The Figure above
indicates that economic structures impact on economic opportunities and
results. The literature is growing its inventory of stories about the ways
structured relationships catalyse or constrain opportunities for individuals
and firms. Many of these stories centre on the ability of individuals to gain
employment through family and business ties.
Research into supply
relationships suggests that firms look to engage with other firms they know or
have been referred to—even if this means accepting higher cost arrangements. A
firm’s opportunities to supply the market are catalysed when they either have
an existing presence or know people on the inside.
Industrialisation Policy
Action Plan (IPAP) as an attempt to move into a more aggressive growth
trajectory. The engagement of an international panel of experts has shown
general agreement with Government’s IPAP that such a trajectory would involve
adjusting production profiles. IPAP favours a more dynamic tradable, soaking up,
the vast pool of unemployed—including discouraged new entrants to the labour
pool, and generally opening the economy to emerging firms.
Broad Based Black Economic
Empowerment (BBBEE) is a structured way of introducing new entrants,
historically disadvantaged, with a need to break into the tightest network of historically
built relationships. The biggest structural factor defining how business works, centers on past experience in big, formal business. Very few managers and
directors in South Africa’s big businesses have traditionally reached their
positions without years of work in the conglomerates, banks or other financial
institutions. It has been rare to find a manager or director coming from
smaller and medium sized business into these large firms, even though most
small and medium businesses have also traditionally been dominated by white
people.
Specialized in-house sub
networks are evident in various industries where firms allocate management
positions only to individuals with experience in the specific firm or its
subsidiaries. Similar in-house networking is evident in the composition of many
boards. The prominence of in-house relational connection is also evident in the
way large firms have organized production and commercial processes.
Large South African firms
have typically looked in-house for many services—from production through to
retail finance. Owning key suppliers, financiers and retailers in a sector
assured preferential relationships for these large firms—tight, controlled network
relationships that minimized risk exposure. These relationships allowed capital
concentration necessary for heavy industry development and fostered stability
and standardization. Where the relationships were not established via direct
ownership ties, they involved financing and preferential contracting mechanism.
Smaller downstream
enterprises have faced major entry hurdles as a result of these preferential
relationship structures, however in industries as variant as furniture,
textiles, tourism and in the core metals and engineering sector. Large firms
started unbundling in the 1990s and focused on core activities, but in so doing
simply traded their horizontal conglomeration for a more intense vertical
presence in many industries. A large proportion of mergers have been vertical,
increasing control of dominant firms through production chains.
One could expect this
kind of vertical consolidation to exacerbate already-low levels of industrial
competition in South Africa. There is a need for an organisation or government to establish and connect
non-integrated downstream suppliers to deal with controlling conglomerates that
make their life especially difficult. The dominance of large enterprises
creates many constraints on SMME development in various industry.
Large businesses have
been able to establish favourable relationships at many levels, resulting in
“closed” markets and “old boy networks” that have successfully kept out new,
perhaps more efficient and competitive market entrants. This is major reason why SMMEs in South Africa contribute less to GDP and employment
than they do in many other countries.
Large firms constitute less than 5 percent of
South Africa’s corporations but account for 60 percent of the country’s GDP, while
constituting more than 95 percent of corporate entities between 1990 and 2000,
SMMEs employed only 55 percent of the country’s labour and generated only about
40 percent of total remuneration.
These highly concentrated
structures have not only limited competition and access by smaller business, they
are also the reasons for South Africa’s weak competitiveness. The declining
entrepreneurship and competitiveness is reflected in the country’s drop from
19th to 25th place (out of 35) in recent versions of the Global Entrepreneurship
Monitor (GEM) indicating that “the country has failed to create a competitive
climate in which emerging businesses can grow and thrive.
