The biggest survey ever of business ownership in South Africa shows that previous counts may have dramatically underestimated the level of entrepreneurship in the country.
Preliminary results of the FinScope Small Business Survey show there are about 5.6-million small business owners in South Africa — one in every six adults.
This is more than double the count of the benchmark Global Entrepreneur Monitor (Gem), an annual study that estimates that about one in every 14 South African adults runs a business.
The FinScope survey was commissioned by the generally highly regarded Finmark Trust, a British-backed non-profit research organisation that studies poverty and financial services in Southern Africa.
The discrepancy between the Finscope survey and the Gem research is so large that the result is bound to cause some controversy among academics and policymakers.
The Gem research, conducted annually by AC Nielsen on behalf of the University of Cape Town’s Centre for Innovation and Entrepreneurship (CIE), has consistency in its favour.
Year after year since 2000 it has measured business-ownership levels at more or less 7% of South Africans by surveying a representative sample of the adult population. This paints a gloomy picture of a country with entrepreneurship levels way below those of similar economies.
In contrast, the Finscope results place South Africa almost on par with its economic peers, such as Brazil, Chile, Hungary and Croatia, where the average ratio of adults running their own businesses is 18.8%.
In South Africa, according to Finscope numbers, the ratio is almost 17%. In Finscope’s favour is the sheer scale of the research. Finmark researcher Irma Grundling says the project cost R6-million.
A total of 5 676 business owners were interviewed in more than 1 000 “enumerator areas” throughout the country, chosen and weighted to provide a representative sample of the South African population.
The Gem research annually surveys a random sample of between 3 000 and 4 000 South African adults, which typically yields a crop of fewer than 300 business owners to interview and from which to extrapolate results. Both teams of researchers would not be drawn into speculating about why their results differ so much.
Grundling claimed she was not familiar enough with the Gem research and Mike Herrington, entrepreneurship professor at the CIE, refused to comment as he had not studied the Finscope research yet.
But he speculated that one possible way in which representative samples can yield significantly different results is the way in which questions are phrased and categories defined. “For example, if you see a person selling a chicken at the side of the road, is that a business?”
Grundling said the Finscope study counted subsistence farmers as business owners if at least part of their produce is sold on the market. Although he didn’t say so, Herrington’s example seems to go to the heart of the difference between the two sets of research.
Several indicators in the new research suggest that either Finscope has over-emphasised the poor in its study, or the Gem researchers have consistently undercounted tiny survivalist enterprises in South Africa.
The Gem project was the first to differentiate between necessity entrepreneurs, people who start businesses because they have no other income, and opportunity entrepreneurs, those who spot a money-making opportunity and pursue it even though they have other options of making a living.
In 2009 it estimated that two-thirds of South Africa’s business owners were opportunity entrepreneurs. Finscope, on the other hand, counts significantly more necessity entrepreneurs.
Finscope estimates that only 26% of South African entrepreneurs can be described as pure opportunity seekers, 51% as necessity entrepreneurs and 22% as mixture between the two. Even if you count this last category as opportunity entrepreneurs, the number comes to 48% only, significantly lower than the Gem estimate.
Another sign that Finscope rightly or wrongly focused more on the entrepreneurship efforts in poor communities is their finding that 58% of South African business owners are women, almost the exact opposite of the Gem research, which estimates that 60% are male.
This suggests that the home-based, income-generating female breadwinner so prevalent among the poor comes to the fore in Finscope’s research. The same goes for its analysis of race groups.
Finscope estimates that 84% of South African entrepreneurs are black, 5% coloured, 4% Indian and 8% white. Gem reckons 64.5% are black, 10.5% coloured, 7% Indian and 18% white. There is an intriguing marker that Finscope may have snapped the picture almost exactly in focus.
The research estimates that 17% of South African business owners, or 965 875, run registered enterprises. That is compellingly close to the figure given by Cipro, the government’s business-registration agency, which says there are 991 414 active registered businesses in South Africa.
It has to be said, though, that Cipro is not universally acknowledged as a bastion of statistical accuracy. If the Finscope research is indeed the first really accurate picture of entrepreneurship levels in South Africa, the country should rise significantly in world entrepreneurship rankings.
South Africa currently ranks 22nd out of 31 countries tracked by Gem. And, unlike Gem, Finscope suggests that South Africa is not a country with a large number of sedentary people completely paralysed by poverty and government handouts. But that is about as far as the good news stretches.
The research paints an overall picture of a harsh landscape populated by millions who struggle to eke out a miserable living:
- Two-thirds of all businesses provide work only for the owner. Only 1% provides work for more than 10 employees.
- More than half said they ran their businesses because they had no other choice — 41% because they couldn’t find a job, 26% to put food on the table and a further 17% because they lost their jobs.
- More than half spend more than 60 hours a week working, almost a third spend more than 80 hours. And the long hours don’t necessarily translate into profit. The research shows that those who make a profit of more than R12 500 a month work on average 60 hours a week, whereas business owners who squeeze out a profit of between R1 500 and R4 000 work an average of 71 hours a week.
- 29% of business owners didn’t know how much turnover and profit they make; 21% refused to disclose the figures. The remainder did an average turnover a month of R19 879 (median R4 058) and an average profit of R6 786 (median R1 503).
- More than a third say they would leave their businesses in favour of employment if they could.
- 73% of all businesses in South Africa are run from home. Significantly, the biggest obstacle for growth identified in the survey was lack of
space to operate in (16%), followed by lack of access to finance (14%), overtrading (13%) and crime (7%).
- Most small businesses operate all year round, with no provisions for holidays or time off sick.
The Finscope research does nothing to alleviate a key policy dilemma facing government. It confirms strong evidence that a small minority of formal businesses create decent jobs and wealth. In contrast, the vast majority of business owners alleviate poverty, but do little more than that.
Which of these two sectors to prioritise and support? It is easy to say both, but resources are scarce. Government’s Small Enterprise Development Agency, which is burdened with the almost impossible mandate of servicing the entire spectrum, is clearly not making much of an impact.
The Finscope research shows that three-quarters of business owners are not aware of any business support organisations or programmes. A total of 94% have never used such services.
If government were to prioritise support for formal, sophisticated businesses, it stands a much better chance of seeing a return on its investment in much-needed jobs and GDP growth, but it would be doing so at the risk of being seen in the short term as helping fat cats while ignoring the poor. And if it prioritises small-business development as poverty relief it runs the risk of being swamped without delivering any economic growth.
Being a single snapshot of the business- owner landscape in South Africa, the Finscope research provides no evidence to back up government’s main small-business development assumption so far that informal survivalists can and do graduate to become formal wealth-creating businesses.
But at least some light is about to be shed on the issue. The Finscope researchers are analysing the data according to a model that divides the business world into eight bands of business sophistication, similar to the living standard measures.
The idea, says Grundling, is not so much to describe a ladder upon which businesses graduate from one rung to another, but rather to identify the particular needs of each segment so that interventions can be fine-tuned for a market that is much larger and more complicated than anyone has thought up to now.