In February, President Cyril Ramaphosa said “the era of big corporates creating thousands of jobs has passed”, and the idea mooted by the National Development Plan in 2012 — that by 2030, 90% of jobs in SA will be created by small, medium and micro enterprises — has now become a target the government is trying actively to achieve. There seems to be a widespread assumption that it is, in fact, desirable for small businesses to become the dominant employers.
According to the Small Business Institute, firms with more than 200 full-time employees now provide more than 70% of formal-sector jobs in our economy. From the World Bank’s most recent Enterprise Survey (2020), based on a sample of 1,000 SA firms, it emerges that large firms generated 4.3% annual employment growth, compared with 0.5% growth by small enterprises.
It is true that in many countries small firms dominate the economy, but whether this leads to more employment is entirely unclear, and there are good reasons to prefer large firms over small ones. Small firms do not generate nearly as much prosperity as big ones do. Countries with the highest levels of small businesses tend to be poor.
As Oxford economist Sir Paul Collier has so powerfully argued, this is because firms need to reach a certain scale before they can produce the “miracle of productivity”. His research demonstrates that workers in larger firms can be 10 times as productive as workers in small businesses because of economies of scale, and because they permit specialisation and the expanded use of machinery and bulk processing.
The argument against large companies is primarily that they will no longer generate jobs in the future. This is based on the notion that larger firms are usually more capital-intensive and will therefore house large quantities of technology-replacing labour as artificial intelligence and robotics evolve. However, despite all the hype and cheerleading, it is unclear how soon or even if such a scenario will be upon us.
What is clear is that to have any chance of tackling SA’s catastrophic employment situation we need more firms, we need firms that will grow, and we need firms that will employ as many people as possible. Merely changing the balance between large corporates and small businesses will do little to achieve these goals. As the Centre for Development and Enterprise’s (CDE’s) outgoing chair, Laurie Dippenaar, put it recently: “Firms are like babies; they are not born big, they grow big.”