The Missing Two Thirds: Where are South Africa’s entrepreneurs? Commentary on the South African 2014 GEM Report

The Missing Two Thirds: Where are South Africa’s entrepreneurs? Commentary on the South African 2014 GEM Report

The annual South African Global Entrepreneurship Monitor (“GEM”) report has recently been published for 2014.  As described in the 2013 GEM report reflection, GEM is the largest annual global study of entrepreneurship covering 90% of the world’s GDP. Following the encouraging developments in the 2013 report, there was some excitement for the 2014 results. Sadly these expectations were misplaced, and in part explained the rather muted release of the report with no launch or government involvement, only the quiet loading of the South African report onto the global GEM website.  The 2014 fall in the main measure, Total Entrepreneurship Activity, was dramatic from 10.6% in 2013 to 7.0% in 2014 – a startling fall of 34% in a single year.  If we apply these percentages to the related South African population numbers, it means we have roughly a million less entrepreneurs than in the prior year. Simply Staggering!

The quantum of this drop led the Foundation to ask GEM South Africa author, Mike Herrington, whether such a drop in a single year was even possible. He stated that it is possible if the environment is not conducive to entrepreneurship and it certainly hasn’t been over the past year. Remember that although it is a 34% drop it is from a very low base.” Hardly comforting.

To put this TEA rate outcome in perspective, it is the worst ever performance by South Africa over the last 12 years of GEM participation with us falling 18 places below the median of all the countries included in the survey.  The 2014 SA GEM report observes: “It appears that entrepreneurship in South Africa is regressing when compared to its counterparts in the rest of Africa.” And just when you think it couldn’t get worse the report goes on: “It is expected that the rates of entrepreneurial activity will further decline in the next few years unless the supply of electricity issues can be addressed.”

But perhaps a better way to understand these results is to use the power of GEM’s global database to establish where a country like South Africa’s levels of entrepreneurship should be. Armed with years of data and 73 countries participating, it is possible to create a normalised trend of entrepreneurial activity relative to the GDP per capita of a country. As shown in the figure below, when applying this to South Africa, our current GDP per capita should translate into a TEA rate of around 20% – nearly three times more than our current rate!

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One of the advantages of the GEM methodology is that it attempts to show a holistic picture of the full entrepreneurial pipeline rather than merely listing current entrepreneurial activity (quantity). This allows us, in addition to current entrepreneurial activity, to evaluate both the future entrepreneurial activity through measures of potential entrepreneurs (potential) as well as quality of entrepreneurship in terms of the ongoing sustainability of entrepreneurship activity (quality).  On all three measures of potential, quantity and quality South Africa’s performance is woeful. But rather than throwing our hands in the air and giving up, by looking more closely at each of these areas relative to past performance, performance of Sub-Saharan and efficiency-driven economy peers we can start to identify the levers for turning this situation around.

The table below measures South Africa’s entrepreneurial performance in these three areas.

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In terms of the potential stage of the pipeline, while there are serious concerns related to our performance in terms of perceived capabilities, where we score at less than 60% of the level achieved by our Sub-Saharan peers, it is South Africa’s entrepreneurial intention that is the killer metric in the pipeline.  Our intention is less than half of efficiency driven economy peers and just more than a fifth of the level of our Sub-Saharan peers.  Currently our entrepreneurial intention is half the level that we require for our entrepreneurial activity stated above (20%).  Unless we can improve this pipeline all later stage efforts to support entrepreneurship are largely futile.

At the quantity stage the bigger driver of poor performance between nascent business (those who have committed resources to starting a business, but have not paid salaries for more than three months) and new business owners (those who have moved beyond nascent and have paid salaries for more than three months) is with nascent business which has dropped by 41% since 2013.

Finally our quality where only 2.7% of the population between ages 18 and 64 have established businesses, places South Africa fourth last on this measure across all participating GEM countries or three times less than our efficiency-driven economy peers.

Clearly there is much work to be done. For those with strong constitutions the full 2014 South Africa report can be found here. In the next GEM post, we shift shift gears and suggest some possible solutions to rectify this downward trend in entrepreneurship in South Africa.  A trend we simply cannot allow to continue.

 

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