A report on the current state of small businesses in South Africa shows the importance of the sector to the country’s economy. The number of small businesses is still increasing, reaching 1.75 million in the last quarter of 2022, while the sector directly generates a third of the country’s added value and 30% of the total workforce.
The ‘Small Business Country in South Africa’ report is the third report compiled by the Trade & Industry Policy Strategy (TIPS) – an independent, non-profit economic research institute, established in 1996 to support economic policy development.
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The number of small businesses
The number of small formal businesses in South Africa will reach 710 000 in 2022, up 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 in the second half second 2022.
In addition, the number of informal businesses increased until 2010, rising from 1.3 million to 1.6 million. However, the number fell sharply at the beginning of the pandemic, although it recovered faster to reach 1.75 million in the last quarter of 2022.
While informal activity and employment experienced a sharp decline in the second quarter of 2020, the decline of the pandemic affected the number of small formal businesses only gradually thanks mainly to the substantial government support for employers.
Despite the relief, the income of formal employers fell by half in the first year of the pandemic and laid off about 400 000, or 5% of the total workforce. Small formal businesses accounted for 85% of all net losses in employment wages from 2019 to the third quarter of 2022.
Virtually all of these job losses affected lower-level workers, with almost no job losses for professionals and managers.
According to the report, available data shows that small formal businesses directly generate a third of value added in South Africa, while informal enterprises add about 5%. By 2020, small formal enterprises hold at least a quarter of total business assets. They are generally more labor intensive and more profitable than their larger counterparts. There is no similar data for informal businesses.
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Create projects and small businesses
Small formal businesses generate 30% of total employment, 32% of all paid jobs, including informal and domestic work and half of paid jobs in the formal private sector according to the report.
Working conditions for employers and salaried workers are only slightly behind those of larger companies, exceeding the norm for salaried employees and own account workers in informal and domestic jobs. Informal businesses, on the other hand, usually provide low income and insecure jobs.
The number of people working in small formal businesses until the 2010s and gaining employment in small businesses declined throughout the pandemic, accounting for almost all formal job losses.
However, the number of formal employers and self-employed remains stable, with the fall in formal opportunities leading to a remarkable rebound in informal self-employment until most of 2022.
The report shows that the stagnation in employment in small formal businesses has led to a decrease in total employment, falling from almost 35% in 2010 to 30% in 2022. The share of small formal businesses in private employment, excluding paid domestic work, has decreased . from 46% in 2010 to 37% in the fourth quarter of 2022.
In 2019, self-employed workers, without paid employees, operated a quarter of small formal businesses. Half have between one and 20 employees, while only one in 10 have between 20 and 49 employees. In the informal sector, in contrast, own-account work predominates and four out of five informal enterprises are managed by own-account workers and virtually all others have four employees or less.
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Production structure
About a fifth of private formal small businesses provide professional services, ranging from education and health 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 almost half of all businesses and this figure includes around half a million street traders. The next largest sector for informal businesses is construction, with a tenth of the total. Just over 5% of informal businesses provide professional services.
The data shows about 60 000 formal small businesses in manufacturing in 2019, or 10% more than a decade earlier, but the number is too small to be analyzed by the industry.
Educating people in small business
The report shows that people with university degrees or other post-matric qualifications are more likely to become formal business owners than those with lower qualifications. Close to half of the formal and self-employed employees have post-matric qualifications, compared to seven employees.
Workers in small enterprises have slightly less education than in large enterprises, but the level of education is higher than informal business owners and employees, as well as domestic workers.
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Youth in small business
Business owners are older than paid workers. In 2019, the average age for wage workers in both sectors was 35, while it was 45 for formal business owners and 41 for informal owners.
By 2022, 4% of young people aged 15 to 34 will be business owners, which equates to 15% of all working youth. Among people aged 35 and over, 10% of the total population owns a business, which equates to 21% of employees. Overall, young people are more likely than older people to be in school (ie, economically inactive) and, if not in school, still looking for work.
In addition to the common barriers for small businesses in South Africa, young people face unique barriers. Most importantly, they still need to gather the experience, network and financial resources needed to provide at least some cushion for entrepreneurial risk. That said, improving education levels since 1994 means that most have a higher level of education than their parents. In 2019, young business owners have almost as many degrees as their older peers, and more have matrics.