gem-south-africa-2014-report-1431707163

2014GEM SOUTH AFRICA

REPORTSouth Africa: The crossroads – a goldmine or a time bomb?

Mike Herrington, Jacqui Kew & Penny Kew

2 2015 GEM South African Report South Africa: The crossroads – a gold mine or a time bomb? 3

ContentsLIST OF FIGURES ......................................................................................................................................................................2LIST OF TABLES .........................................................................................................................................................................3EXECUTIVE SUMMARY .............................................................................................................................................................4ACKNOWLEDGEMENTS ............................................................................................................................................................4ABOUT THE AUTHORS ...............................................................................................................................................................6THE UCT DEVELOPMENT UNIT FOR NEW ENTERPRISE (DUNE) ............................................................................................6

CHAPTER 1: INTRODUCTION AND BACKGROUND ..................................................................................................................81.1 The GEM conceptual framework .......................................................................................................................................... 81.2 How GEM measures entrepreneurship ............................................................................................................................. 141.3 GEM methodology ...............................................................................................................................................................15 1.3.1 Adult Population Survey (APS) ..............................................................................................................................15 1.3.2 National Experts Survey (NES) ............................................................................................................................. 16

CHAPTER 2: A SOUTH AFRICAN PERPECTIVE ON ENTREPRENEURSHIP.......................................................................... 182.1 Introduction .........................................................................................................................................................................182.2 The entrepreneurial pipeline ..............................................................................................................................................20 2.2.1 Attitudes and potential entrepreneurs .................................................................................................................20 2.2.2 Entrepreneurial intentions .................................................................................................................................... 21 2.2.3 Early-stage entrepreneurial activity......................................................................................................................22 2.2.4 Established businesses ........................................................................................................................................25 2.2.5 Business discontinuance ......................................................................................................................................282.3 Profileofentrepreneurs ......................................................................................................................................................28 2.3.1 Age distribution......................................................................................................................................................28 2.3.2 Gender and race differences ................................................................................................................................29 2.3.3 Education ...............................................................................................................................................................30

CHAPTER 3: SOUTH AFRICA’S ENTREPRENEURSHIP ECOSYSTEM ................................................................................... 323.1 An overview of South Africa’s business environment .......................................................................................................333.2 The National Expert Survey ................................................................................................................................................33 3.2.1 Market dynamics ...................................................................................................................................................34 3.2.2 Education ...............................................................................................................................................................34 3.2.3 Government initiatives ..........................................................................................................................................35

CHAPTER 4: GOVERNMENT INITIATIVES .............................................................................................................................. 384.1 Small Enterprise Development Agency (SEDA) .................................................................................................................384.2 Small Enterprise Finance Agency (SEFA) ...........................................................................................................................394.3 National Youth Development Agency (NYDA) ....................................................................................................................394.4 Technology and Innovation Agency (TIA) ...........................................................................................................................394.5 National Empowerment Fund (NEF) ..................................................................................................................................394.6 Other funders ......................................................................................................................................................................404.7 Survey of government initiatives ........................................................................................................................................40

CHAPTER 5: RECOMMENDATIONS FOR POLICY AND PRACTICE ....................................................................................... 425.1 Education and training .......................................................................................................................................................435.2 Government policies and regulations ................................................................................................................................445.3 Market openness ................................................................................................................................................................455.4 Government programmes................................................................................................................................................... 475.5 Entrepreneurialfinancesupport ........................................................................................................................................ 47

REFERENCES ........................................................................................................................................................................ 48

List of FiguresFigure 1.1: Geographical coverage of 2014 GEM survey cycle – green shaded countries .................................................. 9Figure 1.2: Conventional model of national economic growth .............................................................................................. 10Figure 1.3: Model of entrepreneurial processes affecting national economic growth ....................................................... 10Figure 1.4: The GEM Conceptual Framework, used in GEM surveys up to 2014 ................................................................11Figure 1.5: The revised GEM Conceptual Framework ............................................................................................................12Figure 1.6: TheentrepreneurialprocessandGEMoperationaldefinitions ......................................................................... 14Figure 2.1: Total early-stage entrepreneurial activity (TEA) in GEM economies in 2014, by phase of economic development .........................................................................................................................................23Figure 2.2: TEA rates and GDP per capita, 2014 ................................................................................................................... 24Figure 2.3: Correlation of perceived capability (skills) with the level of TEA, 2014 .............................................................30

List of TablesTable 1.1: GEM economies by geographic region and economic development level, 2014 ............................................... 9Table 1.2: Social, cultural, political and economic context and economic development phases .....................................13Table 2.1: Unemployment rates in sub-Saharan Africa, 2014 .............................................................................................19Table 2.2: Perceptions of good opportunities in the adult population of South Africa, 2001–2014 ............................... 21Table 2.3: Entrepreneurship attitudes and intentions in South Africa, 2003–2014 .........................................................22Table 2.4: Prevalence rates (%) of entrepreneurial activity amongst the adult population in South Africa, 2001–2014 .....................................................................................................................................22Table 2.5: South Africa’s relative rankings, GEM 2002–2014 ............................................................................................ 24Table 2.6: Opportunity- and necessity-driven TEA rates amongst the adult population of South Africa, 2001–2014 .....................................................................................................................................25Table 2.7: Phases of entrepreneurial activity in GEM economies in 2014, by geographical region (% of population aged 18–64 years) .............................................................................................................................26Table 2.8: Reasons for business exit in South Africa, 2006–2014 ....................................................................................28Table 2.9: TEA by age group in South Africa, 2001–2014 ...................................................................................................29Table 2.10: Entrepreneurial activity in South Africa by gender, 2001–2014 .......................................................................29Table 2.11: Motivation for early-stage entrepreneurial activity by race group, 2005–2014 ...............................................30Table 2.12: Distribution of educational levels for TEA in South Africa, 2001–2014 ............................................................ 31Table 3.1: Global Competitiveness Report – 2013/14 vs. 2014/15 ..................................................................................33Table 3.2: EFCsinfluencingthepoolofpotentialentrepreneursinSouthAfrica,2005,2010,2013and2014 ............34Table 3.3: Average expert ratings on education and training for entrepreneurship in South Africa, 2010, 2013 and 2014 ..........................................................................................................................................35Table 3.4: EFCsinfluencingtheearly-stageandestablishedbusinessentrepreneursinSouthAfrica, 2005, 2010, 2013 and 2014 ...............................................................................................................................36Table 3.5: Average expert rating on government policies for entrepreneurship in South Africa, 2010, 2013 and 2014 .........................................................................................................................................36Table 3.6: Starting a business in South Africa – procedures and days .............................................................................. 37Table 3.7: Accessing electricity in South Africa – procedures and days ............................................................................. 37Table 4.1: Awareness and usage of government initiatives, 2014 ......................................................................................40Table 4.2: Assessment of local municipality for the Western Cape, 2014 ........................................................................ 41

Although GEM data were used in the preparation of this report, their interpretation and use are the sole responsibiltiy of the authors.

All rights of this publication are reserved and therefore cannot be reproduced in its totality, its part, recorded or transmitted by any information retrieval system in any way, by any means mechancial, photochemical, electronic, magnetis, electro-optical, digital, photcopying or otherwise, without the prior permission in writing by the authors.


Executive Summary Executive Summary

Acknowledgements The authors wish to express their gratitude to the following contributors and partners, without whom this project and report would not have been possible:

The Western Cape Department of Economic Development and Tourism (DEDAT), for their generousfinancialsupporttowardsconductingtheresearch for this report. A special acknowledgement to John Peters and Sharief Davids for their time, effort and commitment to supporting and contributing to this initiative.

The International Development Research Centre of Canada (IDRC). Thanks to Martha Melesse for all her help and encouragement.

The national experts who carved space in their busy schedules to grant us the benefit of theirinsightsandreflections.Weappreciateyourinputand guidance.

Penny Kew for editing the report. The GERA data team – Yana Litovsky, Jonathan

Carmona and Alicia Coduras – for their guidance, assistance and prompt response to all queries.

Those that provided additional research, commentary, moral and practical support to all the authors.

Nielsen South Africa, who conducted the Adult Population Survey (APS).

Rothko International for the design and layout of the report.

The entrepreneurs, within whom so much hope is invested, as well as those who nurture, support and educate them.

Executive Summary

South Africa’s rate of entrepreneurial activity is very low for a developing nation – a mere quarter of that seen in other sub-Saharan African countries. Un- and underemployment is high in South Africa (around 40%); despite this, the number of people starting businesses due to having no other option for work (necessity entrepreneurship) is low.

Entrepreneurial activity in South Africa, although very low, has increased marginally over the last 10 years. However, in 2014 the early-entrepreneurial activity rate dropped by a staggering 34%. There has been an increase in women’s entrepreneurship, primarily due to government support, but the perception of opportunities to start a business and confidenceinone’sownabilitiestodoso,remainslowcomparedtoothersub-Saharan African countries.

The level of business discontinuance remains high compared to business start-ups and exceeds the established business rate, resulting in a net loss of small business activity and subsequent job losses. Like elsewhere in Africa,manyofthebusinessescitelackoffinanceandpoorprofitabilityasthe main reason for shutting up shop.

7.0% of the adult population in South Africa are engaged in entrepreneurship, while 2.7% already own/manage an established business.

The typical South African entrepreneur is male, between the ages of 25–44 years of age, lives in an urban area, is involved in the retail and wholesale sector and has a secondary or tertiary level of education.

Enablers and Constraints

A good infrastructure and banking systems are the two biggest enablers of entrepreneurship in South Africa. Major constraints are an inadequately educated workforce, inefficient government bureaucracy, high levels ofcrime and onerous labour laws.

35.5% of adults in South Africa

see good opportunities to start a business; 25.4% of these would be prevented from doing so by fear of failure.

Initiatives Supporting Entrepreneurship

There are very few government initiatives that contribute towards improving entrepreneurship. The most successful ones are supported by private companies, such as Anglo American’s Zimele programme and the South African Breweries KickStart initiative.

Trends Over Time

Entrepreneurial activity in South Africa, although very low, increased marginally year on year over the last decade. In 2014, however, this trend was severely reversed by a drop of almost 34% from 2013 to 2014.

In South Africa, for every 10 adult males engaged in entrepreneurship there are 8 females.

Challenges for the Future

The main challenge is to provide jobs and/or opportunities for the youth, where the estimated unemployment level is in excess of 60%. This can be assisted through education; however, the level and quality of education in South Africa is one of the worst in the world. The level of maths and science education in the country, as assessed by the Global Competitiveness Report (2014/2015), puts South Africa at #144 of 144 countries.

Regulatory requirements make it very difficult for people to start businesses; this is further exacerbated by onerous labour laws and the low efficiency of the labour force. Corruption, starting at the highest levels of government, remains a major challenge, together with high levels of crime.

Seventy one percent of entrepreneurs in South Africa start businesses to pursue an opportunity and increase their income or independence; 28% do so because they have no other option for work.


About the AuthorsAbout the Authors

About The Authors

Dr Mike Herrington

Mike Herrington, the Executive Director of the Global Entrepreneurship Research Association (GERA), is currently based at the Faculty of Commerce, University of Cape Town, South Africa.

Mike was involved in establishing and developing of a number of Southern African companies before he moved to New Zealand, where he started his own cosmetic company which he later sold.

He returned to South Africa in 1989 and started a ladies’ hosiery company, which he and a partner built up successfully to one employing several thousand people and dominating over 85% of the South African market. They eventually sold the business out to the American based company Sara-Lee Corporation, after which Mike remained with the company for several years before “retiring” in 1999. He was asked to join the UCT Graduate School of Business in 2001 where he started the Centre for Innovation and Entrepreneurship.

Mike obtained an MBA from University of Cape Town and a PhD from London. He is involved in a number of SMME initiatives and has done research on SMMEs in South Africa and sub-Saharan Africa, as well as in other developing economies such as South America.

Professor Jacqui Kew

Jacqui Kew is an Associate Professor at the University of Cape Town’s Department of Accounting. She has been involved with GEM for more than 11 years, where she contributed her passion and expertise in business training, academic and commercial research and projects. She is equally comfortable in classes of executive education, accounting

undergraduates and small business owners. Currently, Jacqui is involved in an exciting project developing e-media learningsupport forfinancialmanagementconcepts.Shedraws energy from nature, particularly her early morning paddling off the Atlantic seaboard.

Penny Kew

Penny Kew has an MSc in Comparative and International Education from Oxford University. She has been involved in the area of education and training since 1997. Penny has been involved in a number of the more recent GEM reports, and was principal researcher and author on the 2008, 2009 and 2010 reports.

The UCT Development Unit for New Enterprise (DUNE)

The UCT Development Unit for New Enterprise (DUNE) is located within the Faculty of Commerce at the University of Cape Town. The unit’s strategic purpose is to drive the development and delivery of innovative research, leadership, postgraduate training and social responsiveness. The focus is on the areas of entrepreneurship, social entrepreneurship and entrepreneurial leadership.

Tofulfilitspurpose,DUNEhasthreekeyobjectives:

DUNE’s intention is to act as an impetus and catalyst for designing, developing and delivering projects focused on promoting research and training at the University of Cape Town. DUNE will also be active in sourcing funding for such projects.

DUNE seeks to also act as a support and network centre within UCT for postgraduate students, student organisations, academic staff and donors who require support in the development of entrepreneurship research.

DUNE seeks to create a space for dynamic dialogue and debate on the role that entrepreneurship and entrepreneurial activity should play in helping South Africa overcome its social and economic challenges.

DUNE is in the process of developing a Master’s Programme in Technology- based Entrepreneurship. This programme will be available to students with mixed academic backgrounds, as well as those with enough prior learning to qualify for the master’s degree, once approved. The key feature of this programme will be that from the outset, participants will be required to set up and run their own technology-based businesses. The academic and small business funding components of the programme will be designed to ensure complete practical support to students as they develop their businesses.


chapter 1

(an all-time record number), comprising approximately 73% of the world’s population and 90% of the world’s total GDP. Participating economies in the 2014 GEM cycle are shown in Table 1.1. Since 2008 (Bosma et al, 2009), GEM has followed the World Economic Forum’s typology of countries, based on Porter’s (Porter et al,2002)definitionsof economic development levels: factor-driven, efficiency-driven and innovation-driven economies.

The economies participating in the 2014 GEM cycle are shown in Figure 1.1 on page 9.

1.1 The GEM conceptual framework

Since its inception, the GEM survey was conceptualised to explore the interdependency between entrepreneurship and economic development. During the last 16 years, thisconceptual frameworkand thebasicdefinitionshaveevolved gradually without compromising the comparability of the collected information, but bringing more clarity to assumed relationships. This process was supported by the work of a number of researchers who, using GEM data, contributed to building an entrepreneurship paradigm (Alvarez et al., 2014, Bosma, 2013, Levie and Autio, 2008, Reynolds et al, 2015).

Introduction and background

INTRODUCTION and backgroundAcademics and policy makers agree that entrepreneurs, and the new businesses they establish, play a critical role in the development and well-being of their societies. As such, there is increased appreciation for and acknowledgement of the role played by new and small businesses in an economy. GEM contributes to this recognition with longitudinal studies and comprehensive analyses of entrepreneurial attitudes and activity across the globe. Since its inception in 1997 by scholars at Babson College and London Business School, GEM has developed into one of the world’s leading research consortia concerned with improving our understanding of the relationships between entrepreneurship and national development.

In the sixteen years since its inception, GEM has measured entrepreneurship in over 100 countries, covering all geographic regions and all economic levels. It has gained widespread recognition as the most informative and authoritative longitudinal study of entrepreneurship in the world. In 2014, 73 economies participated in the GEM study

Table 1.1: GEM economies by geographic region and economic development level, 2014 Factor-driven Economies Efficiency-driven Economies Innovation-driven Economies

AfricaAngola1, Botswana1, Burkina Faso, Cameroon, Uganda South Africa

Asia & OceaniaIndia, Iran1, Kuwait1, Philippines1, Vietnam

China, Indonesia, Kazakhstan2, Malaysia2, Thailand

Australia, Japan, Singapore, Taiwan, Qatar

Latin America & Caribbean Bolivia1

Argentina2, Barbados2, Belize, Brazil2, Chile2, Colombia, Costa Rica2, Ecuador, El Salvador, Guatemala, Jamaica, Mexico2, Panama2, Peru, Suriname2, Uruguay2 Puerto Rico, Trinidad and Tobago

European Union Croatia2, Hungary2, Lithuania2, Poland2, Romania

Austria, Belgium, Denmark, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Slovenia, Slovakia, Spain, Sweden, United Kingdom

Non-European Union

Bosnia and Herzegovina, Georgia, Kosovo, Russian Federation2, Turkey2 Norway, Switzerland

North America Canada, United States

1. In transition to efficiency-driven economies

2. In transition to innovation-driven economies

Figure 1.1: Geographical coverage of 2014 GEM survey cycle – blue shaded countries

Please provide a chapter summary


The starting definition for entrepreneurship still remainsvalid, being:

“any attempt at new business or new venture creation, such as self-employment, a new business organisation, or the expansion of an existing business, by an individual, a team of individuals, or an established business” (Reynolds, P. et al, 1999, p. 3).

The three questions which originally opened the way to the GEM survey (Reynolds, P. et al, 1999, p. 3) were formulated as follows:

Does the level of entrepreneurial activity vary between countries, and if so, to what extent?

Does the level of entrepreneurial activity affect a country’s rate of economic growth and prosperity?

What makes a country entrepreneurial and what factors influenceentrepreneurialactivity?

In order to answer these questions, GEM departed from the conventional approach of thinking about national economic growth. This led to the development of a new conceptual framework, which has been through a series of adjustments since its inception in 1999.

The GEM conceptual framework, as identified in 1999(Figure 1.3), in contrast to the conventional model of national economic growth (Figure 1.2), depicted the basic

assumption that national economic growth is the result of the personal capabilities of individuals, wherever they are located (regardless of the size of businesses or if they are self-employed), to identify and seize opportunities. This process takes place in interaction with the environment (social, cultural and political) in which these individuals are located.

This starting framework (Figure 1.2) subsequently incorporated the findings and insights derived fromnumerous GEM surveys and years of GEM research, evolving into the GEM Conceptual Framework as presented in Figure 1.4.

The most recent revision of the GEM conceptual framework entailed opening the “black box” entitled “Entrepreneurship Profile” (as presented inFigure 1.4). At the beginning of conducting GEM surveys, the implicit assumption of mutual relationships between attitudes, aspirations and activities was built into the conceptual framework, but without spelling out the nature of these relationships.

In the revised GEM conceptual framework (depicted in Figure 1.5) this “black box” has been opened to allow for testing of the characteristics of the assumed relationships between social values, personal attributes and various forms of entrepreneurial activity. This work was carried out by members of the GEM Research and Innovation Advisory Committee (RIAC).

Source: GEM Global 2012 Report

Basic requirements Institutions Infrastructure Macroeconomic stability Health and primary education

Efficiency enhancers Higher education and training Goods market efficiency Labour market efficiency Financial market sophistication Technological readiness Market size

Innovation and entrepreneurship Entrepreneurial finance Government policies Government entrepreneurship programmes

Entrepreneurship education R&D transfer Commercial, legal infrastructure for entrepreneurship

Internal market openness Physical infrastructure for entrepreneurship

Cultural and social norms

From other available sources

Social Economic

Development(Jobs,

Innovation, Social value)

Social, cultural, political context

From GEM National Expert Surveys

Attitudes:Perceived opportunities and capabilities; fear of failure;status of entrepreneurship

Entrepreneurship Profile

Established firms (Employee

Entrepreneurship Activity)

Activity:Opportunity/necessity driven, early stage; inclusiveness; industry; exits

Aspirations:Growth, innovationinternational orientationsocial value creation

From GEM 2012 Adult

Population Surveys (APS)

From GEM AdultPopulation

Surveys (APS)

Figure 1.4: The GEM Conceptual Framework, used in GEM surveys up to 2014

Figure 1.2: Conventional model of national economic growthSource: Reynolds, P. D., M. Hay, S.M. Camp, Global Entrepreneurship Monitor, 1999 Executive Report, p. 9

Figure 1.3: Model of entrepreneurial processes affecting national economic growthSource: Reynolds, P. D., M. Hay, S.M. Camp, Global Entrepreneurship Monitor, 1999 Executive Report, p. 10

chapter 1 Introduction and background

Major Established Firms(Primary Economy)

General National Framework Conditions

Micro, Small and Medium Firms

(Secondary Economy)Social, Cultural, Political Context

National Economic Growth(GDP, Jobs)

Entrepreneurial Opportunities

Business Dynamics

Social, Cultural, Political Context

Entrepreneurial Framework Conditions

Entrepreneurial Capacity

National Economic Growth(GDP, Jobs)


In all the conceptual frameworks, the basic assumption has remained unchanged – entrepreneurial activity is considered an output of the interaction of an individual’s perception of an opportunity and capacity (motivation and skills) to act upon this opportunity and the distinct conditions of the environment in which the individual is located. The GEM survey of entrepreneurship (based on individuals) complements other major business creation surveys by providing unique information on individuals (attributes, values, activities) and their interaction with the environment in practising entrepreneurial behaviour (pro-activeness, innovativeness and responsible choices).

It is clear, therefore, that GEM continues to focus on contributing to global economic development through surveying/researching entrepreneurship, which helps to improve research-based education and research-based formulationofpublicpoliciesinthefieldofentrepreneurship.In order to achieve this, GEM has three key objectives:

To determine the extent to which entrepreneurial activity influenceseconomicgrowthwithinindividualeconomies;

To identify factors which encourage and/or hinder entrepreneurial activity (especially the relationships

between national entrepreneurship conditions, social values, personal attributes and entrepreneurial activity); and

To guide the formulation of effective and targeted policies aimed at enhancing entrepreneurial capacity within individual countries.

Overtheyears,GEMsurveyshaveconfirmedthatthelevelof entrepreneurial activity varies among countries at a fairly constantrate.AcrucialpointconfirmedbyGEMresearchisthat it takes time and consistency in policy interventions in order to enhance and develop the factors which contribute to entrepreneurial activity. Surveys also confirmed thatentrepreneurial activity, in different forms (nascent, start-up, intrapreneurship), is positively correlated with economic growth, but that this relationship differs according to phases of economic development (Acs and Amorós, 2008; Van Stel et al., 2005; Wennekers et al., 2010).

GEM’s role as one of the world’s leading research consortia concerned with improving the understanding and the relationships between entrepreneurship and national development is confirmed by recent policy interventionsaround the world. These are focused on components of the

The components of the revised GEM Conceptual Frame-work are:

Social, cultural, political and economic context

AsinthepreviousGEMmodel,thisisdefinedaccording

to the twelve pillars of competitiveness derived from the World Economic Forum’s Global Competitiveness Index, and the nine components of GEM’s Entrepreneurial Framework Conditions (see Table 1.2). These will affect countries differently, depending on the stage of their economic development, i.e. although all of the pillars will be important to each economy, the pillars of competitiveness which are of most importance to a factor-driven economy will differ from those most important in an efficiency-driven economy.

It is important to note that all components of the environ-ment in which women and men act entrepreneurially (or cannot act proactively and innovatively) are mutually dependent. This dependency demands a holistic approach not only in research but also in designing appropriate policies for building a supportive environment where entrepreneurialbehaviourcanflourish.

Social values towards entrepreneurship

This includes aspects such as the extent to which society values entrepreneurship as a good career choice; whether entrepreneurs have high societal status; and the extent to which media attention to entrepreneurship is contributing to the development of a positive entrepreneurial culture.

Individual attributes

This includes different demographic factors (such as gender, age, geographic location); psychological factors (including perceived capabilities, perceived opportunities, fear of failure); and motivational aspects (necessity versus opportunity based ventures, improvement-driven ventures).

Entrepreneurial activity

This is defined according to the phases of the lifecycle of entrepreneurial ventures (nascent, new business, established business, discontinuation); according to the type of activity (high growth, innovation, internationalisation); and sector of activity (Total Early-stage Entrepreneurial Activity – TEA, Social Entrepreneurial Activity – SEA, Employee Entrepreneurial Activity – EEA).

Figure 1.5: The revised GEM Conceptual Framework

Table 1.2: Social, cultural, political and economic context and economic development phases

From other available sources From GEM National Expert Surveys (NES)

Economic development phases National Framework Conditions, based on World Economic Forum pillarsforprofilingeconomicdevelopment phases

Entrepreneurial Framework Conditions

Basic requirements – key to resource-driven economies

Institutions Infrastructure Macroeconomic stability Health and primary education

Efficiencyenhancers–key to efficiency-driven economies

Higher education and trainingGoodsmarketefficiencyLabormarketefficiency Financial market sophistication Technological readiness Market size

Innovation and sophistication factors – key for innovation-driven economies

Business sophistication Innovation

Entrepreneurialfinance Government policy Government entrepreneurship programmes

R&D transfer Internal market openness Physical infrastructure for entrepreneurship

Commercial and legal infrastructure for entrepreneurship

Cultural and social norms


Social Values Towards Entrepreneurship

Individual Attributes (psychological,

demographic, motivation)

Entrepreneurial Output (new jobs, new value-added)

Outcome (socio-economic

development)Social, Cultural, Political Context

Nat

iona

l Fra

mew

ork

Con

diti

ons

Ent

rep

rene

uria

l Fr

amew

ork

Con

diti

ons

Basic Requirements

Efficiency Enhancers

Innovation and Business Sophistication

Entrepreneurial Activity

By phase of organisational life cycle

Nascent, new, established, discontinuation

Types of Activity High growth, innovative,

internationalisation

Sectors of Activity TEA, SEA, EEA

+–

+–

+–

+–

+–

+–


GEM conceptual framework: environment (entrepreneurial framework conditions), individual capacity for identifying and exploiting opportunities, and society’s capacity to develop an entrepreneurial culture. A recent report on entrepreneurial ambition and innovation (WEF-GEM, 2015) highlights the cases of Colombia and Chile, economies that have put in place several public and private initiatives to enhance their entrepreneurial ecosystems (Drexler and Amorós, 2015).

1.2 How GEM measures entrepreneurship

GEM measures individual participation across multiple phases of the entrepreneurial process, providing insights into the level of engagement in each stage. This is important because societies may have varying levels of participation at different points in this process. However, a healthy entrepreneurial society needs people active in all phases. For example, in order to have start-ups in a society, there must be potential entrepreneurs. Later in the process, people that have started businesses must have the ability and the support to enable them to sustain their businesses into maturity. Figure 1.6 presents an overview of the entrepreneurial process and the GEM operational definitions. GEM’s multi-phase measures of entrepreneurship are given below:

Potential entrepreneurs: Those who see opportunities in their environments, have the capabilities to start businesses and are undeterred by fear of failure.

Intentional entrepreneurs: Those who intend to start a business in the future (in the next three years).Nascent entrepreneurs: Those who have taken steps to start a new business, but have not yet paid salaries or wages for more than three months. New entrepreneurs: Those who are running new businesses that have been in operation between 3 and 42 months.Established business owners: Those who are running a mature business, in operation for more than 42 months.Discontinued entrepreneurs: Those who, for whatever reason, have exited from running a business in the past year.

GEM’s individual-level focus enables a more comprehensive account of business activity than firm-level measuresof formally-registered businesses. In other words, GEM captures both informal and formal activity. This is important because in many societies, the majority of entrepreneurs operate in the informal sphere. In addition, GEM’s emphasis on individuals provides an insight into who these entrepreneursare:forexample,theirdemographicprofiles,their motivations for starting ventures, and the ambitions they have for their businesses.

GEM also assesses broader societal attitudes about entrepreneurship, which can indicate the extent to which people are engaged in or willing to participate in entrepreneurial activity, and the level of societal support for their efforts. The GEM database allows for the exploration of individual or business characteristics, as well as the causes and consequences of new business creation.

A primary measure of entrepreneurship used by GEM is the Total Early-Stage Entrepreneurial Activity (TEA) rate. TEA indicates the prevalence of individuals engaged in nascent entrepreneurshipandnewfirmownershipintheadult(18–64 years) population. As such, it captures the level of dynamic early-stage entrepreneurial activity in a country.

Every person engaged in any behaviour related to new business creation, no matter how modest, contributes to the national level of entrepreneurship. However, it is important to recognise that entrepreneurs can differ in their profilesandimpact.Forthisreason,GEMprovidesarangeof indicators that describe the unique, multifaceted pattern exhibited in each society. It is therefore important to consider not just the number of entrepreneurs in an economy, but other aspects such as the level of employment they create, their growth ambitions, and the extent to which groups such as youth and women are participating in entrepreneurial activity.

1.3 GEM methodology

In order to provide for reliable comparisons across countries, GEM data is obtained using a research design that is harmonised over all participating countries. The data is gathered on an annual basis from two main sources:

1.3.1 Adult Population Survey (APS)

The key entrepreneurship indicators are measured in the Adult Population Survey (APS). Academic teams in each participating economy administer and oversee this survey, which is conducted using a random

representative sample of at least 2 000 adults between the ages of 18–64 years. The surveys are conducted at the same time every year (between May and July) using a standardised questionnaire provided by the GEM Global Data Team. The questionnaire is translated into local languages, and back-translated for a validity check.

In 2014, Nielsen was retained as the accredited vendor to conduct the APS in South Africa. The research included conducting 2 700 face-to-face interviews with a random selection of the adult population in South Africa between the ages of 18–64 years in both rural and urban areas, covering all races and gender. Interviews were conducted in the homes of respondents using a structured questionnaire, in their preferred language.

A probability sample of 3 300 households were selected using Nielsen’s computerised household register (close to 6 million actual addresses in urban areas) as well as maps for rural sampling.

Thesamplewasstratifiedby race,andwithin race,bycommunity size within region. From the 15–99 sampled covering 3 300 households, an effective sample of adults between the ages of 18–99 – a minimum yield of n=2 700 is expected in the final APS sub-sample.An additional sample of n=660 urban households was selected, using the same methodology, to cover the selected districts in the Western Cape and ensure a minimum analysable base in each of the 5 areas and an overall Western Cape sample of n=1000.

Figure 1.6: The entrepreneurial process and GEM operational definitionsSource: GEM Global Report 2014


Potential Entrepreneur:Opportunities, Knowledge and Skills

NascentEntrepreneur:Involved in Setting Up a Business

Owner-Managerof a NewBusiness (up to3.5 years old)

Owner-Managerof an Established Business (more than 3.5 years old)

Total Early-Stage Entrepreneurship Activity (TEA)

Early-Stage Entrepreneurship Profile

Conception Firm Birth Persistence

Discontinuation of Business

Individual attributes• Gender• Age• Motivation (opportunity, necessity)

Industry• Sector

Impact• Business Growth• Innovation• Internationalisation


The individual countries only gain access to the data once the raw data has been analysed by experts at London Business School for quality assurance, checking and uniform statistical calculations. As the GEM research design harmonises the data, it is possible to conduct reliable cross national and intra country comparisons over time.

1.3.2 National Experts Survey (NES) The National Expert Survey (NES) provides

information on the local environment faced by start-up entrepreneurs. Information is gathered about the 9 Entrepreneurial Framework Conditions: financingfor entrepreneurs, government policies, governmental programmes, entrepreneurial education and training, research and development transfer, commercial and professional infrastructure, internal market openness, physical and services infrastructure and social and cultural norms. These 9 framework conditions are detailed below. GEM guidelines suggest that experts canbeidentifiedfromthesourceslisted.

Financing for entrepreneurs: availability of financial resources, equity and debt for new and growing firms, including grants and subsidies.

Sources: Banks and building societies Venture capital associations Business angels associations Informal investors Entrepreneurs Government agencies that provide funds for

entrepreneurs

Government policies: extent to which government policies, such as taxes or regulations, are either size- neutral or encourage new and growing firms

Sources: Policy makers Ministries Other relevant charges (secretaries, deputies) Public agencies Consultants Entrepreneurs Analysts

Government programmes: The presence and quality of direct programmes to assist new and growing firms at all levels of government (national, regional, municipal)

Sources: Policy makers Incubators

Localdevelopmentoffices Commerce chambers Business associations Trade unions Public agencies

Entrepreneurial education and training: The extent to which training in creating or managing new, small or growing business entities is incorporated within the education and training system at all levels – primary and secondary school and post-school entrepreneurship education and training.

Sources: Schools Vocational schools Colleges Universities Business schools Professors

R&D transfer: The extent to which national research and development will lead to new commercial opportunities and whether or not these are available for new, small and growing firms.

Sources: Technology and science parks Centres for research Universities Incubators Accelerators Researchers Inventors

Commercial and professional Infrastructure: The presence of commercial, accounting and other legal services and institutions that allow or promote the emergence of small, new and growing business entities.

Sources: Consultants, advisors, managers Lawyers Accounting Entrepreneurs Incubators Commerce chambers

Internal market openness: There are two sub-divisions – market dynamics, i.e. the extent to which markets change dramatically from year to year; and market openness, i.e. the extent to which new firms are free to enter existing markets.

Sources: Market analysts Consultants, advisors

Brokers Researchers Specialist professors Specialist journalists

Physical and services infrastructure: Ease of access to available physical resources – communication, utilities, transportation, land or space – at a price that does not discriminate against new, small or growing firms.

Sources: Water companies Electricity companies Phone companies Real estate for business Public offices in charge of roads, transportation and

communications Entrepreneurs

Social and cultural norms: The extent to which existing social and cultural norms encourage, or do not discourage individual actions that might lead to new ways of conducting business or economic activities which might, in turn, lead to greater dispersion in personal wealth and income.

Sources: Sociologists Psychologists Social researchers Women’s institutes and associations Young entrepreneurs’ associations Policymakers Specialist journalists

GEM provides a number of criteria which must be met when selecting experts, in order to construct a balanced and representative sample.

At least four experts from each of the entrepreneurial framework condition categories must be interviewed, making a minimum total of 36 experts per country.

A minimum of 25% must be entrepreneurs or business people, and 50% must be professionals.

Additional aspects such as geographical distribution, gender, involvement in the public versus private sector, and the level of experience should also be taken into account when balancing the sample.

NESdataiscollectedby interviewingexperts identifiedbythe local team. GEM researchers are encouraged to source information from the following, when identifying possible experts to survey:

Social networks Phone directories

Professional directories Personal contacts Professional relationships Governmental agencies Local agencies Chambers of commerce Research institutes Consultingfirms Internet

Interviews were offered in a face-to-face, telephonic or electronic format. Experts were chosen for their depth of experience, seniority within organisations, areas of specialisation and affiliation.Insomeinstances,theheadofaninstitutionreferredus to individuals they considered best positioned to provide the insights we sought. Thirty eight percent of the respondents are engaged in full-time entrepreneurial ventures, whilst a number of others indicated that they were involved in small business in addition to their primary job.



chapter 2

South Africa’s level of early-stage entrepreneurial activity has declined by 34% from 10,6% in 2013, to 7,0% in 2014.

This imperative is particularly important in the South African context. Despite the economic downturn that affected advanced economies in recent years, the sub-Saharan African region, likemany emerging economies, benefitedfrom rapid economic growth. Most of the sub-Saharan economies continued registering impressive growth rates of close to 5% in 2013—with rising projections for the next two years—below only emerging and developing Asia. However, the African Economic Outlook 2014 notes that South Africa lags behind the rest of the region. Growth in South Africa in 2013 was estimated at a mere 1.9%, rising by one percent over the next two years.

Statistics in the Poverty Trends Report reveal that 10.2 million people in South Africa live below the breadline. In addition, the country’s levels of inequality are among the highest in the world with the GINI coefficient forSouth Africa (2011) at 0.65, based upon expenditure. The richest 20% of the population account for over 61% of consumption while the poorest 20% account for only

A South African perspective on entrepreneurship

4.5%. Trends reveal that there is a slight overall decrease in poverty which could be attributed to the combination of the growing social safety network, marginal income growth, above average inflation wages increases, anexpansionof creditanda relatively low rateof inflation.Although a good social welfare network is important, it could well contribute to the low levels of early-stage entrepreneurship in the country. In addition, merely alleviating poverty is not enough. It must be reduced and this is a long-term dilemma that faces policy makers. One of South Africa’s most pernicious problems is its high-level of unemployment and underemployment. South Africa has the highest level of unemployment in the sub-Saharan Africa region (Table 2.1), 3.3 times higher than the regional average.

Official unemployment rates are often understated asthey do not take into account discouraged work seekers. In South Africa, unemployment levels can be as high as 45% (depending on the method of measurement). In addition, official unemployment figures often fail totake into account the more significant proportion ofthe underemployed population, (i.e. earning very low wages), stuck in vulnerable employment or classified asthe working poor. These individuals are forced to take whatever work opportunities present themselves, most of which are not sustainable nor are they viable routes out of poverty. A particularly disturbing aspect of the employment challenge in South Africa is that over 65% of the youth are unemployed or under-employed – a situation that has been aptly described as a “ticking time bomb”.

The corporate sector fails to create jobs, and although thegovernment increasedits levelsofstaffingbyalmost 200 000 people over the last few years, it is clear that South Africa can no longer depend solely on large organisations or government as job creators. The emphasis has now shifted towards small and medium enterprises for job creation. South Africans must move away from the concept of seeking employment to one of creating employment for oneself and others.

Entrepreneurship is widely considered to be an important mechanism or driver of sustainable economic growth through job creation, innovation and its welfare effect. Hence enterprise development and entrepreneurship must be seen as one of the key areas that can unlock growth potential in South Africa in order to address the real concerns of poverty and inequality. With the introduction of the new Ministry of Small Business Development, under the direction of Lindiwe Zulu, it seemed that government wasfinallyacknowledgingthecriticalimportanceofSMMEdevelopment. Lindiwe Zulu’s aspirations regarding her portfolio are clearly summarised in the following statement:

“We see small businesses and co-operatives as critical to create an economy that benefits all. It is through this intervention that we will be able to defeat the triple challenges of poverty, unemployment and inequality. It is this partnership that holds the key to unlock our country’s economic potential, thus affording us a golden opportunity to launch a sustained onslaught on poverty, unemployment, inequality and underdevelopment. Indeed, all of us must accept that we carry joint responsibility to re-distribute the wealth of our nation.”

These are bold and inspiring words – and we need to see if anything comes from this. One wonders whether her ministry has the capacity, experience and will to achieve the mammoth task of stimulating South Africa’s small business economy. R. Chance of the Democratic Alliance seems to share these concerns. He has stated that the new department is facing capacity issues and should, wherever possible, seek out partnerships with the private sector. In addition, he believes that it is imperative that the Minister sets out a strategy which is business friendly – not necessarily just big business friendly but enterprise friendly.

In 2014, a record number of 73 economies registered for the GEM cycle. However, survey results from Kuwait, Latvia andTurkeywerenotincludedinthefirstGEMGlobalReportas their APS data was not available at the time of going to print. These countries will be included in a later PDF version of the 2014 Global Report. The participating economies, categorised by geographical region and economic development levels (factor-driven, efficiency-driven andinnovation-driven), are shown in Table 1.1. It should be

A SOUTH AFRICANperspective on entrepreneurship2.1 Introduction

TheUSfinancialcrisisof2007/2008,consideredbymanyleading economists to be the worst economic crisis since the Great Depression of the 1930s, was followed by a significant global downturn (2008–2012). The Global Competitiveness Report 2014–2015 notes that although theglobaleconomyseemstobefinallyleavingbehindtheworst and longest-lasting financial and economic crisisof the last 80 years, this resurgence is moving at a less decisive pace than it has after previous downturns. It remains imperative for policy makers, business and civil society leaders to work together, in order to identify and strengthen the forces that drive future economic growth. In particular, governments are urged to focus on reforms that help to create enabling environments that foster innovation, facilitate more productive economies and critically, open up new and better job opportunities for all segments of the population.

Table 2.1: Unemployment rates in sub-Saharan Africa, 2014

Country Total unemployment rate

Angola 8.4

Botswana 18.4

Ghana 4.5

Malawi 7.6

Namibia 17.7

Nigeria 7.5

South Africa 25.3

Uganda 3.9

Zambia 13.3

Average SSA 7.6

Source: International Labour Organisation (http://www.ilo.org/global/

research/global-reports/global-employment-trends/2014)


notedthatSouthAfricaistheonlyefficiency-driveneconomyin sub-Saharan Africa, with all the remaining participating Africancountriesbeingclassifiedasfactor-driven.

2.2 The entrepreneurial pipeline

The GEM model recognises entrepreneurial attitudes, activity and aspirations as dynamic interactive components of national entrepreneurial environments. Entrepreneurial activity does not take place in a vacuum, and entrepreneurial attitudes and perceptions (both societal and individual) play an important part in creating an entrepreneurial culture.

GEM sees entrepreneurial activity as a continuous process rather than as individual events. As such, the Adult Population Survey (APS) is designed to allow for the measurement and assessment of individual participation across the range of phases comprising entrepreneurial activity: potential entrepreneurship, entrepreneurial intentions, nascent and new business activity, progression into established business ownership, and the reasons for business discontinuance. This process can be viewed as a pipeline, where people participating in each phase are the source of those potentially advancing to the next phase.

In this report, the authors have decided to look at South Africa’s entrepreneurial behaviour over several years of GEM surveys, with a particular focus on the changes that have occurred in the last 12 months so that the current entrepreneuriallandscapecanbedefinedandunderstood.This will allow for trends in South African entrepreneurial activity to be highlighted, as well as assist policy makers to make more informed decisions about how to increase entrepreneurship and enhance SMME development within the country. 2.2.1 Attitudes and potential entrepreneurs

Twomain factors influence whether a person is likely toeven consider starting a business, namely:

Perceivedopportunitieswhichreflectthepercentageof individuals who believe there is occasion to start a venture in the next six months in their immediate environment because good opportunities do exist, and

Perceivedcapabilitieswhichreflectthepercentageofindividuals who believe that they have the required skills and experience to start a new venture.

Another factor which must be taken into account in the fear of failure expressed as a percentage of people who do not want to start a business because of the fear of failure. Fear offailurecanbeinfluencedbyintrinsicpersonalitytraits,aswell as by societal norms and regulations.

GEM considers those who perceive good opportunities for starting a business, as well as believe they have the required skills, as the potential entrepreneurs in a society. It is important to note that, at this stage of the entrepreneurial pipeline, they have not yet decided whether they will pursue the opportunity or not. Table 2.2 shows that South Africa’s pool of potential entrepreneurs has remained relativelyconstantoverthepastfiveyears.SouthAfrica’sscores for both perceived opportunities and perceived capabilities are only half the average for the sub-Saharan African region. GEM studies have shown that individuals in factor-driven economies tend to have higher perceptions that there are good opportunities for entrepreneurs. This tends to decline with greater development levels. South Africaistheonlyefficiency-driveneconomyinsub-SaharanAfrica, but given South Africa’s chronically high levels of both un- and underemployment, this does not explain the magnitude of the discrepancy. South Africa’s scores are alsobelowtheaveragesfortheefficiency-driveneconomiesthat participated in GEM 2014 (37,0% for perceived opportunities and 37,7% for perceived capabilities). 2.2.2 Entrepreneurial intentions

Potential entrepreneurs see good opportunities for starting a business and believe that they have the necessary skills, knowledge and experience to start a business. However, perceiving a good opportunity and having the skills to pursue it will not necessarily lead to the intent to start a business. Individuals will assess the opportunity costs, and risks and rewards, of starting a business versus other employment preferences and options, if these are available. In addition, the environment in which potential, intentional and active entrepreneurs exist needs to be sufficientlyenablingandsupportive.

Intentional entrepreneurs, the next stage in the pipeline, expresstheirintentionofstartingabusiness.GEMdefinesentrepreneurial intention as the percentage of the 18–64

year old population (individuals already engaged in any stage of entrepreneurial activity excluded) who intend to start a business within the next three years. This stage is important in the entrepreneurial process as a strong association exists between entrepreneurial intention and actual entrepreneurial behaviour. Societal attitudes – whether entrepreneurship is seen as a good career choice, whether high status is given to successful entrepreneurs and whether there is a lot of media attention given to entrepreneurship – can have an important influence onentrepreneurial intent.

The 2014 GEM Global Report shows that entrepreneurial intentions tend to be the highest among factor-driven economies and lowest among innovation-driven economies, whichconfirmsthealreadyrecognisedpatternthatstartinga business is more prevalent where other options to provide income for living are limited.

Table 2.3 shows that entrepreneurial intentions in South Africa have dropped by 23% (from 15.4% to 11.8%) when comparedto2013.Thethreeindicatorsreflectingattitudestowards entrepreneurship (good career choice, high status and media attention) have also dropped – of particular concern is the score for good career choice, which is the lowest since 2009. Entrepreneurial intentions in South Africa are significantly lower than for the rest of sub-SaharanAfrica–onlyafifthoftheregionalaverage.SouthAfricaalsoperformedpoorlycomparedtootherefficiency-driven economies in the GEM 2014 survey – the average forefficiency-driveneconomieswas22,8%,arounddoubleSouth Africa’s score.

Entrepreneurial activity is the third phase of the entrepreneurial pipeline, and dependent on a healthy pool of potential and intentional entrepreneurs. Although South Africa’s scores for societal attitudes towards entrepreneurship have dropped, they remain similar to the averages for sub-Saharan Africa, as well as higher than the averagesforallefficiency-driveneconomiesinGEM2014.South Africa’s fear of failure rate is also in line with both thesub-SaharanAfricaandefficiency-drivenaverages.Themajor discrepancy is in the area of entrepreneurial intention. If policy makers and service providers are to be successful in their efforts to stimulate and support new generations of

chapter 2The state of entrepreneurship in

South Africa, 2001 to 2013

Potential Entrepreneurs 2001 2005 2009 2013 2014 Ave SSA**

Perceived good opportunities 19.7* 27.3 35.4 37.8 37.0 73.3

Perceived capabilities 30.4 35.2 35.5 42.7 37.7 77.4

Fear of failure 26 25.5 29.5 27.2 25.5 23.9

Table 2.2: Perceptions of good opportunities in the adult population of South Africa, 2001–2014

*read as 19.7% of the adult population in 2001 perceived there were good opportunities to start a business** SSA=sub-Saharan Africa


entrepreneurs, they will need to identify and reduce factors which inhibit entrepreneurial intentions in this country. It is clear that in South Africa, even if the expected returns from entrepreneurship are considerably higher than the best alternative, the perceived risks involved may be too high for an individual who is thinking about starting a business. A variety of national characteristics could contribute to this risk-assessment, for example, “red tape” which could present unfavourable administrative burdens or high costs to those thinking about starting a business; access to resources and technical assistance; levels of corruption and crime; the attractiveness of the market; and the competitive environment. 2.2.3 Early-stage entrepreneurial activity

Entrepreneurial activities in this report are presented by using the organisational life-cycle approach (nascent and new businesses, established businesses and discontinuation). Table 2.4 presents the entrepreneurial activity prevalence rates in South Africa, along the phases of the life-cycle of a venture, for the period of the country’s involvement in GEM.

The central indicator of GEM is the Total Early-stage Entrepreneurial Activity (TEA) rate, which measures the

percentage of the adult population (18–64 years) that are in the process of starting or who have just started a business. This indicator measures individuals who are participating in either of the two initial processes of the entrepreneurial process:

Nascent entrepreneurs – those who have committed resources to starting a business, but have not paid salaries or wages for more than three months, and

New business owners – those who have moved beyond the nascent stage and have paid salaries and wages for more than three months but less than 42 months.

Measuring the two types of entrepreneurs is important as it provides the level of early-stage activity that will hopefully be transformed into established businesses – i.e. mature businesses, in operation for more than 42 months.

The rates of all levels of early-stage entrepreneurial activity have dropped significantly compared to 2013. TEA hasdecreased by 34% (from 10.6% in 2013 to 7.0% in 2014) and the gap between South Africa and other SSA countries has widened. It appears that entrepreneurship in South Africa is regressing when compared to its counterparts in the rest of Africa.



Figure 2.1: Total early-stage entrepreneurial activity (TEA) in GEM economies in 2014, by phase of economic development

Table 2.3: Entrepreneurship attitudes and intentions in South Africa, 2003-2014

2003 2004 2005 2006 2008 2009 2010 2011 2012 2013 2014Ave SSA

Entrepreneurial intentions 12.2* 15.6 10.7 9.3 16.9 13.3 19.6 17.6 14.0 15.4 11.8 58.0

Good career choice 48.0 59.3 55.2 60.9 64.6 63.7 77,5 72.7 74.1 74.0 69.6 71.5

High status to successful entrepreneurs 48.0 59.1 56.0 59.3 62.2 64.0 77.6 72.1 74.0 74.7 72.9 77.6

Media attention for entrepreneurship 47.5 59.3 54.4 56.8 69.2 63.9 78.6 73.5 72.9 78.4 72.6 72.9

*Read as 12.2% of South African adults in 2003 who have entrepreneurial intentions.

2001 2005 2009 2013 2014 Ave SSA

Nascent entrepreneurial rate 5.3* 3.6 3.6 6.6 3.9 14.1

New business ownership rate 1.4 1.7 2.5 4.1 3.2 13.0

TEA 6.5 5.2 5.9 10.6 7.0 26.0

Established business ownership rate - 1.3 1.4 2.9 2.7 13.2

Discontinuance of businesses - 2.9 3.5 3.9 3.9 14.0

Read as : 5.3% of the adult population in South Africa in 2001 were engaged in nascent entrepreneurship

Table 2.4: Prevalence rates (%) of entrepreneurial activity amongst the adult population in South Africa, 2001–2014

A comparison of South Africa’s TEA rate with the TEA rates of other economies participating in GEM 2014 (Figure 2.1) reinforces this bleak prognosis. South Africa has one of the lowest TEA rates among the efficiency-driven economies–theaveragefortheefficiency-driveneconomiesis14.0,double South Africa’s TEA rate.

Over the years GEM has shown that TEA rates tend to be high in those countries with a low GDP per capita. As the GDP per capita increases, the levels of early-stage entrepreneurial activity decreases as economies tend to become less reliant on small enterprise creation to provide employment. Figure 2.2 plots GDP per capita against the TEA rates for 2014.

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Factor-driveneconomies Efficiency-driven economies Innovative-driven economies

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Figure 2.2: TEA rates and GDP per capita, 2014

Table 2.5: South Africa’s relative rankings, GEM 2002–2014

Year SA’s TEA ranking SA’s TEA rate Median Number of positions above/ below median

2002 20th out of 37 countries 6.3 19 1 below

2003 22nd out of 31 countries 4.3 16 6 below




2008 23rd out of 43 countries 7.8 22 1 below


2010 27th out of 59 countries 8.9 30 3 above


2012 22nd out of 69 countries 7.3 35 13 above

2013 35th out 67 countries 10.6 34 1 below

2014 53rd out of 70 countries 7.0 35 18 below

It is clear that South Africa’s position (designated ZA) is substantiallybelowthe lineofbestfit.This lineofbestfitshows that South Africa should have a TEA rate in the order of 20% (almost three times South Africa’s actual rate of 7%) – a level at which the high rate of unemployment would decrease substantially.

Table 2.5 shows South Africa’s performance in terms of relative position – i.e. how many positions above or below the median for the global GEM sample South Africa ranks – for the years 2002–2014. Again, it is clear that the country’s overallrankinghasdroppedsignificantlybelowthemedianfor all other GEM countries, reversing the positive trend shown between 2010–2013.

A primary objective of GEM is to explore differences in national levels and types of entrepreneurship and to link these to job creation and economic growth. The relative prevalence of opportunity-motivated versus necessity-motivated entrepreneurial activity provides useful insights into the quality of early-stage entrepreneurial activity in a given country.

Necessity based early-stage entrepreneurial activity: Thisisdefinedasthepercentageofthoseinvolvedinearly-stage entrepreneurial activity that claim to be driven by necessity (having no better choice for work) as opposed to opportunity. This is also described as survivalist-driven motivation.

Opportunity based early-stage entrepreneurial activity: This is the percentage of those involved in early-stage entrepreneurial activity driven purely or partly by opportunity, asopposedtofindingnootheroptionforwork.Thisincludestaking advantage of a business opportunity or having a job but seeking a better opportunity.

GEM has shown that businesses started by opportunity-driven entrepreneurs are much more likely to survive and employ people than those started by necessity-driven entrepreneurs. One would therefore expect economies with higher developmental levels to have a high ratio of opportunity entrepreneurs to necessity entrepreneurs. However, in developing countries the levels of necessity-

Table 2.6: Opportunity- and necessity-driven TEA rates amongst the adult population of South Africa, 2001 -2014

2001 2005 2010 2013 2014 Ave SSA

Necessity-driven (% of TEA) 18,5 39,5 36 30,3 28,2 33,7

Opportunity-driven (% of TEA) 64,7 57,0 60,7 68,6 71,3 64,0

Ration of Necessity vs. opportunity 0,3 0,7 0,6 0,4 0,4 0,5

Read as : 18.15% of early-stage entrepreneurs in South Africa in 2001 were motivated by necessity

driven entrepreneurship tend to be high unless there is some form of “security blanket” in the form of social benefits, pensions, child support etc. Table 2.6 shows an encouraging trend in South Africa, in that the ratio of opportunity-driven TEA continues to increase and that of necessity-driven TEA to decrease. This is unusual as one would expect to see necessity-driven businesses increase, given the high rates of unemployment in South Africa.

2.2.4 Established businesses

The level of established businesses is important in any country as these businesses have moved beyond the nascent and new business phases and are able to contribute more to the economy in the form of providing employment and introducing new products and processes. Table 2.4 shows that although there has been a sharp decline in South Africa’s TEA rate since 2013, the established business level has remained relatively constant. However, the established business rate is disturbingly low, compared to that of other sub-Saharan African countries. It is also significantly lower than theaverage forefficiency-driveneconomies–whichat8.5%is more than three times South Africa’s rate of 2.7%. Of particular concern is that South Africa has the fourth lowest established business rate of all the economies that participated in GEM 2014 – only Kosovo, Costa Rica and Puerto Rico have lower rates (Table 2.7).

Theeconomicimplicationsofthesefindingsarecertainlyworrying. South Africa’s persistently low established business prevalence rate paints a bleak picture of the SMME sector’s potential to contribute meaningfully to job creation, economic growth and more equal income distribution. The poor sustainability of start-ups in South Africa relative to other countries in the GEM sample also highlights the need for policy interventions aimed at supporting and mentoring entrepreneurs through the difficultprocessoffirmbirth.Toooftenthesupportofferedbegins and ends with the provision of a generic business plan. Questions also need to be raised about the quality of early-stage entrepreneurship in South Africa, particularly regarding the business and personal management skills of the entrepreneurs.

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y = -6.107In(x) + 73.542R2 = 0,3742

BA Bosnia and Herzegovina

BW BotswanaBR BrazilBF Burkina FasoCM CameroonCA CanadaCL Chile

CN ChinaCO ColombiaCR Costa RicaHR CroatiaDK DenmarkEC EcuadorSV Al SalvadorEE Estonia

FI FinlandFR FranceGE GeorgiaDE GermanyGR GreeceGT GuatemalaHU HungaryIN India

ID IndonesiaIR IranIE IrelandIT ItalyJM JamaicaJP JapanKZ KazakstanLT Lithuania

MY MalaysiaMX MexicoNL NetherlandsNO NorwayPA PanamaPE PeruPH PhillipinesPL Poland

PT PortugalRO RomaniaRU RussiaSG SingaporeSK SlovakiaSI SloveniaZA South AfricaSE Spain

SR SurinameSE SwedenSW SwitzerlandTW TaiwanTH ThailandTT Trinidad & TobagoUG UgandaUK United KingdomUY UruguayVN Vietnam


European Union

Austria 5.8 3.1 8.7 9.9 2.7Belgium 2.9 2.5 5.4 3.5 2.3Croatia 6.0 2.0 8.0 3.6 3.8Denmark 3.1 2.5 5.5 5.1 2.2Estonia 6.3 3.5 9.4 5.7 2.0Finland 3.4 2.3 5.6 6.6 2.3France 3.7 1.7 5.3 2.9 1.7Germany 3.1 2.3 5.3 5.2 1.7Greece 4.6 3.4 7.9 12.8 2.8Hungary 5.6 3.9 9.3 7.9 3.1Ireland 4.4 2.5 6.5 9.9 1.9Italy 3.2 1.3 4.4 4.3 2.1Lithuania 6.1 5.3 11.3 7.8 2.9Luxembourg 4.9 2.3 7.1 3.7 2.6Netherlands 5.2 4.5 9.5 9.6 1.8Poland 5.8 3.6 9.2 7.3 4.2Portugal 5.8 4.4 10.0 7.6 3.0Romania 5.3 6.2 11.3 7.6 3.2Slovakia 6.7 4.4 10.9 7.8 5.2Slovenia 3.8 2.7 6.3 4.8 1.5Spain 3.3 2.2 5.5 7.0 1.9Sweden 4.9 1.9 6.7 6.5 2.1United Kingdom 6.3 4.5 10.7 6.5 1.9Average (unweighted) 4.8 3.2 7.8 6.7 2.6

Non-European Union

Bosnia and Herzegovina 4.5 2.9 7.4 6.7 4.5Georgia 4.1 3.2 7.2 7.3 2.5Kosovo 2.5 1.8 4.0 2.1 6.6Norway 2.8 3.0 5.7 5.4 1.9Russia 2.4 2.4 4.7 3.9 1.2Switzerland 3.4 3.8 7.1 9.1 1.5Average (unweighted) 3.3 2.8 6.0 5.7 3.0

North America

Canada 7.9 5.6 13.0 9.4 4.2United States 9.7 4.3 13.8 6.9 4.0Average (unweighted) 8.8 4.9 13.4 8.2 4.1

Source : GEM 2014 Global Report



Table 2.7: Phases of entrepreneurial activity in GEM economies in 2014, by geographical region (% of population aged 18–64 years)

Nascent entrepreneur-

ship rate

New business

ownership rate

Early-stage entrepreneurial

activity (TEA)

Established business

ownership rate

Discontinuation of businesses (%

of TEA)Africa Angola 9.5 12.4 21.5 6.5 15.1

Botswana 23.1 11.1 32.8 5.0 15.1Burkina Faso 12.7 9.7 21.7 17.7 10.8Cameroon 26.4 13.7 37.4 11.5 17.7South Africa 3.9 3.2 7.0 2.7 3.9Uganda 8.9 28.1 35.5 35.9 21.2Average (unweighted) 14.1 13.0 26.0 13.2 14.0

Asia and Oceania

Australia 7.6 5.7 13.1 9.8 3.9China 5.4 10.2 15.5 11.6 1.4India 4.1 2.5 6.6 3.7 1.2Indonesia 4.4 10.1 14.2 11.9 4.2Iran 7.5 8.7 16.0 10.9 5.7Japan 2.7 1.3 3.8 7.2 1.1Kazakhstan 8.1 6.2 13.7 7.4 2.9Malaysia 1.4 4.6 5.9 8.5 2.0Philippines 8.2 10.5 18.4 6.2 12.6Qatar 11.3 5.4 16.4 3.5 4.8Singapore 6.4 4.8 11.0 2.9 2.4Taiwan 4.4 4.1 8.5 12.2 5.1Thailand 7.6 16.7 23.3 33.1 4.2Vietnam 2.0 13.3 15.3 22.2 3.6Average (unweighted) 5.8 7.4 13.0 10.8 3.9

Latin America and Caribbean

Argentina 9.5 5.2 14.4 9.1 4.9Barbados 8.5 4.2 12.7 7.1 3.7Belize 4.3 3.0 7.1 3.7 4.7Bolivia 21.5 7.1 27.4 7.6 6.9Brazil 3.7 13.8 17.2 17.5 4.1Chile 16.6 11.0 26.8 8.8 8.3Colombia 12.4 6.7 18.5 4.9 5.6Costa Rica 7.6 3.7 11.3 2.5 4.9Ecuador 24.5 9.9 32.6 17.7 8.1El Salvador 11.4 8.7 19.5 12.7 10.8Guatemala 12.0 9.2 20.4 7.4 4.4Jamaica 7.9 11.9 19.3 14.4 6.3Mexico 12.7 6.4 19.0 4.5 5.6Panama 13.1 4.1 17.1 3.4 4.5Peru 23.1 7.3 28.8 9.2 8.0Puerto Rico 8.8 1.3 10.0 1.3 3.6Suriname 1.9 0.2 2.1 5.2 0.2Trinidad and Tobago 7.5 7.4 14.6 8.5 2.8Uruguay 10.5 5.7 16.1 6.7 4.4Average (unweighted) 11.4 6.7 17.6 8.0 5.4

Nascent entrepreneur-

ship rate

New business

ownership rate

Early-stage entrepreneurial

activity (TEA)

Established business

ownership rate

Discontinuation of businesses (%

of TEA)




2.2.5 Business discontinuance

Information on the rate of business discontinuance is another indicator of the sustainability of entrepreneurship in an economy. South Africa’s ratio of TEA to business discontinuance is fairly encouraging – for every person exiting a business in 2014, 1.8 were engaged in early-stage entrepreneurial activity. However, the discontinuance rate among South African businesses still remains greater than the established business rate.

The reasons for business discontinuance are many and varied. Some reasons could be seen as positive, such as the opportunity to sell, pursuing another opportunity or planned retirement. On the other hand, exits may be due to the lack of businessprofitability,problemswithaccessingfinanceandrunning out of working capital. Table 2.8 summarises the reasons for business exit in South Africa. Only 9% of South African business exits in 2014 were for positive reasons, compared to an average of 16% in sub-Saharan Africa. Sixty-twopercentofbusinessesin2014closedforfinancialreasons – either because they were not profitable, orbecausetheyencounteredproblemsinaccessingfinancingtosustainthebusiness.Lackofprofitabilityasareasonforbusiness exit shows a disconcerting upward trend. Although the percentage of South African entrepreneurs exiting businessesin2014becauseofproblemsaccessingfinanceissimilartotheaverageforsub-SaharanAfrica,significantlymore South African businesses are discontinued because of lackofprofitabilitycomparedtotheirregionalcounterparts.This could be because of low levels of business-related skills in South African entrepreneurs; lack of affordable and efficient support structures and infrastructure (transport,electricity, etc.); or the fact that many entrepreneurs in South Africa are active in over-traded sectors populated by lowprofitmarginbusinessesandahighlevelofcompetitionfor limited markets, which can threaten the sustainability of their businesses.

2.3 Profile of entrepreneurs

GEM’s focus on individual-level participation enables this research to reveal a range of demographic and other characteristics about entrepreneurs. The research also makes possible an assessment of the level of inclusiveness in an economy – in other words, the extent to which various groups (for example age, gender or education level) engage in entrepreneurial activity. This information can assist policy makers in targeting effective interventions aimed at increasing participation, as well as productivity in the economy. 2.3.1 Age distribution

Theinfluenceofageonentrepreneurialactivitytendstobevery similar throughout GEM. The prevalence of early-stage entrepreneurial activity tends to be relatively low in the 18–24 years cohort, peaks among 25–34 year olds, and then declines as age increases with the sharpest decrease after the age of 54. Table 2.9 depicts South Africa’s TEA involvement, disaggregated according to age category. The trend is similar to that found in the overall GEM sample. South Africans aged between 25–44 years are clearly the most entrepreneurially active, accounting for between 50% and 60% of all early-stage activity.

Although the low prevalence of entrepreneurial activity in the 18–24 age cohort is in line with general GEM trends, it is of concern in the South African context. The percentage of 18–24 year olds in South Africa involved in early-stage entrepreneurialactivity isalsosignificantly lower thantheaverage for sub-Saharan Africa (which at 26% is more than fivetimestheSouthAfricanfigureforthisagegroup).Theyouth represent a high proportion of the total population within South Africa. The majority of school leavers in South Africa do not pursue tertiary studies and therefore form part of the potential labour force.

2006 2008 2009 2010 2011 2012 2013 2014 Ave SSA

Opportunity to sell 11,8 6,7 3,5 1,4 2,0 1,3 2,8 5,3 5,8

Businessnotprofitable 11,4 31,3 26,0 24,4 32,6 28,7 36,4 42,5 27,7

Problemsgettingfinance 32,1 29,0 27,2 39,1 24,0 28,2 28,9 19,4 20,8

Another job or business opportunity 4,3 6,8 6,0 0,9 6,0 5,4 2,9 3,2 6,9

Exit was planned in advance 2,7 1,0 0,0 0,0 0,0 0,8 1,8 0,5 3,4

Retirement 23,1 0,0 0,0 2,1 1,9 0,0 0,1 0 1,2

Personal reasons 14,7 21,7 21,0 15,5 15,6 19,8 23,2 19,9 16,9

Incident 0,9 3,5 6,4 1,9 0,4 0,6 3,9 9,21 7,08

* 2001-2005 not available

2001 2005 2009 2013 2014 Ave SSA

18–24 years 3,7 3,14 4,7 7,8 4,8 26,0

25–34 years 5,3 6,06 7,4 14,1 9,0 36,3

35–44 years 9,1 7,2 7,7 11,5 7,5 33,3

45–54 years 4,3 4,5 5,9 10,9 7,4 29,7

55–64 years 1,9 5,4 2,2 6,0 4,9 23,2

Read as: 3.74% of 18–24 year olds in 2001 were engaged in early-stage entrepreneurial activity.

Table 2.8: Reasons for business exit in South Africa, 2006–2014

As mentioned previously, one of South Africa’s most serious social problems is the extremely high level of unemployment and underemployment among the youth. The disproportionatelyhighunemploymentfiguresfortheyouthhighlighttheimportanceoffindingwaysofincreasingyouthparticipation in the economy. According to the 2008 Western Cape Youth Report, there are a number of reasons why young South Africans do not become involved in entrepreneurial activity. Althoughaccess tofinance isaperennialproblemfor all small businesses, the youth are particularly vulnerable to this limitation. Young people often have no credit history or assets to serve as collateral in order to secure loans fromfinancial institutions.Theyarealso less likely tohaveaccumulated sufficient capital to be able to use their ownsavingstofinanceabusinessenterprise.

Young people who drop out of education and training avenues fail to access relevant occupational skills. However, there is sufficient evidence that the problemis not just poor levels of school completion but, more importantly, that of skills mismatch. A particularly pernicious problem is that the South African school system does not prepare young people adequately for the realities of the labour market. Many school-leavers do not have sufficient literacy, numeracy and livelihood skills to beable to participate actively in the economy. Those that do attempt to engage in business activities lack managerial,

Table 2.9: TEA by age group in South Africa, 2001–2014

technical and marketing skills, as well as experience, and are therefore at a disadvantage in a competitive and changing business environment.

2.3.2 Gender and race differences

The 2014 GEM Global Report shows that although the ratio of male to female participation in early-stage entrepreneurial activity varies considerably across the total sample of GEM countries, reflecting differences inculture and customs regarding female participation in the economy,aconsistentfinding is thatmenaremore likelyto be involved in entrepreneurial activity. Table 2.10 shows that the same pattern is present in South Africa. In 2014, the ratio of male to female participation in South Africa is 1.2:1. Although South Africa’s overall TEA rates are low, an encouragingfinding is that in2014almost three-quartersof TEA (for both genders) is opportunity-driven. Particularly encouraging is that the female opportunity-motivated TEA has increased from 64% in 2013 to 71% in 2014. This is significantly higher than the average for sub-SaharanAfrican female entrepreneurs (58%).

In terms of entrepreneurial activity across the different population groups, a very encouraging trend is that the level of early-stage opportunity-driven entrepreneurship continues to increase in African blacks. Among coloureds

Table 2.10: Entrepreneurial activity in South Africa by gender, 2001–2014

2001 2005 2009 2013 2014 Ave SSA

Male - opportunity 3.9 3.4 4.6 8.8 5.51 21.7

- necessity 2.2 1.9 2.3 3.3 2.21 10.2

- total 7.3 5.9 7.2 12.3 7.72 32.4

Female - opportunity 2.7 2.1 3.0 5.8 4.47 17.3

- necessity 2.6 1.8 3.0 3.1 1.74 12.0

- total 5.8 4.5 1.6 9.0 6.29 29.9

Read as : 3.9% of the early-stage entrepreneurial males in 2001 were engaged in opportunity-driven entrepreneurship


2005 2009 2013 2014

Black african - opportunity driven 22.9% 49.1% 58.3% 59.8%

- necessity driven 29.3% 30.1% 27.4% 24.8%

Coloured - opportunity driven 9.3% 3.0% 1.5% 3.4%


Indian - opportunity driven 6.4% 1.8% 1.8% 3.0%

- necessity driven 3,6% 0.6% 0.9% 0.0%

Whites - opportunity driven 19.3% 9.7% 7.3% 4.7%


96,5% 96,2% 99,3% 99,2%

Read as : 22.9% of Black African early-stage entrepreneurs in 2005 were motivated by opportunity and 29.3% by necessity.

and Indians, opportunity-motivated TEA showed a healthy increase from the 2013 levels (from 1.5% in 2013 to 3.4% for coloureds, and from 1.8 to 3.0 for Indians). White South Africans, however, recorded their lowest levels of opportunity-driven entrepreneurial activity yet (Table 2.11).

2.3.3 Education

An educated workforce, appropriately skilled and with the capacity for innovation, is vital to an economy’s competitiveness, productivity and growth. A sound education system is therefore one of the key imperatives for a competitive country. It is reasonable to believe that a

goodqualityeducationsystemwillhaveapositiveinfluenceonindividuals’self-efficacyandself-confidence,increasingthe chances of such individuals not only starting a business but also being able to successfully navigate competitive and changing business environments.

GEM research shows that there is a strong correlation between perceived capabilities (skills) and TEA, reinforcing that all forms of education (formal, informal and non-formal) are important in developing entrepreneurial competences. Figure 2.3 shows this positive correlation in all GEM countries in that the higher the perceived skills the higher the TEA.

2001 2005 2009 2013 2014 Ave SSA

None 0,0 0,0 13,2 5,1 5,8 32,5

Some secondary 45,5 42,5 29,9 33,4 34,2 30,0

Secondary degree 43,2 44,6 42,5 48,2 43,4 19,4

Post secondary 11,3 12,9 14,4 13,3 16,6 12,2

Table 2.11: Motivation for early-stage entrepreneurial activity by race group, 2005 -2014

Table 2.12 shows that 60% of early-stage entrepreneurs in SouthAfricain2014haveatleastasecondaryqualification,double the average for the sub-Saharan African region. The percentage of South African entrepreneurs with tertiary level education has also shown a steady increase over the years. The high education levels among South African entrepreneurs may contribute to the fact that the country has a higher percentage of people drawn to go into business because of the opportunity motivation, compared to their counterparts in sub-Saharan Africa.

If economic growth in South Africa is to be sustainable as well as more inclusive, improving education at all levels is critical. It is therefore of concern that the Global Competitive Index (GCI) Report 2014/2015, notes that South Africa continues to perform poorly in terms of primary and secondary education and is once again ranked last in terms of math and science education. Higher education and training also need to be further developed to provide the skills required for higher-value-added employment and growth.

Table 2.12: Distribution of educational levels for TEA in South Africa, 2001–2014

Read as :13.2% of adults with no education in 2009 were involved in early-stage entrepreneurial activity

TEA

-Pe

rce

ntag

e of

Ad

ult

Po

pul

atio

n (1

8–

64 y

ear

s)

Perceived Skills – Percentage of Adult population (18–64 years)

y = 0,0041 X2 - 0,0564X + 4,45R2 = 0,4757

0 10 20 30 40 50 60 70 80 90

Figure 2.3: Correlation of perceived capability (skills) with the level of TEA, 2014

chapter 2A South African perspective

on entrepreneurship

Source: 2014 GEM Global Report


chapter 3

Entrepreneurial Framework Conditions give a better understanding of the entrepreneurial environment within a specific economy.

entrepreneurial contexts. Since its inception in 1999, GEM has proposed that entrepreneurship dynamics can be linked to conditions that enhance (or inhibit) new business creation and growth. In GEM’s methodology these conditions are known as the Entrepreneurial Framework Conditions (EFCs) (summarised in section 1.3.2 in Chapter 1 of this report). The state of these conditions directly influencesthe prevalence of entrepreneurial opportunities, capacity andaspirations,thatinturninfluencesbusinessdynamics.Although the EFCs can be addressed at any stage of development, these conditions function best in economies with an underlying foundation of basic requirements and efficiency enhancers. Understanding these conditions is essential in order to get a better understanding of the entrepreneurial environment within a specific economy –this is done through the National Expert Survey (NES) which is one of the standard instruments of measurement in GEM methodology.

South Africa’s Entrepreneurship Ecosystem

3.1 An overview of South Africa’s business environment

For many years South Africa has been regarded as the number one economy in Africa and has been considered the gateway to the rest of Africa. This situation has now changed and Nigeria has taken over this position.

International organisations such as the World Bank, the World Economic Forum, Doing Business Report, Heritage Foundation and the United Nations provide indices and data on the underlying fundamental conditions required for a well-functioning business environment (such as a country’s macro-economic stability, infrastructure, education, labour market efficiency, technological readiness and marketsize). The Global Competitiveness Report 2014/5 notes that South Africa continues its downward trend in overall competitiveness, dropping to 56th place out of 144 countries. Mauritius, the top performer in the sub-Saharan African region, is now 17 places above South Africa. Key areas of concern highlighted include South Africa’s continued poor performance in the macro-economic environment. Raising education standards and making the labour market moreefficientareseenascritical inviewofthecountry’shigh unemployment rate. Since 2010, South Africa has dropped 16 places in terms of labour market efficiency,and continues to languish at the bottom of the rankings in

SOUTH AFRICA’S Entrepreneurship EcosystemIn recent years, and particularly in the wake of the global financial crisis, policy makers have increasinglyacknowledged that their development strategies need to display an increased focus on the quality of growth in their respective economies – growth that is sustainable, people-centred and inclusive in that it seeks to generate widespread employment and reduces poverty. In order to address the challenges of sustaining development, countries need to embrace extensive growth based on productivity increases driven by improvements in the quality of human and other capital and by innovation. Government policies aimed at creating an enabling and business-friendly environment are thus critical, as SMEs play a key role in achieving sustainable growth and contributing to economic development.

Particular environmental factors (social, political and economic)are influential increatinguniquebusinessand

Condition 2013–2014 2014–2015

Public trust in politicians 88 90

Irregular payments and bribes 47 48

Burden of government regulations 123 120

Favouritismindecisionsofgovernmentofficials 110 104

Business cost of crime and violence 134 133

Quality of overall infrastructure 58 59

Quality of electricity supply 94 99

Quality of primary education 132 118

Quality of education 140 88

Quality of math and sciences 143 144

Quality of secondary education 140 122

Quality of management schools 15 24

Time required to start a business 80 90

Flexibility of wage determinations 140 139

Hiringandfiringpractices 143 143

Availabilityoffinancialservices 2 6

Government procurement of advanced technology 105 112

Table 3.1: Global Competitiveness Report – 2013–14 vs. 2014–15

terms of quality of math and science education. The health of the workforce is also a serious concern – South Africa is ranked 132nd out of 144 economies as a result of high rates of communicable diseases and poor health indicators more generally. Table 3.1 summarises South Africa’s performance in key indicators, compared to 2013/14.

InvestmentconfidenceinSouthAfricaisaffectedbyalackof public trust in politicians (90th), the business cost of crime and violence (133rd), poor quality and supply of electricity (99th) as well as the onerous labour laws. Since the publication of the Global Competitiveness Report 2014/15, the situation with respect to the supply of electricity has markedly deteriorated with rolling blackouts and continuous load shedding. This is seriously affecting all businesses but especially small and medium ones who cannot afford the cost of installing generators. It is expected that the rates of early-stage entrepreneurial activity will further decline in the next few years unless this situation can be addressed.

3.2 The National Expert Survey

Annually, each country participating in the GEM cycle surveys at least 36 key experts or informants. The NES is similar to other surveys that capture expert judgments to evaluate specific national conditions. For example, theWorld Economic Forum’s Global Competitiveness Report


and the World Bank’s Ease of Doing Business Report use similar surveys to build their indices. However, the NES is different in that it focuses only on EFCs rather than on general economic factors.

The NES questionnaire is standardised for all countries and wascarefullydesignedandrefined tocapture informedjudgments of national key informants in each country, who are specially selected on the basis of reputation and experience. Experts are asked to express their views about the most important institutional successes and constraints for fostering entrepreneurship in their country. They also provide some recommendations for the same purpose.

When all the data is collected, the files are harmonisedcentrally by the GEM data team which includes an internal quality audit and the calculation of site variables that summarise each block of questions designed to measure a certain aspect of the EFCs.

The experts were interviewed using both a semi-structured and structured questionnaire. The closed questionnaire consisted of several statements relating to aspects of the nine Entrepreneurial Framework

chapter 3South Africa’s

Entrepreneurship Ecosystem

Conditions. The responses were measured on a Likert scale from “completely false (1)” to “completely true (5)”. The statements were phrased so that a score of 4 or 5 would indicate that the expert regarded the factor as positive for entrepreneurship, while a score of 1 or 2 would indicate that the expert regarded the factor as negative for entrepreneurship. The data obtained from the respondents was analysed in order to determine the mean score for each category of questions.

3.2.1 Market dynamics

Market dynamics and market openness are very important, astheyserveasthefirstbarriersorenhancersforpotentialentrepreneurs in the entrepreneurial pipeline. Table 3.2 shows that there has been little change in the factors influencing market dynamics from 2013–2014. In fact,experts believe that market openness has declined and this may explain to a certain extent why perceived opportunities in South Africa have also declined (Table 2.2).

3.2.2 Education

GEM has shown that there is a direct correlation between the levels of perceived capabilities and the level of TEA in a country (Figure 2.3). The perceptions of entrepreneurs as to whether or not they intend to start a business are heavily influenced by whether they think they have theskills necessary to do so. This is in turn linked to education. Previous GEM South African reports have also suggested that those entrepreneurs with higher levels of education are both more likely to start a business and ensure its sustainability.

Historically experts agree that in South Africa, education is an area that has failed entrepreneurs. Education is inextricably linked to entrepreneurial intentions and growth asitinfluencesconfidenceintheabilitytostartabusiness,and to understand financial and business issues. TheGlobal Competitiveness Report 2014–15 confirms thatpoor education at all levels continues to hamper South Africa’s workforce (Table 3.1). Difficultiesinintegratingintothe workforce, faced by young women and young men, often reflect both a mismatch between capabilities and worktasks and a general skills gap.

Table 3.3 shows that the rating for “primary and secondary education providing adequate attention to entrepreneurship” has dropped from 1.75 in 2013 to 1.47 in 2014. Lynette Ntuli, one of the experts surveyed, highlighted limited access to skills-driven education as a constraint. Not only is the entrepreneurship focus inadequate, but the outcomes and methodologies also need to be probed. A further problem is that the system encourages higher education as the sole pathway to professional advancement and success, and creates the implication that vocational expertise is distinctly inferior to academic knowledge. Many teachers are lacking in academic competence, let alone entrepreneurially able, and they are unable to inspire and support those who show flairandpassion.

The problem in South Africa is not isolated to the quality of entrepreneurship education and training but is a broader problem of primary and secondary education in its entirety. The reality of the South African situation is that the majority of our youth will not be in a position to access higher education and are dependent on the skills embedded in them in the primary and secondary phases of education. SA’s dysfunctional school system produces workers who are so ill-prepared for the world of work that many are virtually untrainable by the time they leave school. Last year the Department of Education again changed the curriculum, exacerbating the problem for poorly trained teachers. This is likely to have an impact on the levels of education for the next few years. Nothing positive seems to be happening, in spite of the fact that South Africa has one of the highest spends per capita on education in the world.

The poor educational and training system also creates a gap in the capacity and readiness to start a business. Young

Table 3.2: EFCs influencing the pool of potential entrepreneurs in South Africa, 2005, 2010, 2013 and 2014

EFC Mean score 2005

Mean score 2010

Mean score 2013

Mean score 2014

Market dynamics 2.7 2.9 2.8 2.9

Market openness 2.4 2.5 3.1 2.3

Entrepreneurship education – primary and secondary levels 2.2 1.8 1.8 1.8

Table 3.3: Average expert ratings on education and training for entrepreneurship in South Africa, 2010, 2013 and 2014

Educational Entrepreneural Framework Condition, 2010, 2013 and 2014

Mean score 2010

Mean score 2013

Mean score 2014

Primary and secondary education encourages creativity, self-sufficiencyandpersonalinitiative 1.8 2.9 2.1

Primary and secondary education provides adequate instruction in market economic principles 1.7 2.5 2.0

Primary and secondary education provides adequate attention to entrepreneurshipandnewfirmcreation 1.8 1.8 1.5

Colleges and universities provide good and adequate preparation for startingupandgrowingnewfirms 2.3 2.3 2.3

Business and management education provides adequate preparation forstartingupandgrowingnewfirms 2.6 2.5 3.0

Vocational, professional and continuing education provides good and adequatepreparationforstartingandgrowingnewfirms 2.3 2.1 2.6

people are left with little preparation in terms of life and technical skills to start and grow a business. It is then left to informal training, mostly from government, NGOs social enterpriseinitiatives,tofillthegap.

Even when individuals study beyond secondary school, experts feel that business and management education fails in preparing young people for a future as a successful entrepreneur. Ratings for different forms of post-secondary entrepreneurial training remain under 3 – in other words, a persistently below average score.

3.2.3 Government initiatives

The transition from an intentional entrepreneur to one that actually starts a business is complex, and many entrepreneurs do not pass the intentional stage for a variety of reasons. The importance of government policies in enhancing entrepreneurial activities is recognised throughout the world. Although it is not governments’ responsibility to start new businesses and provide employment, it is their responsibility to provide an environment that is conducive to starting and sustaining a new business, through reforms and regulations that increase the ease of doing business and lessen unnecessary bureaucratic burdens. The EFCs mostlikelytohavethegreatestinfluenceonthetransitionfrom intentional to active entrepreneur, as well as on the sustainability of the SME sector, are:

The availability of and easy access to entrepreneurialfinance;

Government policies and regulations; The transfer of research and development; and Physical infrastructure, of which the supply of electricity

is a major concern.


SouthAfricahasplentyofmoney/financeavailabletohelpaspiring entrepreneurs and is no better or worse than most other GEM countries around the world. However, previous GEM reports have shown that there is a divergence between theentrepreneurandtheinstitutionprovidingthefinance,possibly because of:

Alackofsufficientcollateralonthepartoftheentrepreneur;

The inability of the entrepreneur to produce a business planthatisacceptabletothefinancialinstitution;

Poor market research and the absence of a viable businessideathathasdemonstrablebenefits;and

Lack of access to markets.

Table 3.4 summarises South Africa’s performance in terms of the Entrepreneurial Framework Conditions relevant to early-stage and established business activity. The experts’ rankings show that almost all the EFCs remain at a rating of 3 or below, and that very little change has taken place from 2013–2014.

A closer analysis of the experts’ assessment of government policies is given in Table 3.5.

It is clear from Table 3.5 that the national experts believe that inefficientgovernmentbureaucracyremainsoneofthemajor obstacles to entrepreneurial activity and business growth in the country. Government bureaucracy also featured strongly in the 2014/2015 Global Competitiveness Report’s list of most problematic factors for doing business in South Africa (in 3rd position). The experts gave strongly negative ratings (under 2) for the time required to obtain permits and licences, as well as the ease of coping with government bureaucracy and regulations, highlighting the red tape associated with starting up and managing a business. Data from the World Bank’s Doing Business reports indicates that reform in this area is long overdue (Table 3.6).

After some easing of the regulations associated with starting a business between 2007 and 2010 (possibly as a result of South Africa hosting the FIFA Soccer World Cup), South

chapter 3South Africa’s

Entrepreneurship Ecosystem

Africa has stagnated in this area. In Mauritius (Africa’s top performer in Doing Business 2015, as well as in the Global Competitiveness Report 2014/15), by contrast, starting a businessalsoinvolvesfiveproceduresbuttakesameresixdays (less than a third of the time required in South Africa to complete the same number of procedures). Overall, in 2014/15 Mauritius was ranked 29th out of 189 countries for ease of starting a business, while South Africa was ranked 61st. Simple business start-up is critical for fostering formal entrepreneurship and economies with efficient businessregistration have been shown to have a higher entry rate, as well as greater business density. Given South Africa’s persistent below-average performance in GEM indicators of entrepreneurial activity, simplifying business start-up is likely to be an important factor in fostering entrepreneurship in this country.

Over the years, the experts have commented that South Africa is characterised by monopolies and a lack of competition in key areas. The telecommunication, energy and the transport sectors are characterised by monopolistic concentration and government influence. These sectors are critical as they all represent key inputs into any business. Monopolistic concentration as well as government influence can increase the inefficiencies in these sectors. Any inefficiency will lead to increased costs that businesses will need to absorb. Economies depend on electricity supplies that are free of interruptions and shortages so that businesses and factories can work unimpeded – currently, an area of grave concern in South Africa. The Doing Business Report 2014 indicates that the ease of access to electricity has declined since 2010, as indicated in Table 3.7. Mauritius is included in the table (for 2015) to provide an example of African best practice. Not only

Table 3.4: EFCs influencing the early-stage and established business entrepreneurs in South Africa, 2005, 2010, 2013 and 2014

EFCMean score

2005Mean score

2010Mean score

2013Mean score

2014

Entrepreneurialfinance 2.7 2.5 3.3 3.0

Government policies 3.5 2.7 3.0 3.0

Government entrepreneurship programmes 2.5 2.1 2.2 2.3

Research and development transfer 2.2 2.1 2.1 2.2

Government and legal infrastructure 2.9 3.0 2.7 2.1

Physical infrastructure 3.3 3.1 2.8 3.1

Table 3.5: Average expert rating on government policies for entrepreneurship in South Africa, 2010, 2013 and 2014

Government policy Entrepreneurial Framework Conditions Mean score Mean score Mean scoreGovernment policies (e.g. public procurement) consistently favour newfirms 2.2 2.7 2.5Support for new and growing businesses is a high priority for policy at national government level 3.1 3.0 3.3Support for new and growing businesses is a high priority for policy at local government level 2.8 2.9 3.2Newfirmscangetmostoftherequiredpermitsandlicencesinabout a week 1.6 1.9 1.6TheamountoftaxesisNOTaburdenfornewandgrowingfirms 2.2 1.9 2.3Taxes and other government regulations are applied to new and growing businesses in a predictable and consistent way 2.8 2.6 2.9Coping with government bureaucracy, regulations and licensing requirementsisnotundulydifficultfornewandgrowingfirms 1.9 2.00 1.8

Table 3.6: Starting a business in South Africa – procedures and days

2007 2010 2015

Procedures to start a business 9 6 5

Days to start a business 35 22 19

is it more difficult to access electricity in South Africa compared to Mauritius, but it is also significantly more costly. Cost (as a % of income per capita) is 729.5 for South Africa compared to 277.0 for Mauritius.

The lack of access to electricity will not only impact on individuals’ ability to benefit from cheaper, saferenergy on a personal level, but will impede these individuals’ attempts to become involved in a variety of business activities. Not only is it expensive and time-consuming to connect to the grid in South Africa, but the deteriorating quality of the supply of electricity (with increasing incidence of rolling blackouts and continuous load shedding) has a strongly negative effect on the sustainability of the SME sector.

Another aspect of government policies cited by the experts as a key factor constraining entrepreneurial development is restrictive labour regulations. Restrictive labour regulations are also ranked as the most problematic factor for doing business in South Africa by the 2014/15 Global Competitiveness Report. South Africa is ranked last out 144 countries for co-operation in labour-employer relations, secondlastintermsofhiringandfiringpractices,and139th for flexibility of wage determination. Legally enforceableminimum levels of protection will always be vitally important to protect workers from unscrupulous behaviour. However, labour legislation should not only favour the employed but should be flexible enough to allow the unemployed theability to successfully seek employment, as well as allowing businesses to grow and expand without the fear of punitive or overly onerous regulations. The high cost of labour relative to productivity and perceived unfriendly labour legislation not only reduces the attractiveness of South Africa as a suitable investment destination, but acts as a profound deterrent to starting and growing a business for potential entrepreneurs within the country.

In conclusion, an important focus of the national experts’ survey, through helping to identify key weaknesses in the entrepreneurial environment, is to provide policy makers and business leaders with information that enables them to put into place precise, practical and targeted recommendations. Entrepreneurial activity is an output of the interaction of an individual’s perception of an opportunity and capacity (motivation and skills) to act upon this and the distinct conditions of the respective environment in which the individual is located. An economy cannot increase the quantity and quality of potential and intentional entrepreneurs without creating an enabling environment in which entrepreneurship can flourish. Informed policydecisions which help to create a nourishing entrepreneurial environmentwillbeofbenefittoentrepreneursinallphasesof their businesses, be it young start-ups, established or repeat entrepreneurs.

Table 3.7: Accessing electricity in South Africa – procedures and days

Number of procedures Number of days

South Africa 2010 4 214

South Africa 2015 5 226

Mauritius 2015 4 84


chapter 4

There are many government initiatives to support SMME development in South Africa, but the question remains as to their effectiveness.

4.1 Small Enterprise Development Agency (SEDA)

This agency was established in December 2004 under the Department of Trade and Industry (DTI). It was formed by merging three organisations, namely the Ntsika Enterprise Promotion Agency, the National Advisory Centre (NAMAC) and the Community Public Private Partnership programme (CPPP). The GODISA Trust and National Technology Transfer Centre were integrated into SEDA in April 2006 to form the SEDA Technology Programme (STP).

SEDA provides business development and support services for small enterprises through a national network, in partnership with other role players who support small enterprises. However, the quality of these contracted service providers varies considerably and consequently the service provided can be very poor and of little constructive value.

Government Initiatives

The business model of SEDA is based upon a number of delivery points or offices located around the country,supportedbyanationalofficelocatedinPretoria.

4.2 Small Enterprise Finance Agency (SEFA)

SEFA was founded in 2012 with access to R1.4 billion in funding, provided by the IDC and the government of South Africa. At the beginning of 2014 it was merged with the South Africa Micro-Finance Apex Fund (SAMAF,) and Khula Enterprise Finance Limited, which previously operated as the Industrial Development Corporation (IDC). SEFA caters for small businesses requiring funding, up to R3 million in theformofbridgingfinance,revolvingloans,assetfinance,working capital and term loans.

AnySMEwithaviablebusinessplancanapplyforfinance.SEFA evaluates the application to determine whether the business can afford the funding and will be able to repay themoneyovertimeoutofitscashflow.

4.3 National Youth Development Agency (NYDA)

TheNYDAwaslaunchedin2009andfinancedfromthede-mutualisation of Old Mutual and SANLAM. Its mandate was to coordinate and promote the development of youth in South Africa,byassistingthemtostartbusinessesandtofinanceexisting businesses. It was required to initiate, facilitate, implement, coordinate and monitor youth development aimed specifically at reducing youth unemployment andpromoting social cohesion. NYDA’s primary target group is young South Africans between 14–35 years of age.

Much controversy has surrounded this organisation which was formed by the merger of two previously ineffective agencies, the Umsobomvu Youth Fund and the National Youth Commission. Their method of accessing their performance is questionable and leaves doubts on to the real effectiveness of the organisation. Over the past few years it has received much criticism in the media for spending money recklessly, as well as for spending a disproportionate amount of its income on salaries of people who are not performing or have been appointed through political connections or nepotism.

The NYDA has theoretically eight key performance areas as part of its strategy, namely:

Economic participation Education and skills development Effectiveandefficientoperations

GOVERNMENT InitiativesSince the advent of democracy in South Africa in 1994, the government has introduced a number of programmes designed to support small and medium businesses. The objective was to stimulate economic development in an attempt to reduce the rising rate of unemployment and the high poverty levels of the majority of the population. Considerable media attention has been given to these initiatives, but the question still remains as to whether they have proven to be effective and have, in fact, contributed to the creation of jobs.

Over the past 20 years several of these initiatives have either been closed or merged with existing organisations in an attempt to produce more constructive results. Examples of such amalgamations include the merger between Ntsika Enterprise Development and NAMAC to form the Small Enterprise Promotion Agency (SEDA). Ntsika failed to achieve its mandate, and was combined with the highly successful National Manufacturing Advisory Centre (NAMAC)

Information services and communications National youth service Policy, lobby and advocacy Research, monitoring and evaluation Social cohesion

New management was appointed in 2014 but it remains tobeseenwhethertheywillbeabletofulfiltherequiredmandate or whether they will be just like the rest, who have failed dismally in the past years.

4.4 Technology and Innovation Agency (TIA)

TIA was created by an act of the South African parliament in November 2008. TIA is an initiative of the Department of Science and Technology (DST) and its mandate is to enable and support technological innovation across all sectors of the economy in order to achieve socio-economic benefits for South Africa and to enhance its globalcompetitiveness. This involves supporting the development and commercialisation of research outputs from higher education institutes, science councils, public entities and private research institutions, and bringing them to market.

TIA was formed through the merger of seven entities previously tasked with promoting innovation in the country. These were the Innovation Fund, Tshumisano Trust, Cape Biotech Trust, PlantBio Trust, LIFElab, BioPAD Trust and the Advanced Manufacturing Technology Strategy (AMTS). Its goals are to use South Africa’s science and technology base to develop new industries, create sustainable jobs and help diversify the economy from commodity exports towards knowledge-based industries equipped to address modern global challenges.

Itwillfundthroughfivedifferentvehicles,namely:

Industry matching funding Equity funding Technology development funding Idea development funding Youth technology

4.5 National Empowerment Fund (NEF) The NEF was established in 1998 and is “the driver and thought leader in promoting and facilitating black economic participation by providing financial and non-financialsupport to black empowered businesses and promoting the culture of savings and investment among black people”.

The NEF provides business loans from R250 000 to R75 million across all industry sectors, for start-ups, expansion and equity acquisition purposes.


4.6 Other funders

There are a number of other funders that are available for entrepreneurs:

Knife Capital Leaf Capital Masisizane Fund Thundafund U-Start Edgegrowth Futuregrowth Atlantic Asset Management Anglo Sebenza Fund

Entrepreneurs need to search these out as they are not government initiatives.

4.7 Survey of government initiatives

A number of specific questionswere added into the APSquestionnaire for 2014:

Do you know the names of any government initiatives that have been set up to assist small business development?

What government initiatives have you heard of and used? For each government initiative you have used, indicate

how effective you believe their assistance was? How effective do you think your local Western Cape

Municipality was in helping small business?

Only 10% of the respondents in the Western Cape knew the names of government initiatives that had been set up to assist small business, against 12% in the rest of the country. This low figure is not surprising taking into account thatonly7%ofall respondents inSouthAfricawereclassifiedas early-stage entrepreneurs and it would be these people who would be more likely to start a business. However, the lack of knowledge of government initiatives among the adult

population may well be a factor affecting those intentional entrepreneurs who do follow through on the intent to start abusiness.Themarginallyhigherfigurefortherestofthecountry is understandable in that many of the government fundinginitiativeheadofficesareinGauteng.

Thoserespondentswhoansweredyestothefirstquestion,were then asked what government initiatives they had heard of (Table 4.1).

NYDA and SEDA were the main agencies that respondents were aware of in all three provinces, although to a far lesser extent in the Western Cape. SEDA was better known in the Western Cape and Gauteng than in KZN but the awareness of the rest of the agencies was low. The Western Cape was the only province that was aware of DEDAT.

When asked which agencies they had actually used, the number of respondents was so low that it was not possible to draw conclusions as to whether the respondents believed their interventions were of use. In order to obtain this information a separate survey would have to be conducted which focuses exclusively on small businesses. This is not the remit of GEM which looks at individuals and their perceptions, aspirations, and intentions.

Respondents in the Western Cape were then asked to give their opinion about the effectiveness of their local municipality. The results of Table 4.2 show that the overall rating is below average, although the reasons for this assessment are not known.

Although the awareness of government initiatives is low it was very encouraging to see a recent initiative launched as a joint venture between the Western Cape government and Deloitte. Entrepreneurs and funders were brought together in a Funding Fair held in Cape Town in March 2015, which was attended by over 1 000 delegates. During the day 60 entrepreneurs who were selected from over 600 applicants were given the opportunity of pitching their ideas to funders,

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Table 4.1: Awareness and Usage of Government Initiatives: 2014What government initiatives have you heard of and used?

Government Agency

Western Cape

Heard of %

KZN

Heard of %

Gauteng

Heard of %National Youth Development Agency (NYDA) 33.7 53.5 65.9Small Enterprise Finance Agency (SEFA) 11.3 21.7 4.0Small Enterprise Development Agency (SEDA) 54.8 26.6 48.5Industrial Development Agency (IDC) 12.5 31.7 14.3National Empowerment Fund (NEF) 4.6 10.0 20.4Department of Economic Development and Tourism (DEDAT) 11.1 0.0 0.0

Table 4.2: Assessment of Local Municipality for Western Cape – 2014For each statement below, indicate which of the following best represents your opinion about the statement1 = strongly disagree; 2 = disagree; 3 = not sure; 4 = agree; 5 = strongly agree; DN = don’t know; RA = refused to answer

Response Assessment ratingThe local municipality has an effective small business support centre 1.4Thelocalmunicipalityofferssufficientgoodqualitytradingspace 2.7Thelocalmunicipalityoffersanefficientbusinesslicencingservice 2.9Thelocalmunicipalityisefficientinitsprocurementpromotion 2.3Thelocalmunicipalityisefficientinallitsdealingswithsmallbusinessowners 2.5The local municipality is better managed than neighbouring municipalities 2.8The local municipality is trustworthy 2.8

run somewhat like a “Dragon’s Den”. This sort of initiative should be copied all over the country in order to make

potential and existing entrepreneurs aware of what support is available and where they can apply for funding.

Government Initiatives


The Global Competitiveness Report 2014–2015 notes that since 2010, economic growth has been slowing down in emerging economies. In addition, emerging economies for the most part have not implemented the structural reforms needed to boost productivity and build competitiveness. South Africa, one of the 20 largest emerging economies, continued its downward trend in 2014, falling to 56th place out of 144 economies. What is of particular concern is that South Africa continues to underperform in many areas of the basic requirements of competitiveness, in particular health and basic education. This highlights the urgent needforSouthAfricatopromptlyandefficientlyimplementappropriate structural reforms. According to the GCR, the necessary reforms are particularly critical in three areas: (1) boosting competition, especially in strategic sectors of the economy, by removing bottlenecks and barriers to entry; (2) makingthelabourmarketsmoreflexibleandmoreeffectiveatusingallexistingtalent;and(3)improvingtheefficiencyof public institutions, which is also crucial to ensure an

effective implementation of structural reforms. These are areas which were also highlighted by South Africa’s national expert panel for the 2014 GEM survey. While most of the sub-Saharan African region economies have in recent years benefited from rapid economicgrowth, South Africa’s growth has been modest at best. The growth there has been has failed to trickle down to all segments of the population. South Africa’s main social problems remain its extremely high income inequality and employment challenge. A weak job-creating capacity that has led to chronically high unemployment and – even moresignificantly–under-employmenthasbeenacriticalcontributory factor in the country’s persistent poverty and inequality. The situation is further exacerbated by youth unemployment of over 60%, reinforcing the need for the government to adopt a sustainable, inclusive growth model. A key priority for South Africa is to improve job creation through reforms to foster a more favourable business

and investment climate, particularly for the small and medium-sized enterprises which contribute so much to employment. In many developing economies, small businesses have been shown to contribute substantially to job creation, economic growth and more equal income distribution. In this context, South Africa’s persistently low levels of entrepreneurial activity relative to other countries participating in the Global Entrepreneurship Monitor surveys are cause for concern. Entrepreneurial activity in South Africa, although very low, was increasing marginally year on year over the last decade. In 2014, however, this trend was severely reversed by a drop of almost 34% from 2013–2014. South Africa’s TEA rate in 2014 is three times lower than the entrepreneurial activity rate that would be expected, given its per capita income.

South Africa’s low levels of entrepreneurial activity are the result of personal, as well as environmental factors. Improving the skills base and fostering positive entrepreneurial attitudes through the education system is critical. However, without a more enabling environment that encourages individuals to see entrepreneurship as a financially viable employment option, it is debatablewhetherSouthAfricawillexperienceasignificantincreasein entrepreneurial activity. A strong entrepreneurial culture cannotdevelopandflourishinareaswithlimitedaccesstoresources, poor infrastructure, little or no customer spend and no vibrant markets. In the absence of an enabling environment in which to utilise and develop their skills in practice, people will be forced to migrate/emigrate to a more favourable environment, search for formal employment within their current province, or remain unemployed. Key to improving South Africa’s entrepreneurial performance, then, is a dual focus on improving the country’s human capital through education and skills training, and creating a more enabling environment in order to dispel negative perceptions about entrepreneurship as an employment option. A more enabling environment is also necessary to reduce the cost of running a business, and therefore improve the sustainability of enterprises in the SME sector.

The recent creation of a separate Ministry for Small Business Development, under the direction of Lindiwe Zulu, indicates an acknowledgement on the part of national government of the critical importance of SMME development. In addition, the Western Cape provincial government has, over the past two years, commissioned a study (in conjunction with the GEM surveys) on entrepreneurship within the Western Cape region. In light of the importance of the SME sector in contributing to job creation and inclusive growth, this high-level interest in entrepreneurial activity and research is heartening. GEM South Africa has been publishing annual reports since 2001 and has made numerous policy recommendationsbasedonthesignificantamountofdatacollected over the last 14 years. The recommendations in

this report take into account the trends in entrepreneurial activity (historical, as well as in 2014) as well as the key constraintsidentifiedbythenationalexperts.

5.1 Education and training

One of the most important constraints identified by thenational experts since 2001 is the poor quality of education and training in South Africa. The Global Competitiveness Report 2014–2015 alsoidentifiedSouthAfrica’sinadequatelyeducated workforce as the second biggest problem for doing business in the country. Structural problems affecting the education system continue to be a stumbling block in the country’s efforts to increase entrepreneurial activity and improve business productivity, affecting all stages of the entrepreneurial pipeline. To increase the size of the pool of potential and intentional entrepreneurs it is important to increase the levels of perceived capabilities through well-structured and high quality education. South Africa’s score for perceived capabilities is only half the average for the sub-Saharan African region as well as below the averages fortheefficiency-driveneconomiesthatparticipatedinGEM2014. SMEs, which contribute so heavily to employment, are especiallyhard-hitbydifficultiesinfindingskilledlabour.

A complete overhaul of the education system is required, with particular focus on improving the country’s uptake and pass rates in Mathematics and Science. A lack ofmathematicallyandscientificallyliteratestudentswill decrease the potential South Africa has to remain competitive in a knowledge economy.

Ensure that competent individuals are leading the educational sector’s reforms. It remains critical to address the quality of the teachers, as well as the quality and relevance of curricula. Mismatches between the skills required by industry and those provided by schools and universities are still prevalent. Educational facilities need to improve their capacity to provide the education and job skills needed to develop greater productivity and technology-intensive industries.

It is imperative to address the structural problems that continue to deprive young people of a good educational foundation. There are still disparities in access to basic education, particularly between rural and urban areas. Even with the huge amounts of funding allocated to education, South Africa is plagued with a continued shortage of textbooks, poor quality infrastructure in many schools and high teacher absenteeism. The through-put rate remains a serious concern, with unacceptably high numbers of students not completing secondary school. A higher level of political accountability in these areas should be enforced.

The school system has a tendency to foster the belief that higher education is the sole pathway to professional advancement and success, to create the

Recommendations for Policy and Practicechapter 5

Please provide a chapter summary

RECOMMENDATIONS for Policy and Practice


implication that vocational expertise is distinctly inferior to academic knowledge. Schools need to actively promote entrepreneurship as a career path – inviting successful young entrepreneurs to participate in the Life Orientation programme is a way to introduce young people to positive entrepreneurial role models.

Introduce into schools a stronger focus on entrepreneurship as a life skill to foster problem-solving skillsandself-confidencethatwillbenefityoungpeople.These skills could be applied across a range of contexts such as managing a family business and/or working as an employee.

To boost job skills in the population, the government needs to strengthen its adult learning policies.

Thecreationandgrowthofinnovativefirmsneedsto be supported by effective university and research institutions with strong links to industry.

Increase investment in training programmes in entrepreneurship and replicate privately sponsored models that are working, e.g. Tsiba; the entrepreneurial academies in Cape Town, Soweto and Vanderbylpark; initiatives like the Fast Track programme at Sasol; and SAB’s KickStart programme. Programmes must be regularly evaluated and continually improved – this includes all public/private initiatives that use government funding. Evaluation should be independent.

Expand interventions that deal with key skills gaps e.g. apprenticeships, technical and vocational education facilities.

Set up experiential incubators that are easily accessible to young potential entrepreneurs, where they can learn and earn while they learn to earn.

Provide mentorship programmes for new entrepreneurs where the mentors have practical personal experience of running a business. It is essential that all entrepreneurial trainers and consultants are well trainedand/orexperiencedinthespecificareaofexpertise that they offer.

. Establish a nationwide network of walk-in centres to support entrepreneurs, especially informal and small businesses. The Clothing Shop is an example of an excellent initiative in training women in the practical aspects of business management.

5.2 Government policies and regulations

Government policies and regulations play a crucial role in creating an enabling business environment: one that is conducive to starting and sustaining a new business. An onerous regulatory environment with unnecessary bureaucratic burdens will reduce the desirability of entrepreneurial ventures, acting as an impediment to the transition from intentional to active entrepreneur, as well as to the sustainability of the SME sector.

An urgent review of the regulatory burden on small businesses is long overdue. Reducing the bureaucracy and red tape is necessary in order to make it quicker andeasiertostartanewbusiness.Simple,efficientand streamlined business registration procedures are critical for fostering formal entrepreneurship.

Ease the restrictive labour laws and empowerment frameworks for small businesses. South Africa’s restrictive employment laws are seen as one of the biggest regulatory obstacles to business growth. Legislationaroundthehiringandfiringofstaffscaresmany small businesses off from hiring staff. Once companieshirestaff,itisverydifficulttoletthemgoif the business cannot afford them or if they prove to be unproductive. Small businesses rarely have the resources to offer long-term mentoring and training. Labour legislation needs to accommodate the up- and downswings in small businesses.

Corruption is seen as the 4th biggest problem for doing business in South Africa (GCR 2014/15). It is critical that the government reduces incentives for corruption and ensures better enforcement of laws and penalties against corruption.

The new Ministry of Small Business Development should put in place a multi-agency assistance framework that offers a variety of schemes, ranging from tax cuts to loans and grants that help defray the costs of productivity improvements in areas such as R&D and business capacity building. The DA, in its economic policy document, suggests streamlining small business support through an integrated system of support for small business via an Opportunity Card. This will simplify the access to government assistance in accessing credit, training, business advisory services and business support services (such as insurance and auditing).

The new Ministry of Small Business Development must, incollaborationwithexpertsinthefield,formulatean informed SME policy approach that explicitly acknowledges the different support requirements of different types of businesses within the SMME sector (for example necessity-driven, micro-enterprises, high-tech and high growth ventures). Targeted policies to foster and support the job creation potential of the informal economy should be included, as well as policies that are tailored to support high-growth ventures with very different needs.

Government should aggressively incentivise entrepreneurship through greater development of specialised economic zones; providing tax breaks for businesses below certain revenue thresholds; and lowering barriers to entry in certain industries.

Create clusters/incubators/business hubs – including entrepreneurs as well as commercial and professional support structures – so that start-ups can be assisted

in a more protected and supportive environment. This is particularly important in rural and semi-rural areas where poor infrastructure (physical and commercial) is a major barrier to small businesses.

Provide incentives for high-growth entrepreneurial ventures, especially in the technology sector. Fiscal and other incentives should be provided for research and development, and science and technology parks should be established to attract and strengthen linkages among foreign and domestic knowledge-intensivefirms.

In its economic policy document, the DA highlights the importance of making it easier for small businesses to win government contracts. It suggests that government should incentivise small business development via public procurement processes, including new local content provisions, implementing an e-Procurement system and commitments to pay suppliers within 30 days.

In parallel with increasing the role of non-state enterprises in sectors still dominated by state-owned enterprises, government must put in place reforms to strengthen the corporate governance and market discipline of state-owned enterprises.

The government should relax immigration requirements, i.e. visa, work permits etc. to allow easier entry to skilled labour, given that an inadequately skilled workforce is one of the biggest obstacles to doing business in South Africa.

5.3 Market openness

Marketopennessisoftenheavilyinfluencedbygovernmentpolicies and regulations.

Allow vigorous competition in all sectors but ensure the inclusion of micro, small and medium businesses which are currently being squeezed out by a few large organisations which have greater negotiating power

Large businesses must embrace the important role that SMMEs play in the economy. Provide incentives to promote partnerships between entrepreneurs and established businesses, for example tax incentives forfirmsthatincorporatenewentrepreneursintotheir supply chains.

Simplify the tender process and standardise this across all government departments to remove the likelihood of corruption and nepotism.

The DA suggests that a community supplier database of small and micro-enterprises should be used for smaller tender opportunities (e.g. less than R30 000). In addition, tenders should be broken up into smaller contracts to encourage small businesses to tender for government work.

The government must commit to ensuring a level playingfieldfornon-stateandstate-ownedenterprises.Key industries (namely postal services, transport,



electricity and telecommunications), all of which form vital inputs into all business activities, are not open liberalised markets. Monopolistic concentration as well asgovernmentinfluencecanincreasetheinefficienciesin these sectors, leading to increased costs that businesses will need to absorb. In addition, monopolies constrain competition from start-ups.

5.4 Government programmes

A radical shake-up of government support/funding programmes for entrepreneurship is needed as a considerable amount of money is tied up in unproductive agencies. It is imperative that experienced staff members, with real entrepreneurial knowledge to support entrepreneurs, are hired. This could also be improved by the introduction of compulsory management training programmes for entrepreneurial consultants.

Remuneration of staff in government programmes should be based upon actual performance that is tangible and can be measured. For example, one agency evaluates itself on the number of business plans that have been accepted and funded but not on the number of people the business has employed and whether it is sustainable or not.

Government programmes are often hobbled by a lack of well-trained, experienced and committed professionals. People who have been retrenched (yet have considerable technical expertise) and those who haveretiredshouldreceivefinancialencouragementtomentorfledglingentrepreneurs.

Provideassistancewiththatfirststepthroughestablishing a “one-stop” shop that offers everything from advice, to skills, to funding opportunities, to assistance with the setting up of basic communications/legalities/amenities etc. Most importantly, a one-stop shop that actually delivers on all of the above is needed.

This report (as well as previous GEM South Africa surveys) shows that awareness about government entrepreneurship programmes and initiatives tends to be very low among the target group. It is important to use diverse information channels, including government web portals, one-stop support centres, SMS campaigns and interaction with representative bodies, to promote awareness and increase take-up of small business support initiatives.

In order to promote entrepreneurship among the youth, the DA suggests an entrepreneurship competition for 18–30 year olds, offering a cash prize to an individual or group of individuals responsible for developing a winning business plan. This should be coupled with

an entrepreneurship week in which participants are encouraged to get involved in activities related to entrepreneurship.

5.5 Entrepreneurial finance support

Entrepreneurs at all stages of the entrepreneurial pipeline find it problematic to obtain funding, especially thoseintending to start a business and those in the early stages (nascentandnewfirms).Inmanycasestheentrepreneursin question do not have the required track record nor have they been able to acquire the required collateral demanded bythefinancialinstitutions.

New funding models need to be introduced, possibly backed by government, which enable entrepreneurs to obtain seed capital without the stringent requirements required by commercial banks with respect to collateral. Commercial banks are often not best placed to assess the risks associated with SMEs. Any new funding model should be run as a public/private initiative where results and accountability play a major role.

Establishfinancialinstitutionsasapublic/privatepartnership (PPP) that will provide low cost funding for nascent, new and established entrepreneurs. However, the money should not be given to the entrepreneurs but rather to a third party who supplies the materials or assets. This prevents the money from being used for purposes other than the business.

A different approach to the management of funding should be encouraged, with attention given to a state-supported micro-funding model, coupled to training/mentoringthroughthefirstyearofoperation.Thiscould also be used to improve access to funding for businesses in the informal sector, where small loans coupled with technical support are often needed.

A lack of accessible venture capital facilities constrains the development of innovative SMEs with high-growth potential. Make funds available from government or provide a tax break for investors to fund entrepreneurs who have the potential to develop high growth businesses. The DA suggests establishing a National Venture Capital Fund to provide investment capital to start-ups and early-stage businesses. The Fund will aim to support innovation in start-ups and SMMEs.

Reduce or eliminate, for a given period, the tax burden onnewentrepreneurs.TheDAsuggestsacash-flowassistance for small businesses via a three year Tax Loss Carry-back for businesses with a turnover of less than R5 million; alternatively, a tax credit that derives from an assessed loss (which hasn’t been claimed as above) to be set off against VAT payable.


48 2015 GEM South African Report

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International Labour Organisation, http://www.ilo.org/global/research/global-reports/global-employment-trends/2014.

Schwab, K. and Sala-i-Martín, X. (2014); World Economic Forum: The Global Competitiveness Report 2014–2015. http://www.weforum.org/reports/global-competitiveness-report-2014-2015

Singer,S., Amoros, J.E., & Moska, D. (2015). Global Entrepreneurship Monitor 2014 Global Report. Retrieved from gemconsortium.org/docs/download/3616

World Bank. 2014. Doing Business 2015: Going Beyond Efficiency. Washington, DC: World Bank. DOI: 10.1596/978-1-4648-0351-2. License: Creative Commons Attribution CC BY 3.0 IGO

Images courtesy of Flickr and World Bank.

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