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South Africa: a land of extremes for entrepreneurs

South Africa presents both strong opportunities and barriers to success for local entrepreneurs. It is evident from the EY G20 Entrepreneurship Barometer report that South Africans embrace the culture of entrepreneurship, a very important element needed to propel it to success. However there are other equally important elements such as access to funding, support and education and training that need strengthening to truly build a thriving entrepreneurial society, writes Cheryl-Jane Kujenga, EY Strategic Growth Markets Leader, Africa.

The overall environment for South African entrepreneurs is one of relative extremes. It is relatively quick and cheap to start a new business, but getting the necessary registrations and compliance in place is difficult. Furthermore, it is expensive and onerous to hire and fire new workers. Similarly, there is a burgeoning middle class of consumers providing rich opportunities, but also a vast pool of unemployed workers, creating a sharply divided market. These extremes are observable across many aspects of the overall environment for entrepreneurs locally.

Access to funding

Seventy-nine per cent of local entrepreneurs say that access to funding is difficult for them. Added to this, many believe that funding conditions are deteriorating further, whether in terms of bank lending, angel investors or initial public offerings. More positively, though, some 69% of local entrepreneurs surveyed have seen an improvement in microfinance, while 53% also report improvements in the availability of Government funding. Both sources of funding are viewed by survey respondents as vital for accelerating growth in entrepreneurship.

Microfinance in particular is ideal for millions of poor, unskilled and unemployed South Africans who, despite their disadvantages, often have the talent to develop successful businesses. Local entrepreneurs point to microfinance as a key funding instrument for the long-term growth of entrepreneurship locally.

Merger and acquisition (M&A) deal activity in South Africa was on the rise through the early 2000s, but has slowed since the financial crisis. But the country still has a very high rate of M&A investment relative to national GDP. Similarly, while venture capital availability is better than the average for rapid-growth economies, sentiment in the survey is considerably worse than average, which impacts its performance.

Overall, South Africa has a highly mature financial sector, and many believe there is enough funding in the marketplace. However, funds are not made easily available to entrepreneurs, and much of the capital is often too expensive, which limits the growth of promising ventures. To help counter this, many entrepreneurs look to the government. When asked which form of funding could make the biggest difference in improving the long-term growth of entrepreneurship, entrepreneurs cite public aid and Government lending as a key priority. This highlights the role that the Government will need to play in supporting entrepreneurship, to complement the country’s financial services sector.

Entrepreneurship culture

South Africa’s business environment and culture raises challenges for local entrepreneurs. The country’s performance overall is weighed down by below-average scores on innovation metrics, such as the number of scientific and engineering articles published, spending on research and development (R&D) and the number of researchers in this area. Patent applications, which provide another measure of innovation activity, fell by 24% in South Africa between 2008 and 2011. This implies that South Africa’s research institutions are unlikely to produce a large number of innovations with a commercial application in the near term, a fact that undermines prospects for the country’s innovation-led start-ups.

Despite these weaknesses, South Africa’s entrepreneurs believe their culture encourages entrepreneurship: 70% of those surveyed believed this. It is possible that a high level of media attention on entrepreneurs and entrepreneurship being seen as a strong career choice, rather than academic, corporate or institutional strengths, have fuelled this impression. Still, exceptionally high proportions of local entrepreneurs indicated that various measures – from promoting their role as job creators, to getting more start-up success stories publicised – could have a strong impact on cultural perspectives of entrepreneurship.

Tax and regulation

South Africa has strong start-up and taxation compliance procedures, in contrast to other members of the so-called “BRICS club” of rapid-growth markets. In terms of tax and regulation, the country puts in a good performance against both mature and rapid-growth G20 economies. Although difficulties and bureaucracy remain, it is relatively easy, quick and cheap to start a business, and the time spent on taxes is in line with mature economies, making this a relative strength for the country’s entrepreneurial ecosystem. Nevertheless, local entrepreneurs are still keen for greater support in complying with regulations, and 42% point to the need for an agency to assist in this area.

A bigger challenge emerges when companies move beyond the start-up phase. The cost of firing workers is a notable detractor, and highlights the ongoing need for labour-law reform in the country. Out of the 144 countries tracked by the World Economic Forum, South Africa is 143rd on hiring and firing practices, 140th for flexibility of wage determination and last on the measure of cooperation in labour-employer relations.

From a regulatory perspective this is the most worrying feature of the South African economy for entrepreneurs. New businesses cannot afford to comply with these burdensome labour laws, and many businesses will remain small or fall into the informal sector to avoid them. Regulatory reforms or tax credits could relatively easily help ease hiring terms, especially for the previously unemployed or for young workers, while incentivising firms to hire more freely.

Education and training

South Africa spends more on education (as a percentage of GDP) than most G20 countries and significantly more than most other rapid-growth economies. However, South Africa’s education system is in clear need of reform, which raises difficult questions about how effectively education funding is being deployed.

The country has low tertiary education enrollment and a low proportion of the workforce educated to a degree level. This means many of the more advanced entrepreneurial ventures simply don’t have access to the skills they need to thrive. Furthermore, at a more general level, entrepreneurs clearly believe that more could be done to improve the public’s view of entrepreneurship in the country. About one in two respondents pointed to the need for more efforts to promote success stories about South Africa’s entrepreneurs, as a key measure for achieving this.

In the shorter term, though, more could be done to bolster informal learning and training schemes in order to help bridge at least some of the gap. There are encouraging signs, based on the sentiment from our survey, that the private sector is helping to pick up the slack here. For example, through stronger corporate engagement with start-ups; 62% of those polled think access to such schemes has improved in recent years, compared with 36% across the G20 overall.

Coordinated support

South Africa’s entrepreneurs report improved access to various support structures, including business incubators, mentor programmes, industry-specific training programmes, entrepreneurial workshops and corporate engagement with start-ups. All this is encouraging news, particularly in terms of business incubators, as these are considered by local entrepreneurs to be the single most important tool for strengthening the future of entrepreneurship in South Africa.

The perception of network-related elements of coordinated support, such as clubs, associations, chambers of commerce and small business administration, where only a minority of entrepreneurs noted improvements, is less encouraging.

Among G20 countries, access to educators is falling most sharply in South Africa, with 30% of respondents reporting a deterioration in the past three years. This contrasts with competing rapid-growth markets that are reporting strong improvement. Some 61% of respondents from India report an increase in access to educators, while Russia (57%), Turkey (57%) and Indonesia (55%) follow the same trend. This again highlights the need for wider educational reform, while suggesting that informal learning and mentorship opportunities will remain vital in the years ahead.

Of the G20, South Africa does seem significantly more enthusiastic about tailored support for female entrepreneurs. As far back as 1998, for example, the Government set up the Technology for Women in Business initiative to help empower women within the technology sector. This shows recognition of the value of more targeted entrepreneurial support.

This article is an extract from the ‘EY G20 Entrepreneurship Barometer 2013 Country Report – South Africa’. Download the full report.

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