Why does SA have so few en­trepreneurs?

Finweek English Edition - - INSIDE - BY LISA ILLING­WORTH

South Africa’s rate of to­tal earlystage en­tre­pre­neur­ial ac­tiv­ity (TEA) has de­clined by 34% from 2013 to 2014, with only 7% of the coun­try’s adult pop­u­la­tion en­gaged in en­trepreneur­ship – a mere quar­ter of that seen in other Sub-Sa­ha­ran African (SSA) coun­tries.

The coun­try’s TEA rate in 2014 is three times lower than the en­tre­pre­neur­ial ac­tiv­ity rate that would be ex­pected, given its per capita in­come, ac­cord­ing to the lat­est Global En­trepreneur­ship Mon­i­tor (GEM) re­port.

Given the coun­try’s high rates of un- and un­der­em­ploy­ment, es­ti­mated at 40%, and one of the high­est lev­els of in­come in­equal­ity in the world, it is cru­cial that the coun­try foster a more favourable busi­ness and in­vest­ment cli­mate for small- and medium-sized en­ter­prises, which have been shown to con­trib­ute sub­stan­tially to job cre­ation, eco­nomic growth and more equal in­come dis­tri­bu­tion in de­vel­op­ing coun­tries, GEM said.

Ma­jor con­straints for en­trepreneurs in SA are an in­ad­e­quately ed­u­cated work­force, i neff icient gov­ern­ment bu­reau­cracy, high lev­els of crime and oner­ous labour laws, it said.

Chris Dar­roll, CEO of Small Busi­ness Project (SBP), a devel­op­ment and re­search com­pany spe­cial­is­ing in im­prov­ing the en­vi­ron­ment for do­ing busi­ness, says that SA’s eco­nomic en­vi­ron­ment “is a hos­tile one for en­trepreneurs. The reg­u­la­tory bur­den amounts to, on av­er­age, 75 hours per month of ad­min­is­tra­tion, which in turn trans­lates into 4%-6% of turnover ev­ery year that a small busi­ness needs to spend just on pay­ing some­one to spend time ad­her­ing to red tape re­quire­ments. With in­creas­ing pres­sure on mar­gins from our en­ergy cri­sis, this t ype of pres­sure is a risk that many busi­nesses don’t sur­vive.”

Mike Her­ring­ton, the prin­ci­pal au­thor of the GEM re­port and head of the UCT Cen­tre for In­no­va­tion and En­trepreneur­ship, says that lit­tle has been done since the an­nounce­ment of red tape re­duc­tion plans to vis­i­bly im­prove the reg­u­la­tory en­vi­ron­ment for those want­ing to start a busi­ness. “In coun­tries like Chile, any­one is able to reg­is­ter a busi­ness on­line and, in­ter­est­ingly, the ma­jor­ity of new busi­nesses are reg­is­tered be­tween the hours of 12 and five in the morn­ing.”

Lindiwe Zulu, min­is­ter of small busi­ness, said that her depart­ment is “tr ying our best to re­duce th­ese ad­min­is­tra­tional draw­backs, but it is of­ten not within our con­trol, as other de­part­ments have set up th­ese reg­u­la­tions and it takes time to get ev­ery­one around the same ta­ble”.

An­other ma­jor con­straint is ed­u­ca­tion lev­els, cou­pled with the lack of an ad­e­quately skilled work­force. “There is a di­rect link be­tween lev­els of ed­u­ca­tion and busi­ness sus­tain­abil­ity,” Her­ring­ton says. “The more ed­u­cated the en­tre­pre­neur, the more likely the en­tre­pre­neur is to be able to sus­tain a busi­ness. Our ed­u­ca­tion sys­tem stil l teaches chil­dren to be em­ploy­ees and not em­ploy­ers.”

While there has been an in­crease in women’s en­trepreneur­ship, pri­mar­ily due to gov­ern­ment sup­port, the per­cep­tion of op­por­tu­ni­ties to start a busi­ness, and con­fi­dence in one’s own abil­i­ties to do so, re­main low com­pared to en­trepreneurs in other SSA coun­tries.

There are also very few gov­ern­ment i ni­tia­tives that con­trib­ute to­wards im­prov­ing en­trepreneur­ship. The most suc­cess­ful ones are sup­ported by pri­vate com­pa­nies, such as An­glo Amer­i­can’s Zimele pro­gramme and SAB’s Kick­Start. The level of busi­ness dis­con­tin­u­ance in

SA also re­mains high com­pared to the rate of busi­ness start-ups and ex­ceeds the es­tab­lished busi­ness rate, re­sult­ing in a net loss of a small busi­ness ac­tiv­ity and sub­se­quent job losses, the GEM re­port found.

The rea­sons for busi­ness dis­con­tin­u­ance are many and var­ied (see ta­ble), and some can be seen as pos­i­tive, such as the op­por­tu­nity to sell, pur­su­ing an­other op­por­tu­nity or planned re­tire­ment. How­ever, only 9% of South African busi­ness ex­its in 2014 were for pos­i­tive rea­sons, com­pared to an av­er­age of 16% for SSA, said the re­port. A mas­sive 62% of busi­nesses closed in 2014 for f inan­cial rea­sons: they were ei­ther not prof­itable, which is show­ing an up­ward trend, or they had prob­lems ac­cess­ing fi­nance to sus­tain the busi­ness. How­ever, sig­nif icantly more South African busi­nesses are closing be­cause of a lack of prof­itabil­ity com­pared to their re­gional coun­ter­parts.

“This could be be­cause of low lev­els of busi­ness-re­lated skills in South African en­trepreneurs; lack of af­ford­able and eff icient sup­port struc­tures and in­fra­struc­ture [trans­port, elec­tric­ity, etc.]; or the fact that many en­trepreneurs in South Africa are ac­tive in over-traded sec­tors pop­u­lated by low profit mar­gin busi­nesses and a high level of com­pe­ti­tion for limited mar­kets, which can threaten the sus­tain­abil­ity of their busi­nesses.”

As t he countr y can no l onger de­pend solely on large or­gan­i­sa­tions or gov­ern­ment to cre­ate jobs, it is cru­cial to pro­vide a more busi­ness-friendly en­vi­ron­ment for en­trepreneurs to flour­ish. “South Africans must move away from the con­cept of seek­ing em­ploy­ment to one of cre­at­ing em­ploy­ment for one­self and oth­ers,” the re­port said.

Mike Her­ring­ton

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