UCT study shows recession has hit SA entrepreneurship hard
The global economic crisis has dealt a major blow to entrepreneurship in South Africa. 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 on Thursday, 13 May, 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 GEM research, conducted annually since 2001 by the UCT CIE, is South Africa's largest
survey of entrepreneurship. It forms part of a global body of GEM research that in 2009
included 54 countries and covered more than 180 000 adults.
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 coresearchers 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.
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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.”
The latest GEM report is sponsored by the Swiss South Africa Co-operation Industry
(SSACI), the Small Enterprise Development Agency (SEDA) and Standard Bank. Nielsen
South Africa conducted the adult population survey – it included 3 135 respondents during
May and June 2009 across all nine provinces. Visit www.gsb.uct.ac.za/cie for details on
GEM.
Ends
Media who would like interviews can contact Jane Boxall on 021 448 9465 or
janeb@rothko.co.za.
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