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More Disincentives To Grow

Entrepreneurs who survive are punished for growing their business.

More Disincentives To Grow

Proposed amendments to the Employment Equity Act include the prohibition of non-compliant companies from doing business with state entities. Of particular interest is that the compliance requirements for small enterprises (i.e. those employing fewer than 50 people) are lighter than those for large companies.

Unsurprisingly the Department of Labour has framed this as a victory for SMEs, but I'd argue it's yet another administrative incentive for staying small instead of scaling up. The Broad-Based Black Economic Empowerment framework, Labour Relations Act, and Small Business Corporation tax structure are just some of the other regulatory initiatives that directly encourage entrepreneurs to dial down their ambition.

South Africa's entrepreneurial environment could not be more schizophrenic. On the one hand, a vast network of government agencies, incubators, and enterprise development programs relentlessly encourage people to start their own business. But those who do, and who survive for long enough, quickly discover that there is an exponential red tape burden beyond a tipping point.

None of this makes any sense.

The cost of starting a business (i.e. actual cash outflows as well as lost opportunity costs and expenditure in kind) is very high, yet the survival rate is very low. So why are wide-eyed entrepreneurs, ill-equipped for the reality of running a business, herded lemming-like to the precipice of economic disaster?

Every other medium of economic participation has an exhaustive framework to protect new entrants from bad actors as well as their own naiveté. Job-seekers are protected by labour laws. Borrowers are protected by the National Credit Act. Investors are protected by a litany of financial regulations and agencies.

There is no safety net for entrepreneurs. Instead, those who are brave, stubborn, smart or lucky enough to beat the odds are rewarded with an avalanche of red tape that punishes them for growing their business, creating jobs and contributing to socio-economic development.