Report reveals decline in entrepreneurial activity in South Africa post-pandemic

1st February 2024 By: Sabrina Jardim - Creamer Media Online Writer

According to the latest ‘2023 Global Entrepreneurship Monitor South Africa’ (GEM SA) report, released on February 1, South Africa’s early-stage entrepreneurial activity has declined to below pre-pandemic levels, with fewer people than ever before considering starting new businesses.

The report highlights that the biggest motive among South Africans to become entrepreneurs is driven by necessity and to earn a living considering jobs are scarce, particularly among men.

Other motives include making a difference in the world, building wealth and continuing a family tradition.

These key findings of the report raise concerns that the country’s weak economy and an insufficient enabling environment for business are hampering the potential of entrepreneurship to contribute to economic growth, job creation, innovation and technology advancement, as well as social cohesion.

Although South Africa effectively rose five places, to 46 out of 50 countries in 2021, to 40 out of 51 countries in 2022, on the GEM National Entrepreneurial Context Index – a measure of the favourability of the environment for entrepreneurship and starting a new business – it was one of only three countries where all 13 of the enabling conditions for entrepreneurship were rated as insufficient.

GEM SA lead author Angus Bowmaker-Falconer, a research fellow at Stellenbosch Business School, said South Africa lagged both global and African levels of entrepreneurial activity and the effectiveness of its support for entrepreneurial ecosystem development.

“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.

“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 startup, growth and sustainability,” he said.

The GEM SA report is released by Stellenbosch Business School in partnership with the Global Entrepreneurship Monitor (GEM) and sponsored by the Small Enterprise Development Agency and Standard Bank.

“A particular concern is the low intentions to start a new business, ownership of new businesses – in existence for between three months and three-and-a-half years – and established businesses older than three-and-a-half years, seen as South Africa emerged from the Covid-19 pandemic. All had declined to pre-pandemic levels, and below, in the latest survey.

“The percentage of adults aged 16 to 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,” said associate professor in the South African Research Chairs Initiative chair for entrepreneurship education at the University of Johannesburg, and co-author of the report, Natanya Meyer.

Total entrepreneurial activity, consisting of active businesses less than three months old and new businesses up to three-and-a-half years old, declined from a pandemic high of 17.5% to 8.5% in 2022/23, below the 2019 level of 11%.

Established business ownership almost halved, from 3.5% in 2019 to 1.8% in 2022/23, after an encouraging 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. 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,” said Bowmaker-Falconer.

Despite increased entrepreneurial rates during the pandemic, Bowmaker-Falconer said not all of these new businesses were successful or sustainable.

“Many faced significant challenges, and the long-term consequences of this surge in entrepreneurship will be determined as the world adjusts to the post-pandemic landscape.”

A positive signal was that the business exit rate – the percentage of people exiting their business over the past 12 months owing to selling or shutting down – recovered to the 2019 level of 5% after an all-time high of 13.9% in 2020/21 when, as expected, the impact of the pandemic was the leading reason for business owners exiting.

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

In 2019, three in ten new business owners expected to employ an additional six people or more in the next five years, but this fell to just two in ten in 2022 – reflecting the generally weak economic conditions and enabling environment, Bowmaker-Falconer said.

The GEM report tracks 13 enabling framework conditions for entrepreneurship, including availability and ease of access to funding for startups, supportive government policies and programmes, taxes and red-tape burdens, levels of entrepreneurial education, infrastructure and services, market dynamics and regulations, and a culture that encourages and celebrates entrepreneurship.

South Africa showed year-on-year improvements in ten of the 13 framework conditions, including those directly dependent on government as well as the levels of and access to finance, leading to the country improving its global ranking by five places.

“However, all 13 conditions remain ranked as insufficient, scoring less than five out of ten. All of the conditions of the entrepreneurial framework, those factors that either support or hinder business startup and growth, need strengthening. Some require a medium- to long-term view, such as policy change, deepening a culture of entrepreneurship, and improving the physical infrastructure of logistics, utilities and communications that enable investment.

“Others can be addressed and vitalised over a shorter timeline, including improvement in coordination of government support programmes, entrepreneurship education in schools, and financial and market access,” Bowmaker-Falconer said.

The annual GEM report is considered the most authoritative global trend study of the state of entrepreneurship, measuring entrepreneurial activity levels and attitudes, the contribution of entrepreneurship to national economies, and the quality of the enabling environment.

Bowmaker-Falconer said the GEM SA report provided a comprehensive picture of the state of entrepreneurial activity and the needs of entrepreneurs in the local economy and also on an international comparative level.

“Entrepreneurship remains a vital economic and social lever to grow the economy and create employment. This is a pressing need in South Africa, given the high levels of inequality and unemployment, and the need to accelerate the pace of economic and social transformation towards an inclusive society and economy.

“Joined-up thinking to create an effective entrepreneurial ecosystem is a key support mechanism. Our research for the GEM provides a clear understanding of the components of this ecosystem and lays the groundwork for practical and policy advice to create a more entrepreneurial South Africa,” he said.

Meyer indicated that the findings in the report would appear to offer a gloomy picture of the state of entrepreneurship in South Africa, especially considering there are still challenges to overcome as a result of the aftermath of the Covid-19 pandemic, as well as the already existing socioeconomic problems faced by the country.

However, said Meyer: “As can be seen by the featured case studies in the report, South Africans are resilient and, with a better ecosystem in place, more and better-performing businesses will emerge. Therefore, improving policies and creating a more conducive enabling environment should be a main priority for policymakers and other stakeholders.”

“New businesses in South Africa are insufficiently focused on sustainability considerations in their business strategies and operations. This is likely [owing] to a combination of awareness and business distress. New digital technology adoption post the Covid pandemic aligns with international trends, and it appears that women entrepreneurs in South Africa adopted new technologies at a greater rate than men since then.”