What is enterprise development?
Enterprise development (ED) refers to initiatives by the public and private sector to help to develop small or medium companies, which are the driving force of the South African economy (along with micro-enterprises). ED helps entrepreneurs to develop, scale and improve these businesses, which stimulates the economy and brings about positive social change.
In South Africa, the Broad-Based Black Economic Empowerment codes of good practice support and promote small businesses, and corporates are required to invest at least 3% of Net Profit After Tax towards the development of transformed businesses. Enterprise development (ED) is one of the priority elements of the Broad-Based Black Economic Empowerment (B-BBEE) Scorecard, along with supplier development (SD). This makes ED a business-to-black-business transaction, with ED beneficiaries at least 51% black-owned. The difference between ED and SD is that SD contributions are made to companies that are already part of the contributor’s supplier chain – the ED recipient could, however, become part of the supplier chain in the future.
ED contributions can be financial or non-financial – for example, corporates could assist entrepreneurs with training and mentorship, legal support, HR support, customer management, counselling, and assistance with a business strategy.
Why is enterprise development important?
Enterprise development is considered one of the strategic roadmaps to overcoming the triple challenge of poverty, inequality, and persistently low unemployment in South Africa.
Prior to the pandemic, the country was working towards the National Development Plan’s (NDP) goal of creating 11 million new jobs by 2030. The NDP envisages that small businesses will create 90% of new employment opportunities and contribute between 60-80% of GDP by 2030. To achieve this goal, GDP growth would need to increase by 5% a year. However, in the wake of the pandemic, the International Monetary Fund has revised its GDP growth forecast for South Africa to 3.1%, 0.5% lower than its previous estimate.
“According to Stats SA, the number of employed decreased by 28 000 to 15 million in the first quarter of 2021 (with the unofficial figure much higher), it is clear that drastic action will need to be taken to help the country recover from the pandemic.” – small businesses have been particularly hard-hit, with close to 43% closing during the first five months. Before Covid-19 reached our shores, it was estimated that there were around 700 000 formal businesses in South Africa, with hundreds of thousands of micro and small businesses located in the informal sector, according to Jennifer Cohen, Executive for Policy and Advocacy at the Small Business Institute (see page 117 of the Trialogue Business in Society Handbook 2020).
By November 2020, 17% of the workforce was classified as ‘self-employed’ (with less than 42% of those small businesses classified as employers in their own right), with paid employees constituting some 83% of the workforce.
The pandemic has proved a significant setback for entrepreneurship in a country in which 70-80% of small businesses have been failing within the first five years, even without the challenges of Covid-19. With only 15% of start-ups able to go the distance in South Africa, we do not have enough sustainable small businesses to create jobs and contribute to national income, let alone promote innovation, drive social change, and foster community development. ED should be an urgent priority for the public and private sectors – not only to help to create small businesses, but to ensure that those newly formed companies can provide employment, scale when they are ready to do so, and continue to operate in the long term.
Although the South African Government has invested heavily in ED and incubation programmes for entrepreneurs, the country lacks a truly enabling environment for these small businesses, which must contend with tough economic conditions, limited access to finance, poor access to markets, a dearth of skilled staff, and complex regulations. ED can help them to navigate some of these challenges, providing the necessary finance and skills transfer they need to grow and become sustainable.