GROWTH POTENTIALS AND CONSTRAINTS OF MICRO, SMALL AND MEDIUM-SIZED ENTERPRISES IN THE SOUTH WEST REGION OF CAMEROON
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This study has identified and analysed the different opportunities and constraints of doing business in the South West Region. The study is based on a mixed research study conducted in the South West region.
Quantitative data was collected from micro, small and medium-sized enterprises (MSMEs) in Buea, Limbe, Tiko and Kumba with the use of questionnaires while qualitative data was collected from government officials with the use of semi-structured interviews. A total of 200 businesses where surveyed, 50 in each of the four towns cited above.
After analysing the data collected, the researcher found that business owners in the region experience a number of constraints which include inadequate electrical power supply, access to finance, high taxes, technology and training.
Furthermore, another problem identified was corruption. On the contrary, the study also identified key opportunities in the region such as fertile soil, good culture, cheap rents and a number of government programmes designed to promote businesses in the SW region.
Based on the outcome of this study, the researcher recommends an improvement in electrical power supply, transport network, better access to capital financing and the elimination of corruption as the conditions necessary to promote the MSMEs in the South West Region.
Key Words: Constraint, Opportunity, Growth, Micro, Small and Medium Sized Enterprise and South West Region
Micro, Small and Medium Sized Enterprises (MSMEs) play an important role in the development of every economy (World Bank, 2009). They create jobs and promote the welfare of the population and as such, this makes it necessary to create a suitable environment that creates the opportunities they need to sustain their growth (Farrell et al., 2008).
Like most traditional businesses, many MSMEs need the three basic economic factors of production in order to grow, and these include land, labour and capital (Kauffmann, 2005).
The factors that enable or hinder the growth of MSMEs can no longer be limited to the traditional factors of production considering that the business environment is rapidly evolving. Before delving into the factors that hinder or support the growth of MSMEs, it is necessary to begin by defining MSMEs.
The appellation MSMEs is relatively new and was only adopted after business literature recognised and began highlighting the importance of micro-enterprises in the economy. Consequently, most of the literature on small business growth makes allusions to SMEs.
The term MSME has a broad spectrum of definitions because different organisations and countries have set different guidelines which they use to categorise SMEs, and this is often based on headcount, sales or assets. A few definitions of SMEs will be examined beginning from the global, African and Cameroonian perspectives and their importance will be highlighted in the different contexts.
The World Bank defines Medium Enterprises (MEs) as those enterprises with a maximum of 300 employees, $15 million in annual revenue, and $15 million in assets (World Bank, 2013). The Inter-American Development Bank describes SMEs as businesses that have a maximum of 100 employees and less than $3 million in revenue (World Bank, 2013).
While the European Union defines small and medium-sized enterprises (SMEs) as, ‘enterprises which employ fewer than 250 persons with an annual turnover of up to 50 million euros, and/or an annual balance sheet total not exceeding 43 million euros’ (European Commission, 2011).
Micro enterprises are defined as those that employ less than ten workers and have a turnover of less than € 2 million European Commission (2011).
This definition is more encompassing, and much larger, especially with regards to turnover than some others.
The European Commission (2011) categorises micro, small and medium sized enterprises (MSMEs) as described in Table 1 below.
In Africa, Stork and Esselaar (2006) report several definitions of SMEs. In Ghana, SMEs refer to firms that have 6-99 workers and do not have more than 2.5 billion Ghana Cedi (¢) of fixed assets (this excludes land and buildings).
In South Africa, SMEs are defined as distinct and separate business entities, including cooperative firms and non-governmental organisations that are managed by a single owner or more which includes its affiliates, if any.
In Nigeria, the Small and Medium Sized Enterprise Development Authority (SMEDAN, 2012) writes that small enterprises refer to SMEs that hire 10-49 employees and have N5m to less than N50m assets excluding land and building.
Firms that hire 50-199 employees and have N50m to less than N500m assets excluding land and building is referred to as medium enterprises. Kauffmann (2005) writes that in Egypt, SMEs are broadly defined as business entities that have more than 5 and fewer than 50 employees.
MSMEs contribute to the sustained economic growth and development in most Sub-Saharan countries (Kropp et al., 2006), and they are critical agents of economic transformation as they account for more than 50 percent of the GDP of many developing economies.
They also constitute a major source of innovation and technological development, the supply of both human capital and raw materials to larger businesses (Fjose et al, 2010). MSMEs play a main role as they constitute a major source of employment in most African countries as depicted in Table 2 below.
Table 2: Enterprise classification by No Employees
In Cameroon, the official definition of SMEs is derived from Law 2010/001 of April 13, 2010, on the promotion of Small and Medium-sized Enterprises (SMEs) (World Bank, 2013).
The law states that Very Small (Micro) Enterprises refer to those that hire less than five people with annual revenue of 15 million FCFA, while small firms refer to those that employ 6 – 20 employees with have an annual turnover of 15 – 100 million.
Finally, medium-sized enterprises apply to those who hire from 21 – 100 people and have an annual turnover of 100 million to 1 billion. The National Statistics Institute (INS) states that MSMEs account for over 90 percent of Cameroon’s economy, with a share of the Gross Domestic Product estimated at 34 percent (World Bank, 2013).
Defining MSMEs by the number of employees wrongly suggests that the larger an enterprise is, the more employees it hires, and that to grow it must take on more employees (Ayyagari et al, 2005).
This notion is not acceptable in the current business environment where most MSMEs are striving to become more efficient by making their operations leaner in order to be profitable (Levine, 2006).
Similarly, defining micro MSMEs using turnover can be problematic because although turnover is a common financial measure of the size of a business, it is important to note that there are firms that have huge turnovers with little net assets.
When using the turnover to categorise the size of firms, this can be misleading because businesses with high-profit margins and wider net assets can be wrongly categorised when the focus is placed on turnover and number of employees. However, there is no better way to categorise MSMEs. In the context of this study, Cameroon’s definition of MSMEs will be used given that the survey is conducted in Cameroon.
Globally, the key constraint faced by MSMEs includes competition from big businesses. Edmiston (2007) writes that small businesses encounter different types of problems that arise because of their size. Bankruptcy is one of the common problems faced by small businesses, and this happens because many small businesses suffer from under capitalisation.
Longenecker (2008) agrees with this assertion although he lays emphasis on the fact that most of the problems encountered by small businesses are caused by poor planning and not the economic conditions.
Richbell et al (2006) note that the theory of capitalisation requires entrepreneurs to have access to capital that is equal or more than the projected revenue expected for the first year of business. Small business owners who are unable implement these principles are more likely to suffer from bankruptcy.
Richbell et al (2006) also argue that another problem faced by small businesses include the fact that large businesses have an edge over them as soon as they are set up in the same place. This makes it difficult for small
businesses within that vicinity to survive competition from larger ones. On the contrary, Alegre and Chiva (2009) argue that MSMEs are easier to start off because they require relatively less paper and managing them is easier given that there is less bureaucracy in their management.
In Africa, MSMEs face some challenges which hinder their growth. The World Bank (2013) argues that inadequate power supply, to financing, infrastructure; markets and democratic regimes are among the main constraints faced by MSMEs in Africa.
These factors contribute to their underperformance and slow down their growth. However, Bouri et al. (2011) have observed that most African countries have been on the rise because they succeeded in reducing their foreign debts and interests, controlling inflation and recording a growth in population and the creation of new MSMEs across the continent.
A functioning financial system is therefore of vital importance both to the growth of the business sector and overall economic growth and poverty reduction (Hardley&Mavondo, 2000). Fjose (2010) argues that MSMEs have high potentials and contribute to economic growth as they create jobs and help in improving the GDP.
The author adds that the advent of new information and communication technologies has created a major opportunity for small businesses in Africa by widening their access to global markets via the internet. Africa’s position as a provider of raw materials has also created a lot of potential for MSMEs as many of them now indulge in supplying primary resources to emerging and growing global economic powers like China (Bouri et al, 2011).
In Cameroon, the opportunities for MSMEs have also been widening as the government has improved its commitment to supporting their growth. The government has created the SME Bank or BC – SMEs following the promise of the President of the Republic made to the population in January 2011, at the 2011 agro-pastoral show in Ebolowa (Ngassa, 2015). BC – SMEs was incorporated in June 2011 with a capital of 10 billion CFA francs (ten billion CFA francs) and its headquarters in Yaoundé (Ngassa, 2013).
In addition to that, the government is also improving the laws to create a favourable environment for MSMEs in Cameroon. On the contrary, small businesses in Cameroon are also facing some constraints which include corruption (Transparency International, 1999), inadequate electrical power (Sumelong, 2013) and the poorly maintained road transport network (Enumedi, 2013). It is on this basis that the researcher has been motivated to conduct this study.
Statement of Problem
The South West Region has abundant economic resources such as land, labour and capital which can drive the growth and performance of Micro, Small and medium sized enterprises. There are still vast parcels of land available for the construction of accommodation, factories and the development of agribusinesses. In some parts of the region, such as KupeMuanenguba, Manyu and Meme, the price of land is still relatively low and in high supply.
This makes them potentially attractive destinations for investors (Ndi, 2011). Secondly, the South West Region has a vibrant youth population with universities and higher learning education institutions in Buea that train and graduate thousands of students into the labour market thereby ensuring a steady supply of skilled labour.
In addition to that, the region also has significant unskilled labour provided by the indigenous population and workers who have been attracted into the SW from the North West and Western Regions (Ndongfung, 2008).
Finally, the South West Region now has branches of numerous national and international banks such as the United Bank for Africa (UBA), SociétéGénérale Cameroun (SGC), Oceanic Bank, BanqueInternationale du Cameroun pour l’Epargne et le Crédit (BICEC), ECOBANK, Afriland First Bank, just to name these few, and uncountable microfinance institutions which make it possible for investors to have access to capital.
The South West Region is also strategically located and offers a lot of potentials which MSMEs can exploit (Sumelong, 2013). For example, significant portions of the region are endowed with the fertile volcanic alluvial soil which constitutes a substantial potential for agribusinesses.
In addition to that, the South West Region has three ports along the shores of the Atlantic, which include the Tiko, Bota and Idenau wharfs. This makes it possible to transport agricultural and other products quickly in and out of the region.
Although the region has some potentials, MSMEs also have some constraints which affect their growth. The uncontrolled level of corruption in Cameroon makes it difficult for small businesses to grow.
Transparency International’s (1998) corruption perception index ranked Cameroon the most corrupt nation in the world. This demonstrates the level of corruption in the country. Corruption hinders the growth of businesses because when tax and police officials are corrupt, they exploit business owners, and this slows down business transactions (Bouri et al, 2011).
Access to capital financing is one of the problems still faced by businesses in many parts of the developed world and Africa (Fjose et al, 2010). Even though there are many banks and financial institutions that may provide credit to MSMEs, it is important to note that some small business owners are unable to present collateral security
which makes it difficult for them to benefit from loans. In addition to that, most banks and microfinance institutions are concentrated in urban areas of the SW region. Consequently, business owners who operate in most villages are unable to gain access to finance. Similarly, regular electrical power failure affects MSMEs that depend on electricity to run their operations. All these opportunities and constraints have made it worthwhile to conduct a study of this nature.
In other locations of the region such as Bangem, where plantains do well, the inadequate road transport network makes it difficult to transport harvest from the farm to the market (Sumelong, 2013). Heaps of plantain harvests are left to rot in the sun during the rainy season because there is no way to transport them to nearby markets in Kumba, Buea, Limbe and Douala where the demand for plantains is high (Sumelong, 2013).
Consequently, this makes it difficult for micro-businesses such as local agricultural cooperatives in the region to excel. The inadequacy of electricity supply also affects many MSMEs that depend on electricity for their daily operations. Businesses such as bakeries, grinding mills and frozen seafood enterprises have to deal with regular power cuts that make it difficult for them to meet their goals. All these factors have negative effects on MSMEs in the southwest region.
This makes it necessary to conduct a study of this nature to identify the constraints and the opportunities that exist for businesses in this region and explore how small businesses can make the best out of the opportunities and find ways to mitigate the adverse effects.
Objectives of the Study
Identifying the opportunities and constraints faced by MSMEs in the South West Region with the aim of recommending policies which can be used to promote business growth in the region, is the major goal of this study. The specific objectives of this study can be stated as follows:
To examine the factors that hinder the growth of micro, small and medium-sized enterprises in the South West Region of
To explore the key advantages the South West Region offers for the growth of
To propose recommendations on what needs to be done to improve the business environment in the South West
The central research question for this study can be stated as follows: “What are the constraints and advantages of micro, small and medium sized enterprises in the South West Region?” This central research question can be adequately tackled by exploring the answers to the following sub research questions.
- What are the factors that hinder the growth of micro, small and medium sized enterprises in the South West Region?
- What are the key advantages which the South West Region offers for the growth of businesses?
- What can be done to improve the conditions and performances of businesses in the South West Region?
The hypothesis of the Study
This study sets out to statistically test the following null hypotheses:
- Hypothesis 1: Micro businesses are more affected by the key challenges that affect businesses than other categories of
- Hypothesis 2: Farmers (agribusiness) exploit fertile soils as a key advantage for their business more than any other type of businesses in the South West Region
- Hypothesis 3: There will be a significant difference between the recommendations to improve the performance of MSMEs by owners of different category of businesses