By Allon Raiz, CEO of Raizcorp
The South African government has implemented many policies and programmes to promote job creation and entrepreneurship, particularly amongst the alarmingly high numbers of unemployed youth. The focus of these policies and programmes has been on the creation of start-up businesses. Despite the vast resources committed to these programmes, their success at reducing unemployment is almost negligible.
Given that South Africa is resource strapped, does this focus on start-up creation represent the most effective policy stance towards small business? And if not, what policy measures should the government be focusing on instead?
The power of start-ups in job creation
The importance of small businesses overall in terms of employment is unquestionable. The Adcorp Employment Index for March 2012 shows that, in South Africa, 68% of employees are employed by small businesses employing less than 50 people, with two-thirds working at businesses that have less than five employees.
South Africa’s start-up business rate of 5.2%, as per the GEM 2011 Report, is notably higher than its new business rate of 4.0%, indicating that start-up firms dominate the country’s total early-stage entrepreneurial activity. The GEM 2005 Report found that less than 4% of start-up businesses (defined as functioning for less than three and a half years) take on any staff. Mike Herrington, executive director of the Centre for Innovation and Entrepreneurship at the UCT Graduate School of Business, points out that this means that for every 100 new small businesses, only about 10 additional jobs will be created.
On the other hand, further evidence from GEM shows that established small businesses, those that have survived for three and a half years or longer, are the ones that create jobs. The GEM 2011 Report states that these businesses create 3.2 jobs on average, and further states that established small businesses create 32 times the employment opportunities that start-up businesses do.
The GEM 2011 Report indicates that South Africa has an established business ownership rate of 2.3%, which is substantially lower than the average of 7.2% for all participating efficiency-driven countries. In terms of established business activity, South Africa ranked 52nd out of 54 countries.
This suggests that to create more jobs government policy should focus on supporting established small businesses rather than start-ups.
Interventions for sustainable job creation
While the government’s New Growth Path (NGP) targets for job creation appear ever more unlikely to materialise, it is essential to identify the interventions that are most likely to lead to sustainable job creation.
· Focus on established businesses with potential for considerable growth
Most often it is the operation that employs around 10 people that is ready to cope with expansion. These are the businesses that should be receiving the bulk of our support services in the form of incentives, grants, export assistance, access to new markets, mentorship for the processes of business expansion, and even subsidies for selected essential services such as financial and HR consulting.
Agencies such as the National Empowerment Fund (NEF) and the Industrial Development Corporation (IDC) should actively court these small businesses and provide them with proposals for expansion. Private sector agencies and banks should aggressively target this sector. In addition, giving procurement preference to this sector would assist suppliers with capacity building.
· Relax labour policies
A working paper published by the African Development Bank in October 2012 states that:
Firm level surveys indicate that the single greatest impediment to the more rapid growth of outward-oriented manufacturing in South Africa is the high level of real wages relative to productivity levels. […] Labour market regulation – in particular the “extension provision” which requires collective bargaining agreements to be extended to all firms in an industry, regardless of size – is inhibiting investment and growth.
Small businesses cannot currently hire staff in confidence, because it is so difficult to fire people who are not performing. The Global Competitiveness Report 2011-2012 ranked South Africa 139th out of 142 countries in terms of rigid hiring and firing practices. While laws to protect employees against exploitation and abuse are needed, there has to be a balance that makes it easier for companies to choose and retain the best person for the job. Relaxing the current dismissal regulations for the discretionary probation period would go a long way towards addressing this matter.
The existing regulations are counter-productive. Thousands of small businesses in South Africa, in fear of the arduous and costly dismissal process, are resorting to using temporary staff or hiring people only on short-term contracts. The Adcorp May 2012 Employment Index notes that since 2000, permanent employment has fallen from 11.0 million to 9.1 million workers, a decline of 1.9 million workers or 18.7% of the workforce. In the same period, the number of temporary workers has increased by 2.6 million workers or 187.5%. For the people in these jobs there is no job security; neither is there an incentive to strive to become a valued member of the workforce.
· Import needed skills
The concern that foreign workers will take jobs away from local people is misdirected – a lack of skills inhibits job creation because without a skilled workforce the economy cannot grow. When intellectual capital flows freely, it supports growth; yet current policies deny South Africa the benefit of an influx of skills, further stifling our economy.
Brazil, which has the world’s sixth largest economy, has traditionally had a permissive immigration policy. Its booming economy is now attracting growing numbers of Portuguese speaking immigrants from job-starved Europe. Entrepreneurship is flourishing in Brazil – its Global Entrepreneurship Week in 2010 attracted 50 000 entrepreneurs, compared with the 8 000 who attended South Africa’s.
· Open up access to African markets
Intra-African trade is tiny relative to what it could be. Given a giant market on our doorstep (up to 30% of Africans are now middle-income earners) South Africa fails to compete with suppliers from abroad. Indian, Chinese and South American products are flooding into Africa – where are the South African goods? Our potential exporters are hampered by old trade monopolies, cumbersome Forex regulations, corruption, cross-border nightmares and a lack of infrastructure.
Government is not working hard and fast enough with its African trading partners to ease the trading environment, improve capacity at border posts, and clear the obstacles to a smooth movement of goods. South Africa is ranked as 115th out of 185 economies for ease of trading across borders in The World Bank’s Doing Business Guide 2013. This is a regional problem that is stifling cross-border trade: Sub-Saharan Africa on average ranks 137th.
· Focus on entrepreneurial education rather than start-up financing
Contrary to popular opinion, lack of access to finance is not the primary obstacle to small business growth. More money won’t solve the problem. A bigger concern should be entrepreneurial skills development and education.
A Development Bank of Southern Africa working paper published in 2011 summarises the South African government’s youth entrepreneurship programmes as follows:
The NYDA is responsible for overseeing and monitoring these interventions for young people, including the provision of loans for young entrepreneurs, business development services, potential support for youth cooperatives and the introduction of youth entrepreneurial training in schools. However, the number of young people accessing these services in 2010 was almost negligible. Hence, there is a major gap in youth entrepreneurial training, which needs to be addressed if self-employment is to provide a pathway into employment for young people.
Emerging entrepreneurs urgently need to learn to understand the concept of a commercially viable business. A legacy of our failed education system and the previous deliberate marginalisation of black entrepreneurs is that the majority of emerging entrepreneurs have not had exposure to the complexities of building a viable and sustainable business. They also often have no experience in identifying viable opportunities and developing these into sustainable ventures.
Banks would love to lend more money if it meant that they could get a competitive return on their investment. There is a great deal more money chasing good ideas than there are good ideas trying to get funding. Again, the solution is to give targeted support to those businesses that have the right potential, and the funding would follow.
Here, the private sector could make a strong contribution in the short-term by deploying skilled personnel (even for a few hours a month) to mentor smaller companies within their supply chains.
Whatever the problems in the small business sector, South Africans are enterprising. With the correct support directed at high potential established small businesses, a lighter corporate governance load and entrepreneurially friendly legislation, entrepreneurship can be the solution to reducing poverty and increasing job creation.