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Profile of the formal business sector in South Africa

Business development and growth should be elevated to become one of the SA government’s priority programmes to urgently address the below average entrepreneurial and business performance of the country. Worldwide, there is a growing awareness that the promotion of productive and innovative entrepreneurship and new firm formation and growth is the only means of achieving sustainable global economic recovery and growth. In fact, the Obama Administration recently singled out the promotion of high growth and innovative entrepreneurship as the core principle of the White House’s National Innovation Strategy for achieving sustainable growth and quality jobs. In similar vein, South Africa should substitute the notion of job creation with enterprise creation, as jobs cannot be sustained independently of business development.

Professor André Ligthelm, Research Director at the Bureau of Market Research of Unisa, recently conducted a study on the state of formal business development in South Africa based on data compiled by Statistics South Africa.

According to Ligthelm, the focus on the formal business sector was primarily informed by prior research that confirmed the survivalist nature of the majority of informal businesses. Owners of businesses established for survival do not have the talent, skills or appetite for risk needed to turn informal businesses into really successful businesses. However, it is important to note that informal businesses play an important role in the lives of the poor and will continue to feature in the South African economy for the foreseeable future as they are often the only means of survival for the poor. Nevertheless, they will never be the springboard for successful and productive business development and growth.

In 2010, a total of 462 330 formal businesses were registered for VAT in South Africa. Almost seven in every 10 of these businesses were either active in the real estate and business services sector (44.3%) or in the trade sector (25.1%).

Figure 1 shows the sectoral distribution of total business turnover in 2011. Almost one third (34.9%) was generated by businesses in the trade sector and 28.5% by businesses in the manufacturing sector. Mining and quarrying businesses were responsible for 6.4% of total business turnover.

Figure 1: Sectoral distribution of total business turnover

Figure 2 depicts the contribution of small, medium and large businesses to total business turnover in 2006 and 2011. The contribution of large businesses to total turnover remained at approximately three quarters of total business turnover. The contribution of small businesses declined from 16.4% in 2006 to 14.4% in 2011. This reality confirms the fact that government policy should become more large business-friendly to stimulate additional fixed investment and the creation of quality jobs.

Figure 2: Contribution to total business turnover by business size class, 2006 and 2011

While total business turnover (at 2006 fixed prices) increased by an average annual rate of 3.1% from 2006 to 2011, business profitability decreased during the same period. Net profit before tax and dividends declined by an average annual rate of -4.5%. Government should realise that the creation of a safe, secure and conducive climate for business development is the only sustainable means of addressing unemployment and poverty. This reality is clearly illustrated by the rapid growth of the private sector (business sector) in successful economies such as China, India and Brazil on the one hand and on the other hand the realisation of the need for private sector (business) strength in many fragile and failed states. Current government policy tends to inhibit business growth and development.

The report, entitled PROFILE OF THE FORMAL BUSINESS SECTOR IN SOUTH AFRICA, 2006-2010, (Research Report No 428), was compiled by Professor André Ligthelm (Research Director) of the Bureau of Market Research.


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