by Staff Reporter on 26/09/12 at 8:16 am
South Africa has one of the best climates in the world for entrepreneurship, which has the potential to alleviate our chronic unemployment problem, why then aren’t more people preparing for self-employment?
The latest international measures find that while South Africa – the breadbasket of Africa – is a great place to start a business, it is lagging most of the world in early stage entrepreneurial activity. Ironically, it is exactly this activity that is the answer to many of the country’s woes. Small, medium and micro enterprise (SMME) development in South Africa is crucial to the alleviation of poverty and the huge unemployment challenge, especially amongst the youth.
“Entrepreneurship is the vehicle for creating new jobs, generating revenue, advancing innovation, enhancing productivity and improving business models and processes,” said Dr Mike Herrington, the executive director of the Global Entrepreneurship Monitor, at the International Small Business Congress in Johannesburg on Saturday 15 September 2012.
In South Africa, small, medium and micro enterprises (SMMEs) contribute more that 45% of the country’s total GDP and just over 50% of the employment opportunities.
In order to develop a healthy business support system, it is important to know more about entrepreneurs around the world. But, many leaders, especially those in the developing world, do not really understand what drives entrepreneurship in their country. There is a need for a standard methodology that allows for comparison with other similar economies.
One such study is the Global Entrepreneurship Monitor (GEM). GEM takes a comprehensive annual snapshot of entrepreneurs around the world, measuring the attitudes of a population and the activities and attributes of individuals participating in various phases of entrepreneurship. GEM considers both those formally registering their businesses and those running informal ones; this is particularly important in emerging markets where unregistered businesses comprise as much as 80% of economic activity.
South Africa has participated in GEM for 11 years under the auspices of the UCT Graduate School of Business. In comparison to our sub-Saharan peers, South Africa looks like an ideal place to start and run a business. It has the highest GDP and the highest GDP per capita of the countries in the region measured by GEM. And in the Doing Business report, conducted by the World Bank Group, in 2012, South Africa is ranked 35th out of 183 countries in terms of the ease of doing business, a noteworthy achievement within the context of the SADC regional average rank of 114 out of 183. South Africa is credited with the best regional performance in the following areas: the cost of starting a business, dealing with construction permits, getting credit, and protecting investors.
South Africa also ranks reasonably next to some its African counterparts in terms of starting a business. It takes approximately six procedures and 22 days to start a business in South Africa, compared to the range of quickest: Ghana (12 days and seven procedures) and slowest: Angola (68 days and eight procedures).
But, despite the fact that the country exhibits factors that are conducive to entrepreneurial ventures, South Africa remains one of the poorest performing countries with regards to entrepreneurial activity, compared to the 54 participating economies in the GEM study. In fact, South Africa’s entrepreneurship is a dismal quarter of its African counterparts.
The primary measure of entrepreneurship used by GEM is the Total Early-stage entrepreneurial Activity (TEA) Index, which measures the percentage of the adult population (18–64 years) who are in the process of starting a business or who have just started a business.
For GEM, countries are separated into three economic categories: factor-driven, efficiency-driven (SA), and innovation-driven economies. South Africa remains at a stagnant low of 9.1% – under the average of other participating efficiency-driven economies at 14%.
“When you plot the TEA rates of the 54 countries against their GDP per capita levels, South Africa still falls well below the line of best fit reinforcing the fact that the country’s TEA rate is lower than expected,” said Herrington.
“If South Africa had a rate of 14% for early entrepreneurial activity, as we should have given the opportunities here, the current high levels (26-40%) of unemployment would dramatically decrease,” he said. One of the country’s stumbling blocks is education, which has a significant role in fostering small business development.
There is no doubt that there is a direct correlation between education and entrepreneurial activity. Over the years GEM has shown that the more educated a person is, irrespective of gender or race, then the more likely they are to start a business and succeed, as well as being more likely to employ a greater number of people – a factor which is vital in our economy.
In education, South Africa stands out for all the wrong reasons in comparisons such as the Global Competitive Index (GCI), which gauges countries’ economic development. “We are worse off now that we were 16 years ago and declining rapidly,” said Herrington.
The GCI confirms South Africa is in 138th place out of 142 countries with regards to the quality of maths and science education, two subjects that provide analytical skills necessary to run a business.
More concerning is that South Africans have a very low perception of potential business opportunities, do not believe that they have the skills necessary to start a business and have very low intentions to do so. (The perception of opportunities was recorded at 41% in SA; compared with 81% in Zambia; 80% in Uganda; 75% in Ghana; and 67% in Angola.) This goes a long way to explaining why South Africa has a low activity rate and SMME development is severely lagging behind.
South Africa also falls very short in other areas of the Global Competitiveness Index, such as labour market efficiency (95 of 142 countries); hiring and firing rigidity (139); flexibility of wage determination (138); quality of education, primary (131) and, higher (73); crime (136); and health (129).
Herrington said that in light of these figures it is clear that small businesses in South Africa need help, not necessarily in the form of funding, but in the form of mentorship from experienced practitioners “who have successfully run their own businesses and know the problems that small businesses encounter.”
GEM also recommends a number of policy reforms including reducing the number of regulations required to start and run a business and privatising ineffective government agencies. Learning from other more successful entrepreneurial developing countries like Brazil and China is also recommended.
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