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How to add R2.5trn to the economy

Why, in entrepreneurship, quality matters more than quantity.

As South Africa looks to harness the full economic potential of entrepreneurship, it is easy to fall into the seemingly logical thinking that more is better. We often hear the rallying cry: “We need more entrepreneurs!” But the answer is not as simple as it might appear, because when it comes to entrepreneurship, quality matters more than quantity. If it was only about more being better, then the most entrepreneurial country in the world would be Senegal (with nearly 40% of the country involved in entrepreneurship).  Yet it is a country ranked 163rd on the Human Development Index.

Why is there a problem with focusing on quantity? The answer is given by Zoltan Acs, author of the Global Entrepreneurship Index (GEI) and one of the most widely published academics on entrepreneurship in the world, where he states, “contrary to popular belief, the most entrepreneurial countries in the world are not those that have the most entrepreneurs.

In entrepreneurship, quality matters more than quantity.

To be entrepreneurial, a country needs to have the best entrepreneurs, not necessarily the most.”

This differentiation between quantity and quantity explains why there are often such contrasting outcomes between two of the most established global measures of entrepreneurship, the GEI Report and the Global Entrepreneurship Monitor (GEM) Report.  In simplified terms GEM is more focused on quantity while GEI focuses on quality.

So it was interesting to note, in the midst of all the entrepreneurial activity recently during Global Entrepreneurship Week, the launch of the 2017 Global Entrepreneurship Index (GEI).  It again highlighted the difference for our understanding of South African entrepreneurship depending on whether we think in terms of quality or quantity.

In the 2017 GEI, the picture of South African entrepreneurship is shown in a far more positive light (ranked 55 out of 137 globally) than suggested by the measures contained in the Global Entrepreneurship Monitor (GEM) – a report that suggests South Africa is one of the worst countries on the continent when it comes to entrepreneurship.

In the main GEM measure known as TEA (Total Entrepreneurship Activity rate), South Africa fluctuates between 7% to 10% of the adult population involved in entrepreneurship, which is about two thirds of the efficiency driven economy (our country classification) average and about half of the African continent average.  And yet in the GEI report South Africa is placed second in Africa and is in the top 40% of the world’s economies.

These conflicting report outcomes are best explained by understanding the distinction between entrepreneurs that are necessity driven versus those that are opportunity driven.  Necessity driven entrepreneurs are those that pursue entrepreneurship out of necessity – they have no other option in the economy for making money. Opportunity driven entrepreneurs are those that are pursuing an opportunity. These are the entrepreneurs that generate productive economic success, that grow and create jobs. The GEM TEA rate in measuring quantity, captures an increasing proportion of necessity entrepreneurs with higher TEA rate levels. In effect it becomes a measure of self-employment rather than economically productive entrepreneurship.  This is evidenced by the fact that the TEA rate is negatively correlated with economic growth, economic freedom and global competitiveness. In contrast, the GEI focuses on innovative, growth orientated, opportunity entrepreneurs and is positively correlated with these measures – the fruits of pursuing quality rather than quantity.

There is a significant economic implication in better understanding the distinction between quantity and quality.  In the 2017 GEI Report, GEI is plotted against GDP as per the figure below.

 

gei-v-gdp

 

This shows a clear positive relationship between GDP and GEI and a correlation of 0.62. The relationship suggests that improvements to GDP could be effected by changes that improve GEI scores.

Specifically, if South Africa were to raise its GEI score by 10% it could add an incredible R2.5 trillion to our economy. 

It is time to end the confusion, to focus on entrepreneurial quality, to ignite our best and brightest with entrepreneurial passion and achieve this 10% GEI shift. Now that is a target worthy of pursuit and importantly it would finally move us out from under the shadow of entrepreneurial negativity generated by too much focus on GEM reports.

This article was first published in the Allan Gray Orbis Foundation Blog. To access the original, please click here.

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I wonder if it is GEI causing GDP or GDP causing GEI?

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