Why does SA have so few entrepreneurs?
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.