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Category: ENTREPRENEURSHIP, The Entrepreneur


The State of Entrepreneurship in South Africa
Written by Tendai Tambudze
20 June 2012

Economic prosperity is highly dependent on an active entrepreneurship sector.

The Global Entrepreneurship Monitor (GEM) is an organisation that investigates entrepreneurship in different countries and identifies factors which encourage or hinder entrepreneurial activities.

According to the 2011 GEM report, South Africa is described as an efficiency–driven economy. This is defined as:

A country that has become competitive with its development accompanied by industrialisation and an increased reliance on economies of scale’

The efficiency driven economy

Capital-intensive large organisations are dominant in an efficiency-driven economy and because higher wages are not necessarily coupled with an increase in prices, more efficient production processes and improved product quality are required. Competitiveness in an efficiency-driven economy is fuelled by education and training, efficient goods markets, effective labour markets, developed financial markets, the ability to exploit the advantages of existing technologies and a large domestic or foreign market. All the BRICS nations are categorised as efficiency driven.

Other economies were categorised as either factor-driven or innovation-driven. The former refers to an economy characterised by subsistence agriculture and a heavy reliance on natural resources and unskilled labour and included countries like Algeria, Jamaica and Venezuela ; and the latter is a more knowledge-intensive and service driven economy typically seen in Australia and Belgium .


South Africa’s entrepreneurial activity

TEA (Total Early-Stage Entreprenurial activity)  measures the participation of individuals in early-stage entrepreneurial activity and conveys the percentage of the adult population between the ages of 18 and 64 years that is in the process of starting a business or has recently done so. South Africa's TEA currently stands at 9.1%.  While South Africa’s TEA has more or less doubled since 2006, it is still low compared to the 14.4% average of other efficiency-driven economies. China, the world’s fastest growing economy, which is also defined as efficiency-driven, currently boasts a TEA of 24.0%.


Factors affecting entrepreneurial activity

The GEM proposes that entrepreneurial activity is also impacted by a distinct set of factors it refers to as Entrepreneurial Framework Conditions (EFCs). Factors on the scale include:

  • Entrepreneurial Finance
  • Government policy
  • Government entrepreneurship programmes
  • Entrepreneurship educations
  • R&D Transfer
  • Commercial and Legal Infrastructure
  • Entry regulation
  • Physical infrastructure
  • Cultural and Social norms

A panel of experts gave an overall negative assessment of the state of most the above factors except physical commercial and legal infrastructure which were deemed to be conducive and supportive to entrepreneurship in South Africa. This paints a somewhat discouraging picture for entrepreneurship today.


Money talks - or does it?

Despite all the factors that contribute towards an entrepreneurial nation, adequate financing and lack thereof is usually at the forefront of any discussion. It would seem that aspiring entrepreneurs, experts and the public share a common view. There is a general consensus that access to venture capital and funding is the major prohibiting factor to starting a business. A study entitled The Entrepreneurial Dialogues captures a series of debates and discussion during the first “State of Entrepreneurship on South Africa conference” held in 2010.

This study challenges this perception of poor access to funding and cites other reasons why entrepreneurs do not always get the funding they request. There are for instance, often discrepancies between entrepreneur eligibility and the funding body’s criteria and mandates. This also highlights the lack of awareness and preparedness among entrepreneurs who go look for funding. The study also notes that there is an excess of entrepreneurs with undifferentiated ideas looking for funding in highly saturated markets. There was a strong recommendation that expectations should be managed and a suggestion that entrepreneurs need to change the mindset that promotes capital as the key enabler to entrepreneurial success.

While much has been said about the difficulties associated with accessing government funding for SMEs through government agencies, it remains a reality that 70% of new business fail within the first few years of inception. With such dismal statistics it should come as no surprise that financial institutions are not rushing to give loans and funding agencies have stringent requirements and rigid objectives. The GEM study does however highlight that South Africa actually fares better than many countries on the Entrepreneurial Finance and Government Policies factors and despite the fact that several of these countries have a higher TEA than South Africa’s.


Building an entrepreneurial South Africa

Entrepreneurial education, especially at school level is cited as an impediment to entrepreneurship and more needs to be done to increase training and education while encouraging children to engage in entrepreneurial activities. R&D Transfer is also said to be constraining entrepreneurial activity in South Africa was, although this is consistent with other efficiency-driven economies. Culturally and socially, South Africans exhibit high levels of ‘fear of failure’ and there is a general preference for a job, rather than starting a business.


The future of successful entrepreneurship may seem to lie in the hands of a few highly driven and determined individuals. The entrepreneurial path is not for all – and those who dare will encounter innumerable challenges. While there is a difficult path to forge on such a journey, the ones who have made it insist that the rewards are certainly worth it.

 


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