Description
The existing literature focused mainly on other factors such as lack of finance.
The Impact of the Business Regulatory Environment
on the Level of Entrepreneurship in South Africa:
An Exploratory View
Mazanai Musara
*
& Caleb Gwaindepi
Abstract-- This paper is a review of literature on the impact of the
business regulatory environment on the level of entrepreneurial
activity in South Africa. The existing literature focused mainly on
other factors such as lack of finance, lack of education and business
skills, crime, poor infrastructure and support system, among others
and their influence on the level of entrepreneurship activity in South
Africa. Despite the contention that the business regulatory
environment is among the chief factors hindering the desired levels of
entrepreneurship activity in South Africa, there is no/little empirical
evidence to support this contention. This is not to imply that the
regulatory environment is not important in as far as entrepreneurial
activity is concerned but it is rather a call for researchers to gather
empirical evidence on this purported important factor, particularly in
the South African context.
Keywords--- Business Regulatory Environment,
Entrepreneurship, South Africa
I. INTRODUCTION
ITH high levels of unemployment and poverty in South
Africa, entrepreneurship has been recognised as the
most effective way to address these problems [5], [6],
[12]. Therefore endeavours to promote entrepreneurship in
South Africa should be considered to be of critical importance.
Among other factors, restrictive legislative and regulatory
conditions are often viewed as critical constraints on the
access of potential entrepreneurs into the business sector, and
as obstacles to their growth [1]. There is therefore a need to
critically examine the business regulatory environment in
South Africa to assess its impact on the level of
entrepreneurial activity. The Global Entrepreneurship Monitor
(GEM) surveys from 2002 to 2011 reviewed that the level of
entrepreneurship as measured by the Total Entrepreneurship
activities (TEA) rate in South Africa is very low compared to
other developed and developing nations (12). In 2011, South
Africa TEA rate of 9.1% was significantly low as compared to
other BRICS countries, Brazil and China with 14.9% and 24%
respectively.
With such a level of entrepreneurship, there is a need for a
critical examination of the purported factors leading to such
low levels.
Simrie [12] revealed that 70.3% of experts interviewed cited
government policies as a key constraint to entrepreneurial
activity in South Africa.
Mazanai Musara
*
& Caleb Gwaindepi are with University of Limpopo
School of Education P.Bag X1106 Sovenga.
Email: [email protected]
*
& [email protected]
Government policies form part of the business regulatory
and policy environment. It is the task of policy makers,
researchers and academics among others to identify gaps and
to come up with recommendations to improve the business
regulatory environment such that it promotes the much needed
increase in the level of entrepreneurship in South Africa. Also
given the enormous benefits of entrepreneurships in terms of
reducing unemployment and alleviating poverty in South
Africa, there is a dire need to create an entrepreneurship
enabling environment.
Despite revelations by several studies [12], [6], [20] that the
business regulatory environment is not supportive to
entrepreneurship, there is little empirical evidence for South
Africa to support this contention. Furthermore, none of these
studies have attempted to identify and critically examine the
specific factors within the business regulatory environment
that hinder entrepreneurship in South Africa.
Several studies [5], [6], [12], [19] attempted to find
solutions to other factors such as low levels of education, lack
of access to finance, lack of or limited access to the necessary
resources, poor infrastructure etc; and a little has been said
about the business regulatory environment. It is paramount to
note that even with availability of resources, skills and
infrastructure, without addressing issues within the business
regulatory environment, the much needed improve in
entrepreneurship may not be achieved.
The regulatory environment is a controlling element for
business to legally and freely function [17]. Studies [8], [12]
which mentioned the business regulatory environment as a
constraining factor to entrepreneurship could not go much
deeper into the roots of the problem. In this study the business
regulatory environment will be thought of in terms of
legislation, political and administrative factors that have an
influence on businesses. Consequently the role that business
and corporate laws play in the formation, growth and
transition of small-entrepreneurial ventures need to be
investigated [17].
II. RESEARCH PROBLEM
Global Entrepreneurship Monitors (GEM) surveys from
2002-2011 revealed consistently low levels of
entrepreneurship activities in South Africa [12]. The surveys
also revealed that the level of entrepreneurship in South Africa
is significantly low compared to the average of all the nations
which participated in the GEM surveys in 2011. In a study,
Rogerson [9] opines that in sub-Saharan African countries
there is no overall scarcity of entrepreneurs, therefore there is
W
International Conference on Law, Entrepreneurship and Industrial Engineering (ICLEIE'2013) April 15-16, 2013 Johannesburg (South Africa)
196
a need to create an entrepreneurship enabling environment in
order to tap into enormous benefits brought in by new
businesses in the form of job creation, poverty alleviation and
economic growth. Several factors such as lack of financial
support, education and training, government policies and
programmes, economic climate, among others were cited as
the reason for low entrepreneurial activities in South Africa
[6], [12], [21]. Simrie et al. [12] further revealed that among
the participating GEM 2011 countries, financial support and
government policies are cited most frequently as factors
constraining entrepreneurship. Economic Commission for
Africa [2] also emphasises the role of government in creating
an enabling regulatory and policy environment for
entrepreneurship. It [2] recommended that the regulatory and
policy environment should be such that it creates a stable
fiscal and monetary policy setting with sustainable interest
rates, a system of financial markets that provides incentives to
save, and mechanisms to channel savings into investments.
Furthermore, policies that minimise the cost of business
licensing and registration while at the same time safeguarding
public interests and policies that facilitate business
transactions such as infrastructure development, were
recommended. In another study, Porteous [8] recommended
assessing the impact of all new legislation to ensure that the
costs and complexities of registration for new businesses are
not increased by new legislation. Strengthening new business
lobby groups and national audit of legislation affecting or
constraining small businesses was also recommended [8]. An
analysis of these recommendations point out that all other
factors purported to be the reasons for low entrepreneurship
activities in South Africa hinges on the business regulatory
and policy environment. These need to be investigated in the
South African context.
Simrie et al. [12] portrayed that the business regulatory
environment is one of the major constraints to
entrepreneurship in South Africa. It also plays a pivotal role in
increasing the level of entrepreneurship. Among the BRICS
countries (Brazil, Russia, India and South Africa) a 28%
increase in Brazil’s entrepreneurship activities between 2006
and 2011 is attributed to its well-managed government
policies to stimulate and support the development and growth
of businesses, as well as numerous business policy reforms
that have focused on making it easier to start businesses [12].
These show the importance of the business regulatory
environment in increasing entrepreneurial activities of a
nation.
The importance of the entrepreneurial environment as a
stimulus to entrepreneurship should therefore not be
underestimated. Furthermore, among the recommendations to
improve entrepreneurship activities provided in the GEM 2011
South Africa’s report [12] was the need for an overhaul of the
business regulatory environment. Therefore, this study
recommends a critical examination of the business regulatory
environment in South Africa so as to make it more favourable
and more supportive to entrepreneurship.
III. RESEARCH QUESTIONS
Despite pointing out the business regulatory environment as
one of the major constraining factor on entrepreneurship in
South Africa, with exception of expert opinions, there is no
sufficient empirical evidence to substantiate on that claim.
Furthermore there is a failure to pinpoint the exact factors
within the business regulatory environment affecting the level
of entrepreneurship in South Africa. The fundamental
questions therefore arise:
i. Are the claims that South Africa’s business
regulatory environment does not promote
entrepreneurship, valid?
ii. What factors within the business regulatory
environment are constraining the levels of
entrepreneurship in South Africa?
iii. What are the key features of the business regulatory
environment in South Africa?
iv. What are the gaps in the business regulatory
environment which need to be closed to improve the
level of entrepreneurship in South Africa?
v. How best can South Africa fine tune its business
regulatory environment to favour the much needed
improvement in the level of entrepreneurship?
IV. AIM OF THE STUDY
The aim of this study is to stimulate and promote empirical
debate on the business regulatory environment and its impact
on entrepreneurship in South Africa. This is intended to ensure
that improvements to the business regulatory environment
promote entrepreneurship in South Africa.
A. The importance of entrepreneurship and challenges
facing entrepreneurs
The importance of entrepreneurship and new businesses in
particular is well-documented the world over as it makes
significant contributions in addressing socio-economic
problems such as unemployment, poverty, income
inequalities, political stability and economic growth among
others [1], [10], [16]. There is a general agreement in both
developed and developing countries that the full potential of
entrepreneurship is not being achieved in attempts to solve
these problems [22]. In a study, Rogerson [10] proposed the
need for specific policy interventions which are designed to
enhance the successful survival and growth of small business
more especially in light of the structural difficulties in the
business environment. As a result, a lot of discussions and
research [3], [5], [6], [12], [22] have been conducted on the
factors impeding entrepreneurship in South Africa and other
developing and developed countries. Several factors emerged
as causes of low entrepreneurship and failure of new
businesses, and these include lack of access to infrastructure,
lack of access to finance, low managerial and business skills,
crime, corruption and an unsupportive business regulatory
environment [12] to mention just a few. In a study by Simrie
et al [12] government policies was ranked high in terms of
expert opinions on the factors impeding entrepreneurship in
South Africa. For more than two decades these factors were
investigated by researchers, academics, scholars, policy
makers, to find solutions to improve the level of
entrepreneurship in South Africa. However, despite all these
attempts, South Africa’s level of entrepreneurship on average
remain unsatisfactorily low [12], [19] and there is high failure
International Conference on Law, Entrepreneurship and Industrial Engineering (ICLEIE'2013) April 15-16, 2013 Johannesburg (South Africa)
197
rate of new businesses [19]. Inspite of the low levels of
entrepreneurship, South Africa was ranked number 28 on the
list of top 30 economies consisting mainly of developed
countries, on ease of doing business [13], which make
paradoxical.
B. Impact of the business regulatory environment
There is a general agreement among several scholars that
the business regulatory environment is among the chief factor
impeding the growth and survival of SMEs is in South Africa
[12], [19]. However, some studies portray a different picture.
For example, in 2012 on a regional ranking, South Africa
ranked 2
nd
after Mauritius and was ranked 36 on the all-
rounder world ranking in terms of easy of doing business
(regulatory restrictions). In terms of starting a business in
particular, South Africa was ranked number 44 [14]. This is an
indication that South Africa has a promising potential of
becoming one of the leading economics in the world. This is
also to challenge the authenticity of claims that South Africa’s
business regulatory environment is among the most pressing
obstacles to entrepreneurship. It is however important to note
that to make the data comparable across economies, “Doing
Business uses several assumptions about the business and the
procedures. It assumes that all information is readily available
to the entrepreneur and that there has been no prior contact
with officials. It also assumes that all government and
nongovernment entities involved in the process function
without corruption. And it assumes that the business is a
limited liability company, located in the largest business city
and conducts general commercial or industrial activities” [14].
These assumptions may yield misleading results more
particularly among small businesses which comprise the bulk
of entrepreneurial activity in the South African context.
Furthermore, World Bank and International Finance
Corporation [14] pointed out that higher rankings do not
necessarily imply better legislation and this discredit the
reliability of such rankings. Moreover, the source of their data
and information, that is experts’ opinions (14), may window-
dress the information portraying a wrong impression on the
matter at hand. Furthermore, it was revealed [14] that the
surveys are restricted to limited liability companies and are not
more concerned with the representative samples since it is not
a statistical survey, thus the data is not generalizable to the
whole of South Africa, more specially to the calibre and
majority of entrepreneurship in the country. The most reliable
sources of information are the entrepreneurs and potential
entrepreneurs themselves. Therefore it remains necessary to
investigate the loopholes in the business regulatory
environment in order to make recommendations that aid in
increasing the level of entrepreneurship in South Africa.
It is apparent that there are obstacles in the business regulatory
environment that impede entrepreneurship in South Africa,
however their extent and magnitude is yet to be investigated
adequately. Venter, Urban and Rwigema [18] pointed out that
arbitrary enforcement and erratic administration laws act as
barriers to new venture creation and hence to
entrepreneurship. It was further argued [18] that the more
complex the procedure of registration or licensing a new
business, the easier it is for governmental bureaucrats to abuse
their power and impose their own discretion and
complications for a new entrepreneurial venture. This is to
argue that the problems in the business regulatory
environment go beyond just mere laws and policies to further
involve the associated criminal activities and corruption by
political and other administrators. The influence of business
regulatory environment can also go beyond the features of the
regulation itself to include the procedural rules of the
regulatory agency responsible for implementing the
regulation.
Luthans, Stajkovic and Ibrayeva [7] further asserts that the
political and administrative discretion not only invites
corruption but also generates uncertainty, making it difficult
for potential entrepreneurs to plan and also leaves individual
and property rights less secure. Such activities increase the
risk associated with pursuing entrepreneurial activities and the
risk factor is among the many reasons why several potential
entrepreneurs are hesitant to pursue their dreams. This is a
major deterrent factor to entrepreneurship.
South Africa has embarked on more important regulatory
reforms to make it easier for potential entrepreneurs to start
businesses. For example, in 2011 South Africa removed the
requirement that entrepreneurs have to obtain legal assistance
or have their incorporation documents notarized in the
amendments to the Companies Act of 2008 [14]. Some of the
changes include; less administration or red tape when
registering a business, reduced financial reporting
requirements for small businesses, enhanced protection for
minority shareholders, introduction of a business rescue
scheme, and provisions have been made for the early
turnaround of businesses in financial trouble. This will
prevent companies going into major judicial management and
also help to save jobs. These amendments also allow
electronic submission of documents and publication, easing
business start-up. Furthermore, in 2012 South Africa made
starting a business easier by implementing its new company
law, which eliminated the requirement to reserve a company
name and simplified the incorporation documents [14]. It
remains to be seen however as to whether these reforms are
significant and sufficient enough to increase entrepreneurship
in the country.
There is on-going concern that some regulations, rules, and
government policies place a disproportionate burden on small
businesses and entrepreneurs [17]. Further concerns are based
on the argument that some of the regulatory reforms that are
intended to support small businesses and entrepreneurship
may not achieve the intended outcomes. Moreover, Dixon et
al [17] further argued that the desire to support small
businesses and entrepreneurship through regulatory reforms
may come into conflict with the reason why the regulations
were passed in the first place. For instance, most regulations
were developed out of the concern about the effects of
businesses on the society at large; this may be compromised
out of the concern to increase entrepreneurship. This needs to
be investigated in the case for South Africa.
Dixon et al. [17] further questions the effects of special
regulatory treatment on small businesses and new
entrepreneurs. Questions raised include:
• Why and under what circumstances does special
regulatory treatment for small businesses occur?
International Conference on Law, Entrepreneurship and Industrial Engineering (ICLEIE'2013) April 15-16, 2013 Johannesburg (South Africa)
198
• Why does it take the specific form it takes?
• What objectives are it designed to serve, and how
effective is it in achieving these objectives?
These are also critical questions which need to be answered
about South Africa’s business regulatory environment. Dixon
et al. [17] further assert that there is little quantitative evidence
to demonstrate the specific impacts of policies and regulations
on entrepreneurs; nor has there been much evidence showing
whether rules and exemptions designed to benefit small
businesses and entrepreneurs actually have that effect. Despite
lack of empirical evidence, challenges in the business
regulatory environment continue to impede entrepreneurship
in both developing and developed economies [2], [3], [5].
V. CONCLUSION
Despite the richness of literature concerning challenges
facing new businesses in South Africa, there is a lack of depth
in many studies, particularly on the factor, business regulatory
environment. Thus there is a need for empirical investigations
to determine the extent and depth of this factor in as far as its
implications on entrepreneurial activity and success is
concerned. Furthermore, regulatory reforms to strengthen the
entrepreneurship are necessary if the country is to achieve the
much need increase in entrepreneurial activity levels and
ultimately employment creation, poverty alleviation and
sustainable economic growth.
Consequently this paper calls for the need to identify and
critically examine the loopholes in South Africa’s business
regulatory environment and come up with recommendations to
improve it in order to create an entrepreneurial enabling
environment in the country. This mean a critical examination
of each pierce of business legislation and policies in South
Africa to establish their influence on entrepreneurship and
finally with the aid of empirically investigations recommend
changes to promote and support entrepreneurship in South
Africa.
REFERENCES
[1] DTI, 2005. Integrated strategy on promotion of entrepreneurship and
Small businesses: Unlocking the potential of South African
entrepreneurs [online] available
athttp://www.thedti.gov.za/sme_development/docs/strategy.pdfAccesse
d 04th J uly 2012.
[2] Economic Commission for Africa 2001. Enhancing the Competitiveness
of Small and Medium Enterprises in Africa: A Strategic Framework for
Institutional Support
[3] Herrington, M. (2011). Entrepreneurship: How can obstacles be
overcome? In M. Mbeki (Ed.), Advocates forchange: How to overcome
Africa’s challenges (pp 115–135). Picador Africa.
[4] Herrington, M., Kew, J ., & Kew, P. (2008). Global Entrepreneurship
Monitor 2008 South African Report. Cape Town: Graduate School of
Business, University of Cape Town.
[5] Herrington, M., Kew, J ., & Kew, P. (2009).Tracking Entrepreneurship in
South Africa: A GEM perspective. London: Global Entrepreneurship
Research Association.
[6] Herrington, M., Kew, J ., & Kew, P. (2010). Global Entrepreneurship
Monitor 2010 South African Report. Cape Town: University of Cape
Town Graduate School of Business.
[7] Luthans, F., Stajkovic, A.D. &Ibrayeva, E. 2000. Environmental and
Psychological challenges facing entrepreneurial development in
transitional economies.Journal of World business, 35(1):95-117.
[8] Porteous. D., 2002, SMME Financing: Credit Providers Position Paper,
[online] available atwww.finmark.org.zaAccessed 5 J uly 2012.
[9] Rogerson, C.M. 2000. Successful SMEs in South Africa: the case of
clothing producers in the Witwatersrand. Development Southern Africa
17(5):667-716.
[10] Rogerson, C.M. 2005. SMME Development in Peripheral Regions:
Manufacturing in Free State Province, South Africa Urban Forum,
16(1):35-54.
[11] Schiffer, M. &Weder B., 2001. Firm Size and the Business
Environment: Worldwide Survey Results. Discussion Paper No. 43,
Washington, D.C: International Finance Corporation.
[12] Simrie, S., Herrington M., Kew J . &Turton N. 2011.Global
entrepreneurship Monitor 2011 South Africa. [online] available
athttp://www.gemconsortium.org/docs/download/2313 Accessed on
04th J uly 2012.
[13] World Bank & International Finance Corporation. 2006. Doing Business
in 2006. No 34550: Washington, DC.
[14] World Bank & International Finance Corporation. 2012. Doing Business
in a more transparent world: Economy Profile-South Africa.
Washington, DC:The International Bank for Reconstruction and
Development.
[15] Timmons, J .A. &Spinnel, S. 2004. New Venture Creation:
Entrepreneurship for the 21
st
century. Boston: Irwin McGraw-Hill.
[16] Amini, A. 2004.The distributional role of Small Businesses in
Development.International Journal of Social Economics 31(4):370-383.
[17] Dixon L., Gates S.M.,Kapur K., Seabury, S.A.& Talley E. 2007. The
Impact of Regulation and Litigation on Small Businesses and
Entrepreneurship: An Overview. In Gates, S.M &Leuschner, K.J . (Eds).
2007. In the Name of Entrepreneurship? The Logic and Effects of
Special Regulatory Treatment for Small Business,Pittsburgh: Rand
Corporation.
[18] Venter, R., Urban, B. & Rwingema H. 2011. Enterpreneurship: Theory
in Practice. Cape Town: Oxford University Press
[19] Maas, G. & Herrington, M. 2006.Global entrepreneurship monitor
South African Report. [Online].Available
athttp://www.gemconsortium.org/document.aspx?id756 [Accessed 6
J une 2011].
[20] Orford, J ., Wood, E., Fischer, C., Herington, M. & Segal, N.
2003.Global Entrepreneurship Monitor: South African Executive
Report, Graduate School of Business, University of Cape Town, Cape
Town.
[21] Angela and Motsa Associates, 2004. SMME Finance Sector Background
Paper: A Review of key documents on SMME Finance 1994-2004.
FinMark Trust: J ohannesburg.
[22] Bosma, N., Acs, Z.J ., Autio, E., Coduras, A. & Levie, J . 2009. Global
Entrepreneurship monitor, 2008 Excutive Report. Babson Park: Babson
College
International Conference on Law, Entrepreneurship and Industrial Engineering (ICLEIE'2013) April 15-16, 2013 Johannesburg (South Africa)
199
doc_879229381.pdf
The existing literature focused mainly on other factors such as lack of finance.
The Impact of the Business Regulatory Environment
on the Level of Entrepreneurship in South Africa:
An Exploratory View
Mazanai Musara
*
& Caleb Gwaindepi
Abstract-- This paper is a review of literature on the impact of the
business regulatory environment on the level of entrepreneurial
activity in South Africa. The existing literature focused mainly on
other factors such as lack of finance, lack of education and business
skills, crime, poor infrastructure and support system, among others
and their influence on the level of entrepreneurship activity in South
Africa. Despite the contention that the business regulatory
environment is among the chief factors hindering the desired levels of
entrepreneurship activity in South Africa, there is no/little empirical
evidence to support this contention. This is not to imply that the
regulatory environment is not important in as far as entrepreneurial
activity is concerned but it is rather a call for researchers to gather
empirical evidence on this purported important factor, particularly in
the South African context.
Keywords--- Business Regulatory Environment,
Entrepreneurship, South Africa
I. INTRODUCTION
ITH high levels of unemployment and poverty in South
Africa, entrepreneurship has been recognised as the
most effective way to address these problems [5], [6],
[12]. Therefore endeavours to promote entrepreneurship in
South Africa should be considered to be of critical importance.
Among other factors, restrictive legislative and regulatory
conditions are often viewed as critical constraints on the
access of potential entrepreneurs into the business sector, and
as obstacles to their growth [1]. There is therefore a need to
critically examine the business regulatory environment in
South Africa to assess its impact on the level of
entrepreneurial activity. The Global Entrepreneurship Monitor
(GEM) surveys from 2002 to 2011 reviewed that the level of
entrepreneurship as measured by the Total Entrepreneurship
activities (TEA) rate in South Africa is very low compared to
other developed and developing nations (12). In 2011, South
Africa TEA rate of 9.1% was significantly low as compared to
other BRICS countries, Brazil and China with 14.9% and 24%
respectively.
With such a level of entrepreneurship, there is a need for a
critical examination of the purported factors leading to such
low levels.
Simrie [12] revealed that 70.3% of experts interviewed cited
government policies as a key constraint to entrepreneurial
activity in South Africa.
Mazanai Musara
*
& Caleb Gwaindepi are with University of Limpopo
School of Education P.Bag X1106 Sovenga.
Email: [email protected]
*
& [email protected]
Government policies form part of the business regulatory
and policy environment. It is the task of policy makers,
researchers and academics among others to identify gaps and
to come up with recommendations to improve the business
regulatory environment such that it promotes the much needed
increase in the level of entrepreneurship in South Africa. Also
given the enormous benefits of entrepreneurships in terms of
reducing unemployment and alleviating poverty in South
Africa, there is a dire need to create an entrepreneurship
enabling environment.
Despite revelations by several studies [12], [6], [20] that the
business regulatory environment is not supportive to
entrepreneurship, there is little empirical evidence for South
Africa to support this contention. Furthermore, none of these
studies have attempted to identify and critically examine the
specific factors within the business regulatory environment
that hinder entrepreneurship in South Africa.
Several studies [5], [6], [12], [19] attempted to find
solutions to other factors such as low levels of education, lack
of access to finance, lack of or limited access to the necessary
resources, poor infrastructure etc; and a little has been said
about the business regulatory environment. It is paramount to
note that even with availability of resources, skills and
infrastructure, without addressing issues within the business
regulatory environment, the much needed improve in
entrepreneurship may not be achieved.
The regulatory environment is a controlling element for
business to legally and freely function [17]. Studies [8], [12]
which mentioned the business regulatory environment as a
constraining factor to entrepreneurship could not go much
deeper into the roots of the problem. In this study the business
regulatory environment will be thought of in terms of
legislation, political and administrative factors that have an
influence on businesses. Consequently the role that business
and corporate laws play in the formation, growth and
transition of small-entrepreneurial ventures need to be
investigated [17].
II. RESEARCH PROBLEM
Global Entrepreneurship Monitors (GEM) surveys from
2002-2011 revealed consistently low levels of
entrepreneurship activities in South Africa [12]. The surveys
also revealed that the level of entrepreneurship in South Africa
is significantly low compared to the average of all the nations
which participated in the GEM surveys in 2011. In a study,
Rogerson [9] opines that in sub-Saharan African countries
there is no overall scarcity of entrepreneurs, therefore there is
W
International Conference on Law, Entrepreneurship and Industrial Engineering (ICLEIE'2013) April 15-16, 2013 Johannesburg (South Africa)
196
a need to create an entrepreneurship enabling environment in
order to tap into enormous benefits brought in by new
businesses in the form of job creation, poverty alleviation and
economic growth. Several factors such as lack of financial
support, education and training, government policies and
programmes, economic climate, among others were cited as
the reason for low entrepreneurial activities in South Africa
[6], [12], [21]. Simrie et al. [12] further revealed that among
the participating GEM 2011 countries, financial support and
government policies are cited most frequently as factors
constraining entrepreneurship. Economic Commission for
Africa [2] also emphasises the role of government in creating
an enabling regulatory and policy environment for
entrepreneurship. It [2] recommended that the regulatory and
policy environment should be such that it creates a stable
fiscal and monetary policy setting with sustainable interest
rates, a system of financial markets that provides incentives to
save, and mechanisms to channel savings into investments.
Furthermore, policies that minimise the cost of business
licensing and registration while at the same time safeguarding
public interests and policies that facilitate business
transactions such as infrastructure development, were
recommended. In another study, Porteous [8] recommended
assessing the impact of all new legislation to ensure that the
costs and complexities of registration for new businesses are
not increased by new legislation. Strengthening new business
lobby groups and national audit of legislation affecting or
constraining small businesses was also recommended [8]. An
analysis of these recommendations point out that all other
factors purported to be the reasons for low entrepreneurship
activities in South Africa hinges on the business regulatory
and policy environment. These need to be investigated in the
South African context.
Simrie et al. [12] portrayed that the business regulatory
environment is one of the major constraints to
entrepreneurship in South Africa. It also plays a pivotal role in
increasing the level of entrepreneurship. Among the BRICS
countries (Brazil, Russia, India and South Africa) a 28%
increase in Brazil’s entrepreneurship activities between 2006
and 2011 is attributed to its well-managed government
policies to stimulate and support the development and growth
of businesses, as well as numerous business policy reforms
that have focused on making it easier to start businesses [12].
These show the importance of the business regulatory
environment in increasing entrepreneurial activities of a
nation.
The importance of the entrepreneurial environment as a
stimulus to entrepreneurship should therefore not be
underestimated. Furthermore, among the recommendations to
improve entrepreneurship activities provided in the GEM 2011
South Africa’s report [12] was the need for an overhaul of the
business regulatory environment. Therefore, this study
recommends a critical examination of the business regulatory
environment in South Africa so as to make it more favourable
and more supportive to entrepreneurship.
III. RESEARCH QUESTIONS
Despite pointing out the business regulatory environment as
one of the major constraining factor on entrepreneurship in
South Africa, with exception of expert opinions, there is no
sufficient empirical evidence to substantiate on that claim.
Furthermore there is a failure to pinpoint the exact factors
within the business regulatory environment affecting the level
of entrepreneurship in South Africa. The fundamental
questions therefore arise:
i. Are the claims that South Africa’s business
regulatory environment does not promote
entrepreneurship, valid?
ii. What factors within the business regulatory
environment are constraining the levels of
entrepreneurship in South Africa?
iii. What are the key features of the business regulatory
environment in South Africa?
iv. What are the gaps in the business regulatory
environment which need to be closed to improve the
level of entrepreneurship in South Africa?
v. How best can South Africa fine tune its business
regulatory environment to favour the much needed
improvement in the level of entrepreneurship?
IV. AIM OF THE STUDY
The aim of this study is to stimulate and promote empirical
debate on the business regulatory environment and its impact
on entrepreneurship in South Africa. This is intended to ensure
that improvements to the business regulatory environment
promote entrepreneurship in South Africa.
A. The importance of entrepreneurship and challenges
facing entrepreneurs
The importance of entrepreneurship and new businesses in
particular is well-documented the world over as it makes
significant contributions in addressing socio-economic
problems such as unemployment, poverty, income
inequalities, political stability and economic growth among
others [1], [10], [16]. There is a general agreement in both
developed and developing countries that the full potential of
entrepreneurship is not being achieved in attempts to solve
these problems [22]. In a study, Rogerson [10] proposed the
need for specific policy interventions which are designed to
enhance the successful survival and growth of small business
more especially in light of the structural difficulties in the
business environment. As a result, a lot of discussions and
research [3], [5], [6], [12], [22] have been conducted on the
factors impeding entrepreneurship in South Africa and other
developing and developed countries. Several factors emerged
as causes of low entrepreneurship and failure of new
businesses, and these include lack of access to infrastructure,
lack of access to finance, low managerial and business skills,
crime, corruption and an unsupportive business regulatory
environment [12] to mention just a few. In a study by Simrie
et al [12] government policies was ranked high in terms of
expert opinions on the factors impeding entrepreneurship in
South Africa. For more than two decades these factors were
investigated by researchers, academics, scholars, policy
makers, to find solutions to improve the level of
entrepreneurship in South Africa. However, despite all these
attempts, South Africa’s level of entrepreneurship on average
remain unsatisfactorily low [12], [19] and there is high failure
International Conference on Law, Entrepreneurship and Industrial Engineering (ICLEIE'2013) April 15-16, 2013 Johannesburg (South Africa)
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rate of new businesses [19]. Inspite of the low levels of
entrepreneurship, South Africa was ranked number 28 on the
list of top 30 economies consisting mainly of developed
countries, on ease of doing business [13], which make
paradoxical.
B. Impact of the business regulatory environment
There is a general agreement among several scholars that
the business regulatory environment is among the chief factor
impeding the growth and survival of SMEs is in South Africa
[12], [19]. However, some studies portray a different picture.
For example, in 2012 on a regional ranking, South Africa
ranked 2
nd
after Mauritius and was ranked 36 on the all-
rounder world ranking in terms of easy of doing business
(regulatory restrictions). In terms of starting a business in
particular, South Africa was ranked number 44 [14]. This is an
indication that South Africa has a promising potential of
becoming one of the leading economics in the world. This is
also to challenge the authenticity of claims that South Africa’s
business regulatory environment is among the most pressing
obstacles to entrepreneurship. It is however important to note
that to make the data comparable across economies, “Doing
Business uses several assumptions about the business and the
procedures. It assumes that all information is readily available
to the entrepreneur and that there has been no prior contact
with officials. It also assumes that all government and
nongovernment entities involved in the process function
without corruption. And it assumes that the business is a
limited liability company, located in the largest business city
and conducts general commercial or industrial activities” [14].
These assumptions may yield misleading results more
particularly among small businesses which comprise the bulk
of entrepreneurial activity in the South African context.
Furthermore, World Bank and International Finance
Corporation [14] pointed out that higher rankings do not
necessarily imply better legislation and this discredit the
reliability of such rankings. Moreover, the source of their data
and information, that is experts’ opinions (14), may window-
dress the information portraying a wrong impression on the
matter at hand. Furthermore, it was revealed [14] that the
surveys are restricted to limited liability companies and are not
more concerned with the representative samples since it is not
a statistical survey, thus the data is not generalizable to the
whole of South Africa, more specially to the calibre and
majority of entrepreneurship in the country. The most reliable
sources of information are the entrepreneurs and potential
entrepreneurs themselves. Therefore it remains necessary to
investigate the loopholes in the business regulatory
environment in order to make recommendations that aid in
increasing the level of entrepreneurship in South Africa.
It is apparent that there are obstacles in the business regulatory
environment that impede entrepreneurship in South Africa,
however their extent and magnitude is yet to be investigated
adequately. Venter, Urban and Rwigema [18] pointed out that
arbitrary enforcement and erratic administration laws act as
barriers to new venture creation and hence to
entrepreneurship. It was further argued [18] that the more
complex the procedure of registration or licensing a new
business, the easier it is for governmental bureaucrats to abuse
their power and impose their own discretion and
complications for a new entrepreneurial venture. This is to
argue that the problems in the business regulatory
environment go beyond just mere laws and policies to further
involve the associated criminal activities and corruption by
political and other administrators. The influence of business
regulatory environment can also go beyond the features of the
regulation itself to include the procedural rules of the
regulatory agency responsible for implementing the
regulation.
Luthans, Stajkovic and Ibrayeva [7] further asserts that the
political and administrative discretion not only invites
corruption but also generates uncertainty, making it difficult
for potential entrepreneurs to plan and also leaves individual
and property rights less secure. Such activities increase the
risk associated with pursuing entrepreneurial activities and the
risk factor is among the many reasons why several potential
entrepreneurs are hesitant to pursue their dreams. This is a
major deterrent factor to entrepreneurship.
South Africa has embarked on more important regulatory
reforms to make it easier for potential entrepreneurs to start
businesses. For example, in 2011 South Africa removed the
requirement that entrepreneurs have to obtain legal assistance
or have their incorporation documents notarized in the
amendments to the Companies Act of 2008 [14]. Some of the
changes include; less administration or red tape when
registering a business, reduced financial reporting
requirements for small businesses, enhanced protection for
minority shareholders, introduction of a business rescue
scheme, and provisions have been made for the early
turnaround of businesses in financial trouble. This will
prevent companies going into major judicial management and
also help to save jobs. These amendments also allow
electronic submission of documents and publication, easing
business start-up. Furthermore, in 2012 South Africa made
starting a business easier by implementing its new company
law, which eliminated the requirement to reserve a company
name and simplified the incorporation documents [14]. It
remains to be seen however as to whether these reforms are
significant and sufficient enough to increase entrepreneurship
in the country.
There is on-going concern that some regulations, rules, and
government policies place a disproportionate burden on small
businesses and entrepreneurs [17]. Further concerns are based
on the argument that some of the regulatory reforms that are
intended to support small businesses and entrepreneurship
may not achieve the intended outcomes. Moreover, Dixon et
al [17] further argued that the desire to support small
businesses and entrepreneurship through regulatory reforms
may come into conflict with the reason why the regulations
were passed in the first place. For instance, most regulations
were developed out of the concern about the effects of
businesses on the society at large; this may be compromised
out of the concern to increase entrepreneurship. This needs to
be investigated in the case for South Africa.
Dixon et al. [17] further questions the effects of special
regulatory treatment on small businesses and new
entrepreneurs. Questions raised include:
• Why and under what circumstances does special
regulatory treatment for small businesses occur?
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• Why does it take the specific form it takes?
• What objectives are it designed to serve, and how
effective is it in achieving these objectives?
These are also critical questions which need to be answered
about South Africa’s business regulatory environment. Dixon
et al. [17] further assert that there is little quantitative evidence
to demonstrate the specific impacts of policies and regulations
on entrepreneurs; nor has there been much evidence showing
whether rules and exemptions designed to benefit small
businesses and entrepreneurs actually have that effect. Despite
lack of empirical evidence, challenges in the business
regulatory environment continue to impede entrepreneurship
in both developing and developed economies [2], [3], [5].
V. CONCLUSION
Despite the richness of literature concerning challenges
facing new businesses in South Africa, there is a lack of depth
in many studies, particularly on the factor, business regulatory
environment. Thus there is a need for empirical investigations
to determine the extent and depth of this factor in as far as its
implications on entrepreneurial activity and success is
concerned. Furthermore, regulatory reforms to strengthen the
entrepreneurship are necessary if the country is to achieve the
much need increase in entrepreneurial activity levels and
ultimately employment creation, poverty alleviation and
sustainable economic growth.
Consequently this paper calls for the need to identify and
critically examine the loopholes in South Africa’s business
regulatory environment and come up with recommendations to
improve it in order to create an entrepreneurial enabling
environment in the country. This mean a critical examination
of each pierce of business legislation and policies in South
Africa to establish their influence on entrepreneurship and
finally with the aid of empirically investigations recommend
changes to promote and support entrepreneurship in South
Africa.
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