Small- and medium-sized enterprises (SMEs) are important to economic growth and development in Ghana. But they continue to face many constraints to growth. How does the current government’s private sector strategy affect SMEs? And what impact is regulation having on their performance?

A book from the Centre on Regulation and Competition, based at the University of Manchester, UK, examines the links between regulation and development in poor countries and includes a chapter assessing the impact of regulation on small businesses in Ghana. SMEs provide much needed employment and incomes in poor countries and encourage entrepreneurship. In Ghana, although SMEs directly employ only 15.5 percent of the workforce, many more people depend on these businesses for their livelihoods.

Since its election in 2000, the Ghanaian government has promoted the private sector and placed it at the centre of the country’s economic growth strategy. Improving the environment for SME development has been an important part of this policy.

A new ministry and a number of public regulatory agencies have been created to improve the operating environment for business. Self-regulatory bodies have also emerged to complement state regulation. The result, the authors argue, is a complicated mix of agencies which lack clear regulatory roles. The public agencies have also tended to focus on the needs of larger businesses.

The authors draw on a survey of small businesses to investigate how regulation affects their activities and performance. The regulations considered include licensing, registration and reporting, labour laws, standards and support services. The businesses surveyed were operating in sectors such as wood processing, food processing, garments and textiles, services and manufacturing.

The authors find that although regulation can have a limited impact on SME decision-making, their performance (measured by profit and employment growth) is largely unaffected by regulation. Other factors are found to be bigger obstacles to enterprise growth in Ghana.

Key findings of the research include:

• Limited ambition among entrepreneurs to pursue growth-oriented business strategies (because of limited access to funds and markets) was identified as an obstacle to growth.
• Lack of access to outside sources of finance was one of the main problems. 
• Delays in setting up businesses were also identified as an obstacle to growth.
• Foreign-owned businesses performed better than firms owned and operated by Ghanaians.
• Most small businesses failed to comply with labour regulations, such as minimum wage rules.
• Small businesses lacked awareness of regulations (for example, property rights) and business support services.

Despite many initiatives and agencies designed to promote the private sector in Ghana, the regulatory framework is not fostering the growth and development of SMEs.

The authors conclude that:

• More could be done to raise awareness among SMEs about regulation and business support services.
• Reform might be needed in some areas of regulation: registration, operating licences, property rights, utilities and financial markets.
• Future research could examine whether regulations which improve SME market access could increase their growth.
• Future research could also look at why foreign-owned businesses perform better and why small enterprise owners in Ghana lack the ambition to expand their businesses.

Source(s):
‘The Changing Regulatory Environment and its Implications for the Performance of Small- and Medium-Sized Enterprises in Ghana’, by Ernest Aryeetey and Ama Asantewah Ahene, in ‘Regulating Development: Evidence from Africa and Latin America’ pages 237-271, Edward Elgar: Cheltenham, edited by Edmund Amann, 2006

id21 Research Highlight: 16 August 2007

Further Information:
Ernest Aryeetey and Ama Asantewah Ahene
Institute of Statistical, Social and Economic Research (ISSER)
P. O. Box LG 74
University of Ghana-Legon
Accra, Ghana

Tel: +233 21 501182
Fax: +233 21 512504
Contact the contributor: aryeetey@isser.ug.edu.gh; isser@ug.edu.gh

Institute of Statistical, Social and Economic Research (ISSER), Ghana

Centre on Regulation and Competition
Institute for Development Policy and Management
School of Environment and Development
The University of Manchester
Harold Hankins Building, Precinct Centre
Oxford Road
Manchester M13 9QH
United Kingdom

Tel: +44 (0)161 2752798
Fax: +44 (0)161 2750808
Contact the contributor: crc@manchester.ac.uk

Centre on Regulation and Competition, IDPM, Manchester, UK