Opportunity is big driver for SA's new business owners
May 21, 2009
By Mike Herrington
The 2008 Global Entrepreneurship Monitor (GEM) survey released yesterday shows that despite achieving poor overall entrepreneurship rates again, South Africa has rays of hope with an encouraging increase in its entrepreneurship rate.
The research, conducted annually since 2001 by the UCT Centre for Innovation and Entrepreneurship (CIE), is South Africa's top survey of entrepreneurship. It forms part of a global body of GEM research, which included 43 countries last year.
A comparison of South Africa's performance over the past few years indicates that there has been a 2.6 percent rise in the country's total early-stage entrepreneurship activity (TEA) rate from 2006 to last year. More people are starting businesses because of an opportunity rather than to survive. TEA is measured by the percentage of people aged 18 to 64 who are involved in starting or running businesses.
According to last year's study, activity motivated by opportunity accounted for 79 percent of entrepreneurial activity, and more black Africans were starting businesses. This is encouraging, the report states, as opportunity-driven business makes a far bigger contribution to job creation and economic growth than necessity or survival entrepreneurship.
Given the failure of the formal and public sector to absorb the growing number of job seekers, attention has focused on entrepreneurship's potential to add to economic growth, job creation and more equal income distribution. Although small, last year's GEM increase is thus statistically significant and may mark the start of a more positive trend in entrepreneurial activity.
But South Africa's performance in global comparisons is somewhat disappointing. It is significantly below the average for all middle- to low-income countries.
South Africa ranked 23rd out of 43 countries, with a TEA rate of 7.8 percent. The average for all middle- to low-income countries is 13.2 percent. The findings are consistent with South Africa's poor performance in previous years.
In terms of new activity among firms, South Africa ranked 38th out of the 43 countries, with a new business prevalence rate of only 2.1 percent. The prevalence rate for established business owner-managers follow a similar disturbing trend: South Africa ranked 41st, with an established business rate of 2.3 percent. The findings indicate a high failure rate for South African start-ups - a big concern.
With a high percentage of start-ups not surviving and going on to become contributors to the economy, the report shows a need for policy interventions aimed at mentoring entrepreneurs through the difficult process of firm birth. South Africa's National Small Business Strategy makes it explicit that a primary policy objective is job creation, but too often, the support offered begins and ends with the provision of a generic business plan.
Local entrepreneurs have poor business and management skills, and an inadequate enabling environment.
Expert input that formed part of the GEM 2008 research indicated that the quality of school-level and post-school entrepreneurship training was poor. Of particular concern is the rating for post-school training, where South Africa achieved the lowest rating of all the "efficiency-driven" countries in this sample.
Education shortfalls were a key GEM finding in 2001 and there has been no improvement in the past seven years. The skills shortage is seen by many in business as a major factor hindering economic growth and business efficiency. In the Global Competitiveness Report for 2008 and 2009, South Africa's poorly educated workforce is cited as the most problematic factor for doing business in the country.
The strongly negative rating of the quality of business education at school level is a clear indication that the education system in South Africa is failing to prepare learners for meaningful participation in the economy. Although entrepreneurship is meant to form part of the secondary school curriculum, it is taught neither widely nor effectively enough.
GEM 2008 found that entrepreneurs still have to deal with poor access to finance, sub-standard infrastructure and regulations that create administrative burdens. Other key findings show that the profile of local entrepreneurs is largely unchanged. Men are still more likely than women to join entrepreneurial activity. As black African women are most affected by unemployment, finding ways to improve female levels of self-employment is imperative, the report states.
A majority of early-stage entrepreneurial activity is in the consumer services sector. Barriers to entry into this sector, in terms of skills and capital required, are low and it's unsurprising that most TEA business entities are in this sector.
Gauteng, KwaZulu-Natal and the Western Cape are the most entrepreneurially active provinces, but the report says it is worrying that last year was the first year in which necessity-motivated entrepreneurial activity outstripped opportunity-motivated activity in Gauteng. The Western Cape and the Free State, on the other hand, have a relatively healthy ratio of opportunity- to necessity-motivated entrepreneurship.
There is a huge disparity in access to in information and communication technology between rural and urban areas. More than 94 percent of respondents used cellphones for business; 58 percent used the internet; but only 42 percent used e-mail. Electronic fund transfers via the internet, ATMs or debit cards are becoming more popular with small businesses.
Despite the encouraging highlights, the GEM 2008 findings broadly indicate that much remains to be done to accelerate entrepreneurship in South Africa.
South Africa has staggeringly high unemployment relative to the rest of the GEM sample. The country's 2007 unemployment rate of 23 percent is double the next highest: Columbia's rate of 12 percent.
Although there has been some growth in the formal sector's employment capacity, such employment rose from 56 percent of employment in 2001 to 66.6 percent by 2007. It is unlikely that growth in the formal economy will be able to absorb sufficient people to solve the job problem.
It is thus imperative that South Africa gets the recipe right to put entrepreneurship on a sustainable curve upwards.
The country will experience a significant rise in entrepreneurial activity only when key areas are addressed correctly, fostering positive entrepreneurial attitudes, creating a more enabling environment and improving the skills base. This is particularly true in rural areas and the less developed provinces.
Mike Herrington is the director of the UCT Centre for Innovation and Entrepreneurship, and lead GEM researcher
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