The implications of South Africa’s inability to generate jobs and growth was brought into sharp focus last week with the release of the Cato Institute’s Misery Report. South Africa now has the unwelcome accolade of being considered one of the ten “most miserable countries” in the world. The report calculates the misery rate of 90 countries, using the misery index, an economic indicator found by adding the unemployment rate to the lending and inflation rates, minus the percentage change in Gross Domestic Product (GDP) per capita. On this ranking, largely due to the level of our unemployment, South Africa ranked number eight in a list headed by countries such as Venezuela, Iran and Serbia. This development is a powerful reminder of the urgent need to revitalise both the quantity and quality of our entrepreneurship as it remains the most powerful weapon in the fight against unemployment. Surely we cannot accept a legacy centred on economic misery?
We discussed last month, South Africa’s Global Entrepreneurship Monitor (GEM) 2013 Report which noted the weakness of South Africa’s entrepreneurial pipeline, but there is another significant pipeline that one should consider carefully in the search for greater levels of entrepreneurial impact – the innovation pipeline. In our determination to move out of economic misery it is important to appreciate that not all entrepreneurship is the same. The far more economically important entrepreneurship is that which is driven by a motivation of opportunity (as opposed to necessity) and opportunity is ultimately a function of innovation. Innovation is the engine of economic growth and so understanding the country’s innovation pipeline helps identify clear opportunities that can be targeted for maximising economic impact.
In order to set the innovation context in South Africa, the equivalent of the GEM report for innovation is the Global Innovation Index and in 2013 South Africa was ranked 58th out of 142 countries, a drop from 54th place in 2012. Despite this slight drop, there is not much particularly surprising about this ranking as it correlates closely with South Africa’s 2013/14 World Economic Forum Global Competitive Index ranking of 53 out of 148 countries. But the Innovation Index does give us more interesting information if we delve a bit deeper.
The overall index comprises two sub-indexes, the input sub-index (looking at inputs such as institutions, research, infrastructure and market sophistication) and the output sub-index (looking at knowledge, technology and creative outputs). South Africa ranks much better in the input sub-index at 51 compared to its Output sub-index ranking of 71. This is concerning as it means that our innovation inputs are not generating the expected outputs. In fact if one then looks at the Innovation Efficiency Ratio which divides output by input, South Africa’s ranking collapses to a lowly 99. Clearly there are bottlenecks in the South African innovation pipeline. The question is where are they?
Exploring the innovation pipeline¹ more closely our bottlenecks are to be found in applied research and the developing of businesses.
In terms of research, as identified in the innovation sub-indexes, our inputs are fine. South Africa currently spends 0.9% of GDP on research which is the same or better than other similar countries. The challenge is that this research is not leading to sufficient applied research, where South Africa only files 1.6 patents per billion PPP$ GDP, a number that has not only been falling over time but is less than comparable countries. In Fitzgerald and Wankerl’s book ‘Inside Real Innovation’ they point out that government funders can invest in two categories: “fundamental innovation, for the ultimate goal of economic growth (with a lot of this type, since that is what the public expects), and research that is expanding knowledge in areas of interest to society but likely not connected to economic growth (with a little of this type). Although difficult to quantify, our experience points to a large imbalance currently: most of society believes it is funding research that will spur innovation and economic growth, but most research activity lies closer to the random research type.” The facts indicate that South Africa is a victim of this imbalance. Historically agencies such as the National Research Foundation have been incentivised on publications over patents and so this outcome is somewhat predictable. We need our research to move out of a government–university loop of non-reality that lacks feedback from the real world, to a space of iterative innovation moving through all aspects of innovation including both the possible market and implementation in addition to the underlying technology.
The second blockage is the development of businesses, the vehicles that take the potential of the innovation to market. The starting point for this blockage is the pool of potential entrepreneurs who can drive this business creation and this sadly takes us back to the challenge identified by GEM and discussed before where our pool of individuals intending to be entrepreneurs (13% of population) is way too small. But there is another piece to the business creation puzzle and that is the level of angel funding available. South Africa currently has three angel investors per million people compared to a figure of 80 per million in the United Kingdom and a staggering 720 per million in America. Too much funding is not helpful as it will allow untested innovation to pass through the so called “valley of death” between the initial research funding and market commercialisation, but if that valley is too deep and financial decisions are too conservative some of the most promising innovations may not be able to get across. At three angels per million this is likely to be the case in South Africa. From a low base angel investing in SA is increasing, but what is really needed is a bigger vision for this as a country in a similar manner to Israel where an intentional decision to create a venture capital industry in the 1990’s through the formation of Yozma has led to it becoming described as the Start Up Nation with the highest number of venture capital investments per capita in the world.
Startup Nation sounds a lot more attractive than top 10 contestant in the Misery Index. It’s about time we unlocked the innovation pipeline.
¹There are six main stages of the innovation value chain starting with basic research, moving into applied research, followed by the development phase which includes both business and product development, before the translation of this into the commercial roll out stage end the finally expansion.