Researchers at the South African chapter of the Global Entrepreneurship Monitor (Gem) are keeping their excitement in check over new data suggesting that entrepreneurship levels in the country have jumped by 50% in the past few years.
Figures from the annual survey, which measures business start-ups in 43 countries, show that in 2008 almost eight out of every 100 adult South Africans owned a business that was less than three-and-a-half years old. This is up from just more than five out of 100 measured every year from 2004 to 2006.
There are several reasons researchers prefer to downplay the increase shown by the study. The first is a nervousness that it might be “a research data-related spike”.
“We are never sure if it is the interview techniques that are perhaps influencing and skewing the data,” says UCT Graduate School of Business researcher Penny Kew.
Entrepreneurial levels are not supposed to change rapidly. They are a cultural phenomenon, more linked to the mind-set and skills set of a nation than to short-term economic fluctuations. Change in entrepreneurship levels “is quite a slow process. Any policy changes take a long time to start filtering through. And I think even more importantly: positive attitudes towards entrepreneurship take a long time to start filtering through,” says Kew.
The data for the latest Gem report was gathered through a random representative sample of South African adults from May 2008 to August 2008 —- just before the global economic downturn and at the cusp of one of the longest consumer booms in the country’s history.
Is it possible that years of sustained growth, with the low-key but sustained propaganda of empowerment, small-business development and entrepreneurship, have kicked in finally, accelerating the rate at which South Africans venture into their own businesses?
“This could be the sign of the start of a more positive trend in entrepreneurship. We look forward to next year’s results to see if this is going to become a positive trend,” says Kew.
Besides, even if the upswing in entrepreneurial activity turns out to be real and sustained, it’s off such a low base that excitement is not yet called for.
“We are miles behind,” says Mike Herrington, leader of the Gem South Africa team and director of UCT’s Centre for Innovation and Entrepreneurship.
In other countries of similar economic development levels of entrepreneurship are significantly higher. In low- to middle-income countries that form part of the Gem study an average of 13 adults per 100 are busy building new businesses, two-thirds more than the rate in South Africa.
Another set of figures thrown up by the report adds to the gloom: 5.7% of South African adults are busy with what the report classifies as “nascent” businesses -— those that have been paying salaries or wages for fewer than three months.
Only 2,1% are owners of “new” businesses -— those that have paid salaries and wages for between three months and three-and-a-half years. And only 2,3% own established businesses -— those older than three-and-a-half years.
Similar ratios were measured in previous Gem surveys, suggesting a staggering failure of attempts to build sustainable businesses.
Just how bad it is becomes clear when compared with other countries. South Africa ranks 23rd out of the 43 Gem countries when it comes to total early-stage entrepreneurship -— the number of owners of businesses younger than three-and-a-half years. But when you remove those businesses younger than three months, South Africa falls to 38th position. Worse still, South Africa ranks 41st when it comes to established businesses. Only Romania and Russia have a lower percentage of adults who own businesses older than three-and-a-half years.
On the positive side, the latest research shows that more South Africans are starting businesses because they want to, not because they have to. In 2008 79% of those who said they were busy with new businesses did so because they spotted an opportunity that made self-employment a more attractive option than either employment or unemployment. It was 55% in 2004.
Only 21% said they were “necessity entrepreneurs” -— forced into business to make ends meet. This proportion is so much lower than the 45% in 2004 that the absolute number of necessity entrepreneurs must have dropped in South Africa.
It is not clear what happened to them, but there are intriguing possibilities.
Herrington suggests that the expansion of social grants and an expectation of further provision from government might lie behind the drop-off of survivalist businesses. Kew speculates that some who start off as necessity entrepreneurs might start seeing opportunities and change their perception about what they are doing and why.
Both researchers agree that the slightly expanding job market just before the recession might have absorbed some of them.
The idea that informal, survivalist entrepreneurs grow into formal business owners is a myth. It is more accurate to see them as the most active of the unemployed. Given half a chance, they will leave the risky, grinding life of a survivalist trader and take a job, perhaps even temporary manual labour in a government-sponsored road-building project or something similar.
The fact that the proportion of opportunity entrepreneurs in an expanding pool of business start-ups is growing can only be good for South Africa.
“Research has consistently shown that the economic contribution of opportunity-motivated firms is higher than necessity-driven enterprises — Almost a third of necessity firms had no employees and the mean number of jobs created per firm was 1,6. By contrast, the mean number of employees for opportunity firms was 4,4, and, compared with necessity firms, opportunity firms were four times more likely to employ six or more people,” the Gem report states.
Herrington cautions that almost two-thirds of all South African start-up businesses are in the services sector —- this is not surprising because skill and capital requirements in that sector are often low. The problem is that the sector is vulnerable to a drop-off of consumer spending -— which happened precipitously soon after the latest Gem data was gathered.
The survival rate reflected in next year’s Gem survey might therefore be even more dismal. But the effect of the recession on the overall levels of entrepreneurship in South Africa is not certain.
American research suggests that the number of start-ups during recessions grows as the laid-off start businesses with their retrenchment packages. But if the Gem project shows anything, it is that entrepreneurial culture differs vastly from one country to another.
South Africans may be prone to react to downturns with shock and fear, clutching their retrenchment packages and meagre government grants to their chests, unable to venture it on uncertain trade.
Or perhaps South Africans fall somewhere in the middle and will adopt an attitude similar to that of the Gem researchers — optimistic, but in a rather gloomy sort of way.