The Covid-19 pandemic has intensified South Africa’s economic challenges, with entrepreneurial businesses being more susceptible to succumb to a depressed trading environment, a new report published on June 8 has found.

'Global Entrepreneurship Monitor South Africa (GEM SA) 2019/20 – Igniting startups for economic growth and social change' report co-author Angus Bowmaker-Falconer says business earnings have been impacted by Covid-19 and that further job losses are likely.

“Many small, medium-sized and microenterprises may not survive under these extraordinary high stakes.”

Launched by the University of Stellenbosch Business School (USB), the Global Entrepreneurship Monitor (GEM) and the Small Enterprise Development Agency (Seda), the report included a survey sample of 3 300 people, and the national expert survey involved the input of 36 experts from diverse fields.

Most local companies are small or medium-sized enterprises and many will battle to stay afloat after one to three months with no or limited trade and income. “Early-stage entrepreneurial startups (new ventures less than 3.5 years old) are likely to be ravaged,” he says.

He and fellow co-author Mike Herrington say the economic and social upheaval caused by the Covid-19 pandemic underline the need for a collective and robust national strategy to unlock entrepreneurship in South Africa.

Bowmaker-Falconer is a research fellow at USB. Herrington, previously the executive director of the Global Entrepreneurship Research Association, established GEM SA in 2001.

VULNERABLE BEFORE COVID-19

Even before the Covid-19 pandemic, they highlight that many aspects of South Africa’s entrepreneurial ecosystem needed a major overhaul and that post-Covid-19 the economic and social recovery could take several years.

GEM’s research during the 2008/9 international financial crisis showed a significant dip in early-stage entrepreneurial activity across the globe. Entrepreneurial ecosystems took two to three years to reach pre-2008 levels after this event. The recovery curve was driven directly by country-specific economic policy and financial support responses.

The report finds that South Africa’s entrepreneurial ecosystem was rated one of the most challenging in the sample of participating economies in 2019 and has exhibited little sign of improvement over the past few years. 

In 2019, South Africa ranked forty-ninth out of 54 economies on GEM’s National Entrepreneurship Context Index, ahead of only Croatia, Guatemala, Paraguay, Puerto Rico and Iran.

In addition, the report shows that societal values regarding entrepreneurship showed an upward trend from 2003 to 2019. Specifically, there has been an increase from 2017 to 2019 in the number of people who see entrepreneurship as a good career choice (from 69.4% to 78.8%) and one with high status (from 74.9% to 82.2%).

There has also been a substantial increase (from 43.2% in 2017 to 60.4% in 2019) in the number of individuals who perceive that there are good entrepreneurial opportunities in South Africa and believe that they have the skills and capabilities to start a business. According to GEM, this number is relatively high compared to many other economies.

However, fear of failure is high at 49.8% among South Africans, the report finds, with this factor, likely a deterrent for individuals to start a business venture, having increased significantly from 2017 to 2019.

According to the report, only 11.9% of respondents have entrepreneurial intentions, thereby representing one in every eight South Africans being “latent entrepreneurs” who intend to start a business within the next three years.

The report points to a small increase in the total amount of early-stage entrepreneurial activity (TEA) in the country between 2016 and 2017. This momentum was not, however, carried through to 2019, which showed no real increase from 2017 at only 10.8%.

This TEA rate was below the average of 12.1% for the other participating African countries in 2019.

South Africa’s business exit rate decreased from 6% in 2017 to 4.9% in 2019, but is still higher than the established business rate of 3.5%. This confirms that more businesses are being closed down, sold or otherwise discontinued than being started.

There is clear evidence, the report shows, of purpose-driven entrepreneurship taking hold at a grassroots level – an encouraging sign of a collective will for future business sustainability.

CHANGING GEARS, MOVING FORWARD

Moving from startup to scale requires the right support from the government and the private sector alike, notes GEM, adding that the report calls for interventions in terms of government policies and initiatives, market openness, entrepreneurship education and training, and the availability of and access to finance to foster entrepreneurship.

Bowmaker-Falconer say government is an enabler and fully supports and understands the importance of entrepreneurial development for inclusive economic growth and social cohesion.

“The Department of Small Business Development announced significant new measures before this crisis related to access to funding. These measures include harmonising funding applications across all developmental finance institutions and introducing a blended financing model to reduce financing costs for entrepreneurs.”

He adds that, overall, the focus for the government should now be on achieving policy and support initiative alignment priorities.

“Big business needs to partner with the government and play their part in opening markets and value chain participation for smaller enterprises,” Bowmaker-Falconer says.

As the sponsor of the study, Seda will now facilitate the implementation of the recommendations across the broader small enterprise development support system with its partners.

One of the areas currently being pursued by Seda is identifying partners that can enhance its service offerings in research.