VENTURES: UCT Study Shows Recession Has Hit SA Entrepreneurship Hard
Recent Western Cape Business News
The global economic crisis has dealt a major blow to local entrepreneurship. There was a 40% fall in the number of start-ups in 2009 compared to 2008 and existing entrepreneurs are struggling to survive.
This is according to the latest Global Entrepreneurship Monitor (GEM) study, conducted by the UCT Centre for Innovation and Entrepreneurship (CIE) based at the UCT Graduate School of Business. The findings were released yesterday, as part of the new CIE book, Tracking Entrepreneurship in South Africa: A GEM Perspective, which analyses nine years of GEM data on entrepreneurship and makes recommendations for policy interventions.
The primary measure of entrepreneurship used by GEM is the Total Early-Stage Entrepreneurial Activity (TEA) rate, measured by the percentage of people aged 18 to 64 who are involved in starting or running businesses. According to the latest findings, South Africa’s TEA rate dropped significantly from 7.8% in 2008 to 5.9% in 2009. The decline in SA is in line with global trends – entrepreneurial activity declined in two-thirds of the countries participating in GEM in 2009.
Of particular concern, according to Dr Mike Herrington (Director of the UCT CIE) and his co-researchers Jacqui Kew and Penny Kew, is the drop in the established business rate (businesses that survive beyond three and a half years) from 2.3 % in 2008 to a mere 1.4% in 2009.
“Together with the low rate of new firm activity, this reconfirms that the prognosis for survival and sustainability of early-stage businesses in South Africa remains poor,” said Herrington.
That 2009 was a troubled year for SA entrepreneurs is vividly borne out by the fact that SA was included among the ten GEM countries with the highest share of pessimistic entrepreneurs in 2009.
“Almost a third of all GEM 2009 respondents felt that the global economic crisis had resulted in a reduction in opportunities for their businesses, while close to two-thirds reported that starting a business was more difficult in comparison to 2008,” explained the research team.
The findings also show that necessity-driven entrepreneurship increased from 21% to 33% in 2009 – this means that a greater proportion of entrepreneurs said that they started a business because they had no other way to survive.
“This spike in survivalist entrepreneurs is likely in response to the high levels of retrenchments and loss of almost a million jobs in the formal sector over the past year,” said Herrington.
In South Africa, the global economic crisis exacerbated a number of factors that have traditionally impacted on entrepreneurial activity.
“Access to finance was complicated by a lack of liquidity in the financial sector, stricter implementation of the new National Credit Act and the increased robustness of business applications demanded by commercial banks,” said Herrington.
Another factor hitting SA entrepreneurs hard was consumer spending contracting for four consecutive quarters – showing its sharpest decline in 24 years.
“Since almost two-thirds of early-stage entrepreneurial activity in SA is in the consumer services sector, this would have a significantly negative effect on sustainability of existing businesses as well as opportunities for new ventures,” said Herrington.
The cost of crime also worsened due to the recession. Crime statistics for 2008/09 indicate a 45% increase in robberies at small businesses. Overall, more than 70% of robberies targeted small businesses in 2009. The high level of crime was ranked as the second most problematic factor for doing business in SA in the 2009 survey.
Herrington said that despite the big dent caused by the recession, it is important not to lose sight of the persistent trend of low overall early-stage entrepreneurial activity in South Africa. The 2009 TEA rate of 5.9% is in line with the average rate of 5% recorded for the period 2004 – 2006. In 2009, South Africa ranked 35th out of 54 countries, with a TEA rate below the average (11.7%) of all participating countries.
SA’s TEA rate of 5.9% is significantly lower than the average for all middle to low income countries (14.8%) – these are countries similar to SA in GDP and stage of economic development.
“These findings are cause for serious concern, particularly as they continue to confirm the trend of below-average entrepreneurial activity demonstrated in previous GEM surveys. According to the GEM data, a country at SA’s stage of economic development would be expected to have a TEA rate in the order of 13%, more than double South Africa’s actual rate of 5.9%,” said Herrington.
He added that emergent economies with a similar GDP per capita, such as Argentina, Chile, Brazil and Peru, achieved TEA rates in 2009 that are three to four times higher than that achieved by South Africa.
“In South Africa, entrepreneurial activity continues to be hindered by a poor skills base as well as severe environmental limitations including poverty, a lack of active markets and poor access to resources. It is therefore, perhaps, not surprising that many South Africans do not regard entrepreneurship as a positive and viable career choice,” said Herrington.
“South Africa has staggeringly high levels of unemployment relative to the rest of the GEM sample – it is unlikely that growth in the formal economy will be able to absorb sufficient people to solve the unemployment problem. The poor rate and sustainability of start-ups in SA relative to other countries in the GEM sample highlights the need for improved policy interventions.”
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