Taking responsibility for entrepreneurship development in South Africa: The role of local municipalities

Introduction

Entrepreneurship of any form is central for economic development, poverty alleviation, job creation and economic inclusion (Bruton et al., 2013; Malecki, 2018). This role of entrepreneurship is even more important in rural and other marginalised communities where extreme poverty, unemployment and economic exclusion are rife (Bruton et al., 2013; Sutter et al., 2019). While the role of entrepreneurship on economic development is well pronounced in literature, it is unsettling to note that the entrepreneurship development endeavours are mainly concentrated in urban areas. Jili et al. (2017) found that while there are a vast number of social and economic development projects that are earmarked for rural communities, there is poor implementation of these projects due to lack of entrepreneurial skills in the communities. This lack of entrepreneurial skills in local municipalities is, therefore, a major deterrent to development in these communities (Malefane, 2009). Thus, entrepreneurship development in local municipalities is paramount if the much-needed economic development in local municipalities is to be achieved.

There are several models for entrepreneurship development that cater for the diversity of entrepreneurial context; however, in South Africa, a one-size fits all approach to entrepreneurship development is apparent (Meyer et al., 2016). Yet, the challenges and resource endowments are not the same rural and urban areas (Rogerson, 2018). Most entrepreneurs in local municipalities face additional challenges relating to the lack of infrastructure support (Meyer et al., 2016). In South Africa for instance, poor transportation infrastructure and lack of proper public services such as electricity, water, sanitation and telecommunications place massive constraints of Small, Medium, and Micro Enterprise (SMME) development. Given the gap in the literature on rural entrepreneurship development, an investigation on the role of local municipalities in entrepreneurship development is paramount (Organisation for Economic Co-operation and Development (OECD), 2003). Against this backdrop, the aim of the paper is to present a critical review of the role that local municipalities can play on entrepreneurship development in their communities.

Several objectives are formulated in order to achieve the aim of this paper. The first objective is to discuss and address the need for entrepreneurship development in local municipalities. This will be followed by a discussion of the role that local municipal authorities ought to play in entrepreneurship development. The role of local economic development (LED) strategies is then presented. This will be followed by a discussion of international experiences on LED strategy-led entrepreneurship development. The last objective of the paper will be to look at the implications for South Africa’s entrepreneurship development before the conclusions.

The need for entrepreneurship development in local municipalities

Entrepreneurship development is an important tool for human development (Adenutsi, 2009; Madzivhandila, 2014; Meyer et al., 2016). Meyer et al. (2016) confirm that entrepreneurship is a catalyst for the development of underdeveloped areas. In the east and central Europe for example, entrepreneurship through microfirms plays a significant role in the economies, comprising 86% of the total amount of active firms (Bomani and Derera, 2018). However, this scenario is boosted and influenced by the local entrepreneurial environment that these areas have built (Adenutsi, 2009; Bomani and Derera, 2018; Madzivhandila, 2014; Meyer et al., 2016).

In South Africa, unemployment and poverty are rife in local municipalities; thus, the job opportunities to be created by entrepreneurs can play a critical and important role towards alleviating these social ills in local municipalities (Meyer et al., 2016). In addition, the contributions that entrepreneurs bring about in terms of increasing access to essential products and services, as well as infrastructure improvements, are undoubtedly much needed in local municipalities in South Africa. However, challenges such as lack of funding stifle the expansion of local entrepreneurs and exclude them from large markets as suppliers of large companies or suppliers to markets (Bomani and Derera, 2018). In other words, small enterprises, particularly those in rural areas lack the much-needed support to develop and expand beyond start-up (Bomani and Derera, 2018; Madzivhandila, 2014; Small Enterprise Development Agency (SEDA), 2016). However, there is also ample evidence in the literature on the importance of entrepreneurship development and its positive relationships with LED (Stam and Spigel, 2017; Tambunan, 2008).

Tambunan (2008) also observes that entrepreneurship development in local municipalities could offer three major benefits. Firstly, local municipalities provide niche markets for the entrepreneurs’ businesses. This is primarily the case because most local municipalities in South Africa have many untapped entrepreneurial opportunities. Secondly, for the communities, entrepreneurship development is the last resort for pulling poor people out of poverty through employment opportunities and improved access to essential services. Lastly, entrepreneurship development in local municipalities creates an impetus for emerging businesses to grow alongside large businesses through subcontracts on large-scale municipal infrastructure and other development projects (Adenutsi, 2009; Madzivhandila, 2014; Meyer et al., 2016). A good example is in Indonesia where local entrepreneurs were empowered to play a significant role in domestic economic activities and as a result contribute enormously towards employment creations and income generation for a large number of poor households (Tambunan, 2008). Given the enormous contributions of entrepreneurship development, local municipalities ought to play a major role in entrepreneurship development in their communities.

The role of local municipalities

Local municipalities play an important role in the social and economic development of many communities (Bomani and Derera, 2018; Lauermann, 2018). Notably, the Constitution of South Africa emphasises the role of municipalities that they must “… give priority to the basic needs of the community and “to promote the social and economic development of the community” (Republic of South Africa, 1996: 47). In other words, if well-coordinated and adequately supported, the role of local municipalities in rural entrepreneurship development can address underdevelopment, unemployment, poverty and food insecurity (Bomani and Derera, 2018; Lauermann, 2018; Lukhele and Madzivhandila, 2018; Sekhampu, 2010). Sekhampu (2010) identifies four main roles that municipalities can play towards ensuring the economic development of their communities.

LED strategies and entrepreneurship development

LED strategies could play a significant role in improving entrepreneurship development in communities. LED strategy formulation is an important process for municipalities in pursuit of their constitutional obligation to promote social and economic development. Most rural municipalities are characterised by poor infrastructure, which hampers the development of entrepreneurship development (Bomani and Derera, 2018; Lauermann, 2018; Lukhele and Madzivhandila, 2018; OECD, 2003). In other words, the LED status of these municipalities is not conducive enough to support the establishment of new small businesses. Inadequate access to basic infrastructures such as transport, communication is prevalent in these areas (Lauermann, 2018; Lukhele and Madzivhandila, 2018). For instance, poor communication enablers, few telephone lines, fewer computers and internet access cause challenges and are expensive for small enterprises (Ngorora and Mago, 2018). Furthermore, Ngorora and Mago (2018) highlight that although rural entrepreneurship is pivotal in improving the rural standards of living, its growth is also subdued by an array of challenges including limited access to finance, inadequate skills, limited access to markets and lack of access to information, advice and business services.

Notwithstanding the fact that there are many challenges as explained above, Malefane (2009) acknowledges that LED strategies in South Africa could play a significant role in facilitating effective economic and social development. Similarly, OECD (2003) establishes a strong relationship between LED and entrepreneurship development. Furthermore, OECD (2003) notes that entrepreneurship development aligned to LED strategies could improve local social and economic development through employment and income growth, increases in tax revenues, improved service provision, local wealth retention as well as inspire more development through motivational effects. However, there are enormous challenges, which impede the potential of LED strategies in as far as realising the much-needed economic development is concerned (Bomani and Derera, 2018; Lauermann, 2018; Malefane, 2009; OECD, 2003). Malefane (2009) points out the lack of implementation and control systems as major impediments. Maserumule (2008) also notes that municipalities in South Africa are experiencing knowledge and skills challenges in their attempts to meet their developmental goals. Similarly, OECD (2003) observes that limited social and business networks in local municipalities are a major obstacle to social and economic development. Hence, the alignment of LED strategies with entrepreneurship development can bring along more social and business networks that can foster LED. LED strategies can be used as integral tools to facilitate optimal use of municipal resources, redistribution of wealth, improving quality of life, improving access to amenities or other infrastructure and more importantly act as enablers of innovation to provide sustainable solutions to the triple challenges of poverty, unemployment and inequality.

International experiences on entrepreneurship development

There are many successful entrepreneurship development initiatives across the globe. However, this paper focuses on entrepreneurship development experiences from the selected BRICS block of countries in which South Africa is a member. The reason the paper draws inference and lessons from BRICS countries are because they are considered among the biggest and fastest growing emerging markets, or those markets still developing and entrepreneurship is playing a critical role in their growth. The BRICS block consists of Brazil, Russia, India, China and South Africa. Russia is excluded from our analysis due to the lack of comparable entrepreneurship development activities in literature. In addition to the BRICS countries, Nigeria will also be discussed as a good African example with successful and representative entrepreneurship development initiatives.

The Global Entrepreneurship Monitor reports consistently showed high entrepreneurial activity, as measured by the total early stage entrepreneurial activity (TEA) rate, for Brazil. Brazil ranks among the 10 most entrepreneurial countries in the world (Carraro et al., 2016; Fischer et al., 2018). These consistently high TEA rates are attributed to Brazil’s entrepreneurship development programmes. In particular, the high TEA rates in Brazil can be linked to the country’s favourable policy framework for new business development and support, favourable and entrepreneurship enabling environments as well as well-designed business development services (Carvalho and Galina, 2015; Chandra and Fealey, 2009). In particular, Chandra and Fealey (2009) applauded the incubator networks in Brazil for the role of entrepreneurship development. The incubator networks in Brazil are highly influential in as far as directing government policy relating to entrepreneurship development (Arruda et al., 2015; Chandra and Fealey, 2009).

In India, entrepreneurship development is also well pronounced, to the extent that the country is hailed in literature as one of the most entrepreneurial in the world (Koster and Rai, 2008). The culture and value systems in India play a significant role in entrepreneurship development in the country (Audretsch and Meyer, 2009; Chand and Ghorbani, 2011).

Business incubation services were also noted to play a significant role in entrepreneurship development in China (Chandra and Fealey, 2009). China began the promotion of entrepreneurial development through business incubation services only in the late 1980s, but today due to entrepreneurship development, China is the largest emerging market with an average annual growth rate of over 10% (Chandra and Fealey, 2009). Entrepreneurship development in China is also attributed to the development of strong intra-community networks of entrepreneurs who support each other (Chand and Ghorbani, 2011).

In Nigeria, entrepreneurship development is also on the rise (Oni and Daniya, 2012). The increasing level of entrepreneurship development in Nigeria is attributed in part to the economic conditions in the country which is driving more people into entrepreneurial activity in order to survive, but also to the direct government and financial institutions’ interventions to assist emerging entrepreneurs. Oduntan (2014) also highlights the need for the government of Nigeria to improve infrastructure such as electricity power supply, water supply and transportation as well as telecommunication services. These improvements are also critical for entrepreneurship development in South Africa. In the next section, the paper, therefore, presents our entrepreneurship development framework for local municipalities in South Africa.

An entrepreneurship development framework for local municipalities

Based on the review of the role of local municipalities on entrepreneurship development, the paper proposes an entrepreneurship development framework for local municipalities (Figure 1). The paper does not ignore the fact that there are activities already implemented by different municipalities in South Africa, however, a well-developed and coordinated effort needs to be encouraged if small enterprises are to be sustainably developed in local areas. According to Bomani and Derera (2018), most municipalities have realised the importance of rural entrepreneurship and SMMEs and are adopting strategies to enhance rural entrepreneurial development. However, the results of the strategies have not matched expectations. OPEN IN VIEWER

Some of the strategies include initiatives to enhance SMME access to finance by providing information about the existing financial institutions that offer credit finance. Some municipalities have provided land, premises and market facilities for SMMEs; however, SMMEs struggle to pay high service fees to the municipalities for renting such facilities (Meyer et al., 2016). Furthermore, the Preferential Procurement Policy Framework Act 5 of 2000 and the Preferential Procurement Regulations of 2001 were adopted in South Africa to enhance the participation of historically disadvantaged individuals and SMMEs in the public procurement system (Bomani and Derera, 2018; Meyer et al., 2016). However, only a small number of small businesses’ goods and services are directly linked to the functioning of the municipality benefits. In other words, the limitation of these efforts is that the procurement policies of the municipalities are designed in such a way that local entrepreneurs can apply and obtain tenders for supplying goods and services to the municipalities (Bomani and Derera, 2018). The large array of other local entrepreneurs are left out on this process, for instance, small businesses dealing with communications and internet connections, beauty shops, transport, and agricultural-related businesses.

While programmes such as the National Contractor Development Programme (NCDP) are in place as well (Department of Public Works (DPW) and Construction Industry Development Board (CIBD), 2011), their reach and impact on overall entrepreneurship in local municipalities are not well documented. According to DPW and CIBD (2011), the NCDP comprises contractual relationships between the Construction Industry Development Board (CIBD), National and Provincial Public Works Departments and other willing stakeholders in which stakeholders contribute resources to develop previously disadvantaged contractors. While these contractual relationships stimulate entrepreneurship development, these programmes are not well coordinated to benefit other entrepreneurs outside the construction industry (Pooe and Mafini, 2012; Tsoabisi and Phago, 2010). Therefore, more coordinated and integrative ways to facilitate entrepreneurship development in local municipalities are imminent.

This paper, therefore, proposes a framework, which recognises the roles of municipalities in promoting entrepreneurship development (Figure 1). The role of municipalities as coordinators, facilitators, stimulators and entrepreneurs for entrepreneurship development is important. The paper acknowledges that the proposed framework (Figure 1) should be linked to the critical needs of rural entrepreneurs. In other words, local municipalities, where possible, need to facilitate strategic linkages between rural entrepreneurs and large customers or companies in urban areas to achieve a proper market for the local products beyond the local area. Local municipalities could fulfil these roles through emphasising entrepreneurship also in their development plans (Bomani and Derera, 2018; Lauermann, 2018; Lukhele and Madzivhandila, 2018). In addition, capacity building and community participation mechanisms such as training services, incubation services, improving access to resources, in particular, land and capital, as well infrastructure development are imperative if the much-needed entrepreneurship development is to be achieved.

Local municipalities could also play a critical role in the development of entrepreneurial orientation in the localities (Lubacha-Sember and Godlewska, 2017; Meyer et al., 2016). Cultivating an entrepreneurial culture through creating platforms for sharing experiences and increasing the visibility of role models is paramount. Models and inspiration in this regard can be drawn from communities such as the Indian and Chinese communities as well as countries such as Scotland where entrepreneurial ecosystems are culturally ingrained (Stam and Spigel, 2017).

In terms of creating a supportive environment, business development services such as incubation, facilitating access to resources (capital and land), improving infrastructure and enacting legislation that is favourable for entrepreneurship development are important (Lubacha-Sember and Godlewska, 2017; Meyer et al., 2016). In fact, the infrastructure conditions, as well as inhibiting legislation, are seen as the major contributors to low entrepreneurship development in local municipalities as in South Africa as a whole (Bomani and Derera, 2018; Lauermann, 2018). Thus, improvements in these areas are critical for entrepreneurship development to take place.

Lastly, a supportive environment is critical for entrepreneurship development in local municipalities (Figure 1). Community involvement, especially in terms of development plans and passing of legislation, is important. These are critical to align municipal goals with the actions and activities of their respective communities. In addition, partnerships and collaborations with educational institutions such as universities, colleges, schools and other training centres to provide training and knowledge production are critical for entrepreneurship development in local municipalities where skills’ shortages are known to inhibit entrepreneurship development.

The proposed entrepreneurship development concludes with a recognition of the important outputs of entrepreneurship development. These outputs include improved access to products and services, poverty alleviation, employment opportunities, improved standards of living, economic growth, wealth distribution as well as overall sustainable development.

Conclusion

Local municipalities should play an enormous role in entrepreneurship development in their communities. The study identified the critical role of local municipalities as facilitators, coordinators, stimulators and entrepreneurs which undoubtedly enable the institutions to fulfil their overall constitutional mandate of ensuring social and economic development in their communities. The paper further highlighted and emphasised the entrepreneurship development in LED together with various other development initiatives. Creating entrepreneurial orientation in communities and building supportive, and cooperative environments are important imperatives for entrepreneurship development in local municipalities and South Africa at large. Finally, the paper developed and recommended the entrepreneurship development framework which could play a pivotal role in influencing (Figure 1) municipalities to invest and support LED initiative which will strengthen the development of small, medium and micro enterprises.