A targeted approach to informal business development: the entrepreneurial route

Abstract

The present paper maintains that initiatives to promote and support small businesses need to focus on those with growth potential rather than on the small business sector as a whole, and that the human factor, especially entrepreneurial intentions and behaviour, is the overwhelming force in small business success. Empirical evidence shows that many entrepreneurs setting up businesses in the informal economy of South Africa have little business acumen. The majority of informal businesses operate as survivalist entities with limited development and growth potential. The paper suggests that only between 10 and 15 per cent of informal entrepreneurs have sufficient business skills to expand and develop their businesses. These should be the focus of policy initiatives. Separate collective support measures should be designed to make the business environment more hospitable to low-potential informal businesses.

1. INTRODUCTION

High unemployment is often highlighted as the single most significant impediment to poverty reduction in developing countries, including South Africa (Minford & Mahambane, 2005:5). As a result, considerable emphasis is placed on the contribution that the small, medium and micro enterprise (SMME) sector can make towards relieving the high levels of unemployment. One of the major reasons for unemployment in South Africa is the disproportional dependence of labour market entrants on formal sector jobs. A consequence of the formal sector's inability to accommodate new entrants is the establishment of small (informal, survivalist) businesses, often set up to escape the plight of unemployment rather than to exploit a promising business opportunity. This situation in the informal sector leads to high business mortality rates and peculiar business developmental problems that require very specific targeted policy approaches and measures to ensure higher levels of business survival and formalisation.

Promoting the entrepreneurial spirit in a country is widely accepted as the key to economic growth, job creation and improved competitiveness (Antipolis, 2000). Entrepreneurship combines innovation (i.e. risk-taking and the provision of new goods and services) and individual initiative, resulting in organisational renewal, both improvement of existing businesses and the establishment of new ones (Cross, 1995; Research Centre of Entrepreneurship, 2002). In comparison with the rest of the world, South Africa scores relatively low on the extent of entrepreneurial activity in the country. This demands an in-depth understanding of and insight into the growth and development of small businesses in order to unleash the latent entrepreneurial potential embedded in people (Von Broembsen et al., 2006).

Entrepreneurship is often equated with small business development as a whole (Dockel & Ligthelm, 2005:61). This paper, however, argues that the term ‘entrepreneurship’ embraces only those businesses that show growth and development, which implies that small business policy initiatives should rather focus on those businesses that have growth potential (Glancy, 1998) and not on the small business informal sector as a whole. Policy-makers are becoming increasingly aware of the economic and social limitations of policy initiatives that rely too heavily on this sector as a whole. To target the businesses with growth potential, the factors likely to influence their behaviour need to be identified.

The paper briefly analyses the informal or unrecorded economy with specific focus on the magnitude of informal sector employment and business formation. It emphasises the role of entrepreneurship in small business development. It offers an exposition of the extent of entrepreneurial acumen in informal businesses in South Africa and argues for the need to follow a targeted approach in small (informal) business support to allow emphasis on only those businesses with development and growth potential. These topics are introduced with a brief discussion of existing government support programmes, which confirms that SMME support programmes largely focus on more successful small businesses and therefore already display some form of targeting.

2. SMME SUPPORT PROGRAMMES IN SOUTH AFRICA

SMME development is one of the South African Government's priority programmes. The policy framework to provide an enabling environment for small business development is outlined in a 1995 White Paper (Republic of South Africa, 1995). Since then, renewed emphasis has been placed on measures to assist the development of this sector, such as viewing the promotion of entrepreneurship as an integral part of small business development; establishing partnerships between government and other role-players such as the corporate sector, private financing institutions, non-governmental institutions and organised business; and integrating the support provided by various governmental departments and institutions. The government also recognised that it should continue to help small businesses by addressing their changing circumstances and finding ways to improve their operating conditions. As a result, a strategic framework rather than a blueprint for small businesses was adopted in 2005 (Republic of South Africa, 2005). Yearly reviews supplemented by 5-yearly impact reviews will reveal progress and also the adjustments that will be needed to ensure appropriate SMME policy and support measures.

Although the contribution of small businesses to economic development and the impact and efficacy of the various policy initiatives are not the subject of this paper, the rest of this section briefly refers to the assessment of existing government policy for supporting small business.

Several studies have been conducted on the efficacy of the government's SMME support programmes. These are summarised by Monkman (2003:1), who says various state-backed entities have been established in the SMME sector, with little apparent success. In a study on the impact of the government's SMME programmes, Rogerson (2004:782) concludes that the existing government SMME programmes have largely been biased towards medium and small enterprises and have bypassed microenterprises. The Office of the Presidency (2006) also confirms that the growth in the small business economy does not necessarily reflect the success or impact of government support programmes. Some of the major deficiencies of these programmes are summarised by Monkman (2003:4) as follows:

•	Gaps between businesses' needs and the types of services offered.
•	Programmes that do not develop entrepreneurial culture.
•	A tendency to focus on potentially viable firms.
•	A tendency to serve larger small and medium enterprises better than smaller ones.
•	Low usage of Department of Trade and Industry and agency programmes.
•	Cumbersome administration.

This list confirms that small business support in South Africa mostly neglects the large group of informal enterprises. The bulk of these enterprises can be typified as survivalist with limited dynamism and hence little entrepreneurial spirit (Ligthelm, 2004:73). Their involvement in business activity is motivated largely by an attempt to escape from unemployment and poverty and not by a desire to seize a profitable business opportunity. This fact, together with the empirical finding that successful small businesses positively correlate with the entrepreneur's level of entrepreneurial acumen (Dockel & Ligthelm, 2005:62), confirms that SMME support programmes tend to focus on businesses with growth potential rather than survivalist businesses with limited potential. This is not necessarily wrong and explains why existing government programmes are biased towards more successful businesses.

Ligthelm (2004:73) maintains that survivalist businesses with limited growth potential (low-growth firms) demand support programmes that may differ substantially from traditional SMME support programmes. Support aimed at businesses with growth potential (high-growth firms) is individualistic in nature and aimed at supporting a specific business with financial or other resources. Low-growth firms (often with limited entrepreneurial acumen) should rather be supported by collective programmes aimed at improving the external business environment in which they operate. Programmes such as these help by, for example, erecting rudimentary shelters and providing access to basic infrastructure. The majority of these low-growth firms are located at pedestrian concentrations such as train stations or bus stops and central business district areas where collective programmes would benefit the majority of such firms (Ligthelm, 2004:73). Successful businesses show a positive correlation between business management skills and entrepreneurial behaviour (Dockel & Ligthelm, 2005:61). These businesses are currently the focus of government support programmes.

3. VARIABLES FOR SMALL BUSINESS SUCCESS

Before analysing the role of entrepreneurship in small business growth, it is important to note that a complex multidimensional set of factors may contribute to small business success. These factors can be grouped into three categories: economy based, industry or sector based, and firm based. Economy-based factors are associated with national economic variables related to the state of the economy, such as the specific phase of the business cycle, growth policies, employment prospects and the economic environment created by the national government for business growth. Industry-based factors are associated with the sphere of industry in which the firm operates and can relate to supply and demand factors inherent in the sector, ease of entry and degree of competitiveness, among other things. Firm-based factors are those internal to the firm in the form of the availability of resources, especially entrepreneurship, and the effective use of resources to achieve a favourable outcome. It is sometimes useful to consider the external factors collectively by combining economy-based and industry-based factors as exogenous to the business, and distinguishing these from factors over which the individual owner has control, which are classified as firm-based and hence endogenous. This classification is especially relevant for targeting policy to address specific problem areas, as well as for ensuring that the various policy measures adopted do not clash, thereby cancelling the intended effect. If, for instance, the risk is predominantly endogenous, then policy measures should be aimed at the firm level, such as providing training and education and small business support structures. If the causes of failure are predominantly external, then policy should be aimed at changing the economic environment in which the firm operates (Dockel & Ligthelm, 2002:2).

The above factors may differ in importance and relevance. In this regard, it is necessary to acknowledge Rogerson's (2000) warnings that in South Africa there is a marked difference between the success factors at the upper end of the market (formal small businesses) and at the lower (stagnant or slow growers in the informal economy). This paper focuses only on one component of this lower end (the second economy), as the next section explains.

4. FOCUS ON THE INFORMAL ECONOMY

To explain on which component of the informal or unrecorded economy this paper focuses, it is first necessary to categorise the components of this sector.

Most authors studying the informal economy face the difficulty of defining the sector. It is widely acknowledged that it includes all unrecorded economic activities that normally escape detection in the official estimates of the Gross Domestic Product (GDP). Schneider and Klinglmair (2005:2) confirm that the informal economy embraces all unreported income from the production of goods and services – both legal and illegal, either from monetary or barter transactions – and hence all economic activities that would have been taxable if reported to tax authorities.

Using this definition, it is possible to dissect the informal or unrecorded economy into the following subsectors (Organisation for Economic Cooperation and Development [OECD], 2002:13; Ligthelm, 2005:6).

•	The unrecorded part of the formal or first economy. In most countries, the formal economy is responsible for the bulk of economic production. It is integrated with the global economy, operates with advanced technology and is generally well managed and well endowed with entrepreneurial acumen. Informality in the first economy is often the result of avoiding compliance with cumbersome procedures and regulation. Farrell (2004:27) states that it is no secret that some businesses operate partly or wholly outside the law by under-reporting or not reporting employment, avoiding taxes, infringing copyrights and even failing to register as legal entities. Schneider and Klinglmair (2005:17) confirm that the main reasons for becoming informal in the modern economy are direct and indirect taxation, and government regulations. Both these burdens provide a strong incentive to operate in the informal economy. In the official labour market, the costs firms (and individuals) have to pay when officially hiring someone are increasing enormously because of indirect tax, and social contributions on wages, and because of the legal regulations attached to employment. (Examples of indirect taxes on wages are the training levy and contributions to the unemployment insurance fund. Both are calculated on the wage bill of a company.) Schneider (2002:21) remarks that this is especially true in Europe, where the total tax and social security burden adds up to 100 per cent in addition to the wage effectively earned by the employee.
•	The second economy. This has become an important element in the South African government's development policy and plans to combat poverty. In contrast to the first economy, with its modern and globally integrated nature, Mbeki (2003:5) typifies the second or marginalised economy as underdeveloped, contributing little to the GDP, containing a large percentage of the South African population, incorporating the poorest of our rural and urban poor, structurally disconnected from both the first and the global economy, and incapable of generating its own growth and development. Valodia (2007:1), however, expresses the opinion that this part of the economy is integrally connected in the sense that developments and cyclical factors in the formal economy are likely to have a significant impact on businesses in the second economy. This part of the economy manifests itself as small, often survivalist businesses such as traders on the kerbside, in pedestrian malls and at transport interchanges, and small manufacturers and home-based businesses such as spaza shops. These businesses are often so small that they fall outside the income tax net and often employ no non-household members. Infringement of regulations, such as safety regulations, and non-compliance with product quality prescriptions, is often caused by ignorance rather than deliberate misdemeanour.
•	The illegal or third economy. This embraces all forbidden activities and includes the production and distribution of illegal goods and services, production and sale of counterfeit products, smuggling and the resale of stolen goods, bribery and money laundering (OECD, 2002:51).

It is interesting to note that the OECD, in their handbook on measuring the unrecorded economy, also distinguish the above three components, albeit using different terminology (OECD, 2002:13). They call them the underground economy, the informal economy and the illegal economy, respectively.

The above discussion shows that informal businesses cover a variety of activities: the unrecorded part of large businesses, small survivalist businesses, and even fraudulent businesses. In the rest of this paper, the term ‘informal sector’ (or ‘informal economy’) refers only to small businesses active in the second or marginalised economy and excludes the other two components.

5. EMPLOYMENT CREATION WITHIN THE INFORMAL ECONOMY

The informal economy provides an important alternative to unemployment, especially in countries without a system of social security (Barker, 1999:94). Often, people cannot rely on government support and have to fend for themselves. Involvement in the informal economy does not necessarily solve the problem of poverty, since income levels are low and conditions of employment poor (Ligthelm, 2005:54). However, the shortage of productive employment opportunities often compels people to enter the informal economy. Although the figures below are an attempt to estimate informal sector employment, Devey et al. (2003:21) warn that there are problems with the informal employment estimates of the StatsSA October Household Surveys and Labour Force Surveys. Any estimates of the size of informal employment should therefore be treated with caution.

Figure 1 shows the labour absorption rate of the formal economy of South Africa. This rate is defined as the percentage of the working-age population 15–64 years old who are employed in the formal economy. The figure shows that the absorption rate of the formal economy fell from 45.7 per cent in 1980 to only 27.7 per cent in 2005.

Figure 1: Labour absorption rate of the formal economy of South Africa for selected years, 1980–2005

This decline in the ability of the formal economy to accommodate the work seekers in South Africa is shown in Figure 2, which illustrates the change in GDP in relation to the change in employment growth (expressed as indices with 1979 = 100). The figure clearly shows that employment growth was somewhat less than economic growth from 1980 to 1989, with a marginal increase in the divergence between the two variables. GDP indices increased from 107 in 1980 to 124 in 1989, and non-agricultural employment indices increased from 104 in 1980 to 112 in 1989. From 1990 to 2005 a substantial divergence between economic growth and non-agricultural employment growth became evident. GDP indices continued their upward trend from 124 in 1990 to 170 in 2005. In contrast, employment indices declined from 112 in 1990 to a mere 92 in 2005. This increasing gap between GDP and employment growth is further evidence of labour shedding in the formal non-agricultural sectors, often leaving the informal sector as the only viable option for survival for these people.

Figure 2: Change in GDP in relation to change in employment (1979 = 100), 1980–2005

Figure 3 shows the long-term trends in informal sector employment. The share of informal workers shows a continuous upward trend for the 15-year period from 7.7 per cent in 1980 to 22.0 per cent in 1995. For the next 10 years (1995–2005) the share of informal workers moved sideways at a share of just over 20 per cent of total employment. This represents just over two million workers fending for themselves primarily through establishing small survivalist businesses. From 2003 onwards a gradual decline in the share of informal workers is predicted. The main reason for this decline is the expected increase in the prevalence of HIV/AIDS, especially among the less affluent segments of the South African population, which are disproportionally represented in the informal sector (Harris & Van Aardt, 2004). The South African GDP growth, close to 5 per cent during 2005 and 2006, also resulted in the realisation of positive formal employment growth during this period.

Figure 3: Informal sector employment as percentage of total employment, 1980–2005

It is important to note that the majority of informal sector employees are accommodated in informal businesses often established by themselves. The average employment size of informal businesses in South Africa amounted to 2.29 (owner included). Of these, 44 per cent are involved in their own businesses as owners while the rest (56 per cent) are accommodated as employees in informal businesses.

In Section 4 above, the second economy is referred to as an aggregate. However, it should be considered that although the second economy is largely located in the trade sector, some of the other sectors are also fairly well represented. This sectoral differentiation may affect the type and volume of support needed in the various economic sectors. The need for capital and support may be higher in the manufacturing and transport sector than in the trade sector. Skills requirements may also vary between manufacturers (e.g. between plumbers and welders) whereas businesses in the buying and selling trades do not require a variety of skills.

Figure 4 shows the sectoral composition of employment in the second economy. Just over one-half of the employment (50.1 per cent) was in the trade sector (wholesale and retail). This is followed by construction with 13.8 per cent of employment and the manufacturing sector with 10.6 per cent, which covers businesses such as carpentry, plumbing, shoe repairing, welding and baking.

Figure 4: Distribution of informal workers by sector, 2001

The relatively smaller employment size of businesses in the trade sector compared with other sectors implies a proportionally larger share of the trade sector in the number of businesses than its share in employment. The employment size of hawkers (trade sector), for example, is 1.59 compared with 2.46 in non-trade businesses (Ligthelm, 2005:49). Censuses on businesses in the second economy are very scarce. A survey conducted by the World Bank in selected metropolitan areas in the mid-1990s estimated the share of trade business at 70.3 per cent of the total of second economy businesses (World Bank, 1993:16). Recent studies suggest there has been a decline in the number of retail businesses because of the shopping malls that have opened in almost every sizeable township in South Africa, resulting in a consumer expenditure displacement from small survivalist retailers to national chains operating from these newly established malls (Ligthelm, 2007:53).

Two questions arise from the above discussion. First, does business establishment in the informal economy result from entrepreneurial behaviour or from an effort to escape poverty? And second, what (targeted) approach should be followed to raise those businesses with development potential to higher and sustainable business levels?

6. MEASURING THE LEVEL OF ENTREPRENEURSHIP IN INFORMAL BUSINESSES

Since the middle of the last century, a considerable body of research by personality theorists has emerged to explain entrepreneurial behaviour and intentions in terms of personality traits (Cromie, 2000; Llewellyn & Wilson, 2003; Mu¨ller & Gappisch, 2005). In short, entrepreneurship is defined by personality trait theory as a construct made up of a set of personal characteristics, in particular risk-taking, creativity and ambition. Although several instruments have been developed in an attempt to construct entrepreneurial personality characteristics, psychologists have failed to present conclusive evidence on profiling an entrepreneur. Llewellyn and Wilson, for example, say that ‘After reviewing the literature [on personality trait theory] it became clear that further research is necessary to establish the potential influence of personality traits on entrepreneurship’ (2003:343).

The economic and management sciences do not have personality measuring tools comparable with those of the psychological sciences to gauge the level of people's entrepreneurial traits. In this paper, proxies are used to approximate the levels of entrepreneurship in informal businesses that can help inform strategies for transforming informal survivalist businesses into growing small business firms. Of particular concern here is how to identify which businesses have the growth potential that would justify making them the focus of support strategies.

Entrepreneurial actions of business people within their businesses, such as evaluating the competition and analysing the risks, were used in this study to shed some light on the entrepreneurial level of small (often informal) businesses in South Africa. This approach was based on the premise that entrepreneurial behaviour means becoming actively involved in starting and running an own business, by exercising a series of typical entrepreneurial activities that will be highlighted in the rest of this section.

To measure the level of entrepreneurship in small businesses, the following three surveys were analysed:

•	The Global Entrepreneurship Monitor (GEM) project conducted among a sample of all South Africans, which means that formal-sector and informal-sector businesses were included in the sample (Von Broembsen et al., 2006).
•	A survey by the Bureau of Market Research among informal retailers in South Africa (Ligthelm, 2004).
•	A survey among small businesses in the Gauteng Province by FinMark Trust 2006.

There was a clear variation in the sample populations in these studies. Limited empirical research on the second economy's level of entrepreneurial acumen compels researchers to use suboptimal databases to analyse this sector. In this study, however, an attempt was made to relate this less than perfect empirical data to entrepreneurial behaviour in second economy businesses.

6.1 Global Entrepreneurship Monitor project

The first measurement was developed by the Loxton Business School and the Babson College in the USA. They conducted several international comparative studies on entrepreneurship under the banner of the GEM project. The South African part of the study was conducted by the Graduate School of Business of the University of Cape Town (Von Broembsen et al., 2006). One of the aims of the study was to establish the rate of entrepreneurial activity in South Africa. This was established by interviewing 2761 adults between the ages of 18 and 64 years in 2005 to determine their involvement in business formation.

The GEM project's principal measure of entrepreneurial activity was the so-called Total (Early-stage) Entrepreneurial Activity (TEA) ratio or index. This index is the proportion of adults aged between 18 and 64 years who have owned and managed a start-up business (one that has not paid salaries for 3 months or more) or a new business (one that has paid salaries for between 3 and 42 months). South Africa's TEA rate was calculated at 5.1 per cent in 2005. The TEA calculation was conducted worldwide for 35 countries in 2005. The ratio of just more than 5 in every 100 South African adults involved in businesses of at least 3.5 years' duration ranked among the lowest in the world.

A comparison with the eight developing countries that participated in the GEM 2005 study showed that (Von Broembsen et al., 2006):

•	South Africa had the lowest entrepreneurial activity rate of all the developing countries included in the 2005 GEM study.
•	South Africa's low TEA rate was attributable especially to a low-opportunity entrepreneurship activity rate – the lowest of all the developing countries.
•	The established firm rate (i.e. the percentage of adults who are owner-managers of businesses that have paid wages for more than 3.5 years) was 1.3 per cent. This figure was the lowest of all the developing countries, and one of the four lowest of the 35 GEM countries sampled in 2005.
•	With the exception of Mexico, of the eight developing countries sampled South Africa's start-up businesses were the least likely to mature to the new-firm stage (a duration of more than 3 months). This indicates that the success rate of new ventures was lower in South Africa than in most other developing countries.

Entrepreneurs who pursue a business opportunity are referred to as opportunity entrepreneurs, while those who are involved in an entrepreneurial effort because they have no other choice of work are referred to as necessity or survivalist entrepreneurs. About three-quarters of all entrepreneurs in the 35 countries included in the GEM study were classified as opportunity, and one-quarter as necessity. For developing countries these figures gravitate towards necessity entrepreneurs, with a ratio of 63:37 (in 2004) in favour of opportunity entrepreneurs. In South Africa, the entrepreneurial pool is made up of 58 per cent opportunity and 42 per cent necessity. It is important to note that the study was based on a random adult sample, which implies that respondents' businesses ranged from informal survivalist to more established formal small businesses. The GEM study (Von Broembsen et al., 2006) also calculated that only 25 per cent of the so-called early-stage businesses (i.e. businesses in operation for less than 3.5 years) have a chance of surviving beyond 3.5 years. Considering the fact that the ratio of opportunity to necessity businesses stands at 58:42 for South Africa, it can be assumed that only a very small percentage of the latter managed to progress to the established business phase. This is based on the assumption that opportunity businesses have a substantially better chance of surviving beyond 3.5 years than survivalist ones. The latter either cease to exist or continue as survivalists primarily because their lack of entrepreneurial behaviour.

6.2 The Bureau of Market Research informal sector survey

Further to the definition of entrepreneurship as stated in Section 4, Timmons (1999) states that entrepreneurship results in the creation, enhancement, realisation and renewal of value, not just for owners but for all participants and stakeholders. At the heart of this process is the recognition or creation of opportunities, coupled with the will and initiative to seize these opportunities. It requires a willingness to take risks – both personal and financial – but in a manner calculated to continually shift the odds to the entrepreneur's favour, and balancing the risk with the potential reward. Typically, entrepreneurs devise ingenious strategies to marshal their limited resources. They face dilemmas and must make decisions despite ambiguity and contradictions.

Some operational elements of this process can be identified. Entrepreneurial behaviour consists largely of taking calculated risks, and this calculation involves assessing the competition and analysing the risks, considering alternative investments, and working at taking the business from start-up to an established and profitable phase.

In a survey of 400 informal retail businesses in South Africa, respondents were asked to indicate to what extent 10 of these operational elements were applied in their businesses (Ligthelm, 2004). Figure 5 shows that these elements were generally not applied in the informal businesses included in the sample. On average, just under one in seven (14.3 per cent) confirmed that they applied the following elements in their businesses:

Figure 5: Execution of entrepreneurial functions by informal business owners/managers

•	Conducting a risk analysis prior to starting the business.
•	Compiling a business plan prior to establishing the business.
•	Regularly updating the business plan.
•	Compiling a marketing strategy.
•	Considering alternative business investments after establishing the business.
•	Compiling an operational plan for the business.
•	Regularly investigating alternative investments.
•	Regularly analysing the competitors.

Positive responses were elicited for the following two elements:

•	A future vision for the business.
•	Intention of converting the business into a formal business.

The first eight elements above refer to practical actions that constitute part of considered entrepreneurial behaviour. Non-compliance can therefore be monitored in practice. However, the last two elements refer to intentions or dreams that may easily elicit a positive response or may equally well remain dreams in the case of informal (survivalist) business owners.

6.3 The FinMark business survey

A survey was conducted in 2006 (FinMark Trust, 2006) among 2000 informal and formal businesses in Gauteng to assist in market segmentation and needs analysis exercises. (Gauteng is the largest of South Africa's nine provinces and contributes just over 40 per cent to the national GDP.) According to the survey results, this province's small business fraternity consists of almost two-thirds (63.9 per cent) informal businesses and one-third (36.1 per cent) formal businesses. The informal businesses were classified into seven categories. Figure 6 shows that:

Figure 6: Classification of informal businesses in Gauteng

•	Just under one-third (31.5 per cent) were operating from the kerbside with no facilities, or only minimal ones (categories 1 and 2).
•	Just over one-half (54.3 per cent) were home based, with access to electricity, and in some cases also to hot water (categories 3 and 4).
•	Just under one in eight (14.1 per cent) were home based, with facilities such as landline telephones and computers (categories 5 and 6).
•	Only 0.1 per cent were operating from office blocks or shopping centres (category 7).

The FinMark (2006) study also presents the various business categories on a continuum ranging from informal businesses without any sustainability and growth potential to those with the greatest opportunity to increase their turnover and employment. Based on this continuum, approximately 14 per cent of informal businesses fall within the so-called ‘zone of transition’; that is, businesses with the greatest opportunity to gain in the short term from development and support strategies. The study (Finmark, 2006) stated that human behaviour (in this case entrepreneurial behaviour) largely dictates a business's position in the so-called ‘zone of transition’. Among the informal business fraternity, very few businesses make it into this zone.

6.4 Combined findings

The foregoing analysis depicts a sizeable portion of the informal small business fraternity. These are businesses largely established for household survival purposes, and operating at bare survival level. Their major characteristics, as evident from the three surveys, are:

•	Their mortality rate is high.
•	They have been established because of unemployment, not because promising opportunities were recognised.
•	Their business environment is stagnant, with limited trade-up or conversion to higher business echelons.
•	Their market growth is often manifested by new entrants rather than by an increase in the existing business's turnover.
•	They are often operating in kerbside shelters or from home.

Within this informal sector business environment, the cited surveys suggest an extremely low conversion from start-up to established business with growth potential. The Bureau of Market Research and FinMark surveys suggest that between 10 and 15 per cent of informal businesses have growth potential. Although the GEM study does not specifically quantify the growth or survival potential of necessity (survivalist) entrepreneurs, it can be assumed to be very low considering that only 25 per cent of all new businesses (including opportunity entrepreneurs) survive beyond 3.5 years.

7. ENTREPRENEURSHIP AND INFORMAL BUSINESS GROWTH

The success of small (informal) businesses has been the subject of a great deal of analysis (Everett & Watson, 1998; Lussier & Pfeifer, 2001). Growth has been associated with many factors, including the effect of policy measures directed at the small business sector, and macro-economic, industry and firm-specific factors (Dockel & Ligthelm, 2002:2). However, it must be admitted that economic theory has been of little help in explaining the reality of business formation, growth and decline (Wennekers & Thurik, 1999). One must largely agree with the assessment that the internal dynamics of the growth of small businesses have remained something of a ‘black box’ (Freel, 2000:321).

Some of the analyses of business growth are descriptive, others are more quantitative. Most of the quantitative studies focus on identifying the characteristics responsible for the growth of small businesses that can in turn be used to predict such growth. According to Freel (2000), research that only enumerates frequencies and is capable of asking only ‘what’ and ‘how many’ questions and neglects the ‘why’ and ‘how’ questions of small business growth offers less rich explanations of the processes driving this growth. Without analysing the literature on business growth in detail, Morrison et al. (2003:418) synthesise the literature by proposing a framework for identifying business growth factors and their characteristics. They consider the human factor to be the overwhelming force that determines whether or not a business will prosper. They propose that small business growth is based on clear, positively motivated business intentions and actions on the part of the owner-manager to achieve the desired outcome. The picture emerging from the three surveys mentioned above supports this finding and highlights entrepreneurial behaviour as the key variable in informal business growth and development. But it is to be found in only a relatively small percentage of informal (survivalist) businesses.

8. CONCLUSION

The above discussion reveals a continuum of small informal businesses ranging from those with growth potential to survivalist businesses that lack this potential. A small portion of informal businesses can be typified as enterprises where opportunities were seized as the basis for their establishment, while the majority can be described as or survivalist businesses. The latter show limited growth potential and have relatively high mortality rates. The analysis suggests that only between 10 and 15 per cent of informal businesses show inherent potential to grow and to trade up to higher and more formal business echelons.

The results of the analysis therefore suggest that policy initiatives to promote small business development and survival should be a dual approach consisting of the following two broad categories:

•

Targeting small businesses with growth potential on an individual basis with traditional small business programmes offering financial, training and counselling support.

•

Designing collective support programmes for survivalist businesses with limited growth potential. These programmes may include improving the business environment; for example, by providing shelters and access to basic infrastructure. The majority of these businesses will remain survivalist. A workable policy should also take into account the lack of resources to pay for the services and facilities provided to these businesses.

Limited financial and other resources available at traditional small business support institutions preclude the possibility of spreading policy initiatives broadly to include the entire small business sector. The focus should be on the small percentage of businesses with growth potential. It seems that the human factor and particularly the business's entrepreneurial endowment largely dictate its growth potential. Businesses owned or managed by people with an entrepreneurial mindset should be the focus of individual business support strategies.

In conclusion, the above discussion provides substantive evidence that the bias in the existing SMME support by South African Government institutions towards high-growth firms makes a lot of sense. The existing programmes are largely individualistic in nature – they focus on individual firms with growth potential that will be able to service their loans and create additional jobs. To assist low-growth (survivalist) businesses as well will demand new initiatives and programmes, and these should be more collective in nature and aimed at improving the business environment. Growth and additional jobs will not necessarily follow from such an exercise.

Notes