The moderating influence of the external environment on the growth

There are a wide range of studies and literature focusing on the moderating influence of the external environment on the growth of informal businesses. For instance, Chittithaworn, et al. (2011:182) concluded that the external factors including government regulation, technological changes and the market have a great influence on the growth of informal businesses. From the same perspective, Gupta, et al. (2013:10) argued that the external environment provided opportunities and threats to businesses. In a broader sense, Gupta, et al. (2013:10) highlighted that the external environment encompasses a variety of factors which include the demographic environment that comprises such factors as size, growth rate, age composition and gender composition of the population. The heterogeneity of demographics in terms of varied tastes, preferences and beliefs affects the demand patterns of populations, and the business needs to design different strategies for the various demand patterns. Social environmental factors include human relationship and its effects on the society, hence the growth of the business.

Furthermore, Gupta, et al. (2013:11) showed that understanding a particular culture (a system of beliefs and values) and its proper analysis provides opportunities to establish and run a business while the political environment refers to the factors related to the management of public affairs and their influence on the growth of a business. The economic environment encompasses economic planning tools and techniques such as a five-year plan, budgets and monetary, fiscal, and industrial policies. Thus, the economic system is a very important determinant of the scope of business and therefore, a very important external factor influencing the growth of informal businesses.

According to Komollo (2010:2), the major problem associated with informal activities in the external environment is the lack of regulation. Komollo (2010:2) stated that the majority of informal businesses tend to encroach on the road reserves. This leads to a state of fear for these business owners as to when, rather than if, they will be evicted from their premises. This has led the traders to construct make-shift, ugly-looking structures that are poorly serviced, aesthetically unfriendly and environmentally unstable

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and from which they cannot reap the maximum economic benefits of their trade. The logic behind this mode of business operation is the fact that some potential customers consider the structures where the informal businesses operate as a nuisance, and thus do not want to be associated with them. In line with Komollo (2010), Osei-Boateng and Ampratwum (2011:6) highlighted that informal businesses tend to escape the regulation of government and consequently, they suffer the neglect of policy makers.

It is further noted that often informal businesses are victims of policy interventions such as city decongestion initiated by local governments (district, municipal and metropolitan assemblies). In a study of South African informal business sustainability in the Cape Town central business district, Young, et al. (2012:11322) noted that the failure rate of informal businesses was very high specifying that up to 70% of new businesses failed in their first two years of existence. Among the numerous key reasons for the failure were external factors which included economic factors (policies, procedures, inflation rates and interest rates) and social factors (crime and infrastructure).

Related findings were reported by Ishengoma and Kappel (2011:358) in their study on business environment and the growth potential of micro and small manufacturing enterprises in Uganda. It was specifically established that limited access to productive resources, to markets and high tax rates were some of the major external factors that impeded the growth of informal businesses. From the same perspective, Olawale and Garwe (2010:730) highlighted that economic variables and markets have a direct influence on the potential attractiveness of various strategies and consumption patterns in the economy and have significant and unequal effects on businesses in different industries and in different locations. Specific economic variables identified included the fiscal and monetary policies of the government, inflation, interest rates and foreign exchange rates. These variables influence the demand for goods and services and hence the growth of informal businesses.

A study by Politis and Gabrielsson (2006:5) established that although informal businesses play a vital role in the economic growth and development, they face considerable challenges in the early stages of their development. Furthermore, these

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challenges may hinder their continued expansion and growth. One of the main challenges that was highlighted was the equity capital gap, which referred to the problems faced by new and small ventures in attracting long-term finance from external sources for expansion and growth. It was specifically pointed out that informal businesses could not afford to borrow external capital due to high interest rates charged and also because they did not have collateral.

Onodugo and Ewurum (2013:14) asserted that businesses should scan the external environment for opportunities and threats if they are to survive. The opportunities and constraints are classified into what is generally regarded as the elements of the environment. The first element is the economic environment dealing with the mode of production, distribution, and consumption in an economy and also includes the state of the economy and the existing government economic policies thriving at the time. Socio- cultural environment was mentioned and refers to the totality of the prevailing values, norms, attitudes, morals and beliefs, which impact heavily on businesses.

In addition, Onodugo and Ewurum (2013:14) mentioned the political and legal environment that have to do with the existing laws and government policies that change from time to time and must be adhered to by businesses if they are to survive. This again offers businesses a number of opportunities as well as threats. Finally, the technological environment assists the business during transformation. It is noted that new technologies replace the existing ones, and assist in improving service delivery to the customers. Onodugo and Ewurum (2013:14) concluded that competition in most industries develops along the lines of technological advancement and innovation and any business that is slow to adapt to technological changes, such as in the case of informal businesses, is most likely to face extinction.

It is evident from the review of literature that the external environment moderates the growth of informal businesses through provision of the opportunities in terms of the market where they sell their products and services. On the adverse side, it presents a variety of challenges such as high tax rates and competition from superior formal businesses, that most informal businesses find difficult to compete and cope with and

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eventually ruin their survival and growth. Hence, depending on the ability of informal businesses to take advantage of opportunities or guard against external challenges, the external environment may positively or negatively influence the growth of informal businesses. Specifically, external opportunities, if effectively utilised enhance business growth and have a positive influence while external challenges that cannot be guarded against lead to business failure (Politis & Gabrielsson, 2006:5; Onodugo & Ewurum, 2013:14).