Ramaphosa makes noises about backing small business. It’s about time

18 March 2018 - Boris Urban

The structure of the South African economy is often overlooked as a factor of small business and entrepreneurship.

South Africa’s new president, Cyril Rampahosa, is promising to free up and propel the country’s small business sector and its natural partner entrepreneurship, a long overdue move that could help the country realise strong economic growth.

South Africa has been trapped in a low growth trajectory for about 10 years. This has made it difficult to reduce high levels of poverty, inequality and unemployment. For a while now, many have pointed out that harnessing the small business sector and entrepreneurship lies at the centre of the solution.

Ramaphosa has added his voice to this chorus. Coming from a man whose had close links to business, the president’s promise to support entrepreneurship and small business development deserves to be taken seriously.

In his hope-filled 2018 state of the nation address, he touched the essence of what drives entrepreneurship. He said:

While change can produce uncertainty, even anxiety, it also offers great opportunities for renewal and revitalisation, and for progress.

It is precisely at the nexus of uncertainty and opportunity that entrepreneurship takes place. According to the traditional neoclassical view, entrepreneurship is the ‘mystical’ element that delivers external shocks to a state of equilibrium in the marketplace by introducing new products and services.

Without the presence of these two factors – lucrative opportunities and enterprising individuals – very little renewal or revitalisation will take place in South Africa.

Ramaphosa knows this. But it won’t be easy, even for him. The neglect and the damage caused to the small business sector and the culture of entrepreneurship over the years is huge. Years of red tape, corruption, bad policies, ill equipped small business support institutions and monopolistic behaviours have stifled entrepreneurial activity.

But the situation won’t change unless a close and detailed look is taken at the accumulated problems. And solutions that are designed must take into account a multitude of factors.

A lack of entrepreneurial activity

There’s growing evidence showing that developing countries offer more entrepreneurial opportunities. There’s also evidence that these are being matched by higher rates of opportunity driven entrepreneurs entering the market.

A recent study found that more than half (69%) of entrepreneurs in developing countries chose to pursue an opportunity as a basis for their entrepreneurial motivations, rather than starting out of necessity.

South Africa has an unusually low share of employers and self-employed people in the labour force. It also has a relatively low share of working age adults in employment. This is a major factor behind the country’s high joblessness .

In fact, South Africa’s total entrepreneurial activity rate, which measures the prevalence of starting a business from a country’s working age population, remains among the lowest in the peer group of developing nations. The series of Global Entrepreneurship Monitor reports, show that just 9.2% of South African adults were involved in starting up a business in 2015. This compares poorly to the average of 15% in comparable countries like Malaysia, Latvia, Romania, Argentina and Brazil. Ecuador has an entrepreneurial activity rates of 34%, Chile 26%.

Even more disconcerting is the fact that in South Africa many initiatives and programmes sponsored by national government are not yielding much. Many institutions supporting small business development are dogged by bureaucratic inefficiencies and inter-departmental conflicts.

The major weakness of these national institutions is centralised coordination. They are not well suited to react quickly and dynamically.

There is also enormous red tape facing small businesses and entrepreneurs. For instance South Africa’s labour laws have been found to be a significant regulatory obstacle to small business growth. And small business is also subjected to long and gruelling delays to get permits and licences. This makes for a corruption rife environment.

Ramaphosa has acknowledged the negative impact of bureaucracy, red tape and corruption on the economy and for start-ups and enterprise growth.

What’s needed now is action.

Hostility towards small business

The structure of the South African economy is often overlooked as a factor of small business and entrepreneurship. The country’s economy has traditionally been hostile towards small businesses. This is largely due to its distinctive economic history, which created highly concentrated markets.

Several industries in South Africa can be categorised as tight oligopolies, where several large firms dominate the competitive landscape. They hold considerable market power and are protected by high entry barriers. Small businesses are kept at bay.

About half of the country’s small businesses are in business services and retail. In the informal sector the self-employed are overwhelmingly in retail.

It’s hard for South African small businesses to penetrate lucrative sectors such as electricity, gas, water and manufacturing. Entry barriers are extremely high which leaves old monopolies in a comfortable place to the detriment of the broader economy.

Reinventing entrepreneurship

If entrepreneurship is to be rekindled the first thing that needs to happen is some readjustment in the structure of the country’s economy. Key adjustments should ensure:

• An environment that offers equal access to opportunities, development tools and access to resources.

• A robust and interactive entrepreneurship ecosystem system that connects everything – from suppliers, distribution channels, universities to venture capital.

• Improved access to finance as well as market access for small businesses.

• Long-term investments in entrepreneurial capital which mainly requires quality education.

South Africa must realise that small businesses are not simply smaller versions of big business. They are vulnerable because they’re small and new. They need a supportive environment and a mix of responsive policy interventions.

But entrepreneurs can’t simply sit back and blame the environment. Entrepreneurs need to develop a hard-headed awareness of market realities and hard-won business truths. Entrepreneurship requires individuals to take action.

Small scale entrepreneurs must be alive to the dictum which says:

Big businesses are not against you; they are merely for themselves.

Boris Urban, Professor Wits Business School, University of the Witwatersrand. This article was originally published on The Conversation. Read the original article.