Chicken and egg: Entrepreneurship and economic growth

Johannesburg – Entrepreneurship is an important element to solving South Africa’s economic growth problem, said an analyst.

Trudi Makhaya, a consulting economist at Mercantile Bank, spoke to Fin24 about the impact of the credit downgrade to junk status on entrepreneurs. She also shared ways in which entrepreneurs can thrive in a low growth economic environment, and their role in boosting growth.

“Part of the problem of the South African economy is that it is small. It does not have vibrant participation from all segments of society,” she said.

For this reason, entrepreneurship can assist in boosting the economy in two ways. Firstly it is a way to create new companies, with big vision that would see them become major employers in the future, she explained. “Not only would we get employment out of that, we get the benefits of new markets, new players and competition.”

Entrepreneurship can also benefit the “smaller end of the scale”, she said. People who become self-employed often create opportunities within their communities. This is especially useful in rural areas and townships where there is not enough economic activity. This will encourage entrepreneurship and the pursuit of opportunities that enhance local economies, she explained.

Chicken and egg situation

Makhaya said that entrepreneurship’s role in boosting growth presents “a chicken and egg” situation. “To get the growth you need entrepreneurship. You need them generating new ideas and pursuing business, otherwise where would growth come from?”

Makhaya explained that entrepreneurs can’t wait for the economy to turn before banks and government decide to support them, as this is self-defeating.

“A lot of advocacy and persuasion is needed to convince established businesses to see the benefit of cooperating with new business,” she added. In some cases  these collaborations won’t happen if the businesses are competitors. However there is an opportunity for larger businesses to incorporate smaller businesses into their value chain to provide certain input activities.

READ: Junk status: Entrepreneurs must get creative

As for the role of government, Makhaya said it is important to be supportive of local businesses and to support local production, instead of having businesses import from elsewhere. “From the big corporate side and government side, a lot that needs to be done to encourage procurement from smaller businesses,” she explained.

Red tape has also served as a barrier to get new businesses off the ground. There should be a focus on reducing the admin hurdles that are unnecessary for small businesses to go through.

Makhaya added that substantial capital is necessary to help innovative small players take on the giants, referencing Discovery, MTN and Allan Gray as examples of "small fish" which became successful companies.

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