SA lagging in small business activity

1. South Africa lags most developing countries when it comes to creating small businesses, according to the Global Entrepreneurship Monitor (GEM) study released in March, where South Africa’s entrepreneurship ranking dropped from 20th position out of 34 countries in 2004 to 25th position out of 35 countries last year. This year’s data has not been released.South Africa has the lowest entrepreneurial activity rate of all the 12 developing countries surveyed in the study, with only five out of every 100 adults involved in starting up businesses.Apart from Mexico, South Africa offers a new business the smallest chance of surviving its first three months. The study was conducted by the University of Cape Town Centre for Innovation and Entrepreneurship. South Africa’s aspirant entrepreneurs face a battery of obstacles. Access to finance is often perceived as the greatest.
   However, counterproductive government policy and inefficient bureaucracies are seen as equally problematic, says Sanlam chief economist Jac Laubscher. This creates delays and costs for entrepreneurs, whether they are street sellers or operating formal businesses. But the essential problem is far more complex and a solution is not so readily available. Laubscher says that in a well-integrated economy, small businesses can produce inputs for other firms. For example, a microenterprise may make the sleeves for shirts and sell them to a bigger firm that assembles them into the finished product, other parts of which are made by different firms .
   In South Africa’s “two economies” - one rich and well developed, the other poor and marginalised - there is little opportunity for these kinds of micro enterprises. The first economy can produce everything it needs cheaply, or it can import it from other countries. This means opportunities for micro enterprises to link up with the formal sector are limited and the market for most small businesses lies with the consumer. The GEM research demonstrates that South Africa’s history of unequal access to education, finance and opportunity hampers the development of entrepreneurs. Unlike countries such as India or the US, South Africa, with its poor education system, has little or no culture of entrepreneurship.
   Very few people grow up in households with parents who own a business, where the conversation around the dinner table revolves around paying accounts, struggling with employees and government regulations. Goolam Ballim, Standard Bank Group’s chief economist, says this lack of exposure and the shortage of formal training programmes mean that many small businesses are fragile. Their lack of experience and expertise prevents them from penetrating their markets. This stops small informal operators from developing into larger formal businesses that have to comply with a wide range of institutional and regulatory requirements. This restriction, in turn, means they are unable to develop to a point where they can achieve the economies of scale that would make their businesses more profitable.
   There are different types of small businesses with very different chances of success. Ntsika Enterprise Development, which trains entrepreneurs, says survivalist and single-person micro enterprises operate in the informal sector. At the other end of the scale, medium and large enterprises constitute the formal sector. Micro enterprises employing one to four people are considered to be a mix of the formal and informal sector. Survivalist, or necessity, enterprises are run by people who have no other way to earn a living. The Ntsika review says most entrepreneurs in this category are involved in activities such as hawking, vending and subsistence farming. These are enterprises with no paid employees and minimal asset value. They generate income below the poverty line and their main aim is to provide minimal subsistence for the unemployed and their families. The main sources of finance for the survivalist sector are family and friends, informal money lenders, non-governmental organisations and credit obtained from suppliers. Most survivalist enterprises have never had access to formal financial institutions.
   Statistics SA estimates that in 2005 the survivalist sector made up 23.3 percent of all enterprises and contributed less than 5 percent of total employment. André Ligthelm of the Bureau of Market Research (BMR) at the University of SA estimates that the average turnover of businesses in the second economy was R68 930 in 2004, with an average employment of 2.3 persons per business. The total number of informal outlets was estimated at 749 500, including 261 000 hawkers, 127 600 spaza shops and 40 100 shebeens. BMR surveys confirm that almost nine in every 10 informal business owners are involved in their businesses on a full-time basis, implying that limited income emanates from other sources. “At an average household size of 4.5 [people], it can be stated that close to 5 million people in South Africa sourced some or all of their income from the marginalised second economy,” Ligthelm says.
   The GEM report shows that less than 3 percent of “necessity businesses” are likely to create a significant number of jobs. Marlese von Broembsen, its principal author, says the key findings indicate that micro and survivalist enterprises are unlikely to create jobs in the numbers needed to combat South Africa’s economic inequalities. Opportunity entrepreneurs’ performance is more encouraging. The report showed that businesses created to take advantage of an opportunity are more likely to employ six or more people. The study recommended that if the government was serious about creating jobs, it needed to focus on entrepreneurs it had identified as job creators.
   Believing that small businesses would create more jobs than big firms, the government has set up parastatals to support them. These include Ntsika for training and Khula Enterprise Finance to provide microcredit. However, Mike Schussler, an economist at T-Sec, says the strategy has not worked well. Khula has failed because its strategy is based on the assumption that there are enough linkages between the first and second economies to generate credit demand for micro enterprises to act as suppliers to the first economy. Schussler says these linkages, however, are just not there in sufficient quantity.
   The government has long paid lip service to the need to develop entrepreneurs. Given the institutional failures, it is clear that much more needs to be done.