Today, South Africa’s economy is a two-tiered economy with two distinctive segments: (i) a developed world infrastructure; and (ii) a developing world infrastructure. In fact, the disparity between these two regions is vast as one region is a recipient of development aid while the other is filled with skilled professionals. For purposes of this article, we focus on the more developed region since this is the region that SME entrepreneurs are potentially interested in starting businesses in.
South Africa is a dynamic emerging economy that presents a lot of opportunities for Small and Medium Enterprise (“SME”) entrepreneurs to create new companies. On the positive side, the country has a segment of the economy that offers a highly developed first world economic infrastructure, a transparent regulatory system, access to raw materials, political stability which all make the country a vibrant emerging market economy. In addition, South Africa is also one of the most advanced and productive economies in Africa. However, the country still has some key underlying issues and challenges that a SME entrepreneur needs to be aware of before they decide to start a company in that region. The following article looks at different facets of South Africa’s economy and analyses whether the country is a favorable market for SME entrepreneurs.
Today, South Africa’s economy is a two-tiered economy with two distinctive segments: (i) a developed world infrastructure; and (ii) a developing world infrastructure. In fact, the disparity between these two regions is vast as one region is a recipient of development aid while the other is filled with skilled professionals. For purposes of this article, we focus on the more developed region since this is the region that SME entrepreneurs are potential interested in starting businesses in.
Within the developed region, South Africa has a reasonably modern and well developed transport infrastructure which has declined somewhat over the last 10 years mainly due to a lack of investment and a skills shortage in the country. The road system is, however, extensive and in relatively good condition. The air and rail networks are the largest on the continent and the country’s ports provide a natural stopover for shipping to and from Europe, the Americas, Asia, Australasia, and both coasts of Africa. More specifically, approximately 95 percent of all trade to the region passes through the ports of South Africa and those of East Africa, providing a vital link in the logistic chain of southern Africa.
Additionally, South Africa has a stock exchange that ranks among the top twenty in the world. According to the International Monetary Fund (“IMF”), the World Bank, and the CIA World Factbook, South Africa is ranked 25th, 24th, and 24th in the world in terms of GDP derived from purchasing power parity (“PPP”) as of 2009.
The FIFA 2010 World Cup provided an incentive for the government to invest billions into improving infrastructure in the nine host cities in order to cope with the expected massive influx of visitors. This meant major upgrades to the country’s airports and improvements to the general transport system, including the taxi recapitalisation program, consolidation of passenger rail, and a transformation of the bus industry.
Some examples of South Africa’s improvements in its infrastructure system are highlighted here:
- In Durban, South Africa’s third largest city and Africa’s busiest port, a new airport that cost R6.8bn called the King Shaka International Airport was built to replace the old Durban International Airport.
- The country also spent more than R33bn on roads, public transport, five new stadiums and upgrades to four existing stadiums.
- An additional R25bn was spent to build Gautrain, a commuter railway that links the commercial hub of Johannesburg, with Pretoria, South Africa’s political capital. The Gautrain system will not be fully operation till 2011, but some of the key lines are currently running.
The massive stimulus that came in the form of construction spending has provided the South African economy a significant boost and has largely prevented the country from experiencing a significant downturn following the global economic fallout that occurred in September 2008 in the U.S.’s financial sector. The following graph illustrates South Africa’s real GDP during the global recession as well as the Organisation for Economic Development’s (“OECD”) projections until 2012.