Like warthogs need aardvarks, small firms need conducive conditions

What accounts for differences in the success of small and medium enterprises (SMEs) in different countries? According to the Small Business Institute, only 28% of jobs in South Africa are in small firms, compared with global rates of 60%-70%. That may be exaggerated by how SMEs are measured, but they certainly seem to thrive much more readily in other African countries I visit. Why?

The concept of an ecosystem for business helps explain how complex this question is. In biology an ecosystem is the whole set of interacting organisms and their environment, which sustain each other.

I came across an illustration of this from the creation of the Pilanesberg game reserve. Apparently, when warthogs were reintroduced they died in the first winter. Warthogs do not dig their own burrows, but find shelter in abandoned burrows of other animals, particularly aardvarks (ant bears).

However, there were no aardvarks in the reserve at that stage, so warthogs had nowhere warm to sleep through the cold winter nights. The next year management introduced aardvarks before warthogs, and this time they survived and thrived.

Warthogs need aardvarks — an apparently unrelated species. What do SMEs need? Most obviously, small businesses need to be well fed with money and talent. Their environment needs a market big enough to sustain their growth. It should provide infrastructure — physical infrastructure such as roads, communications infrastructure such as reliable and inexpensive internet, and legal infrastructure that enforces contracts. Finally, it needs to be free of the cold winds of unfriendly regulation and, of course, civil disturbances such as having one’s business burnt down.

Congenial conditions in the natural ecosystem can create an explosion of a species in one area. Similarly, a business ecosystem can produce a Silicon Valley that contains all the capital, talent, infrastructure, market and guidance to attract tech entrepreneurs from around the world. In an even more dramatic illustration, 60% of the world’s buttons are manufactured in one Chinese town, called Qiaotou. Hundreds of businesses are attracted by the facilitative conditions they create for one another, an ecosystem so rich they flourish despite the vibrant competition.

Fintech is a growth industry in Africa because rapidly growing internet access has created a market, capital is keen on the idea, experienced engineers are returning to the continent, regulations are facilitative in some countries, and the ecosystem needs reliable and economical money transfers. But manufacturing struggles to survive in most African countries because the market is too small to justify the scale required to compete with foreign imports; poor transport infrastructure makes exporting to bigger markets prohibitively expensive; talent is scarce in the form of workers and managers familiar with manufacturing; regions lack investors and consultants who understand the industry; and often governments do not understand what promotes competitiveness in manufacturing.

Entrepreneurship flourishes in conditions conducive to creating businesses. But under apartheid sanctions, SA capital had to turn inward, with a few large companies buying up the economy. This legacy continues — the voice of business is big business. Regulations that suit big business can kill SMEs that lack capacity even to complete the paperwork. Despite huge efforts to facilitate them, small firms struggle to break in, like little trees in a forest, shaded from the sun by the canopy.

In future columns I plan to explore the influences described above, but it really helps to view them as interrelated elements in an evolving ecosystem. Trying to grow entrepreneurship from one perspective only, such as government, banking, training and incubating, is like dropping warthogs into the Pilanesberg without aardvarks.

For SMEs to thrive, we need a holistic vision and collaborative action. I would love to hear from you if you have examples.

• Cook chairs the African Management Institute.