The Impact of Human, Social and Financial Capital on the Performance of Small and Medium-Sized Enterprises (Smes) in South Africa

Topics: Finance, Entrepreneurship, Corporate finance Pages: 24 (8261 words) Published: September 4, 2013
© Kamla-Raj 2011

J Soc Sci, 29(3): 193-204 (2011)

The Impact of Human, Social and Financial Capital on the Performance of Small and Medium-Sized Enterprises (SMEs) in South Africa Olawale Olufunso Fatoki Department of Business Management, University of Fort Hare, Alice, P.B. X1314, Eastern Cape, 5700, South Africa Fax: 927-40-653-2248 E-mail: ofatoki@ufh.ac.za KEYWORDS Human Capital. Social Capital. Financial Capital. SMEs. Performance ABSTRACT The study investigates the impact of human, social and financial capital on the performance of Small and Medium-Sized Enterprises (SMEs) in South Africa. The failure rate of SMEs is very high in South Africa and it is important to investigate factors that can impact on the performance of SMEs. Objective and subjective methods were used to measure performance. Data was collected through the use of self-administered questionnaire in a survey. Data analysis was done through descriptive statistics, chi square, Pearson correlation and regression analysis. The results indicate that there is a significant positive relationship between human, social and financial capital and the performance of SME.

I. INTRODUCTION The SME sector plays a vital role in creating jobs and wealth in an economy. SMEs (refer to Table 1 for the definition of SMEs in South Africa) are an essential source of jobs, entrepreneurial spirit and innovation and are thus crucial for fostering competitiveness (Temtime and Pansiri 2004; Wong et al. 2005). The South African economy is characterised by a low growth rate, a high inflation and a high rate of unemployment. SMEs employ half of the working population and contribute 50% to the gross domestic product of South Africa (Gumede 2004; Mutezo 2005; Rogerson 2008). However, despite the noted contribution of SMEs as pointed out above, SMEs in South Africa suffer from a high failure rate. According to Brink et al. (2003), it is estimated that the failure rate of SMEs in South Africa is between 70% and 80%. As a result, many SMEs do not reach their full potential and fail to grow, resulting in lost jobs and wealth for their region in which they are based. Sha (2006) notes that given this high failure rate, it becomes vital to research the factors that are required to enable the SMEs to survive. Problems encountered by small businesses are numerous and can be described amongst others as being environmental, financial or managerial in nature. Ahmad et al. (2010) point out that for SMEs, the critical resources are likely to be held by the individual entrepreneurs that are likely to be reflected in their skills, knowledge, experience and education. The lack of separation between owner-

Table 1: Definition of small and medium enterprises in South Africa Sector Total full-time employee(less than) Total annual turnover (less than) R40m R10m R30m R15m R50m R25m R20m R10m Total gross asset value (less than) R15m R3.75m R5m R2.5m R8m R4m R4m R2m

Manufacturing Retail Wholesale Business services

Medium Small Medium Small Medium Small Medium Small

200 50 120 50 120 50 120 50

ship and control in SMEs suggests that business owners themselves are responsible for the direction and development of their firms. Hence, the success or failure of the SMEs is largely influenced by the skills and abilities of the owners. Marshall and Oliver (2005) observe that the hardships encountered by entrepreneurs often stem from a lack of knowledge or skill, a lack of finances, or the lack of a supportive social network. In the entrepreneurial process, there are three basic categories of capital that contribute to a successful venture: human, financial, and social. Herrington et al. (2009) find that lack of education (a subset of human capital) and training is the most important cause of failure for new SMEs in South Africa. Gumede and Ramussen (2002) find that most SMEs in South Africa do not engage in networking, implying a lack of social capital.

194 Empirical literature on the...

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