Proudly South Africa – Telling an entrepreneurial story?

Proudly South African Entrepreneurs

Chatting to business owners exhibiting at the Buy Local Summit was inspiring. So inspiring that I almost entirely missed the official programme. Dragging myself away from the businesses exhibiting I attended the sessions after lunch. Over three sessions I was left with a distinct sense that the Proudly South Africa lacked a strategy and an identity. The panelists all emphasised useful points on the need for leadership in South Africa, social dialogue and raised a couple of interesting experiments in supply chain and franchising. Nothing wrong with these statements, but there was little or no attention on how this related to increasing the demands for South African products by South Africans. It is typical of all conferences in South Africa, general calls for leadership without what conference goers call ‘actionable insights’. As I listened to the interviews on radio and TV on the event, my sense of a directionless campaign grew, despite me nodding to the fact that buying local was good for economy.
The Buy Local Summit is the premier event for Proudly South Africa, an organisation aimed at promoting South Africans to buy local goods and services. The official message from leaders inside and outside of government was that buying locally was patriotic, was supportive of job creation and contributed to the economy of South Africa. Outside in the exhibition space, business owners emphasised not the link between my wallet and my patriotism, but rather the link between their product or service and how it could help me. For example, businesses focussed on designing products, focused on the innovativeness or uniqueness of the product. Next, they emphasised international quality of their products, and that they were fairly priced. I quizzed them on whether they thought South African were not patriotic by not buying more South African products, and they argued that the real problem was customers knowing about the product. Those in manufacturing and construction always added that they found it difficult to compete with the ‘big boys’. Most importantly, they understood Proudly South Africa not as patriotic buying, but rather that the country has lots going on and that they could compete internationally. Herein, may lie a future direction for Proudly South Africa campaign. A campaign that emphasises the uniqueness, quality and price points of local products.

Learning from Shot ‘Left

The Shot ‘Left campaign offers a way to illustrate what is possible. The campaign emphasises memories, fun and family all within South Africa. The Shot ‘left campaign asked the nation to change our perception, offering memories, fun and quality time. They were not arguing that the intrinsic value of the South African tourism offering was one of patriotism, but rather than great and affordable holidays are possible in South Africa. In a way it transforms what it means to be South Africans, especially for families who have never had a holiday before. It opened markets and created a new segments. This is important, because the process sees government and social partners working together to create new markets, through an exceptionally targeted campaign. In short, it is an effective and positive marketing campaign with none of the policy babble, although its motivations are to reach a policy objective of growing tourism by South Africans in South Africa. Proudly South Africa needs to do something similar. It is a marketing organisation, and needs to devise a marketing strategy that emphasises the intrinsic value of South African experience. What would such a marketing campaign focus on? First, it would deal with questions of quality of South African products, erroneously regarded as inferior to imported goods Second, it will reposition South African goods as being ‘cool’ and well designed, emphasising the intrinsic value of South African brands. Third, it would have a very specific target audience for its marketing campaign, not a broad appeal to conscious of South Africans.

Creating local demand

Now, one might be wondering what this tells us about human nature. Should an appeal to patriotism not be enough?
The problem with the current message is that it is not actionable, even for patriotic ethical consumers who are seeking local products. The problem is magnified for consumers not already convinced to buy local products. A marketing campaign linked to easy ways to find and purchase South African goods would make Proudly South Africa relevant. It would offer an important platform for South African companies, especially those that produce manufactured goods, a way to reach a wider audience. In so doing, the benefits of having many smaller businesses and more employment would be more realisable. The clarion call to patriotic shopping needs to be replaced with a message that South African products are cool and quality products. This change in the marketing strategy in itself is an important starting point, but will require complimentary initiatives to help growing businesses operate and succeed in the South African economy. Much of the wider economic strategy is outside the ambit of Proudly South Africa, but it can play a crucial role in creating demand for locally produced products and services.

What Zuma said about small business in #SONA2016

The State of Nation 2016 was dominated by President Zuma explaining government’s economic plan.  President Zuma delivered his speech after Congress of the People (COPE) and Economic Freedom Fighters (EFF) were ordered to leave parliament after chanting  “Zupta Must Fall”. President Zuma had little to say on small business, as compared to wooing international investors. The two most important extracts from SONA2016 are:
 

The department of small business development was established to provide such targeted support to small business. Economic transformation and black empowerment remain a key part of all economic programmes of government. One of our new interventions is the Black Industrialists Scheme which has been launched to promote the participation of black entrepreneurs in manufacturing. We urge big business to partner the new manufacturers including businesses owned by women and the youth, as part of broadening the ownership and control of the economy.
 
I announced programmes for the revitalisation of agriculture last year. We introduced the Agri-Parks programme, aimed at increasing the participation of small holder farmers in agricultural activities. Construction has begun in at least five agriparks, which are: Westrand in Gauteng, Springbokpan in North West, Witzenberg in Western Cape, Ncora in the Eastern Cape and Enkangala in Mpumalanga. The agricultural programmes must empower women farmers as well. Allow me to introduce the winner of the Female Entrepreneur of the Year 2015, Ms Julia Shungube, from Nkomazi municipality in Mpumalanga.

There is some action on these fronts, and must be welcomed. However, the comprehensive and deliberate drive to create conditions for small business to thrive is something that President has not delivered on. A good start would for the President to make clear that all businesses are equal in their engagements with the state, and not that some persons have favorable access. Whether Zuma likes it or not, international investors are looking more at his personal relationship, than whether the lights remain on or the roads are tarred. Confidence among entrepreneurs requires clear statements that the economy is not rigged to benefit the connected few. In 2011, we argued that Zuma faced a vision test. As it stands, I do not think he has passed this test during SONA 2016.

BRICS – Internet Users as a percentage of population

The South African Internet space is incredibly grumpy. In a couple of conversation, the outlook is described as incredibly gloomy, and there is a strong anti-government stance. The data now tells a more upbeat story. The diagram below shows that just under half the population in South Africa has internet access.  The data is drawn from the World Development Report, and compares South Africa and its BRICS partners on the measure, “Internet users as a percentage of population” (Latest data: 2013). Progress since 2009  in South Africa has been extremely good, and we are now comparable to our BRICS partners on this measure.
 
BRICS Internet
 
An interactive version is available at this link. 
Interpretations of the data for South Africa will no doubt be polarised. Some in the industry celebrate it as a triumph of markets, while government officials argue that Internet Services Providers are reaping the rewards of a rising middle class. Whatever, the interpretations, this bit of data begins to suggest that things are not as gloomy and grumpy as some suggest.

Making pizzas isn't chemical engineering

What do a pizza maker and a chemical engineer starting businesses have in common? They both recognise an opportunity, and they will both assemble the resources they need to run their businesses.

They are entrepreneurs, but they have major differences. The chemical engineer who is commercialising a new process to create solar panels is described as an innovation-driven enterprise; the pizza maker is described as a traditional small or medium business.
This distinction is the basis for an interesting paper titled “A Tale of Two Entrepreneurs: Understanding Differences in the Types of Entrepreneurship in the Economy”, available from the Kauffman Foundation.
The distinction is palpable in our discussions on economic transformation, and the role of small business and start-ups in South Africa. On the one hand, there are those arguing for “gazelles” – innovators – to be the centre of policy, as they have the potential to be large employers and wealth creators, but we never identify who these potential gazelles are and what would lead to their proliferation.
On the other hand, the mantra of creating “one million small businesses” refers only to government policies that hinder small business, and not to actual market conditions.
We simply have not moved beyond high-level policy statements to developing the strategies that we need as a nation. We are expert cheerleaders for the Little Guy in the economy, but we have not moved to tangible products and services on a scale that will have an impact. In this environment, neither the pizza maker nor the chemical engineer is likely to benefit.
Bill Aulet, one of the co-authors of the paper, provides important advice on understanding the different challenges entrepreneurs face in terms of funding, growth potential, risk levels and other needs.
This is an incredibly useful starting point in South Africa, where generalisations about red tape compete with generalisations about oligopolies. In fact, it might be truer to state that we should be tackling both red tape and highly concentrated markets. But, again, these are such high-level policy statements (often with credible evidence) that they miss the fact that entrepreneurs in South Africa have different needs.
The pizza maker will have to navigate the municipal regulations on the preparation of food, a complicated system of human resources legislation and an opaque system of government funding. But, she will also have to purchase flour in a market that is dominated by large companies, and where small millers are unable to readily ship product to market.
One option for the business would be to go the artisanal route, but it would be difficult to do brisk business given the demand for artisanal foods.
The chemical engineer with the new processes for developing solar panels has similar challenges. Government regulations on inventions in universities seem too state-centric and the cost of prototyping is extremely expensive, and the venture capital system in South Africa underdeveloped. Moreover, there are the challenges of selling the process, and patents to bigger companies might be limited due to an investment stance that does not value early-stage development, or selling the product to construction companies may not be immediately open due to difficulty in marketing an unknown product.
There are pizza makers and chemical engineers who will have the nous and tenacity to navigate each of these challenges. However, not nearly enough of either type makes it through this demanding process. South Africa has one of the lowest rates of established businesses in the world.
A starting point to improving the prospects of success is recognising the different steps required to support more traditional small businesses and innovation-driven businesses.
This article  first appeared in the Sunday Times: Business Time on the 22 March 2015. 

ROLLER COASTER OF VOLATILITY

ROLLER COASTER OF VOLATILITY
By Haroun Pochee.  B.Com CA (SA) – Growing Hands Entrepreneur Development
Are we on a real life rollercoaster ride of fast paced change, unexpected twists, turns and breathless anxiety?
Whether it is in our business environment, political happenings, managing the myriad of power cuts, the extreme fluctuations in exchange rates and markets the ride is not an exhilarating one and our best laid plans can easily be derailed and crashed into an abyss beyond our control.
This can be gut wrenching and factors beyond yours and my control influence the way we react and plot the course of action.  It is definitely not a theme park ride but a real life experience.
We are definitely living in volatile times!
Who would have thought that the oil price would crash in such a short period of time? Who would have thought that the European economy would be in such dire straits? Who would have thought that with such a small representation in the South African parliament, the Economic Freedom Front would make such an impact on the domestic political front?
The impact and consequences of such a drastic change on our business and financial affairs have yet to be assessed and digested by the experts. It leaves the business community with uncertainty in inconsistency.
David Morobe, a regional director of Business Partners emphasized one of the challenges in his keynote address at the 2015 Growing Hands Entrepreneur Start-Up program recently. He said;
“Unemployment is a global issue. Global youth unemployment is a crises and is predicted to keep rising. The South African situation is dire. Four million seven hundred thousand people out of an estimated eighteen million people are unemployed.”
He cited that in South Africa entrepreneurship offers the country a chance for growth, job creation and wealth creation. Yet entrepreneurship did not seem to be a desirable choice for young people. Morobe emphasised; “We must build a society that appreciates the role of entrepreneurs.” International there is a lot of support for entrepreneurs and entrepreneur development. Business Partners have started the “Square Peg Movement” which is intended to promote “entrepreneurship as a noble career.” The idea being that the movement could develop people who see the world for what it could be, who could go against the tide and find the best of themselves with joy and spirit and who care for the spirit and well being of our communities and their upliftment.
 
He inspired with his conclusion; “True success can be defined as – Not what we know but what we do with what we know. Everything starts with an idea and we are all creative in one way or another”
He gave aspirant entrepreneurs who find themselves challenged by the rollercoaster ride HOPE to see the world from their perspective, for what it could be and who are swimming against the odds of challenges in trying to create opportunities for themselves, their families or their loved ones.
There are lessons for all of us:

  • We have to encourage entrepreneurial activity.
  • Support, mentor and fund ventures even if they are small and self sustaining.
  • Be prepared and accept that there could be failure.
  • Our plans, like the times we live in, need to be flexible and should allow us to tailor or amend should any of the matrix change fundamentally.
  • We have to be better prepared to adapt to trend changes and adopt principles of change management.
  • Expand our business and personal networks seeking opportunities for improving and expanding business prospects.
  • Invest in our personal development to up-skill ourselves and improve our preparedness for any threats that may arise.
  • We cannot be paralysed by procrastination and indecision. Leaving a situation unaddressed for too long without decisiveness can be fatal.
  • Understand our individual leadership personality and role.

Working on our challenges, sharing our concerns and making our action plans come to fruition will help us prepare ourselves to overcome the head winds of the rollercoaster of economic uncertainty.
 
Growing  Hands is a NPO, providing Entrepreneur Development programs. Visit Growing  Hands Facebook page for more information on our programs, our volunteers and our presenters.

Local success need not be an alien concept

ENTREPRENEURS can learn a lot just from visiting and trading with other businesses and so can those making public policy.
But this critical street-level perspective is missing with government officials in the wake of recent attacks on foreign-owned spaza shops, seemingly unable to explain whether foreign-owned shops are super profitable, if they pay taxes and whether they should be formalised.
I recently went to a foreign-owned spaza shop in Yeoville, Johannesburg. The shop owner willingly sold me a soft drink, but was reluctant to share stories.
Yet even a quick glance around the shop was revealing. A machine dispensed prepaid electricity and airtime. Items of fresh produce were sold individually, as were pieces of chicken. Advanced payment systems for certain services sat cheek-by-jowl with the traditional method of selling single servings.
The setup reminded me of tactics outlined by CK Prahalad in his book The Fortune at the Bottom of the Pyramid.
Another example: on a Sunday afternoon, we needed to repair a school uniform — which was no problem, because we had a choice of about a dozen tailors in Fordsburg.
After a couple of quick quotes and the compulsory haggling, we had a repair completed professionally and within half an hour. The business we chose had one person dealing with customers and two tailors working through a large number of garments.
This business intrigued me. Three people employed in a small shop, with neat fittings, the requisite equipment and doing a brisk trade.
It is the type of business envisaged by the National Development Plan, which sees lower-skilled service businesses as employment generators. The tailors would not take kindly to being described as such — indeed, they could probably produce a bespoke suit — but their niche is for repairs done inexpensively and for day-to-day women’s outfits. If you wanted a bespoke suit, you would find a specialist around the corner, and next to him someone displaying his summer collection of evening wear for women.
Crucially, these tailoring businesses are thriving, despite the enormous job losses in the clothing and textile industries and tough negotiations on a minimum wage in the sector.
These ventures raise questions —  significant policy questions —  especially if the number of such businesses can be increased to reduce unemployment.
In townships, besides collective buying and the selling of single servings and prepaid technology, an important service is the provision of credit, often interest free.
For some it is about practising the Islamic prohibition on charging interest, but more generally it is a time-honoured way of doing business.
This practice is supported by monthly transfers from the state through social grants, remittances and salaries in these communities, and an acceptable default rate on payments.
These informal credit agreements are an important part of operating in South Africa’s townships.
One could get wrapped up in the seeming exceptionalism of foreign-owned stores, but the Gauteng City-Region Observatory has revealed that the majority of informal businesses in Gauteng are owned by South Africans. And success is not foreign to them.
Moreover, one should remember that, for a range of reasons, many foreign-owned businesses are not fully formal. But the kneejerk response to formalise them must be questioned. The Sustainable Livelihoods Foundation argues for a two-pronged strategy: formalising larger businesses and allowing microenterprises to remain informal.
This could be an optimal strategy for our government and is a policy recommendation worth considering.
Around the world, governments are encouraging immigrant entrepreneurs. The education and entrepreneurship Kauffman Foundation recently offered guidance to national, state and local governments in the US on attracting talented expats, specifically in the technology sector. And a “start-up visa” to support the relocation of businesses is already available to entrepreneurs in Chile, France and Canada, with other countries adopting similar strategies.
The common refrain in South Africa is that immigrant entre-preneurs are only involved in retail, so do not bring anything “new to the table”.
But these entrepreneurs are also involved in light manufacturing, making products such as washing powder, sweets and mattresses.
Often they are importing technologies and processes developed in other countries to serve poorer consumers. These experiences in manufacturing are an important area of study, especially because the government has a commitment to creating 1000 black industrialists.
The attacks on foreign-owned shops in Gauteng are clearly xenophobic. Underlying them are assumptions about the profitability of foreign-owned businesses and a sense that the economy does not offer locals any opportunities. But aspirant entrepreneurs can learn by observing successful businesses owned by South Africans and immigrants.
This would be enhanced by addressing the root causes of violent protest: resilient and high levels of inequality in wealth and opportunity in South Africa.
In addressing this underlying challenge, better public policy will be developed from us all having more of a street level perspective.
This article first appeared in the Sunday Times: Business Times on the 8 February 2015.

SA’s phantom ‘efficient laager’ skews thinking

THE “efficient laager” is my description of big business’s role in South Africa’s discussions on economic policy.
The central feature of this hypothesis is that it defines business — particular big business — as a bastion of efficiency, neglecting to tackle the core questions of economic concentration.
The stance is insulated and defensive. You and I are probably not welcome in this laager.
About 60 business leaders were polled on their perceptions of the South African economy for the World Competitiveness Report, and substantiate the dominance of the “efficient laager” mentality. Two responses in particular highlight a worrying perspective among business leaders.
First, respondents were asked about the intensity of local competition. The respondents rated South Africa at 36 out of 144 countries. In other words, in this perspective South Africa’s market economy is seen as competitive by international standards. However, according to the Global Entrepreneurship Monitor, the established business ownership rate is only at 2.5% -among the lowest in the world — which hardly suggests a high level of local competition.
Second, respondents were asked about value chain breadth, with a lower ranking suggesting that companies are not involved across the entire value chain. Respondents to the survey ranked South Africa 68 out of the 144 countries surveyed. Yet the South African economy is highly concentrated as cases presented to the Competition Commission have shown over the years.
Industries as diverse as steel and bread all reflect a highly concentrated ownership structures. Importantly, the price structure and dominance of value chains by very large companies is one of the biggest challenges we face in democratising the economy. Again, the perception of respondents can be questioned as much higher entrepreneurship rates are evident in countries ranked much lower on this measure than South Africa.
If the private sector is seen as excellent by respondents, the government is viewed as completely bad.
Let us be clear, the public service in South Africa requires extensive reform to combat rising patronage. The interpretation by private sector analysts is, however, hysterical, and offers scant solutions.
Two examples show this. First is the hyperbolic comparison. At a recent event hosted by the Wits School of Governance, a leading private sector commentator argued that “children under the Taliban receive a better education than children in South Africa”. It is pure sensationalism, partly because the Taliban does not rule Afghanistan. The fact-checking website Africa Check and academic Nic Spaull show that business leaders have a much more negative perception of our education system than international benchmark data supports.
The second common warning is that South Africa risks becoming a “failed state”.
Let us be clear again, the worrying signs of rising patronage must be countered.
However, it is not merely a problem for the government; it resides in the large companies. Listed companies on the JSE that have participated in black economic empowerment transactions invariably do deals, not with smaller companies in their sectors, but rather with companies that have strong political connections.
This is part and parcel of the worrying system of patronage emerging in South Africa. Patronage politics resides inside the largesse of the government, but also is deeply rooted in South Africa’s private sector.
The creation of this phantom “efficient laager” has huge implications. It reflects the duality of income and asset holdings in our society, with the so-called top 1% not merely disconnecting, but taking up a posture that paralyses them.
After all, if all the problems reside in the government, there is little a senior executive can do, except bemoan the rise of the patronage politics and premise investment decisions on this perception of South Africa.
Every so often, some business leaders offer a welcome counter perspective, showing that a more realistic assessment of South Africa and its challenges is possible. These voices are, however, in the minority.
Consequently, a dominant discourse is entrenching itself and big businesses are retreating further into a set of orthodox positions based on conservative perspective of market based reforms.
It venerates economic growth and deregulation, without tackling questions of equity. It hysterically criticises patronage, while participating in it.
A further retreat into what I am calling the “efficient laager hypothesis” would not merely widen the gap between the government and business, but would also reframe the debate in ways that take us further away from solutions. Smaller businesses should take note, because they should not join the chorus of big business, but rather challenge this perspective.
 
This article was first published in Sunday Times: Business Times

One large business vs. 1000 little ones

Possibly, the most important question in public policy is “who benefits”.
In answering this question, not only can distributional outcomes be assessed, but often the underlying power structures. The recent reporting on the Public Investment Commission investing R1.5 billion of government employee pension funds in CAMAC Energy raises just this question: “Who benefits”.
Three features of CAMAC Energy are important. First, the company has several investments across the African continent, mostly in oil and mining. Second, it is regarded as a high risk penny stock in New York. In fact, reports show that the first tranche of PIC investment staved off its liquidation. Third, the owner of CAMAC Energy is described as well-connected to political leaders, including those in South Africa.
Now, imagine if the PIC decided to spend this money on businesses in South Africa. For arguments sake, let‘s remove the question of patronage from the equation. The exercise is to explore the possibilities of spending R1.5 billion on venture capital for smaller businesses.
The simplest option would be to divide the total into equal stakes of R 1.5 million each given to one thousand small businesses in South Africa. Assuming that each of these businesses employ the founder and create an additional two jobs, this would yield 3000 jobs. However, we know that business failure is high, so something in the region of 1500 jobs could have been created. More to the point, even in a pessimistic scenario 500 new businesses would be created, with substantial impact on the asset holdings of the owner and her family. The broader social good would be served not only with broadening ownership, but also with small impacts on economic growth.
Another option would be to limit the selection of companies for venture capital to those working with successful franchises or incubators. The investments decision are more cautious aiming to scale currently successful experiments. The number of jobs could easily reach between 5000 and 10000 new jobs, assuming that small successful franchises runs two shifts a day.
The possibilities are however even wider. In one of the tech incubators, a company is conjuring up an open source solution to a problem facing businesses, and in so doing establishes in addition to the software cloud services. This company supports the businesses of 200 South African companies, who provide extensions and maintenance around the software that has been created. The impact on direct and indirect jobs would multiply quickly, and a guess of around 10 000 jobs would be plausible. This is not as farfetched as it seems, as research suggests that South Africa could create 145 000 jobs from cloud computing.
A more adventurous option of matching funding would expand the funds available and test the plans of entrepreneurs. Entrepreneurs would be required to receive matching funding to access government funds. This is common today in American cities. Entrepreneurs would proposition venture capitalists, banks and invest their own cash to access government funding. The total available funds would now be R 3 billion, and the potential gains for economic growth and employment much greater. More importantly, the small number of angel investors could grow rapidly, thus supporting an ecosystem for entrepreneurs seeking smaller sums of equity investment.
The mind could run wild with possible options. For instance, imagine investing R 500 million into manufacturing companies in the “East Rand”, to support the Ekhurhuleni initiative to create a aerotropolis. Or investing R 200 million into the burgeoning tech sectors in Johannesburg and Cape Town. Or, investing in logistics to support smallholder farmers to bring goods to market.
The possibilities are in fact endless, and in each of these policy options the distributional impacts on opportunities, jobs and economic growth would be greater than investing in CAMAC Energy.
These proposals should not be construed as suggesting that all pension funds start investing in risky startup activity, or that the success of any of the ideas mentioned here is guaranteed. Rather these ideas are meant to show in the world of investment opportunities, spending R 1.5 billion on a single company raises substantive questions. This is especially true given that the investment in Camac is comparable in size to investments in agencies like the Jobs Fund and the National Empowerment Fund, which have larger mandates.
In answering the question “who benefits”, it is certainly not small business. The ANC has in its explanation of the term “radical economic transformation” argued that it means amongst other things, an expansion of economic opportunity and equal ownership of assets. It is a certainty that this agenda is not aligned with an investment of R1.5 billion in CAMAC Energy.
The investment in Camac begins to shed light on the underlying power structures that guide investment decisions. However, the important conclusion is that we have prioritised one opportunity with limited gains for our society, over possibly starting one thousand small businesses.
An edited version of this article first appeared in the Sunday Times : Business Times 
 

Small firms may not be SA's saviours

Small firms may not be SA’s saviours

WHAT do Clem Sunter and Julius Malema have in common? They share the policy goal of creating a million small businesses in South Africa.

The arithmetic is seductive: by creating the businesses, jobs and new assets come into existence. If these outcomes were achieved, the results would be spectacular.

For Malema and his supporters, a substantive change in ownership patterns would have been achieved. For Sunter and his supporters, more open and transparent markets would provide evidence of successful market-based reforms.

The pair obviously differ on how the million new jobs would be created, but the agreement on a target is useful and rare in an increasingly polarised South Africa.

Small business as a creator of jobs and wealth is an influential idea and, some would say, one whose time has come.

To arrive at this outcome, important assumptions must be true — the most important being that small businesses need to survive beyond 36 months, which is when they could be described as “established businesses”. As important is that the growth of small business will be labour intensive or, at the very least, require additional labour.

But an article published on the website Econ3X3 asks us to confront a world in which neither of these assumptions hold true today. The authors, Andrew Kerr, Martin Wittenberg and Jairo Arrow, who are academics at the University of Cape Town or Stats SA, use Quarterly Employment Survey data to estimate the contribution of big and small firms to job creation and job destruction. Their major finding is that large firms have higher rates of net job creation than small ones.

It is important to remember in interpreting the findings that the authors are measuring both job creation and destruction.

Traditionally, in South Africa we have measured only job creation and assumed that about 50% of new jobs are created by small business.

The problem with this assumption is that we tend not to measure the loss of jobs over time. In fact, it is more correct to say that small businesses destroy lots of jobs, because the majority of these firms fail before their third year. Kerr and his co-authors argue: “Firm death as a cause of job destruction is stronger among smaller firms: only 7% of the 37 000 job losses of the largest firms has been due to closures, as against 34% for the smallest firm category. (The 34% entails thousands of small firms.)”In fact, they suggest that a firm with 500 employees is a threshold for positive net employment creation. The arithmetic of a million new businesses each employing a couple of people thus needs to be questioned, because very small firms do not have the cash flow to employ people.

However, the deeper question remains: Why do small businesses contribute so little to net job creation? Kerr and his co-authors do not provide a definitive answer, but point to the possibilities of setting wages by collective bargaining, although they also hint that labour legislation may not be as onerous to firms as is widely believed.

A deeper look at structural factors could reveal constraints to the survival of small businesses, such as the pricing of steel or the availability of high-quality bandwidth. More research needs to be undertaken in this regard.

The core lesson for setting policy targets is twofold. First, the idea of creating a million new small businesses has gained ground and plays a useful role as a rallying cry.

Second, if we are serious about small businesses contributing to job creation, a different target needs to be developed. That target would focus on the number of successful small businesses after three years. It is a target that Sunter and Malema need to pay attention to if small business is to play a meaningful role in contributing jobs and creating new wealth.

• Hassen is a public policy analyst who writes about small business. See zapreneur.com

• This article was first published in Sunday Times: Business Times

Small Business Ministry Should Learn by Doing

Strategy before structure – President Jacob Zuma should heed this guideline when considering a small business ministry.
The idea of creating a small business ministry was given strong support on the election campaign trail by senior leaders of the African National Congress. Supporters of the idea, especially from organised black business, correctly point out that public policy on small business requires a major overhaul. Intriguingly, organised black business have argued that a small business ministry is required to support and create “black industrialist”, which suggests a possible focus on creating smaller manufacturers.

Strategy and structure

 
The idea has however not received unanimous support as small business advocates worry that it will create a “ghetto” into which all small business issues will be consigned, without impacting on broader economic policy. The alternative suggestions include creating a commission or locating small business in the Presidency.
Taken together, there is agreement that improving public policy for small business requires an institutional home, but disagreements on exactly what that home should be. Underpinning this call for a home for small business in government, is the widely accepted view that public policy on small business requires a major overhaul. It is on this foundation, that the tensions between strategy and structure can be merged.
Traditionally, the process of developing public policy culminates in a White Paper. Usually, this is based on research, available evidence and consultation. A more experimental approach to public policy making could however serve small business owners better and improve the quality of public policy. The idiom “learning by doing” summarises this approach. [ref] This experimental approach has gained credence with the publication of books such as Poor Economics: A Radical Rethinking of the Way to Fight Global Poverty by Abhijit Banerjee and Esther Duflo  and More than good intentions: Improving the Ways the World’s Poor Borrow, Save, Farm, Learn, and Stay Healthy by Dean Karlan and Jacob Appel  These books provide important ways to understand how to make choices between public policy options and to scale successful initiatives. In the case of South African small business it is worth considering such an approach. [/ref]

Experiments

As an example, government could create a venture capital fund that aims to accelerate startup activity in South Africa. Innovations such as requiring entrepreneurs to find matching funds from other sources, or from their savings could be introduced. In addition, partnerships with existing small business support programmes could be fostered. Importantly, government would begin to understand its role as a venture capitalists, and through that explore whether a shift from providing loans to venture capital would work.
As another example, government could reduce the risk of starting a business by dramatically reducing or eliminating taxes for small business. This would be a much more ambitious programme of tax reduction for small business than the existing programmes. Government would thus learn whether eliminating taxes on small business would support businesses to move beyond the startup phase.
In yet another example, government would seek to grow the number of suppliers into value chains. This would require creating markets in which smaller companies could sell to larger companies, on a fairer basis. The small scale agricultural sector could be a prime candidate for such an initiative, through both selling of produce and through small scale agro-processing. In this case, government plays a role as an intermediary and market maker, either directly or through partnerships.
More experimentally, government could support the creation of maker spaces – which provide tools for prototyping products and reduce the costs through digital innovations. The current work by the Department of Trade and Industry on incubators could be leveraged to support South Africa’s innovators.
 
These examples are all affordable, within existing resources, but require careful  reprioritisation of both taxation and expenditure. Importantly, the small business ministry in these examples would not be playing an “integrating and coordinating” role but rather as a space to test several carefully selected ideas. In this process, it would construct its relevance and provide leadership to government departments.

Structural Change?

The Achilles heel of adopting a more experimental approach; critiques would argue; is that it does not tackle wider structural changes needed in the economy. This warning must be heeded, if we are to proverbially “get bang for our public bucks”. Thee lessons learned from the experiments would be vital to understanding how to scale interventions in the small business sector, especially the links to industrial policy . In so doing, projects selected to scaled up would support wider structural changes.
In providing a mandate to experiment with several ideas would create a model of evidence based public policy making, where government learns by doing. In adopting such an approach the speed of getting products to support small business is increased, as is the ability to scale up what works. In making decisions on small business ministry President Zuma must focus on the development of strategy through experiments, rather than a staid process that leads to a White Paper that emphasises “coordinating and integration”.
 
An edited version of this column first appeared in the Sunday Times on May 18, 2014.