Entrepreneurial grit brings few dividends

Britt Youens finds evidence of abundant entrepreneurial enthusiasm but fewer signs of its sustainability.

Summary - Urban coloured males with matric are more likely than other South Africans to embark on entrepreneurial activities, but urban white males with a tertiary education are more likely to succeed. The vast majority of self-starters join the informal sector and never register their companies; nevertheless, the Companies and Intellectual Property Registrations Office (CIPRO) in Pretoria receives a fairly large number of applications to register close corporations (CCs), companies and patents. This is encouraging news amidst the gloom caused by our high unemployment figures. From 2001 to 2003, just over 30 000 new companies were registered annually. During the same period many more new close corporations were registered – over 86 000 in 2001 and more than 100 000 in each of the following two years. New patents have averaged between 9 500 and 12 000 per annum since 1982. These are positive developments. However, we need to consider whether these companies and CCs are profitable and whether they contribute to sustained job creation. The university of Cape Town’s Centre for Innovation and Entrepreneurship produces a Global Entrepreneurship Monitor (GEM), which compares entrepreneurial activity in 37 countries. Overall, South Africa rated 19th in 2003 with a combined entrepreneurial activity of 6.54 per cent. This was the lowest of all the developing countries participating in the study. South African start-up companies also fail more often; the ratio between start-ups (companies less than three months old) and new firms (companies that have paid wages and salaries for longer than three months but less than 42 months) in South Africa was 2.4:1, compared to a GEM average of 1.3:1. Furthermore, many of South Africa’s entrepreneurs are ‘necessity entrepreneurs’ (i.e. they start businesses because they have no other alternative) and relatively few are opportunity entrepreneurs (who start businesses to pursue exploitable opportunities). South Africa ranked 9th in the former category, 29th in the latter. GEM also found that entrepreneurial activity doesn’t necessarily translate into significant job creation. In 2002 nearly two-thirds of entrepreneurs had no employees, while 2.8 per cent of the firms accounted for nearly half of all the jobs assessed in the study. However, entrepreneurial firms account for one-third of the total number (11.4 million) of employed people in South Africa, which suggests that they play a vital role in overall job creation, even if they take some time to contribute meaningfully. All the above data concerned formal registered businesses. Informal unregistered businesses play a major role in disadvantaged communities, accounting for 88 per cent of all businesses in those areas. Forty-seven per cent of these informal businesses earned less than the minimum standard of living of R1 270 a month. Entrepreneurship in South Africa is therefore hamstrung by a continued preoccupation with putting food on the table. The GEM study found that there was very little understanding of how difficult it is to build a successful business: many potential entrepreneurs expected their ventures to generate money quickly and easily, and were not willing to invest the time and money required for success. Failure was also viewed very negatively. Despondency over failure was compounded by the high proportion of necessity-driven entrepreneurship - the kind the poor are forced into, and the type that is most likely to fail.

In South Africa, if you are a coloured male, have a matric certification, and live in a metropolitan area you are more likely to embark on some form of entrepreneurial activity than any other person in the country. However, if you are a white male, with a tertiary education, and are based in Johannesburg, or a similar urban setting, you are more likely to succeed at one.

At some time, many of these budding entrepreneurs have faced the queues at the Companies and Intellectual Property Registrations Office (CIPRO) in Pretoria. Many more have posted their applications, but the vast majority of self-starters never register and join the burgeoning informal sector.

My own visit to these offices provided me with the opportunity to rather unscientifically audit new business activity, and, struck by the seemingly large number of applications to register close corporations, companies and patents, later write this article. For amidst the gloomy statistical reality that the unemployment rate of those actively seeking employment is still hovering around 27,8 per cent, there appears to be an encouraging undercurrent that hints at self-sustainability.

In March 2004, Statistics South Africa calculated that 4,6 million South Africans between the ages of 16 and 65 were unemployed1. Significant downsizing by business and government alike has not provided much relief, so increasingly we look to individuals not only to create work opportunities for themselves, but in the future to employ others as well.

Statistics from CIPRO indicate the following2:

\The number of new companies registered year on year, from 2001 to 2003, has remained relatively constant with data captured until May 2004 showing a similar progression. Table one indicates that just over 30 000 new companies have been registered annually.

The number of new close corporations registered annually is significantly higher as shown in table one. In addition, the number of new close corporations jumped from 86 396 in 2001 to over 100 000 in 2002 and 2003 (and seemingly the same number of new registrations will result in 2004).

Company and close corporation liquidations have, year on year, also remained relatively constant, marginally decreasing the overall registration figures.

However, in total only 879 139 close corporations and 338 877 private companies actually operate in South Africa, suggesting that while relatively large numbers of close corporations and companies are registered annually, far fewer are operational.

Finally, the statistics relevant to new patent registrations indicate a very constant pattern of growth as shown in table three. New patents year on year, from 1982 to 2002 hover between 9 500 and 12 000. What these figures do not show however is the extent to which these patents are utilised and the commercial success they bring their owners.

This very brief analysis shows some positive developments; particularly as new close corporation, company and patent registrations are relatively stable. However, as a measure of their value, we need to consider whether these companies are indeed profitable and whether they are in any way contributing to sustained job creation.

In order to help contextualise entrepreneurship in South Africa, the university of Cape Town’s Centre for Innovation and Entrepreneurship, through its Global Entrepreneurship Monitor (GEM) for 20033, has calculated the following:

Just under five per cent of the adult population have been involved in some start-up activity (where a start-up is a business that has not paid salaries and wages for longer than three months) — placing South Africa fifteenth out of the 37 countries participating in the study.

South Africans were placed 29th in new firm activity given that two per cent of the population sustained new firms (a new firm being a business that has paid salaries and wages for longer than three months but less than 42 months).

Of the adult population, 2,38 per cent are “necessity entrepreneurs” (where the entrepreneur is involved in a new business because that person has no other alternative). South Africa was listed as ninth in this category.

In opportunity entrepreneurship, where opportunity entrepreneurs are involved in a new business to pursue an opportunity, South Africa ranked 29th where only 3,3 per cent of the adult population are involved in pursuing exploitable opportunities.

Overall, South Africa was positioned 19th with a combined entrepreneurial activity of 6,54 per cent. This rate is the lowest of all the developing countries participating in the study including Thailand, India, Chile, Argentina, Brazil and Mexico. Furthermore, South Africa is in the lowest quartile of all the countries studied in two key measures, opportunity entrepreneurship and new firm activity.

The study shows that in the majority of GEM countries, the rate for start-up participation exceeds the new firm participation rate by 1,3:1. In contrast, the South African ratio is 2,4:1 or nearly double the GEM average. Therefore while attempts by entrepreneurs in South Africa to start their own business often succeed, more than half of these businesses cannot be sustained. The GEM study describes this phenomenon as “a distinct and adverse feature of South Africa’s entrepreneurial sector”4, and it raises concern over the ability of our entrepreneurial sector to generate economic growth and create jobs.

The other disheartening characteristic of South African entrepreneurship is the relatively low level of new business growth as a result of arising opportunity. Opportunities evolve out of various developments in society, including political change, new legislation and technological advances amongst others. A large number of South Africa’s entrepreneurs are ‘forced’ into creating their own businesses, most often because they are unemployed and in some cases unemployable.

It is of little surprise that the state of economic development in a country has an impact on the level of entrepreneurship in that country: low per capita income induces higher rates of necessity entrepreneurship. In South Africa’s case our entrepreneurial pool is made up of 58 per cent opportunity entrepreneurs and 42 per cent necessity entrepreneurs, similar to the developing country average. But without sustainable development it becomes difficult to eradicate high levels of unemployment and flagging growth rates and the least successful form of entrepreneurial activity is thus fostered.

The study also finds that entrepreneurial activity does not necessarily translate into significant job creation, given that many entrepreneurs are self-employed and do not employ staff and that start-up activity can take some time to result in multiple jobs. Table four shows an analysis of employment by firms in the GEM 2002 sample (excluding owner(s) but including start-ups, new and established firms). It is evident that the distribution of jobs is highly skewed across the firms. Nearly two-thirds of the entrepreneurs have no employees, while 2,8 per cent of the firms account for nearly half of all the jobs assessed in the study. Businesses with two or more employees make up 23,4 per cent of the study and account for 91,4 per cent of the jobs.

However, in relation to the total number of employed people in South Africa, of which there are 11,4 million, entrepreneurial firms account for one third of total employment (excluding the owner(s) of entrepreneurial firms). This suggests that entrepreneurial firms play a vital role in overall job creation in South Africa even though they take some time to contribute meaningfully to job creation.

So far consideration has only been given formal businesses, that is those entrepreneurs registered with CIPRO. However, informal entrepreneurial activity, or unregistered businesses, plays a weighty economic development role for historically disadvantaged individuals (HDIs), especially black women and men.

Entrepreneurs in the informal sector account for 88 per cent of all businesses in communities with a large proportion of HDIs, whereas entrepreneurs in the formal sector account for the remaining 12 per cent.

Perhaps even more importantly, while informal entrepreneurs employ on average 0,8 people (in addition to the owner), formal entrepreneurs employ on average 7,2 people (in addition to the owner). Therefore, formal businesses account for 56 per cent of all employment in privately owned businesses in disadvantaged communities as shown in table five.

Table six further indicates that 50 per cent of formal businesses have a monthly turnover of more than R5 000 whereas 88 per cent of informal businesses have a turnover of less than R5 000. Forty seven per cent of informal businesses and 22 per cent of formal businesses indicated that they made less than the minimum standard of living of R1 270 per month. In reality then, a large percentage of entrepreneurs in these communities are trying to sustain an existence by creating their own work, despite the fact that the monetary rewards of this effort can be meagre.

Entrepreneurship in South Africa is therefore hamstrung by an inability to take advantage of exploitable opportunity and continued large-scale preoccupation with whatever will put food on the table. And while it is still predictable that education levels and privileges related to racial categories have an effect on who will be more successful at creating a business, these results raise concern over the type of business culture developing, and how it will impact on innovation and entrepreneurship now and into the future.

A survey conducted as part of the GEM study showed that an individual’s belief in their own ability to launch a new business is expected to have a powerful influence on their decision to do so. In fact those adults who believed they had the requisite skills were eight times more likely to become involved in starting a business than those who believed they lacked the requisite skills. An individual’s level and nature of education influences this self-perception as does exposure to family members or friends with entrepreneurial experience.

However, conclusions were also drawn with regard to South African’s business culture and cultural heritage generally, which negatively impacts on entrepreneurship. Amongst these conclusions it was felt that there is very little understanding of how difficult it is to build a successful business. There are many eager individuals wanting to start a business but who are not willing to invest the time and money needed to pursue its success.

Secondly, many potential entrepreneurs have the expectation that their venture will generate money quickly and with ease. This thinking may also contribute to the relatively high number of necessity entrepreneurs who are looking for a ‘quick-fix’ and are not seeking to attain viability for their businesses.

Failure in business is also viewed very negatively. Despondency over failure is compounded by the high level of necessity-driven entrepreneurship, the type of entrepreneurial venture most likely to fail, the kind the poorest are forced into. It becomes increasingly unlikely that someone who has very little income and fails at a venture, will reinvest the little they have in order to start again. And, further, it is these individuals who remain in the need-trap, perpetuating the growth of necessity, as opposed to exploitable opportunity, entrepreneurship.

There is little doubt that the entrepreneurial sector contributes greatly to job creation and economic development in South Africa. However, it is clear that many communities are in need of greater innovative thinking, perseverance and support, irrespective of whether that support comes from government initiatives, financial institutions or family structures.

1. Downloaded from www.statssa.gov.za/keyindicators/lfs.asp on12 January 2005.
2. All CIPRO statistics downloaded from www.cipro.co.za/about_us/registration_stats.asp on 12 January 2005.
3. The GEM project is a comparative study of entrepreneurship including the following countries — Japan, Russia, Belgium, France, Hong Kong, Croatia, Sweden, Taiwan, Poland, Finland, Spain, Netherlands, Slovenia, Germany, the United Kingdom, Italy, Singapore, Denmark, South Africa, Hungary, Israel, Switzerland, Australia, Norway, Canada, Ireland, the United States of America, Iceland, China, Mexico, Brazil, Argentina, New Zealand, Korea, Chile, India and Thailand. All statistics referring to the GEM study are taken from Foxcroft, M.L., Wood, E., Kew J.,Herrington M. and Segal N., (2003) South African Executive Report: Global Entrepreneurship Monitor 2003, UCT Centre for Innovation and Entrepreneurship.
4. Ibid, pp. 14.