Start-ups, key to Economic Growth

Start-ups, key to Economic Growth

Screen Shot 2016-06-28 at 7.51.12 AMPhumlani Nkontwana, an Entrepreneurial Leadership Programme Officer at the Foundation and Programme Manager of Enterprise Development Academy at the Gordon Institute of Business Science (GIBS), shares his views on the importance of small and medium-sized enterprises, also known as startups, in boosting the South African economy. The Foundation believes that strong support is required for startups, equipping young entrepreneurs with the necessary skills and networks to start growing businesses that will have a high impact on the economy in future. The ultimate goal is to create jobs that will reduce poverty and inequality; one that is realised in the Foundation through its Association of Allan Gray Fellows.

Tackling barriers to entry will grow South Africa’s economy and could boost startup entrepreneurial activity

In South Africa small businesses are often treated or viewed as a sideshow – or, worse, as a charity. A closer look at how things work exposes flaws in this viewpoint. In reality innovation and job creation are driven by Small and Medium-sized Enterprises (SMEs). The South African government is trying to push for creating 800,000 jobs per year between now and 2030, a total of 11 million jobs, because of their belief that it will stimulate and develop the economy. SMEs can impact the economy if given a chance, i.e. if supply chain barriers can be removed. The National Development Plan (NDP) envisages that this sector should account for 90% of new jobs.

It is time for a mindset shift in South Africa, especially in corporations that might be reluctant to procure goods and services from startups and other small entities. Many large organisations procure from old peers without opening the door for small businesses.

Truth be told, amid pockets of excellence in the entrepreneurial world, not all SMEs are faultless. Some fail to collaborate as consortia, even when critical mass means either landing or losing new contracts. There are also those who execute unprofessionally. However, this can be corrected by coaching and mentoring.

Excluding SMEs from supply chains instead of empowering them with skills or reducing entry barriers benefits no one; it limits economic growth. How will SMEs be able to prove themselves and present track records unless given the chance to gain experience?

Blue chip companies such as ArcelorMittal, Growthpoint Properties and Woolworths have been commended for building their own timbre by going the extra mile to shore up SMEs. J.P. Morgan is another example of a company stepping in to support SMEs through its fund, the Small Business Boost Programme at GIBS’s Enterprise Development Academy. This new project will offer extensive training, support and mentorship to two cohorts of 50 entrepreneurs. The list of companies that deserve praise for uplifting startups or procuring from small businesses are not short, but there is huge room for improvement.

Statistically, developed nations view the SME sector as a launch pad, which explains the healthy ties between corporations and small businesses, with governments playing supportive roles while universities churn out the relevant skills. A company such as Microsoft comes to mind: it was built by students and grew because of the entrepreneurial and innovative minds behind it combined with the context that nurtured that development.

During 2011, in the 27 European Union countries, as much as 58% of gross value came from SMEs. In OECD countries SMEs accounted for an estimated 99% of enterprises and two-thirds of employment in 2010. These numbers highlight the fact that corporations don’t create jobs to the extent that might be believed. The 2016 OECD report states that “innovative SMEs fuel employment and economic growth and nearly all net job creation in the US between 1997 and 2005 came from firms less than five years old.”

Back home small businesses can support the success of their larger peers. Small Business Development Minister, Lindiwe Zulu, once observed that “the diversification of supply chains assists big businesses to have a wider choice of suppliers from Small, Medium and Micro-sized Enterprises (SMMEs) and promotes innovation within the value chain. The growth and sustainability of big business therefore depends on a strong small business sector, both as consumers and suppliers.”

The benefits of cracking open supply chain management to include the SME sector are apparent. For South Africa to grow, research and development (R&D) should be made a top priority, because it catapults economies. The South African government, which funds projects, academia and the private sector invest a smidgeon – below 1% of its GDP – on R&D, while the Netherlands – whose economy is much bigger than ours – spends twice as much in percentage terms. The average expenditure on R&D in OECD states is 2.5%.

If we are serious about being innovative and unlocking opportunities while improving our competitiveness, we should bolster our R&D budget. We have just averted a credit downgrade, yet our economy, against the backdrop of runaway unemployment, has all the right ingredients for pronounced growth.

Coupled with that, new industries have to be nurtured to complement the entrenched ones such as mining and manufacturing. The question is, where will the magic come from? To quote the NDP: “ the green economy is poised as one of the areas that will support growth.” So let’s start there!

Aggressive investment in transport will bring magic in three ways: it will create jobs, lower input costs and cut travel times, both social and economic benefits. The tourism and telecommunications industries can grow further and so too the medical industry. Traditional medicine, especially, remains untapped in commercial terms and stands out for its potential to help stimulate the economy.

Captains of industry and lenders are well-placed to invest in R&D, to improve our competitiveness and to help entrepreneurs chase these dreams. It is through a strong SME sector that South Africa can achieve some if not all of the NDP imperatives and reach its true potential.

 

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