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The role of entrepreneurial action in economic recovery

The Covid-19 lockdown is having an unprecedented impact on small business and entrepreneurship globally. Governments around the world are rightly focusing on protecting people’s health while at the same time protecting the economy through stimulus and relief packages. There are differences in opinions as to what specific measures are required to return to ‘normality’, which further depends on the length of the pandemic and the severity of the impact on different types of business sectors.

Emerging research in South Africa and abroad suggests that small businesses are struggling to survive, with estimates that about one in ten businesses are less than a month away from shutting down completely; despite government spending, some businesses will not be able to come back from their current deficit. Furthermore, some policy briefs note that many small businesses were in trouble before the lockdown as a result of the cumulative effects of the recession and load shedding. 

Moreover, the pandemic has exacerbated the vulnerability of small businesses since they are highly dependent on short-term cash flows to fund operating expenses. These circumstances highlight the importance of the role of entrepreneurship to restart economic activities post-Covid-19. 

Despite common assumptions that disasters result in business failures and bankruptcies on a large scale, some research findings suggest that most businesses do in fact recover following disasters. While there are numerous stylised facts on business entry, exit, survival, and growth, the literature has not yet resolved the long debate on the relationship between business cycles and entrepreneurship. 

A growing number of researchers support the opinion that such a relationship is complex. On the one hand, crisis and shocks may allow entrepreneurs to detect and exploit new opportunities; on the other, economic crisis can discourage the detection and pursuit of new business opportunities.

Successful entrepreneurs seem to have a unique ability to discover opportunity even amid drastic times. Entrepreneurship, by its very nature, is a process of trial and error that involves many repeated challenges. In fact it could be argued that these are individuals with ‘failure experience’. Perseverance or resilience enables entrepreneurs to overcome repeated rejection, particularly as rejection is the rule rather than the exception in many entrepreneurial endeavours. 

Having the requisite perseverance and resilience to overcome such obstacles, some argue, is the very essence of successful entrepreneurship. Resilience or ‘grit’ is an individual’s ability to persist and maintain interest with passion in the pursuit of long-term goals even when faced with adversity. 

Studies show that an entrepreneur’s sense of self-efficacy can play a major role in how they approach goals, tasks, and challenges brought about by crisis events. Entrepreneurs with a high sense of self-efficacy demonstrate resilience and determination to re-open their businesses. Self-efficacy is a learned behaviour and can be developed through training and modelling, and is often part of the MBA curriculum at business schools. 

Entrepreneurs often function in ambiguous and uncertain social contexts where entrepreneurial activity is part of the national economic ecosystem. The South African ecosystem is a complex system hosting a number of entities that are interdependent. This fact was made evident early on in the Covid-19 lockdown, when informal traders were allowed to resume trade, but there was no one with whom to transact. One huge advantage of using the ecosystem concept is that it becomes immediately obvious that focusing only on one element (such as SMMEs bailouts) is an idle activity, since it underestimates the complexity of doing business with a wide range of actors in an environment featuring multiple interdependencies. 

The reality in South Africa is that the vast majority of all SMMEs are informal, survivalist enterprises driven by necessity. Covid-19 has exposed the vicious cycle of how many small and informal business owners struggle day-to-day to survive. These ‘me-too’ replicative types of entrepreneurs belong to what Schumpeter called the “cluster of followers”. This “cluster of followers” tends to have low impact on economic development and growth and they fail to create jobs, and distribute incomes and resources. Not only in South Africa, but also globally, SMMEs that grow and scale up represent only a tiny fraction of all start-ups. 

Rhetoric on SMMEs and ideologically driven programmes to assist entrepreneurs are unsuitable for timely reactions to dynamic global changes, such as the Covid-19 crisis. While larger companies could recover quicker, since they have cash reserves and perhaps some slack resources, smaller businesses will struggle to reopen and survive. In light of the Covid-19 lockdowns, SMMEs in services, hospitality, and tourism are likely to be among the last sectors to reopen fully. This is problematic as these sectors are critical for small and informal businesses.

Government needs to help transition small and informal businesses into innovative and sustainable entrepreneurial ventures. Furthermore, they must stimulate more start-ups by providing immediate subsidy schemes, tax incentives, and labour-law exemptions, as well as lower barriers to entry in sectors where traditionally large companies dominate, such as telecoms. 

Yet, entrepreneurs may have an inherent advantage due to their agility and flexibility to adapt to changing circumstances. Such capabilities are critical resources for entrepreneurs navigating the Covid-19 recovery phase. The ability to focus on short-term experiments, where the loss in a worst-case scenario is affordable, allows small businesses to exploit environmental contingencies by remaining flexible and adaptable. 

The ability of the entrepreneur to make agile decisions is vital in the early recovery of a business in crisis. Research shows that crisis can lead to a concentration of innovative activities within a small group of fast-growing entrepreneurial firms, particularly those firms already highly innovative before the crisis. In other words, firms that pursue innovative strategies are those better able to cope with crises. 

The decision to resume business trading and operations requires decisive entrepreneurial action. This will require some form of new business model creation and adaptation, which may involve digitalisation, diversification, and greater integration with local/regional value chains. Such entrepreneurial actions need to be both remedial and opportunistic in nature, by focusing both on short-term firefighting strategies as well as on long-term innovation strategies. Entrepreneurs can then quickly adapt to what is the ‘new normal’ for doing businesses in South Africa, exploit new opportunities, and prosper. DM


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Boris Urban is a Professor at the Wits Business School, University of Witwatersrand. Boris was the inaugural Chair in Entrepreneurship at Wits and has more than 30 years of academic and professional experience where he has practiced, taught, and researched organisational behaviour, strategy, and entrepreneurship.

Founded in 1968, Wits Business School is the graduate school of business administration of the University of the Witwatersrand, one of the top tertiary institutes in Africa. The School offers a variety of postgraduate academic programmes and executive education programmes as well as weekly public seminars. WBS also designs tailor-made, in-company programmes, partnering with client organisations to develop management capacity.  With a full suite of programmes on offer, WBS delivers innovative, transformative, and immersive learning experiences using generative thinking methodologies. The School’s aim is to deliver leaders who can shape the future of Africa and raise the bar on how business is done on the continent. Learning is therefore relevant to the challenges and opportunities that we face on this continent, providing students with a deep understanding of the complexities of doing business in Africa within a global context. For more information about its Academic Programmes, visit www.wbs.ac.za


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