The role of industrial zones in SME growth in emerging markets

BY OXFORD BUSINESS GROUP

As governments across Africa look to bolster the economic potential of small and medium-sized enterprises (SMEs), industrial parks and special economic zones (SEZs) are emerging as key enablers of their development.

SMEs are the backbone of the global economy, particularly in emerging markets, where they make up 90% of all businesses and create 50% of all jobs. The impact is higher in Africa, where SMEs employ around 80% of the continent’s workforce.

But while SMEs are a major economic driver, there is also significant room for further growth.
In Egypt, for example, SMEs employ 75% of the workforce, but contribute less than 20% of the country’s exports.

This is a common pattern across Africa. In Morocco SMEs make up 90% of all companies but account for roughly 30% of exports.

Given their economic potential, supporting SMEs is seen as a key path to expanding the middle class and achieving more inclusive economic growth in emerging markets.

Although SMEs have long been central to national growth and development plans, this focus has intensified as a result of the pandemic.

For example, in January Morocco’s government announced a series of measures designed to help SMEs, including greater access to credit and business support. In a similar vein, in December last year the Kenyan government and the World Bank unveiled a plan that will see 250,000 micro-enterprises and SMEs receive better access to finance.

SME presence in industrial parks

As governments across Africa look to SMEs as a driver of growth and post-pandemic recovery, SEZs and the industrial parks within them are viewed as instrumental to their development.

While SEZs have often been established to attract foreign investment from large, multinational companies, there are also examples of them being used to help develop SMEs.

Some think that the expansion of small business participation in industrial parks could lead to greater involvement in the industrial value chain, which could result in an increase in SME exports.

One player developing this strategy is Egypt’s Polaris Parks. Established in 2007, it has five industrial parks in the country, totalling 5m sq metres.

While the various sites host multinational giants such as Procter & Gamble, Schlumberger and Henkel, they are also home to a number of smaller regional and local companies.

Indeed, its Bosla Park facility caters specifically to SMEs. Located in 6th of October City, the park contains 300 ready-made business units, providing companies with various forms of industrial facilities and infrastructure.
Polaris Parks, which also offers prospective clients both legal and administrative assistance, is constructing a second SME-focused industrial park in its Sadat City facility.

“The role of free zones and industrial parks in Egypt is… not confined to supporting large companies and heavy industry, but to boost SME development and stimulate business connections between cities and parks,” Osman Arikan, general manager of Polaris Parks, told OBG in November last year.

“There is a key opportunity for SMEs in Egypt to build out their production capacity, test innovative ideas and ultimately begin exporting their products from industrial parks. The government has been encouraging the development of SMEs through special incentives and financing, while parks have put tools at SMEs’ disposal,” he added.

The current focus on SMEs aligns with the government’s broader goals. The Egypt Vision 2030 strategy contains several initiatives designed to stimulate SME growth, such as improving access to financing and business space, as well as helping small businesses integrate into value chains.

Capitalising on the AfCFTA

The increased focus on developing SMEs, and in particular those that operate from industrial parks, comes as governments across Africa look to capitalise on the benefits associated with the African Continental Free Trade Area (AfCFTA).

Launched on January 1, 2021, the free trade area brings together 54 of the 55 members of the African Union and has a combined GDP of $3.4trn. It aims to create a single market for goods, services and the movement of people, with plans to abolish tariffs on 90% of the goods produced within the zone.

The World Bank anticipates that the AfCFTA could boost African exports by 29%, or around $560bn, and lift more than 30m people out of extreme poverty by 2035. In a further sign of the bloc’s trade potential, the UN Economic Commission for Africa estimates that the AfCFTA could increase intra-African trade by 40-50% by 2040, with intra-African exports forecast to rise by 25-30% by that time.

In light of this, many countries are looking to bolster their industrial capacity.