Policy research entity Trade and Industry Policy Strategies (TIPS) finds in its latest Real Economy Bulletin that the number of small formal businesses in the economy has grown from 680 000 in 2019 to 710 000 in 2022, despite the negative impact of the Covid-19 pandemic.

The number of informal businesses has risen from between 1.3-million and 1.6-million in the 2010s to 1.75-million as of the last quarter of 2022, having fully overcome a sharp decline at the start of the pandemic.

The entity says although the number of small businesses being established has grown in the last three decades, it has not been enough to overcome the disastrous deficit of small enterprise left by Apartheid. The suppression of small businesses was a central factor behind high unemployment.

In other upper-middle-income countries, small business owners make up more than 20% of the working-age population. In South Africa, small business owners make up 6% of the working-age population.

This backlog explains much of South Africa’s low unemployment levels, TIPS states.

TIPS estimates that small formal businesses generate a third of value added in South Africa, while the informal small business sector adds about 5%.

The entity estimates that small formal businesses account for about 30% of total employment, with the number of people working in small formal businesses remaining flat through the 2010s before falling sharply during the Covid-19 pandemic. That shrinkage in formal opportunities fuelled an extraordinary rebound in informal self-employment through most of 2022 and prior years.

Encouragingly, TIPS finds that remuneration and benefits in small formal businesses for employers and wage workers lag only slightly behind those in larger companies. They far exceed the norm for waged employees and own-account workers in informal businesses and in domestic work. TIPS says informal businesses typically provide low incomes and comparatively insecure jobs.

About a fifth of private formal small businesses supply professional services, ranging from education and healthcare to engineering, legal advice and creative work.

A quarter of the private formal small businesses involve retail and hospitality. The rest are mostly involved in construction; transport and communications; manufacturing; and agriculture.

In the informal sector, retail trade accounts for close to half of all businesses, including around 500 000 street traders. The next-largest sector for informal business is construction, with about a tenth of the total.

Just more than 5% of informal businesses provide professional services.

Close to half of formal business owners have post-matric qualification of some kind, compared to a seventh of their waged employees. Workers in smaller formal enterprises are generally slightly less educated than those in larger companies, TIPS reports.

Smaller formal businesses typically have higher education levels than informal business owners.

In the early 2000s, black entrepreneurs owned 40% of small formal businesses. Their share rose to about 60% in 2019. The pandemic hit them disproportionately hard, and this figure remains the same in 2022. TIPS attributes this to many black enterprises having been new, which makes it harder to survive tough times and also the fact that white entrepreneurs are more likely to inherit significant resources of some kind, which provide a buffer in downturns.

TIPS also finds that black people have consistently owned around 95% of informal enterprises, while women own around a quarter of small businesses – half of them being white.

In the informal sector, the share of women entrepreneurs has declined from 40% in 2019 to 35% in 2022.

In terms of profitability, small formal businesses generally post a higher rate of return on assets than large firms both within industries and overall. In 2020, small businesses that published yearly financial statistics reported a 5% return on assets, compared with 2% that large companies reported, but 7% for medium-sized enterprises.

Looking at geographic distribution, TIPS says formal businesses have historically been located in metro areas, with the five largest metros holding just more than a third of the population and economic capacity.

The concentration of formal small businesses in the biggest metros intensified through the 2010s. By 2019, the largest metros hosted about 60% of all formal small businesses, which has remained the case through 2020 and to date.

In contrast, the location of informal businesses has correlated better with the distribution of people. The five biggest metros held 35% of informal businesses in 2010, 39% in 2019 and more than 45% late in 2022.

Formal small businesses were particularly limited in the historic labour-sending regions of South Africa – the former so-called “homeland” areas. These areas held around a quarter of the population in 2022, but only 5% of small formal enterprises.

They contained over a quarter of informal businesses, but the share had fallen from 37% in 2010.

TIPS will soon publish a paper on small business in industrial policy, which analyses factors behind the state of small businesses as described in the Real Economy Bulletin.