Major blow to new businesses in South Africa- impacting job creation

 ·11 Feb 2024

Amid the challenging operating environment, entrepreneurs in South Africa are increasingly hesitant to start new businesses, limiting the creation of desperately needed jobs.

According to the 2023 Global Entrepreneurship Monitor South Africa (GEM SA) report by the Stellenbosch Business School, South Africa’s early-stage entrepreneurial activity (TEA) has dropped below pre-pandemic levels.

The report states that the country’s weak economy and insufficient enabling environment for businesses are hampering the potential of entrepreneurship to improve economic growth, job creation, innovation and technology advancement, and social cohesion.

South Africa did climb the rankings on the GEM National Entrepreneurial Context Index (NECI) – a measure of the favourability of the environment for entrepreneurship and starting a new business – from 46 out of 50 countries in 2021 to 40 out of 51 in 2022.

However, South Africa was one of only three countries where all 13 of the enabling conditions for entrepreneurship were rated as insufficient (scoring less than five out of 10):

GEM Report 2022-2023

“Overall, we are not seeing resilience and recovery of entrepreneurial activity to pre-pandemic levels in South Africa compared to global and African perceptions, although these also are not optimistic,” said GEM SA lead author Angus Bowmaker-Falconer.

“This is reflective of our poorly performing economy, the impact of the energy crisis and deteriorating transport, logistics and other public infrastructure and service delivery, and the lack of a favourable enabling environment to support business start-up, growth and sustainability.”

Associate Professor Natanya Meyer, the report’s co-author, said that it is especially concerning that the intention to start a new business dropped below pre-pandemic levels.

“The percentage of adults aged 16-64 intending to start a new business in the next three years declined to 10% in 2023, the lowest in 20 years, after reaching an all-time high of 20% in 2021/22,” Meyer said.

TEA, including active businesses less than three years old and new businesses up to three and a half years old, dropped from a pandemic high of 17.5% to 8.5% in 2022/23 – far below the 11% seen in 2019.

In addition, established business ownership (over 3.5 years) almost halved from 3.5% in 2019 to 1.8% in 2022/23 after a major peak of 5.2% in the pandemic years.

“The extent to which the COVID-19 pandemic influenced entrepreneurship levels remains complex. Lockdowns and related restrictions seriously disrupted how people worked and negatively impacted trade and markets, putting pressure on economies worldwide,” Bowmaker-Falconer said.

“At the same time, this crisis presented ‘problems to be solved’, and many new and established businesses pursued these opportunities.”

“In lower-income economies such as South Africa, there was generally less financial support from governments, as well as possibly fewer available jobs and income alternatives, which may have pushed more people into starting their businesses in 2020 and 2021.”

In addition, the business exit rate, the percentage of people exiting their business over the past year due to selling or shutting down, reached the 2019 level of 5% after an all-time high of 13.9% in 2020/21, with the pandemic the main reason for business owners exiting.

The report also showed that entrepreneurs had low and declining expectations of their businesses being able to create jobs.

In 2019, three in 10 business owners said that they expected to employ an additional six or more people in the next five years.

However, this number dropped to just two in 10 in 2022, which Bowmaker-Falconer linked to the generally weak economic conditions and enabling environment.

What to improve

Although the findings in the report paint a gloomy picture of the state of entrepreneurship in South Africa, Meyer stressed that many challenges caused in the aftermath of the Covid-19 pandemic have to be overcome – on top of the many challenges seen in the country.

“As can be seen by the featured case studies in the report, South Africans are resilient, and with a better ecosystem environment factors in place, more and better-performing businesses will emerge,” she said.

“Therefore, improving policies and creating a more conducive enabling environment should be a main priority for policymakers and other stakeholders.”

Read: Two ways to save on your tax bill in South Africa

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