Start-ups the elixir for growth

Statistics South Africa’s Labour Force Survey (Q1 2010) points to continued declines in formal-sector employment.

Local employers have responded to recessionary pressures by cutting 833 000 jobs countrywide in the past 12 months, contributing to a sharp spike in unemployment (25%) and youth unemployment (40%).

The government, already struggling with a wide range of service-delivery issues, is under pressure to implement innovative job-creation strategies. They could do worse than turn to the country’s entrepreneurs.

The world is fast recognising the role entrepreneurs play in alleviating poverty in poor and developing economies. One of the key messages from the World Economic Forum in Tanzania this year was that entrepreneurs were best positioned to unlock Africa’s resource and mineral wealth.

‘Small businesses can contribute to the African economy by adding value, creating employment and driving growth,” says Gavin Friedman, of smallbusiness incubator Raizcorp.

Small, medium and micro enterprises (SMMEs)—businesses established and run by individuals—could play a critical role in creating employment. This sector could generate the ‘decent jobs” that the government’s expanded publicworks programme fails to deliver.

The National Small Business Act recognises five distinct categories of small business locally. These include survivalist enterprises, micro enterprises, very small enterprises, small enterprises and medium enterprises.

South Africa is constrained by a vast number of survivalist businesses, which typically operate in the informal sector with virtually no investment capital or assets and generate income below the poverty line. Examples of survivalist enterprises abound in our city centres, at large construction sites and close to public transport hubs.

An individual will set up a small roadside stall selling food, fruit and vegetables or sweets, or offering basic services such as hairdressing to passing commuters, often earning less than minimum wage. Women make up approximately 56% of this business category.

Entrepreneurs cannot grow when survival is their main focus, but opportunities exist among family-owned micro enterprises that employ between one and five individuals, usually from the same family unit. These businesses operate below the radar with no licences, business premises and free from labour legislation.

The challenge to government and various business incubators is to identify entrepreneurs in this sector for advancement. The bulk of new jobs will be created in the very small, small and medium enterprises where employment averages between 10 and 200 individuals.

Businesses in these categories tend to be better capitalised with varying levels of owner involvement in management and operations. The government’s main challenge is to create a framework in which SMMEs can thrive—and they’re not succeeding yet.

According to the 2006 Global Entrepreneurship Monitor (GEM) report, the national success rate for entrepreneurial ventures is a trifling 3.9%. There are numerous reasons for these failures, including the impact of government red tape, an unfavourable legal environment, poor cash-flow management, inability to secure finance and credit, low skills levels and regressive labour practices.

Some business specialists lament the shortage of effective support institutions and lack of access to markets, procurement and information too. ‘Corporate governance has become extremely complicated in South Africa and therefore impacts hugely on the growth of companies,” says Frances Wright, managing director of Trinitas Consulting.

‘New laws are passed on a regular basis and entrepreneurs are forced to give attention to time-consuming corporate governance issues, rather than building their companies.” The government is aware that some of its bureaucratic processes are a hindrance to encouraging and supporting entrepreneurial activity.

A White Paper by the department of trade and industry, A National Strategy for the Development of Small Business in South Africa, was published 15 years ago, and the National Small Business Act was passed by Parliament in 1996. There are a range of steps the country’s regulators can take to support small businesses and improve the success rate of new business start-ups.

A good place to start is the GEM report, compiled by a not-for-profit academic research consortium aimed at making highquality international research data on entrepreneurial activity readily available worldwide. GEM 2009 advises national policymakers to tailor their socioeconomic programmes to the development of their country.

Enabling entrepreneurship is desirable, but basic requirements such as primary education are also essential. ‘Entrepreneurs with high aspirations fare better in countries with a stable economic and political climate and well-developed institutions,” it says.

The government must reduce the number of steps required to start a new business and increase the efficiency of business registration. They would do well to focus on the Companies and Intellectual Property Registration Office (Cipro), which has been in the news in recent months for severely limiting administrative efficiency in the SMME space.

It also makes sense for the government to provide additional and far-reaching tax breaks for start-up businesses. This support can be simple, such as raising VAT ceilings.

Wright says: ‘The government would help entrepreneurs hugely if of entrepreneurship in South and Southern Africa? GEM 2009 conducted research in 54 countries, with South Africa’s efficiency-driven economy ranking rather disappointingly in the bottom third.

Today’s SMME is tomorrow’s big business. Small businesses contribute to gross domestic product and create job opportunities. Entrepreneurs alleviate poverty through income generation and creating ‘real and decent” job opportunities.

‘To grow and maximise employment opportunities, the entrepreneur must install the systems and processes necessary to standardise delivery,” says Wright. These include role definition for employees, performance management and rigorous budgeting.

Friedman believes entrepreneurs should learn the value of building a solid cash flow and strive to balance lifestyle and business growth. This will enable small business owners to employ at the correct intervals.

If the entrepreneurial sector falters, South Africa will struggle to achieve its long-term objectives of realigning wealth across population segments and bolstering economic growth. A focus on innovation and competitiveness will ensure the richest continent below the ground takes its rightful place as the richest above ground too.

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