Small businesses make a big difference

Small businesses made an exceptional contribution to the South African economy in 2022 despite economic policy having hobbled the sector’s growth.

The Trade and Industrial Policy Strategies (TIPS) Small Business Report for 2023 revealed that formal small businesses comprised 30% of total employment in South Africa.

TIPS estimates that small businesses contribute a third of the total value added to the economy.

It is impressive, given the minuscule size of South Africa’s pool of small business owners.

The report said that only 6% of South Africans are self-employed employers. In middle-high income countries, this figure is typically over 20%. 

There were 710,000 formal small businesses in the country in 2022, up from 680,000 in 2019 before the pandemic.

The country has around 1.7 million informal enterprises.

Cause of the problem

TIPS said the low level of small business in the country was “inherited” from Apartheid, which saw the destruction of black-owned family farms and urban enterprises.

Small business was suppressed through that period, which was a central factor behind high joblessness, it said.

Author and scenario planner, Clem Sunter, told Daily Investor that blaming South Africa’s suppressed small business sector on Apartheid misses the point entirely.

He said that South Africa has not yet built an inclusive economy with a high economic growth rate. This was always essential to avoid undoing the work done in the political negotiation.

“To go back and blame it on the Apartheid years misses the point that the ANC has done absolutely nothing for small business.”

He said that after the transition from Apartheid, building an inclusive economy with a high economic growth rate was essential to solidify South African democracy.

Speaking to BizNews last year, Sunter said building a pipeline of entrepreneurs from the informal to the formal sector is key to building an inclusive and dynamic economy.

“I feel so strongly that it’s not about some central plan which will magically work in South Africa to create an extra three or four million jobs,” he said.

“It’s actually saying, how do we build from the ground up with what we have.”

He said the informal economy needs to be recognised and supported.

The TIPS report found that, generally, small businesses were both more labour-intensive and more profitable than their larger counterparts.

In 2020, small businesses reported a 5% return on assets, compared to 2% for large companies. Medium-sized enterprises reported the best return on assets at 7%.

Accurate data on the return on assets of informal enterprises do not exist. However, TIPS estimates the figure to be small.