Academic journal article Journal of Small Business Management

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

Academic journal article Journal of Small Business Management

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

Article excerpt

Although the government of South Africa (SA) has formally adopted a policy of proactive support of entrepreneurship, providing business assistance to all of its entrepreneurs is beyond SA's financial and human resource capabilities. This study utilizes the results of an in-depth survey of 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 use this distinction in our analysis of the data and framing of the implications for business assistance strategy in SA.

Introduction

It is estimated that two million people are engaged in some form of self-employment in South Africa (SA). (1) Although SA has formally adopted a policy of proactive support of entrepreneurship, (2) providing business assistance to all of its self-employed is beyond SA's financial and human resource capabilities. Given scarce resources, support must be targeted to those entrepreneurs that have greater potential to grow and to increase employment. The appropriate targeting of support services is facilitated through (1) categorizing entrepreneurs according to their capacity to grow their firms and create jobs, and (2) identifying the particular training and support requirements of each category. This study seeks to achieve these outcomes through analyzing data from an in-depth survey of 400 owners of businesses operating in SA's townships.

This paper augments previous research by Ladzani and van Vuuren (2002), and Morris and Pitt (1995). Lani and van Vuuren (2002) report survey responses of three firms that offer business training to perspective SA entrepreneurs, and use the responses to make recommendations on the training that should be offered to SA entrepreneurs. Here, we use the responses of existing township businesses to recommend the content of training experiences for township entrepreneurs. But more importantly, we provide a framework for selecting the businesses that will receive training, given that the government of SA cannot provide training to all of the potential and ongoing business owners in SA. Morris and Pitt (1995) surveyed 30 informal businesses in Khayelitsha, an SA township. They conclude that whereas most of the informal businesses do little more than subsist, a subgroup exists that is relatively dynamic; and the problem is how to systematically identify this group. We propose to systematically identify the dynamic subset by separating township firms into economically formal and legally formal firms, based upon the internal operating traits of the firms. We use this distinction to provide recommendations on prioritizing the township firms that will receive government assistance and the content of the assistance. The specific questions pursued here are

(1) What business and owner traits predict financial success and job creation among the township entrepreneurs?

(2) What are the key issues that challenge township entrepreneurs?

(3) What do the answers to these two questions imply about the content and recipients of the business assistance that maximizes the financial success and job creation of township entrepreneurs?

We find that two distinctions are helpful in our approach for targeting business services. In SA, registered businesses have informed the appropriate government bodies of their existence and received licenses to operate, can be taxed and provided government services as legal entities. These firms have been the dominant focus of support programs created by the government of SA. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.