The study highlighted some of the development challenges facing South Africa. These include high levels of unemployment, poverty and income inequality. The objective of the study is to examine the critical role that small and medium enterprises (SMEs) play in alleviating some of the development challenges facing South Africa. SMEs are expected to be an important vehicle to address the challenges of job creation, sustainable economic growth, equitable distribution of income and the overall stimulation of economic development in South Africa. The study finds that the perception of entrepreneurial opportunities and capabilities has increased since 2001 but still relatively low by international standard. In addition, the rate of business establishment is much lower than the rate of discontinuance. There is a net loss of small businesses. These factors may negatively impact on the ability of SMEs to help in alleviating some of the development challenges facing South Africa. Policy measures to improve the low rate of business establishment and reduce the high rate of discontinuance are of critical and urgent importance in South Africa.