entrepreneurship in south africa

7/29/2019 Entrepreneurship in South Africa

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Table of Contents

What is the status quo of Entrepreneurship SA?............2

Profile of the South African entrepreneur...........................................................3

Sector Activity....................................................................................................3

Education............................................................................................................4

Tax burden......................................................................................................... 5

Business support services.................................................................................. 5

Financing............................................................................................................ 6

International Comparisons...........................................6

Entrepreneurial Activity......................................................................................6

Entrepreneurial Aspirations................................................................................6

Education and training........................................................................................7

Is this a favourable environment for ME (you) to start a

business? (Support your arguments with valid facts)....7

Interventions aimed at increasing female participation......................................8

Education and training........................................................................................8

Government policies...........................................................................................8

Access to finance................................................................................................9

Conclusions.................................................................9


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What is the status quo of Entrepreneurship SA?

South Africa has participated in the Global Entrepreneurship Monitor

(GEM) survey since 2001, and in the time since, has compiled historical

data that provides insight into the extent and the nature ofentrepreneurship activity in South Africa.

In 2002, an analysis of 37 countries showed that South Africa ranked 19 th

in overall entrepreneurial activity with 6.54% of the adult population

involved in an entrepreneurial venture. This rate was the lowest of all the

developing countries involved in the survey, which included Thailand,

India, Chile, Argentina, Brazil, and Mexico along with South Africa. Other

measures showed South Africa ranked 15th in start-up activity and 29th in

new firm activity, with almost 5% of the adult population involved in

starting a business and only 2% of the adult population involved in new

firms.

In 2002 South Africa, ranked lowest of all participating developing

countries in all measures of entrepreneurship.

Looking at the 2003 data, South Africas ranking continued to drop in the

international rankings of entrepreneurial. South Africa was ranked 22nd out

of 31 countries in terms of new business formation. According to a new

measure of entrepreneurial activity within established firms introduced by

the GEM survey, South Africa ranked 36th out of 40 countries. Once again,

South Africa was ranked last amongst the developing countries. For the

first time in 2003, another African developing country was included in the

survey. The inclusion of Uganda showed that low total entrepreneurial

activity (TEA) rates are not an African phenomenon as Uganda showed the

highest TEA rate of all the participating countries in 2003 (GEM, 2003).

By 2004 the TEA index in South Africa was 5.4% compared to an average

of 9.4% and 21.0% in the developing countries. By 2004, it is pretty

certain that South Africa has a relatively low TEA rate compared to theother countries. South Africas Total Early-stage Activity (TEA) rate in 2005

is 5.1%.

The 2006 report indicated that South Africas position in the GEM rankings

has deteriorated over time despite improved macro-economic conditions

in the country (GEM, 2006).

In 2008, South Africa ranked 23rd out of 43 countries, with a TEA rate

below the average rate (10.6%) of all participating countries. South

Africas TEA rate of 7.8% is significantly lower than the average for allefficiency-driven economies (11.4%) as well as the average for all middle


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to low income countries (13.2%). South Africas performance in terms of

relative position has, since 2001, consistently been below the median and

this trend continues in 2008 (GEM, 2008).

The latest data on South Africas low entrepreneurial activity ratescontinues to paint a bleak picture of the SMME sectors current potential

to contribute meaningfully to job creation, economic growth and more

equal income distribution (GEM, 2008). In fact, given that South Africa is

characterised by a dual economy a formal and an informal economy it

would be expected that TEA rates would be in line with other developing

or emergent economies such as Argentina, Chile, Brazil and Peru. In 2008,

these countries achieved TEA rates that are two to three times higher

than that achieved by South Africa (GEM, 2008).

Profile of the South African entrepreneur

The 2004 GEM survey discovered that men and people between the ages of 25 and 44 are morelikely to become entrepreneurs than women and people younger than 25 and older than 44.

Whites were also more likely to be entrepreneurs than black Africans. However, the survey went on

to indicate that the differences between whites and black Africans largely reflect lower levels of

education and a higher probability of being located in a rural area for black Africans compared to

whites (GEM, 2004).

The GEM 2007 report concludes that youth in South Africa are positively

orientated towards entrepreneurship. Despite this positive orientation

however, there seems to be resistance or fear towards starting ones ownbusiness. Various factors can be cited for this phenomenon such as a lack

of self-confidence, the complexity of starting a new business and the level

of knowledge/education, which might hamper entrepreneurial activities.

Although other factors were also identified, such as a general lack in

understanding of small business management, the important factors were

more in terms of education and self-confidence.

The profile of South African entrepreneurs remains largely unchanged

throughout the years South Africa has participated in the GEM surveys.Men are still 1.6 times more likely than women to engage in

entrepreneurial activity. The 2008 research shows that population group

still has a strong influence on entrepreneurial activity, with whites and

Indians being more likely to start a business than coloureds or black

Africans (GEM, 2008).

Sector Activity

Almost two-thirds of early-stage entrepreneurial activity in South Africa is

in the consumer services sector as can be seen inTable 1below. Although


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the consumer services sector also accounts for the majority of established

business entities, it is by a much smaller margin. Both the transformative

and business services sectors are well represented among established

businesses (GEM, 2008). Given the low levels of skills and education in the

South African population, it is unsurprising that the majority of TEAbusiness entities are in the consumer services sector. Barriers to entry

into this sector, in terms of both skills and capital required, are low.

Table 1: Involvement in entrepreneurial activity, by sector

Sector TEA business

entities (%)

Established business

entities (%)

Extractive 1.5 0.0

Transformative 18.2 33.0

Business services 15.3 19.0

Consumer services 65.0 48.0

Source: GEM Report, 2008

Overall, however, the majority of businesses have a low technology

orientation. There are a number of possible reasons for this, the most

important being the low level of technological and science skills in the

majority of the South African population, as well as the high cost of new(often imported) technology which is beyond the means of most small

businesses. Given that technology is an important productivity enhancer,

it is worrying that South Africa is lagging in terms of uptake of new

technology.

Education

Education is strongly associated with rates of new firm activity.

Entrepreneurs with a matric and/or tertiary education are, on average,more likely to be able to take a new venture beyond the start-up phase.

Increasing the proportion of young people who obtain matric is likely to

increase success rates of start-up activity and have a positive impact on

job creation. Increasing access to and success in secondary and tertiary

education will ensure a higher rate of entrepreneurial activity among

future generations of South Africans.

In 2002, the long-term priority for increasing entrepreneurial activity was

cited as the need to improve access to and success in education. Thebiggest concern was the lack of core skills among entrepreneurs, i.e.


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financial literacy, record-keeping and marketing. Again in 2003, two

priorities seemed to stand out. Firstly, changes in the school education

system are required to raise entrepreneurial awareness and create a good

grounding in basic financial and businesses skills. Secondly, effective

training in specific financial administration skills is required on a fairlylarge scale amongst existing entrepreneurs.

The experts in South Africa proved to be more pessimistic than the

majority of efficiency-driven countries about the availability of help

outside the education system as well as the quality of school-level and

post-school entrepreneurship training. The strongly negative rating of the

quality of entrepreneurship education at school level is also a clear

indication that the education system in South Africa is failing to prepare

learners adequately for meaningful participation in the economy. Thesefindings suggest that a lack of human capacity is one of the key obstacles

to increased entrepreneurial activity in South Africa. However, without a

more enabling environment that encourages individuals to see

entrepreneurship as a financially viable employment option, it is

debatable whether South Africa will experience a significant increase in

entrepreneurial activity. This is particularly the case in rural areas as well

as the less developed provinces.

Tax burden

In 2002, it was cited that entrepreneurs in the formal sector are hindered

by the tax compliance process which imposes a heavy administrative

burden on young firms. There is a great need to reduce the administrative

burden of compliance on firms in the early stage of development by

introducing three-monthly cycles for payment of PAYE, skills development

levy and UIF.

Business support servicesBusiness support services for registered businesses, particularly those

provided by government, are often inaccessible or of poor quality. We

believe that the relevant public authorities urgently need to develop the

capacity to raise the quality of support services delivered to

entrepreneurs.

Implementation of successful government programmes depends on

private sector partnerships and the involvement of experienced and

successful entrepreneurs at all levels in the process.


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Financing

A micro-finance industry which can operate effectively on a large scale to

support the informal sector would enable a greater number of opportunity

entrepreneurs to rise up from the informal sector. This micro-finance

industry should be more oriented to production rather than consumption.In 2003, however, financial supportis identified as the number one

limiting factor. Overall for developing countries financial support is the

number one limiting factor according to the country experts in these

countries.

International Comparisons

Entrepreneurial Activity

In comparing South Africa to other efficiency-driven economies, it can be

seen that Latin American countries have a relatively high early stage

entrepreneurial activity and Eastern European countries have relatively

low rates of early-stage entrepreneurial activity. The United States has

more early-stage entrepreneurial activity than EU countries and Japan.

Some European countries such as Belgium, Germany and France have the

lowest rates of entrepreneurial activity levels. This is indicative of the

mindset of Europeans in terms of risk aversion and their preference for

employment over self-employment. However, this also demonstrates that

the alternatives available to Europeans such as good income, job or socialsecurity is more advanced that the South African system.

Entrepreneurial Aspirations

The international GEM survey shows that high-growth expectation

entrepreneurial activity (HEA) varies between countries. So does the

relative prevalence of this activity within early-stage entrepreneurial

activity as a whole. For example, among innovation-driven economies,

there is a 15-fold difference between the adult-population prevalence rateof high-expectation early-stage entrepreneurship of the United States and

Greece.

The difference is over five-fold between the two largest emerging

economies in the world, China and India. Colombia, China, Peru and Chile

exhibit the highest prevalence rates of high-expectation entrepreneurship

of the factor- and efficiency-driven GEM countries.


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Education and training

GEM expert surveys in most participating countries have almost without

exception, cited entrepreneurship education and training as poor or

inadequate. The relationship between training in starting a business and

entrepreneurial attitudes, aspirations and activity has been found to begenerally positive, but varies by phase of economic development (GEM,

2008).

In factor-driven economies, quality and quantity of training is associated

with higher levels of necessity based entrepreneurial activity, while in

efficiency driven countries, it is associated with higher levels of market-

expansion entrepreneurial activity. However, once again South Africa

proves to be outside the expected norm as this is not the case. In

innovation-driven countries, training levels are negatively associated with

some attitudinal and activity measures (GEM, 2008).

Is this a favourable environment for ME (you) to start a business?

(Support your arguments with valid facts)

The GEM 2008 surveys were conducted mostly during May and June, when

the start of the credit crisis loomed but before the true impact of the

current economic crisis became apparent. Nevertheless, an overall decline

in perceived opportunities to start a business in 2008 was observed.

Countries showing the severest declines in the rate of perceived

opportunities (between 50 and 30 percent) include Iceland, Chile, Ireland,

Latvia and Hungary.

Perceived skills and knowledge to start a business were not affected by

the business cycle.

Also intentions to start a business within three years do not appear to

have declined as much in 2008 as perceived opportunities. There are

several possible explanations for this. First, the crisis may actually cause

individuals to seriously consider becoming entrepreneurs in the near

future because they fear they might lose their jobs. Second, the group of

(potential) future entrepreneurs may be less pessimistic than the total

adult population and may not perceive the financial crisis as a substantial

burden for getting their own business started they might for instance

draw more heavily on their own (perceived) capabilities to start a

business. Thirdly, they may have decided to defer the start-up to near the

end of the three year period, with the expectation that the recession will

be over within three years.

In this context of difficult economic times, it may seem counter-intuitive to

choose this moment in time to launch entrepreneurial activities. However,it is my view that now is as good time as any, provided of course one is


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not launching a luxury item. Although the general environment still has

some way to go before it can become fully enabling of entrepreneurs and

entrepreneurial thinking, I believe that the government is taking steps in

the right direction and demonstrating a willingness to address the issues

raised in the sections above.

Interventions aimed at increasing female participation

Africa has considerable hidden growth potential in its women, and that

tapping into that potential can make a substantial difference for Africas

growth and poverty reduction. Interventions aimed at increasing female

participation in the SME sector are thus an important strategy for

economic development in South Africa. The Business Partners Womens

Fund, launched in 2007, is an important initiative in this regard. Jo

Schwenke, former MD of Business Partners, notes that his organisation

has found women to be better business risks than men, with a

significantly lower rate of failure. An estimated 14 new jobs are created

every time they invest in a woman-owned business. It is important that

government programmes follow this lead to enable more female

entrepreneurs to take up meaningful roles in the business community.

Education and training

Of all 30 GEM countries who conducted the national experts survey in2008, South Africa had the highest percentage of experts identifying

education and training as a major limiting factor. This was also the finding

in 2001 the first year that South Africa participated in the GEM project

and it is disturbing to note that in this respect there has been no

improvement in the past seven years.

Talk about education and MBA entrepreneurial course

Government policiesAn interesting case is government policy, which ranks high as both a

limiting and a supportive factor. The governments BEE initiatives are

seen as providing a framework for channelling previously excluded groups

into business environments. Regulations associated with starting a

business have eased in recent years. In 2007 nine procedures were

required, taking 35 days; in 2009 this has been reduced to six procedures,

taking 22 days.

On the other hand, South Africas restrictive employment laws are seen as

one of the biggest regulatory obstacles to business growth, cited by a


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third of businesses in the Thornton survey, as is inefficient government

bureaucracy or red tape.

Simplify business registration procedures, for example a single form of no

more than three pages for bank/ tax/ CIPRO. Provide online facilities

(where possible) for forms, returns and access to other entrepreneurs. Government has launched an efiling version for small business

Reduce telecommunications costs (by allowing for competition) as well as

other infrastructure-related bottlenecks (particularly in transport and

logistics). Addressing mobile phone connect fees

Access to finance

The finding that access to finance is a key problem is a common feature of

research on problems facing all entrepreneurs and is apparent in research

done in both developed and developing countries. Given that start-up

funding for small businesses often comes from personal savings or money

from families, the youth, women and people in rural areas are likely to be

particularly disadvantaged in their attempts to start small businesses. A

number of government initiatives exist to assist with funding of

entrepreneurial ventures, including Khula Enterprise Finance, Small

Enterprise Development Agency (SEDA), Umsobomvu Youth Fund and the

Industrial Development Corporation (IDC).

Conclusions

The factors that affect whether or not the environment in South Africa is

right for me to become an entrepreneur depend on my entrepreneurial

orientation, a supportive environment and a cooperative environment.

Although the supportive business environment in the country is not at a

desirable level, definite steps are being taken by the government to

facilitate SMME development. These include business oriented packaging

for tax e-filing and various organisations for financing and mentoring. A

cooperative environment of tertiary education programmes thatencourage entrepreneurial development are slowly emerging.

entrepreneurship in south africa

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