Do South Africans have what it takes to become effective entrepreneurs? The 2002 Global Entrepreneurship Monitor (GEM) report reveals that South Africa has below the average rate of entrepreneurial activity compared to the 36 other countries taking part in the survey. South Africa comes last of all developing countries. Chile, Brazil, Mexico, India, Argentina and Thailand were among the top eight.
In Thailand 18,9% of adults have started their own businesses, India is second at 17,9% and Chile third with 15,7%. Our figure is 6,5%. While our entrepreneurial rate is relatively low compared to many small, business-driven economies, it is higher than it was two decades ago. Perhaps the real question is not how are we doing compared to other countries, but how are we doing compared to our own past?
The GEM report also showed that of the 37 countries surveyed, South Africa has the highest failure rate for new businesses. Minister of Trade and Industry Alec Erwin disclosed in June 2001 that 117 246 small enterprises receiving government assistance had failed during the past four years, at a cost of more than R68-million.
This is not necessarily bad news, provided that people can learn from business failure, pick themselves up and start all over again. A risk-taking, achievement-orientated culture that provides opportunities for all, and does not attach stigma to failure, boosts entrepreneurship.
Successful enterprises often suffer the steep learning curve of business failure at least once before succeeding. In addition, it is not so much that many businesses are failing as entrepreneurs are moving on to “better prospects”.
Regulations can play a part. Good bankruptcy laws that allow entrepreneurs to try again are important, for example, while bad bankruptcy laws can blunt a location’s entrepreneurial edge.
In South Africa, it is expensive for a small venture to exit a business. Current legislation on insolvency and bankruptcy contains a glut of obsolete provisions and is often obscure.
Regulations impose disproportionate costs on small businesses because they do not have the administrative capacity to absorb them.
Some examples of regulatory constraints in South Africa include the Receiver of Revenue’s decision that VAT should be paid on invoice and not on receipt of payment, which has led to cash flow problems for many entrepreneurs, particularly those with clients who are slow to pay.
Skills development for many South African small businesses revolves around levies on the payrolls of businesses and learnerships as “just another tax”.
Being unable to claim their levy back for financial or administrative reasons, many small firms have not yet produced a training plan that could be recognised by their sector’s education and training authority, and end up paying their levy without claiming it back.
World Bank research shows that the registration cost of companies in South Africa amounts to 36,7% of annual gross national product, while in Canada and the United States it amounts to 1,4% and 0,9% respectively.
It takes about 30 days to register a new business in South Africa, while in Canada it takes two and in the US seven. South Africa’s registration period is well within the average 63 days it takes in the 75 countries surveyed, but clearly this is not good enough. A shift to a regulation that reduces the administrative burden for small and medium enterprises is the best investment South Africa can make in its future.
Judi Hudson and Chris Darroll are based at the Small Business Project, a business development, research and advocacy organisation in Johannesburg