The SMME (small, medium and micro enterprise) sector in South Africa doesn't have the potential to contribute meaningfully to job creation, economic growth or more equal income distribution.
This is one of the findings of the 2008 Global Entrepreneurship Monitor (GEM) survey released yesterday, which paints a bleak picture for the country's SMMEs.
The GEM study, conducted annually since 2001 by the UCT Centre for Innovation and Entrepreneurship at the UCT Graduate School of Business (GSB), is South Africa's largest survey of entrepreneurship and it forms part of a global body of GEM research which in 2008 included 43 countries.
In 2008, South Africa ranked 23rd out of 43 countries with a Total Early-stage Entrepreneurship Activity (TEA) rate of 7,8%. This is significantly below the average for all middle to low income countries (13,2%) – TEA is measured by the percentage of people aged 18 – 64 who are involved in starting or running a business. The findings are consistent with South Africa's poor performance in previous years.
In terms of new firm activity South Africa ranked 38th out of the 43 countries with a new business prevalence rate of only 2,1%. This is significantly lower than the average of 4,6% for all GEM countries. The prevalence rate for established business owner-managers follow a similar disturbing trend – South Africa ranked 41st out of the 43 countries, with an established business rate of 2,3%. This indicates a high failure rate for South African start-ups.
According to Dr Mike Herrington, director of the CIE and lead GEM researcher, the low business prevalence rates remain a major concern for South Africa.
"The poor sustainability of start-ups in South Africa relative to other countries highlights the need for policy interventions aimed at supporting and mentoring entrepreneurs through the difficult process of firm birth. South Africa's National Small Business Strategy makes it explicit that a primary policy objective is employment creation, but too often the support offered begins and ends with the provision of a generic business plan," he says.
The GEM 2008 study has also highlighted that entrepreneurs in South Africa have poor business and management skills, and an inadequate enabling environment.
"Expert input that formed part of the GEM 2008 research pointed out the quality of school-level and post-school entrepreneurship training as being poor – 62% of the experts interviewed listed education and training as a key shortfall area.
"Of particular concern is the rating for the quality of entrepreneurship education and training after school, where South Africa achieved the lowest rating of all the "efficiency driven" (the category South Africa falls under due to its phase of economic development) countries in this sample," says Herrington.
In addition, it was found that entrepreneurs still have to deal with poor access to finance, sub-standard infrastructure and regulations that create huge administrative burdens and costs.
According to Amrei Botha, head of SME Propositions at Standard Bank, a GEM sponsor, there are numerous reasons why SMMEs struggle to obtain financing from commercial banks.
"The main reason is that SMMEs often expect banks to invest in business ideas that are not feasible from a financial perspective. Often SMMEs do not give sufficient attention to assessing the viability of the business venture, setting profitable margins and calculating realistic sales forecasts. In some cases access to finance is limited by the lack of assets and hence collateral provided by an entrepreneur as security for the loan.
"It is critical for SMMEs to provide a good quality business plan, supported by financial projections, when applying for financial assistance. The purpose of the loan, i.e. what the funds will be used for, should also be clearly stated. This information assists the bank in determining whether the entrepreneur will be able to repay the loan or not," says Botha.
Despite the poor overall entrepreneurship rates, there are some rays of hope – a comparison of South Africa's performance over the last few years indicates that there has been a 2,6% increase in the TEA rate from 2006 to 2008, and more entrepreneurs are starting businesses because of an opportunity rather than to survive. This is an encouraging finding, the report stated, as opportunity-driven entrepreneurship makes a far more significant contribution to job creation and economic growth than necessity/survival entrepreneurship.
According to the 2008 study, opportunity-motivated entrepreneurial activity accounted for 79% of total entrepreneurial activity, and many more black African individuals in particular are starting businesses because of an opportunity.
"Although small, it is statistically significant. South Africa's performance in global comparisons remains somewhat disappointing, but this increase may mark the start of a more positive trend in entrepreneurial activity," says Herrington.
Herrington added the 2008 report reflects that South Africans were relatively positive about the country at the time of the data collection, and cautioned that the effects of the global economic crisis could change things – this would only become fully apparent in future GEM studies.
Other key findings from GEM 2008 reveal that the profile of South African entrepreneurs remains largely unchanged. Men are still more likely than are women to engage in entrepreneurial activity (1,6 times more likely). As black African women are the group primarily affected by unemployment, finding ways to improve female levels of self-employment is imperative, the report states.
A significant majority (almost two-thirds) of early-stage entrepreneurial activity in South Africa is in the consumer services sector. Barriers to entry into this sector, in terms of both skills and capital required, are low and the report says it's unsurprising that the majority of TEA business entities are in this sector. It noted that the consumer services sector is vulnerable in periods of economic slowdown and if a weakness in consumer spending persists as the global credit crisis deepens, this is likely to exacerbate the poor sustainability of start-ups.
Gauteng, KwaZulu-Natal and the Western Cape remain the most entrepreneurially active provinces, but the report says it is worrying that 2008 was the first year in which necessity-motivated entrepreneurial activity outstripped opportunity-motivated entrepreneurial activity in Gauteng. The Western Cape and Free State, on the other hand, have a relatively healthy ratio of opportunity to necessity-motivated entrepreneurial activity.
In terms of information communication technology (ICT) there is a large disparity in access to ICT between rural and urban areas. Over 94% of all respondents said they used a cell phone for business purposes; 58% used the internet but only 41,7% made use of e-mail for business purposes; and educational level it was found has the greatest impact on the use of more sophisticated ICT adoptions. EFT payments via the internet, ATM machines or debit cards are becoming more popular with SMMEs, the study found.
Herrington says that, despite the encouraging highlights, the GEM 2008 findings broadly indicate that much remains to be done to accelerate entrepreneurship in South Africa.
"South Africa's low levels of entrepreneurial activity are the result of environmental as well as personal factors. Improving the skills base and fostering positive entrepreneurial attitudes through the education system are critical. However, without a more enabling environment that encourages individuals to see entrepreneurship as a financially viable employment option, it is debatable whether South Africa will experience a significant increase in entrepreneurial activity. This is particularly the case in rural areas as well as the less developed provinces."
The 2008 GEM study was sponsored by the Swiss South Africa Co-operation Industry (SSACI), the Small Enterprise Development Agency (SEDA), the South African Department of Trade and Industry, and Standard Bank.