IMPACT OF COVID ON SMEs

CHAPTER TWOLiterature Review2.1 OverviewThis chapter is a comprehensive review of the existing literature on the impact of Covid-19 pandemic on the SMEs and the strategies that were adopted in the recovery process. The review had a goal of critically analyzing the research conduct in this area and identifying key themes and gaps in the knowledge which should be addressed by subsequent studies. Covid-19 was first diagnosed in Wuhan china and due to international travels, the virus spread to many other countries in the world including South Africa (United Nations, 2019). This resulted to the government implementing policies that were intended to curb further spread of the virus. Although the measures that were put across by the government were useful in preventing further spread of Covid-19, they affected the global economy and the local economy. Many businesses were affected but SMEs were the most affected by the measures. This is because SMEs are the most vulnerable business (Anakpo & Mishi, 2021. pp. 67) Covid-19 had impact on many sectors of SMEs. There was an economic impact of Covid-19 on SMEs, operational challenges and the adaptation strategies, financial support that SMEs received during the pandemic and government policies that were made during that period, digital transformation that SMEs had to make and the technological adoption, entrepreneurial resilience and innovation and finally psychological and wellbeing effect of the pandemic on SMEs operators (Fubah and Moos, 2022, pp. 1944) This section highlights the main findings, trends and gaps in the knowledge. This research identified the knowledge gaps on the impact of Covid-19 on the SMEs and the strategies that were adopted in the recovery. By conducting a thorough literature review on the impact of Covid-19 on SMEs and the strategies that were adopted in the recovery, this research had an aim of contributing to the existing knowledge base on the same topic, provide insight to the owners of SMEs, inform policy making decisions and also to provide insight to the future researchers on the same topic (Rajagopaul, Magwentshu, & Kalidas, 2022). 2.2 Contextualizing Covid-19The Covid-19 pandemic, caused by a novel coronavirus SARS-CoV-2, had emerged as a glolal health pandemic and it had impact on socio-economic. The virus was first identified in Wuhan China in late 2019 and due to its infections nature, the virus spread rapidly to other countries and the first case of Covid-19 in South Africa was identifies in March, 2020. The spread of the virus resulted to social and economic disruption in South Africa and the world at large (United Nations, 2019) The Covid-19 has its roots in the Huanan seafood wholesale market in Wuhan, Hubei province, China. The marked is believed to be the potential source of zoonotic transmission from where the virus spread from animals to human beings. The initial cases which had respiratory symptoms were reported in December, 2019 and the world Health Organization (WHO) declared it a public health emergence of international concerns in January, 2020 (WHO, 2020). The virus was highly infectious and it quickly spread from one person to the other leading to the spread of the virus beyond China borders. Due to the rapid spread of the virus, strict measures were implemented to curb the spread of the virus. The measures include; total lockdown, social distancing, travel restrictions and the implementation of health and safety protocols such as wearing of mask in public places. The measures were implemented to curb the spread of the virus, elevate burden on the health care systems and to protect public health (United Nations, 2019) The covid-19 pandemic had presented an unpredictable crisis to the global economy and since SMEs are the most vulnerable to global economic shock, they were the most affected sector. SMEs were affected in many ways, first of all there was a significant decline in the economic activity and this was because of the disruption of the supply chain, mandatory closures and decrease in the demand of goods and services by consumers (Naidoo, 2021, pp. 423). There are many sectors of SMEs and therefore sectors like hospitality, retail, tourism and art was hit hardly by the impact of the pandemic. This is because the government had restricted movement, social gatherings and this affected al non-basic businesses. In addition to that, SMEs faced operational challenges while adopting to the new realities that was caused by the pandemic. . Some changes that the operation of SMEs experienced are; remote working, production and distribution changes (Muriithi, 2021: 76). The implementation of the health and safety guidelines that were provided by the government had a significant impact on the SMEs. Sudden shift to online work and remote operations was a challenge to the operation of SMEs as most of them did not have the necessary skills to adopt to the technological changes and they also lacked the necessary infrastructure to run remotely. Financial limitation made the situation even harder for the SMEs. There was a decrease in the cash flow, difficulty in accessing credit since the creditors were being strict, since there was a low cash flow, SMEs had difficulty in meeting their financial obligation such as paying of salaries. During the pandemic period it is a reality that many SMEs had to shut down their operation completely (Anakpo & Mishi, 2021. Pp 76)By recognizing the role of SMEs in the economy, governments around the world had to offer support to the SMEs. The support that was offered by government was expected to offer financial assistance to SMEs, ensure that they do not shut down and also facilitate the process of recovery from the shock that was caused by the pandemic. Various measures were implemented by the government. The government offered financial assistance such as loans, grants and wage subsidies to ensure that SMEs survive the impact of the pandemic and that they can sustain their operation (Anakpo & Mishi, 2021. pp. 9) Tax relief measures were also implemented, deferral of repayment of loans and subsidies on rent in order to ease the financial burden that SMEs were going through while navigating through the pandemic. In addition to that, policies that promote digital transformation, adoption of e-commerce and innovation in the business had been encouraged by the government to enable SMEs to adopt to the new normal. However, the effectiveness and accessibility to these support measures varies from one country to another. Many SMEs particularly those with limited financial literacy and those that lacks digital transformation have experienced difficulty in accessing and navigating the complex web of support program (Naidoo, 2021, pp. 423). Covid-19 brought a profound disruption to the economy and society globally. SMEs are important economic drivers, they faced uncertainties and significant challenges due to the impact of the pandemic. This context provides an insight to the unique circumstances that SMEs had to operate through. By deeply researching on the origin, global spread and the impact of Covid-19 on SMEs, this research has already contributed to the knowledge base surrounding the challenges that SMEs faced and the strategies that were used in the recovery (Rajagopaul, Magwentshu, & Kalidas, 2022). 2.3 Role of SMEs in the Socioeconomic DevelopmentSmall and Medium-sized enterprises (SMEs) play crucial role in driving the socioeconomic development in many countries in the world. Their contribution to the economy involves many aspects including economic growth, poverty reduction, innovation, creation of jobs and social inclusivity (Muriithi, 2021: 66). This research in this section has a comprehensive review of the role of SMEs in socioeconomic development, giving their significance and the mechanism through which they contribute to the social and economic objectives. It is not a secret that SMEs contribute to the growth and development of the economy. They contribute to the GDP of the country by generating output, creating job opportunities and also by fostering the entrepreneurship of a country. There are different industries when it comes to SMEs and what each SME deals with, they often offer specialized services and products which cater to the specific need of the customer. They are flexible and agile which is why they are able to respond quickly to the market demands which as a result they exploit emerging opportunities (Mishra & Alok, 2017: 102) SMEs also contribute to the economic growth through their capacity to innovate and adopt new technologies in the market. They are often at the forefront of introducing new products, advancement in technology, business models and new process of exploiting the market demand. Their ability to adapt and deployment of new technologies enhances their productivity, efficiency and competitiveness and therefore it stimulates economic growth in a large scale (Dladla, 2021: 69)SMEs also plays a major role in creation of jobs and new opportunities. In many economies, SMEs are the primary source of employment and in particular in sectors such as services, manufacturing and in creative industries. Many operations in the SMEs are labor intensive, they provide such opportunities to the local community and the marginalized groups, including youth, women and individuals with no or limited formal education (Muriithi, 2021: 79). The nature of work n SMEs which is labor intensive, enables them to utilize surplus labor and reduce the rate of unemployment and therefore it helps to reduce income inequality and improve social stability in the society. SMEs creates multiplier effect by generating indirect employment opportunities through their supply chain and by stimulating the demand of goods and services in the local economy (Anakpo & Mishi, 2021. pp. 77)SMEs play important role in the socioeconomic development through their role in fostering Innovation and entrepreneurship. They are actually the breeding ground for entrepreneurial talent and provides a platform through which individuals can transform innovative ideas into viable business. The entrepreneurial spirit is one of the characteristics of SMEs and the ability to adapt to the challenging market dynamics. In SMEs, innovation takes various forms, including product innovation, business model innovation and process innovation (United Nations, 2022: 69). They are known to introduce incremental improvement and innovations that helps to drive progress in technology and enhancement of competitiveness. SMEs often collaborate with research institutions, large enterprises and universities in creating innovation ecosystem that will help in knowledge spillover which as a result helps to promote regional development in the economy (Muriithi, 2021: 99)SMEs also play a role in the reduction of poverty and increase social inclusion. By creating employment opportunities particularly in the marginalized areas and rural areas, SMEs contribute to income generation and reduction of poverty. They empower communities and individuals by providing avenue for upward social mobility and economic participation. SMEs also contribute to social inclusion and promote equal opportunities and diversity. While offering employment opportunities, SMEs are inclusive as they offers opportunities to individuals from different backgrounds including women, individuals with disabilities and the minority group of peoples. SMEs have the ability to meet local needs and address social challenges through their products, services and community engagement (Rajagopaul, Magwentshu, & Kalidas, 2022). SMEs also plays a role in regional development and economic resilience. In most cases, SMEs are dispersed across different regions, this includes rural areas and remote areas which as a result contributes to the balance in regional development. They create economic activities outside major urban areas which as a result stimulates local economy and enhance the quality of life in underserved regions (Saundrers, Lewis & Thornhill, 2016: 49). Additionally, SMEs are more resilient to economic shock and crises compared to large enterprises. Their small size, flexibility and the close connection to local markets enable them to adapt quickly to change in circumstances. During a period of economic shock, SMEs can act as a source of stability which can help to mitigate the negative impact on employment and local economies. Finally, it is clear through this research that SMEs play important role in socioeconomic development. Their entrepreneurial spirit and ability to make new innovations make them essential drivers of productivity, competitiveness and regional development (Mishra & Alok, 2017: 119). 2.4 Challenges facing selected SMEs in South AfricaSmall and medium-sized enterprises (SMEs) in South Africa face a number of challenges that hinder their growth, sustainability and contribution to the economy. These challenges arise from various factors, including the regulatory framework, business environment, and shortage of skills, limited access to finance and the dynamics in the market (Creswell & Poth, 2017: 23). This section is an overview of the literature on the challenges facing selected SMEs in South Africa. This research has shed light to the key obstacles that SMEs encounter in their operation. Access to finance is one of the key challenge that faces selected SMEs in South Africa. Many SMEs struggle to secure funding to expand their business operation or to open new SMEs. According to traditional funding institutions, SMEs are believed to be a high risk venture which as a result they are not given priority in accessing funds, they are also given stringent lending requirement and high interest rate (ITC, 2020:5). These measures restrict SMEs the ability to invest in technology, research and development, equipment and human resources. Also the collateral requirements imposed by banks and other financial institutions act a barrier for SMEs especially these that are in the informal sector and the ones that lack tangible assets. Lack of alternative financial options and limited financial literacy increases the difficulty of accessing funds to sustain their business and open new branches (Muriithi, 2021: 99)SMEs in South Africa faces a complex regulatory environment which is characterized by high compliance cost. Since the compliance cost is high, it makes SMEs to channel more time in it, resources and attention while forgetting the main business activity. Some of the things that the SMEs must comply to, includes taxation, labor law, licensing and health safety and standards. The compliance cost affect SMEs especially those with limited administrative capacity (ITC, 2020:5). Additionally, frequent changes in the compliance requirements complicates the process even further. Lack of clear and consistent guidelines which is coupled with limited availability of support services, makes the compliance even more complicated making the SMEs vulnerable to fines, penalties and legal dispute with the regulatory bodies (Rajagopaul, Magwentshu, & Kalidas, 2022). Shortage of skills and human capital development is another major challenge that SMEs face. SMEs struggle to attract and retain skilled personnel due to the competition from large enterprises. Shortage of skilled labor in sectors such as engineering, finance, technology hinders the ability to innovate, improve new technologies and adopt new technologies. Many times, the education and training system does no align with the needs of SMEs, thus leaves a gap in the availability of relevant skills. Another cause of human capital challenges is the limited access to quality education and training programs (Dladla, 2021: 65) Market dynamics and competitive environment is another challenge facing SMEs in South Africa. SMEs operate in a competitive and dynamic environment. Large companies often dominate market with established brands and extensive distribution network. SMEs struggle in the competition with the large enterprises leading to limited market share, market concentration and reduced bargaining power. Additionally, limited market access and opportunity to export limits their customer base beyond the local market. Inadequate marketing and sales strategies, lack of market information and inadequate marketing strategies hinder SMEs ability to reach to new customers (Rajagopaul, Magwentshu, & Kalidas, 2022). Finally, infrastructure and technology constraints causes a significant challenge to SMEs in South Africa. Inadequate physical infrastructure, including power supply, transportation and telecommunication hinders the efficient and cost effective operations of SMEs especially those in remote areas. Limited access to affordable and reliable internet access further limits SMEs ability to use digital technologies, online platforms for business growth and e-commerce. Technology is associated with high cost which may be expensive for SMEs to afford. Finally, lack of digital skills hinders the ability of SMEs to fully adopt technology in the operation(Mishra & Alok, 2017: 79) 2.5 Sustainability of SMEs Sustainability of SMEs has recently gained attention due to their role in economic development. This section is an overview of the sustainability of SMEs based on research, highlighting key dimensions, drivers and challenges associated with sustainable business practices. Sustainability of SMEs has three interrelated dimensions, including economic, environmental and social. The economic dimension has a focus on the long term profitability and viability of SMEs, which ensures the ability of SMEs to generate sustainable economic values to stakeholders. It includes consideration such as financial performance, efficient resource allocation and creation of shared values to employees, customers, local community and suppliers. Environmental dimension of sustainability focuses on the impact of SMEs on the natural environment and use of environmental friendly practices. Which includes, reduction of carbon emission, minimization of waste generation, conserving resources and adoption of clean production method (Humphreis, Neilson & Ulyssea, 2020: 52) SMEs can contribute to environmental sustainability through energy efficient measures, use of sustainable sources and waste management. Social dimension of sustainability addresses the social impact SMEs on community, employees and the society at large. It includes fair labor practice, promotion diversity and inclusion, support to local communities and engagement in corporate social responsibility initiatives. By maintaining social sustainability, SMEs can build strong relationship with the society and stakeholders (Dladla, 2021: 113) There are various drivers that motivates SMEs to adopt sustainable practice and one key driver is regulatory pressure. It includes the regulation by the government and regulatory bodies which are used by businesses. Compliance with the regulations motivates SMEs to integrate sustainability into their production. Failure to compliance results to legal penalties. Another driver is the consumer demand for sustainable services and products. Also the business case for sustainability is a driver for SMEs. Sustainable practices leads to cost effectiveness and improved operational performance (Muriithi, 2021: 99)While drivers are incentives for SMEs to adopt to sustainable practices, there are challenges and barriers. First, the limited resources that are available act as a barrier. The cost that is associated with adoption of sustainability is also a barrier. Lack of awareness about the sustainable practices is a barrier too. The complexity and fragmentation of supply chain is also a barrier. Finally, absence of supportive policies, regulations and incentives hinders the sustainability efforts (Muriithi, 2021: 34).ConclusionIn conclusion, Small and Medium-sized enterprises (SMEs) play a vital role in driving the economic growth, job creation and innovation. However, there are many challenges that hinder the growth, sustainability and contribution to the economy. This literature review has highlighted the key challenges faced by selected SMEs in South Africa, additionally, the review has addressed the dimensions, drivers and challenges of the sustainability for SMEs. While SMEs face significant challenges, they also immensely contribute to innovation, job creation and economic growth. Addressing the challenges they face and promoting sustainable practices among SMEs requires a multi stakeholder approach whereby the government, industry, financial institution, educational institution work together to create an enabling environment. 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