More businesses starting up, but many still fail due to lack of profit, lack of finance and personal reasons according to the 2013 Gem report.
With a record number of over one in every ten adults involved in starting their own business last year, South Africans have become more positive about entrepreneurship than a decade ago, reveals the latest Global Entrepreneurship Monitor (Gem) report.
While in 2002 just 6.5% of adults were involved in starting or running a new business, last year the figure stood at 10.6% of adults, says the report released in April.
Principally, 26% more adults intend to start a business in the next three years compared to 2003. This is partly because South Africans are more confident about starting a business.
Over a decade ago, just 30% believed they had what it takes to become an entrepreneur, today this figure stands at 43%. It means that nearly half of South Africans believe they can start a successful small business. Although this remains significantly lower than the average for sub-Saharan countries of 79%, the report’s authors, Mike Herrington and Jacqui Kew, say it’s a notable improvement.
They attribute the change in perceptions largely to the improvement of conditions for black people – with the black middle-class having doubled between 1993 and 2008, while Black Economic Empowerment has provided many with new business opportunities.
Linked to this, the percentage of black Africans who start a business because they perceive there to be an opportunity rather than out of necessity, has increased steadily – from 44% in 2005 to 68% in 2013.
Last year it moved to within one percentage point of the country’s overall opportunity-driven entrepreneurship rate, while in 2005 it stood at 13 percentage points behind the total rate.
While most groups have increased their level of opportunity-driven entrepreneurship, that of coloured people has declined significantly – from 86% in 2005 to 57% last year.
It is cause for concern that among the various race groups coloured people are the least likely to be involved in starting or running a new business – just 4.8% of adults, compared to 13% for Indians, 11.3% for black Africans and 8.2% for white people.
The researchers believe that it is because of this that just seven percent of those in the Western Cape (where coloured people account for more than half of the province’s population) are starting new businesses, compared to 15.4% in Gauteng and 9.5% in the rest of the country.
In Cape Town the figure is 7.4% of adults, compared to almost a fifth in Johannesburg and 14% in Durban.
Yet, despite this, entrepreneurs in the City of Cape Town (83.7%) perceive themselves, on average, to be more innovative with respect to the extent to which their product or service is new to some or all customers and where few or no other businesses offer the same product, compared to entrepreneurs in Johannesburg (62.9%) or Durban (54.8%).
The Western Cape also has more high-growth entrepreneurs than Gauteng, with a third saying they believe they will employ 20 or more people over the next five years, compared to eight percent in Gauteng and 13% in rest of SA.
What of South Africa’s notoriously high business failure rate? A positive sign is the steady increase in the number of adults running a business of more than three and a half years old. Since 2005 the rate has more than doubled, from a lowly 1.3% of adults to 2.9% of adults.
Although the report doesn’t say why, the increase could possibly be explained by the larger number of adults over the age of 45 starting firms.
Those aged between 45 to 64 year old now make up 23% of all entrepreneurs, up from 16% in 2001. Older people are more likely to have more experience and capital to sustain a business successfully, which could explain why more adults are now running established firms.
It also helps that South African entrepreneurs are slightly more educated now than they were ten years ago – 13% now have tertiary qualifications, up from 11% in 2001, even if it’s still below the average in Brazil of 16%.
But, worryingly the number of adults involved in closing a firm still exceeds those running established firms – at an average of 1.7 times.
However, this is down from 2005 (during an economic boom too) when the figure stood at 2.2 times that of established firms. In India, for each adult involved in closing a firm, seven are involved in running an established firm.
The report lists the main three reasons for business discontinuance in South Africa as a lack of profit, with those listing this as a concern having increased from 11% in 2006 to 36% last year, lack of finance, and personal reasons.
More South Africans are starting businesses than ever before, but the failure rate remains worryingly high. It is this that policymakers must concern themselves with more.