Executive Summary

This essay sets out to evaluate the role that small businesses play in the economy of South Africa. It discusses the role of small businesses in creating jobs, developing of new products and new markets, the flexibility of small businesses to changing markets as well as their aggregate taxes. Promoting small businesses makes sense as an economic development strategy, but with some qualifications. Small businesses are potent job creators, but so are large businesses. The attribution of the bulk of net job creation to small businesses arises largely from relatively large job losses in large firms, not to especially robust job creation by small firms. More importantly, data show that large businesses offer better jobs than small businesses, on average, in terms of both compensation and stability. Further, there is little convincing evidence to suggest that small businesses have an edge over larger businesses in innovation. However, research and experience show that pursuing large businesses is likely to be a poor economic development strategy, which suggests that promoting and fostering small businesses may offer a more viable alternative. Small businesses also contribute to the tax returns in the country. Although their contribution is far lesser than those larger companies provide, it still counts. The competition that small businesses stimulate is a driving force in the economy, as well as a challenge to the larger companies. Background Reading
Small, medium and micro-enterprise (SMME) development was identified by the government as a priority in creating jobs to solve the high unemployment rate in South Africa, and the Small Business Act was introduced in 1996 (Nieman, 2001). In terms of the South African National Small Business Act, 1996, a small business is defined as a “separate and distinct entity, including a cooperative enterprise