Economic, political malaise has dented SA’s entrepreneurial spirit – GEM report

South Africa has been well known for its entrepreneurial spirit. The incredible successes of businesses like Discovery, Black Like Me, Nandos and most recently, Get Smarter, have encouraged many South Africans to see starting their own businesses as a desirable goal. But it’s not enough.

This year’s Global Entrepreneurship Monitor (GEM) – which annually surveys the state of entrepreneurship in over 60 countries  – has revealed that significantly fewer South Africans believe that they have either the opportunity or the capability to start their own business.

The study found that only 37.9% of South Africans believe that they have the required skills and knowledge to become entrepreneurs — against a global average of just over 50% — and down from 45.4% last year. This puts South Africa at 55 out of 62 countries for this indicator.

In addition only 35% of South Africans believe that there is a good opportunity to start a firm in the area in which they live, compared to 40.9% last year.

“We believe that the current political and economic malaise in the country has seriously dented the fragile entrepreneurial spirit in the country helping to accelerate the decline of this critical sector that we look to create much needed jobs in the country,” says Penny Kew, a co-author of the report.

Number of adults who intend to start a business in next three years fell by over a third since 2013

Added to this the number of South Africans of working age who intend to start their own business within the next three years has fallen by more than a third compared to 2013, and almost halved since 2010.

“Just 10.1% of the adult population between the ages of 18 and 64 now intends to open a new business,” says Kew. “Just four years ago this number was 15.4%, and in 2010 it was at a high of 19.6%.”

This figure is significantly below the African region as a whole, where 41.6% of people of working age intend to become entrepreneurs. It is also less than half of the 26% of people in other emerging (efficiency-driven) economies around the world who plan to open their own firms.

Declining startup rate

The GEM measure of Total early-stage entrepreneurial Activity (TEA), which looks at actual participation in the entrepreneurial process, has also been declining sharply.

By this measure, South Africa has fallen from 22 out of 69 countries in 2012 (when 7.3% of working age adults were involved in starting or running a firm of less than 3.5 year old) to 46 out of 65 countries this year — when the TEA rate was 6.9%.

One positive finding of the report however, is that almost three-quarters of South African entrepreneurs are opportunity-driven, which is higher than the average for efficiency-driven economies, as well as substantially higher than the average for the Africa region.

“This is  significant because it is these businesses that are most likely to generate jobs and help to grow the economy,” says Kew.

Reduce barriers

Kew points out that for policy makers and service providers to stimulate and support new generations of entrepreneurs – especially opportunity-driven entrepreneurs — they must identify and reduce the factors that are putting people off from starting their own business.

“It is clear that in South  Africa, even if the potential 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.”

The report argues that this is due to a number of factors such as the administrative burden of red tape, onerous labour regulations, access to resources, corruption, political uncertainty and the competitive environment.

Given the key societal challenges South Africa faces including rising unemployment and a widening gap between rich and poor, it is critical that this situation is addressed.

“Encouraging entrepreneurship and supporting small businesses are vital in stimulating the economic growth that the country so urgently needs,” says Kew.

‘Unsustainable unemployment’

GEM Executive Director Mike Herrington, co-author of the South Africa report, said a weak job-creating capacity has led to chronically high unemployment and under-employment which has been a critical contributory factor in the country’s persistent poverty and inequality.

“Unemployment is currently at its highest levels, with youth unemployment at over 65%, and everyone acknowledges that this is not sustainable.”

Herrington acknowledges that this is not a warning that people want to hear.

“In government and in organisations that are dedicated to boosting entrepreneurship there is a resistance to the bad news and a tendency to focus on the quality of entrepreneurship, while ignoring the implications of a dwindling pipeline in the macro picture,” says Herrington.

“GEM data show starkly that we have too few entrepreneurs and too few people who want to be entrepreneurs. And those that do take the plunge, few survive for longer than three and half years.

“So even though the quality of South Africa’s entrepreneurs is better than in the rest of Africa, there are still not enough of them.”

However he says data from South Africa’s economic peers show that it is possible to do much better than this.

“Having clarity about the problem frees us from debating the science and helps us to focus on what we must do about the problem,” he concludes.