South Africa’s economy grew at a modest annual average rate of 0.3% to 2% from 2021 to 2023. In contrast, the Southern African Development Community’s (SADC’s) economy expanded at a faster pace, with average growth rates ranging from 2.5% to 4%, according to the World Bank, International Monetary Fund (IMF), and United Nations.
Leading SADC economies included Botswana, Mozambique, Zambia and Tanzania, experienced more robust growth, ranging between 3.5% and 6%. Other countries worth noting included Angola (which grew by between 3% and 4%), and Malawi (about 4% annually). Given these figures, a regional approach offers greater growth potential for South African businesses, particularly small and medium-sized enterprises (SMEs) looking to scale in the next three to five years. As the South African domestic market remains highly competitive and dominated by larger, more established enterprises, the SADC region presents untapped opportunities for expanding businesses to grow sustainably.
In South Africa’s mature and predominantly oligopolistic market, competition for limited resources will be fierce, with procuring teams typically awarding opportunities to larger and more established organisations. For smaller enterprises, this creates a tough environment where the odds of breaking through are slim. The larger players are often seen as “safe bets” for procurement, suggesting smaller companies will need to go the extra mile to prove themselves and avoid costly mistakes to stand a chance over the longer-term. Given this context, many SMEs face significant barriers to growth domestically. In contrast, the SADC region offers a more favourable landscape for expansion. But this comes with problems, including differing regulations, business environments and socio-cultural dynamics. Setting up in a new country involves significant costs, and mistakes in regional expansion can jeopardise not only the venture abroad but the company’s operations in its home market as well. For this reason, collaboration with local partners in target markets is crucial.
Partnering with a local enterprise can provide a South African business with vital knowledge, networks and trust within the host market. By teaming up with a host nation local partner, a South African SME signals its long-term commitment to the region and creates mutually beneficial relationships that support both businesses’ success. But partnerships should be approached with care and thorough due diligence. Assessing the prospective partner’s track record and gathering referrals from trusted sources can mitigate such risks. It is also essential to carry out commercial, legal, and financial checks to ensure a sound foundation for collaboration.
Financing regional expansion is another critical challenge. While SADC has yet to establish itself as a cohesive trading bloc, making regional funding options limited, donor agencies currently fill part of the financing gap. But donor funding is finite and cannot support widespread growth. The SMEs seeking to scale up must look to development financiers, despite most of these institutions preferring to usually lend to larger, established companies with proven financial stability. For smaller businesses, gaining access to capital for regional expansion requires presenting a compelling case for commercial viability. Companies must demonstrate solid revenues, profitability and the ability to repay loans. Additionally, securing guarantees from home markets can be complex, leading some businesses to seek funding within each country they plan to expand into. As a result, local partnerships will again be beneficial here due to them providing some of the local credibility needed to secure financing from host country banks or co-financing arrangements between regional and South African lenders.
When expanding regionally, SMEs should focus on their core strengths and adjust only where necessary. Trying to diversify too much in unfamiliar markets can lead to failure. Instead, businesses should leverage their existing success while tailoring their approach to local market nuances. For example, a refrigerator manufacturer looking to expand into a regional market where most consumers are weekly wage earners might adjust their product mix to offer more units at affordable price points for these consumers. This adjustment ensures the company stays true to its core business model while catering to local market conditions.
Given the SADC’s diverse economic landscape, several sectors offer significant growth opportunities for South Africa’s scaling businesses. These include:
Based on the above, focusing on regional opportunities in the SADC presents a viable pathway for scaling South African SMEs facing a depressed local economy. Key to success will be strategic partnerships, securing adequate funding and remaining committed to core strengths while adapting to local market demands. As SMEs navigate these opportunities, learning from larger enterprises and following a carefully planned regional strategy will ensure sustained, long-term success.
James Maposa is the managing director at Birguid.
