Global Entrepreneurship Monitor

Transcription

1 Global Entrepreneurship Monitor South Africa Mike Herrington, Jacqui Kew, Miranda Simrie and Natasha Turton

2 The UCT Centre for Innovation and Entrepreneurship Contents LIST OF FIGURES...2 LIST OF TABLES...3 EXECUTIVE SUMMARY...4 ACKNOWLEDGEMENTS...5 THE UCT CENTRE FOR INNOVATION AND ENTREPRENEURSHIP...6 ABOUT THE AUTHORS...7 CHAPTER 1: THE GEM MODEL The GEM research project The GEM conceptual model How GEM measures entrepreneurship GEM methodology BEST PRACTICE IN ENTREPRENEURSHIP DEVELOPMENT: Tsiba...13 CHAPTER 2: THE STATE OF ENTREPRENEURSHIP IN SOUTH AFRICA The state of South Africa s business environment The state of entrepreneurship in South Africa in Entrepreneurial activity Established business ownership Discontinuance South Africa s entrepreneurship profile Gender Age Brics Introduction TEA and established business ownership rates Gender Age Necessity- and opportunity-driven motives Education Attitudes and perceptions Perceived opportunity Perceived capabilities Fear of failure Entrepreneurial intentions Societal attitudes Conclusion BEST PRACTICE IN ENTREPRENEURSHIP DEVELOPMENT: Business Bridge...36 CHAPTER 3: THE SOUTH AFRICAN ENTREPRENEURSHIP ENVIRONMENT The entrepreneurial framework conditions An assessment of the entrepreneurship environment Constraints to entrepreneurial activity >

3 3.4 Factors that foster entrepreneurial activity Experts recommendations...47 BEST PRACTICE IN ENTREPRENEURSHIP DEVELOPMENT: Raymond Ackerman Academy of Entrepreneurial Development...50 CHAPTER 4: SPECIAL FOCUS 2011: ENTREPRENEURIAL EMPLOYEE ACTIVITY Introduction Entrepreneurial employee activity rates Education Employer support The national experts survey Conclusion CHAPTER 5: POLICY RECOMMENDATIONS AND CONCLUSIONS Concluding remarks...67 REFERENCES APPENDIX A: NATIONAL EXPERT SURVEY 2011 PARTICIPANTS...70 List of figures Figure 1.1: The entrepreneurship process... 9 Figure 1.2: The GEM model Figure 1.3: The 12 pillars of competitiveness and their relation to economic development stage Figure 2.1: TEA rates for participating countries in 2011, by phase of economic development Figure 2.2: TEA and GDP across GEM countries, Figure 2.3: South Africa s TEA rates over the period Figure 2.4: 2011 TEA rates in efficiency-driven economies Figure 2.5: Relative contributions to TEA of start-up and new firm activity in South Africa, Figure 2.6: Comparison of established business ownership and TEA rates across GEM countries in Figure 2.7: Comparison of female and male TEA rates across GEM countries, organized by female TEA rate Figure 2.8: Early-stage entrepreneurial activity rates by age groups, across the three economic development phases Figure 3.1: Model of entrepreneurial processes affecting national economic growth Figure 3.2: South Africa s entrepreneurship institution profile Figure 4.1: Entrepreneurship process and GEM operational definitions, including entrepreneurial employee activity Figure 4.2: Prevalence rates of current entrepreneurial employee activity (EEA) in the population Figure 4.3: Prevalence of EEA in a leading role, currently active, in the adult population of eight economies Figure 4.4: EEA and TEA rates by type of development: Innovation-driven (ID), efficiency-driven (ED) and factor-driven nations (FD) Figure 4.5: Percentage of employed population between years involved in entrepreneurial activities for main employer in the past eight years based on level of education attained Figure 4.6: Percentage of adult population between years based on level of education attained Figure 4.7: Experts perceptions in three efficiency-driven economies of the four categories influencing EEA Global Entrepreneurship Monitor 2011 South Africa

4 List of tables Table 2.1: Relative ranking Table 2.2: Prevalence rates (%) of entrepreneurial activity across GEM countries in Table 2.3: South African early-stage entrepreneurs motivations for engaging in entrepreneurship by gender, Table 2.4: Age breakdown of early-stage entrepreneurs in South Africa and efficiency-driven economies, Table 2.5: Involvement in TEA by age in South Africa, Table 2.6: Total early-stage entrepreneurial activity and established business ownership rates across the BRICS countries Table 2.7: Percentage of males and females involved in early-stage entrepreneurial activity across the BRICS countries Table 2.8: Percentage of population involved in early-stage entrepreneurial activity by age across the BRICS countries Table 2.9: Percentage of early-stage entrepreneurs (TEA) motivated by necessity and opportunity across the BRICS countries Table 2.10: Percentage of population involved in early-stage entrepreneurial activity by education across the BRICS countries Table 2.11: Entrepreneurial perceptions, intentions and societal attitudes across the BRICS countries (2006) Table 2.12: Entrepreneurial perceptions, intentions and societal attitudes across the BRICS countries (2011) Table 3.1: GEM s Entrepreneurial Framework Conditions Table 3.2: Summary of experts assessments of the entrepreneurial environment, 2010 and Table 3.3: Experts views of key factors constraining entrepreneurship in South Africa Table 3.4: Experts views of key factors that foster entrepreneurship in South Africa Table 3.5: Key recommendations from South African national experts, Table 4.1: Prevalence of EEA in a leading role in both the adult and employed populations Table 4.2: Rankings of four efficiency-driven and four innovation-driven economies for the two pillars of global competitiveness concerning education Table 4.3: Comparison of the levels of employer support between efficiency-driven economies Table 4.4: Questions asked of South Africa s national experts specifically linked to entrepreneurial behaviour by employees Table 4.5: Questions asked of South Africa s national experts specifically linked to the conditions that foster entrepreneurship Table 4.6: Comparison of experts perceptions in three efficiency-driven and three innovation-driven economies Table 5.1: Policy recommendations for improving South Africa s entrepreneurial environment >

5 The UCT Centre for Innovation and Entrepreneurship Executive Summary Academics, business leaders and government decision makers are largely in agreement that entrepreneurship plays a critical role in an economy s wellbeing and its ability to compete on a global scale. In South Africa, the topic of entrepreneurship is a particularly important one, given the state of the country s economic and social health. The GEM project is now widely recognized as the most comprehensive and authoritative study of entrepreneurship around the world. South Africa has been participating in this prestigious study since 2001, and has over the years gained much insight into the country s entrepreneurial context as compared to other similar economies. GEM s primary measure of total early-stage entrepreneurial activity (TEA) shows that South Africa s rate in 2011 (9.1%) has remained constant (8.9% in 2010). However, South Africa s TEA rate is, again, far below the average of comparable economies around the world. This therefore remains a matter of grave concern, and presents an opportunity for closer investigation and debate around the factors that impact on entrepreneurial activity in South Africa. South Africa s nascent entrepreneurship rate of 5.2% and new firm activity rate of 4.0% are constant with 2010 s nascent entrepreneurship rate of 5.1% and new firm activity rate of 3.9%. Of greater concern and as was the case in 2010, the prevalence rates for established business ownermanagers remain extremely low with South Africa showing a rate of 2.3% in 2011 versus 2.1% in The 2011 South African GEM report includes a comparison of entrepreneurial activity between the BRICS countries (Brazil, Russia, India, China and South Africa), for the years 2006 (before the global economic crisis) and It shows that Brazil s TEA rate increased by 28.0% between 2006 and Reasons for this include well-managed government programmes to stimulate and support the development and growth of small businesses, as well as numerous business reforms that have focused on making it easier to start businesses. Improvements in Brazil s societal attitudes towards entrepreneurship were seen. Its rate of entrepreneurial intentions increased significantly by 63.0% and its fear of failure rate decreased. These have all contributed to the increase in Brazil s TEA rate. Russia s TEA rate remained low between 2006 and 2011 (4.8% and 4.6% respectively). Russia has the lowest TEA rate of all the BRICS economies and one of the lowest of all the efficiency-driven economies. Its government programmes and investments to stimulate small business development have been judged largely ineffective. Other notable reasons for Russia s low TEA rate include a high fear of failure rate, plus low rates of entrepreneurial intentions, perceived capabilities and societal attitudes, some of which are also the lowest of the BRICS economies. An interesting finding is that the rate of female owners of established businesses in Russia outnumber the rate of male owners in China experienced the highest increase (48,0%) in TEA rate of the BRICS economies between 2006 and 2011, and has the highest TEA rate of all the BRICS economies. The rapid expansion of the Chinese economy has resulted in more opportunities for entrepreneurial activity, particularly in the big cities. China also experienced the highest growth in female involvement in early-stage entrepreneurial activity (62%). China s rate of established businesses is also the highest of the BRICS economies, with the business reforms introduced in China since 2007 being cited as some of the key contributing factors. With respect to South Africa, female involvement in earlystage entrepreneurship increased between 2006 and 2011, but by a much smaller percentage than the increase for male involvement. South Africa s rates of TEA in the years and years age brackets are the second lowest of the BRICS economies, which is a cause for concern when one considers the youth unemployment rate of 48.2%. In most other efficiency-driven economies, the years age bracket drives TEA. Given that South Africa has a very low established business rate (the lowest of the BRICS economies and one of the lowest across all GEM countries), indicates that relatively few jobs are available for youth and that small business development aimed at youth should be one of South Africa s most pressing priorities. 4 Global Entrepreneurship Monitor 2011 South Africa

6 Executive Summary South Africa experienced marginally increased rates in perceived opportunities and societal attitudes towards entrepreneurship. However, these positive indicators have still not impacted South Africa s rate of entrepreneurial intentions sufficiently. While South Africa s rate of entrepreneurial intentions increased between 2006 and 2011, it is still very low (second lowest of the BRICS economies). Given South Africa s very high unemployment rate, improving policies and schemes that increase the number of individuals that pursue entrepreneurship as a positive employment choice are vital. India did not participate in the GEM 2011 survey. It was found that India s rates in most categories in 2006 were average relative to the BRICS economies, but had the highest rates of perceived opportunities and perceived capabilities. All five of the BRICS countries will be participating in the GEM survey in In assessing the South African entrepreneurial environment, national experts participating in the 2011 study appear to agree with experts interviewed in 2010 on the positive and negative factors influencing entrepreneurship in the country. As was the case in 2010, most experts rate the country s physical infrastructure highest in terms of stimulating entrepreneurial activity. In 2011, government entrepreneurship programmes score lowest, with much criticism levelled at the fact that a proliferation of government agencies with significant funding has failed to address the needs of entrepreneurs. Within this context, this report features three examples of current best practice in the area of entrepreneurship education and development. The Business Bridge, Raymond Ackerman Academy of Entrepreneurial Development and the Tertiary School in Business Administration (TSiBA) all demonstrate a track record of success in teaching entrepreneurial skills and developing entrepreneurs. The special inserts on these institutions provide insight into their different models, the factors driving their success, and their recommendations for other initiatives that share their objective of entrepreneurship development. The 2011 South African GEM report includes a chapter focusing on special interest issues. Chapter 4 focuses on individual employees who play a leading role in the creation and development of new business activities for the organisation in which they work. These individuals are referred to as employees involved in entrepreneurial employee activity (EEA), in which the EEA rate is the percentage of the population who are currently involved in entrepreneurial activities within the organisation in which they work. The findings show that South Africa s EEA rate is the lowest of all the efficiency-driven economies. A poor education system, low levels of employer support and the domination of top-down decision-making in South Africa are some of the primary contributing factors to the country s low EEA rate. The report concludes with policy recommendations for consideration by government in its efforts to stimulate entrepreneurship and in so doing develop the economy. A key overarching theme in these recommendations is the need for active engagement with all relevant stakeholders to ensure that an enabling environment for entrepreneurship can be created so that the needs of current and future entrepreneurs will addressed. Acknowledgements The South African GEM team wishes to express its gratitude to the following contributors and partners without whom this project would not have been possible: Our sponsors the Swiss South African Co-operation Initiative (SSACI), South African Breweries (SAB), and the Small Enterprise Development Agency (SEDA). Thank you for your financial support, without which this research would not have been possible; The 38 national experts who willingly gave their time and shared their insights into the state of entrepreneurship in South Africa; Nielsen South Africa, who conducted the Adult Population Survey on our behalf; Rothko Marketing & Design for designing and printing the report; and Penny Kew for editing assistance. The success of the GEM project is dependent on the enormous efforts of the GEM global team at London Business School and Babson College. The South African team acknowledges the significant role they played in the project, and thanks them for their invaluable contribution. We wish to express our sincere gratitude to Alicia Coduras from the GEM Global team, for her patience as well as generosity of her time. Her assistance enabled us to focus more on the interpretation of our findings and contributed enormously to helping us to meet our targets. Most importantly, we acknowledge the South African entrepreneurs without whom this study would have no meaning, and wish them well in their endeavours >

7 The UCT Centre for Innovation and Entrepreneurship the uct Centre for Innovation and Entrepreneurship The Graduate School of Business at the University of Cape Town (UCT) established the UCT Centre for Innovation and Entrepreneurship (CIE) in 2001, with financial assistance from Liberty Life, the World Bank Group and the Gatsby Charitable Foundation. The ambition was bold to make the Graduate School of Business Africa s leading tertiary institution in entrepreneurship teaching and research, and to become internationally recognised as an authority in this field in developing economies. The Centre, built on initiatives started in the mid- 1990s, was organised around three distinct and mutually reinforcing sets of activities: teaching and materials development, research and public policy, and business creation and growth. The core focus of the Centre is on the delivery of quality entrepreneurship education at academic and all other levels of society. The Graduate School of Business s philosophy of entrepreneurship education is that, to be effective, it must be practical. Our students therefore have meaningful interactions with entrepreneurs, are involved in actual entrepreneurial projects, work in multi-disciplinary project teams, and are evaluated by entrepreneurs and investors as well as by academic staff. The entrepreneurship courses delivered by the CIE are closely integrated with new venture activity in the local business and investment communities. The intention is not to compete with incubators or other business promotion projects, but to seek partnership with the most successful of these for mutual benefit. The CIE s core activity of quality entrepreneurship education has significantly enhanced its ability to establish such partnerships. The CIE is involved both in high-value-added and high-potential new ventures, and in township and other community-based enterprises. Since its establishment, the CIE has assisted over 450 township enterprises by providing practical business advice and access to finance and training, with the objective of enabling them to become independent, sustainable businesses with greater potential for expansion. A variety of short courses have been designed to teach entrepreneurs basic financial and administrative skills, marketing, strategy and a number of other disciplines all with the objective of encouraging self-sufficiency and reducing the risk of business failure. During 2011 the CIE was involved in a number of activities including: research that aims to develop a better understanding of the capacities and needs of all the different categories of entrepreneurs in South Africa so that advisory services and finance can be more precisely targeted; advising academics, primarily those actively involved in research, on the commercialisation of their intellectual property; 6 Global Entrepreneurship Monitor 2011 South Africa

8 The UCT Centre for Innovation and Entrepreneurship assembling a group of high-profile entrepreneurs in the Western Cape in order to finance and assist high-growth business ventures; offering coaching and mentoring services to entrepreneurs; assisting large companies in nurturing innovative and entrepreneurial behaviour in their organisations; developing a micro-franchising network targeted at small business entrepreneurs from disadvantaged and/or rural communities; and providing a five-month full-time programme for young (18 26 year old) school leavers from poor, disadvantaged communities through the Raymond Ackerman Academy of Entrepreneurial Development. The programme, which operates in Cape Town and at the Soweto campus of the University of Johannesburg, assists selected delegates who graduate to obtain meaningful employment, to pursue further tertiary education, or to start their own businesses. The CIE is proud to be a longstanding participant in the international GEM project. We believe that the research spearheaded by GEM is essential for the development of global entrepreneurial activity and we are committed to that purpose in South Africa. About the authors: Miranda Simrie Miranda Simrie has an MBA from the UCT Graduate School of Business. She has been involved in the areas of SMME support and enterprise development for a number of years, having worked in these fields in both the public and private sector. Dr Mike Herrington Mike Herrington is the Director of the UCT Centre for Innovation and Entrepreneurship at the Graduate School of Business. He is a recognised entrepreneur, having started four businesses one in New Zealand and three in South Africa. He was responsible for starting the CIE and is keenly interested in entrepreneurship and all levels of business creation. His major interests are in the areas of entrepreneurship, business planning, venture capital and the internationalisation of business. Mike has been leader of the GEM South Africa team since In 2010, he was appointed one of four country representatives on GEM s eight-member international board, and subsequently appointed (in July 2011) as the Executive Director of GEM worldwide. Jacqui Kew Jacqui Kew is a senior lecturer in the College of Accounting at the University of Cape Town. She has been involved at the UCT Centre for Innovation and Entrepreneurship at the Graduate School of Business on a consultancy-basis since She has contributed to various GEM reports and has been part of the GEM South Africa team for a number of years. She is active in various small business development programmes and is also involved in executive education short courses at the Graduate School of Business where she specialises in finance for non-financial managers in both corporate and small businesses. Natasha Turton Natasha Turton works as a freelance consultant and researcher. Most of her projects involve entrepreneurship and small business development. She completed an MBA at the University of Cape Town s Graduate School of Business in Her thesis examined challenges and successes surrounding MSME development in Zambia. Prior to completing her MBA, Natasha spent five years in Mozambique in strategy, marketing and supply chain management in the private sector >

9 chapter 1 The Global Entrepreneurship Monitor (GEM) research programme was initiated in 1997 as a joint venture between academics at London Business School and Babson College in the United States. THE GEM model 1.1 The GEM research project Its purpose was to explore and assess the role of entrepreneurship in national economic growth. GEM defines entrepreneurship as any attempt at new business or new venture creation, such as self-employment, a new business organisation, or the expansion of an existing business, by an individual, a team of individuals, or an established business (Bosma, Wennekers & Amorós, 2012, p.9). Though GEM s definition of entrepreneurship as new business activity is rather narrow, it must be noted that it takes a broad view of what it deems (new) business activity to be i.e. rather than focus on official records of new business registrations as an indicator of entrepreneurial activity, GEM adopts a behavioural approach (for example, by considering individuals contributions to entrepreneurial ventures irrespective of whether they own the enterprise). Traditional analyses of economic development and growth tend to focus primarily on the contribution of large corporations, on the assumption that these firms are the main drivers of economic growth in modern economies. GEM, on the other hand, recognises and takes into account the role played by new and small businesses in the economy. In its attempt to facilitate understanding of the relationship between entrepreneurial activity and economic growth, GEM has the following objectives: to allow for comparison of levels of entrepreneurial activity among countries; to determine the extent to which entrepreneurial activity influences economic growth within individual countries; to identify factors which encourage and/or hinder entrepreneurial activity; and to guide the formulation of effective and targeted policies aimed at stimulating entrepreneurship. The first GEM study, comprising only ten developed economies, was conducted and reported on in Over the course of the subsequent 12 years, GEM has grown to include over 80 economies, and is now widely regarded as one of the most authoritative longitudinal studies of entrepreneurship in the world. In 2011, more than people in 54 countries representing all the regions of the world, as well as varying levels of economic development, participated in the study. Based on this survey, it was estimated that 388 million entrepreneurs were actively pursuing starting a new enterprise or involved in running a new business in According to Kelley, Singer and Herrington (2012, p. 4), this finding included an estimated: 163 million women early-stage entrepreneurs; 165 million young early-stage entrepreneurs between the ages of 18 and 35 years; 8 Global Entrepreneurship Monitor 2011 South Africa

10 The GEM Model 141 million early-stage entrepreneurs who anticipated creating at least five new jobs over the next five years; 65 million early-stage entrepreneurs who anticipated creating 20 or more new jobs over the next five years; 69 million early-stage entrepreneurs who supply innovative products and services that are new to customers and have few competitors; and 18 million early-stage entrepreneurs who sell at least 25% of their products and services internationally. In addition to the data it usually gathers, the 2011 GEM project focused on entrepreneurial employee activity (or intrapreneurship) as a special topic. 52 countries (out of the total of 54) participated in this special topic survey, and from the data obtained GEM estimates that 46 million employees were actively engaged in entrepreneurial activities within their existing organisations (Kelley, et al 2012). South Africa participated in this aspect of the 2011 GEM study, obtaining an Entrepreneurial Employee Activity (EEA) rate of 0.3% which is significantly lower than the average of 1.8% for efficiencydriven economies. The findings suggest, therefore, that the formal South African employment environment exhibits very low levels of entrepreneurship. GEM provides a comprehensive view of entrepreneurship across the globe by measuring the attitudes of a population, and seeking to understand the activities and characteristics of individuals involved in various phases and different types of entrepreneurial activity. To this end, each country s GEM team conducts an annual survey of at least 2,000 adults, complemented by in-depth inputs from selected national experts on the factors that impact on the nature and level of entrepreneurship in each country. South Africa joined the GEM project in 2001, and has participated in all subsequent studies. This year therefore sees the eleventh anniversary of South Africa s participation in GEM. 1.2 The GEM conceptual model Entrepreneurial activity is considered to be an important catalyst for economic growth and development through job creation, innovation and its welfare effect. This realisation has led to a growing policy interest in entrepreneurship at an international level. The GEM project recognises that entrepreneurship is a process that comprises different phases, from intending to start, to just starting, to running new or established enterprises and even discontinuing these. Because the contexts and conditions that affect entrepreneurship in different countries are diverse and complex, it is not possible to conclude that one phase inevitably leads to the next. For example, a country may have a large number of potential entrepreneurs but this may not necessarily translate into a high rate of entrepreneurial activity. Therefore, the arrows that connect the different phases are not straight lines, suggesting the tentative nature of the relationship between the different phases. The entrepreneurship process and GEM s operational definitions are illustrated in Figure 1.1. The phases of entrepreneurship The GEM approach to understanding the entrepreneurship process as one that consists of different phases is useful for assessing the state of entrepreneurship in each phase. The entrepreneurship process starts with potential entrepreneurs those individuals who believe that they possess the capabilities to start businesses and who would not be dissuaded from pursuing the idea of starting a business by fear of failing. For some potential entrepreneurs, their intention to start a business is underpinned by the perceptions society holds of entrepreneurs, the status these individuals enjoy in their society, and whether the media positively represents entrepreneurs. Entrepreneurship Phases Total early-stage Entrepreneurial Activity (TEA) Discontinuance Potential Entrepreneurs: Beliefs and Attitudes Intentions Nascent New Established Source: GEM Global Report, 2011 Figure 1.1: The entrepreneurship process >

11 chapter 1 For those individuals whose intent to start a business is strong enough, the next phase is nascent entrepreneurial activity i.e. the first three months of running a new enterprise. Given the challenges associated with starting a new business, many fledgling businesses fail in the first few months, hence not all nascent entrepreneurs progress to the next stage. New business owners are defined as those former nascent entrepreneurs who have been in business for more than three months, but less than three and a half years. Nascent and new business owners together account for the total early-stage entrepreneurial activity (TEA) measured by GEM. Established businesses are those older than three and a half years. It is important to consider both established business owners as well as entrepreneurs who have discontinued businesses or exited businesses as these two categories represent a key resource for other entrepreneurs (for example, through providing financing, mentorship, advice or other types of support). The GEM model, shown in Figure 1.2 below, illustrates the institutional environment and the effect it has on entrepreneurship. Two sets of conditions, namely basic requirements and efficiency enhancers, impact on societies as well as entrepreneurial activity within societies. Furthermore, Figure 1.2 also indicates nine entrepreneurship framework conditions deemed to influence individuals decisions to pursue entrepreneurial initiatives and thus influence the rate and profile of entrepreneurship in different economies. The GEM model suggests that, at a national level, the framework conditions that apply to established business activity differ from those that apply to entrepreneurial activity. The performance of larger established firms is influenced by general business conditions, which influence firms ability to compete effectively, to start new or ancillary businesses and to create jobs (Von Broembsen, Wood & Herrington, 2005). Both the national and the entrepreneurial framework conditions are dependent on the social, political and economic context in which they exist. These contexts are influential in creating unique business and entrepreneurial environments, and should therefore be taken into account when analysing cross-national differences and national developments over time. GEM classifies the economies that participate in the study as factor-driven, efficiency-driven, or innovation-driven. These categories are based on the World Economic Forum s (WEF) Global Competitiveness Report, which identifies three phases of economic development based on GDP per capita and the share of exports comprising primary goods. The Global Competitiveness Index is determined by measuring different components, each focusing on a different aspect of competitiveness. These components are clustered into 12 pillars of competitiveness, namely: institutions infrastructure macroeconomic environment health and primary education higher education and training goods market efficiency labour market efficiency financial market development technological readiness market size business sophistication innovation. According to the WEF classification, the factor-driven phase is dominated by subsistence agriculture and extraction businesses, with a heavy reliance on (unskilled) labour and natural resources. Companies compete on the basis of price and trade in basic products or commodities, with low productivity evident in low wages. In this stage of development, competitiveness is primarily related to well-functioning public and private institutions (pillar 1), established infrastructure (pillar 2), a stable macroeconomic environment (pillar 3) and a healthy workforce that has at least benefited from basic education (pillar 4). In the efficiency-driven phase, a country has become more competitive with further development accompanied by industrialisation and an increased reliance on economies of scale, with capital-intensive large organisations more dominant. Because of higher wages which are not necessarily coupled with an increase in prices, more efficient production processes and improved product quality are required. At this point, competitiveness is increasingly fuelled by education and training (pillar 5), efficient goods markets (pillar 6), effective labour markets (pillar 7), developed financial markets (pillar 8), the ability to exploit the advantages of existing technologies (pillar 9), and a large domestic or foreign market (pillar 10). As development advances into the innovation-driven phase, businesses are more knowledge-intensive, and the service sector expands. Wages have increased so that they are able to sustain the associated increase in the standard of living. At this stage, companies must compete by introducing and producing new and unique goods using the most advanced production processes (pillar 11) and by innovating new processes and products (pillar 12). Figure 1.3 provides a graphical representation of the 12 pillars and their relation to the three stages of economic development. The basic requirements sub-index clusters those pillars that are most critical for countries in the factor-driven stage. The 10 Global Entrepreneurship Monitor 2011 South Africa

12 The GEM Model From other available sources Social, cultural, political context From GEM National Expert Surveys Basic requirements Institutions Infrastructure Macroeconomic stability Health and primary education Efficiency enhancers Higher education and training Goods market efficiency Labour market efficiency Financial market sophistication Technological readiness Market size Innovation and entrepreneurship Entrepreneurial finance Government policies Government entrepreneurship programs Entrepreneurship education R&D transfer Commercial, legal infrastructure for entrepreneurship Internal market openness Physical infrastructure for entrepreneurship Cultural and social norms Established firms Entrepreneurship Profile (Employee Entrepreneurship Activity) Attitudes: Perceived opportunities and capabilities; fear of failure; Status of entrepreneurship Activity: Opportunity/Necessity driven, Early stage; Inclusiveness; Industry; Exits Aspirations: Growth, Innovation International orientation Social value creation From GEM 2011 Adult Population Surveys (APS) From GEM Adult Population Surveys (APS) Social Economic Development (Jobs, Innovation, Social value) Source: GEM Global Report, 2011 Figure 1.2: The GEM model Basic requirements Institutions Intrastructure Macroeconomic environment Health and primary education Key for factor-driven economies Efficiency enhancers Higher education and training Goods market efficiency Labor market efficiency Financial market development Technological readiness Market size Key for efficiency-driven economies Innovation and sophistication factors Business sophistication Innovation Key for innovation-driven economies Source: Global Competitiveness Report Figure 1.3: The 12 pillars of competitiveness and their relation to economic development stage >

13 chapter GEM methodology One of the key objectives of GEM is to provide reliable data on entrepreneurship that will be useful in making meaningful comparisons both internally and between different countries over time. For this reason, all participating countries make use of standard research instruments. The GEM data is gathered annually and is derived from two main sources, namely: Adult Population Survey (APS) efficiency enhancers sub-index groups those pillars that are essential for countries in the efficiency-driven stage, while the innovation and sophistication factors sub-index includes the pillars that are crucial for countries in the innovation-driven stage. 1.3 How GEM measures entrepreneurship GEM takes a comprehensive snapshot of entrepreneurs around the world, measuring the attitudes of a population and the activities and attributes of individuals participating in various phases of entrepreneurship. The study also considers the aspirations of these entrepreneurs regarding their businesses, along with other key features of their ventures. This orientation to the examination of entrepreneurship sets GEM apart from other research which is heavily focused on the number of official new firm registrations as an indicator of entrepreneurial activity. GEM considers both those formally registering their businesses and those running informal ones. These unregistered businesses can, in fact, comprise as much as 80% of economic activity in developing countries (GEM 2010 Global Report). Furthermore, GEM views entrepreneurship as a process, and takes into account the role played by individuals in new business creation in measuring national entrepreneurship levels. The primary measure of entrepreneurship used by GEM is the Total Early-stage Entrepreneurial Activity (TEA) Index, which gauges the level of dynamic entrepreneurial activity in a country by considering the incidence of start-up businesses (nascent entrepreneurs) and new firms (up to 3.5 years old) among the adult population (i.e. individuals aged years). Another important distinguishing feature of GEM is the distinction it makes between different types of entrepreneurship and how these contribute to economic growth and job creation. Individuals who start businesses in response to a lack of other options for earning an income are deemed to be necessity entrepreneurs, while those who start businesses with the intention to exploit an opportunity are identified as opportunity entrepreneurs. The latter may include individuals who aim to maintain or improve their income, or to enhance their independence. Each participating country conducts a survey of a random representative sample of at least adults (aged years). The surveys are conducted at the same time of year (generally between April and June) using a standardised questionnaire provided by the GEM consortium. The APS is generally conducted by an independent research vendor, chosen by each country s GEM team based on the evaluation of the vendor s research proposal. The raw data is sent directly to the GEM data team for checking and uniform statistical calculations before being made available to the participating countries. National Experts Survey (NES) The NES provides insights into the entrepreneurial startup environment in each country with regards to nine entrepreneurial framework conditions, namely: financing governmental policies governmental programmes education and training research and development transfer commercial infrastructure internal market openness physical infrastructure cultural and social norms. The NES sample is comprised of a minimum of 36 respondents, with four experts drawn from each of the entrepreneurial framework condition categories. Out of this sample, a minimum of 25% must be entrepreneurs or business owners, and 50% must be professionals. Additional aspects such as geographical distribution, gender, the public versus private sector, and level of experience are also taken into account in selecting the sample. In addition to the APS and NES, the GEM Report also makes use of standardised national data from international data sources such as the World Bank, the International Monetary Fund and the United Nations. This information is used to add context to the report, and to explain the relationship between entrepreneurial activity and national economic growth. 12 Global Entrepreneurship Monitor 2011 South Africa

14 CASE STUDY #1 BEST PRACTICE ENTREPRENEURSHOP DEVELOPMENT: TSiBA Please tell us about your organisation/ programme s objectives and the reasons it was established. TSiBA s aim is to provide high quality business education for people with a social conscience who have the desire and the skills to build our nation. Access to tertiary education is hampered by many factors including the quality of secondary education and financial hurdles. For this reason we offer full tuition scholarships to study our Higher Certificate in Business Administration that acts as a bridge into our degree programme. This foundation curriculum is structured so that additional learner support is fully integrated. Further scholarships are awarded to pursue our accredited Bachelor of Business Administration degree in Entrepreneurial Leadership. TSiBA s unique focus on Attitude, Skills and Knowledge effectively enables talented and ambitious South Africans to jump the gap between rich and poor. Indeed, we do more than offer a bridge to becoming economically active: TSiBA develops leaders, entrepreneurs and change agents who utilise the business knowledge and skills that they gain for the purpose of the fundamental transformation of our society i.e. not only jumping the divides, but closing them too. At TSiBA, we call this Paying it Forward. What, in your opinion, are the factors that have contributed to the success of the programme thus far? Our specific focus on grassroots entrepreneurs/bottom-of-the-pyramid folk has forced us to really get to know our target market and understand their challenges and, therefore, amend our approach to meet their needs. Mentorship is the glue that holds the model together without that nothing works. The road map, contract etc tidies up the relationships between the entrepreneurs/beneficiaries and TSiBA: This leads to greater commitment and an understanding that what we provide is not simply up for grabs but needs to be earned. Entrepreneurial successes mostly happen not because of out inputs but because of the dedication and determination of the entrepreneurs and their willingness to apply what they learn. What do you perceive to be the key ingredients of a successful entrepreneurship development programme? Encouraging innovative thinking, an intrapreneurial attitude, uncovering individuals leadership and self-development potential in a supportive environment which is augmented by our mentorship programme. Exposing students to real business challenges in our courses and fostering an understanding of social entrepreneurship. Grounding the course in generic business knowledge. Strengthening the basics in our Certificate year: numeracy, communication and IT. The Tertiary School in Business Administration (TSiBA) provides an innovative and comprehensive solution to addressing inequality in a sustainable manner. TSiBA (which means to leap in Xhosa) is a unique private not-for-profit higher education institution that offers emerging leaders an opportunity to study an enriched degree that is focused on developing entrepreneurship and leadership. TSiBA was founded in 2004 with a vision to Ignite Opportunity. TSiBA opened their doors to their first 80 students in 2005 and currently serve 330 full-time students at their urban campus in Pinelands, Cape Town and their rural campus, TSIBA Eden, in the town of Karatara, near Knysna. We asked Leigh Meinert, Director of TSiBA, to tell us more about this unique initiative. What highlights/successes stand out for you over the course of your involvement with the programme? Although we are still graduating small numbers, our throughput rate is excellent (24% compared to national average of 11%) and TSiBA graduates are doing incredibly well in both the work environment and post-graduate studies. 83% of our graduates are employed full time and 15% are enrolled in post graduate studies. We have produced four Mandela Rhodes Scholars (that s 8.5% of all our graduates). Feedback from employers attests to the problem-solving ability of our graduates, their confidence and adaptability. What are your recommendations for other initiatives aiming to achieve the same/ similar objectives? Understand the market and focus on developing support models that work for a particular segment. A single intervention is of little sustained assistance: long-term, help over time works but that requires sustained operational and financial investment. It s about people not business. Work with partners and donors who understand this >

15 chapter 2 The South African economy has historically been dominated by large corporations and the public sector. THE STATE OF ENTREPRENEURSHIP in South Before the advent of democracy in 1994, the economic landscape was characterised by a conspicuous absence of small enterprises in the dominant sectors of the economy a situation which was exacerbated by prohibitive laws which prevented small businesses, particularly non-white businesses, from developing. Following the country s first democratic elections, the formal sector underwent major restructuring, prompting massive job losses and a resultant increase in informal economic activity. While this led to growth in the informal sector and an increase in the number of small businesses, this change was brought about by necessity rather than opportunity. Over the last decade, the country s economic, social and political challenges have increased clearly evidenced in the growing unemployment, service delivery protests and mounting concerns about corruption, crime and governance. Despite the many strides South Africa has made over the last 10 years, the country s poverty levels remain unacceptably high particularly when compared with other emerging economies. 2.1 the state of South Africa s business environment The Doing Business 2012 Report ranks different countries according to the ease of doing business in each country, as defined by its performance in ten aspects: starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts and resolving insolvency. In 2012, South Africa is ranked 35 th out of 183 countries, a noteworthy achievement within the context of the SADC regional average rank of 114 out of 183. Significantly, South Africa is credited with the best regional performance in the following areas: the cost of starting a business, dealing with construction permits, getting credit, and protecting investors. The report also notes the following salient findings with regards to starting a business in South Africa: It takes approximately six procedures and 19 days to start a business. The process of starting a business has been made easier with the implementation of the new company law, which removed the requirement to reserve a company name and simplified the incorporation documents. The Global Competitiveness Report (GCR), an annual publication of the World Economic Forum, provides 14 Global Entrepreneurship Monitor 2011 South Africa

16 The state of entrepreneurship in South Africa comprehensive assessments of the productive potential of countries across the world. The Global Competitiveness Index (GCI) is a comprehensive tool that measures the microeconomic and macroeconomic foundations of national competitiveness. The GCI defines competitiveness as the set of institutions, policies, and factors that determine the level of productivity of a country (GCR, ). The level of productivity, in turn, determines the level of wealth that can be created by an economy. The GCR has seen South Africa moving up by four places to 50th position (out of 142 countries), remaining the highest-ranked country in sub-saharan Africa and the second-placed among the BRICS economies (with China at 26th position). The country benefits from the large size of its economy, particularly by regional standards (it is ranked 25th in the market size pillar). South Africa also performs well in measures of the quality of institutions and factor allocation, such as intellectual property protection (30th), property rights (30th), the accountability of its private institutions (3rd), and its goods market efficiency (32nd). Notably, the country ranked 4th for financial market development, indicating high confidence in South Africa s financial markets at a time when trust is returning slowly in many other economies. South Africa also performed reasonably well in more complex areas such as business sophistication (38th) and innovation (41st), benefiting from solid scientific research institutions (30th) and strong collaboration between universities and the business sector in innovation (26th). This combination of positive attributes makes South Africa the most competitive economy in the SADC region. However, in order to further improve its competitiveness the country will need to address some key concerns. Prominent amongst these is South Africa s labour market efficiency (95th), which is characterised by rigid hiring and firing practices (139th), inflexibility in wage determination by companies (138th), and significant tensions in relations between employers and the workforce (138th). While progress has been made in increasing basic literacy rates, the quality of South Africa s education system (ranked 131st for primary education and 73rd for higher education) remains a major concern, with concerted efforts needed to improve the quality of mathematics and science education (138th). A recently conducted diagnostic on the state of the country found that, after four years of training, the average score of teachers taking tests in mathematics (of the same level that they themselves teach) was a shockingly poor at 33% (National Planning Commission, 2011). In addition to the need to address teacher performance and school leadership (as indicated in the NPC diagnostic), efforts must also be made to increase the university enrollment rate of only 15%, which places the country 97th overall, in order to enhance its innovation potential. In addition, South Africa s infrastructure, although good by regional standards, requires upgrading (62nd). The poor security situation remains another important obstacle to doing business in South Africa. The business costs of crime and violence (136th) and the sense that the police are unable to provide protection from crime (95th) do not contribute to an environment that fosters competitiveness. Another major concern remains the health of the workforce, which is ranked 129th out of 142 economies the result of high rates of communicable diseases and poor health indicators generally >

17 chapter 2 Percentage of adult population between years 30% 25% 20% 15% 10% 5% 0% Pakistan Algeria Bangladesh Jamaica Iran Venezuela Guatemala Russia Malaysia Hungary Croatia Bosnia and Herzegovina Poland South Africa Mexico Romania Lithuania Latvia Turkey Barbados Slovakia Brazil Uruguay Thailand Argentina Panama Colombia Trinidad & Tobago Peru Chile China Slovenia Denmark Japan Germany Belgium France Sweden Spain United Arab Emirates Finland Switzerland Singapore Norway Ireland United Kingdom Portugal Czech Republic Korea Taiwan Greece Netherlands Australia United States Factor-driven economies Efficiency-driven economies Innovative-driven economies Source: GEM Global Report 2011 Figure 2.1: TEA rates for participating countries in 2011, by phase of economic development 2.2. the state of entrepreneurship in South Africa in Entrepreneurial activity Since its inception, GEM has used the Total Early-stage Entrepreneurial Activity (TEA) index as the principal measure of entrepreneurial activity in participating countries. The TEA index provides a benchmark for comparisons across different countries, as well as longitudinal in-country comparisons. It measures the participation of individuals in early-stage entrepreneurial activity and conveys the percentage of the adult population between the ages of 18 and 64 years that is in the process of starting a business or has recently done so. In 2011 the GEM project investigated the extent of entrepreneurial activity in 54 participating economies. As can be seen from Figure 2.1, South Africa remains one of the more poorly-performing countries with regards to entrepreneurial activity despite the fact that the country exhibits the factors which are conducive to entrepreneurial ventures, including government policies and programmes aimed at stimulating entrepreneurship. Figure 2.2 plots the TEA rates of the 54 countries against their GDP per capita levels. South Africa clearly falls way below the line of best fit reinforcing the fact that the country s TEA rate is lower than expected given its GDP per capita. Previous GEM research has shown that TEA rates (in general) tend to decline with increasing levels of GDP per capita. The decline can be ascribed to increasing availability of job opportunities as economies grow. According to Bosma et al (2012), the relationship between TEA and GDP per capita is less evident for economies in the innovation- driven stage. With the hosting of the FIFA Soccer World Cup in 2010, the South African economy received a boost both in terms of the financial returns it gained, as well as the increase in entrepreneurial energy that surged as many new small businesses emerged and entrepreneurial aspirations flourished in anticipation of the opportunities that this major international event signaled. According to Herrington et al (2010), startups or nascent entrepreneurship increased from 3.6% (per 100 of the adult population aged between 18 and 64 years) in 2009 to 5.1% in 2010, while the rate 16 Global Entrepreneurship Monitor 2011 South Africa

18 The state of entrepreneurship in South Africa Percentage of population involved in early-stage entrepreneurial activity BD PK GT BA DZ CN PE TH JM RO CO ZA IR LV BR MY MX VE TR PA CL AR HU HR PL RU UY LT TT PT Algeria DZ Argentina AR Australia AU Bangladesh BO Barbados bb Belgium BE Bosnia & Herz BA Brazil BR Chile CL China CN chroatia hr czech republic CZ Denmark DK BB SK CZ GR ES SI KR Finland FI France FR germany de Greece GR Guatemala GT Hungary HU Iran IR Ireland IE Jamaica JM Japan JP Korea KR Latvia LV Lithuania LT FI AU UK FR IE TW DE BE JP DK NL Malaysia MY Mexico MX Netherlands NL Nigeria NG Norway NO Pakistan PK Panama PA Peru PE poland pl Portugal PT Romana RO Russia RU Singapore SG SE SW AE US Slovakia SK Slovenia SI South Africa ZA Spain ES Sweden SE SW Switzerland Taiwan TW Thailand TH Trinidad and Tobago TT Turkey TR United Arab Emir AE United Kingdom UK United States US Uruguay UY venezuala ve NO SG R 2 = GDP per capita in purchasing power parities ($), in thousands Source: GEM Global Report 2011 Figure 2.2: TEA and GDP across GEM countries, 2011 of new businesses increased from 2.5% to 3.9% a fact that the authors say could be credited to South Africa s hosting of the 2010 FIFA World Cup. The TEA rate therefore increased from 5.9% in 2009 (during the global recession) to 8.9% in 2010 (just before the World Cup started) as can be seen in Figure 2.3. According to the 2010 Finscope Small Business Survey, there were 5,979,510 small businesses in South Africa during 2010, a marked increase from the last recorded figure of approximately 2.2 million in 2006 ( South Africa s TEA rate increased by 62% to 8.9% from 2009 to 2010, and remained fairly constant in 2011 (Figure 2.3). South Africa s absolute rate of 9.1% in 2011 is not a significant increase over 2010 if one takes into account the spread in standard deviation. Early-stage entrepreneurial activity Percentage of year old population TEA 10% 9% 8% 7% 6% 5% 4% 3% Changes in SA TEA rates 2% 1% 0% Figure 2.3: South Africa s TEA rates over the period >

19 chapter 2 TEA rates in 2011 Early-stage entrepreneurial activity Percentage of year old population 30,00% 25,00% 20,00% 15,00% 10,00% 5,00% 0,00% Russia Malaysia Hungary Croatia Bosnia and Herzegovinia Poland South Africa Mexico Romania Lithuania Latvia Turkey Barbados Slovakia Brazil Uruguay Thailand Efficiency-driven economies Argentina Panama Colombia Trinidad & Tobago Peru Chile China Figure 2.4: 2011 TEA rates in efficiency-driven economies As Figure 2.4 shows, South Africa s TEA rate is below average when compared to other participating efficiencydriven economies. Table 2.1 below shows that South Africa s overall ranking in the last decade of participating in GEM has shown negligible improvement. This is a significant finding, especially within the context of the country s stature on the continent, as well as the progress it has made over the last decade with regard to economic policy and programmes aimed at stimulating economic growth. When viewed within the context of the rates of entrepreneurial activity in comparable economies around the world, South Africa s performance with regard to TEA appears even more dismal. As illustrated in Table 2.2, the Table 2.1: Relative ranking Year SA s TEA rate SA s TEA ranking Median % % % % % % % % % Number of positions above/below median 20th out of 37 countries 19 1 below 22nd out of 31 countries 16 6 below 20th out of 34 countries 17 3 below 25th out of 34 countries 17 8 below 30th out of 42 countries 21 9 below 23rd out of 43 countries 22 1 below 35th out of 54 countries 27 8 below 27th out of 59 countries 30 3 above 29th out of 54 countries 27 2 below 18 Global Entrepreneurship Monitor 2011 South Africa

20 The state of entrepreneurship in South Africa Table 2.2: Prevalence rates (%) of entrepreneurial activity across GEM countries in 2011 Nascent entrepreneurship rate New business ownership rate Early-stage entrepreneurial activity (TEA) Established business ownership rate Discontinuation of businesses Necessity-driven (% of TEA) Improvementdriven opportunity (% of TEA) Factor-driven economies Algeria Bangladesh Guatemala Iran Jamaica Pakistan Venezuela average (unweighted) Efficiency-driven economies Argentina Barbados Bosnia and Herzegovina Brazil Chile China Colombia Croatia Hungary Latvia Lithuania Malaysia Mexico Panama Peru Poland Romania Russia Slovakia South Africa Thailand Trinidad & Tobago Turkey Uruguay average (unweighted) Innovation-driven economies Australia Belgium Source: GEM Global Report >

21 chapter 2 country s TEA remains at the lower end of the spectrum comparable to the rates of entrepreneurial activity found in countries such as Algeria, Pakistan and Poland, which all display lower levels of economic development than South Africa. Significantly, the country s TEA rate of 9.1% is markedly below the average TEA rate of 14.1% for efficiency-driven economies participating in GEM Van Broembsen et al. (2005) point out that, while the TEA rate provides a quantitative assessment of entrepreneurial activity, it does not provide much insight into the quality of that entrepreneurship. An important factor to consider in this regard is the nascent entrepreneurship rate (i.e. the proportion of start-up businesses) to new business ownership rate (i.e. the proportion of new firms), as well as the prevalence of established businesses. Start-up or nascent entrepreneurs are actively engaged in setting up a business they will own or co-own, and have not paid wages or salaries for more than three months. New firms have survived the start-up phase and have paid salaries and wages for more than three months but less than three and a half years. Established businesses are those that have been in existence for more than three and a half years. Table 2.2 summarises the prevalence rates of nascent entrepreneurship, new business ownership, established business ownership and discontinuation of businesses. South Africa s start-up business rate of 5.2% 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. However, South Africa scores lower than the average for participating efficiency-driven economies on both of these measures. Similarly, South Africa s established business ownership rate of 2.3% is substantially lower than the average of 7.2% for all participating efficiency-driven countries. This finding, which does not represent a statistically significant improvement on the 2.1% recorded in 2010, remains particularly disconcerting. In terms of established business activity South Africa ranked 52nd out of 54 countries, faring only slightly better than Hungary (at 2.0%) and Venezuela (at 1.6%). Figure 2.5 illustrates the relative contributions of startup and new businesses to South Africa s TEA rates over the period While the 2011 GEM South Africa Adult Population Survey recorded a slight increase on the previous year s new business rate of 3.1% (up to 4,0% in 2011), the nascent entrepreneurship rate declined from 5.9% in 2010 to 5.2% in This finding indicates an increase in businesses that have survived beyond the startup phase a positive indicator of economic development in the country. The decline in the rate of start-up firms Proportion of start-up and new firm activity % Contribution of new firms to TEA Contribution of start-up firms to TEA Figure 2.5: Relative contributions to TEA of startup and new firm activity in South Africa, (i.e. in the number of people starting businesses) is not out of line with the general consensus that South Africa s hosting of the 2010 FIFA World Cup created a temporary boom in economic activity as people took advantage of the opportunity to start businesses that would benefit from the influx of foreign visitors Established business ownership While the importance of early-stage entrepreneurs in infusing vitality and innovation into economies cannot be overstated, it is also important to acknowledge the crucial role played by established businesses in a country s economic development. Businesses that have survived the early stages provide essential opportunities for employment as well as a resource of knowledge and experience that can benefit early-stage entrepreneurs. Kelley et al (2012) report that, while TEA rates are highest in factor-driven economies, established business ownership rates show a slight increase from the factor-driven to innovation-driven stage of economic development. According to these authors, factordriven economies have significantly more early-stage entrepreneurs than established business owners more than two and a half times as many (Kelley et al, 2012, p. 13). As countries achieve greater economic development, TEA rates decline, particularly as necessity-driven entrepreneurial activity declines. 20 Global Entrepreneurship Monitor 2011 South Africa

22 The state of entrepreneurship in South Africa Percentage of adult population between years 30% 25% 20% 15% 10% 5% 0% Total early-stage Entrepreneurial Activity Owners-Managers in Established Firms Venezuela Guatemala Algeria Pakistan Jamaica Iran Bangladesh Hungary South Africa Russia Mexico Barbados Croatia Romania Poland Bosnia and Herzegovina Malaysia Latvia Peru Uruguay Panama Lithuania Trinidad & Tobago Chile Colombia Turkey Slovakia Argentina Brazil China Thailand France United Arab Emirates Singapore Slovenia Denmark Czeck Republic Germany Portugal Taiwan Norway Belgium Sweden United Kingdom Ireland Japan Netherlands Finland Spain United States Australia Switzerland Korea Rep. Greece Factor-driven economies Efficiency-driven economies Innovative-driven economies Source: GEM Global Report 2011 Figure 2.6: Comparison of established business ownership and TEA rates across GEM countries in 2011 Figure 2.6 shows a comparison of established business rates and TEA rates across the 54 countries that participated in the 2011 GEM study. As is evident from Figure 2.6, the factor-driven economies exhibit generally low established business ownership rates relative to TEA rates. With the exception of two countries (Malaysia and Thailand), all the participating efficiency-driven economies show significantly higher TEA rates relative to established business ownership. Notably, South Africa s established business ownership rate is a mere 2.3% compared to its 9.1% TEA rate in Discontinuance Kelley et al (2012) observe that the rate of business discontinuance generally declines as economic development level increases. Business discontinuation is more pronounced during the early stages of economic development as more businesses are started during these stages. Given the risks associated with starting businesses, it is not surprising that many fail during the initial start-up period. GEM 2011 reports that lack of profitability and problems securing financing account for more than half the business discontinuances in the factor-driven and efficiencydriven economies. The data obtained from South African participants echo this pattern, with 32.6% of respondents who have exited businesses in the past year citing lack of profitability as the reason for exiting, and a further 24% noting problems with access to finance. Kelley et al (2012, p.14) note that in innovation-driven economies [t]hese reasons, particularly trouble obtaining finance are less frequently noted entrepreneurs in those economies exhibit a higher likelihood of exit due to retirement, sale or another opportunity. 2.3 South Africa s Entrepreneurship Profile One of the distinguishing features of the GEM project is the fact that it goes beyond a mere quantitative approach to understanding entrepreneurship in different economies, and places value on examining the profile of entrepreneurs to gain a deeper understanding of the intricacies and complexities that comprise this important subset of the population Gender Previous GEM studies have shown that the ratio of male to female participation in early-stage entrepreneurial activity varies considerably across different countries, possibly reflecting differences in culture and customs regarding women s participation in the economy. Over the years, one finding that has remained consistent is that men are more likely than women to be involved in entrepreneurial ventures >

23 chapter 2 Percentage of adult population between years 30% 25% 20% 15% 10% 5% 0% Pakistan Bangladesh Iran Algeria Jamaica Venezuela Guatemala Malaysia Russia Hungary Croatia Poland Bosnia South Africa Turkey Lithuania Romania Slovakia Latvia Mexico Barbados Uruguay Brazil Colombia Argentina Trinidad & tobago Peru Panama Thailand Chile China Slovenia Denmark France Japan Korea Ireland Norway Czech Republic Finland United Arab Emirates Germany Sweden Belgium Spain Portugal Unitek Kingdom Taiwan Greece Netherlands Switzerland Singpaore Australia United States Factor-driven economies Efficiency-driven economies Male Female Innovative-driven economies Source: GEM Global Report 2011 Figure 2.7: Comparison of female and male TEA rates across GEM countries, organized by female TEA rate 2011 Table 2.3: South African early-stage entrepreneurs motivations for engaging in entrepreneurship by gender, 2011 TEA Male TEA rate Relative contribution to overall TEA rate Female TEA rate Relative contribution to overall TEA rate Opportunity-driven 7% 64% 5% 71% Necessity-driven 4% 36% 2% 29% Overall rate 11% 100% 7% 100% Figure 2.7 shows the rates of female and male participation in entrepreneurship across the 54 countries that participated in GEM Notably, the rates of female early-stage entrepreneurship to male early-stage entrepreneurship are comparable in only eight out of the 54 economies surveyed. Interestingly, these eight countries Panama, Venezuela, Jamaica, Guatemala, Brazil, Thailand, Switzerland and Singapore are located in different parts of the globe and represent different phases of economic development. GEM surveys conducted before 2010 have shown that men in South Africa are times more likely to be involved in early-stage entrepreneurial activity than women are. However, the 2010 adult population survey indicated a male TEA rate that was only 1.2 times higher than the female TEA rate. In 2011, this figure has again increased to 1.6 with the male TEA rate at 11.3% as opposed to the female TEA rate of 6.9%. Further analysis of the 2011 APS data reveals the relative contributions of opportunity- and necessity-driven motives to the male and female TEA rates in South Africa. As illustrated in Table 2.3, both male and female early-stage entrepreneurs in South Africa are predominantly motivated by perceived opportunities rather than necessity Age Economies can benefit from the entrepreneurial activity of all the people in the country, regardless of their age. While older citizens can add the benefit of experience, 22 Global Entrepreneurship Monitor 2011 South Africa

24 The state of entrepreneurship in South Africa Percentage of Adult Population between years 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% Factor-driven Economies Efficiency-driven Economies Innovation-driven Economies years years years years years Source: GEM Global Report 2011 Figure 2.8: Early-stage entrepreneurial activity rates by age groups, across the three economic development phases their contacts and capital, younger entrepreneurs are more likely to have fresh ideas and new approaches, bring about innovation and change, and are likely to have a bigger appetite for risk. Bosma et al (2012) note that while entrepreneurship is often more common in the age groups between the youth and those 50 years and older, policy makers may benefit from considering the entrepreneurial potential of these two groups. Figure 2.8 reveals that the distribution of early-stage entrepreneurship by age groups is roughly the same across the three different phases of economic development, with the highest prevalence rates of TEA within the and years age groups. The differences between the relative contribution to TEA per age category between South Africa and the cluster of efficiency-driven economies are clearly illustrated in Table 2.4. The most notable difference is the fact that the largest contribution to TEA in South Africa comes from the year old group, whereas the year old group drives early-stage entrepreneurial activity in efficiencydriven economies on average. This finding is also significant for the country as it represents a major shift from 2010, as can be seen from Table 2.5 below. Contrary to 2010, where TEA was largely driven by the year old group, the relative contribution to TEA of this group has declined by 12 percentage points while it has increased by eight percentage points for the year old group. The drastic decline in TEA for the year cohort could be partly attributable to the fact that fewer individuals in this group have sought out entrepreneurial opportunities following the 2010 FIFA World Cup and have instead entered formal employment. Within the context of an increasing need for youth entrepreneurship to address the growing problem of youth unemployment, this finding further highlights the need for serious intervention with regard to youth involvement in entrepreneurship. It is therefore important to implement targeted interventions aimed at stimulating entrepreneurial activity among this group. Table 2.4: Age breakdown of early-stage entrepreneurs in South Africa and efficiency-driven economies, years years years years years South Africa 6.8 (16%) 10.2 (24%) 13.6 (32%) 8.3 (19%) 4.0 (9%) Average for efficiencydriven economies 12.4 (18%) 17.8 (27%) 16.3 (24%) 12.9 (19%) 8.2 (12%) Table 2.5: Involvement in TEA by age in South Africa, years years years years years % 36% 24% 14% 6% % 24% 32% 19% 9% For example, 20%of the early-stage entrepreneurs fall into the age group years >

25 chapter BRICS Introduction BRIC is an acronym which refers to a select group of four large, developing countries, Brazil, Russia, India and China. The 2003 Goldman Sachs report, Dreaming with BRICs: The path to 2050, identified these nations as the most important emerging economies in the world, and the ones which would outshine many of the developed nation economies by Combined, the BRIC countries comprise 40% of the world s population and account for more than 25% of global GDP (Global Sherpa, 2011). By 2020, all of the BRIC countries are anticipated to be in the top 10 largest economies of the world, with China forecasted to be the largest economy between 2030 and 2050 in terms of GDP. Apart from their growth characteristics, the BRIC countries have little in common and this classification is seen as primarily an investment category. Analysts believe that China will dominate in manufactured goods, India in services, and Russia and Brazil in raw material supplies, and that, by working together, they can effectively counter the deep-seated interests and organisational structures of the West (Economy Watch, 2010). A trait which the BRIC countries do however share is the high percentage of gross domestic product (GDP) spent on research and development (R&D). This spend is higher on average than most developed nations and contributes to the growth in innovative and competitive business concepts. Development of human capital is another key element in all BRIC nations and the size of their respective populations also means that each economy has a very large local market for its own goods and services (Van der Merwe, 2009). Brazil, Russia, India and China formally invited South Africa to join the group in December 2010 and the new grouping is referred to as BRICS. When compared with the other BRICS nations, South Africa is by far the smallest in economic output. It has an economy of $286 billion, less than a quarter of Russia s, the smallest of the original four BRIC nations, and its population of 50 million is far below Russia s 142 million and Brazil s 191 million. Many economic analysts are surprised by the country s inclusion to the BRIC group. According to Jim O Neill (global chairman of Goldman Sachs) who coined the term BRIC 10 years ago, South Africa has too small an economy to justify its inclusion in the group. The country is far too small to be in the top 20 global economies, and is not even a member of the N11 (the Next 11 emerging economies with promising outlooks, as recognised by Goldman Sachs). Even on the African continent, South Africa s growth prospects are anticipated to be only 2.7% in 2012, while the average for the rest of Africa, in the short to medium term, is expected to be 7%. South Africa is also losing out in terms of foreign investment to Nigeria, a country with a population of 155 million (Naidoo, 2012). Arguments for the inclusion of South Africa in BRICS indicate that what South Africa lacks in demographic and economic clout, it is said to make up by representing Africa at the BRICS table. South Africa accounts for approximately one third of domestic product in sub- Saharan Africa, and is seen as being able to provide BRICS members with improved access to Africa s 800 million consumers, as well as its minerals and other 24 Global Entrepreneurship Monitor 2011 South Africa

26 The state of entrepreneurship in South Africa Table 2.6: Total early-stage entrepreneurial activity and established business ownership rates across the BRICS countries Country Total early-stage entrepreneurial activity (TEA) Total established business ownership rate Brazil 11.6% 14.9% 12.1% 12.2% Russia 4.8% 4.6% 1.2% 2.8% India 10.4% N/A 5.6% N/A China 16.2% 24.0% 8.9% 12.7% South Africa 5.3% 9.1% 1.7% 2.3% resources. South Africa has a mature economy, sound corporate governance structures and a strong regulatory framework, which can attract investors seeking a secure investment. South Africa is also the platform, through the Johannesburg Securities Exchange (JSE), on which investment throughout the continent is established. Many South African companies do business in Africa and are also therefore well placed to provide information to BRIC nations looking to invest in Africa (Naidoo, 2012). While there are limited formal ties between the BRIC countries as a united economic group, the four countries represent important economic partners for South Africa. Becoming part of BRICS could provide opportunities for South African businesses to access markets in the BRIC countries and could allow South Africans to learn how some businesses in those markets have managed to become leaders in their fields. Brazil, Russia, India and China also have the capacity to bring investments, knowledge and technologies that have the potential to help South Africa and the continent accelerate its development (SA Info, 2011). As indicated above, South Africa s growth prospects are lower than the other BRICS countries. Given that entrepreneurial development is being purported to be a key driver in increased economic development, this chapter will compare the BRICS nations with respect to their entrepreneurial activity. This chapter will look at the TEA rates and established business ownership rates of the BRICS economies and identify if there are gender, age and educational differences in entrepreneurial activity. It will also explore the rates of opportunity- and necessity-driven businesses, as well as perceptions of and capabilities for entrepreneurial activity within Brazil, Russia, China and South Africa. While India is a key member of the BRICS community, it did not participate in GEM in 2011 and will therefore not be included in all of the analyses that follow. In 2006, all five BRICS countries took part in the GEM survey, so comparisons between the years 2006 and 2011 will be made throughout the chapter. As the global economic crisis hit in 2007, the chapter will also refer to how this has affected the entrepreneurial activity over the five year period under review ( ) TEA and established business ownership rates In 2006, countries participating in the GEM survey were classified as either middle-income or high-income economies. Middle-income economies (all BRICS countries were classified as such in 2006) were characterised as having a per capita GDP lower than USD $20,000. In 2006, South Africa (Table 2.6) had one of the lowest TEA rates (5.3%) among the BRICS countries, higher only than Russia (4.8%). The average for middle income economies in 2006 was 12.8%. China was the only economy with a TEA rate higher than the average (16.2%) and has also experienced the largest TEA rate growth (48%) between 2006 and According to Birdthistle et al. (2010), the rapid expansion of the Chinese economy has resulted in more opportunities for entrepreneurial activity, especially in the big cities. In the 2011 GEM survey, countries are grouped into factor-, efficiency- and innovation-driven economies. In 2011, the average TEA rate for efficiency-driven economies (which includes Brazil, Russia, China and South Africa) is 14.1%. China and Brazil both have TEA rates above the average. A comparative study on support to small businesses in South Africa, Brazil and India (Timm, 2011) found that, of these three economies, policies and schemes designed to support small business development appear to be most effective in Brazil. Reasons for this include better monitoring mechanisms of small business support centres, specific targets for support centres and simplified >

27 chapter 2 support architecture of government agencies and departments which support small businesses in Brazil. According to Doing Business 2011, Brazil had a number of business reforms between 2008 and 2011 that focused on making it easier to start businesses. These reforms included enhancing electronic synchronisation between federal and state tax authorities. In 2011 Russia had the lowest TEA rate among the BRICS economies (4.6%), and has shown only a slight improvement since The GEM Russia 2008 Report noted that TEA rates climbed between 2006 and 2008, explained in part by measures aimed at reducing entrance barriers to markets and improving access to physical infrastructure through considerable financial help from the government. More than 38 billion rubles were used as subsidies for developing R&D parks, business incubators, and venture funds. However, experts interviewed in Russia s national experts survey a year later, in 2009, considered state programmes for supporting new and developing firms to be largely ineffective, and the behaviour of state officials providing such aid were judged incompetent, explaining in part why Russia s TEA remains very low. The experts in Russia also listed high levels of bureaucracy as another barrier to entrepreneurship development. Experts in Russia also believe that there is no effective system for transferring knowledge and technology from research institutes to developing companies, making their acquisition by entrepreneurs challenging. The situation in South Africa is quite similar, with government policies and programmes being among the most frequently cited limiting factors since Experts have since 2006, ranked research and development transfer as one of the two most limiting factors with respect to entrepreneurial development. In 2010, South Africa was one of four efficiency-driven countries to rank government programmes as one of the three worst performing Entrepreneurial Framework Conditions. Given that South Africa has a plethora of highlyfunded programmes that are tasked with entrepreneurial development, the extremely poor ranking is of particular concern. While government policy emphasises the importance of entrepreneurial activity as well as the informal economy and has allocated vast financial resources towards their development owners of start-up or growing businesses are generally unaware of the agencies to which they can avail themselves for assistance and support. In the 2010 South Africa GEM report, a number of experts also commented on the lack of competent people working in many of the agencies indicating that the people offering support to entrepreneurs, especially in areas other than large cities are woefully incompetent and inadequately prepared. There was also the belief that the people who staff these agencies are unable to appreciate innovative thinking and stifle entrepreneurial initiative (p. 58). These issues are also considered to be factors explaining the lower TEA rate in South Africa. With respect to established business rates, which are businesses that have survived beyond three-and-a-half years, South Africa (1.7%) had a slightly higher rate than Russia (1.2%) in 2006, however Russia s established business rate improved to 2.8% over the five-year period. South Africa currently has the lowest rate for established businesses of the BRICS economies at 2.3%. The economic implications of these findings are concerning because the average number of jobs created by established businesses is 3.2, which is 32 times greater than for nascent firms (GEM South Africa 2005 Report). Given South Africa s high unemployment rate of 23.9% (Statistics South Africa, 2011), South Africa s low established business prevalence rate thus paints a bleak picture of the SMME sector s potential to contribute meaningfully to job creation, economic growth and more equal income distribution. While Brazil s established business rate did not change much over the five year period (12.1% in 2006 and 12.2% in 2011), this rate has consistently been above the average for efficiency-driven countries, and Brazil is ranked third highest amongst the efficiency-driven countries in 26 Global Entrepreneurship Monitor 2011 South Africa

28 The state of entrepreneurship in South Africa 2011 (after Thailand and China). China experienced a significant increase in the rate of established business (8.9% to 12.7%). Doing Business 2011, noted that China withstood the effects of the economic crisis. The Doing Business 2011, report on China also noted that a number of key business reforms had been introduced in China since Obtaining credit was made easier by expanding the range of assets used as collateral, for example; debtors and a combination of assets can be used to secure a loan; the tax burden on businesses was reduced corporate income tax rate was reduced from 33.3% to 25%; and important improvements with respect to bankruptcy law i.e. additional protection provided to secured creditors to receive proceeds if borrowers becomes insolvent. The following section includes a closer examination of the profile of entrepreneurs in each of the BRICS countries Gender The ratio of male to female participation in early-stage entrepreneurial activity varies considerably across the total sample of GEM countries, reflecting differences in culture and customs regarding female participation in the economy, a consistent finding is that men are still more likely to be involved in entrepreneurial activity. However in recent years, GEM research has shown that female entrepreneurial activity has been a key contributor to economic growth in a number of countries, especially in developing nations. Table 2.7 shows the percentage of males and females involved in early-stage entrepreneurial activity. Where female involvement is concerned, the rates increased for all four countries from 2006 to China experienced the largest increase in females (62.3%) over the five year period. Notably, Brazil s female entrepreneurs outnumbered male entrepreneurs by 53% to 47% in Recent GEM reports have noted that several developing or emergent economies with a similar GDP per capita to South Africa, such as Brazil, Argentina and Peru, consistently achieve TEA rates that are two to three times higher than that achieved by South Africa. One of the reasons for the lower TEA rate in South Africa is that in Brazil, as in many of the other Latin American countries, the gender gap in TEA is low. The increase in female participation in South Africa, may therefore in part explain the increase in South Africa s TEA rate in Table 2.7 also shows that South Africa s increase in female involvement between 2006 and 2011 was 43.8%, significantly lower than the increase seen in male involvement (94.8%). This indicates that while there has been an improvement in the gender participation in South Africa, more can be done to include women in entrepreneurial development in South Africa. With respect to established businesses, Pines et al. (2010) found that gender differences were larger in the rate of established businesses versus nascent and new businesses in all types of economies. The implication of these findings is that the survival rate of women s businesses is lower in almost all countries and economic levels. These findings are confirmed by the GEM Women s Report 2010, which shows a larger gender difference in the established business rate in all but four countries. Russia is one of the four countries that is an exception. The GEM 2010 Women s Report found that more than half of the established business owners in Russia are women. This gap in South Africa is small. The South Africa GEM 2010 Report confirms this and notes that the difference in the established business rate in South Africa is 53% male to 47% female. Table 2.7: Percentage of males and females involved in early-stage entrepreneurial activity across the BRICS countries Country Male Female Brazil 13.7% 15.3% 9.6% 14.5% Russia 7.3% 5.1% 2.6% 4.0% India 11.6% N/A 9.1% N/A China 18.4% 25.6% 13.8% 22.4% South Africa 5.8% 11.3% 4.8% 6.9% For example, 18.4% of males in China are involved in early-stage entrepreneurial activities >

29 chapter 2 Table 2.8: Percentage of population involved in early-stage entrepreneurial activity by age across the BRICS countries Country years years years years years Brazil 10.9% 12.8% 16.8% 17.8% 10.6% 17.2% 8.9% 13.0% 6.0% 9.3% Russia 6.1% 3.9% 7.4% 6.6% 6.2% 6.0% 2.1% 3.8% 1.9% 1.5% India 9.0% N/A 12.5% N/A 9.8% N/A 10.4% N/A 9.2% N/A China 20.5% 20.6% 24.6% 28.7% 15.3% 26.4% 9.3% 21.9% 6.0% 18.3% South Africa 4.4% 6.8% 6.2% 10.2% 6.4% 13.6% 4.0% 8.2% 5.1% 3.9% For example, 10.9% of year olds in Brazil are involved in early-stage entrepreneurial activity Age The influence of age on entrepreneurial activity tends to be very similar throughout countries in the GEM survey. The prevalence of early-stage entrepreneurial activity tends to be relatively low in the years age bracket, peaks among year olds, and then declines as age increases with the sharpest decrease after the age of 54. In line with this, Table 2.8 shows that early-stage entrepreneurial activity for all the BRICS economies is most prevalent in the years and years age brackets. It is notable, however, that China s TEA rates are relatively high across all age groups, ranging from 18.3% in the years age bracket, to 28.7% in the years bracket. Interestingly, China s rates in the two oldest age brackets experienced the most significant increases of all BRICS countries (134% in the years age bracket and 205% in the years age bracket). Russia s rates have been the lowest among the BRICS countries in every age bracket for both years except in the years age bracket when South Africa s rate was lower in Russia also experienced decreases in their rates from 2006 to 2011 for every age bracket except the bracket. The biggest increases in South Africa s rates occurred in both the years and years age brackets, where rates in both brackets more than doubled from 2006 to As GEM findings in general have shown a low prevalence of entrepreneurial activity in the years bracket, it is encouraging to see that South Africa s rate in this age bracket has increased over the five year period. However, the current rate of 6.8% is the second lowest of the BRICS economies. This is cause for great concern when one considers that the country has a youth unemployment rate of 48.2% (Youth Policy, 2011). In times of economic downturns, young people are generally the first to lose their jobs and the last to find jobs when the economy rebounds (United Nations, 2011). Youth unemployment rates in Brazil, Russia are 17.8% and 18.3% respectively (Youth Policy, 2011). A youth unemployment rate for China is not available. Many young people in South Africa attempt to enter the job market immediately after leaving school. Given that South Africa has a very low established business rate (the lowest of the BRICS countries and one of the lowest across all GEM countries), suggests that relatively few jobs will be available for them. South Africa s social security system, while working to reduce poverty and income inequality, could contribute to the lack of entrepreneurial inclinations and activity among the youth who are able to rely on the social security structures if they are unable to find work Necessity- and opportunity-driven motives According to Acs (2007), necessity entrepreneurship is having to become an entrepreneur because one has no better option, while opportunity entrepreneurship, is an active choice to start a new enterprise based on the perception that an unexploited, or underexploited business opportunity exists. The more of a population that becomes involved in opportunity entrepreneurship, the more one will see rising levels of economic development. GEM research has consistently shown that the economic contribution of opportunity-motivated firms is higher than for necessity-driven enterprises. The South African GEM 2005 Report found that, in South Africa, almost a third of necessity firms had no employees and that the average number of jobs created per firm was 1.6. By contrast, the average number of employees for opportunity firms was 28 Global Entrepreneurship Monitor 2011 South Africa

30 The state of entrepreneurship in South Africa Table 2.9: Percentage of early-stage entrepreneurs (TEA) motivated by necessity and opportunity across the BRICS countries Country Necessity-driven Opportunity-driven Other motives Brazil 48.6% 30.7% 51.4% 68.7% 0.0% 0.6% Russia 29.6% 26.9% 69.7% 69.4% 0.7% 3.7% India 27.4% N/A 64.3% N/A 8.3% N/A China 38.7% 40.6% 59.2% 56.8% 2.1% 2.6% South Africa 28.5% 34.8% 65.6% 63.4% 5.9% 1.8% 4.4, and opportunity firms were more than four times as likely, compared to necessity firms, to employ six or more people (van Broembsen et al, 2005). GEM research has established a consistent association between GDP per capita and the level and nature of entrepreneurial activity in an economy. In economies with low GDP per capita (applicable to the BRICS economies), TEA rates tend to be high with a relatively high proportion of necessity-motivated entrepreneurship. As per capita income increases, opportunity-driven entrepreneurship increases (GEM 2011 Global Report). Larger established firms also play an increasingly important role in the economy, providing the option of stable employment for a growing number of people as a viable alternative to the risks of self-employment (GEM South Africa 2010 Report). Table 2.9 looks at early-stage entrepreneurial activity according to whether business ownership is motivated by necessity or opportunity. With respect to necessitydriven entrepreneurship, only the rates in China and South Africa increased between 2006 and South Africa experienced the highest increase (22%), over the five year period. Brazil experienced a significant decrease in necessitydriven entrepreneurship over the same period (36.8%). The GEM 2010 Women s Report noted that the rate of males motivated by necessity in Brazil was slightly higher than the rate of females motivated by necessity. The GEM 2010 Women s Report found that, in a nine year analysis of a select group of economies between 2002 and 2010, women, in the efficiency-driven economies, were almost always more likely to have started businesses out of necessity than men. However, the report noted too that the proportion of women with necessity-driven motivations declined over the time period, with the largest decline in necessity motives for women seen in Brazil and China. With respect to opportunity-driven entrepreneurship, Brazil again experienced the most significant change. Brazil s rate for opportunity-driven entrepreneurship increased by 33.6%. According to OECD (2011), Brazil has achieved significant progress since the mid-1990s, which can be attributed primarily to a strengthening of public institutions. There has also been considerable social investment which has caused the rates of poverty and inequality to drop. Labour market informality receded, and product markets opened up. Brazil has been able to withstand the global financial crisis well owing to its economic stability, timely macroeconomic policy responses combined with monetary easing, some fiscal stimulus and credit expansion. Brazil was able to achieve a real GDP growth of 7.5% in 2010, and its rate of unemployment has been decreasing year-on-year since These factors may in part explain why opportunity-driven rates were able to increase between 2006 and 2011, and why necessitydriven rates dropped so significantly over the five year period in Brazil >

31 chapter Education As highlighted in previous GEM reports, a healthy and educated workforce is vital to an organization s competitiveness and productivity. A sound basic education system is therefore one of the key imperatives for a competitive country. Table 2.10 looks at early-stage entrepreneurial activity according to level of education attained. It should be noted that, in the year 2006, individuals with no or some primary education were included in the category called some secondary, as most of the participating countries at that time were innovation-driven economies and thus most individuals had at least primary education levels. Subsequently, the category None for some or no primary education was introduced, as more developing nations joined the GEM consortium. The 2011 figures in the None category have therefore been included with the 2011 some secondary figures to allow for comparison with the 2006 figures. South Africa had (Table 2.10) a significant increase in the rate for individuals, with some secondary levels of education, involved in entrepreneurial activity in (46.7%). This may explain in part South Africa s significant increase in the rate of necessity-driven entrepreneurship, as individuals with incomplete educations are less likely to find jobs. Table 2.10 also shows that South Africa s rates in the remaining three education categories decreased between 2006 and None of the respondents in the South African APS survey with graduate levels of education were involved in entrepreneurial activity. Notably, the rates of entrepreneurial activity by those with graduate levels of education also decreased significantly in Brazil and China. This could indicate that graduates individuals with Masters or Doctorates are more likely to find jobs in their professional fields. It may also indicate that the economic downturn has caused those with these advanced degrees who might normally have considered entrepreneurship to remain instead in formal employment until there is an economic upturn again Attitudes and perceptions Bosma and Levie (2009) note that economic development (or welfare) is not the only factor determining entrepreneurship rates. They argue that entrepreneurial attitudes and perceptions play an important part in creating an entrepreneurial culture. GEM measures several such attitudes and perceptions that are believed to play an important part in creating an entrepreneurial culture within an economy. These include the extent to which people think there are good opportunities for starting a business, their perceived capabilities and their Table 2.10: Percentage of population involved in early-stage entrepreneurial activity by education across the BRICS countries Country None* Some secondary** Secondary degree ** Post secondary** Graduate** 2011*** (includes None ) Brazil N/A 28.9% 45.7% % 35.0% 45.4% 8.6% 8.6% 10.6% 1.9% Russia N/A 0.4% 4.2% 2.3% 2.7% 23.9% 12.0% 45.4% 44.2% 26.4% 41.1% India N/A N/A 34.2% N/A N/A 27.3% N/A 38.4% N/A 0.0% N/A China N/A 7.5% 34.7% 23.3% 30.8% 35.6% 30.1% 4.3% 38.6% 25.4% 0.6% South Africa N/A 7.9% 28.9% 34.5% 42.4% 45.1% 40.8% 17.2% 16.9% 8.7% 0.0% * None and Some secondary education categories were combined in 2006, therefore this category is excluded from discussion as the None rates for 2011 have been added to the some secondary 2011 rates for direct comparative purposes. ** Some secondary refers to education more than primary school and before the completion of Matric. Secondary degree refers to the completion of Matric. Post secondary refers to a post high school education short of a Masters degree. Graduate is a Masters or Doctorate degree (GEM Global classifications). *** Some secondary rates for 2011 include the None rates for Global Entrepreneurship Monitor 2011 South Africa

32 The state of entrepreneurship in South Africa Table 2.11: Entrepreneurial perceptions, intentions and societal attitudes across the BRICS countries (2006) Brazil 37.0% 53.6% 37.8% 19.8% 63.4% 68.1% 64.5% Russia 23.7% 25.1% 51.6% 8.4% 71.2% 67.8% 53.5% India 52.0% 62.5% 36.2% 31.9% 67.0% 84.3% 69.4% China 28.9% 35.5% 23.2% 32.3% 69.5% 67.7% 76.9% South Africa 27.8% 36.1% 26.7% 9.3% 60.8% 59.3% 56.8% * Fear of failure assessed among those seeing opportunities ** Entrepreneurial intentions assessed in non-entrepreneur (non-tea) population Table 2.12: Entrepreneurial perceptions, intentions and societal attitudes across the BRICS countries (2011) Perceived opportunities Perceived capabilities Fear of failure * Entrepreneurial intentions ** Entrepreneurship as a good career choice High status to successful entrepreneurs Media attention for entrepreneurship Perceived opportunities Perceived capabilities Fear of failure * Entrepreneurial intentions ** Entrepreneurship as a good career choice High status to successful entrepreneurs Media attention for entrepreneurship Brazil 43.0% 52.8% 35.3% 32.3% 86.3% 86.3% 81.9% Russia 27.0% 33.2% 46.4% 6.2% 64.5% 65.2% 55.3% India N/A N/A N/A N/A N/A N/A N/A China 48.8% 43.9% 34.9% 43.3% 73.1% 73.4% 75.9% South Africa 40.7% 42.8% 28.8% 17.6% 72.7% 72.1% 73.5% * Fear of failure assessed among those seeing opportunities ** Entrepreneurial intentions assessed in non-entrepreneur (non-tea) population fear of failure which would prevent them from starting a business. Also important are society s attitudes towards entrepreneurship, measured by: the perceptions of the status of entrepreneurs, their media image, and whether entrepreneurship makes an attractive career choice. This could be influenced by how often people see stories in the media about successful new businesses and how these success stories are perceived by the general public. Cultural and social norms of a country can markedly influence this perception as well Perceived opportunities GEM studies have consistently found that perceptions that there are good business opportunities for entrepreneurs are higher in factor-driven economies and decline with each level of economic development. In line with this, India, being the only factor-driven economy among the BRICS nations, showed the highest rates of perceived opportunities among the BRICS economies in Of the four efficiency-driven economies, both China and South Africa (Tables 2.11 and 2.12) showed the largest increase >

33 chapter 2 in perceived opportunities over the five year period (69% and 46% respectively). This is encouraging for South Africa because GEM research has shown that individuals who see good business opportunities in their area are three times more likely to be involved in entrepreneurial activity (GEM 2004 Report). It must however be noted that both China and South Africa were increasing off a much lower base than Brazil Perceived capabilities Perceived capabilities reflect the percentage of individuals who believe they have the required skills, knowledge and experience to start a new business. High prevalence rates of perceived capabilities are not always associated with high rates of perceived opportunities. The GEM 2004 Report noted that individuals who were confident that they possessed the skills to start a business were four to six times more likely to be involved in entrepreneurial activity. The rates of perceived capabilities in Brazil, Russia and South Africa are higher than their rates of perceived opportunities, which indicate that more Brazilians, Russians and South Africans believe they are capable of becoming entrepreneurs than there are who see opportunities to do so. China and South Africa s rates of perceived capabilities increased between 2006 and In terms of perceived capabilities, South Africa and China still rank relatively low when compared to all efficiency-driven economies. However, the increase in the rate for perceived opportunities and perceived capabilities in China and South Africa are positive contributing factors to increasing TEA rates Fear of failure Fear of failure (when it comes to starting one s own business) is a measure that applies only to individuals who have indicated that they perceive opportunities. Russia has the highest fear of failure rate of the BRICS economies (46.4%). The fear of failure rate in Brazil decreased over the period. As noted early in this report, Brazil has the most effective policies and schemes designed to support small business development. It is possible that these schemes, as well as the increasing acceptance of entrepreneurship as a positive employment option has positively impacted on the fear of failure experienced in Brazil. Between 2006 and 2011, the fear of failure rates increased in both China and South Africa. However, South Africa s rate is still the lowest of the BRICS economies (28.8%). Given this relatively low fear of failure rate, it would be expected that South Africa would have a higher TEA rate, especially as Brazil has a higher fear of failure rate but a higher TEA rate than South Africa. However, given that South Africa s perceived capabilities rate is lower than the rate for Brazil, this may help to explain in part South Africa s low TEA rate Entrepreneurial intentions The rates of entrepreneurial intentions of individuals not involved in entrepreneurship have increased quite substantially in Brazil, China and South Africa between 2006 and 2011, with Brazil experiencing the most significant increase (63%) considering its fairly high base. Given the relatively low increases in TEA rates over the five year period, it is clear that a significant percentage of entrepreneurial intentions did not translate into actual business. The economic crisis was more than likely the primary cause where potential entrepreneurs may have seen opportunities in 2006 and intended to pursue them through self-employment, in 2007 these opportunities may have disappeared. Given that Brazil s rate of opportunity-driven entrepreneurship increased by 33.6% over the five-year period, this may indicate that, even though the economic downturn impacted the entrepreneurial activity overall, a portion of those intending to become entrepreneurs were still able capitalise on the perceived opportunities. While South Africa s rate of entrepreneurial intentions increased by 89%, it is still very low (17.6%). Considering South Africa s high unemployment rate (23.9%), it is highly concerning that so few individuals want to pursue entrepreneurship. Russia s rate of entrepreneurial intentions of 6.2% is alarming. According to Churilova and Shuklin (2009), this is related to the lack of human capital availability, and the necessary skills and financial possibilities Societal attitudes Brazil experienced a significant average increase of 30% for all three categories of societal attitudes towards entrepreneurship (Tables 2.11 and 2.12), namely entrepreneurship as a good career choice, high status to successful entrepreneurs, and media attention for entrepreneurship. South Africa s rates for all three categories also increased quite significantly between 2006 and 2011, but are lower than those of Brazil. While it is encouraging that South Africa has improved its rate in every category, the GEM South Africa 2010 Report noted that South Africa has a great deal to learn from countries such as Brazil, with respect to promoting a culture of entrepreneurship. The report quoted figures from the 2010 global entrepreneurship week where Brazil drew a record five million participants (1.4-million participants in 2008). South Africa only had 32 Global Entrepreneurship Monitor 2011 South Africa

34 The state of entrepreneurship in South Africa >

35 chapter 2 8,000 participants in its first year (2009). The report highlighted that Brazil s success was built on getting key partners such as the media involved, with newspapers agreeing to run full-page advertisements promoting global entrepreneurship and top graphic designers designing the campaign s adverts week free of charge. In South Africa, media groups generally were only prepared to get involved if they were paid (Malik Fal, MD of Endeavor SA). The discrepancy in entrepreneurial attitudes and perceptions in South Africa and Brazil contributes to the differences between their respective TEA rates. As entrepreneurship becomes more acceptable and is seen to be a positive employment choice by a society, more people are prepared to move into entrepreneurial ventures. Between 2006 and 2011, as Brazilian society s perception of entrepreneurship increased significantly, as well as the media attention provided to entrepreneurship, Brazil s fear of failure rate decreased slightly between 2006 and 2011, and its rate of entrepreneurial intentions increased quite significantly. This has contributed in part to Brazil s increase in TEA rate over the five-year period. Russia s rates for the three categories concerning societal attitudes are the lowest of the BRICS economies. According to the GEM Russia 2009 Report, media in Russia is becoming a more positive influence on entrepreneurial behaviour, with the report highlighting that almost 60% of Russia s adult population have learned about successful new companies from the media. Russia showed a decrease in the perception that entrepreneurship is a good career choice as well as a decrease in the perception relating to the high status of successful entrepreneurs between 2006 and Coupled with an increasing rate of fear of failure and lower rate of perceived capabilities, this explains why TEA rates in Russia are low and have decreased marginally over the five year period Conclusion Brazil s TEA rate increased by 28% between 2006 and Reasons for this include well-managed government programmes to stimulate and support the development and growth of small businesses. Since 2008 Brazil has also had numerous business reforms that have focused on making it easier to start businesses. Improvements in Brazil s societal attitudes towards entrepreneurship were seen. Its rate of entrepreneurial intentions increased significantly by 63%. Brazil s fear of failure rate decreased. These have all contributed to the increase in Brazil s TEA rate. Brazil s overall decrease by 36.8% in necessity-driven entrepreneurship between 2006 and 2011 may be attributed in part to its narrowing gender gap in entrepreneurship. Brazil s government policies have helped to protect Brazil from the worst of the global financial crisis, the country achieved a real GDP growth of 7.5% in 2010, and its rate of unemployment has been decreasing yearon-year since These factors would also explain why opportunity-driven rates were able to increase between 2006 and 2011, and why necessity-driven rates dropped so significantly over the five year period in Brazil. Russia s TEA rate has remained low between 2006 and 2011 (4.8% and 4.6% respectively). Russia has the lowest TEA rate of the BRICS economies and one of the lowest of all the efficiency-driven economies. While huge government programmes have been developed and investments made to stimulate small business development, experts in Russia believe that they have been largely ineffective, with incompetence by state officials and high levels of bureaucracy being viewed as two of the primary factors. There are other notable reasons for Russia s low TEA rate. Russia has the highest fear of failure rate of the BRICS economies (46.4%) and Russia s rate of entrepreneurial intentions of 6.2% is extremely low, a concept related to belief in a lack of human capital availability and necessary skills. These findings are in line with Russia s low rate for perceived capabilities (33.2%), which are the lowest of the BRICS economies. Russia s rates for the categories relating to societal attitudes are also the lowest of the BRICS economies. An interesting finding is that female entrepreneurs in Russia involved in early-stage entrepreneurial activity increased while the rate for male entrepreneurs decreased. The rate of female owners of established businesses also outnumber the rate of male owners. China experienced the highest increase (48%) in TEA rate of the BRICS economies between 2006 and 2011, and has the highest TEA rate of the BRICS economies. The rapid expansion of the Chinese economy has resulted in more opportunities for entrepreneurial activity, particularly in the big cities. China also experienced the highest growth in female involvement in early-stage entrepreneurial activity (62%). China s rate of established businesses is also the highest of the BRICS economies. The business reforms introduced in China since 2007 are cited as some of the key contributing factors. China has the highest rate in perceived opportunities of the BRICS economies, which was also the largest increase over the five year period (69%). Combined with China having the highest rate of entrepreneurial intentions of the BRICS economies and the second highest rate of perceived capabilities in 2011, bodes well for China s continuing growth in total early-stage entrepreneurial activity. 34 Global Entrepreneurship Monitor 2011 South Africa

36 The state of entrepreneurship in South Africa With respect to South Africa, female involvement in early-stage entrepreneurship increased by 43% between 2006 and In several developing economies with a similar GDP per capita to South Africa have TEA rates that are two to three times higher than those achieved by South Africa. In these countries, such as Brazil, the gender gap in TEA is low. The increase in South Africa s TEA rate in 2011 may therefore be explained in part by the increased female participation in entrepreneurial activities. This indicates that, while there has been an improvement in the gender participation in South Africa, more needs to be done to include women in entrepreneurial development in South Africa. South Africa s rate in the age bracket increased between 2006 and However, the current rate of 6.8% is nevertheless extremely low (the second lowest of the BRICS economies), which is a cause for concern when one considers the youth unemployment rate of 48.2%. Given that South Africa has a very low established business rate (the lowest of the BRICS countries and one of the lowest across all GEM countries), indicates that relatively few jobs are available for youth and that small business development aimed at youth should be one of South Africa s most pressing priorities. Between 2006 and 2011, South Africa had the second largest increase in the rate of perceived opportunities of the BRICS economies. In terms of societal attitudes towards entrepreneurship, South Africa s rates for all three categories increased significantly between 2006 and South Africa s fear of failure rate is the lowest of the BRICS economies. However, increased rates in perceived opportunities and societal attitudes towards entrepreneurship, as well as the relatively low fear of failure rate, have still not impacted South Africa s rate of entrepreneurial intentions sufficiently. While South Africa s rate of entrepreneurial intentions increased between 2006 and 2011, it is still very low (second lowest of the BRICS economies). Given South Africa s very high unemployment rate, improving policies and schemes that increase the number of individuals that pursue entrepreneurship as a positive employment choice are vital. While it was not possible to include India in the comparisons, it was noted that rates in most categories were average relative to the BRICS economies. However, considering India s rates of perceived opportunities and perceived capabilities were the highest of the BRICS economies in 2006, and India s rate of entrepreneurial intentions was the second highest, it will be interesting to see if these have translated into an increased TEA rate in 2012 when they participate again the GEM survey >

37 CASE STUDY #2 Business Bridge is a Section 21 not-for-profit organisation which offers a part-time business education programme as well as short courses to small business owners. The courses are offered online and face-to-face, and are at virtually no cost to the individual. The majority of the small business owners who are enrolled in the courses are aged between years, with most graduates being under 28 years old. Most have completed secondary education and have started their own businesses. An impact assessment report on the South Africa programme published in March 2011 reports that 13 course alumni created 22 jobs over four months after completing the sales course. We interviewed the director of the South African programme, Kim Rey. BEST PRACTICE IN ENTREPRENEURSHIP DEVELOPMENT: Business Bridge Please tell us about your organisation/ programme s objectives and the reasons it was established. Our main purpose is to provide high quality business education on a global scale, opening access to key business tools for grassroots entrepreneurs around the world. Our approach involves online learning augmented by face-to-face tutoring by trained alumni from leading business schools, delivered through a network of local hubs provided by our global partners. Our programme will give participants the knowledge, skills and confidence to greatly increase their chances of being successful in business. Our beneficiary group comprises of current and prospective business owners; men and women, aged 20-35, who have some basic education (many to secondary level), who need to improve their business skills and confidence in order to grow their business and create jobs, but cannot afford conventional business education. By working to improve the lost potential in the small business community, we also aim to tackle unemployment and poverty. The wider/indirect beneficiaries of our initiative are numerous. They include the family members of the entrepreneurs whose businesses run more profitably and sustainably, the employees taken on by the businesses as they grow, and the communities that benefit from what the (expanded) businesses have to offer. What, in your opinion, are the factors that have contributed to the success of the programme thus far? 1. Ability to bring together a mix of partners, including Not-for-profit partners: The Business Place, provide us with the infrastructure and physical capacity to delivery our courses effectively. Our objective is to build a network of channel partners in a range of appropriate locations in the countries in which we operate as this is key to the scalability and therefore our success. Commercial partners: Tutuwa (part of Standard Bank) and ABSA, support us by funding a pipeline of students. We continue to explore other partnership opportunities in the countries in which we operate. We are looking to establish long term and meaningful partnerships. Academic partnerships: We draw tutors from leading business schools in the countries in which we operate e.g. GIBS, University of Cape Town, University of Stellenbosch in South Africa to mention a few. 36 Global Entrepreneurship Monitor 2011 South Africa

38 Best practice in entrepreneurship development: Business Bridge 2. Monitoring and evaluation We survey our graduates on a quarterly basis, after the completion of the course, via a mixture of , telephone and face-to-face interviews. We ask a variety of questions that allow us to track the broad development of their businesses. 3. Our tutors We recruit business school alumni and other professionals to teach our courses and their high quality and local expertise are key drivers of educational success. 4. Our content We have high-quality business education content that we have developed through our suppliers, Imparta, a London-based leading provider of online courses for training in strategy, marketing and sales. The universal feedback from students, channel partners, tutors and external stakeholders is that the intellectual integrity and design quality of our material is extremely high. From the student perspective, it is clear that our course content is a marked improvement from their normal training materials. What do you perceive to be the key ingredients of a successful entrepreneurship development programme? It is important to ensure high quality content and tutors and extremely reliable delivery. We have high standards of delivering our courses, which are well run and professional. We make sure that our materials are printed to high colour specification, and packaged in smart professional folders that students can have pride in. Classrooms are already set up before students arrive, and we expect sessions to start on time. This aims to generate strong commitment to the learning process which itself leads to better outcomes. Moreover, we find that there is a large appetite amongst business school alumni and professionals to get involved and therefore we are able to attract high calibre tutors to work with BB. The insight that entrepreneurs do not need one type of support in isolation. They need access to a whole set of support services, of which training is just one. We do not attempt to do everything, but focus on training, and build partnerships with organisations that provide other services, i.e. finance through our collaboration with Tutuwa. Follow up sessions to ensure that any lessons learnt in terms of content and delivery are built into future programmes. We seek detailed feedback from our students, both qualitative and quantitative, on all aspects of our courses. Our postcourse follow up sessions were designed in an attempt to understand what worked well and what can be improved upon as well as being of value to our students in themselves. What are your recommendations for other initiatives aiming to achieve the same/similar objectives? 1. Focus on quality is key Content must be of the highest quality we have achieved this by partnering with Imparta a worldclass e-learning company. They design our courses to an industry leading specification. This sets us apart from other programmes. Our tutors must be credible and have lived and experienced what they teach (rather than being professional trainers). 2. Do not work in isolation Understand other service providers in area and see to what extent you can work together. As mentioned earlier, our various partnerships have been integral to our success to date >

39 chapter 3 The 2011 GEM Global Report emphasises that GEM is based on two key principles. THE SOUTH AFRICAN entrepreneurship environment Firstly, an economy s prosperity is highly dependent on an active entrepreneurship sector. While this holds true for economies at various stages of development, the nature and impact of the entrepreneurial activity can vary in impact and character. In less developed economies, or those experiencing economic decline, necessitydriven entrepreneurship can provide self-employment opportunities when formal jobs are scarce. On the other hand, economies that are more developed can stimulate entrepreneurship through their innovation capacity and wealth, yet they can also offer more opportunities for formal employment hence reducing the potential for necessity-driven entrepreneurship. Second, an economy s capacity for entrepreneurship is determined by individuals ability and motivation to start businesses, and may be enhanced by society s positive perceptions and attitudes with regard to entrepreneurship. The contribution entrepreneurship makes to the economy can be further increased if participation by different groups is encouraged, and the environment is conducive to developing high growth enterprises. 3.1 the entrepreneurial framework conditions The GEM model (Figure 3.1) illustrates the institutional environment and the role it plays in entrepreneurship. According to the model, basic requirements (namely a country s macroeconomic stability, institutions, infrastructure, health and primary education) and efficiency enhancers (namely higher education and training, goods market efficiency, labour market efficiency, financial market sophistication, technological readiness and market size) are the underlying fundamental conditions required for a well-functioning business environment. In factor-driven countries the focus of development efforts is usually on the basic requirements. As these aspects become relatively established, and the economy graduates toward the efficiency stage, more funding and development efforts should focus on the efficiency enhancers. In addition to these requirements, GEM proposes that entrepreneurial activity is also impacted by a distinct set of factors it refers to as Entrepreneurial Framework Conditions (EFCs). According to Bosma et al (2008, p. 40), these EFCs are the necessary oxygen of resources, incentives, markets, and supporting institutions to the growth of new firms. The state of the EFCs has a direct influence on the existence of entrepreneurial opportunities and entrepreneurial capacity. Furthermore, there is a direct relationship between the EFCs, entrepreneurship dynamics and economic growth, as depicted in Figure Global Entrepreneurship Monitor 2011 South Africa

40 The South African entrepreneurship environment Entrepreneurial Opportunities Social, Cultural, Political, context Entrepreneurial Framework Conditions Business Dynamics National Economic Growth ( GDP, Jobs) Entrepreneurial Capacity and Preferences Source: GEM Global Report 2011 Figure 3.1: Model of entrepreneurial processes affecting national economic growth >

41 chapter 3 GEM s EFCs are explained in Table 3.1 below. Table 3.1: GEM s Entrepreneurial Framework Conditions Entrepreneurial Framework Conditions (EFCs) Explanation of EFCs 1. Entrepreneurial Finance The availability of financial resources (equity and debt) for small and medium enterprises (SMEs) (including grants and subsidies). 2. Government Policy The extent to which public policies give support to entrepreneurship. This EFC has two components: 2a. Entrepreneurship as a relevant economic issue, and 2b. Taxes or regulations are either size-neutral or encourage new SMEs and growing firms. 3. Government Entrepreneurship Programmes The presence and quality of programmes directly assisting SMEs at all levels of government (national, regional, municipal). 4. Entrepreneurship Education The extent to which training in creating or managing SMEs is incorporated within the education and training system at all levels. This EFC has two components: 4a. Entrepreneurship Education at basic school (primary and secondary), and 4b. Entrepreneurship Education at post-secondary levels (higher education such as vocational, college, business schools, etc.). 5. R&D Transfer The extent to which national research and development will lead to new commercial opportunities and is available to SMEs. 6. Commercial and Legal Infrastructure The presence of property rights, commercial, accounting, and other legal and assessment services and institutions that support or promote SMEs. 7. Entry Regulation Contains two components: 7a. Market Dynamics: The level of change in markets from year to year, and 7b. Market Openness: The extent to which new firms are free to enter existing markets. 8. Physical Infrastructure Ease of access to physical resources communication, utilities, transportation, land or space at a price that does not discriminate against SMEs. 9. Cultural and Social Norms The extent to which social and cultural norms encourage or allow actions leading to new business methods or activities that can potentially increase personal wealth and income. 40 Global Entrepreneurship Monitor 2011 South Africa

42 The South African entrepreneurship environment Information on the EFCs is gathered by means of the National Expert Survey (NES) conducted in each participating GEM country. The NES provides insights into the ways in which these EFCs either foster or constrain the South African entrepreneurial climate, activity and development. The 38 experts who participated in the NES in 2011 are listed in Appendix A. 3.2 An assessment of the entrepreneurship environment Every year, each participating GEM country surveys at least 36 experts (four in each of the nine EFCs) to gain insight into the entrepreneurial environment in that country. In order to assess the national conditions influencing entrepreneurial activity in South Africa, experts were asked to complete a questionnaire consisting of 97 statements about factors relating to the country s entrepreneurial environment. Of these, 88 related to the nine EFCs, while the remaining nine questions addressed the special topic of employee entrepreneurial activity (intrapreneurship). Each response was measured on a five-point Likert scale where a score of 1=completely false, 2=partly false, 3=neither true nor false, 4=partly true and 5=completely true. The statements were phrased so that a score of 4 or 5 would indicate that the expert regarded the factor as positive for entrepreneurship, while a score of 1 or 2 would indicate that the expert regarded the factor as negative for entrepreneurship. This implies that mean scores above 3 indicate an overall positive assessment of the relevant factor, while scores below 3 can be construed to imply an overall negative assessment. The data obtained from the 38 respondents was analysed in order to determine the mean score for each category of questions. For the purpose of comparison, the findings of the 2010 and 2011 NES with regard to the 9 EFCs are summarised in Table 3.2. As is evident from Table 3.2, the national experts who participated in the NES indicate that the South African entrepreneurship environment remains mediocre. There appears to be very little change between the 2010 and 2011 findings, with only one factor rated at above average overall. As was the case in 2010, experts agree that South Africa s physical infrastructure is conducive to entrepreneurship. This finding is in line with the general sense that South Africa is the most developed economy on the continent with regard to physical infrastructure and services. In addition, there seems to be agreement that the country s commercial and legal infrastructure provides a supportive environment for entrepreneurial activity. Notably, entrepreneurship education at school level scores lowest overall, as was the case in While it appears that experts in 2011 have a slightly more positive view of this framework condition, it is evident that this area remains one of great concern. North (2002, p. 24) notes Table 3.2: Summary of experts assessments of the entrepreneurial environment, 2010 and 2011 Entrepreneurial Framework Conditions Mean score 2010 Mean score Entrepreneurial Finance Government Policy 2a. Entrepreneurship as a relevant economic issue 2b. Taxes or regulations are either size-neutral or encourage new SMEs and growing firms Government Entrepreneurship Programmes Entrepreneurship Education 4a. Entrepreneurship Education at basic school 4b. Entrepreneurship Education at post-secondary levels R&D Transfer Commercial and Legal Infrastructure Entry Regulation 7a. Market Dynamics 7b. Market Openness Physical Infrastructure Cultural and Social Norms >

43 chapter 3 that, while much has been said and done in recent years to encourage children to become involved in entrepreneurial activities, there is an urgent need for young people to be educated and trained in the field of entrepreneurship Entrepreneurship education will therefore contribute to the ideal of empowering as many people as possible in order to unleash the previously stifled human potential of all South Africans. Given that South Africa is not an innovation-driven economy, it is not surprising that research and development transfer is rated second lowest overall. While most experts who participated in the NES acknowledge the high standard of the country s research institutions, there is a general sense that SMEs do not benefit from this. Most experts agree that government entrepreneurship programmes are not effective in developing entrepreneurs and contributing to the growth of entrepreneurship in South Africa. In the 2011 NES, the experts rated government support programmes for entrepreneurs second lowest overall. One of the key issues that emerged in discussions about this topic is the fact that there are multiple support agencies, all with large budgets, yet their impact is negligible. This is particularly worrying given the high priority the government has attached to SME development. In assessing South Africa s entrepreneurship environment, it is important to evaluate it against comparable economies. Figure 3.2 plots South Africa s entrepreneurship institution profile (in terms of the nine EFCs) against those of the group of participating efficiency-driven economies, as well as the group of countries that exhibit high levels of both non-ambitious and high ambitious entrepreneurship (as defined by job creation expectation). It is important to note that, while South Africa displays relatively low levels of early-stage entrepreneurial activity, the classification as a high non-ambitious and high ambitious entrepreneurship country relates to a qualitative aspect of the entrepreneurial activity in the country. In comparison with other efficiency-driven economies, South Africa appears to perform better on the factors of finance for entrepreneurship and government policies with regard to entrepreneurship. Of particular significance is the fact that, in contrast to other efficiency-driven economies, the country seems to under perform in the areas of cultural support for entrepreneurship, internal market dynamics, government programmes and physical infrastructure. As noted in previous GEM studies, and reinforced in the 2011 APS data, South Africans despite mounting Entrepreneurship Eductaion: Post Secondary school Entrepreneurship Eductaion: Primary / Secondary Cultural Support for Entrepreneurship Finance & Entrepreneurship Physical Infrastructure R&D Transfer Source: GEM Global Report 2011 Government Programs Internal Market Openness South Africa Efficiency-driven Economics high non-ambitious entrepreneurship (SLEA) and high ambitious entrepreneurship (MHEA) Entrepreneurship Policies General National Policy Regulation Professional & Commercial Infrastructure Internal Market Dynamics Figure 3.2: South Africa s entrepreneurship institution profile unemployment and massive poverty exhibit high levels of fear of failure, combined with a culturally embedded preference for a job rather than starting a business. It is possible that a positive correlation exists between poverty and fear of failure, and that the lack of cultural support for entrepreneurship could be attributable to an ingrained culture of entitlement in which it is expected that both government and large companies will provide the necessary employment (Herrington et al, 2008). Significantly, one NES respondent highlights the need to address the lack of cultural support for entrepreneurship through education. She emphasises that one way to create a culture of entrepreneurship in South Africa is through teaching kids at school that business may be the only option for them so they had better master it. A number of other experts agree that it is important for society to 42 Global Entrepreneurship Monitor 2011 South Africa

44 The South African entrepreneurship environment stimulate an entrepreneurial culture through highlighting role models that have succeeded at entrepreneurship. Most experts agree that South African market dynamics discourage people from starting small businesses, and hamper the growth of existing small enterprises. One key issue is the dominance of large firms and the inability of small businesses to compete with regard to price, quality and availability of goods and services. A number of experts emphasised the importance of supplier development in contributing to the sustainability and growth of small enterprises. While some experts agreed that government policy favours small business development, given the importance the government ascribes to entrepreneurship as a key contributor to economic growth, many assert that government programmes fail to give effect to this imperative. While there are many agencies and programmes aimed at supporting entrepreneurship, there appears to be doubt as to the quality and efficacy of these interventions. One respondent highlighted the fact that government agencies are ineffective because they are staffed by people who are not qualified and who have themselves never been entrepreneurs, and therefore lack practical business experience. 3.3 Constraints to entrepreneurial activity In addition to the closed questions on the EFCs, respondents were asked to identify and comment on the three most important factors constraining entrepreneurial activity. Table 3.3 provides a breakdown of their responses with regard to the factors constraining entrepreneurial activity. According to Table 3.3, most national experts identify government policies, financial support, and education and training as the three most important factors constraining entrepreneurship in South Africa. Across participating GEM 2011 countries, financial support and government policies are cited most frequently as factors constraining entrepreneurship. These three factors also featured as the most significant constraints to entrepreneurship in South Africa during the 2010 GEM study. Government policies The majority of the experts surveyed for the 2011 NES (70.3%) cited government policy as a key constraining factor to entrepreneurship in South Africa. This echoes the 2010 findings where 53% of respondents identified this as Table 3.3: Experts views of key factors constraining entrepreneurship in South Africa Constraining factor Percentage of South African experts citing this factor Average percentage of GEM 2011 experts citing this factor Financial support Government policies Government programmes Education and training R&D transfer Commercial and professional infrastructure Market openness Access to physical infrastructure Cultural and social norms Capacity for entrepreneurship Economic climate Workforce features Perceived population composition Political, institutional and social context >

45 chapter 3 a key constraint. Respondents list bureaucracy, legislative compliances, restrictive labour legislation, and onerous administrative and legislative requirements related to registering and starting a business among the factors that constrain entrepreneurial activity in the country. According to the Global Competitiveness Report , inefficient government bureaucracy is the most problematic factor for doing business in South Africa. Research conducted for the South African SMME Business Confidence Index Report (First Quarter, 2011) reports government taxes and regulations to be one of the major limiting factors identified by SMME owners/ managers. The most cited limiting factor was Black Economic Empowerment another government policy viewed by some as a significant impediment to stimulating business growth in the country. With specific regard to labour legislation, the Global Competitiveness Report notes rigid hiring and firing practices (ranked at 139th out of 142) as a major hurdle to the country s competitiveness, reinforcing some NES respondents view that compliance with the Labour Relations Act is tedious. Despite the fact that GEM and other research has repeatedly highlighted the undue burden that government policy and legislative requirements place on small businesses, it is evident that very little progress has been made with regard to simplifying legislation and streamlining administrative processes that impact on entrepreneurial activity. A primary example of this failing is evidenced in the fact that it takes, on average, between 19 (Doing Business, 2012) and 22 days (Global Competitiveness Report, ) to start a business in South Africa. Although this finding indicates a slight improvement from previous years, South Africa lags far behind the top performer, Mauritius, where starting a business takes only 6 days. While government has taken steps to address some of the inefficiencies associated with legislation regarding companies (e.g. the promulgation of the new Companies Act in May 2011, and subsequent formation of the Companies and Intellectual Property Commission in replacing the former Companies, Intellectual Property and Registration Office (CIPRO)), it is evident from the 2011 GEM study that government policy is still viewed as a major impediment to entrepreneurship, and that it remains an issue that requires further attention. Financial support Herrington et al (2008, p. 48), in reviewing South Africa s participation in the GEM project over a number of years, observe that access to finance has remained one of the top three constraints. In 2011, it appears that this remains unchanged as financial support is again cited as a key constraint to entrepreneurship in South Africa. Much has been said about the level of difficulty associated with accessing government funding for SMEs through government agencies. In addition to this, a significant number of NES respondents identified access to financial support as a key factor that limits entrepreneurial activity in South Africa. Specifically, respondents have highlighted the lack of venture capital funding and angel investors, as well as limited availability of affordable money as issues that require dedicated attention. As far back as 2001, GEM research identified lack of access to finance as a major obstacle to the growth of entrepreneurship in South Africa. Over the years, different aspects of this issue were highlighted. While government funding for small businesses has certainly increased since 2001, some of the problems associated with government support initiatives and funding agencies have remained. One of these issues is the fact that a plethora of Development Finance Institutions exist in South Africa, each with their own objectives, budgets and management structures. Government institutions that offer support to small businesses include the following: Small Enterprise Development Agency (SEDA); South African Micro-Finance Apex Fund (Samaf); Khula Enterprise Finance Limited (Khula); National Empowerment Fund (NEF); Industrial Development Corporation (IDC); National Youth Development Agency (NYDA); Land Bank; Mafisa. Even though some of the more problematic programmes were revisited and adapted (e.g. Umsobomvu Youth Fund, Khula Enterprise Finance), criticism still abounds with regard to how these initiatives are managed and implemented, and why agencies roll over large chunks of development funding every year. SMEs still largely bemoan their relationships with retail financial institutions, citing procedures and qualifying criteria among the major problems. Another key issue highlighted by some national experts is the fact that, even when a small enterprise qualifies for debt instruments, loans are prohibitively expensive. One key problem area that remains is the lack of micro-finance at reasonable rates. Education and training A number of NES respondents have pointed to the role of inadequate education and training in constraining entrepreneurial activity in South Africa. Some have highlighted the need for entrepreneurship education at 44 Global Entrepreneurship Monitor 2011 South Africa

46 The South African entrepreneurship environment basic school level, and the importance of equipping the youth with skills that will enable them to start and run businesses. Over the years, GEM has shown a consistent link between education and entrepreneurial activity. Herrington et al. (2011) observe that individuals who have completed matric, and more specifically those with a tertiary education, are significantly more likely than those who did not complete matric to start and run a small business. Furthermore, higher levels of education are also strongly related to the probability that a business will survive beyond the initial start-up phase. While government recognises the importance of improving the education system, and commits approximately 17% of its total budget to education (bringing government expenditure on education in line with what is spent by wealthy OECD countries, all of which are ranked significantly higher with respect to the quality of education), South Africa still fares dismally with regard to both the quality of education as well as the school completion rate. In addition, the country s university enrolment rate remains distressingly low at approximately 15%, despite government s efforts to highlight the importance of higher education and training. Maas and Herrington (2011) highlight the role of education and training in cultivating an entrepreneurial mindset in individuals, and emphasise the importance of higher education institutions (HEIs) in bringing this about. They note that, instead of focusing predominantly on educating students for a career, HEIs should play a more active role in stimulating entrepreneurship through equipping individuals to become entrepreneurs. With unemployment in South Africa currently estimated at more than 25%, and a growing awareness of the role of entrepreneurship in stimulating economic growth and reducing joblessness, Maas and Herrington propose that HEIs have a significant contribution to make in cultivating an entrepreneurial culture. To this end, they emphasise the importance of an integrated approach to entrepreneurship education, noting the importance of three key elements: the creation of an enabling institutional environment; the engagement of key stakeholders; and the development of entrepreneurial pedagogic approaches in teaching, learning and support practices (Herrmann, in Maas and Herrington, 2011, p. 228). Importantly, these authors agree with Friedrich and Visser (2005) in their criticism of HEIs in South Africa as institutions that do not contribute to stimulating entrepreneurship as they churn out would-be bureaucrats, rather than calculated risk takers (Friedrich & Visser, in Maas & Herrington, 2011, p. 228) >

47 chapter Factors that foster entrepreneurial activity In addition to commenting on factors constraining entrepreneurship, the panel of national experts was asked to provide input into the factors that stimulate entrepreneurial activity in South Africa. These responses were again coded using the 14 categories outlined above. Table 3.4 provides a summary of the inputs. Though there appears to be significant variance in experts responses with regard to factors that foster entrepreneurial activity in South Africa, it is possible to draw inferences with regard to the most salient factors from the analysis of the NES data. Across participating GEM countries, there appears to be no specific trend with regard to factors that foster entrepreneurship. As illustrated in Table 3.4, South African experts cited government policies, government programmes, education and training, and economic climate most frequently. Government policy Even though government policy has been widely cited as a key impediment to entrepreneurial activity in South Africa, a significant proportion of the national experts who participated in the 2011 GEM study are of the opinion that some government policies (e.g. the new Companies Act, BBBEE Act) are contributing to creating a supportive environment for entrepreneurial activity. Furthermore, in an addendum to the NES for South Africa, the area of government policy emerged as the second-highest ranked factor facilitating entrepreneurship second to education. One respondent noted that government policy promoting small business development does help, even if not enough, while another pointed specifically to the Enterprise Development Pillar of BBBEE although more needs to be done to leverage that pillar. Other responses included a reference to excellent tax incentives for micro businesses and comment on various lobbying efforts aimed at relaxing labour law and improving tax conditions for start-up companies. Interestingly, while most responses indicate an awareness of the positive impact of government policy on entrepreneurship, there seems to be a general recognition that not enough has been done and that the pace of change has been slow. Notably, South Africa s National Planning Commission, in its National Development Plan published in November 2011, identified simplifying labour legislation as a key objective in the drive to create jobs. This reinforces the South African government s commitment to stimulating job creation through providing an enabling environment Table 3.4: Experts views of key factors that foster entrepreneurship in South Africa Fostering factor Percentage of South African experts citing this factor Average percentage of GEM 2011 experts citing this factor Financial support Government policies Government programmes Education and training R&D transfer Commercial and professional infrastructure Market openness Access to physical infrastructure Cultural and social norms Capacity for entrepreneurship Economic climate Workforce features Perceived population composition Political, institutional and social context Global Entrepreneurship Monitor 2011 South Africa

48 The South African entrepreneurship environment for the growth of small enterprises. It must be noted that the National Development Plan was released at the time the GEM 2011 report was being written. It would therefore be interesting to reflect on progress with regards to the implementation of the plan in the 2012 report. Government programmes Though much criticism has been lobbied at government programmes aimed at providing entrepreneurship development and support, some recognition has been given to the intent of some of these government initiatives as well as the progress achieved by some (with particular reference to initiatives such as the National Empowerment Fund and the Industrial Development Corporation). A number of national experts commend the existence of business support agencies (such as the Small Enterprise Development Agency) and government funding programmes, while others make references to tendering processes that favour new and small firms and government s commitment to job creation through support programmes for small businesses, such as the Expanded Public Works Programme. One respondent observed that one of the ways in which government programmes can foster entrepreneurship is through setting targets for initiatives, like those implemented by the IDC and other government agencies, and holding these programmes accountable to achieve their targets. Research and development transfer In 2007, a study conducted by the Human Sciences Research Council found that, between 2002 and 2004, more than half of South African companies engaged in innovative activities in the form of new product and process development (Southafrica.info). This implied that the country s rate of innovation was comparable to that of European countries. Of particular significance was the fact that R&D activity was not limited to large companies, but that smaller companies were also contributing to the pool of R&D activity. Also noteworthy was the finding that government funding had contributed to the success of more than 10% of the successful innovators who were surveyed. The Global Competitiveness Report (p. 39), in assessing the factors that contribute to South Africa s competitiveness, observes that the country does reasonably well in more complex areas such as innovation (41st), benefiting from good scientific research institutions (30th) and strong collaboration between universities and the business sector in innovation (26th). The findings of the NES confirm this. A number of respondents refer to the role that business incubators play in stimulating entrepreneurship, and the fact that tertiary education and research institutions should position themselves to partner with business and government in creating an environment that is conducive to stimulating entrepreneurship. Comment is also made about the need for knowledge transfer between established, big businesses and emerging small enterprises. One important way to facilitate the development of small businesses is through the efforts of large corporations in developing their own small suppliers so that they can ensure products and services that comply with their standards and requirements. Economic climate In an interview with WITS Business School Journal, expert in entrepreneurial incubation Pavlo Phitidis of Aurik observes that when the economy suffers, it s the entrepreneurial businesses that tend to survive and thrive. He notes that larger companies are simply not flexible enough in harsh economic climates. Entrepreneurs seem to be more fluid and passionate about innovation (Shirley, 2012). Like many countries around the world, South Africa s economy suffered as a result of the recent global economic recession. While many recognise and allude to the devastating effect the economic downturn has had on jobs and livelihoods, some respondents have pointed to the positive effects of a negative occurrence, citing the fact that the recession forced many people into necessity-driven entrepreneurship as they lost their jobs and had to confront the reality of unemployment. For some the need to survive drove them to explore entrepreneurship as a viable alternative, while for others it was the fact that they were trained and had no prospect of advancing during a time when few corporates could afford to pay executive salaries. 3.5 Experts recommendations Aside from gleaning insights into experts opinions of the strengths and weaknesses in an economy with regard to entrepreneurial activity, an important focus of the NES is to obtain informed and practical recommendations that can be used to guide policy decisions. The key recommendations offered by the national experts in 2011 are recorded in Table >

49 chapter 3 Table 3.5: Key recommendations from South African national experts, 2011 Category Financial support Recommendations Different funding models are needed. These should not aim to copy the Silicon Valley model but rather focus on what works in Africa. Facilitate the formation of angel investor networks. Create a national SME fund providing loans at low interest rates. Lower the cost of capital for start-ups. Make available funds from government or provide a tax break to investors to fund entrepreneurs that have the potential to develop high growth businesses. New development based funding models are needed (with stronger Development Finance Institutions.) Make it easier for small companies to borrow cash. Increase venture capital finance for small and medium enterprises. Provide appropriate funding support along the entire growth path of a business, particularly with respect to innovations. Government policies Make complex legislation easier for start-ups. Reduce government administrative requirements for starting up a business and complying on a monthly basis e.g. UIF, PAYE, tax, etc. Provide simplified and localised administration and support for registering businesses. Create a simple, tax-free legal form of enterprise that allows informal businesses to register as legal entities, open bank accounts and enter into contractual relationships. Ease restrictive labour laws and make it easy to hire and fire. Reduce the tax burden on new entrepreneurs. Incentivise small firms to employ more than 5 people through tax breaks and more business-friendly labour laws. Relax BBBEE legislation for small and medium businesses. Create one stop shops to complete all regulatory requirements. Introduce widespread tax incentives to encourage angel investment into early- stage businesses. Ease exchange control requirements, allowing entrepreneurs the freedom to move money in or out of the country, and more importantly, allow foreign investors to invest or divest with ease. Target South Africans abroad to participate and invest back home. Overhaul the regulatory environment. Government programmes Government should support entrepreneurship training and access to funding, but by people who have the skills. Improve the management and performance of agencies supporting entrepreneurship. Ensure government grants are available no strings attached for start-ups especially where they work with universities or science councils to develop technology and perform technology transfer. Improve co-ordination of entrepreneurship support initiatives. A radical shake-up of government support/funding programmes for entrepreneurship is needed lots of money is tied up in unproductive agencies. More radical government support initiatives are needed. Use experienced staff with real entrepreneurial knowledge to support entrepreneurs. Introduce national exams/assessments for business support staff. Introduce national accreditation for small business consultants. Provide compulsory management training for government support programmes. Employ commercially experienced business people rather than bureaucrats to operate funding programmes and manage business selection and mentoring. 48 Global Entrepreneurship Monitor 2011 South Africa

50 The South African entrepreneurship environment Category Education and training Provide mentorship programmes for new entrepreneurs. Develop an established cadre of retired successful business people to act as mentors, supporters, and technical advisors to improve businesses. Increase the training budgets to include universities etc. Establish a nationwide network of walk-in centres to support entrepreneurs, especially informal and small businesses. Focus on entrepreneurial education at school and university level. Develop a skilled labour pool and ensure access to a central pool of skilled professionals and mentors on demand. Provide free/subsidised mentoring/training and education for entrepreneurs and encourage a constant learning community by incentivising the transfer of skills and knowledge. Create national single-entry support platforms (with demarcated services for startup and growth needs). Teach and encourage children about the merits of entrepreneurship and job creation from a young age. Promote entrepreneurship as a positive career choice/activity. Complement entrepreneurial education in schools with awareness programmes for parents. Improve maths and science education levels. R&D transfer A carefully implemented national programme of incubators should be set up, in partnership with the private sector. Government subsidised, but private sector-run, incubators for small, new and emerging and innovative businesses should be created. Government should set up and fund more business incubation centres that are able to tap into a network of successful business leaders who can serve as mentors. Commercial and professional infrastructure Provide better institutional arrangements to assist SMMEs. Improve access to affordable and excellent supply chains. Market openness Improve access to market and procurement opportunities, especially between large firms, 1st, 2nd and 3rd tier suppliers. Help small businesses identify markets, both nationally and internationally. Create regulatory and monitoring mechanisms for access to markets. Improve access to markets. Access to physical infrastructure Create accessible and comprehensive public transport systems. Reduce time to set up business operations through improvement of utilities. Cultural and social norms Advertise local success stories. Create local heroes/role models. Government should develop programmes that encourage self-reliance and in so doing change our social culture. Celebrate champions of entrepreneurship (role models). Capacity for entrepreneurship Recommendations Focus on quality of entrepreneurs going through programmes. Support new high-growth initiatives, no matter the colour of the business owners. A facility/agency is required to select and process innovative ideas from universities/research agents and prepare them to be presented as possible business ventures. Create small business hubs to assist start-ups for a limited period. Workforce features Ensure access to appropriately skilled employees >

51 CASE STUDY #3 The Raymond Ackerman Academy (RAA) of Entrepreneurial Development was established in 2005 as an initiative aimed at assisting young entrepreneurs from disadvantaged backgrounds to achieve a quality education in entrepreneurship. The RAA currently runs programmes at the UCT Graduate School of Business and at the Small Business Development Centre at the Soweto Campus of the University of Johannesburg (Started in 2009). The six-month course is practical, and teaches both business and life skills, thus assisting young entrepreneurs to gain the knowledge, skills and the motivation required to kick start their careers as entrepreneurs. The Academy has graduated approx 300 students in Cape Town and 400 in Soweto. The Academy runs two courses per year and takes an average 30 students per course (60 students in Soweto). Elli Yiannakaris, Director of the RAA at the UCT Graduate School of Business, provided us with some insight into this successful initiative. BEST PRACTICE IN ENTREPRENEURSHIP DEVELOPMENT: Raymond Ackerman Academy Please tell us about your organisation/ programme s objectives and the reasons it was established. With the increasing rate of poverty, inequality and access to basic services, South African citizens are faced with a multitude of interlinking challenges that affect their social, emotional, environmental, physical, financial and occupational wellbeing. Young people, even after completing their matric, face the reality of unemployment and will generally not have access to further education due to poor academic results, financial constraints and the need to finding work in order to assist their families with and income. In response to this Raymond Ackerman financed the establishment of The Raymond Ackerman Academy in January 2005 with the desire to offer disadvantaged youth, excluded from tertiary education because of social, academic or financial constraints, a chance to develop themselves and make a difference in their own, as well as the future of their communities. The Raymond Ackerman Academy of Entrepreneurial Development offers an inspiring and innovative programme in entrepreneurial development. The course is offered at NQF level 5 and is targeted at young people between the ages of 18 and 30 years who would not necessarily have access to tertiary education but are passionate about business and personal development. The Academy aims to help young people rise above their social, financial and academic constraints to achieve a quality education in entrepreneurship. What, in your opinion, are the factors that have contributed to the success of the programme thus far? The Academy believes that teaching fundamental business skills is very important; however, this must be coupled with soft skills development. As such, the curriculum includes various personal development workshops that build confidence, professionalism and interpersonal skills. The RAA classes are kept relatively small so that they each student enjoys individual attention and is closely observed. This allows the Academy to monitor personal and academic progress and to intervene where necessary, assisting students to overcome any challenges that may be hampering their success whilst on the programme. The Academy course includes a 10-week work experience programme where students choose a work place and go to work each Wednesday. This ensures that students see the practical application of the theory that 50 Global Entrepreneurship Monitor 2011 South Africa

52 Best practice: Raymond Ackerman Academy is covered during the course. Students are encouraged to comment on the real world application of the business fundamentals learnt in class and to provide insight into how they can apply what they have learnt in their own career or business one day. Business idea development is an important component of the programme, students are taught techniques that allow them to develop or identify innovative business ideas that are not copycat ideas, but rather ideas that appeal to the mass market and in many cases are solutions to common problems experienced in their communities. What do you perceive to be the key ingredients of a successful entrepreneurship development programme? An entrepreneurial development programme should include the following: Practical business or work experience in order to apply the theory taught; Teaching or content that encourages innovation with regards to business idea development (and encouraging ideas that are sustainable in the local context); Soft skills development including professionalism; Personal finance training; An introduction to economics so that students understand the world in which they operate. What highlights/successes stand out for you over the course of your involvement with the programme? The personal transformation of the students from when they arrive to when they graduate. This is most visible when they do their final business plan presentations to Mr Ackerman. Of the 300 graduates in Cape Town, 80% of those that are contactable have either gone on to study, work or open their own business. Of those who have opened their own businesses more than 90% are still in operation >

53 chapter 4 SPECIAL FOCUS 2011: entrepreneurial employee activity 4.1 Introduction This research area uses a variety of terms to describe the entrepreneurial activities of individual employees, including corporate entrepreneurship, corporate venturing, strategic renewal and intrapreneurship in its debates (Bosma, Wennekers, & Amoros, 2012). The first three concepts indicated above generally refer to top-down processes and management strategies within the business to foster workforce initiatives and efforts to innovate and develop new business (Bosma et al., 2012). Intrapreneurship relates predominantly to bottomup, proactive initiatives by individual employees. The 2011 GEM special focus topic focuses on the individual entrepreneurial employees who play a leading role in the creation and development of new business activities for the organisation in which they work. These activities include the development or launch of new goods or services, or the setting up a new business unit, new establishment or subsidiary. These activities could include both topdown and bottom-up entrepreneurial initiatives. In this chapter, these individuals will be referred to as employees involved in entrepreneurial employee activity (EEA). The The special focus topic for GEM 2011 relates to entrepreneurial activities of individual employees, and measures how entrepreneurial individual employees are within a business. EEA rate is the percentage of the population who are currently involved in entrepreneurial activities within the organisation in which they work. It should be noted that entrepreneurial employees are not necessarily involved in entrepreneurial activity at all times, and their roles may not specifically require them to be entrepreneurial. Entrepreneurial employees share characteristics with both independent entrepreneurs and routine workers. In the case of independent entrepreneurs, they are similar in their entrepreneurial work, but different in their employment status, since one group is employed and the other group self-employed. With respect to routine workers, the two groups are similar in their employment status as employees, but differ in their approach to work one group being entrepreneurially-minded and the other is working routinely (Schott, 2011). While research in both entrepreneurship and management has paid increasing attention to entrepreneurship within existing organisations, very little research on EEA in South Africa has, as yet, been done. Data for the GEM 2011 special topic was collected through the adult population survey (APS). Respondents 52 Global Entrepreneurship Monitor 2011 South Africa

54 Special focus 2011: Entrepreneurial employee activity were asked a series of questions to determine whether or not they are involved, in a leading role, in individual entrepreneurial activity. The national experts survey (NES) asked questions relating to employer support for EEA, as well as questions relating to the direct and indirect influences on EEA. This chapter will look at the EEA rate for South Africa, and comparisons will be made with the BRICS economies, as well as with certain innovation-driven economies. The chapter will also consider which factors impact, either positively or negatively, on the EEA rate in an economy. Due to increasing levels of competition and the dynamic nature of modern organisations, it is becoming imperative that businesses keep up with continuous changes or risk being left behind. There is a greater need for companies to be creative and innovate at both a strategic level and within day-to-day operations (Anu, 2007). Innovation can be seen as the commercialisation of new combinations based on the application of new materials, the introduction of new processes, the opening of new markets and the development of new organisational forms (Janszen, 2002). Employees can be a key mechanism for innovation. However, as vision, goal-orientedness, ambition, risk-taking and inspiring leadership are some of the requirements necessary to develop and drive innovation successfully, it is particularly employees who are entrepreneurial in nature that are needed. Encouraging and supporting entrepreneurial employee activity can, therefore, lead to rapid and cost effective innovation from within the business and assist in the creation of a workforce that can help maintain and improve its competitiveness (Anu, 2007). The World Economic Forum indicates that there are 12 pillars which drive productivity and competitiveness. Innovation is seen as the most crucial pillar impacting on improved standards of living. Companies in countries that have reached the innovation phase of development need to proactively design and develop new and improved products and create new markets. This requires an environment which is conducive to creative and innovative Entrepreneurship Phases Total early-stage Entrepreneurial Activity (TEA) Discontinuance Potential Entrepreneurs: Beliefs and Attitudes Intentions Nascent New Established Potential Entrepreneurial Employees: Individual Drivers, Organisational Context and Institutional Levers Idea Development Preparation and Expoloitation Source: GEM Global Extended Report, 2011 Figure 4.1: Entrepreneurship process and gem operational definitions, including entrepreneurial employee activity >

55 chapter 4 activities. While less-advanced countries may be able to improve productivity by adopting existing technologies or making improvements in other areas, to achieve global competitiveness, innovation is still required. South Africa, as for many efficiency-driven economies, would be able to improve productivity by adopting existing technologies. South Africa can also become more competitive if companies in South Africa look internally and ensure that entrepreneurial employee activity is being both stimulated and supported. 4.2 Entrepreneurial Employee Activity rates EEA rates (Figure 4.2) represent the percentage of the population that are currently involved, in a leading role, in entrepreneurial employee activity. Figure 4.2 shows that South Africa has an EEA rate of 0.32%, which is among the lowest of all countries who participated in the survey. The EEA rates for the efficiency-driven economies range from 0.09% to 4.39%. On average, EEA rates for the innovationdriven economies are higher, with a range of 1.27% to 13.5%. Table 4.1 looks at the differences in EEA rates between the adult and employed populations, as well as between those currently active in entrepreneurial employee activity in a leading role and those who have been involved in EEA in a leading role in the past three years, to understand how consistently employees are involved in entrepreneurial activity. The rate for individuals currently active in EEA is slightly lower than the rate of individuals who have been active in the past three years. This may reflect a fear of taking risks, both by employees and their managers. The fear of risk-taking could be due to the recession which has lead to budget cuts within business, increased competition and a tougher job market. This may be cause for concern as during economic downturns organisations would rely on their employees for creativity and innovation to mitigate the negative effects of a downturn. It may also indicate that entrepreneurial employees are to some degree restricted in their roles in pursuing innovative ideas. Table 4.1 also shows that, in the employed population, South Africa s EEA rates fall far below average when compared to most other countries in the GEM survey. The range for the employed population of those currently active in EEA in efficiency-driven economies is 0.18% and 8.28%. For innovation-driven economies, it is 3.82% and 18.39%. Chapter 2 looked at various entrepreneurial measures of the BRICS countries. Figure 4.3 compares the EEA rates of the BRICS countries, Brazil, Russia, China and South Africa (India did not participate in the GEM survey in 16% 14% Percentage of adult population between years 12% 10% 8% 6% 4% 2% 0% Bangladesh Pakistan Jamaica Iran Venezuela Algeria Panama South Africa Malaysia Russia Turkey Barbados Mexico Brazil Trinidad & Tobago Peru Thailand Colombia China Latvia Bosnia and Herzegovina Poland Argentina Hungary Chile Slovakia Romania Lithuania Croatia Uruguay Greece Taiwan Korea Spain Singapore Portugal United Arab Emirates Japan Czech Republic Switzerland Germany France Slovenia United Kingdom Ireland Australia United States Netherlands Finland Belgium Denmark Sweden Factor-driven economies Efficiency-driven economies Innovative-driven economies Source: GEM Global Extended Report, 2011 Figure 4.2: Prevalence rates of current entrepreneurial employee activity (EEA) in the population 54 Global Entrepreneurship Monitor 2011 South Africa

56 Special focus 2011: Entrepreneurial employee activity Table 4.1: Prevalence of EEA in a leading role in both the adult and employed populations * Official EEA rate for South Africa Source: GEM South Africa Adult Population Survey Adult population Employed population Are you currently in the development of new activities for your main employer, such as developing or launching new goods or services, or setting up a new business unit, a new establishment or subsidiary, and in a leading role? 0.32%* 1.58% In the last three years, have you been involved in the development of new activities for your main employer, such as developing or launching new goods or services, or setting up a new business unit, a new establishment or subsidiary, and in a leading role? 0.41% 2.03% 2011). Figure 4.3 also looks at the four economies with the highest EEA rates. Notably, all four are innovationdriven economies. Three of the innovation-driven economies shown in Figure 4.3 are positioned in the Top 10 of the Global Competitiveness Index in (Sweden in 3rd place out of 142, Finland in 4th and Denmark in 8th), while Belgium is in 15th place overall (Global Competitiveness Report, ), adding weight to the fact that innovative individuals drive competitiveness for organisations and, ultimately, economies. Similarly, China, with the highest EEA rate (1.73%) of the four BRICS economies, has the highest ranking of the BRICS countries with respect to the Global Competitiveness Percentage of Adult Population between years South Africa Russia Efficiency-Driven Economies Brazil China Source: GEM Global Survey Data, 2011 Innovation-Driven Economies Finland Belgium Figure 4.3: Prevalence of EEA in a leading role, currently active, in the adult population of eight economies Denmark Sweden Index in 26th place. The remaining BRICS countries are ranked as follows: Brazil in 41st place, South Africa in 50th, and Russia in 55th. Their EEA rates are 0.84%, 0.32% and 0.44% respectively. Figure 4.4 shows that, with respect to factor-, efficiencyand innovation-driven economies, EEA rates are higher in innovation-driven economies, and TEA rates are higher in the efficiency- and factor-driven economies. The 2011 GEM Global report (p. 24) argues that the higher rate in the innovation-driven economies is partly caused by the fact that a higher percentage of the adult population is employed in organisations; with more people working for organisations, an economy is likely to have more entrepreneurial employees on an absolute basis. Interestingly, the four innovation-driven countries with the highest EEA rates (Sweden, Denmark, Belgium and Finland respectively) are among those countries with the lowest TEA rates. The 2011 GEM Global report argues that this is further indication that entrepreneurship in organisations replaces, to some extent, independent entrepreneurship as an alternative means for pursuing entrepreneurial opportunities (pg 24). Established business rates for the majority of innovationdriven economies are also higher than their TEA rates. Established businesses have the greatest impact on employment, as well as generally offering better employee benefits and more job security than start-up businesses. Innovation-driven economies have, historically, had low unemployment, which acts as a disincentive to independent entrepreneurial development. Innovationdriven economies generally rank higher in the Global Competitiveness Index with respect to education. Well-educated employees in these economies who are entrepreneurially-minded are able to be entrepreneurial within organisations, and drive innovation, growth and competitiveness (reflected in the higher EEA rates) >

57 chapter 4 US Australia Netherlands Greece Taiwan Korea Czech R Portugal UK Ireland Norway Singapore Switzerland Finland UAE Spain Sweden France Belgium Germany Japan Denmark Slovenia China Chile Peru Trinidad & T. Colombia Panama Argentina Thailand Uruguay Brazil Slovakia Turkey Lativa Lithuania Romania Mexico South Africa Poland Bosnia & H. Barbados Croatia Hungary Malaysia Russia Nigeria Guatemala Venesuela Iran Jamaica Bangladesh Algeria Pakistan Source: GEM Global survey data 2011 EEA ID TEA ID EEA ED TEA ED EEA FD TEA FD EEA and TEA rates by type of development: Innovation-driven (ID), efficiency-driven (ED) and factor-driven nations (FD) Figure 4.4: EEA and TEA rates by type of development: Innovation-driven (ID), efficiency-driven (ED) and factor-driven nations (FD) 56 Global Entrepreneurship Monitor 2011 South Africa

58 Special focus 2011: Entrepreneurial employee activity As an anomaly to the above, the three innovation-driven economies with the highest TEA rates, the United States, Australia and the Netherlands, also have high EEA rates, indicating that entrepreneurial activity may thrive in both forms. In the case of the United States, the high TEA rate may be due to low social welfare expenditure which would incentivise entrepreneurship. In innovation-driven economies, larger established firms play an increasingly important role in the economy, providing the option of stable employment for a growing number of people as a viable alternative to the risks of self-employment, and as indicated can lead to greater EEA rates. With regards to efficiency-driven economies, earlystage entrepreneurial activity is still several times as prevalent as entrepreneurial employee activity. The smaller number of established firms in efficiency-driven economies could therefore explain, in part, both the higher TEA and lower EEA rates found in general in efficiencydriven economies, South Africa, however, has low rates of both TEA and EEA compared to other efficiency-driven economies. The low TEA rate as discussed elsewhere in this report is due to poor education, lower than average perception of capabilities and opportunities as well as a lack of well managed small business support. The low TEA rate could also be influenced by a substantial social welfare system. The low EEA rate for South Africa could also be influenced by the poor quality of education in South Africa. While much of EEA seems to occur in top management, it is possible that South Africa s education system is not encouraging many of our managers to be entrepreneurial within their places of work. 4.3 Education Two requirements for developing a strong innovation capacity within an economy are a healthy and welleducated workforce. Quality higher education and training within an economy, one of the World Economic Forum s pillars of productivity and competitiveness, are a crucial component if companies within in the economy wish to become more competitive. In today s increasingly integrated global economy, companies will have to proactively encourage, develop and support well-educated workers who are able to adapt rapidly to the changing environment and the evolving needs of the production system through innovations which will drive growth (Global Competitiveness Report, ). Employed respondents in GEM s APS survey were asked whether they had been actively involved in a leading role in entrepreneurial activity for their main employers in the past three years. Responses were then cross-tabulated with their levels of education attained. Figure 4.5 shows Percentage of Employed Population between years 4 3,5 3 2,5 2 1,5 1 0,5 0 None or some primary Level of education attained Some secondary Secondary degree (completed Matric) Source: GEM South Africa Adult Population Survey Post secondary Figure 4.5: Percentage of employed population between years involved in entrepreneurial activities for main employer in the past 3 years based on level of education attained that employees in South Africa with higher levels of education are more likely to be involved in entrepreneurial employee activity. This supports the argument that education, specifically higher levels of education, is important if a country wishes to see an increase in its capacity for innovation. The finding that education is an important facet with respect to increased levels of EEA is also argued in the 2011 GEM global report. The report states that entrepreneurial employee activity seems to be an activity that is particularly suitable for higher educated employees. The report highlights that higher job levels offer more autonomy to employees and provide better opportunities to develop social networks, which are both conducive to entrepreneurial employee activity (p. 62). Considering the importance of education in entrepreneurial employee activity, it is useful to consider education across the population of South Africa. Figure 4.6 shows that approximately 14.3% of the country s population only has some primary education, with a further 40.7% having an incomplete secondary education. More than half the population (55%) therefore does not have a secondary schooling qualification. What is of further concern is that the Global Competitiveness Index has rated South Africa 131 out of 142 economies (11th last) for health and primary education (which takes into account the quantity and quality of basic education received by the population). This indicates that the primary education received by the majority of the population is also of a poor standard. Individuals with low levels of education are less likely to be entrepreneurially active as employees >

59 chapter 4 Percentage of Adult Population between years None or some primary Level of education attained Some secondary Secondary degree (completed Matric) Source: GEM South Africa Adult Population Survey Post secondary Table 4.2 compares the Global Competitiveness Index rankings for health and primary education, as well as higher education and learning, of the innovation-driven economies with the highest EEA rates (Finland, Belgium, Denmark and Sweden) and those of four of the BRICS economies. The innovation-driven economies were ranked significantly higher, particularly in higher education and training (where all four are found in the top ten), than most of the BRICS countries adding weight to the role that education must play in a country s EEA rate. China, however, is ranked just four places below Denmark for health and primary education, which may explain in part why it has the highest EEA rate among the four efficiencydriven countries. Figure 4.6: Percentage of adult population between years based on level of education attained With regards to higher education and training (which measures secondary and tertiary enrolment rates as well as the quality of the education), the country is more favourably positioned in 73rd place. These rankings are in line with GEM s findings that EEA is predominant in individuals who have either secondary degree or post secondary levels of education (Figure 4.5). However, South Africa s EEA levels are likely to remain low until improvements in the quality of education are made and higher levels of education are made accessible to more of the population. 4.4 Employer support Employer support for new ideas is felt to be important in encouraging a culture in which new ideas can develop. To assess how encouraging and supportive employers are when approached with new ideas, the special topic survey asked whether employers provided either some or high levels of support to employees. Table 4.3 looks at the EEA rates of the efficiency-driven economies participating in the 2011 special topic survey and whether support from employers is provided. Countries with lower EEA rates (which includes South Africa) generally show lower levels of support from employers. This relationship is particularly true with respect to the lack of HIGH support offered by employers. Table 4.2: Rankings of four efficiency-driven and four innovation-driven economies for the two pillars of global competitiveness concerning education Country Pillar of Competitiveness EEA Rate (currently active in EEA, adult population) Health & primary education Ranking (out of 142 countries) Higher education and learning Ranking (out of 142 countries) South Africa 0.32% Russia 0.44% Brazil 0.84% China 1.73% Finland 8.00% 1 1 Belgium 8.55% 2 5 Denmark 9.18% 28 6 Sweden 13.50% 18 2 Source: Global Competitiveness Report Global Entrepreneurship Monitor 2011 South Africa

60 Special focus 2011: Entrepreneurial employee activity Table 4.3: Comparison of the levels of employer support between efficiency-driven economies Efficiency-driven economy EEA rate (currently active in EEA in a leading role) HIGH support from employers when employees come up with new ideas SOME support from employers when employees come up with new ideas South Africa 0.32% 16.14% 51.71% Malaysia 0.41% 5.48% 50.00% Turkey 0.61% 37.51% 74.97% Mexico 0.82% 10.19% 50.93% Brazil 0.84% 20.83% 54.63% Peru 1.16% 16.67% 61.37% Thailand 1.38% 12.35% 49.07% China 1.73% 20.61% 77.46% Bosnia & Herzegovina 2.30% 32.43% 74.72% Poland 2.31% 15.41% 55.84% Argentina 2.53% 26.58% 65.30% Hungary 2.63% 21.45% 68.43% Chile 2.63% 34.53% 72.93% Slovakia 2.73% 18.6% 67.89% Romania 2.98% 44.29% 67.98% Croatia 3.71% 23.30% 64.83% Uruguay 4.39% 44.26% 66.75% Source: GEM Global survey data >

61 chapter 4 South Africa has amongst the lowest ratings with respect to both some and high support levels offered by employers. This could be linked to the low education levels in the country, with employers possibly not encouraging or supporting new ideas from all levels of employees, assuming instead that the best innovations and decisions for a company are made by the more educated at the upper levels of management. Employers should consider creating a culture of inclusivity and creativity, and show strong encouragement for new ideas from all employees, as it may help to expose those who are inherently entrepreneurial and have the potential to add value to the organisations in which they work. 4.5 The National Experts Survey The national experts survey (NES) in 2011 posed a number of statements specifically linked to EEA. The responses from 38 national experts were analysed on a Likert scale, with 1 signifying that the expert believed it to be a completely false statement, and 5 a completely true statement. Tables 4.4 and 4.5 show the two topics which were covered, as well as the statements which were included. The responses were then grouped into four categories to determine the overall impact of specific factors on EEA: 1. Level of internal corporate support for entrepreneurial employee behaviour 2. Top-down versus bottom-up decision-making domination within organisations 3. Impact of indirect, external influences on entrepreneurial employee behaviour 4. Impact of proactive, direct, internal influences on entrepreneurial employee behaviour In terms of internal corporate support for entrepreneurial activity, which refers to direct employer support as well as access to resources, knowledge and contacts in the workplace, the average score was This indicates that experts believed that there is an insufficient amount of support in place, and is an area in which companies can improve. This is in line with the findings of the adult population survey, where only 51.71% of the sample believed that some support is provided for entrepreneurial employee activity. Table 4.4: Questions asked of South Africa s national experts specifically linked to entrepreneurial behaviour by employees Topic 1: Entrepreneurial behaviour by employees There are no formal restrictions if you want to start a business using the resources, knowledge and contacts obtained from your current job as an employee Top-down decision making strategies dominate bottom-up decision making strategies within large organisations Top-down decision making strategies dominate bottom-up decision making strategies within small and medium sized organisations Employers provide support to employees who come up with new ideas Employees support colleagues who come up with new ideas SOURCE: GEM South Africa National Experts Survey Table 4.5: Questions asked of South Africa s national experts specifically linked to the conditions that foster entrepreneurship Topic 2: Conditions that foster entrepreneurship Entrepreneurs have much less access to social security than employees The education system emphasises innovative and proactive behaviour of individuals in general Employers stimulate proactive behaviour by employees The level of employment protection is deterring employees to start their own business SOURCE: GEM South Africa National Experts Survey 60 Global Entrepreneurship Monitor 2011 South Africa

62 Special focus 2011: Entrepreneurial employee activity The experts were asked whether, in large, medium and small companies, top-down decision-making in South Africa dominates bottom-up decision-making. The average score was 3.78, which indicates that experts believe that decision-making tends to be dominated by upper levels of organisations. Fostering entrepreneurial behaviour within traditional, hierarchy-driven companies where top-down decision-making is prevalent is difficult because their emphasis is on clearly defined boundaries which usually limits flexibility and chokes communication with and at lower levels (Dess, Lumpkin, & Mckee, 1999). Experts were also asked for their perceptions relating to a number of external conditions which may foster entrepreneurial employee activity. These external conditions, specifically related to the level of employment protection which might deter employees from starting their own separate businesses, as well as entrepreneurs possibly having less accessibility to social security than employees. The average score for this category was 3.69, indicating some agreement among experts that these external factors exist in South Africa and may disincentivise entrepreneurship. An increased access to social security and the high level of employment protection are likely to lead to an increase in the number of entrepreneuriallyminded people choosing to stay in formal employment. These external conditions are therefore likely to contribute to an increase in entrepreneurial employee activity. Questions relating to direct, internal influences on EEA to determine the education system s role in stimulating innovative behaviour of individuals, as well as whether employer encouragement of entrepreneurial behaviour existed, were asked. Note that, for encouragement by employers, this is considered proactive and progressive in nature and is therefore different to employers providing support in the form of resources, knowledge and contacts to employees already exhibiting entrepreneurial activities. The average for this category was This indicates that experts do not believe that the education offered in South Africa is adequate in its ability to stimulate innovative behaviour within employees. Experts also felt that employers in South Africa do not do enough to encourage innovative behaviour. This NES finding is less negative than the findings in the APS, which showed that the low education levels and low levels of employer support in South Africa significantly hinder EEA. Brazil and Russia also participated in the questions on EEA in their national experts surveys. Figure 4.7 compares the scores of the perceptions of experts in Brazil and Russia for each of the four categories with those of the experts in South Africa. The findings for all three economies are similar for internal corporate support and direct, internal influences, showing that experts in all three of the economies believe that both support from employers in the form of proactive encouragement of entrepreneurial behaviour, as well as resources to support good ideas, are not enhancing the climate in which EEA is able to flourish. South Africa scores higher with respect to indirect, external influences, indicating that experts in South Africa believe that high employment protection and low social security for business owners (relative to employees) disincentivise entrepreneurship. Unfortunately, while it may disincentivise entrepreneurship, the country s low EEA rate indicates that it does not sufficiently foster entrepreneurial employee activity, except possibly for individuals who are well-educated. Figure 4.7 shows that, with respect to top-down decisionmaking, while Russia scores highest, experts in all three economies agree that decision-making is concentrated in upper levels of management. This dominance of topdown decision-making is likely to discourage employees at lower levels from taking proactive steps to innovate (with EEA remaining as an activity which happens by those who are well-educated and are the decision-makers), possibly stifling entrepreneurial potential at lower levels. Table 4.6 shows a comparison between three innovationdriven economies which have among the highest EEA rates and Brazil, Russia and South Africa (BRICS), to determine what the differences and similarities are in the NES findings for each economy. Table 4.6 shows that the scores for corporate support and direct influences are slightly higher for innovationdriven economies in comparison to the BRICS economies. This supports the APS findings that increased levels of employer support lead to increased levels of EEA. With regards to external conditions, scores are again slightly higher for the three innovation-driven economies. Employees in most innovation-driven economies enjoy benefits such as pension plans to which employers make contributions. Employees also have unemployment insurance based on salary should one lose income resulting from a job loss, particularly valuable during an economic downturn. There are strong labour and employment protection frameworks in most innovation-driven economies. Individuals who are entrepreneurial in nature may therefore not be incentivised to pursue entrepreneurship options, instead choosing to stay with formal employment and becoming active in entrepreneurial employee activity. For the efficiency-driven economies, experts in South Africa and Russia believe that the external conditions of employment protection and social security may also disincentivise entrepreneurship and therefore foster EEA to some degree (although to a lesser >

63 chapter 4 Expert s perceptions of the 4 categories of influence on EEA 1. Internal corporate support 5,00 4,00 3,00 2,00 4. Impact of direct, internal influences 1,00 0,00 2. Domination of top-down decisionmaking South Africa Brazil Russia 3. Impact of indirect, external influences Source: Gem Global Survey Data 2011 Figure 4.7: Experts perceptions in three efficiency-driven economies of the four categories influencing EEA Table 4.6: Comparison of experts perceptions in three efficiency-driven and three innovationdriven economies Category of influence on EEA Country* EEA Rate Internal corporate support Domination of top-down decision-making Impact of indirect, external influences Impact of direct, internal influences South Africa 0.32% Russia 0.44% Brazil 0.84% The Netherlands 5.60% Finland 8.00% Sweden 13.50% Source: GEM Global Survey Data 2011 * Note that, of the BRICS countries, China and India did not participate in the national experts survey. Of the innovationdriven economies with the highest EEA rates, Belgium and Denmark did not participate, so have been replaced by The Netherlands which has one of the next highest EEA rates. 62 Global Entrepreneurship Monitor 2011 South Africa

64 Special focus 2011: Entrepreneurial employee activity degree than in the innovation-driven economies), while Brazil s experts believe that these conditions do not necessarily favour employees at the expense of entrepreneurship, which may explain in part why EEA is occurring at higher levels in Brazil than in South Africa and Russia. Table 4.6 shows that experts in all six economies agree that top-down decision-making dominates bottomup decision-making. Considering that employees with higher education levels tend to dominate upper levels of management, and that entrepreneurial employee activity is most prevalent among individuals with higher levels of education, this suggests that EEA is limited to top managers. The concern with this situation is that individuals with inherent entrepreneurial ability at lower levels may not be recognised for the potentially important role they could play for the organisation in increasing innovation levels. As with employer support, employers could consider the creation of a culture of inclusivity and creativity to develop those at lower levels of the organisation who have the potential to innovate. 4.6 Conclusion The vast majority of the South African population currently has no tertiary education, and the quality of the primary education is ranked 11th worst by the World Economic Forum. Given that education has been shown to impact positively on the rates of EEA in a country, without an improvement in both the quality of education and an increase in the quantity of people with secondary and tertiary education, South Africa s potential for a significant increase in entrepreneurial employee activity is doubtful. Individuals who have completed secondary education are the major contributors to entrepreneurial employee activity in South Africa. As the country is only ranked in 73rd place on the Global Competitiveness Index for higher education and learning, this may explain, in part, why the EEA rate in South Africa is so low. Sweden, Denmark, Belgium and Finland are ranked among the highest on the Global Competitiveness Index with respect to education and all show extremely high rates of EEA. These innovation-driven countries reveal a strong positive correlation between education and EEA. South Africa ranks among the lowest of the efficiency-driven economies with respect to employer support, particularly in the form of HIGH support. This is a further contributor to the country s low EEA rate. South Africans may have high levels of untapped potential within organisations. To foster entrepreneurial employee activity will require a shift in management mindsets, a recognition and appreciation of employees exhibiting entrepreneurial tendencies, as well as the development of a corporate culture which intentionally stimulates and supports entrepreneurial employee activities. The alternative to this is that South African companies, by not recognising the potential which already exists within the business, may lose a valuable, cost-effective opportunity to innovate through increased productivity and competitiveness. Efforts could also be made during recruitment to recognise candidates with behavioural characteristics similar to those of entrepreneurs. Comments by the NES experts show that decision-making in small, medium and large companies is still dominated by upper levels of management. GEM research indicates that EEA is an activity more likely to occur by more highly educated employees, and it therefore seems likely that EEA in South Africa is concentrated in upper management levels. The concentration of innovative and entrepreneurial activity by a small percentage of the population in senior management roles may stifle entrepreneurial employee activity at lower levels of the business. Individuals in lower levels of management may have significant entrepreneurial potential which only needs recognition and development. This is particularly relevant in a country like South Africa where quality education is not available to all of the population. Individuals with the potential to innovate may not have been exposed to an education that has allowed this potential to develop. Employer support and the creation of a culture that encourages inclusivity and creativity could help tap into the potential that has not been recognised by the education system. It has been noted that entrepreneurial employees are not necessarily involved in entrepreneurial activity at all times, and that their roles may not specifically require them to be entrepreneurial. Entrepreneurial activity is able to occur when a person with entrepreneurial tendencies has the education, opportunity and support to become actively involved in a leading role in entrepreneurial activity within a business. A significant increase in South Africa s EEA rate is only possible with more focused attention on improving education, when entrepreneurially-minded employees are recognised and when high levels of proactive encouragement and support for entrepreneurial employee behaviour are provided by employers. Considering the importance of innovation and creativity within a business, and given that little literature exists on EEA, further research on the impacts of top-down decision-making on entrepreneurial activity at lower levels, as well as on existing support structures within companies that effectively encourage EEA, would help to understand how to practically stimulate and develop entrepreneurial employee activity and take advantage of the role which entrepreneurial individuals can play in improving a company s competitiveness >

65 chapter 5 POLICY RECOMMENDATIONS and conclusions The preceding chapters have provided insight into the context and current state of entrepreneurship in South Africa. Table 5.1 aims to outline policy recommendations for government to consider with regard to developing an environment that will be conducive to stimulating entrepreneurship in South Africa. Much discussion has taken place in South Africa, especially within the National Planning Commission, about what policy recommendations should be implemented in order to stimulate the current low levels of entrepreneurial activity in the country. Some of the policy recommendations made by interested parties have been implemented to varying degrees of success but in many cases where policy has been changed and improved it has not been implemented at the appropriate level of government either due to a lack of will, incompetence or plain inefficiency. Hence, changes made in good faith are not having the desired effect at the level of the SMMEs. However, it is absolutely crucial to note that small changes will have no lasting effect until such time as four main inhibiting constraints are addressed and are rectified to an acceptable level. Corruption from the top down is having a massive impact on economic development and unless brought under control, will continue to have a major impact on early-stage entrepreneurial development. The unacceptable high levels of crime is affecting all business from micro-enterprises to large corporations. Good health is the corner stone of any successful economy yet South Africa s health system has declined dramatically over the past 10 years. An unhealthy society cannot start and run businesses successfully. Finally the level and type of education needs to be rectified for without an educated population very little will happen to lift the economy from its current low. These four challenges, unless resolved, will continue to debilitate this country s capacity to develop and support small business owners, and may in fact negate some of the positive initiatives which are taking place, rendering them a complete waste of time and money. Stimulating entrepreneurship, and then supporting it appropriately, will need considerable reforms, starting at the uppermost echelons of government. 64 Global Entrepreneurship Monitor 2011 South Africa

66 Policy recommendations and conclusions Table 5.1: Policy recommendations for improving South Africa s entrepreneurial environment Category Recommendation Rationale Financial support Government policies Government programmes Prioritise investment in youth entrepreneurship as a means to address youth unemployment and dependence on social welfare. Review the mandates, operations and performance of existing DFIs and implement measures to improve their delivery. Structure and customise different government funding instruments to meet the unique needs of entrepreneurs at different stages of development. Prioritise micro-lending to start-ups and small enterprises. Review policies relevant to SMEs with the objective of reducing the administrative burden, and simplify legislative requirements so that it is easier to start and run a business. Implement incentives to encourage entrepreneurs to start new businesses and companies to invest in small businesses (e.g. through internships and apprenticeships). Ensure that support service providers delivering government programmes are equipped and qualified to deliver quality services to entrepreneurs. The example set in Brazil of programme monitoring and evaluation needs to take place, to ensure that positive impacts are indeed being made, and to determine where improvements are required Mounting youth unemployment has significant implications for social welfare, health, safety and security, and overall economic growth. By investing in youth entrepreneurship, both unemployment and the welfare burden can be reduced. Multiple government funding agencies implies inefficient use of available resources. By reviewing current DFIs, government can implement informed measures to streamline operations so that government funding can be channelled effectively. Enterprises at different stages of development require funding assistance that is customised to their needs. Government has to be responsive to these needs and offer assistance that is relevant and appropriate so that enterprise development is facilitated. Onerous legislative requirements can stifle entrepreneurship and discourage potential entrepreneurs from starting businesses. Consider implementing one-stop shops to deal with all administrative requirements for starting and running a business. An incentive system will facilitate investment in entrepreneurship by creating an environment that rewards the risks taken by entrepreneurs and investors. Entrepreneurs starting out or growing their businesses could gain more from professionals who have real business experience >

67 chapter 5 Category Recommendation Rationale Education and training R&D transfer Commercial and professional infrastructure Market openness Access to physical infrastructure Cultural and social norms Capacity for entrepreneurship Implement specific entrepreneurship education and training in basic and higher education institutions curricula. Review the entrance requirement as well as curriculum for teacher training. Include self-employment as a viable alternative within career guidance structures. Review structures and curricula of FET colleges to ensure that they become more practical in addressing the needs of learners and future employers. Partnerships between the public and private sectors will facilitate technology transfer and innovation. Government should consider incentive programmes for big companies to provide small businesses with knowledge and technical expertise. Government should address the issues that make it difficult for businesses to start up and transact. Enable easier trade between South Africa and other countries by reducing trade barriers and facilitating meaningful trade relationships. Implement a comprehensive plan to address failing infrastructure and utilities. Engage business in the process of scoping and planning for requirements. Prioritise safety and security and implement a holistic approach to reducing crime by involving all stakeholders, including communities, in addressing the crime problem. Get significant media buy-in Partner with civil society and the private sector in addressing the need for positive role models to stimulate an interest in entrepreneurship, especially among the youth. Research shows that there is evidence supporting the relationship between education and entrepreneurial ability. Specific entrepreneurship education will encourage individuals to consider entrepreneurship as a viable career alternative from an early age. Poor quality educators can have a lasting negative impact on the economic and social welfare of learners. Capable teachers who have practical experience in teaching their subject matter will have greater impact. Schools are tasked with providing career guidance to learners, yet often lack insight into non-traditional career possibilities. Improving the quality standards at FET colleges will assist in creating more positive perceptions of these institutions and the graduates they produce. Small businesses often cannot afford to import technical expertise or develop technology. By creating an environment that facilitates R&D transfer, government would be contributing to creating more competitive and sustainable enterprises. The ease with which businesses can transact has a direct impact on business confidence. To stimulate business confidence, government needs to create an enabling environment for businesses to do business. Ease of access to markets will impact positively on entrepreneurship development as it will facilitate trade for both large and small businesses. An economy s competitiveness is affected by the standard of its infrastructure and quality of utilities. By engaging communities in addressing social ills, government can create real buyin and ensure that a sense of responsibility and mutual accountability is created. Brazil s media have contributed to a significant increase in both awareness and involvement in entrepreneurship development in Brazil Individuals are not born as entrepreneurs. The capacity for entrepreneurship can be developed through concerted effort. 66 Global Entrepreneurship Monitor 2011 South Africa

68 Policy recommendations and conclusions 5.1 Concluding remarks Over more than a decade of participating in the GEM project, the South African entrepreneurial landscape has seen many changes yet in many ways, has remained the same. The most pertinent finding has been the fact that total early-stage entrepreneurial activity has not fluctuated over the years, except with the past two years showing a gradual increase in TEA. Significantly, 2010 and 2011 sees the TEA rate at its highest ever raising questions around the factors that have contributed to this unexpected positive change. It may be possible that the FIFA Soccer World Cup 2010 bubble has endured longer than initially anticipated, and that some of the growth can be ascribed to the lingering early-stage entrepreneurial activity associated with the event and its implications for local economic growth. Another reason for the increase in early-stage entrepreneurial activity may be the fact that government has embarked on a serious effort to shake up service delivery and revitalise the economy, with efforts such as the National Planning Commission providing evidence of government s commitment to engage citizens in planning for the country s future, and developments in promulgating policy aimed at stimulating the economy (e.g. the new Companies Act). While the increase in the TEA in 2010 and 2011 is certainly a positive development and one that is to be celebrated, it must be noted that South Africa is still a long way from where it should be with regard to entrepreneurship when compared with similar economies. Given the country s high levels of unemployment, particularly among its youth, coupled with unacceptable levels of poverty and underdevelopment, the relatively low TEA rate is worrying. Despite the GEM and other research consistently pointing to the need for a comprehensive plan and dedicated resources to address the burgeoning youth unemployment crisis, very little has changed in this regard as youth unemployment is currently at a record high following the global economic recession. The GEM project aims to not only create awareness of the state of entrepreneurship, but also to contribute to the debate around how an entrepreneurial climate can be fostered. To this end, policy recommendations are offered in the hope that real, concerted effort will be applied to transforming South Africa s entrepreneurial environment and creating opportunities for lasting economic growth >

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71 The UCT Centre for Innovation and Entrepreneurship Appendix A: National Expert Survey 2011 Participants Expert s name Andrea Bohmert Michael Jordaan Mark Clark John James Andrew Bailey Anton Groenewald Reason for inclusion in NES Venture capital Hasso Plattner Ventures Africa CEO First National Bank Entrepreneur shareholder in cellphone insurance business Heads South African International Business Linkages programme a cost-sharing initiative funded by USAID, aimed at enterprise development Intellectual Property Manager, University of Cape Town Acting Deputy Director-General in the Premier s office (Provincial Government of the Western Cape), responsible for policy development Ekhsaan Jawoodeen Pierre Coetzer Carlo Vizzi Herbert Hirsch Phillip Dexter David Gretton Jayshree Naidoo Zulfiq Isaacs Martin Feinstein Allon Raiz Brian Williams Wajdi Abrahams Kosta Kontos Camaren Peter Catherine Wijnberg Carlos Gomes Rodney Douglas Anwar Booley Riaan Venter Melanie Burke Jacyntha Maclennan Iegshaan Ariefdien Senior Researcher in Parliament of South Africa, responsible for economic policy Entrepreneur service provider consulting in the social development area Manager: Business Support Economic and Human Development Department, City of Cape Town Entrepreneur Politician (COPE); Member of Parliament; ex trade unionist Executive Support Officer to the Mayoral Member for Economic Development & Tourism, City of Cape Town Strategy Management & Innovation, Development Bank of Southern Africa Entrepreneur IT sector Enterprise development expert (previous CEO: Enablis) and entrepreneur CEO: Raizcorp, a company specialising in enterprise and entrepreneurship development Business support service provider to SMEs Consultant to South African Breweries (SAB) Kickstart Programme; entrepreneur Entrepreneur in IT sector Researcher: Sustainability Institute CEO of Fetola (enterprise development consultancy); entrepreneur Entrepreneur; owner of Wellness Warehouse (a retail chain specialising in health and wellness products) Business support service provider to SMEs (Enablis); entrepreneur Entrepreneur financial services sector Entrepreneur communications sector Entrepreneur IT sector; mentoring and support services for young entrepreneurs Senior Manager: Wesgro (invest promotion agency; business support provider) Business Incubator Manager: Furntech (a national support service initiative for the furniture manufacturing sector) 70 Global Entrepreneurship Monitor 2011 South Africa

72 Expert s name Zolile Siswana David Rebe Jo-Ann Johnston Brett Commaille Fred Robertson Leonid Schumacher Craig Gradidge Shirley Robinson Roland Hein John Peters Reason for inclusion in NES Executive Director: Economic Development and Recreational Services, Nelson Mandela Metro (Eastern Cape) Entrepreneur property sector Chief Director: Economic Development and Tourism, Provincial Government of the Western Cape Ex-CEO of Invenfin (a venture capital firm); now runs own venture capital company Exec Deputy Chairman: Brimstone (a black-owned investment company listed on the JSE); entrepreneur Entrepreneur wine industry Entrepreneur financial services sector Special economic projects advisor to provincial and national government departments Ex-COO of Wesgro; currently running own business Chief Director: Economic Development and Tourism, Provincial Government of the Western Cape >

73 Notes 72 Global Entrepreneurship Monitor 2011 South Africa

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