If South Africa is serious about economic growth and slashing rising unemployment, government will have to take real steps to improve the climate for entrepreneurship, says Mike Herrington, executive director of the Global Entrepreneurship Monitor.
Research released on the drop in entrepreneurial activity in South Africa raises some serious questions about government’s ability to create favourable conditions for entrepreneurs – especially young entrepreneurs. While government appears to have some understanding of the seriousness of the situation, too little is being done to encourage the growth of new and small businesses.
Research has shown a consistent association between a country’s stage of economic development and its level of entrepreneurial activity. But according to the Global Entrepreneurship Monitor (GEM), an annual study conducted by the UCT Graduate School of Business, early-stage entrepreneurial activity in South Africa in 2012 dropped to 7.3% from a high of 9.1% in 2011.
This is significantly below the average of similar efficiency-driven countries (14%), once again showing the country’s consistently below-average trend in early-stage entrepreneurial activity relative to countries with similar development level.
The GEM annual survey is a widely recognised international study of entrepreneurship and each year takes a comprehensive snapshot of entrepreneurs around the world, measuring the attitudes of a population and the activities and attributes of individuals participating in various phases of entrepreneurship. In 2012, 69 countries took part in the study.
A bleak picture
The picture painted by the 2012 GEM Report is rather bleak for South Africa. It shows that only 14% of individuals intend to pursue a business opportunity within the next three years, well below the 27% average for efficiency-driven countries. South Africa’s established business rate of 2.3% is once again the second lowest in the world, a consistent finding in GEM South Africa surveys. The rate is again also far below the average for efficiency-driven countries (8%).
In the latest GEM study, a comparison is made between the youth in South Africa and the youth in nine other sub-Saharan countries: Angola, Botswana, Ethiopia, Ghana, Malawi, Namibia, Nigeria, Uganda and Zambia. South Africa’s rate of perceived opportunities for its youth is 39% – the lowest of the sub-Saharan African countries that participated in GEM. The average for the region is 70%.
South Africa’s rate of perceived capabilities for its youth is 40%, again the lowest of the participating African countries and far below the average for sub-Saharan Africa of 76%. The pool of potential entrepreneurs in South Africa’s youth population is 20%, also considerably below the average of 60% for sub-Saharan Africa.
All of this points to an increasingly uninspiring state of entrepreneurship among South African youth. But considering the poor level of primary and secondary education, it is not really surprising. The South African education system is recognised as being among the worst in the world – and this is the environment where the seed for entrepreneurship is supposed to be planted and nurtured.
What is the solution?
The GEM report contains extensive recommendations for improving the climate for entrepreneurship, including overhauling the education system with a particular focus on improving the country’s uptake and pass rates in maths and science, identifying entrepreneurial role models within communities, improving conditions for new start-up businesses, relaxing labour laws and regulations, mentorship by bigger business and streamlining funds to reach start-up businesses.
It also mentions the encouragement of vigorous competition in all sectors and promoting innovation by rewarding companies which innovate. Innovation reduces costs to consumers and enables markets to change frequently.
Another important aspect is incentivising established and large businesses to support new and growing businesses, for example through tax deductions. Venture capitalists and angel investors with an appetite for risk and a willingness to provide mentorship should be more actively involved.
Four key inhibitors
But these tweaks to the entrepreneurial pipeline will have no lasting effect unless the four megaliths inhibiting entrepreneurship in South Africa are addressed. These are corruption; crime; health and education.
Corruption has a massive impact on the economy and unless brought under control will continue to negatively affect entrepreneurship development. According to Corruption Watch, widespread corruption in the market place is on the rise in South Africa. The latest Transparency International Corruption Perceptions Index ranks South Africa 69th out of 176 countries.
While this does indicate that South Africa is nowhere near the worst, the findings also reveal that the country is sliding in rankings from year to year. While the post-apartheid government inherited an intrinsically corrupt system of governance, this seems to have been perpetuated.
In August 2011, it was reported that about 75% of the cabinet’s 35 members had financial interests outside their official occupations. This was also the case with 59% of the 400 MPs. Many members of the political elite and their families profit from business and the finance minister in 2011 stated that approximately R25bn worth of public tenders were being investigated for fraud.
The World Economic Forum’s (WEF) Global Competitiveness Report further showed that corruption was one of the most cited problematic factors for doing business in South Africa, a huge concern as it stifles business activity, especially for smaller businesses.
The unacceptably high levels of crime affecting all businesses, from micro-enterprises to large corporations, also plays its part in constraining the activities of entrepreneurs across the country. The Global Competitiveness Index ranks South Africa extremely poorly where business costs of crime and violence are concerned, at 134th out of 144 countries.
Health system on the decline
Good health is the cornerstone of any successful economy yet South Africa’s health system has declined dramatically over the past 10 years. The Global Competitiveness Index ranks South Africa extremely poorly where life expectancy is concerned, at 133rd out of 144 countries.
And then there is education, which underpins it all. WEF has ranked South Africa second worst in the world where the quality of maths and science education is concerned and this bodes badly for the development of young entrepreneurial minds. The Department of Education’s Annual National Assessments Report 2012 on education results from Grades 1 – 6 and Grade 9 showed that the higher the grade under consideration, the lower the mark was for maths. Further cause for concern was that the country’s average mark for Grade 9 maths was 13%. Without an educated population very little will happen to lift the economy from its current sluggishness.
These four challenges, unless resolved, will continue to debilitate this country’s capacity to develop and support entrepreneurs, and may in fact prove to negate some of the positive initiatives which are taking place, rendering them a complete waste of time and money. Stimulating entrepreneurship, and then supporting it appropriately, will need considerable reforms, starting at the uppermost echelons of government.