Zambia is one of the poorest countries in the world. Private sector development is seen as increasingly necessary to stimulate economic growth, reduce poverty and achieve the Millennium Development Goals. But Zambia, along with many of its African neighbours, lacks growth-oriented companies.

New research from Reading University Business School, in the UK, examines why enterprises have not had much success in Zambia and how they could be encouraged. The micro, small and medium enterprise (MSME) sector is particularly important because it has the potential to provide employment and nurture future entrepreneurs. In Taiwan and other South East Asian economies, this sector has been the major driver of economic growth and exports.

The literature on small and medium enterprises (SMEs) identifies a variety of factors that influence economic growth. These include external factors such as policy, government attitudes and tax regimes, and internal factors such as leadership ability, attitudes to risk, marketing knowledge and levels of information. There is a lack of empirical data and analysis on the number of MSMEs in Zambia, however, and the sectors in which they operate.

Researchers interviewed 200 MSME owners across a range of sectors, including manufacturing, mining, trading and services. They found

• For 32 percent of respondents (Group A), the motivation for setting up a business was identification of a gap in the market.
• For 47 percent of respondents (Group B)., the motivation for setting up a business was to supplement family income
• Most Group A owners do little real market research and operate without much market knowledge.
• Fewer Group B owners are risk takers, preferring small businesses that will provide a sustainable income rather than large or growing firms.
• Rather than share information and risk others gaining a competitive advantage, most enterprises operate in isolation.
• There is a small third group of entrepreneurs that is willing to take risks; this group gathers accurate information to understand the market better.

The researchers recommend that the Zambian Government addresses a loophole in the tax regime that allows enterprises to operate tax-free for three years, and owners to continually re-register under a new name, thereby evading payments. They also recommend that policymakers recognise the wide diversity of enterprises and owner aspirations, and develop ways to deal with them. Possibilities include:

• a range of informal and formal networks (for example micro-credit institutions)
• policies to support the flow of information
• toolkits for identifying different types of entrepreneurs and their needs (prior to targeting resources and designing incentives appropriate to different groups)
• more statistical data and research on Zambian MSMEs to understand which firms should be targeted for growth
• training courses on the ‘practice of entrepreneurship’ at college and university level.

Source(s):
‘Enterprise Development in Zambia: Reflections on the Missing Middle’, Journal of International Development 19 (6), pages 793 to 804, by Christine Phillips and Seema Bhatia-Panthaki, 2007

id21 Research Highlight: 11 May 2008

Further Information:
Christine Phillips
School of Business
University of Reading
PO Box 218
Reading RG6 6AA
UK

Tel: +44 118 3785041
Fax: +44 118 3788226
Contact the contributor: c.b.phillips@rdg.ac.uk

School of Business, University of Reading, UK

Other related links:
id21 Insights Issue #37 'Putting poor people first. Making PPPs work for all'

'Poverty Reduction Strategy Papers: neglecting growth, employment and external shocks'

'Reforming water services in India'