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Early-stage venture capital in South Africa: Challenges and prospects M. Jones Investment Banking Division, Merrill Lynch South Africa, [email protected]

C. Mlambo* Graduate School of Business, University of Cape Town, Private Bag, Rondebosch 7701, Republic of South Africa [email protected] The aim of this paper is to assess which factors impact the development of early-stage venture capital in South Africa. Factors identified for other markets and countries are explored and their relative importance in South Africa determined from the perspective of market participants. These include venture capital and private equity fund managers, government institutions, intermediaries and university research coordinators. The study used both an online survey, to capture a broad representation of opinion, and interviews, for in-depth responses. There was broad consensus among respondents with regards to the key factors requiring attention, which include the lack of funds targeted at early-stage investments, the lack of specialised fund managers, and the low entrepreneurial skillsets in the country. Through a detailed analysis of the responses, certain measures are proposed that can enhance the development of early-stage venture capital in South Africa such as engaging more with angel investors and improving the cooperation between the different market players in the sector. *To whom all correspondence should be addressed.

Introduction South Africa continues to focus on the need to drive local economic development and to encourage entrepreneurial activities especially among the ‘previously disadvantaged populations’1. Skillsets, training, regulation and bureaucracy play a pivotal role in entrepreneurial development. However, entrepreneurs often face increasing difficulties in accessing a broad range of financing options. Thus private equity (PE) and venture capital (VC) can be instrumental in filling this financing gap. The difference between PE and VC is the form and stage at which the investments take place. Typically, PE refers to later stage investments through the acquisition and financing of established businesses. When financed by significant levels of debt, such transactions are known as leveraged buyouts (LBOs). These had become common in the developed PE markets of the US and Europe before the financial crisis. VC, on the other hand, refers to a much earlier stage of financing of nascent businesses with limited or no track records, such as a new business idea. The aim is usually to finance their growth to significantly greater sizes in terms of market share and customer base. In either case, the aim is to make a profit on the initial investment by taking equity ownership in companies and holding the 1

These are people of colour who were discriminated against during the Apartheid era.

investment for a specified period of time, often 3 to 5 years for PE funds and longer periods for VC funds. The longer period of investment and the heightened risks posed by early-stage companies such as the unproven future demand of an undeveloped product, reaction by competitors (Kaplan et al., 2004) and the lack of entrepreneurial track record makes VC investment riskier than PE. Unlike PE, VC funding is highly unlikely to involve any form of debt financing due to the unattractive risk profiles of the funded firms. Thus the return on equity on VC investments is based on growth rather than on leverage. Early-stage VC investment is really the key in terms of spreading wider economic benefits because it takes place at the hurdle stage when so many new businesses face a funding gap. This is also the stage when university research can be capitalised upon and be developed further. The significant role played by the VC market in innovation and in driving economic growth has been identified by a number of authors (Sahlman, 1990; Gilson, 2003; Kenney, Han & Tanaka, 2002; Dossani & Kenney, 2002). VC provides the necessary financing that enables businesses to bring ideas to market and expand (Lerner, Moore & Shepherd, 2005). At the early-stage, businesses are unlikely to have tangible assets or revenue track records making them unattractive for typical bank financing (Gompers, 1995). Whereas many businesses are often started using personal savings and funding from friends and families, this

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form of financing is often not available in sufficient quantities to provide a realistic and sustainable form of financing for new developing businesses. An alternative source is ‘angel’2 funding which, according to Sahlman (1990), may have outweighed VC funding as a source of finance in the US. However, inference may not be made to developing economies, which may well be without the prerequisite pool of angel investors. By definition, the pool of available resources from angels may not be viable for increasingly larger capital demands (Gompers, 1994).

Although the lack of early-stage financing is welldocumented in survey reports, research seeking practitioner or stakeholder input in determining the difficulties faced in successfully establishing and maintaining an active earlystage VC market in South Africa has been limited. Available research has focused, for example, on funding decision criteria used by VC firms (Van Deventer & Mlambo, 2009), the potential of the South African VC market (Stillman, Sunderland, Heyl & Swart, 1999) and its development in general (Lingelbach, Murray & Gilbert, 2009).

VC funds add more value to investee companies by bringing their own expertise, networks of contacts, suppliers, financing expertise and key personnel (Dossani & Kenney, 2002; and Jeng & Wells, 2000). What is clear is that in the US, the birthplace of the VC industry and still the largest VC market in the world (Lerner et al., 2005), the VC industry has had some remarkable successes and has contributed to significant economic growth, job creation and wealth enhancement in that country (Sahlman, 1990). Companies that owe their current success to initial financing being made available by VC investors include Apple, Intel, Federal Express, Microsoft and Compaq (Sahlman, 1990). Of the many venture-capital-backed companies, about 579 went public during the 11 years ending in 1988 and their “total market value exceeded 30% of the total market value of all comparable companies going public during that period” (Sahlman, 1990: 482).

This study seeks to fill this gap by examining if there are any specific characteristics that make the South African market uniquely difficult for early-stage VC to flourish. It also assesses if the role of government is well-developed and understood, for example, with regards to regulation, incentives and public-private partnerships. The measures proposed by respondents that can be taken to encourage and enhance VC as a source of funding to entrepreneurs in South Africa are also reported.

VC-backed firms have not only been an important engine of economic growth and job creation, but they have also been responsible for commercialising cutting edge science such as biotechnology advancements and the internet (Gilson, 2003). Thus, according to the 2008 study by the South African Venture Capital & Private Equity Association (SAVCA), VC plays a necessary and critical role in the innovation value chain. It makes it possible for new businesses to be established, leading to the creation of jobs and an increase in the country’s export potential (SAVCA, 2008). Despite its importance, early-stage VC funding is almost non-existent in South Africa. Companies such as HBD Ventures that have sought to enter the VC market subsequently withdrew to focus on PE. According to KPMG & SAVCA (2009), no new early-stage funds were raised in South Africa through the VC market between 2004 and 2006 and the level has remained minimal in absolute terms. This is so despite R14.5 billion and R15.3 billion having been raised in South Africa for later stage investments in 2006 and 2007, respectively. In 2007, less than 1% of the amount raised was seed capital. As at 31 December 2008, the South African portfolio of seed, start-up and early-stage investments was 6% of the total unrealised portfolio at cost, which does not appear to be different from Europe’s 9% and is slightly more than half the 11% for the US (see Figure 1). However, early-stage financing is critical for South Africa given its social and developmental objectives. 2

This often represents High Net Worth Individuals (HNWI) investing directly into developing businesses.

The paper proceeds as follows. Section 2 briefly reviews the literature on factors influencing the development and success of early-stage VC funding globally. Section 3 explains the data collection process and analysis. Section 4 presents the findings and Section 5 concludes and make some policy recommendations.

Literature review According to the literature, there are a number of factors that impact early-stage VC development. These include the presence or absence of entrepreneurial skill sets, viable exit mechanisms, industry specialisations, monitoring problems, labour market rigidities, regulatory constraints, political distortions and the paucity of deal flow (Lingelbach et al., 2009).

Entrepreneurs and skill sets The absence of the entrepreneurial spirit or culture can be an inhibitor to VC development. This has been the finding by Becker & Hellman (2003) in the case of Germany. In addition, the lack of entrepreneurial skills was found to be the stumbling block to the emergence of entrepreneurial opportunities in the post-planned economies of Central and Eastern Europe (Karsai, Wright & Filatotchev, 1997; Farag, Hommel, Witt & Wright, 2004). The simple lack of quality ideas being presented to VCs contributes to the lack of development of the industry. Lerner et al. (2005) state that in New Zealand many of the interviewees complained about the quality of proposals they receive. In South Africa, where a sufficient level of opportunist entrepreneurs exist (Lingelbach et al., 2009), it is not clear if this translates to opportunities for VC. The situation is exacerbated by the unwillingness of entrepreneurs to cede control to “outsiders” (Karsai et al., 1997; Kenney et al., 2002; Banerjee, 2008). Many entrepreneurs would approach VC firms for debt financing instead of equity (Bliss, 1999), which shows that they simply do not understand the function of VC.

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Viable exit mechanisms The Venture Capital Cycle of Gompers & Lerner (1999) has “successful exit from the investment” as a key component. Exits might involve, at a bare minimum, the potential for appropriate bankruptcy proceedings particularly for earlystage investors (Farag et al., 2004). Other exit mechanisms potentially suitable for VC investments include buy-backs by management, trade sales, initial public offerings (IPOs)

and sell-on to other VC/PE investors (Cumming et al., 2002). Where value maximising exit routes exist, providers of VC funding are able to invest with confidence knowing that if the investment develops successfully, a suitable return can be realised. Where entrepreneurs and managers are equity-compensated, a successful exit would encourage effort on their part and provide them with an incentive to align their objectives with those of the VC (Jeng et al., 2000).

100% 90% 80%

37% 53%

70% 60% 50%

66% 16%

Replacement 13%

40% 30%

41%

20%

20% 6% SA Portfolio at 31 December 2008

Expansion and Development

5%

10% 0%

Buy -out

9%

23%

Seed Capital, Start Up and Early Stage

11%

European US investments: investments: 2000 to 2007 2000 to 2008

Source: KPMG & SAVCA 2009 Figure 1: Analysis of investments by stage based on cost of investments – Comparison of South Africa, Europe and the US IPOs also provide signalling to the market (Black et al., 1998). According to Cumming and Fleming (2002), IPO exits are highest ranked because of the level of information asymmetry between the buyer and the seller and thus only high quality businesses would use this route. In many markets, available exit routes are limited to trade sales, and this is sub-optimal to the development of the VC market. Farag et al. (2004) found that the lack of viable exit routes, other than trade sales, had a negative effect on the development of the VC sector in Central and Eastern Europe. Similar results were found by Da Rin, Nicodana and Sembenelli (2006) in a study of 14 European countries and by Banerjee (2008) in the case of India. Both studies found that the stock market has a positive, large effect on VC activity. However, Jeng & Wells (2000), in a sample of 21 countries, found that the availability of IPO exit routes is a significant determinant of later stage funding decisions but not of funding decisions at the early-stage. Jeng & Wells (2000) discussed the potential for emerging market companies to find suitable listing opportunities overseas. They pointed out that the development of NASDAQ in the US and AIM in London offers suitable listing opportunities for small, high growth companies. The

regulations and approach of these two stock exchanges incline them to early-stage companies, particularly high tech offerings, benefitting from a large, well-educated investor pool. Using overseas stock exchanges as exit options may appear too remote and potentially risky for VC funds in South Africa in addition to the issues raised by exchange controls. The Alt-X, which was established in South Africa to attract early-stage companies, is still limited in its ability to create a sufficiently deep investor pool (SAVCA, 2008). The lack of an active or viable IPO exit route makes stock market-based valuations of a business difficult, especially using cash flow valuation techniques (Cumming et al., 2002) since these require establishing the cost of equity and hence an appropriate discount rate.

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Monitoring, labour market rigidities and industry specialisations VCs seeking to enter into early-stage investments would assess three forms of risks, namely, internal, external and execution risks as defined by Kaplan and Stromberg (2004). The ability to assess and reflect these risks accurately in contracts, covenants and in decision making is critical (Van Deventer & Mlambo., 2009). Post-investment, VC funds require significant commitment of resources in terms of investor management involvement and monitoring so as to add value and to ensure that investee companies are growing appropriately (Gilson, 2003). The clustering of VC firms around key technology and growth company hubs helps to alleviate the monitoring problem as is the case in the US (Kenney et al., 2002) and in India (Dossani et al., 2002). In South Africa, the concentration of the financial community in Johannesburg, might present a problem for entrepreneurial development outside Gauteng. VC focus, for example in the US and Israel, also tends to be on high tech industries, particularly information and bio technology (Dossani & Kenney, 2002). This may also result in the concentration of expertise in only a few industries. However, in India, other investable industries include software, pharmaceuticals, agriculture and industries allied to these (Dossani & Kenney, 2002). Labour market rigidities and regulations also impact the level of innovation, entrepreneurship and early-stage VC investments (Sahlman, 1990; Jeng & Wells, 2000; Da Rin et al., 2006). In South Africa, there are a number of employment-linked regulations in force. These include the Broad-Based Black Economic Empowerment (BBBEE) or Employment Equity (EE) (Lingelbach et al., 2009), which may need to be considered in entrepreneurial and investment decisions.

The role of government The government plays a critical role in establishing the VC sector and in developing early-stage VC funds (SAVCA, 2008). The government can do this through the implementation of sound monetary and fiscal policies that largely establish and maintain a stable macroeconomic environment (Dossani & Kenney, 2002; Kenney et al., 2002). Favourable taxation policies on risky investments would enable high returns and thus encourage new earlystage investments (Da Rin et al., 2006). Lower capital gains taxes (CGT) enable greater returns to be captured by investors and the difference between the income tax and the CGT would lower the potential cost of leaving one’s job and becoming an entrepreneur (Da Rin et al., 2006). The US VC market benefited significantly from policies that support the funding of University research and providing a ready supply of well-trained graduates, from science and engineering backgrounds (Dossani & Kenney, 2002; Kenney et al., 2002). The Massachusetts Institute of Technology (MIT), Stanford, California and Berkeley

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universities played a particularly important role in developing VC funds in the US (Kenney & Von Burg, 1999). The US has been successfully spinning off research and innovation (Bottazzi & Da Rin, 2002) and other governments around the world have tried to replicate (Megginson, 2004) with varying degrees of success. In the US, the Employment Retirement Income Security Act (ERISA) of 1972, which made pension funds criminally liable for losses incurred in high risk investments almost destroyed the VC sector when pension funds stopped investing in VC (Dossani & Kenney, 2002). It took 9 years of intensive lobbying by the National Venture Capital Association to have the restrictions finally removed (Dossani & Kenney, 2002). What is required is the establishment of legislation that encourage the formation of VC firms that can successfully attract and contract out risk, while protecting investors (Cumming & Fleming, 2002). Equally important is a legal framework that is strong in providing legal protection and rights to investors and entrepreneurs (Karsai et al., 1997; and Cumming & Fleming, 2002). Whilst the US government played no direct role in the establishment of the US VC industry (Gilson, 2003), many governments around the world have attempted to engineer and support this industry. The German government, for example, formed the Deutsche Wagnisfinanzierungsgesellschaft (WFG) in 1975, using capital to the value of 50 million Deutschemarks provided by 29 German banks and with 75 per cent of WFG’s losses guaranteed by the government. The WFG’s mandate was to provide VC funding to entrepreneurial businesses with the explicit goal of enhancing innovation creation and conversion (Becker & Hellman, 2003). The results were fairly disastrous in that more than two thirds of WFG’s portfolio companies resulted in partial or total losses, and less than 20% ever generated any returns (Becker & Hellman, 2003). The combined internal rate of return of WFG’s portfolio over its lifetime was estimated to be a negative 25 per cent (Gilson, 2003). In contrast, in Israel, government policies are generally considered to have “supercharged the growth of the Venture Capital” industry (Dossani & Kenney, 2002: 12). Key to this was the establishment of Yozma, a government-funded organisation meant to encourage VC in Israel. Yozma created nine VC funds, in which it invested alongside the private sector (Gilson, 2003). The role of Yozma and its operations, including the nature of guarantees and call options, were different from those of the WFG. Whereas investment decisions were made by the board in the case of the WFG, fund managers made the investment decisions in the case of Yozma and they were appropriately incentivised (Sahlman, 1990). Yozma’s investment funds were all largely successful, grew in size and were ultimately privatised. Although one may attribute the success of the Israeli VC market to its strong ties with the US, it is important to note that most VC-backed Israeli companies were also increasingly able to approach the US market as their IPO destination of choice (Avnimelech & Teubal, 2004).

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Data and methodology

invitations to participate in the survey, 19 responses in total were received by the cut-off date. This represented a response rate of approximately 35%. The majority (i.e. 48%) of the respondents were VC fund managers followed by university research coordinators responsible for the commercialisation of research (21%) and PE fund managers (16%), with government institutions, VC advisors/intermediaries and other categories tied at 5%. The reported findings reflect the views of these respondents.

This research is mostly qualitative, given that the investigation revolves around opinions and personal insights of industry stakeholders. The data was primarily collected through a self-completed online questionnaire to allow a wider geographical spread of the respondents. The questionnaire contained both closed and open-ended questions in order to enable an element of both ranking and personal insight. The use of rankings within the surveys enabled variation between responses to be explicitly identified. Open-ended questions enabled participants to provide greater detail on key issues. Interviews were then used to supplement the data collected through the self-completed questionnaire. The interviews were typically 45 minutes to one hour long. Each interview was recorded, but detailed handwritten notes of the key issues identified during the interview were also taken. These notes were then supplemented by working through the recordings, picking up where key themes arose or new information was provided. The interview data was used to provide additional detail in relevant areas. This is known as data triangulation which is common in cross-sectional designs (Easterby-Smith, Thorpe & Lowe, 1991). Triangulation has the advantage of counterbalancing the strengths and weaknesses of the different methodologies used (Abrahamson, 1983). In sampling potential respondents, the SAVCA database was consulted and the members categorised as VC houses providing early-stage funding, current providers of later stage VC funding, PE players who have avoided the earlystage space, mergers & acquisitions (M&A) advisors and other intermediaries. In addition to using the SAVCA database in sourcing potential respondents to the survey, an internet search and alternative sources (such as the Silicon Cape) were used to check for additional potential respondents. The aim was to reach the majority of relevant entities operating in the VC industry in South Africa. Typical respondents included VC houses specialising in smaller-sized deals, university representatives responsible for the commercialisation of research and parastatal organisations concerned with promotion of entrepreneurship, hence having a vested interest in VC development, such as the Industrial Development Corporation (IDC) through the relevant Department of Trade and Industry (DTI) bodies. In interpreting the data collected through the questionnaires and the interviews, care was taken not to impose personal viewpoints to the findings to ensure conformability. The research tried to capture as broad a set of views as possible within the interest groups identified and the results reported represent an amalgamation of these views. Out of the 54

Research findings Consistent with the literature (e.g. Lerner et al., 2005; Sahlman, 1990; Gilson, 2003), all respondents agreed that VC is important for enhancing innovation and economic growth (95%), job creation (85%) and social development (60%) and that private sector early-stage VC is lacking in South Africa (18 out of 19 respondents). The general feeling was that significant amounts of private sector money are available to venture capitalists, but they are mostly directed at the later stage than at the seed and start-up phases. According to the interviewees, fund managers may claim that they look at “start-up” investments, as many do in their SAVCA profiles, but this is generally not the case. The vast majority of activity is focused on post revenue businesses, typically with at least 2 years of track record, where the product/service is in the market and the business already has customers. While angels were reported to be a key funding option for early-stage non-university based ventures, it was argued that actively investing angels are few and far between and that they typically invest in businesses within their existing networks. With regards the relationship between angel investors and venture capitalists, about 58% of respondents thought of it as complementary, while 16% thought it was competing and 26% considered it to be neutral. A complementary relationship is important to successfully deal with the early-stage funding gap. While the literature (Dossani & Kenney, 2002; Jeng & Wells, 2000) argues that venture capitalists are likely to be more proactively involved in their investee companies, our findings suggest that angel investors get much more involved than VC funds. Angels tend to attend management meetings more regularly than VC funds and they proactively reach out to their own networks to aid in activities such as sales and distribution. This is because angels typically invest in sectors that they are in or were successfully operating in and have detailed knowledge of, as well as in developed networks. Thus although funding from angel investors may be limited, they bring more to the business than just financing.

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Table 1: Survey respondents’ perceptions about VC in South Africa Question: 1.

Obs.

Yes

No

Unsure

Is early-stage investing important for: •

Enhanced innovation?

19

100%

0%

0%

•

Economic growth?

19

95%

5%

0%

•

Job creation?

19

85%

10%

5%

•

Social development?

19

58%

10%

32%

2.

Is there a shortage of private sector early-stage VC in South Africa?

19

95%

5%

0%

3.

Are IPOs a viable exit option?

19

26%

74%

0%

4.

Are overseas listing destinations an option?

19

32%

47%

21%

5.

Does venture capital need geographic clusters?

19

53%

47%

0%

6.

Are industry specialisations needed?

19

88%

12%

0%

Question:

Obs.

Complementary

Competing

7.

The relationship between angel investors and early-stage VC is

19

58%

16%

26%

8.

The relationship between government and private sector funds is

19

26%

32%

42%

Key issues facing early-stage venture capital in South Africa With regards to the main thrust of the research, possible explanations were given as to why there are so few VCs looking at early-stage investments in South Africa. First, there are more than enough opportunities at the later-stage with a lot less risk. Secondly, fund managers at present are simply not interested in making small investments since this translate to small returns in absolute terms. Most VCs in South Africa are currently looking at a minimum equity cheque size of R5 million and upwards, which, for a 25% stake, implies business valuations of at least R20 million. In rating 14 different factors identified in the literature as impacting early-stage VC on a scale of 1 (not important) to 5 (very important), respondents identified the ability to raise funds from investors targeted at early-stage investments, a lack of specialised early-stage fund managers and entrepreneurial skill sets to be the top three issues. Raising funds The issue of raising funds was ranked most highly with an average score of 4.4. What was most readily identified was the need to lower the cost of capital in order to enable suitable returns to be made. However, the high cost of capital is commensurate with the high probability of business failure at this stage of development. Generally,

Neutral

according to respondents, the lack of a track record or steady stream of success stories for early-stage investments in South Africa deters the ability to attract funds at the earlystage. It thus makes it difficult to convince pension funds and other investors on the merits of investing at this stage as it is considered too risky by many. It also came up from the interviews that the introduction of the Broad Based Black Economic Empowerment (BBBEE) investments may have compounded the difficulty in raising funds. Essentially, BBBEE investments fall under replacement capital but they have been the focus of many new funds. The drawing of funds away from early-stage investments has been one of the unintended consequences of the BBBEE initiative. However, contrary to the literature suggesting that labour market rigidities negatively impact early-stage VC activity (Sahlman, 1990; Jeng & Wells, 2000; Da Rin et al., 2006), BBBEE was lowly ranked in this study as a factor impacting early-stage VC investments in this specific regard. A further issue raised was the inability to attract early-stage investments from overseas where a significant proportion of PE funds in South Africa come from. Some of the survey and interview participants blamed this on South Africa’s inhibitive exchange controls.

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Figu ure 2: Factorrs impacting eearly-stage venture capita al in South Affrica Lack of specia alised early--stage ventu ure capital ffund ma anagers The second highhest ranked isssue was a laack of speciallised fun nd managers aat the early-sttage. Despite many busineesses at the early-stagge needing more m hands-on n help acrosss the boaard and not jjust financingg, the generall sense was tthat, unllike with anngel investorss, there is no n small-busiiness exp perience at preesent at VC firms fi to enablee VC partnersships to be b fulfilling aat the early-staage. What is needed n is the rright poo ol of managerrs. According to the literatu ure (e.g. Kaplaan & Strromberg, 20044), funds willl typically focus on a speccific areea because off the need to establish a clear c mandatee for inv vestors at the time of raisiing the funds. In addition,, the trad ditional PE aand/or later stage s investm ment criteria, and theeir holding peeriods, are nott directly tran nsferable to eaarlystage investmentts. En ntrepreneuria al skill sets The third higghest rankedd issue is the quality of enttrepreneurial skill sets. Too probe furth her on this isssue, resspondents weere asked too rank 6 isssues concern rning enttrepreneurshipp in South Africa A in ordeer of importaance. The top-ranked iissue was giveen a score of 6 and the loweest a sco ore of 1.

f the averaage scores plo otted in Figurre 3, As can be seen from ked as the num mber the lack of generral business skkills was rank fr onee priority problem area in linne with researrch findings from Cen ntral and Easteern Europe (FFarag et al., 20 004; Karsai ett al., 199 97). The feeling was thatt South Africca has plentyy of inno ovative ideas but the invent ntor is rarely th he right personn to takee it to mark ket. Experiennced businesss managers are requ uired. The neetworks of buusiness contaccts maintainedd by VC Cs are neither formal nor avvailable at thee necessary sccale to help h businessees and often coome post-inveestment yet many m entrrepreneurs need assistancee prior to VC funding and the costs can be proh hibitive. In line with Bliss B (1999), it was repo orted that soome entrrepreneurs do o not understaand the naturee of VC fundding. In some s instancees they assum me that they are a being giveen a loan n and are, th herefore, reluuctant to giv ve up significcant equ uity stakes. Th hey also tend to use overin nflated valuatiions in their t businesss plans, basedd on unproven n concepts beeing takeen to multiplee country mark rkets. This often leads to many m diffficult discussions when theey approach venture v capitallists for funding, especially e w with regards to early-sttage inveestments wherre actual outcoomes are unceertain.

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Max possible average score = 6 No issues Lack of entrepreneurs Skill assessment difficulties Education Levels Lack of understanding VC role General business skills 0

1

2

3

4

5

Figure 3: Key issues relating to entrepreneurship in South Africa Other highly ranked issues regarding entrepreneurship include the education levels in South Africa, difficulties in assessing skills and the lack of entrepreneurs in general. The general feeling from the interviewees was that inventions coming from universities are of relatively higher quality than non-university inventions. However, there is a lack of track record of successful university-sourced business plans and inventions. This was blamed on the university models for promotion which encourages publications rather than patent-filing and the commercialisation of research. In some cases the value of intellectual property (IP) is overestimated without enough market research. However, according to university respondents, universities' technologies are often in an early-stage of development and the necessary funds to develop such technologies to a stage where VCs are willing to invest are usually not forthcoming. Some university research can be very expensive requiring millions of rand to be invested even before the concept is market-proven. Such research is unlikely to be backed by VCs and the short-time horizons that VCs are looking to invest are incompatible with the commercialisation of university research. There is an attempt by government to fill this gap, for example through the National Research Foundation (NRF), the Innovation Fund, the BRICS3 (in respect of biotechnology) and the IDC.4 Various university technology transfer offices lobby government through the South African Research & Innovation Management Association (SARIMA). The focus has, however, shifted in recent years away from technology transfer and SARIMA towards general research and the NRF. While the interaction between the technology transfer 3 4

Brazil, Russia, India, China and South Africa.

The Innovation Fund was, however, criticised in that it requires the intellectual property (IP) to be kept within the country reducing the ability to internationalise the business. Although the IDC was acknowledged as important and much better able to work within this space, given its new internal structure and VC fund, its fund size and the scale of its operations were questioned in terms of addressing such a large and important market across South Africa. The bulk of research funded by the NRF is general and not pro-commercialisation.

offices of the various universities is being addressed with greater cooperation and coordination, a forum for formal discussions with SAVCA, SARIMA and the broader PE/VC community could enhance understanding between the different parties. The importance of IPOs as an exit route Contrary to the literature (e.g. Jeng & Wells, 2000; Da Rin et al., 2006), it was reported by 74% of the respondents that the lack of an IPO exit route does not impact investment decisions in South Africa. The Alt-X is not seen as a viable option and very few, if any, VC funds have successfully listed on this market. Exit routes of choice seem to be trade sales and secondary sales to later stage investors. Despite the importance and profile of other listing destinations such as AIM and the NASDAQ, and the literature’s support of these as alternative exit routes for VCs in emerging markets (Da Rin et al., 2006), about 47% of the respondents felt that overseas listing destinations were not an option whilst 21% were unsure. Geography and industry specialisations Although 53% of the respondents said VC activity needs to be clustered geographically, monitoring from a distance was not perceived to present problems, especially for particular industries such as Information and Communication Technology (ICT) where businesses are much more virtual and hence accessible. However, the importance of networking initiatives such as the Silicon Cape, which brings together people from all over South Africa and internationally, was acknowledged.

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ICT Biotechnology Healthcare Outsourced financial services Outsourced business services Robotics Green technologies Manufacturing technology Mining & materials Figure 4: Industry specialisations that are likely to emerge in South Africa Industry specialisations were considered important by 88% of the respondents. It was suggested that infrastructure and networks should be focused around industries such as ICT, Biotechnology and Healthcare (see Figure 4). According to respondents, if South Africa can develop solutions to address, for example, the lack of infrastructure and limited broadband access in large townships and rural areas, these could be exported to other emerging economies with similar challenges such as India and China. The respondents cited the importance of mobile and mobile applications as an example in which South Africa could develop and sustain a critical competitive advantage.

The role of government The majority of respondents (18 out of 19) indicated that the government is not doing enough to aid early-stage venture capital. As for the relationship between quasi-government funds and private sector VC, 42% of the respondents thought of the relationship as neutral while 32% thought of it as competing and only 26% thought of it as complementary. The respondents considered tax incentives to be the number one priority area for government action, followed by government funding to the VC sector (see Figure 5). Tax incentives In line with the literature (e.g. Da Rin et al., 2006), the need for tax incentives was not only the highest ranked, but was repeatedly brought up in the interviews and the issue raised by the Silicon Cape and the media (Engelbracht, 2009). It

also remains an important topic in other developed VC markets such as the US (Aberman, 2009). Lack of tax incentives can explain the inability of funds to attract investments from overseas and locally, and the lack of success by universities in raising funds from alumni. Government funding With regards to government funding, it was felt that the level of funding was simply not enough. Some also felt that certain government funds are specifically seeking to take equity stakes in existing businesses rather than aiding the creation of go-to-market products and services at stages that are too early for VCs. Such direct involvement by government may end up “crowding out” private sector VC investments. A similar issue was that of government agencies acting as real partners just like private sector VCs views their role. However, a lack of the necessary skill sets, experience or empowerment on the part of these managers to take key funding and business decisions when working with investee companies often lead to unhelpful and unnecessary delays. It was suggested in one interview that when a VC work alongside government, the issue of decision-making can be resolved through the VC acting as a proxy for voting shareholders. The many different government funds and a lack of transparency and understanding as to which body has what mandate was also considered an issue, thus making the future role of the Technology Innovation Agency (TIA) as a coordinating body important.

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Maximum possible average score = 7 Macroeconomic instability Crime/safety Legal and IP Protection Investment in University Research Improving education Exchange controls/Trade Regs Government funding of sector Tax incentives 1

2

3

4

5

6

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Figure 5: Key issues for government attention Exchange controls and trade regulations Exchange controls and trade regulations have been highlighted often by market participants and by SAVCA (2008) as presenting barriers to the internationalisation of IP and for South African businesses that want to sell abroad especially with regards to payments. The current IP legislation was considered too restrictive and the government was critiqued for not consulting widely enough with universities and VCs in drawing up the legislation. The general feeling was that the domestic market is simply not big enough to offer the real potential that taking a business internationally brings. It was also argued that although almost all decent exits are effectively done offshore, the new legislation prevents this. It was revealed that the process of approval by the Reserve Bank can be frustratingly long with some approvals taking up to 18 months.

Measures that can be taken to promote early-stage VC funding in South Africa With regards to raising funds, it was recommended in the interviews that an “angel fund” be created into which high net worth individuals can contribute funds without taking away the opportunity for them to get directly involved in the running of the business. The fund could have a general/limited partnership structure, just like a typical VC/PE fund, with a management team to manage funding applications, deal transactions and for administration. The fund would benefit from a pool of experienced businessmen, either focused on particular industries thus creating industryspecific funds, e.g. a tech fund or a healthcare fund, or interested in investing generally, either way maximising the breadth and scale of mutual networks and contacts. In addition, potential investments could be debated amongst angels thus offering a greater level of due diligence for the investment. In response to the lack of specialised early-stage fund managers, the respondents alluded to the fact that more successful entrepreneurs need to be directly involved in setting up their own funds. It was also highlighted that

universities can establish their own VC fund to target university inventions which are considered to be of a significantly higher quality than non-university inventions, thus offering a completely different risk profile for investors. To address the lack of entrepreneurial skill sets, the respondents pointed out the need to find ways to formalise the VC-business networks in order to tap into the skills available in South Africa through mentorships, and possibly through incubators. The government’s role could be to direct funding into the “incubation of start-up businesses, mentoring & coaching of new entrepreneurs and for provision of business support to start-up companies during the first years of their lives.” (Interviewee) Many respondents also pointed to the need to alter learning at schools and universities to encapsulate business management and other skills likely to aid entrepreneurs. For example, Science, Technology and Business Skills could be made compulsory at school, and lessons could be learnt from China, South Korea, Ireland and other growing economies with regards to their education systems (Interviewee). The respondents also called for a shift in the entrepreneurial culture in South Africa so that failure and learning can be better accepted. It was argued that universities can help educate inventors with regards to creating realistic and investable business plans. One university interviewee indicated that their university has started to employ retired businessmen and professors to scout or survey PhD work being done to find what might have the potential for realistic commercial applications and providing this perspective to those undertaking the research. Where government is concerned, the respondents suggested that legislation regarding tax incentives needs to be drawn in line with other countries overseas (such as the UK) where such incentives exist. This would significantly contribute to an enabling environment for VC. Respondents also recommended that the government’s funding should be done

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through private sector VC. The government should seek to de-risk private sector investments, instead of pursuing the good returns for itself, and should stop “making all sorts of development demands that cannot be met” (Interviewee). This appears to be in-line with the literature (Gilson, 2003; Dossani & Kenney, 2002) where, in the case of Israel, the government merely provided funds as an anchor investor to a privately managed fund.

Conclusion and recommendations This study set out mainly to explore the reasons for the lack of early-stage VC in South Africa and to provide some proposals for its development. First, the survey participants concurred that VC is a critical mechanism in support of innovation and economic growth. It was established, however, that although South Africa has a later stage VC market and a well-developed PE market, there are very few early-stage VC funds available, whether private or government funded. This presents a problem for entrepreneurs seeking capital at the early-stage as they are faced with a limited set of funding options. This lack of early-stage VC in South Africa is attributed to the difficulty in raising funds targeted at early-stage investments followed by the lack of experienced managers to help entrepreneurs through mentoring and incubation. The latter is critical given the low level of entrepreneurial skill sets in the country, with entrepreneurship more opportunistic than visionary or game-changing. Angel investors are seen as complementary to early-stage VC, particularly in providing smaller investments. However, the absence of a formal structure to pool funds from angels presents a potentially missed opportunity. It is recommended that the role of angel investors be formalised and that the latent pools of financial capital and business skills available in the country be tapped into. Tax incentives can be used to encourage a more formal pooling of funds from angels whilst maintaining their involvement in accessing networks and as mentors. Contrary to the literature (e.g. Da Rin et al., 2006; Jeng & Wells, 2000), the lack of a realistic IPO exit route does not appear to impact early-stage VC in South Africa. Some respondents claimed that AltX has not yet been used as an exit route for most VC investments. However, research that explores how stock exchanges such as AIM and NASDAQ built their critical masses is important for the AltX to draw lessons from so that it can perform its role effectively. There was a general feeling that cooperation, communication and understanding between universities, VCs and the government in South Africa are limited. This is seen to impact the degree to which university research can be commercialised. Some suggested that the government should revisit its funding approach to the VC sector, and should increasingly be involved in developing business skills and incubators for entrepreneurs. With respect to coordinating efforts, SAVCA was seen to be more appropriate for this role, in addition to publicising the VC

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success stories to build awareness and understanding of the sector. Lessons can also be drawn from other markets where such success stories exist. The small sample size used for this research was unavoidable given the limited number of VC firms in South Africa. Nevertheless, the triangulation method used, and resorting to descriptive methods of analysis, made our findings relatively robust. Future research, however, should try to find ways of increasing the sample size in order to avoid the small sample bias, especially when statistical methods of analysis are to be used.

Acknowledgement and disclaimer: The development of this work for publication was supported by the National Research Foundation (NRF). Any opinion, findings and conclusions or recommendations expressed in this material are those of the authors and not of the NRF or the authors’ respective institutions. Neither the NRF nor the authors’ respective institutions accept any liability in this regard thereto. We also acknowledge the useful comments from two anonymous referees. Any errors and omissions remain ours

References Aberman, J. 2009. The decline of the United States venture capital industry: What the federal government should do about it. Washington, D.C.: Amplifier Ventures. Abrahamson, M. 1983. Social Englewood Cliffs, NJ: Prentice Hall.

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Cumming, D. & Fleming, G. 2002. ‘A law and finance analysis of venture capital exits in emerging markets’, Working Paper Series in Finance 02-03. Canberra: The Australian National University. Da Rin, M., Nicodana, G. & Sembenelli, A. 2006. ‘Public policy and the creation of active venture capital markets’, Journal of Public Economics, 90(8-9): 1699-1723. Dossani, R. & Kenney, M., 2002. ‘Creating an environment for venture capital in India’, World Development, 30(2): 227-253. Easterby-Smith, M., Thorpe, R. & Lowe, A. 1991. Management research: An introduction. London: SAGE Publications Ltd. Engelbracht, C. 2009. ‘Give angel investors tax relief to plug fund gap of start-ups’, Business Report, November 26, 2009. [Online] URL: http://www.aurik.co.za/give-angelinvestors-tax-relief/ Farag, H., Hommel, U., Witt, P. & Wright, M. 2004. ‘Contracting, monitoring, and exiting venture investments in transitioning economies: A comparative analysis of Eastern European and German markets’, Venture Capital: An International Journal of Entrepreneurial Finance, 6(4): 257-282. Gilson, R. 2003. ‘Engineering a venture capital market: lessons from the American experience’, Stanford Law Review, 55(4): 1067-1103. Gompers, P., 1994. ‘The rise and fall of venture capital’, Business and Economic History, 3(2): 1-26. Gompers, P. 1995. ‘Optimal investment, monitoring, and the staging of venture capital’, The Journal of Finance, 50(5): 1461-1489. Gompers, P. & Lerner, J. 1999. The venture capital cycle. 2nd Edition. Cambridge, Massachussetts: MIT Press. Jeng, L. & Wells, P. 2000. ‘The determinants of venture capital funding: Evidence across countries’, Journal of Corporate Finance, 6(3): 241-289. Kaplan, S. & Stromberg, P. 2004. ‘Characteristics, contracts and actions: Evidence from venture capitalist analyses’, The Journal of Finance, 59(5): 2177-2210. Karsai, J., Wright, M. & Filatotchev, I. 1997. Venture capital in transition economies: The case of Hungary, Entrepreneurship Theory and Practice, 21(4): 93-110. Kenney, M., Han, K. & Tanaka, S. 2002. ‘Scattering geese: The venture capital industries of East Asia’, A Report to the World Bank. BRIE Working Paper 146. Berkeley, California. [Online] URL: http://brie.berkeley.edu/publications/wp146.pdf

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Kenney, M. & Von Burg, U. 1999. ‘Technology and path dependence: The divergence between Silicon Valley and Route 128’, Industrial and Corporate Change, 8(1): 67-103. KPMG & SAVCA. 2009. Venture capital and private equity industry performance survey of South Africa covering the 2008 calender year. Johannesburg: KPMG Services. Lerner, J., Moore, D. & Shepherd, S. 2005. ‘A study of New Zealand's venture capital market and implications for public policy’, A report to the Ministry of Research, Science and Technology, New Zealand. Lingelbach, D., Murray, G. & Gilbert, E. 2009. ‘The rise and fall of South African venture capital: A coproduction perspective’. [Online] URL: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1459175 Megginson, W. 2004. ‘Towards a global model of venture capital?’ Journal of Applied Corporate Finance, 16(1): 826. Sahlman, W. 1990. ‘The structure and governance of venture-capital organizations’, Journal of Financial Economics, 27(2): 473-521. SAVCA. 2008. Venture capital at an inflection point? Johannesburg: SAVCA. Stillman, R., Sunderland, J., Heyl, L. & Swart, H. 1999. A venture capital programme for South Africa: study and recommendations. Working paper, Arlington, Virginia: Nathan Associates. Van Deventer, B. & Mlambo, C., 2009. ‘Factors influencing venture capitalists' project financing decisions in South Africa’, South African Journal of Business Management, 40(1): 33-41.

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Small medium micro enterprise business goals and government support: A South African case study R. Peters University of the Western Cape, Modderdam Road, Bellville, Cape Town, Republic of South Africa, 7535

V. Naicker* *University of South Africa, Cnr Janadel & Alexandra Avenues, Midrand, JHB Republic of South Africa, 7535 [email protected] Small and medium-scale enterprises (SMMEs) form the majority of the enterprises in the South African economy. The South African government has identified the SMME sector as one of the potential enablers to achieve its objectives of improving job creation opportunities, reducing poverty and creating a more equitable distribution of wealth. The aim of this article was to provide a perspective on the success government support initiatives has had on the SMME sector. To achieve this, the study sought to analyse the perceived strengths and weaknesses of government’s national strategy and its institutions tasked with creating an enabling environment for the sector. The study employed a survey research design methodology in which mixed methods were used. The national business strategy employed by government was critically analysed. Empirical data was collected from 282 respondents in order to answer the research question. The results show that the government’s approach has favoured ‘supply-side interventions’ including, providing access to training, credit, mentoring and information to existing and new business. Furthermore, this study has identified the lack of awareness as the primary reason for the under-delivery of the government support initiatives in SMME development. Respondents indicated that they frequently made use of the services of business consultants and external specialists from which they perceived added more value to their respective businesses. *To whom all correspondence should be addressed.

Introduction The government has identified the small, medium and micro enterprise sector (SMME) as one of the potential means of creating an enabling environment by improving job creation opportunities and wealth distributions necessities (Department Trade and Industry 1995). If the government’s strategy to use the SMME sector is to have any significant success, focus must be placed on developing competent entrepreneurs, especially amongst those classified as previously disadvantaged persons. According to Guzmán & Santos (2001) the entrepreneurial quality of the SMME owner is a critical factor affecting SMMEs’ ability to overcome barriers to survival and achieve sustainable growth. The national strategy for small business development, referred to as the National Small Business Strategy (NSBS), was formally endorsed by the South African Parliament in 1995. This strategy established several important objectives for the SMME sector when dealing with problems it was facing. The most common problems included an unfavourable legal environment, lack of access to markets and procurement, lack of access to finance and credit, low skills levels, lack of

access to information and, lastly, a shortage of effective supportive institutions (Republic of South Africa 1996). Considering the current supply side measures and its effectiveness to date, smaller towns and rural areas enjoy even less support from government institutions in terms of fostering an enabling environment conducive to creating and or expanding SMME’s, as opposed to urban areas (Peters 2009). A consequence of apartheid was the location of previously disadvantaged communities that were purposefully situated outside and far removed from towns, city centres and more importantly developed hubs. This indicates a need for planning from a spatial perspective. Many services under the auspices of Local Economic Development (LED) are available through local government structures, such as municipalities. Although they are most aware of problems faced by entrepreneurs in their respective districts, unfortunately most of these municipalities do not have the capacity to render efficient or effective support to existing and would-be entrepreneurs. LED has gained considerable prominence in development planning. The government’s neo-liberal macro-economic agenda sought a market-driven economic expansion and

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growth strategy, facilitating market expansion, with local government playing a key role in stimulating economic development through investment in infrastructure to “crowd in private investment and boost short-term economic performance” (RSA 1996). According to Peters (2009),considerable emphasis was placed on ‘developmental local government’, increasing the role of government, particularly local agencies, in promoting growth and development, thus entrenching an essentially pro-poor policy focus. The government saw the central responsibility of municipalities as being to work together with local communities to find sustainable ways to meet their needs and improve the quality of their lives (Department of Provincial Affairs 1998). Keeping in mind the urban versus rural bias, the focus of this research will be on SMMEs operating in towns, small towns and rural areas in and around the Kwa-Zulu Natal province in South Africa. This province is home to the large portion of the South African population and is one of the poorest in the country in terms of the poverty gap.

Rational of this research SMMEs are potentially of great socio-economic significance in employment creation, closing the income inequality gap and alleviating poverty. In response to the challenges set out by government and documented in a DTI (1995) the Center for Small Business Promotion (CSBP) of the Department of Trade and Industry (DTI) and the National Small Business Council (NSBC), as well as other developmental agencies, were established to drive the National Small Business Strategy. It was expected from these DTI programmes and other programmes administered by its apex institutions, Khula (credit) and Ntsika (now Small Enterprise Development Agency (SEDA) - training) to build the technical and financial capacity of Small-, Medium- and Micro-sized enterprises. The purpose on the part of the SA government was to foster a culture of entrepreneurship particularly amongst African Blacks, the success of which could be measured by improved competitiveness in terms of turnover growth and employment creation. Throughout the 1990s and to date, most of the research conducted into the effectiveness of government support has focused on the major economic regions in South Africa, whilst neglecting the rural and small town SMMEs (Rogerson 2000). This study aims to contribute to closing the gap on an urban bias against the rural and small town SMMEs, where a more targeted government support programme is urgently needed.

Literature review SMMEs are potentially of great socio-economic significance in employment creation, closing the inequality gap and

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alleviating poverty. In response to the challenges set out by government and documented in a DTI (1995) the Center for Small Business Promotion (CSBP) of the Department of Trade and Industry (DTI) and the National Small Business Council (NSBC), as well as other developmental agencies, were established to drive the National Small Business Strategy. It was expected from these DTI programmes and other programmes administered by its apex institutions, Khula (credit) and Ntsika (now Small Enterprise Development Agency (SEDA) - training) to build the technical and financial capacity of Small-, Medium- and Micro-sized enterprises (Peters 2009). Also, a number of specific programmes had been introduced by the Industrial Developed Corporation (IDC) and the DTI. In many developed countries, the late 1970s and 1980s witnessed the re-emergence of SMME’s, due to two major events. Firstly, spectacular cases of large enterprises running into economic difficulties and shedding employment arose in nearly all industrialized countries, while the SMME sectors, or parts of them, fared relatively well through a period of economic turbulence that had started in the early 1970s. Second, Birch (1979; 1987) found that SMMEs created the majority of new jobs in the USA. This provoked an upsurge in research into employment shifts towards smaller units. The OECD concluded in 1985 that, in several of its member states, a tendency towards the concentration of workers in small firms could be found, even after accounting for shifts in developed structure or sectoral composition (OECD, 1985). After having reviewed data on employment shares by enterprise size for nine industrialised countries, (Sengenberger, Loveman & Piore., 1990:8) confirm that: despite significant cross-national differences in the size distribution and despite methodological caveats, the employment share of small enterprises has reversed a downward trend that had prevailed for many decades and risen significantly. Keeping this in mind, it is important to guard against rushing into premature and overly general conclusions on the economic and social implications of the shift toward smaller units (Harrison, 1994). Job generation studies show that the employment dynamics accompanying new firm formations and business closures is very important to net employment contribution of small units (Becattini, 1990; Koshiro, 1990; Mead, 1999). Many of the recent births of small firms in developed countries may have been induced by poor economic conditions in general, and by high unemployment in particular. Those undertaken as ‘last-ditch’ attempts to provide livelihoods to the founder may rest on rather shaky grounds, and their failure rate might, therefore, be expected to be abnormally high, as either ‘good times’ draw the entrepreneur back into dependent employment or ‘bad times’ topple the weak firm (Sengenberger et al., 1990).

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Still, it has now been acknowledged that a large majority of business units in developed countries are small, and even a conservative review of the job generation literature suggests that small firms account for at least a proportional share of employment creation. Net new jobs created in small firms, however, result from a very dynamic process of expansion and contraction within the small firm sector. While some small firms start and remain small throughout their existence, others experience stages of growth, and senescent firms even decline (Timmons 1994).Large employment gains occur seemingly only in a few small firms (Sengenberger et al., 1990; Qualman, 1988; Mead 1999).Indeed, recent research by the European Commission has shown that only enterprises characterised as fastgrowing SMEs contributed some 50% of net job creation (Papoutsis 1996). Historically in African as well as in other less developed countries, SMMEs (and micro enterprises in particular, which constitute the majority) have received mounting attention because of their labour-absorptive capacity in times of a shrinking of both public sector and private formal economy, and increasing numbers of new labour entrants. With the shift of industrial policy away from importsubstitution and of trade policy towards liberalisation, SMMEs are moreover expected to respond flexibly and thus withstand global competition (Hirst & Zeitlin, 1992; Bambara, 1995; Kaplinsky, 2010). While the Latin American experience of both single and especially clustered SMEs confirm the dynamism associated with SMMEs (Cortes, Berry & Ishaq, 1987) there has been little systematic evidence of the incidence of microenterprise ‘graduation’ or growth into larger ones in Africa (Mead 1999).Indeed, one-person operations constitute the majority of small-scale industry in Africa, and only about 1% succeed in graduating to an intermediate-size (Dia, 1996; McPherson, 1996). Product specialisation is, in most cases, not a strategic answer to segmented markets, but to lack of resources (Pedersen & McCormick, 1996; Amsden, 1997). Virtually all SMMEs operate in conditions of excess supply of relatively unskilled and unorganised labour, which allows them to transmit the burden of unstable markets to their employees and to base competition on squeezing labour costs rather than innovation or technological upgrading (McCormick, 1999). Unlike in South Korea, where large firms function as catalysts for growth to their subcontractors, corporate subcontracting to small and mostly ‘informal’ firms in Africa is more than often a means to reduce costs by exploiting labour-surplus conditions and circumventing regulations and trade union organisations (Pedersen & McCormick, 1996).Clusters of sector-specific firms do exist in Africa, but their growth experiences vary and differ markedly from other developing country cases, such as the successful Sinos Valley shoe cluster in Brazil; the surgical instruments cluster in Sialkot, Pakistan; or from the ‘model’

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industrial districts of Italy (Yankson, 1996; Advani, 1997; McCormick, Kinyanjui & Ongile, 1997; McCormick 1999). Indeed, strong social ties and networking, reported to be essential for the success of industrial districts in Europe, have ambiguous effects on firm growth in Africa. While being supportive amongst the Igbo in Nigeria, research in Kenya suggests that the successful African entrepreneur has loosened his or her networks, based on kinship and social ties in general (Brautigam, 1997; Ferrand, 1997). Furthermore, formal institutions in Africa face crises of legitimacy and enforcement by not being rooted in local culture and are, therefore, far from conducive to enterprise growth (Dia 1996). The above suggests that modes of competition and growth trajectories of SMMEs vary across continents and countries (Khoza 1994; Humphrey & Schmitz 1995; Amsden 1997). Research findings on SMMEs throughout Africa are diverse, although they show widely that it cannot be enterprise size as such which determines a firm’s growth potential for success and failure of SMMEs co-exist and instead point to the role of the entrepreneur (Sengenberger et al., 1990; Späth 1994). The predominance of SMMEs in the industrial sector, both in terms of numbers and employment opportunities generated, does demonstrate that SMMEs form an important part of African economies. Nevertheless, the critical underlying issues of the viability of these small firms, and the sustainability and quality of the employment generated by them remain unclear (Späth, 1994; Dia, 1996; McCormick et al., 1997). Since the elections of April 1994, the issues of BEE and a more equal income distribution have been placed high on the agenda of the new government of South Africa (Rogerson & Rogerson, 1995). Nevertheless, the need to take the South African economy onto ‘a higher road’, with a diversified economy in which productivity and international competitiveness is enhanced, investment is stimulated and entrepreneurship flourishes, is recognised as a condition to address these issues successfully (RSA, 1996; DPA, 1995). SMMEs are seen as vehicles to: -

Address the problem of high unemployment levels in South Africa, because of their high labour-absorptive capacity;

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Activate domestic competition by creating market niches in which they grow until they identify a new niche as a response to demand changes, and for them to be internationally competitive because of their flexibility;

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Redress the inequalities inherited from the apartheid period - in terms of patterns of economic ownership and restricted career opportunities for Black employees;

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Contribute to Black Economic Empowerment (BEE), in that the majority of SMMEs are reported to be

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-

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initiated, owned or controlled by those members of society who were discriminated against in South Africa’s past; and, Play a crucial role in peoples’ efforts to meet basic needs in the absence of social support systems during restructuring processes – which refers in particular to South Africa’s micro-enterprise segment, especially survivalist activities characterised by low entry barriers for inexperienced job seekers

Pretorius & Vuuren (2003) argue that economic incentives do not favour SMMEs, and believe the core focuses of government programmes, as promulgated through DTI and its apex organisations include finance, growth, expansion and competitiveness assistance programmes, are more relevant to existing businesses than to start-ups. In a survey conducted by the Global Entrepreneurship Monitor (GEM) in 2004, less than one-in-ten respondents rated as effective the government’s overall effort to promote the SMME sector. The findings of the Reynolds et al. (2003) survey suggested that this dilemma in the main was caused because of poor communication on the part of government support agencies. Peters (2009)states that the intention on the part of government was to foster a culture of entrepreneurship amongst African Blacks in particular the success of which can be measured by improved competitiveness in terms of turnover growth and employment creation. Throughout the 1990s and to date, most of the research conducted into the effectiveness of government support has focused on the major economic regions such as Gauteng or Western Cape in South Africa, whilst neglecting the rural and small town SMMEs (Rogerson, 2000) The government, through the Department of Trade and Industry (DTI), established the Center for Small Business Promotion (CSBP) at National level. This centre in turnestablished Ntsika Enterprise Promotion Agency (now the Small Enterprise Development Agency – SEDA) and Khula Enterprise Finance Limited. These are the main statutory bodies established to support and assist SMMEs (Naicker, 2006). The DTI (1995)stipulates that the SA government’s role is one of facilitator as opposed to an implementer. According to Peters (2009) the implementation of the NSBS relies on a partnership of national, provincial and local governments), NGOs, parastatals, community-based organisations, business associations, the private sector and foreign donor agencies. The DTI initially envisaged the partnership as between Khula, which facilitates access to finance, and Ntsika, which facilitates access to non-financial areas of SMME support. SMMEs themselves were to participate in the partnership through a Small Business Council (now defunct), with provincial government support to be channelled through SMME Desks, created in each of the nine provinces. A number of SMME development initiatives were started after the installation of the democratically elected South

African government in April 1994. The government saw underdeveloped and undeveloped SMMEs as a window of opportunity to address the challenges of job creation, economic growth and equity in South Africa. The starting point for the process of small business development was to create an enabling environment. The discussion document on the strategy and policy for SMMEs was released at the end of October 1994, resulting in the White Paper on a National Strategy for the Development and Promotion of Small Business in South Africa that was passed by the government in March 1995. Linked to the provision of services by government to the emerging SMME sector is the issue of compliance by small enterprises with generally accepted standards of business behaviour. Most of the SMME enterprises in South Africa are not registered. Common reasons for non-registration include the lack of desire or capacity to keep detailed records and the erroneous belief that non-registration evades VAT. In fact, input Value Added Tax (VAT) remains payable even if the output VAT is not remitted. Thus, the burden of paperwork for often non-literate SMME operators, the survivalist nature of many SMME activities and the short term nature of many such enterprises can be cited as some of the reasons that mitigate against business registration. It is against this background of stagnant job creation and the new government facing the political reality of the need for rapid job creation that SMMEs were seen as one significant part of the broader economic growth strategy. The broad strategy of economic growth is outlined in the GEAR (Growth, Employment and Redistribution) document, and includes engagement in global competition and the reduction of protective trade barriers, curbing labour wage demands, identifying potential economic clusters, reduction in state subsidies for industry, and macroeconomic balance ( Colbert, 1999). Support of SMMEs in the survivalist, micro and small business sector usually targets the need for basic business skills training for emergent entrepreneurs and the need for better access to capital. In South Africa, these two issues in particular have formed the cornerstone in the government’s strategy for SMME promotion and development (Colbert, 1999).This is based on the premise that past market failures, including restrictions on Black business ownership and access to finance must be addressed in order to create an enabling environment for SMME development (Ebersohn, 1997). The motivation for South African government support of the SMME sector is an increase in political stability that has coincided with greater access by small business employment, even if on a survivalist scale. Tendler and Amorim (1996) indicate that most assistance to SMMEs world-wide is supply driven, that is, assistance takes the form of providing one or more on-going services to emergent business, often including access to credit, business management training or technical assistance. Supply-side assistance is generic in nature and is applied

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across sectors in an attempt to service a maximum number of client enterprises (Tendler & Amorim, 1996). Among other noted deficiencies of this supply-sided approach to the provision of business skills is that business training is not grounded in the harsh environment of the marketplace where business training must eventually be put in practice (Kuroda & Kasajima, 1987).Thus, the particular problems and market distortions that gave rise to the need for SMME training initiative in the first place are not being addressed in the context of the marketplace, but rather as a training component that, once learned, is implicitly assumed transferrable to the marketplace (Tendler & Amorim, 1996). There is substantial contrary evidence to indicate that business learning is quickest, most efficient and relevant when it is directly related to the marketplace (Kuroda & Kasajima, 1987). In general, the elements of the SMME support framework envisioned by the DTI (1995) relate most directly to the capacity of the government to effectively interact with the SMME sector. The provision of specific services to SMMEs thus comes off as secondary to developing the capacity of government to understand and have an impact upon the activities of the SMME sector. For example, out of 21 suggestions for the SA government action to create more effective support of SMMEs (DTI, 1995) 13 were related primarily to the inner workings of government, three to improved access to finance, two to training needs of SMMEs, one to information collection and dissemination, and one to the promotion of joint ventures between larger and smaller enterprises (DTI, 1995). Three issues have emerged as paramount, namely the development of support for SMME in South Africa. This has been an area that has been grossly neglected by previous governments, especially for persons of colour. The present government views the passage of new legislation to define its own role as a fundamental task for support of SMMEs. Second, SMME support will focus on the formation of new quasi-governmental institutions to improve access to finance, commonly believed, but not always proven, to be the major obstacle facing emergent entrepreneurs (Meyanathan, 1994). Generic business skills, financial management and general entrepreneurial skills are the third focus of the DTI’s national strategy for SMME support (DTI, 1995).

Methodology The findings of prior studies discussed above suggest that the government should strive to foster an entrepreneurial culture amongst previously disadvantaged groups in South Africa. The success of such initiatives can be measured by improved competitiveness in terms of (1) employment creation and (2) turnover growth. Competitiveness derives from the creation of the locally differentiated capabilities to sustain growth in an internationally competitive environment (Fan, 2009). The improvement in employee numbers should be measured by increases in permanent

17

employment. Turnover, on the other hand, is defined as a measure of sales that is generated for each rand invested in operating assets. The Small Enterprise Development Agency (SEDA) has scant databases for SMMEs registered in the respective districts. The researcher then set out to make contact with SMME’s listed on the SEDA database to set up interviews and complete the research instrument. What became evident was that the significance of using these databases is that most registered businesses were in existence for more than one year and were not classified as survivalist. Also, all businesses listed on the database were involved in manufacturing (or some derivative thereof), retailing, agribusiness and transport which are the biggest contributors to the gross geographic product (GGP) for the province. Further to this, these criteria ensure that the inclusion of owners/managers with a reasonable understanding of minimum wages, turnover, government initiatives and the concept of BEE. In order to evaluate the impact of the government support initiatives to assist the SMME sector in employment creation and turnover growth in the Kwazulu-Natal province in South Africa, an empirical survey, by means of a structured questionnaire, was conducted in the province. The population of the study consists of owner/managers of small and medium sized enterprises (as classified in Government White Paper 2001) delineated to manufacturing firms, transport, agribusiness and retail business in the KwazuluNatal province. The study was conducted in two phases, using a survey design with the pilot study which was conducted in 30 organisations to test the feasibility of the research instruments. The reliability (0,845) of the final instrument was calculated using Cronbach Alpha. The pre-study experience was then used to refine the questionnaire, conceptual framework and methodology for the main fieldwork. In total, 282 businesses were interviewed across districts of the KwaZulu-Natal province. The pilot study was also used to identify potential practical problems in following the research procedure. For example, problems such as poor recording and response rates were to be identified and precautionary procedures or ‘safety nets’ were devised. Thus, a small group of respondents who were as similar as possible to the target population was used. The questionnaire was then administered to the pilot respondents, in the same way as it was administered in the main study. The areas covered by the final questionnaire on the demographics and opinion of SMME owners/managers on the effectiveness of government SMME support initiatives are summarised below: -

the age, gender and level of qualification of the respondents;

-

the period during which the business is incepted;the form of business owned by the entrepreneur;

18

S.Afr.J.Bus.Manage.2013,44(4)

Table 1: Age of the respondents -

the awareness of the government support agencies;

-

the usage of government support agencies;

-

-

Frequency

Per cent

Under 21

1

0,4%

opinions of the SMME owners/managers on the government support services; the effectiveness of the government initiatives rated by the SMME owners/managers; and

21-30

70

24,8%

31-40

158

56,0%

41-50

53

18,8%

the obstacles of the SMMEs to achieving business goals.

Total

282

100,0%

The aim of this study was to establish whether the South African government plays a significant role in supporting SMME’s in Kwa-Zulu Natal province in South Africa. 2

The Pearson’s Chi-square (χ ) test is used to evaluate whether there exists a relationship between government support initiatives and the growth in the KwaZulu-Natal SMME sector. Using job creation and revenue increases as measures of growth in the SMME sector, the evaluation is divided into the following hypotheses: H1a:

There is no relationship between government support initiatives and SMME growth in terms of employment creation in the past two years;

H1b:

There is a relationship between government support initiatives and SMME growth in terms of employment creation in the past two years;

H2a:

There is no relationship between government support initiatives and SMME growth in terms of year-on-year revenue increases since business inception; and

H2b:

There is a relationship between government support initiatives and SMME growth in terms of year-onyear revenue increases since business inception.

Age Group

Table 2: Gender of the respondents Gender

Frequency

Per cent

Male

172

61,0%

Female

110

39,0%

Total

282

100,0%

To establish the relationship between the SMME owner/managers and the success of the business all respondents were asked to indicate their educational background. Six categories of highest qualifications were used to describe the educational characteristics. These were primary, junior secondary, senior secondary, diploma, graduate and post-graduate qualifications respectively. Table 3 presents the distribution of the educational levels of the respondents. Approximately 36,5% (103) of the respondents had completed a senior certificate while 10,3% (29) of respondents were graduates. Only, 3,2% (9) of those interviewed had completed post-graduate qualification(s); 23,8% (67) completed junior secondary school and 6,4% (18) had completed primary schooling. Table 3: Level of qualification of the respondents Frequency

Percent

Primary

18

6,4%

Junior secondary

67

23,8%

Senior Secondary

103

36,5%

Diploma

56

19,9%

Analysis of survey respondents

Graduate

29

10,3%

Table 1 and Table 2 present the age and gender distributions of the respondents in the survey respectively. From Table 1, the majority of respondents (158) were between the ages of 31-40 years and 18,8% (53) of the respondents were between the ages of 41-50.

Post graduate

9

3,2%

282

100,0%

The items in the questionnaire were assigned Likert scale scores. The data was then processed and analysed using SPSS version 17 for Windows.

Findings

Of those interviewed 98,6% (277) were South African citizens. Table 2 indicated that 61% (172) of the respondents were male and 39% (110) were female.

Qualification

Total

The period during which the business of the respondents is established is documented in Table 4. The majority of the enterprises in the survey (40,1%) were started between 2001 and 2005. Around 37,2% (105) of the enterprises in the survey had started their business between 1996 and 2000. Only 20,9% (59) of the respondents started the business prior to 1996.

S.Afr.J.Bus.Manage.2013,44(4)

19

Table 4: Business inception

respondents indicated that they never heard of Khula Enterprises. Of the respondents interviewed, only 30,7% (86) of respondents indicated that they heard of Umsobomvu Youth Fund (UYF), a fund set up to focus on the youth of South Africa (below the age of 35).

Frequency

Per cent

Prior to 1996

59

20,9%

1996 – 2000

105

37,2%

2001-2005

113

40,1%

2006

2

0,7%

Total

279

98,9%

3

1,1%

282

100,0%

Year(s)

No response Total

Table 5 records the forms of businesses owned by the respondents. The majority of the owner/managers (58,5%) in the survey indicated that their chosen form of legal entity was Close Corporation (CC) because of the limited liability aspect and ease of registration aspect. Approximately 14,2% (40) of the respondents had opted for a sole trader form of business ownership while 18,1% (51) of respondents opted for the private company form of ownership. Table 5: Form of business ownership Type of Ownership

Frequency

Per cent

Sole trader

40

14,2%

Partnership

24

8,5%

165

58,5%

51

18,1%

Closed corporation Private company Other

1

0,4%

Total

281

99,6%

1

0,4%

282

100,0%

No response Total

Respondents were interviewed to ascertain the level of awareness of certain government initiatives put in place to assist the sector to grow and if they have at any stage in their respective business life cycle made use of the government initiatives that were made available to boost economic growth within the sector. Table 6 presents the survey results regarding the level of awareness of respondents of the various government support agencies/initiatives. When respondents were asked if they had heard of any of the listed government support initiatives, the majority (82,1%) of respondents had indicated that they had heard of the Centre for Small Business Promotions (CSBP). Approximately 65% (182) of the respondents had heard of the Industrial Development Corporation (IDC) and 66.8% (187) of the respondents had heard of Manufacturing Advisory Centre’s (now part of Small Enterprise Development Agency). The majority (91.4%) of

From observing and talking with entrepreneurs, many were not aware that UYF contributed a substantial amount of funds to service providers to set up business plans for existing and prospective entrepreneurs. Table 6: Awareness of the government support agencies Government support agency Center for Small Business Promotion (CSBP) South African Micro Finance (Apex) Fund

Measure Count

82,1%

Count

99

%

35,5%

Count

Export Incentives (Department of Trade and Industries)

Count

Manufacturing Advisory Centers (Now SEDA)

Count

Khula Enterprise

Brain

Umsobomvu Youth Fund (UYF)

230

%

Industrial Development Corporation (IDC)

Competitiveness Fund

Yes

%

%

182 65,0% 162 58,1% 187

%

66,8%

Count

37

%

13,2%

Count

24

% Count %

8,6% 13 4,7%

Count

86

%

30,7%

No

Total

50

280

17,9%

100,0%

180

279

64,5%

100,0%

98

280

35,0%

100,0%

117

279

41,9%

100,0%

93

280

33,2%

100,0%

243 86,8% 256 91,4% 266 95,3% 194 69,3%

280 100,0% 280 100,0% 279 100,0% 280 100,0%

Following on from the “heard of support agencies” question, respondents were asked to indicate if they had in fact made use of the government support agencies for informational and/or finance requirements. From Table 7, around 66,3% (185) of the respondents indicated that they had used the services of CSBP while 56,8% (158) of the respondents had made use of the services of the IDC for information relating to funding (or tried to make use of for securing loans). While only 41% (114) of the respondents had made use of SEDA for informational/financial purposes, almost none of the respondents indicated that they made use of the services of Khula or UYF.

20

S.Afr.J.Bus.Manage.2013,44(4)

Table 8: Opinions on government support services

Table 7: Usage of government support agencies Government support agency CSBP

South African Micro Finance (Apex) Fund

Measure Count

66,3%

Count

62

%

22,2%

Count

Export Incentives Export Incentives (Department of Trade and Industries)

Count

Manufacturing Advisory Centers (Now SEDA)

Count

Khula Enterprises

Brain

Umsobomvu Youth fund (UYF)

185

%

Industrial Development Corporation (IDC)

Competitiveness Fund

Yes

%

%

%

158 56,8% 137 49,3% 114 41,0%

No

Total

94

279

33,7%

100,0%

217 77,8% 120 43,2% 141 50,7% 164 59,0% 269

279 100,0% 278

I am not interested to know about government services offered because I feel ultimately it won’t benefit me as a business person

55

19,5%

Too much red tape (beauracracy)

104

36,9% 4,6%

278

102

36,2%

100,0%

Total

274

97,2%

8

2,8%

282

100,0%

278 100,0%

%

3,2%

Count

1

%

,4%

Count

0

278

278

%

0%

100,0%

100,0%

Count

0

278

278

%

0%

100,0%

100,0%

99,6%

Per cent

13

9

277

Frequency

Government institutions are i t t Other

100,0%

Count

96,8%

Opinions on government services

278 100,0% 278 100,0%

Table 8 demonstrates the survey results when the respondents were asked why they have not made use of or (in their opinion) not heard of government initiatives to assist the SMME sector. From Table 8, 19,5% (55) of the respondents felt that government initiatives would not be beneficial to them. A larger group of the respondents (36,9%) felt that government departments had too much ‘red tape’ and they were overwhelmed with paper work that ultimately might result in nothing. Nevertheless, only a very small percentage of the respondents (4,6%) were of the opinion that government departments (initiatives offered) were incompetent. Many of the respondents (36,2%) opted to tick the “other” option on the questionnaire. During the survey, many respondents indicated that they made use of assistance from specialists other than government. From interviewing and observing respondents, many of them indicated that they made use of the services of business consultants/external specialists such as accountants/tax specialists, product/service specialists, information technology (IT) specialists, attorneys, etc. Service delivery from government departments came across as a more contentious issue.

No response Total

Table 9 documents the ratings of the respondents on the services provided by the government incentives. From Table 9, the majority of the respondents opted for the option “neither poor nor well” (fence sitters). Approximately 79,9% (223) of the respondents rated the overall government promotion of the small business sector as neither poor nor well. The impact of small enterprise support structures was given a 64,9% (181) response in the category neither poor nor well while 39,2% (109) of the respondents rated the impact of BEE procurement initiatives as ‘well’. Approximately 35,5% (99) of the respondents rated labor legislation polices in the category ‘well’, while 4,3% (12) of the respondents considered labor legislation as ‘very well’. From Table 10, the respondents were asked to consider the biggest obstacles they perceived to be frustrating them in achieving their respective business goals. Approximately 91,6% (259) of the respondents said that tough competition was hampering them in achieving their respective goals. On the other hand, 65.4% (185) said that corruption negatively affected their businesses in some way or another. Of those interviewed, 46.4% (131) of the respondents said that government ‘red tape’ were not an impeding factor on their businesses, while 53.6% (151) said that it was negatively affecting their respective businesses. Labour and tax issues were particularly alluded to in the interviews.

S.Afr.J.Bus.Manage.2013,44(4)

21

Table 10: Obstacles to achieving your business goals

Table 9: Rating of government initiatives Services

Measure

Very poor

Poor

Average

Well

Very well

Total

Overall promotion of small enterprise

Count

0

32

223

17

7

279

%

0,0%

11,5%

79,9%

6,1%

2,5%

100,0%

Communicatio n of small enterprise incentives

Count

1

36

220

14

7

278

%

0,4%

12,9%

79,1%

5,0%

2,5%

100,0%

Count

4

47

206

14

8

279

%

1,4%

16,8%

73,8%

5,0%

2,9%

100,0%

Impact of government incentives in general

Count

0

32

212

30

5

279

%

0,0%

11,5%

76,0%

10,8%

1,8%

100,0%

Impact of small enterprise support structures

Count

0

23

181

72

3

279

%

0,0%

8,2%

64,9%

25,8%

1,1%

100,0%

Impact of export incentives

Count

1

38

132

106

1

278

%

0,4%

13,7%

47,5%

38,1%

,4%

100,0%

Count

0

40

121

109

8

278

%

0,0%

14,4%

43,5%

39,2%

2,9%

100,0%

Impact of labour legislation

Count

3

43

122

99

12

279

%

1,1%

15,4%

43,7%

35,5%

4,3%

100,0%

Impact of import/export legislation

Count

0

39

102

54

84

279

%

0,0%

14,0%

36,6%

19,4%

30,1%

100,0%

Impact of skills development programs

Count

3

47

163

55

10

278

%

1,1%

16,9%

58,6%

19,8%

3,6%

100,0%

Communicatio n of legislation

Impact of BEE procurement

Approximately 51% (143) considered low growth in their respective sector to be a contributing factor to them not achieving all their business goals. Approximately 62,5% (176) of the respondents said that the lack of government support was not an impediment to achieving their respective goals. Of the respondents interviewed, 73,4% (207) considered BEE not to be an impediment to them achieving their business goals, whilst 83,8% (235) regarded access to finance to be a constraint to achieving their business goals. Approximately 16,2% (47) of the respondents reveal that access to finance was not a constraining factor, whilst 91,6% of the respondents considered tough competition as a bigger obstacle to growth than access to finance. Table 11a displays a cross tabulation of the impact of the overall promotion of SMMEs in relation to the labor force expansion in the past two years.

Obstacle Tough competition

Corruption Government Redtape Low/no growth in your respective sector Lack of government support Black economic empowerment (BEE) Lack of access to finance

Measure

Yes

No

Total

Count

259

23

282

%

91.6%

8.4%

100.0%

Count

185

97

282

%

65.4%

34.6%

100.0%

Count

151

131

282

%

53.6%

46.4%

100.0%

Count

143

139

282

%

51.0%

49.0%

100.0%

Count

106

176

282

%

37.5%

62.5%

100.0%

Count

75

207

282

%

26.6%

73.4%

100.0%

Count

235

47

282

%

83.8%

16.2%

100.0%

The Chi-square test results are presented in Table 11b. The null hypothesis stated that there is no relationship between government support initiatives and SMME growth in terms of job creation. The Chi-square results are insignificant (p > 0.05), indicating an insignificant relation between government incentives and the increased labor force over the last two years. Table 12a represents a cross tabulation of the impact of the overall promotion of SMMEs in relation to the year-on-year revenue increases since business inception. The Chi-square test results demonstrated in Table 12b are insignificant (p > 0.05), which indicates that the overall promotion of small enterprises did not have a positive effect on improving yearon-year turnover for SMMEs.

22

S.Afr.J.Bus.Manage.2013,44(4)

Table 11a: Promotion of SMMEs and job creation

Table 12a: Promotion of SMMEs and turnover increases

(Y) Overall promotion of SMMEs * (X) Labor force expansion

(Y) Overall promotion of SMMEs * (X) Turnover increases

(X) In the past two years has your labor force: Degree

Expanded

Contracted

Not changed

Count

10

7

14

31

% within (Y)

32,3%

22,6%

45,2%

100,0%

% within (X)

7,6%

10,8%

17,3%

11,2%

% of Total

3,6%

2,5%

5,1%

11,2%

Count

112

51

59

222

% within (Y)

50,5%

23,0%

26,6%

100,0%

% within (X)

85,5%

78,5%

72,8%

80,1%

% of Total

40,4%

18,4%

21,3%

80,1%

Count

9

7

8

24

% within (Y)

37,5%

29,2%

33,3%

100,0%

Total

Degree

Measure Yes Count

Very poor/ Poor

(Y) Overall promotion of SMMEs

Measure

(X) Year-on-year turnover increases since business inception

Neither poor nor well

Well/ Very Well

Total

6,9%

10,8%

9,9%

8,7%

% of Total

3,2%

2,5%

2,9%

8,7%

Count

131

65

81

277

% within (Y)

47.3%

23,5%

29,2%

100,0%

% within (X)

100.0%

100,0%

100,0%

100,0%

% of Total

47.3%

23,5%

29,2%

100,0%

Table 11b: Chi-square test Value

Df

Asymp. Sig. (2-sided)

Pearson Chi-Square

6,165

4

0,187

Likelihood Ratio

5,982

4

0,201

Linear-by-Linear Association

0,973

1

0,324

N of Valid Cases

22

10

68,8%

31,3%

100,0%

% within (X)

11,1%

12,8%

11,6%

% of Total Count (Y) Overall promotion of SMMEs

Neither poor nor well

277

Well/ Very well

8,0% 158

32

3,6%

11,6%

62

220

% within (Y)

71,8%

28,2%

100,0%

% within (X)

79,8%

79,5%

79,7%

% of Total

57,2%

22,5%

79,7%

18

6

24

% within (Y)

75,0%

25,0%

100,0%

% within (X)

9,1%

7,7%

8,7%

% of Total Count Total

Total

% within (Y)

Count

% within (X)

Coefficient

Very poor/ Poor

No

6,5% 198

2,2%

8,7%

78

276

% within (Y)

71,7%

28,3%

100,0%

% within (X)

100,0%

100,0%

100,0%

% of Total

71,7%

28,3%

100,0%

Table 12b: Chi-square test

Coefficient

Value

df

Asymp. Sig. (2sided)

Pearson Chi-Square

0,268

2

0,875

Likelihood Ratio

0,268

2

0,875

Linear-by-Linear Association

0,267

1

0,606

N of Valid Cases

276

Conclusion Promoting the SMME sector so as to create an enabling environment by reducing unemployment and creating a more equitable distribution of wealth is the overall ambition of government support initiatives in South Africa. These initiatives had to ultimately lead to sustainable job creation and increased turnover for the SMME sector. However, 18 years into democracy and from the feedback of this survey, in line with prior studies of similar nature, the indication is that government support initiatives in this regard had been ineffective. Based on the survey conducted in 2007, the results of the Chi-square tests ruled out the significance of the relationship between the government support initiatives and the growth in the SMME sector in the KwaZulu-Natal province, a province with the largest disproportional

S.Afr.J.Bus.Manage.2013,44(4)

23

developmental challenges amongst other provinces in South Africa.

Birch, D. L. 1979.'The Job Generation Process': Final Report to Economic Development Administration: Cambridge.

The feedback of the survey indicates that the majority of the respondents have not heard of Khula Enterprise and Umsobomvu Youth Fund (UYF), the two primary initiatives that provide finance to start-ups and youth entrepreneurs. Ironically, the primary obstacle to achieving business goals identified by the respondents is lack of access to finance. Despite the lack of awareness of the respective government support initiatives in the SMME sector, the general feeling that there is too much red tape associated with the application and usage of government support initiatives is the primary reason for lack of usage of these initiatives.

Brautigam, D. 1997. ‘Substituting for the state: Institutions and industrial development in Eastern Nigeria', World Development, 25(7):1063–1080.

Finally, it could be argued that it is the task of government departments to communicate to the industry the initiatives available to them from each of the respective departments, as a significant correlation exists between the awareness and usage of the government support initiatives. The majority of the respondents felt that the services provided by the government support initiatives are neither well nor poor, indicating rooms for improvement in various service areas. The services overally did not as yet have the desired effect. This study contends that the quality of the entrepreneurs as identified above is a critical factor in SMME success and as such, If the government’s strategy to use the SMME sector so as to create an enabling environment and correct inbalances created in the main by past restrictive policies is to have any significant success, focus must be placed on developing competent entrepreneurs, especially amongst those classified as previously disadvantaged persons. More focus should be placed on education and the training of budding entrepreneurs in particular in small towns and rural areas.

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Peters, R.M. 2009. ‘SMME development initiatives and its constraints to growth in South Africa'. Doctoral Thesis. Johannesburg: University of Johannesburg. Pretorius, M. & Van Vuuren, J.J. 2003. ‘Contribution of support and incentive programs to entrepreneurial orientation and start-up culture in South Africa', South African Journal of Economic and Management Sciences, 6(3):514–528. Qualman, R. 1988. ‘Why do(n’t) they innovate? Explaining diverse SME adjustment strategies in Africa'. Paper presented at the Seminar of the EADI Working Group on Industrialisation 18/19 Sept., The Hague. Republic of South Africa. 1996. Growth, employment and reconstruction strategy. Pretoria: Government printer. Reynolds, P.D. et al. 2003. Global Entrepreneurship Monitor (GEM): Executive report. Springer, Small Business Economics, 24:205-231. Rogerson, C.M. 2000. ‘Successful SMEs in South Africa: The case of clothing producers in the Witwatersrand', Development Southern Africa, 17(5):687–716.

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Students’ entrepreneurial regulation and intention to become an entrepreneur: A comparison between public and private universities Z.A.L. Pihie and A. Bagheri* Department of Science and Technical Education, Faculty of Educational Studies, Universiti Putra Malaysia Department of Entrepreneurship Development, Faculty of Entrepreneurship, Tehran University [email protected]; bagheri [email protected] Motivation and ability to orient ones’ knowledge, thought and behavior to accomplish entrepreneurial goals and tasks has recently termed as entrepreneurial regulation. Entrepreneurial regulation strongly affects the whole process of new venture creation and specifically entrepreneurial opportunity exploration that is the first step in the entrepreneurship process. However, few researchers examined the construct particularly among potential entrepreneurs such as university students. This study aims to measure self-regulation (promotion focus), entrepreneurial self-efficacy and intention to become an entrepreneur among university students. 722 students from both public and private universities were randomly selected as the participants based on the assumption that entrepreneurship education and training programs and university environment highly influence the development of entrepreneurial regulation, self-efficacy and intention in students. Analysis of the data revealed a significant relationship between students’ promotion focus, entrepreneurial self-efficacy and entrepreneurial intentions. Furthermore, students from public universities had significantly higher entrepreneurial regulation and intentions than their counterparts from private universities. We discuss the implications of the findings for entrepreneurship research, theory development and education. *To whom all correspondence should be addressed.

Introduction The critical decision of choosing entrepreneurship as the career path and translating the intention into an actual new venture has been one of the core focuses of entrepreneurship researchers. To better explain this challenging and complex process, researchers used various theories and models, the most cited of which are intentional theories (Ajzen, 1991; Shapero & Sokol, 1982). The rationale behind using these theories in entrepreneurship domain is that selection to startup ones’ own business rather than being employed is basically a conscious and deliberate behavior that can be most accurately predicted by intention (Guerrero, Rialp & Urbano, 2008; Souitaris, Zerbinati & Al-Laham, 2007; Segal, Borgia & Schoenfeld, 2005; Ajzen, 2002; Krueger, Reilly & Carsrud, 2000; Boyd & Vozikis, 1994). However, there is an unpredictable lag of time between the intention and creation of a real venture (Krueger et al., 2000; Krueger & Brazeal, 1994). Moreover, entrepreneurial intention can be affected by personal and environmental factors and consequently changes over time (Souitaris et al., 2007; Segal et al., 2005; Ajzen, 2002; Krueger et al., 2000). This led researchers to seek more action-related theories such as self-regulatory focus (Higgins, 1998) to better explain entrepreneurial endeavors. Based on the theory, Bryant (2007: 738) has recently termed “entrepreneurial-regulation”; the motivation and ability to orient ones’ knowledge, thought and behavior to successfully accomplish entrepreneurial goals and tasks. Entrepreneurial regulation strongly affects the whole

process of a new venture creation and specifically entrepreneurial opportunity exploration that is the first step in the entrepreneurship process (Tumasjan & Braun (In press); Bryant, 2007). However, few researchers examined the construct and its association with entrepreneurial intention (Tumasjan & Braun (In press); Trevelyan, 2011, Bryant, 2009, 2007), particularly among potential entrepreneurs such as university students. This study aims to narrow the gap through measuring entrepreneurial regulation dimensions (promotion focus and entrepreneurial self-efficacy) and entrepreneurial intention among university students. The findings expand the literature on students’ entrepreneurial attributes by assessing entrepreneurial regulation, entrepreneurial self-efficacy and intention to become an entrepreneur. The following section of this paper briefly highlights the theoretical foundations of the entrepreneurial regulation construct and its association with entrepreneurial intention. Then, we present the research method and findings. Finally, we discuss main implications of our findings for entrepreneurship research, theory development and education.

Entrepreneurial regulation: The theoretical and conceptual foundations The theory of self-regulation (Higgins, 1998) has recently attracted increasing attentions particularly in the entrepreneurship research. This is due to the power of the theory in explaining behaviours in complex and uncertain situations and stressing on the role that individuals can play in controlling and directing their behaviours toward their

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goal achievement. The theory is based on the belief that people consider the pleasant and beneficial outcomes when they set their personal goals and avoid uncomfortable situations (Higgins et al., 2001). In approaching their goal realization or task accomplishment, people act in two distinctive ways which are promotion and prevention focus. They are promotion focused when there are positive outcomes, gains and benefits in achieving their goals and prevention focused when there are negative outcomes, losses or failures in attaining their goals (Gorman et al., 2012; Brayant, 2007; Brockner, Higgins & Low, 2004; McMullen & Shepherd, 2002). Individuals’ sense of selfregulation takes shape by a combination of their past success and failure experiences and situational factors which attract or compel them to direct their behaviors and achieve a specific goal (Higgins et al., 2001). Therefore, peoples’ selfregulation differs in four main ways which are a) motivation and cognitive abilities to set personal goals; b) capability to organize the outcomes of the goals’ accomplishment; c) the means and strategies they use to achieve the goals; and c) the situation in which they act (Trevelyan, 2011; Brayant, 2009, 2007; Brockner et al., 2004; McMullen & Shepherd, 2002). Researchers have recently applied self-regulatory theory in entrepreneurship domain to better explain entrepreneurial motivation and behavior (Gorman et al., 2012; Trevelyan, 2011; Brayant, 2009, 2007; Brockner et al., 2004). In particular, the theory has been used to describe the decision to pursue entrepreneurship as one’s career (Bryant, 2006). In highly complex and risky situations such as entrepreneurship, self-regulation focus can be defined as the way individuals approach selection into entrepreneurship and direct their knowledge, thought and behavior to enact the intention and fulfill entrepreneurial tasks. Self-regulation and particularly promotion focus, therefore, affects the amount of efforts entrepreneurs put in establishing a new venture and performing entrepreneurial tasks and their success throughout the process of a new venture creation (Trevelyan, 2011; Brockner et al., 2004). In contrast, entrepreneurs with prevention focus avoid risky and uncertain tasks such as entering a new industry or market (Trevelyan, 2011). Scholars believe that entrepreneurs need both promotion and prevention focus for their challenging task performances (Brockner et al., 2004). However, empirical research findings indicate that entrepreneurs are more promotion focused specifically in exploring various creative and innovative opportunities for establishing their own ventures (Tumasjan & Braun (In press); Trevelyan, 2011; Brockner et al., 2004), deciding on which entrepreneurial opportunities to exploit (Bryant, 2007) and improving the performance of their new venture (Hmieleski & Baron, 2008). Bandura (1997) argues that self-regulation focus affects ones’ behavior through self-efficacy processes such as motivation to act, persistence in the face of problems and the sense of competence in accomplishing a task. Self-efficacy is the personal cognitive evaluation of one’s ability to successfully perform a specific task. Entrepreneurial selfefficacy, therefore, is “the belief in ones’ efficacy in

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performing entrepreneurial tasks” (Brayant, 2007:735). Entrepreneurial self-efficacy improves individuals’ motivation and competence in stepping into the challenging process of new venture creation (Boyd & Vozikis, 1994). Based on the associations between entrepreneurs’ promotion focus, self-efficacy and cognition capacity, Brayant (2007: 738) termed “entrepreneurial-regulation” construct in order to explain the common sources that inform entrepreneurial behavior. Although the author emphasizes that entrepreneurial regulation is not a new construct, research findings confirm the complementary nature of entrepreneurs’ promotion focus and entrepreneurial selfefficacy (Tumasjan & Braun (In press)). Through a metaanalysis of the researches on self-regulation dimensions, Gorman et al. (2012) conclude that promotion and prevention focus are two independent constructs each of which is related to other constructs of the relevant theories. Tumasjan and Braun (In press) examined the impact of regulation focus and entrepreneurial self-efficacy on opportunity recognition among 254 entrepreneurs. The researchers conclude that promotion focus enhances entrepreneurs’ creative and entrepreneurial self-efficacy in the process of entrepreneurial opportunity recognition. Despite researchers’ emphasize on integrating the two constructs (Brayant, 2009, 2007), as far as we know, there is no other study particularly in educational settings that looked at the strength of “entrepreneurial-regulation” in explaining entrepreneurial intention. Drawing upon Brayant’s (2007) conceptualization, this study integrated and measured promotion focus and entrepreneurial selfefficacy among university students.

Entrepreneurial regulation, entrepreneurial intention and entrepreneurship education The theory of self-regulation orientation (Higgins, 1998) has also been applied to explainthe critical role that education and training can play in improving students’ self-regulation orientation and consequently their intention and competence to become an entrepreneur (Tumasjan & Braun (In press); Bryant, 2006, 2007; Brockner et al., 2004; McMullen & Shepherd, 2002). Researchers attempted to explore the relationship between entrepreneurs’ self-regulation focus and their entrepreneurial behavior and related it to entrepreneurship education improvement (Tumasjan & Braun (In press); Trevelyan, 2011; Bryant, 2006, 2007). Only few studies investigated the association between students’ self-regulation focus and their entrepreneurial intentions. Using a sample of 142 business students, McMullen and Shepherd (2002) concluded that promotion focused students have higher entrepreneurial intentions than prevention focused ones. Therefore, educational methods for improving students’ entrepreneurial self-regulation focus are yet to be developed (Brayant, 2007). Despite the recent emergence of self-regulatory theory in the entrepreneurship education research (Bryant, 2006; McMullen & Shepherd, 2002), there has been a tradition of using intentional theories such as theory of planed behavior (Ajzen, 1991) to explain the impact of entrepreneurship

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education on students’ selection into entrepreneurship (e.g., Wu & Wu, 2008; Souitaris et al., 2007; Fayolle, Gailly & Lassas-Clerc, 2006; Zhao, Seibert & Hills, 2005; Henry, Hills & Leitch, 2005; Peterman& Kennedy, 2003; Ajzen, 2002). The theory explains human decision to adopt a behavior such as new venture creation as a function of the interactions between three main motivational and enabling factors including control over behavior (individuals’ perceptions of their abilities and skills to perform the tasks of an entrepreneur), attitude toward behavior (individuals’ awareness of the importance and value of entrepreneurship) and subjective and social norms (individuals’ perceptions toward how significant others value and support establishing a new business). Defining social norms as the widely accepted rules by groups of people, Meek, Pacheco and York (2010) concluded that such norms influence peoples’ intention to establish their own businesses. Various educational programs have been developed to improve students’ entrepreneurial intention and particularly through enhancing their self-efficacy in performing different roles and tasks of an entrepreneur (Kickul et al., 2009; Wu & Wu, 2008; Wilson, Kickul & Marlino, 2007; DePillis & Reardon, 2007; Segal et al., 2005; DeNoble, Jung & Ehrlich, 1999). Through engaging in the learning opportunities provided by the programs, students evaluate their capabilities in performing entrepreneurial tasks and decide on whether to pursue entrepreneurship as their future career path (Wilson et al., 2007; Fayolle et al., 2006; Zhao et al., 2005; Chen, Greene& Crick. 1998). Although the association between students’ entrepreneurial intention and entrepreneurship education has been wellestablished in the entrepreneurship literature (Culbertson, Smith & Leiva, 2011; Kickul et al., 2009; Souitaris et al., 2007; Fayolle et al., 2006; Zhao et al., 2005; Krueger et al., 2000; Chen et al., 1998), there is little knowledge about the impact of education on students’ self-regulation focus and their intention to launch a new venture (McMullen & Shepherd, 2002). Previous research findings showed the influential role played by self-regulation in entrepreneurs’ decision making process (Bryant, 2007). However, the key role of self-regulation focus in the decision to become an entrepreneur and realization of the intention specifically among students has been almost overlooked. This lack of understanding face educators with critical challenges in providing effective education programs and pedagogical methods that improve students’ self-regulation and entrepreneurial intention based on their strengths and weaknesses in each specific aspect of the constructs (Chen et al., 1998). This study aims to narrow the gap by measuring university students’ entrepreneurial regulation and intention.

Method Research design and measures We employed a questionnaire consisting of 25 items to determine the level and pattern of self-regulation, entrepreneurial self-efficacy and entrepreneurial intentions among the participants. The questionnaire contained 4 main

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sections. The first section asked students’ demographic information such as age, gender, level and field of study and university. The second section measured participants’ promotion focus based on the Regulatory Focus questionnaire (Grant & Higgins, 2003). Students’ promotion focus was assessed through 6 items (e.g., Compared to most people, are you typically unable to get what you want out of life?). Five items of the Self-efficacy Skills questionnaire (Scherer et al., 1989) was administrated to measure students’ self-efficacy in different tasks of an entrepreneur including marketing, accounting, organizing and personnel and production management (e.g., I can successfully complete the necessary marketing tasks related to owing a business: consider selling, selecting and customer service). The final section of the questionnaire assessed entrepreneurial activities. This section encompassed two subsections. First, students’ desire and goal to pursue an entrepreneurial career (6 items), e.g., I am ready to do anything to be an entrepreneur and second, value of entrepreneurial activities for their family, friends and people in their community measured by 8 items, e.g., My immediate family values entrepreneurial activities and career (Ajzen & Fishbein, 1980; Krueger et al., 2000).

Sample The participants were 722 students who were randomly selected from five universities in Malaysia. The students were selected from both public and private universities based on the assumption that situational factors such as education highly affect individuals’ sense of self-regulation, self-efficacy and entrepreneurial intention (Ajzen, 2002; Higgins et al., 2001; Bandura, 1997). Furthermore, the universities offer students different entrepreneurship education design, content and pedagogical methods and these differences affect students’ entrepreneurial ability and intention improvement (Matlay, 2006). The students were asked to respond to the items of the questionnaire on a 5 point Likert scale, anchored from 1 “strongly disagree” to 5 “strongly agree”. In terms of age, the majority of the students were in the rage of 16 to 25(76,9%) years old. Of the 722 participants, 377(52,2%) were male and 342(47,4%) were female. 391(54,2%) students were from private universities and 331(45,8%) were from public universities. Most of the students were doing their Bachelors 541(74,9%). The students had different education backgrounds (104(14,4%) doing education of agriculture science, 82(11,4%) information technology, 41(5,7%) accounting and finance, and 495(68,5%) others). Majority of the students had no business experiences 491(68%). 363(50,3%) students had never taken an entrepreneurship course and 348(48,2%) had passed an entrepreneurship course previously.

Findings Analysis of the data on self-regulation (promotion focus), entrepreneurial self-efficacy and entrepreneurial intention indicates that students scored moderate in all dimensions of the constructs (table 1).

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Table 1: Means, standard deviations and levels of the study variables Construct Mean SD Level Entrepreneurial-regulation focus 3,20 0,49 2,73 0,46 • Promotion focus Moderate • Entrepreneurial self3,21 0,71 efficacy 3,09 0,52 • Entrepreneurial intentions Moderate 3,01 0,57 • Social valuation Note: interpretation of mean scores (1-2,33) low, (2,34-3,67) moderate, (3,68-5) high.

Drawing upon Bryant’s (2007) conceptualization and measurement of “entrepreneurial-regulation”, we calculated an entrepreneurial regulation score for each student by adding their scores in promotion focus and entrepreneurial self-efficacy. Table 2 shows a significant difference between public and private university students in entrepreneurial regulation and intention. Although the number of students from private universities in the sample was more than the public university students, students from public university scored higher in entrepreneurial regulation (t=-5,47, sig