Problems of Small Businesses

Topics: Africa, Small business, Sub-Saharan Africa Pages: 7 (1891 words) Published: May 5, 2013
2.1 Globalization of Markets and Production

Globalization refers to a fundamental shift in world economy in which nations are moving toward an interdependent global economic system (Hill, 2009). Globalization has resulted in markets in which previously historically separate markets have become one huge global marketplace as a result of reductions in trade barriers and advances in information and transportation technologies. As a result, small firms can now participate in international trade right from inception. Another facet of globalization is globalization of production. Companies can locate production facilities in countries where labor and other production inputs are cheaper. The end result is that globalization presents new threats for small companies in Africa in the form of increased competition from foreign entrants. Locally manufactured goods now compete with cheaper good quality products from emerging economies, such as China, India, and Brazil. These inexpensive imports are rapidly replacing locally made goods and shutting down small-scale manufacturers.

2.2 Lack of Financial Support

Despite existing policies on financial support for small businesses, very few entrepreneurs receive financial help when they need it. For example, Mambula (2002) found that 72 percent of entrepreneurs he studied in Nigeria considered lack of financial support as the number one constraint in developing their business. According to Mambula, small businesses consider procedures for securing business loans from banks cumbersome, and the collateral demanded for such loans excessive. Banks, on the other hand, defend their behavior by noting that most small firms that apply for loan do not present acceptable feasibility study or good business plan. Furthermore, many entrepreneurs do not even have a deposit account in a bank, a condition for advancing a loan to an applicant. To complicate the problem, there is no law to protect a bank against loan default. Banks also point out that entrepreneurs are unwilling to acquire formal training in how to run a business. Although in some African countries banks are by law required to set aside a certain percentage of their profits for small business loans, many banks would rather pay a fine than make what they believe to be a high risk loan.

2.3 Poor Infrastructure

Basic physical infrastructure required for economic development, such as good roads, ample power supply, and good rail and river transportation facilities, are in very poor shape in most African countries. As a result, deplorable roads, deteriorating rail lines, where rail transportation still exists, inadequate power supply, and unusable waterways have combined to make small business operations difficult. For example, damage to equipment because of power surges and down time due to unavailability of electric power during production hours are major problems for small manufacturers in some African countries (Akwani, 2007). To overcome this problem, entrepreneurs who can afford it own private generators to power their manufacturing operations, thus increasing production costs and making their products less competitive. Furthermore, poor transportation facilities and bad roads result in higher cost of moving goods from one section of the country to another.

In addition to the problems noted above, the information and communication infrastructure in most African countries are weak. Access to information infrastructure is considered an indispensable condition for widespread socio-economic development in this age of globalization and information economy (Cogburn and Adeya, 2000). The result of poor communication networks in most African countries is the low level of Internet usage. Also, Africa has low telephone penetration, and inadequate broadcasting facilities, computing infrastructure, and other consumer electronics. Although these are the general shortcomings for African countries, it should be noted that African countries...
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