2021 Entrepreneurial Activity Review

South Africa is the second largest economy in Africa (by GDP) and has relatively well-established markets and supply chains. Yet constraints on entrepreneurship make it challenging to sustain a business. Structurally, the economy remains characterized by excessive concentration of ownership and control in key sectors, as well as by a lack of participation by the totality of South Africans.

In 2021, overall entrepreneurial activity in the general population remained positive, despite the macro challenges of COVID-19, the electricity shortages that prevailed throughout the year, and the civil unrest and riots in July. In 2021, South Africa’s TEA rate increased to 17.5%, from 10.8% in 2019, while its EBO rate increased to 5.2% in 2021 from 3.5% to 2019. The increase in EBO is particularly encouraging, as this means more early-stage entrepreneurs made it to the established stage between 2019 and 2021, despite the obvious constraints placed on businesses due to COVID-19.

The improvement in TEA may have been buoyed by slightly improved economic conditions, and most likely by the staggering rate of unemployment reported in the second quarter (34.9%, or 44.4% using the expanded definition). 

In 2021, 62.2% of South African adults stated that their household income had decreased because of the pandemic, while 10.3% stated that their household income increased, the second highest among GEM Level C economies. However, despite some of these more promising indicators, confidence among South African early-stage entrepreneurs appears to be mixed. For example, 59.2% of TEA respondents stated that it was more difficult to start a business now than a year ago, while 48.9% stated that they saw new opportunities because of the pandemic; both rates were about average for GEM Level C economies. Perhaps somewhat concerning is that only 52% of TEA respondents plan to use more digital technologies to sell goods and services over the next six months, the lowest figure among GEM Level C economies.

The latter may be the result of a lack of access and affordability rather than intent. Taken together, these rates may indicate that early-stage entrepreneurs in South Africa are less likely to adjust their business plans to respond to new business realities.

2021 Framework Conditions Review

Opinions on existing framework conditions point to a diminished outlook for early-stage entrepreneurs. This is particularly true for finance, where the framework condition Ease of Access to Entrepreneurial Finance received a 3.4 score from experts, the third lowest figure among GEM Level C economies. This is one of the constraints that can dampen business investment, such as the kind needed to implement digital technologies — an area in which it appears many South African early-stage entrepreneurs may not be investing.

The framework condition Government Policy: Taxes and Bureaucracy also received a low score from experts — 3.5 — which was the fourth lowest among GEM Level C economies. This reinforces a frequent economic analysis of South Africa that identifies excessive regulation and a difficult tax system as constraints on entrepreneurship. Only once this is addressed can more entrepreneurs scale up, make it to established-business stage, and formally hire employees. Similarly, the condition Government Entrepreneurial Programs received a 3.1 score, the fourth lowest among GEM Level C economies, signalling a lack of effective programs from the state that could help entrepreneurs navigate challenges.

Infrastructure spending in South Africa has also declined in recent years, a reality identified by experts. For Physical Infrastructure, the score came in at 4.8, the second lowest for GEM Level C economies. The South African state clearly faces a myriad of challenges with infrastructure investment, including ensuring reliable energy supply, rail freight network optimization, rebuilding public sector transport systems, and service delivery at local government level. Improvements to these will all contribute to economic growth and indirectly to entrepreneurship development.