Building a start-up economy is possible if the ideas of young entrepreneurs are given adequate levels of support. And the government can play a role in this regard.
Amidst the gloomy figures about joblessness and weak growth, there is a start-up revolution that is taking place quietly in South Africa. There is even a Silicon Valley Initiative in Cape Town started by two South African entrepreneurs, Vinny Lingham and Justin Stanford.
South Africa’s start-up ecosystem, with Cape Town touted by many as its capital of this new revolution, may not be to the magnitude of Silicon Valley in the San Francisco Bay Area, or London, Israel, and Japan – in countries that are blazing the trail in the tech start-up revolution, but it has many promising elements.
Promoting start-ups, encouraging greater innovation, and building a sound regulatory infrastructure for small business may just be the needed solution to our low-growth and high unemployment mode.
Various reports by international agencies such as the OECD and research by local experts have demonstrated amply how concentrated the South African economy is across different sectors – agribusiness, manufacturing, and finance.
Yet these behemoths are no longer a force for creating national prosperity. They are not innovative. Their investment appetite in the economy is low and hold little promise for solving the low growth and unemployment challenge that we face as a country.
There have been several policy attempts at finding solutions to the structural bottlenecks that constrain growth, but to little avail.
Just a few weeks ago, Statistics South Africa released a report that showed that the manufacturing industry, and mining and quarrying industry experienced negative growth on a quarterly basis, and these sectors have pulled down overall GDP growth.
Accordingly, manufacturing decreased by 6.4%, with a negative impact of -0.8 of a percentage point to GDP growth. As Stats SA reported, the mining and quarrying industry contracted by 9.9% and also contributed -0.8 of a percentage point to GDP growth, with agriculture, forestry and fishing industry contracting by 24.2% and contributed -0.7 of a percentage point to GDP growth.
The sectors that, according to Stats SA, performed positively are largely white-collar sectors: government services, finance, business services, and real estate. Against this backdrop we should be looking more at creating value through innovation-driven initiatives within a well-supported start-up ecosystem. We should look more at small and medium-sized enterprises as the future pivots for growth and employment creation.
Weak investment commitment by large firms
Big firms are hardly reinvesting in the economy. A year ago it was reported by the University of Johannesburg Centre for Competition and Regulation and Economic Development that about R1.4 trillion is sitting in the reserves of JSE-listed companies rather than creating value in the economy. At the time, some captains of industry attributed this apathy to the political climate and policy uncertainty. Their formula was something like get the “politics right (or get rid of President Jacob Zuma) and investments shall follow”. The politics have improved with the change of political leadership, and we are yet to see restored confidence in the economy.
The problem of lack of investment by big firms in the economy is not a uniquely South African one, but one that the Columbia-based economist, Paul Krugman suggests blights economies that suffer from high levels of concentration, where there are few companies that have unbridled market power. In this view lack of reinvestment by major firms is as a result of “the growing importance of monopoly rents: profits that don’t represent returns on investment, but instead reflect the value of market dominance….the growing importance of rents is producing a new disconnect between profits and production and may be a factor prolonging the slump.”
While in the South African case, competition policy has been used to greater effect to discipline anti-competitive behavior and market dominance, a more proactive complementary set of policies aimed at supporting small and medium-sized enterprises and to enrich the start-up ecosystem are urgently needed.
Public policy should be geared towards creating prosperity through small and medium-sized enterprises rather than looking at the industrial behemoths that have forgotten what it is to be innovative and competitive.
Some of these, especially in the manufacturing sector, rely on steroids of government incentives, which is a form of corporate welfare in exchange for maintaining jobs in the short- to medium-term.
So far, the start-up revolution has not gained much of a critical mass. We may still be a long way towards producing similar positive effects as Silicon Valley or other start-up capitals of the world. There is however a growing appetite.
This became clear during a discussion with two start-up entrepreneurs in their early 20s. One is a Cape Town-based entrepreneur, Vuyolwethu Dubese, a 23-year-old woman who is the Thomson Reuters Ecosystem Manager for Innovation. She refers to herself as a millennial. Her work is at the nexus of forging partnerships between big businesses, venture capital, and entrepreneurs who are starting new businesses that could be value creating in the economy.
Another 23-year old entrepreneur, Karidas Tshintsholo who grew up in Enkangala township near Pretoria is a serial entrepreneur in the agricultural and textiles sectors. He debunks myths that young people are not fit for agriculture. Through an app-based platform that he invented with his team of young entrepreneurs, he is able to link farmers who exist on the margins of the formal economy with the market. His initiative cuts out the middle-men, aggregates crops in real time from different farmers, integrates logistics, and facilitates ease of off-take for smallholder farmers.
There are many other examples of fresh thinking about business and economic value. There is also a growing army of socially conscious venture capitalists such as Michael Jordaan, who left the rarefied world of banking to fan the flame of social entrepreneurship. His philosophy is that start-ups exists to create both economic value and solve real problems in society.
He has been instrumental in solving market-related challenges using the combined innovative energies of start-ups and venture capital. His brainchild includes the new mobile start-up “rain”, which seeks to overcome the problem of high data cost.
South Africa possess latent potential for innovation. What is often lacking is the right kind of mindset and a public policy that is stuck in old ways of thinking, even when these have proven not to work.
There is an opportunity for government to be a catalyst that accelerates the fledgling start-up revolution in South Africa as a force to drive innovation, create growth of a different quality, and generate opportunities for young people to participate meaningfully in the economy.