The determinants of total entrepreneurial activity : a spatial approach

Abstract

Various bodies and governments from around the world have recognised the importance of entrepreneurship in economic growth and job creation. The rate of start-up businesses and entrepreneurial activity is crucial in every country. The Global Entrepreneurship Monitor (GEM) recognises the contribution of entrepreneurial activity to economic growth and measures it by means of the total entrepreneurial activity (TEA) index. Most recent evidence suggests that regional (or spatial) inequality in many developing countries has increased in recent years, and that regional inequality in these countries has thus become a major setback for governments. In this study spatial differences in the rate of start-up businesses and entrepreneurial activity in a developing country were investigated The objectives were to provide an overview of different aspects related to entrepreneurship, describe the different determinants that influence entrepreneurship and describe the situation in South Africa in terms of these determinants. The general determinants that influence entrepreneurial activity are openness of trade, role of the government, financial markets, technology. infrastructure, management skills and labour markets. The entrepreneurial determinants are physical infrastructure, commercial and professional infrastructure, cultural and social norms, education and training, financial support, government programs, market openness and transfer of research and development. The outcomes set by the government through business creation are economic growth, job creation and innovation. In this study cross-sectional data on South Africa's 354 regions (magisterial districts) for the years 2003 and 2004 is used. Therefore data could be pooled. The dataset includes data on TEA per region, regional profits, regional unemployment rates, number of banks per region, education levels per region. population per region, population density per region, urbanisation per region, the number of people employed in the informal sector, the disposable income per family, the gross value added, the economic growth rate and the exports per region. The results show that profits, education and the number of bank branches in a district are positively associated with start-up rates, with the largest effect being due to profits. At present, economic size (measured by GVA) acts as disincentive for new start-ups in South Africa. The results also show that the rate of start-ups is not statistically related to the unemployment rate across South Africa's regions. This finding could reflect low survival rates of start-ups in South Africa. It could also suggest, given the significance of profits, that most entrepreneurs in South Africa tend to be "opportunity" entrepreneurs rather than necessity entrepreneurs. It is clear that some determinants have a bigger effect on entrepreneurial activity than others. This will vary from country to country. Therefore, the continuous investigation on determinants in every country is essential to the quest for achieving national outcomes. The most important determinants in South Africa are physical infrastructure, financial support and education. A country can only improve the entrepreneurial activity by addressing the determinants that have the most significant influence on entrepreneurial activity. Some of the most important recommendations from this study include: • The physical infrastructure in a country influences other determinants. Profit has a strong effect on the rate of start-ups and entrepreneurial activity. The implication is that unless structural factors within regions change, the spatial patterns and inequalities in entrepreneurial activity in South Africa will probably persist. Therefore, improving physical infrastructure in the different regions should receive urgent attention. • Financial support is a determinant of entrepreneurial activity. The number of bank branches in a district is significantly and positively associated with the start-up rate of businesses. It is also important that the South African banks need to improve their service and assistance to businesses. Financial support has a big influence on entrepreneurial activity. The commercial banks in South Africa should therefore urgently look towards improving their support to businesses. • The education, training and skills development of entrepreneurs in South Africa is inefficient. The strong effect of education on entrepreneurial activity supports the low rate of TEA in South Africa. Therefore policy choices should focus on improving and expanding entrepreneurship education and training.