State of small businesses in South Africa shows how important they are to the country

A report on the current state of small businesses in South Africa shows how important the sector is for the country’s economy. The number of small businesses is still climbing, reaching 1.75 million by the final quarter of 2022, while the sector directly generates a third of the value added in the country and 30% of total employment.

The ‘State of Small Business in South Africa’ report is the third one compiled by Trade & Industrial Policies Strategies (TIPS) – an independent, non-profit, economic research institution established in 1996 to support economic policy development.

ALSO READ: Survival tip for SMEs after limited good news in budget speech

Number of small businesses

The number of small formal businesses in South Africa reached 710 000 in 2022, increasing from 680 000 in 2019 and 590 000 in 2010. Although the Covid-19 pandemic caused an initial 25% decline in the second quarter of 2020, the number recovered to 710 000 by the second half of 2022.

In addition, the number of informal businesses increased through the 2010s, jumping from 1.3 million to 1.6 million. However, this number fell sharply at the start of the pandemic, although it recovered faster to reach 1.75 million by the last quarter of 2022.

While informal activities and waged employment experienced a very sharp downturn in the second quarter of 2020, the pandemic downturn affected the number of small formal businesses only gradually thanks primarily to substantial government support for employers.

Despite the relief, formal employers’ incomes dropped by half in the first year of the pandemic and they shed around 400 000 jobs, or 5% of their total employment. Small formal business accounted for 85% of all net losses in waged jobs from 2019 to the third quarter of 2022.

Virtually all of these job losses affected lower-level workers, with almost no decline in employment for professionals and managers.

According to the report, the available data suggest that small formal businesses directly generate a third of value added in South Africa, while informal enterprise adds around 5%. In 2020, small formal firms held at least a quarter of total business assets. They were generally more labour intensive and more profitable than their larger counterparts. There is no similar data for informal business.

ALSO READ: Technical skills required to tackle SA’s youth unemployment crisis

Job creation and small business

Small formal business generated 30% of total employment, 32% of all waged jobs, including informal and domestic work and half of waged work in the formal private sector according to the report.

Their conditions of employment for both employers and waged workers lagged only slightly behind those in larger companies, far exceeding the norm for waged employees and own-account workers in informal and domestic work. Informal businesses, on the other hand, typically provided low incomes and comparatively insecure jobs.

The number of people working in small formal businesses was flat through the 2010s and waged employment in small businesses trended down throughout the pandemic, accounting for almost all of the formal job losses.

However, the number of formal employers and self-employed people remained relatively stable, with the fall in formal opportunities fuelling the extraordinary rebound in informal self-employment through most of 2022.

The report indicates that stagnation in employment at small formal business resulted in a falling share in total employment, dropping from almost 35% in 2010 to 30% in 2022. The share of small formal business in private waged employment, excluding paid domestic work, fell from 46% in 2010 to 37% in the fourth quarter of 2022.

In 2019, own-account workers, with no waged employees, operated a quarter of small formal businesses. Half had between one and 20 employees, while just under one in 10 had between 20 and 49 workers. In the informal sector, in contrast, own-account work dominated and four out of five informal enterprises were run by own-account workers and virtually all of the rest had four employees or fewer.

ALSO READ: Youth unemployment – Too much empty talk with little action

Production structure

Around a fifth of private formal small businesses provide professional services, ranging from education and healthcare to engineering, legal advice and creative work, according to the report. A quarter are in retail and hospitality, while the rest are mostly in construction, transport and communications, manufacturing and agriculture.

In the informal sector retail trade accounts for close to half of all businesses and this figure includes around half a million street traders. The next largest sector for informal business is construction, with a tenth of the total. Only just over 5% of informal businesses provided professional services.

The data show around 60 000 formal small businesses in manufacturing in 2019, or 10% more than a decade earlier, but the number is too small to analyse by industry.

Education of people in small businesses

The report shows that people with a university degree or other post-matric qualification were much more likely to become formal business owners than those with lower qualifications. Close to half of formal and own-account workers have post-matric qualification of some kind, compared to a seventh of their workers.

Workers in smaller enterprises were slightly less educated than those in larger companies, but they had much higher education levels than informal business owners and their employees, as well as domestic workers.

ALSO READ: 2023 Budget: SMEs need fundamental, large-scale interventions

Youth in small businesses

Business owners were significantly older than waged workers. In 2019, the median age for waged workers in both sectors was 35, while it was 45 for formal business owners and 41 for informal owners.

In 2022, 4% of young people aged 15 to 34 were business owners, which equated to 15% of all employed youth. Among people aged 35 and over, 10% of the total population owned a business, which equalled 21% of the employed. Overall, young people were more likely than older people to be in school (that is, economically inactive) and, if out of school, still seeking work.

In addition to the general obstacles to small business in South Africa, young people faced unique barriers. Above all, they still had to accumulate the experience, networks and financial resources needed to provide at least some cushion for the risks of entrepreneurship. That said, improving education levels since 1994 meant that they generally had higher education levels than older adults. In 2019, young business owners were almost as likely to have a degree as their older peers, and much more likely to have matric.