Distinguishing Economically - From Legally-Formal Firms: Targeting Business Support to Entrepreneurs in South Africa's Townships

Abstract

Although the government of South Africa (SA) has formally adopted a policy of proactive support of entrepreneurship, providing business assistance to all entrepreneurs is beyond SA's financial and human resource capabilities. Given limited resources, support must be targeted to those entrepreneurs that have greater potential to contribute to SA's economic growth. This study utilizes the results of an in-depth survey of 400 entrepreneurs in SA's townships to find: 1. The business and owner traits that predict revenues and job creation among the township entrepreneurs, 2. The key issues that challenge township entrepreneurs, and 3. What the answers to these issues imply about the appropriate content and recipients of business assistance to township entrepreneurs. A distinction is helpful in framing this study's approach. In SA, Registered (licensed) businesses are legally formal firms. In contrast, economically formal firms have institutionalized processes that lead to success as a profit-making firm. We find that revenues and employees are higher for firms owned by males, firms operating from a container or a formal building, and firms that have access to credit. We also find that firms that record receipts and disbursements have higher revenues, whether or not they are registered. We use this milestone as indicating an economically formal firm. The survey responses also indicate that additional training in keeping financial records and marketing the product are the highest internal priority for assisting township entrepreneurs; and access to credit is the highest external priority. In terms of the businesses that receive the assistance, if the priority in SA's townships is growth through the legally formal business sector, then government support should be focused on registered firms. If the priority is growth through firms that have the best internal foundation for growth, then government support should focus on the economically formal firms: firms that record receipts and disbursements. Including legally informal/economically formal firms in business assistance programs will reach more women-owned firms, more firms in retail- and consumer-oriented lines of business, more firms in areas where the infrastructure is less well developed (in terms of electricity and water), and more firms of owners whose language of choice is Zulu or Xhosa instead of English.