The growth of small businesses in South Africa is severely affected by the institutional environment in which they operate. In this series of articles, Cornelia Olivier, Head of Sourcing: Corporate Services, Absa, looks at South Africa’s institutional environment.
In the final part of the series, Olivier tells SmartProcurement how extending formal credit to household enterprises in South Africa supports a proportionate growth in the number of formally registered small businesses, but she is concerned that the country’s education system may be cutting down our entrepreneurial ambitions…
Formal credit has a positive impact on self-employment and small business
Olivier recently conducted a study into the impact of two formal institutional small business enablers in South Africa: access to finance and education. The study revealed that formal credit extended to household enterprises in South Africa has a positive impact on self-employment and can create a proportionate growth in the number of formally registered small businesses.
The study suggests that lending extended to registered household enterprises is an enabler of the population it is aimed at – that is, individuals seeking professional self-employment and small formal businesses seeking limited growth. This aligns with the principle that allocating a resource to support specific activities, leads to behaviour that grows these activities (1).
Formal lending enables small business growth
If institutional focus is lent to individuals seeking professional self-employment and small formal businesses seeking limited growth through the measurement of formal lending extended to the wider SMME segments, it is likely that formal credit extended to the wider SMME segments will enable growth in the entire formal small business sector in South Africa, says Olivier.
Another area of investigation may be the institutional enablers related to increasing the number of SMEs that are formally registered with SARS, notes Olivier.
“Formal finance extended to small business is an enabler of small business, but formal financing is extended by lending institutions that require the small business to be formally registered with the tax authorities. Highlighting areas that enable formal registration of small businesses might increase the formal small business sector in this country, and further improve small business opportunities for obtaining formal credit.”
Education capital may grow opportunistic entrepreneurship and wage employment
South African government spending on education appears to have a strong, positive impact during the growth of early-stage entrepreneurship, but a strong, negative impact on self-employment.
“Observations indicate that education capital may grow opportunistic entrepreneurship and wage employment, rather than survivalist entrepreneurship in South Africa. Education capital seems to assist in growing revenues in the formal small business sector,” noted Oliver.
In fact, Olivier noted that the attainment of secondary education seems to enable survivalist self-employment as an alternative to unemployment, while tertiary education seems to reduce survivalist entrepreneurship.
The figure illustrates the enabling stages of entrepreneurship through education.
The findings highlight the contrast between survivalist entrepreneurship and opportunity entrepreneurship in South Africa.
When taking into account the affect of years of schooling on small business growth it seems that entrepreneurs who have growth ambition and access to finance, and are enabled through additional years of schooling, have higher growth prospects. However, the attainment of tertiary education seems to discourage self-employment, strengthening the theory that the preference for wage employment outweighs the preference for self-employment in South Africa.
With high levels of unemployment and the strong preference for wage employment, the South African government and the Department of Education have to recognise the strong influence of the informal cultural-cognitive institutional pillar and include elements in the schooling system that address society’s underlying perceptions and beliefs about entrepreneurship and self-employment.
Formal bank lending will enable small business growth
Given the link between formal bank lending and small business growth, the banking sector’s contribution could be central, and it is highly likely that formal lending extended to small business will increase once measured and reported for all sectors of formal small business.
The impact of institutional incongruence on small business growth
Further investigation on the impact of institutional incongruence on the growth of small business in South Africa could lead to better understanding the interaction of the regulatory, cultural-cognitive and normative institutional pillars in enabling small business growth. In particular, the interaction of the regulatory environment with the normative environment – such as the impact of labour laws on small business, or the impact of tax regulations on access to finance in small business – might provide more insight into the impact of policy decisions regarding small business growth in South Africa.
It may also be useful to investigate the underlying institutions – whether formal or informal – that currently encourage the strong preference for wage employment rather than self-employment in South Africa. The understanding of this preference will equip institutions such as policy makers and education institutions to address the disabling effect that this factor has on the growth of small business in South Africa.
To find out more about the study conducted, please contact the author on LinkedIn.
(1) Bowen, H.P. & De Clercq, D. (2008). Institutional context and the allocation of entrepreneurial effort. Journal of International Business Studies, 39, pp. 747-767.