tending to replicate existing models such as the mobile airtime kiosk, the informal convenience shop or a taxi operation.

These businesses are often started by individuals who cannot find gainful employment, as opposed to innovators driven by finding new solutions to existing challenges. Given the fact that they are typically not disruptors, the value to these businesses of investing in R&D is often not apparent.

Poor infrastructure

Having reliable access to electricity, water, communication services, roads and affordable, safe public transport is hardly a given in many developing countries and is entirely dependent on location. 

Many small business owners don’t have access to adequate utilities and therefore struggle to produce goods, deliver services or communicate with potential clients and business partners. 

South Africa, for example, is the 25th largest country by area and travel distances between suppliers and target markets can be extreme. A lack of affordable, reliable transport options hampers the ability of SMEs to meet clients and business partners. 

Insufficient infrastructure also often extends to business services such as accounting and legal services, which is also not always readily available to developing world entrepreneurs.

Skills and labour shortages

Onerous labour laws designed to benefit workers can make it difficult for SMEs to offer employment contracts that protect the business if it’s going through a difficult period and unable to pay workers.

Additionally, skilled workers, especially in finance, accounting and sales are scarce. Generally speaking, well educated workers prefer to work for larger, more established companies offering a recognisable career path and security, whereas SMEs last less than 3.5 years on average.

Disconnected

The small number, size and remote locations of new entrepreneurial business in developing countries also tends to prevent them from forming collectives to enhance their bargaining power. 

Consequently, they find it difficult to lobby government institutions or access mentorship, funding, more prosperous markets and other benefits that connecting with politicians and industry leaders can bring about.

Potential solutions 

It’s however not all doom and gloom for small businesses, as there are a number of resources and options available to them to address these challenges.

An ever increasing number of individuals livelihoods are dependent on SMEs, forcing governments to create enterprise propeller and incubation programmes to assist them. Small business owners need to keep themselves abreast of programmes and grants offered by Governments that may lift their businesses to the next level.

Adopting accessible and affordable technology enables businesses in remote locations to provide a competitive service offering, and it’s possible to offer goods and services to viable markets globally via the internet, when local markets cannot sustain and grow small businesses.

Outsourcing non-core services like accounting, payroll and taxation management is now possible for SMEs in remote areas, thanks to OCR technologies coupled with online and artificial intelligence-aided accounting software. 

And finally, SMEs also need to pay special attention to potential additional costs, address problems when they arise and fix broken processes in-house before handing over to a third party.

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