The_Role_of_Government_in_Developing_Entrepreneurs_in_SA

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The Role of Government in Developing Entrepreneurs in
South Africa
By
Gerald Steyn
Student Number: 202525170
Submitted in fulfilment of the requirements for the degree of
MASTER IN BUSINESS ADMINISTRATION
Graduate School of Business, Faculty of Management Studies
University of KWAZULU-NATAL
Supervisor: Mr. A Bozas
Co-Supervisor: Mr. M Challenor
December 2006

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Acknowledgements
Several people have been instrumental in allowing this project to be completed. I would like
to thank especially Mr. Alec Bozas, my appointed supervisor at the Graduate School of
Business, especially for his encouragement and patience throughout the duration of this
project. I would also like to thank Chanine Jones and Yvonne Steyn, who conducted the
telephone interviews and generously devoted their time to this project to collect the required
data.

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Dedication
I dedicate this work, first and foremost to my family that has stood by me on my travels to
this degree, the company that has supported me; and especially to the small and medium
enterprises that contest in the open market on a daily basis.

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Declaration
I hereby confirm that this work submitted for assessment is my own. Any use made within it
of works of other authors in any form is properly acknowledged at their point of use. A list of
the references employed is included. I confirm that this work has not been submitted in
canditure for any other degree at any other academic institution.
Signed ………………………………………………………….....
Date …………………………………………………………….

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Abstract
Governments the world over have accepted the role that entrepreneurs play in economic
development and employment. In turn, entrepreneurs for the most part, create small and
medium enterprises that rely heavily on support from their respective governments to achieve
the requisite success. The following study attempts to ascertain the reason/s why, according
to the Global Entrepreneurship Monitor, entrepreneurial activity in South Africa is not
increasing.
A study was undertaken of what initiatives are currently employed by a variety of countries
including South Africa and the successes or shortcomings of these initiatives. This study
identified a number of key success factor for developing entrepreneurs.
A telephone survey was performed on 180 entrepreneurs in South Africa, which registered
their businesses after January 2004, to determine their sentiments on the national framework
conditions and initiatives provided by the Department of Trade and Industry and its affiliates.
This identified access to finance as a major hurdle for entrepreneurs as well as large levels of
unawareness of the initiatives employed by the Department of Trade and Industry. Low
numbers of the respondents surveyed had made use of the initiatives supplied by the
Department or its affiliates. Furthermore, it was determined that entrepreneurs that operate
in rural towns are more adversely affected by these factors than those in cities or large towns.
Respondents were surveyed on their employment growth prospects and overall were positive
about increasing their workforce; however, poor access to finance and deficiencies of
government incentives and skilled workers were identified as potential obstacles to increasing
employment numbers.
The study finds the necessity for state sponsored capital funds and widespread tax incentives
for both entrepreneurs and those willing to invest in the small and medium enterprises that
entrepreneurs establish.
Improvements in registration processes, regulation and compliance costs, communication of
initiatives and access to support for entrepreneurs are identified as critical success factors
along with the widespread use of small business incubators and programmes for
rehabilitating honest bankruptcies.

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TABLE OF CONTENTS
Acknowledgements i
Dedication ii
Declaration iii
Abstract iv
List of Tables vii
List of Figures viii
List of Acronyms ix
1 CHAPTER ONE: Introduction to the Perceived Problem 1
1.1 Background 1
1.2 Overview of the Problem 3
1.3 Problem Statement 3
1.3.1 The Problem 3
1.3.2 The Problem Statement 5
1.4 Research Objectives 6
1.4.1 Skills 7
1.4.2 National Framework Conditions 7
1.5 Limitations of the Study 8
1.6 Research Methodology Overview 8
1.7 Chapter Overview 10
1.8 Conclusion 10
2 CHAPTER 2: Review of Related Literature 11
2.1 Introduction 11
2.1.1 Entrepreneurial Motivation 11
2.1.2 Entrepreneurial Personality 12
2.1.3 Entrepreneurial Education 13
2.1.4 Entrepreneurial Framework 14
2.1.5 Business Incubation 15
2.2 The Approach of the European Union 16
2.2.1 Regulatory Framework 18
2.2.2 Tax Incentives 19
2.2.3 Technology 20
2.2.4 Training Nascent Entrepreneurs 21
2.2.5 Facilitating Easier Exit 21
2.2.6 Access to Finance 22
2.2.7 Small Business Incubators 23
2.3 The Japanese Approach 23
2.3.2 Business Support and Development 24
2.3.3 Regulation, Subsidies and Taxation 25
2.4 The Approach of the United States 26
2.4.1 Small Business Administration 26
2.4.4 Tax Incentives 28
2.4.5 Access to government contracts 29
2.4.6 Special Programmes 29
2.5 The Indian Approach 30
2.5.2 Regulation, Subsidies and Taxation 32
2.5.4 Promotion of SMEs 34
2.6 The Approach of the DTI in South Africa 35
2.6.2 Regulatory Environment 37
2.6.4 Taxation and Subsidies 40
2.6.5 Small Business Incubators 40
2.7 Concluding Remarks 41
3 CHAPTER 3: Research Methodology 42
3.1 Introduction 42

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3.2 Research Methodology 42
3.3 Sample 45
3.4 Questionnaire Design 46
3.5 Pilot Study 47
3.6 Planning of Fieldwork 47
3.6.1 Training of Fieldworkers 49
4 CHAPTER 4: Data Collection and Analysis 50
4.1 Introduction 50
4.2 Fieldwork 50
4.3 Analysis 66
4.4 Ethical Issues 73
5 CHAPTER 5: Conclusions and Recommendations 75
5.1 Introduction 75
5.2 Discussion 75
5.2.1 Assessment of Current Environment 75
5.2.2 Availability of Finance, Support and Training 76
5.2.3 Opinions of Existing National Framework Conditions 78
5.2.4 Employment Growth Expectation Levels 78
5.2.5 Initiatives Undertaken by Other Countries versus DTI Initiatives 79
5.2.6 Regulatory Factors and Taxation 81
5.3 Recommendations 82
5.3.1 Streamlined Registration Processes 82
5.3.2 Comprehensive Communication of Information 83
5.3.3 Reduction of Regulations and Compliance Costs 83
5.3.4 Tax Incentives for SMEs 84
5.3.5 Tax Incentives for Capital and Technology Expansion 84
5.3.6 Tax Incentives for Private Investors in SMEs 85
5.3.7 State Sponsored Venture Capital Funds (VCF) 85
5.3.8 Programmes for Rehabilitating Non-fraudulent Bankruptcies 86
5.3.9 Developing Young Entrepreneurs 86
5.3.10 State Support at Regional Level 86
5.3.11 State Sponsored Business Opportunities 87
5.4 Limitations of the Study 87
5.5 Suggested Further Research 88
5.6 Summary 89
5.7 Conclusion 90
Bibliography 92
Appendix I Rank Order of Most Time Consuming and Taxing Regulations 99
Appendix II Telephone Survey Questionnaire 100
Appendix III Principal Communities: All Population Groups 104

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List of Tables
Table 4.1 Response Rate by Province 51
Table 4.2 Respondents by City Type 51
Table 4.3 Employee Bands for Respondents 51
Table 4.4 Prior Employment Status of Respondents 52
Table 4.5 Prior Employment Status by Province 52
Table 4.6 Prior Employment Status by City Type 53
Table 4.7 Type of Business Selected by Province 54
Table 4.8 Type of Business Selected by Type of City 55
Table 4.9 Respondent Education Level 56
Table 4.10 Age Groups 56
Table 4.11 Method of Financing 56
Table 4.12 Financing Method by City Type 57
Table 4.13 Ease of Access to Finance by City Type 57
Table 4.14 Ease of Registering New Business by City Type 58
Table 4.15 Ease of Access to Information and
Assistance on Registration by City Type 59
Table 4.16 Ease of Access to Information and Assistance
on Running Business by City Type 60
Table 4.17 Awareness of DTI Initiatives 61
Table 4.18 Awareness and Usage of SEDA 62
Table 4.19 Awareness and Usage of Khula Finance 62
Table 4.20 Awareness and Usage of IDC 62
Table 4.21 Awareness and Usage of Business Partners 63
Table 4.22 Governments Creation of Awareness of Support Initiatives for SMEs 63
Table 4.23 Overall Promotion of SMEs 64
Table 4.24 Impact of General Legislation 64
Table 4.25 Communication of Legislation 64
Table 4.26 Expected Employee Level in Five Years 65
Table 4.27 Perceived Factors that would Hamper Growth 65
Table 4.28 Awareness and Usage of SETAs 65
Table 4.29 Financing Choice by Business Entry 66
Table 4.30 Chi-Square Test for Financing Choice by Business Entry 67
Table 4.31 Relationship between Education and Method of Financing 67
Table 4.32 Chi-Square Test for Relationship between Education and
Method of Financing 67
Table 4.33 Cross-tabulation of Ease of Access to Finance by Type of City 68
Table 4.34 Chi-Square Test for Ease of Access to Finance by Type of City 68
Table 4.35 Cross-tabulation of Type of City to Method of Financing 68
Table 4.36 Chi-Square Test for Type of City to Method of Financing 69
Table 4.37 Chi-Square Test for Type of City to Method of Financing Controlling for
Third Variable 69
Table 4.38 Cross-tabulation of Level of Education to Type of Business 70
Table 4.39 Chi-square Test Statistics for Key Success Measures 72

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List of Figures
Figure 4.1 Prior Employment Status by Province and City Type 53
Figure 4.2 Type of Business Selected by Province 54
Figure 4.3 Business Selections by City Type 55
Figure 4.4 Ease of Access to Finance 58
Figure 4.5 Ease of Registering New Business 59
Figure 4.6 Ease of Access to Information and Assistance on Registration 60
Figure 4.7 Ease of Access to Information and Assistance on Running Business 61
Figure 4.8 Predicted Probability of Membership: Test 1 71
Figure 4.9 Predicted Probability of Membership: Test 2 72

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List of Acronyms
BEE Black Economic Empowerment
CIPRO Companies Intellectual Properties Registration Office
CLCSS Credit Linked Capital Subsidies
DTI Department of Trade and Industry
EC European Community
ECIC Export Credit Insurance Corporation of South Africa
EIC Enterprise Information Centre
EIF European Investment fund
EU European Union
GEM Global Entrepreneurship Monitor
GDP Gross Domestic Product
HSDC High Speed Data Communications
IFC Information and Facilitation Counter
ICT Information and Communications Technology
IDC Industrial Development Corporation
JASME Japan Finance Corporation for Small and Medium Enterprise
METI Ministry of Economy, Trade and Industry
NAFTA North American Free Trade Agreement
NEF National Empowerment Fund
NLFC National Life Finance Corporation
NPO Non-Profit Organisation
NSIC National Small Industries Corporation
OECD Organisation for Economic Development
RBI Reserve Bank of India
RFI Retail Financial Intermediary
RuDASA Rural Doctors Association of South Africa
SA South Africa
SAARF South African Advertising Research Foundation
SABTIA South African Business and Technology Incubation Association
SAMRO South African Music Rights Organisation
SARS South African Revenue Service
SBA United States Small Business Administration
SBDC Small Business Development Centre
SBP Small Business Partnerships for Growth in Africa
SBTN Small Business Training Network
SBI Small Business Incubator
SBIC Small Business Investment Companies
SEDA Small Enterprise Development Agency
SEFC Scheme of Small Enterprise Financial Centre
SETA Sector Education and Training Authority
SIDC State Industrial Development Corporation
SFC Indian State Financial Corporation
SIDO Small Industry Development Organisation
SME Small and Medium Enterprise
SMEDP Small and Medium Enterprise Development Programme
SMME Small Medium and Micro Enterprise
SSI Indian Ministry of Small Scale Industries
StatsSA Statistics South Africa

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STP SEDA Technology Program
STPI Software Technology Parks India
TEA Total Entrepreneurial Activity
TWIB Technology for Women in Business
UIF Unemployment Insurance Fund
UK United Kingdom
US United States of America
VAT Value Added Tax
VCT Venture Capital Trust
VCF Venture Capital Fund

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1 CHAPTER ONE: Introduction to the Perceived Problem
1.1 Background
There are numerous benefits for which entrepreneurship has received notoriety including,
developing innovations, creating employment, building industrial litheness and providing
better prospects for individual development, growth and job satisfaction (Vesper, 1999).
Entrepreneurs are even credited for the founding and growth of one hundred and ninety seven
of America’s Fortune 200 companies (Betcher & Purrington, 2001).
In the 1950s, economists in Europe predicted the ascendancy of large organisations. Large-
scale firms were required to accomplish economies of scale, make the most of foreign markets
and to take advantage of innovations in technology (European Commission, 2003). Indeed,
throughout the 1960s and 1970s, large companies dominated the European economy. Since
then, the trend has started to reverse. Large firms rationalised by restructuring, outsourcing or
downsizing and the number of business owners in European countries increased from 29
million to 45 million between 1972 and 1998 (Audretsch, Thurik, Verheul & Wennekers,
2002).
Several studies have shown the existence of a logical relationship between the per capita
Gross Domestic Product (GDP) of a country, its economic growth and its level and type of
entrepreneurial activity (Minniti & Bygrave, 2004). The entrepreneurial sector provides job
opportunities and scope for the creation of new markets (GEM, 2004, Acs & Armington,
2003).
Conversely, Van Stel and Storey (2004) find that net job formation might not be positive, as
new firms contribute only a very small proportion of new jobs in the economy and merely
displace existing jobs. Added to this new businesses have a greater probability of failure
(Geroski, 1995).
With the increase of per capita income, there is often an increase in the role of large firms to
meet the demand of growing markets and to increase their relative role in the economy. This
is usually accompanied by a reduction in the number of new firms, since a growing number of
people find stable employment in large industrial plants (European Commission, 2003).

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Audretsch, Carree and Thurik (2001), Audretsch and Fritsch (2002), Van Stel and Storey
(2004) and Fritsch and Mueller (2004) suggest that the uncertain evidence on the relationship
between new firm formation and both economic growth and net employment change, (as
reported by, among others, Storey, 1991 and Fritsch, 1996) may be due to the long periods
required for the main effects of new entry to occur.
This could be as a result of further increases in income being experienced, leading to an
increase in the role played by the entrepreneurial sector, as more individuals have the
resources to go into business for themselves in an economic environment that allows the
exploitation of new opportunities (Acs, et al., 2005).
In effect, the concept of entrepreneurship is largely dependant on the individual. The
entrepreneur’s behaviour is most important, followed by the necessary skills and resources.
Thereafter the opportunity identification and subsequent pursuit thereof, sees the change from
the individual to the new firm or enterprise, in which the entrepreneur has a controlling
interest and security of property rights. This provides a means to convert their personal skills
and ambitions into actions within an environment that is conducive to entrepreneurship
(Lazear, 2002).
The Global Entrepreneurship Monitor distinguishes between a number of framework
conditions that need to exist to promote entrepreneurial activity (Minniti, Bygrave & Autio,
2005). These are discussed in detail in chapter two.
In Taiwan, which is described as a highly entrepreneurial nation, entrepreneurs are referred to
as small enterprises (Lundström & Stevenson, 2005).
Given the status of the South African economy, the Department of Trade and Industry (DTI)
some time ago identified the need to develop entrepreneurs thereby creating a vibrant Small
and Medium Enterprise (SME) market, which facilitates wealth generation, job creation and
economic development, (DTI, 2004a). A SME is defined in the Small Business Act, 102 of
1996 (Internet 1), as a business entity employing a maximum of 100 employees. In the case of
enterprises in the mining, electricity and manufacturing sectors, the threshold is 200
employees.

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As part of its “Vision 2014” strategy, the DTI has identified the increase in the contribution of
SMEs to the GDP as one of its key performance areas in achieving its goals of economic
growth, employment creation and reduction of economic inequality, (DTI, 2004b).
A number of initiatives, programmes and partnerships with private institutions have been
implemented over the past number of years for this purpose. These will be discussed in detail
in chapter two.
1.2 Overview of the Problem
The first contribution of new firm formation to employment growth is, naturally, the number
of jobs directly created as successful new firms enter the market and grow. Comprehensive
compilations of studies relating firm size to growth such as Sutton (1997) have produced the
stylized fact that (successful) smaller firms have higher growth rates than their larger
counterparts.
These findings have been confirmed in most subsequent studies despite differences in
country, industry, time, and methodology used (Audretsch, et al., 2004). More specifically,
the evidence has been especially strong for the nascent and very small firms to outperform
their older and larger counterparts in terms of employment formation even when corrected for
their higher probabilities of exit.
As noted above the DTI, through its initiatives together with its business partners, has created
the mechanisms for financial support and entrepreneurial capacity, to develop SMEs and
entrepreneurs and thus stimulate economic and employment growth.
1.3 Problem Statement
1.3.1 The Problem
“South Africa (SA) ranks at the bottom of the developing world when it comes to
entrepreneurship activities, averaging 50 percent lower than other developing nations such as
Argentina, Chile, Thailand, Uganda and Mexico. The data was released from the Global

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Entrepreneurship Monitor, a joint survey between the London Business School and Babson
College which benchmarks 34 countries,” (Shezi, 2004).
The Global Entrepreneurship Monitor (GEM) measures the proportion of a country’s adult
population, which are actively involved in starting or running a new business to publish a
Total Entrepreneurial Activity (TEA) index. In 2004, the TEA in South Africa was 5.4
percent compared to an average of 9.4 percent in all the 34 countries measured that year. It is
further noted that the average TEA for developing countries, where South Africa is clustered,
was 21 percent, (GEM, 2004).
In 2005, the TEA in South Africa was measured at 5.1 percent compared to an overall average
of 8.4 percent of the 35 countries that were measured. The average for developing countries in
2005 was 16.4 percent, (Minniti, et al., 2005). Furthermore SA showed very low levels of
established business ownership, being businesses that have been established and paying
wages for more that 42 months. This totalled 1.3 percent of the adult population aged between
18 and 64 years where the average for all countries surveyed was 6.6 percent, (Minniti, et al.,
2005).
Education opportunities and education systems, cultural factors, societal views and
perceptions as well as management training may need addressing and will be considered when
the results of this research are evaluated.
Financial support may be affected by government's fondness for simple solutions, the most
common of which is to provide seed capital. Such funds are often distributed through small-
business development centres. Seed capital might well be fuel for transformative
entrepreneurship but if only seed capital is provided, it flows straight to low-quality ventures
(Venkataraman, 2004).
This may be the reason why research shows that largely the majority of new venture financing
in South Africa is from non-government sources (Minniti et al., 2005). This will be discussed
further in chapter two.
Access to skilled workers and the degree of flexibility of the labour market may be hampering
the development of SMEs.

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Bureaucracy within the regulatory environment and cumbersome procedures or lengthy
periods for registering and licensing a business could be one of the causes of low
entrepreneurial activity.
The government has invested considerable resources into supporting small enterprises.
However, it may be possible that the reach of these programmes is too limited and many
businesses may not be aware of or may not have used any of the government’s programmes
and structures.
Furthermore, small enterprises may be unimpressed with the direct support offered by
government.
GEM measured high expectation entrepreneurs for the first time in 2005. These are defined as
start-ups and newly formed businesses that expect to employ at least 20 employees in five
years time. This information is important as whilst new businesses contribute a major
proportion of jobs in many countries, very few expect to grow beyond one or two employees
(Autio, 2005).
The bulk of employment creation in the next five years is expected to come from high
expectation entrepreneurs (Autio, 2005). This could require research focused on the
expectation levels of SMEs in South Africa for employment growth and what factors they
consider a hindrance to growth.
1.3.2 The Problem Statement
The problem being experienced is that despite the initiatives and mechanisms implemented by
the DTI, entrepreneurial activity is not increasing and levels of established business
ownership remain very low, according to Minniti et al., (2005).
The root causes may lie in the regulatory environment, efficacy of the existing DTI initiatives,
access to finance or may be attributable to the lack of skills on the part of entrepreneurs.

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1.4 Research Objectives
In his foreword to the Global Entrepreneurship Monitor (2001) Report, Dr. S. Michael Camp,
vice president of research at the Kauffman Centre for Entrepreneurial Leadership, rates the
GEM as one of the most significant research programmes in the study of entrepreneurship
(GEM, 2001).
In 2001, the TEA in South Africa was measured at 9.4 percent (GEM, 2001). Since then the
TEA has declined to 6.5 percent in 2002 (GEM, 2002), 5.7 percent in 2003 (GEM, 2003) and
to 5.1 percent in 2005, as discussed earlier.
The DTI has implemented numerous initiatives and programmes over the past decade to lift
the levels of entrepreneurial activity, (these will be discussed further in chapter two). The
TEA as measured by the GEM continues to decline whilst other developing countries
maintain double digit figures (GEM 2001; 2002; 2003; 2004; 2005).
The objectives of this study are to measure:
• The prior employment status of entrepreneurs, choice of business, age groups, level of
education, location and number of employees and how these variables affect each
other.
• The most common source of financing utilised by the new ventures, what variables
affect financing used and the ease of access to capital.
• Opinions on the availability of finance, skills support and training and which
initiatives the respondents are aware of and have utilised.
• Regulatory factors that could be contributing to the low levels of entrepreneurial
activity that is currently being experienced.
• The opinions of the respondent SMEs of the existing national framework conditions.
• Employment growth expectation levels and what factors the respondents consider
could be obstacles to promoting growth.
• Initiatives undertaken by other countries and how SA measures up to these.
Researching the above may identify why entrepreneurial activity is not increasing in SA and
these issues are discussed more fully below.

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The success of entrepreneurs is overall governed by two key factors. The first is a capacity for
entrepreneurship that relates to the skills and expertise required to start up or assume
ownership of an existing firm. The second factor is a set of national framework conditions
that is conducive to entrepreneurial activity.
1.4.1 Skills
Practical skills are defined as a combination of training and experience that enable an
entrepreneur to fulfil the core function of his or her business and to understand the processes
involved in order to produce a quality product or service. Business skills are equally as
important to ensure that the company is run on a sound financial basis and in compliance with
legal and regulatory frameworks (Schwenke, 2004).
1.4.2 National Framework Conditions
As stated earlier the GEM distinguishes between a number of framework conditions that are
required to stimulate entrepreneurial activity. These include among others, the availability of
finance, government policy, regulations, institutions, support and communication
programmes, education, training and technology transfer and the availability of business and
support services.
Respondents will be surveyed on their state of employment prior to entering the business and
whether they entered into a brand new venture, purchased an existing business or a
franchise/licensed business. This should provide a better understanding of how the
entrepreneurial motivation and business choice effects the respondents’ perception of the
skills and framework conditions.
By achieving feedback from SMEs on these research objectives, the researcher can establish
what changes to current policy and initiatives may yield better results. This could identify the
strengths, shortcomings or failures of the current initiatives, thereby drawing conclusions as to
what steps could be undertaken by the DTI to ensure that entrepreneurs are able to play a
significant role in innovation, job creation and growth of the economy.

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1.5 Limitations of the Study
As with many research undertakings, the ability to survey a comprehensive sample of the
population has its limitations. For the purpose of this study to identify respondents to survey,
only registered companies were selected for information gathering. In SA, the DTI refers to
Small Medium and Micro Enterprises (SMMEs), where micro enterprises are businesses that
employ less than five workers. For the purposes of this study, micro enterprises are included
in the definition of Small and Medium Enterprises (SMEs).
Whilst there are many SMEs that operate as sole proprietors, they are not officially registered
businesses. These have not been included in the study, as they could not be identified on the
DTI’s Companies Intellectual Properties Registration Office (CIPRO) database. Research
from the United Kingdom, however, shows that only 11.7 percent of sole proprietors have
employees compared with 61.4 percent for registered companies (Internet 2).
Furthermore the sample will not be stratified by race, gender, company size within the
parameters defined, or cultural segments as the study takes a holistic view of businesses that
are only stratified by city or large towns and rural towns in the nine provinces. It is possible
that demographics will affect the success of the new venture and entrepreneurial activity
overall, however demographic differences not included in this study are, race, gender or
cultural background as GEM does not perceive these as factors affecting entrepreneurial
activity (GEM, 2003).
1.6 Research Methodology Overview
With exploratory research, the problem being considered is only partly understood, and the
research is conducted to obtain a better understanding. In this quantitative study, the
researcher has chosen to use structured questionnaires in order to obtain primary data.
Respondents were randomly selected from the DTI’s, CIPRO database. The CIPRO database
contains records of registered companies incorporated in SA and is available to all companies
and organisations that are registered for and subscribe to CIPROs services.

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Telephone surveys were used to complete the interviewer administered questionnaires and
companies with less than 200 employees were used as targets for the research. These
telephone surveys were performed by two field workers.
Secondary data was obtained through a review of literature published on initiatives
undertaken by other countries and the efficacy thereof. These were studied to compare
differences with local current policy and initiatives of the DTI.
The two independent category variables used as denominators were city/large town and rural
town as the town status may affect the dependent variables.
The Rural Doctors Association of South Africa (RuDASA) (2006), reports that there is no
agreed definition of “rural” in SA. They state that the term is used freely for different
purposes and this often causes confusion. The report goes on to state that “historically
Statistics South Africa (StatsSA) classified areas proclaimed as municipalities (mostly the
cities and previously “white” towns and their associated “townships”) as urban, and
everything else as rural. In the 2001 census these old boundaries were still used because it
allowed comparison with data from previous census reports.”
StatsSA no longer reports on rural versus urban populations as all parts of SA now fall within
a municipality and as yet there is no official definition of rural. Municipalities include one or
more towns, though many of these towns may be small and have very few amenities, and all
except the metropolitan municipalities include areas that are to some degree rural (RuDASA,
2006).
For purposes of this study the distinction between city/large town and rural town is based on
the South African Advertising Research Foundation’s (SAARF) ‘Communities’ definition
with a rural town having a population of less than 40,000 (SAARF, 2006). Towns in which
the respondents were located were cross-referenced with the SAARF Communities Table A
included in Appendix III, to ensure they were included in the correct strata.

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1.7 Chapter Overview
Chapter One provides an overview of the reasons why the study is being undertaken and the
methods employed to perform the study.
Chapter Two focuses on the literature available concerning the topic being researched and the
approach adopted in various countries concerning the topic.
Chapter Three contains theoretical outlines concerning the research methodology employed
and aspects of the actual fieldwork done.
In chapter Four, the results are reported, analysed and discussed.
Chapter Five contains the discussion, recommendations, and suggestions for further research.
1.8 Conclusion
This chapter has introduced the problem, specified the research problem and objectives, and
discussed reasons for the research. The chapter that follows focuses on related and current
literature considered relevant to this study.

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2 CHAPTER 2: Review of Related Literature
2.1 Introduction
Countries such as the United Kingdom (UK) and the United States (US) have developed
rapidly because entrepreneurial skills were allowed to thrive (Casson, 1990, Storey, 1994). In
the worldwide economy large organisations cut jobs at an alarming rate in the mid to late
1990s according to Reynolds, Hay and Camp, (1999), who reported that Fortune 500
companies in the US had lost more than five million jobs in the period since 1980.
In the same period however, more than 34 million new jobs were created (Reynolds, et al.,
1999). Furthermore, small businesses entering the marketplace (i.e., those with fewer than
500 employees) employed 53 percent of the private workforce and accounted for 47 percent
of sales and 51 percent of private sector Gross Domestic Product (GDP) in the US.
According to Geroski, (1995), “…the effect of small business entry may actually be more
profound than just correcting displacement from static equilibriums, since entry may also
stimulate the growth and development of markets”.
2.1.1 Entrepreneurial Motivation
Underlying the start-up of each new firm is an entrepreneur who acquires the knowledge to
recognise and pursue a good business opportunity. However, bringing new products and
services into existence usually involves considerable risk. By definition, entrepreneurship
requires making investments today without assurance of what the returns will be tomorrow
(Lazear, 2002).
Shane (2003:4) defines entrepreneurship as “an activity that involves the discovery,
evaluation, and exploitation of opportunities that previously had not existed”. In this context,
opportunities arise from factors such as technological, social, and demographic change and
could exist independently of the entrepreneur’s discovery and subsequent actions.

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2.1.2 Entrepreneurial Personality
Despite vast research into the common personality traits of entrepreneurs, namely,
achievement motivation, locus of control, creativity and risk taking, Shaver (1995:21) reports,
“despite the power of individual examples, there does not seem to be a coherent and
meaningful personality structure that distinguishes entrepreneurs from the rest of us”. Shaver
(1995:21) further advocates, “only achievement motivation shows a clear relationship to
entrepreneurial activity”.
The argument that the concept and attributes of entrepreneurship exist within a unique
personality, has come under tremendous dispute. Drucker (1993:1), advocates, “Most of what
you hear about entrepreneurship is all wrong. It is not magic; it is not mysterious; and it has
nothing to do with genes. It’s a discipline, and like any discipline, it can be learned”.
Earlier Cohen (1980) cited the findings of renowned psychologist, Alan Jacobwitz who
suggested that there are specific types of people who become entrepreneurs, and that there are
a number of stages in the development of those types. While this approach was supported by
the majority of theorists at the early stages of entrepreneurial research, some criticize that it
has yet to be empirically proven (Naffziger, Hornsby & Kurtako, 1994).
The aspects of trait theories have not been completely shunned by researchers, however.
Numerous researchers support Jacobwitz’s evidence of entrepreneurial type characteristics
(Krueger & Brazil, 1994, Naffziger, et al., 1994), but select a more dynamic approach to
entrepreneurial personality in which character traits and ensuing behaviour are fashioned by
an assortment of attributes (Krueger & Brazil, 1994, Naffziger, et al., 1994).
Von Mises (1949:343) postulates that entrepreneurship “defies any rules and systematization.
It can be neither taught nor learned”. Kirzner (1973) who was a student of von Mises
advocates that it is true that no one can teach an entrepreneur the specific innovation that he
creates but does question the relevance thereof.
What is of more importance to Kirzner (1973) is that he believes one can instil in business
students the requisite skills and attributes to transform an innovative concept into a practical

13
business plan. Students can be taught to overcome risk aversion and that they are at liberty to
be creative in their thoughts and to establish new enterprises Kirzner (1973).
New venture creation is also determined by the motivation behind the decision to start up
one’s own business. There are those entrepreneurs that exploit a perceived opportunity and
those that are forced into entrepreneurship due to a lack of work or dissatisfaction with their
current circumstances or environment.
Koppl and Minniti (2003) describe entrepreneurship as sometimes referring to the founding of
a new venture, and sometimes to one or more special characteristics of the founder. GEM in
turn, views entrepreneurship as “an aspect of human action in which all individual based acts
of engaging in business are, to various degrees, expressions of entrepreneurial attitudes,”
(Minniti, et al., 2005).
Any individual embarking on a new venture and attempting to succeed in an incredibly
competitive market could be described as an entrepreneur even in spite of not having high-
growth aspirations (Minniti, et al., 2005).
2.1.3 Entrepreneurial Education
An escalating trend in the number of entrepreneurship education programmes to a degree
supports the idea that entrepreneurs can be made, and thus the sentiment that entrepreneurship
can be taught. Inc.com the website for Inc. Magazine reports that in the early 1980s, 300
universities in the US provided courses in small business and entrepreneurship.
Results from a survey released in June 2006 by the Indiana University's Johnson Centre for
Entrepreneurship and Innovation indicate that there are now in excess of 2,200 courses
available from more than 1,600 universities in the US alone (Internet 3).
Good quality practical skills begin with education or training from a college, university of
technology, trade school, or university and are strengthened by work experience and further
training. They are the foundation on which an enterprise’s product or services offering is built
and are essential to its long-term success (Schwenke, 2004).

14
Sound business skills are also a requirement and while some of these skills can be bought in, a
good understanding of basic financial and staff management is a must. Many independent
enterprises with good products or services flounder because stock control, the debtor’s book
and cash flow management are not as sound as they should be or because there are problems
with labour management (Schwenke, 2004).
Beyond the role of formal education, Krueger and Brazeal (1994) assert that environment
plays an important role in cultivating entrepreneurial behaviour. They find that
entrepreneurship is ruled by an atmosphere that promotes change and innovation and provides
appropriate mentors and role models.
2.1.4 Entrepreneurial Framework
National framework conditions are aspects of the national economic and social environment
that directly interact with entrepreneurial activity. The GEM identifies the following factors as
key to the fostering of entrepreneurial activity (Minniti et al., 2005).
• Availability of finance.
• Government policies, regulations and institutions.
• Government support programmes.
• Education, training and technology transfer.
• Availability of business and support services.
• Market openness and presence of opportunities to start a business.
• Quality of physical infrastructure.
• Prevalence of entrepreneurial skills and competencies within the population.
• Protection of intellectual property rights.
• Support for women’s entrepreneurial activity.
Lundström and Stevenson (2002) propose a collective framework of measures for
entrepreneurship policy, derived from an analysis of ten case governments, which fall within
six major categories:

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• The regulatory environment for start-ups.
• Promotion of entrepreneurship.
• Entrepreneurship education.
• Business start-up support.
• Access to financing and seed-capital.
• Target group strategies.
Lundström and Stevenson (2002), also define a transition towards entrepreneurship policy as
having stated objectives to promote entrepreneurship and increase business start-up rates.
Four particular areas of procedures not usually found in SME policy are identified. They are:
• Integration of entrepreneurship education in schools.
• Reduction of business entry and exit barriers.
• Widespread promotion of an entrepreneurial culture.
• Specific strategies to support entrepreneurs in the nascent and start-up stages.
Moreover, the Organisation for Economic Development (OECD) (2004) highlights the
importance of systematic review, assessment and evaluation of these programmes to ensure
that they are effectively directed and cost effective.
2.1.5 Business Incubation
Business incubation is a dynamic process of business enterprise development. Small Business
Incubators (SBI) nurture young firms, helping them to survive and grow during the start-up
period when they are most vulnerable. SBIs provide hands-on management assistance, access
to financing and orchestrated exposure to critical business or technical support services. They
also offer entrepreneurial firms shared office services, access to equipment, flexible leases
and expandable space under one roof (Boyd, 2006).
The ascendance of entrepreneurship in the past decade is reflected in several major policy
initiatives around the world and entrepreneurship is now centre stage in the public policy
arena of most countries (Reynolds, et al., 1999).

16
From a policy standpoint, many developing countries have identified entrepreneurship as a
key driver for the next phase of economic growth.
Countries such as Singapore, Israel, Ireland, Taiwan, India, and China have recreated the
ecological elements and developed a highly educated workforce, that they believe lead to
innovation and risk taking.
The policies and initiatives undertaken by The European Union, Japan, United States of
America, India and South Africa are presented, as the researcher believes that this will
provide an even distribution of developed and developing economies around the world.
2.2 The Approach of the European Union
“Entrepreneurship and innovation are central to the creative process in the European economy
and to promoting growth, increasing productivity and creating jobs” (Internet 4).
Georgiou (2006:6) reports, “in all Western European countries, entrepreneurship reduces
unemployment because it creates enough jobs”
According to Eurostat (2005), SMEs in Europe total approximately 23 million enterprises,
which constitute approximately 99 percent of all European enterprises and provide more than
75 million jobs.
In his foreword to the European Charter for Small Enterprises, Günter Verheugen, vice
president and enterprise and industry commissioner of the European Commission (EC)
describes small and medium sized enterprises as, “the backbone of the European economy
and the best potential source of jobs and growth,” (Internet, 5).
The charter identifies small enterprises as being the most susceptible to variability in the
business environment, first to be hampered by excessive bureaucracy and first to prosper from
initiatives to cut official procedure and reward achievement (Internet, 5).
There is a resounding call for small enterprises to be considered as a primary catalyst for
employment and innovation in Europe (Internet, 5).

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The European Union (EU) has recognised that there is a need for the best possible
environment to be created for small business and entrepreneurship.
In line with this requirement the principles of the charter:
• Acknowledge the dynamic capacities of small enterprises in answering to new market
needs and in providing jobs.
• Stress the importance of small enterprises in fostering social and regional
development, while behaving as examples of initiative and commitment.
• Recognise entrepreneurship as a valuable and productive life skill, at all levels of
responsibility.
• Applaud successful enterprise, which deserves to be fairly rewarded.
• Consider that some failure is concomitant with responsible initiative and risk-taking
and must be mainly envisaged as a learning opportunity.
• Recognise the values of knowledge, commitment and flexibility in the new economy
(European Commission, 2000).
The framework conditions required to foster entrepreneurial activity require the member
states to:
• Strengthen the spirit of entrepreneurship, which enables European business to face
future challenges.
• Develop a regulatory, fiscal and administrative framework conducive to
entrepreneurial activity and advance the status of entrepreneurs.
• Ensure access to markets on the basis of the least taxing requirements that are
consistent with overriding public policy objectives.
• Facilitate access to the best research and technology.
• Improve access to finance throughout the entire life cycle of an enterprise.
• Improve performance continuously, so that the European Community will offer the
best environment for small business in the world.
• Listen to the voice of small business and promote top-class small business support
(European Commission, 2000).

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Given the above charter, the following initiatives have been undertaken by various European
states in the period since its inception in 2000.
2.2.1 Regulatory Framework
The question of the administrative burden on small firms was discussed by Hans-Werner
Müller of the European Association of Craft SMEs. Müller (2006:4) reports “the average
SME has to devote four percent of its turnover to dealing with administration,” furthermore he
adds, “it not only affects profits but has a psychological effect on SMEs’ staff and
management” (European Innovation, 2006).
The EC has adopted a combined EU target of reducing administrative costs by 25 percent in
the medium term. This is part of a determined policy to establish administrative costs and
reduce administrative burdens in the EU (European Commission, 2006).
A guide to government rules and regulations for setting up a business was released in the UK
in 2003 in a booklet format, aimed at aspiring entrepreneurs. The publication provides clarity
on legal and regulatory requirements for starting up a business and explains the regulations
that might affect a growing business (European Charter for Small Enterprises, 2006).
Prior to the launch of the guide, there had not been a single reference point from which new
businesses could identify what government expects of them and how to access government
sources of advice (European Charter for Small Enterprises, 2006).
The objective of this initiative is to provide an easily understood and coherent guide, which
offers time and cost savings. To date in excess of 350,000 copies of the guide have been
distributed since its launch.
Research conducted in France shows that 88 percent of SMEs are unaware of the initiatives
and programmes offered by the European Union SME policy (European Innovation, 2006).
The “Kick-start” project launched in Malta is an initiative, which has a number of components
that include:

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• A virtual SME information centre that allows organisations to register their business
and commercial activities online, whilst simultaneously providing necessary
information.
• A website for SMEs active in industrial zones to assist them in being more organised
and accessible to their customers.
• A tender alert service to inform SMEs about calls for tenders within Malta and the EU
(European Charter for Small Enterprises, 2006).
A programme for drafting a business plan and financial statements for SMEs was launched in
Austria, in 2005. It is designed as an instrument for use in the strategic management,
development of business activities and for examining and clarifying visions and strategies.
This in turn helps transform strategies and plans into economic figures (European Charter for
Small Enterprises, 2006).
In Portugal, a single access point counter with electronic links has made it possible to
establish a company in approximately one hour. This is a joint initiative of the ministries of
Justice, Finance, Labour and Social Security, and Economy and Innovation, which integrates
every necessary procedure to create a company. The initiative results in reduced costs and
makes it easier to fulfil the necessary requirements (European Charter for Small Enterprises,
2006).
2.2.2 Tax Incentives
Many EU states offer tax incentives to SMEs.
The UK government has introduced research and development tax credits, to encourage
investment by business and has phased out payment of the working tax credit via employers.
These reforms have benefited some 1.2 million SMEs. The government has also increased the
first-year capital allowance to 50 percent for SMEs investing in capital equipment and
machinery (UKNP, 2006).
In terms of the Value Added Tax (VAT) annual accounting scheme, the UK government has
increased the turnover threshold up to which businesses can take advantage of the scheme
from 1 April 2006, thereby providing access for an additional 80,000 SMEs (UKNP, 2006).

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Many EU states offer tax relief to investors in small business. The Enterprise Investment
Scheme in the UK for example, allows tax relief on investments in unlisted companies. The
main features of the scheme are:
• Income tax relief of 20 percent, up to £400,000, per investor, per year, on approved
investments.
• Full capital gains tax (worth up to a further 40 percent relief) exemption on disposal of
shares, providing they be held for three years.
• The investor may not own more than 30 percent of the company as a result of making
her/his investment, although they can later acquire more shares which will not carry
the same incentives without losing the original relief (UKNP, 2006).
A new 30 percent rate of income tax relief for investments in venture capital trusts (VCT) was
announced in the 2006 UK budget. This is designed to assist in developing a solid foundation
for raising funds and continued growth in the VCT industry (UKNP, 2006).
2.2.3 Technology
Member states have responded to the specific needs of SMEs by developing numerous
effective policies to promote the use of Information and Communications Technology (ICT)
and electronic commerce by SMEs. Successful policy initiatives have been developed at
national, regional, and local levels.
In Germany for example, the “Prozeus” project creates ICT awareness through the
development of skills and the provision of information. The project provides development and
investment security through the establishment of technical and application-based
recommendations for ICT standards. By providing the SMEs with examples of effective
solutions, it improves their ICT skills and encourages them to implement these applications
themselves (European Charter for Small Enterprises, 2006).
The “eAskel” programme, introduced in Finland, is geared to the long-term, business oriented
development of the use of information technology by SMEs. It aims to make the use of

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information technology and networks part of a firm’s planning and development of its busi-
ness activities (European Charter for Small Enterprises, 2006).
2.2.4 Training Nascent Entrepreneurs
A programme targeted at individuals or businesses that may be interested in taking over an
existing business as an alternative to a nascent enterprise was launched in Sweden. The
initiative includes processes designed to create awareness, educate and train businesses and
business consultants and provide guidance and mechanisms for business transfers.
Furthermore, measures to facilitate the meeting of potential buyers, sellers, and advice on
various vehicles for finance are provided (European Charter for Small Enterprises, 2006).
As of 2005/2006, all students aged 14 to 16 at secondary schools in England are entitled to
five days of enterprise education. It was also planned that the percentage of schools in
Scotland participating in enterprise education will increase from 10 percent to 100 percent
over the period 2003 to 2006 (European Commission, 2005).
In Wales, targets have been set to distribute materials to 180,000 pupils annually and have
150,000 pupils participating in entrepreneurial experiences. Training was to be given to 1,200
teachers, careers advisers and lecturers and 500 entrepreneurs would act as role models for
pupils over the 2003 to 2006 periods (European Commission, 2005).
Young Enterprise Norway is an important partner of the Norwegian government in
implementing many of the initiatives outlined in the government’s strategy for
entrepreneurship education. In the 2003/2004 school year for example, 8,000 upper secondary
school students established and managed 1,280 mini-enterprises as part of the Student
Company Programme of Young Enterprise Norway (European Commission, 2005).
2.2.5 Facilitating Easier Exit
Denmark is preparing a reform of its Bankruptcy Act in order to make it easier for non-
fraudulent entrepreneurs to get a fresh start after bankruptcy. The draft provides for a faster
start for restructuring after an honest bankruptcy and a faster repayment of debt.

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France has presented a proposal for a new bill for rescuing enterprises. It aims at early
detection of financial difficulties and authorises entrepreneurs to negotiate their debts with
their main creditors out of court in a secure legal framework before the suspension of
payment. It includes a simplified liquidation procedure in clear cases where no rescue is
possible and reduces sanctions with a view to promoting a second chance for honest
bankrupts (European Commission, 2005).
2.2.6 Access to Finance
The 2004 Enterprise Policy Scoreboard reports that based on recent surveys approximately 15
to 20 percent of SMEs regard access to finance as a primary constraint to business, with
particular reference to access and cost of small business loans. These vary between the
member states (European Commission, 2004).
Eurobarometer (2005) found that on average, 77 percent of EU SMEs have sufficient
financing to see their projects through. Banks were identified as the most popular choice for
finance at 78 percent, with public institutions making up 11 percent and venture finance
companies 2 percent. Despite the popularity of banks as vehicles for finance, over 70 percent
of respondents felt that banks were reluctant to risk investing in SMEs
Through self funded and developed financial instruments, the EC makes access to loans from
banks more attainable by providing guarantees. It is also facilitating venture capital
investment into SMEs. The European Investment Fund (EIF) on behalf of the EC manages the
financial instruments, and the funds are distributed through financial institutions such as
banks. 510 Million Euros were allocated for 2001 to 2006 and more than 1 billion Euros have
been earmarked for the period 2007 to 2013. The financial instruments cover SME’s varying
needs, from start-ups to established companies (EIF, 2006).
Several member states implemented measurable targets for access to finance. France, for
example aims to achieve risk capital investments totalling one billion Euros per year by 2010.
Slovakia in turn, is aiming at attaining three to four venture capital funds valued at about 120
million Euros by the same time (European Commission, 2005).

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2.2.7 Small Business Incubators
In excess of 100 Small Business Incubators (SBI) provide business development, sales and
marketing development, facilities and office services and financial consultancy in the EU
member states. Many states have business incubators programmes and associations (Internet
6).
2.3 The Japanese Approach
Shoichi Nakagawa, former Japanese minister of economy, trade and industry, describes SMEs
as the backbone of the Japanese economy. He stresses the “importance to economic
revitalization that they escape their present difficulties and are able to demonstrate their
dynamism to the full” (Japan Small Business Research Institute, 2005).
To this end, the Ministry of Economy, Trade and Industry (METI) is committed to taking all
necessary steps to support the development of motivated and capable SMEs based on
measures in the following key fields:
• Diversification and facilitation of SME finance and support for revitalization of SMEs.
• Support for start-ups and SMEs entering the market place.
• Development and utilisation of human resources at SMEs (Japan Small Business
Research Institute, 2005).
Japan’s Small and Medium Enterprises Agency, which was established in 1948, identifies
“difficulty in procuring funds as one of the greatest managerial issues for SMEs” (Internet 6).
To this end the Japan Finance Corporation for Small and Medium Enterprise (JASME),
National Life Finance Corporation (NLFC) and the Shoko Chukin Bank, have been
established to meet these requirements.
In addition to providing finance, the credit guarantee system aims to supplement the lack of
credit and collateral faced by SMEs and facilitate fund supply through the guarantee of loan
credit by means of credit guarantee corporations for SMEs (Internet 7).

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Start-up businesses that have a sound business plan are, irrespective of previous work
experience, able to obtain loans without security or guarantor up to a limit of 5.5 million yen.
JASME also provides loans to SME operators who are expected to show great growth and
loans can be provided without collateral, by making use of corporate bonds and reservation
rights for new shares (Internet 7).
Prefecture governments and JASME moreover provide funds to extend long-term and low-
interest loans for projects to advance modernization and rationalization of SMEs through
promotion of SME structural upgrading, including joint performance of SMEs projects and
collectivization of factories and stores for the purpose of managerial improvement of SMEs
(Internet 7).
2.3.2 Business Support and Development
Business support systems for SMEs are provided via three types of SME support centres.
These three centres, in partnership with current government SME support institutions, act as
comprehensive service outlets to provide information concerning SME support strategies and
direct consultation services providing expert advice (Internet 7).
The SME venture business support centres are established at eight locations around the
country to provide extensive support to those intending to start up a business or SMEs
considering a public offering of stock. They provide financial and technical assistance and a
high-level consulting service on management, finance, and legal matters (Internet 7).
There are 57 prefecture SME support centres where SME support projects are performed.
These projects are presented by prefecture governments under the small and medium
enterprise support law, to facilitate smooth access to business requirements such as human
resources, technology and information in response to the diversified needs of SMEs (Internet
7).
The regional SME support centres are established at 261 locations in each broader municipal
area of the country as common support centres, to easily administer advice for small
enterprises planning a business start up or targeting business innovation (Internet 7).

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Organisations in Japan are encouraged to undertake projects that contribute to structural
upgrading, such as joint SME businesses and collectivization of factories and stores.
JASME and prefecture governments provide long-term, low-interest loans, consultation to
private, public corporations, and commercial/industrial associations that support these
upgrades (Internet 7).
The Organization for Small & Medium Enterprises and Regional Innovation (SMRJ) also
helps the development of new business areas and start-ups in regional areas by means of SBIs.
These regional SBI facilities promote the formation of new businesses and in turn strengthen
regional economic performance and self-reliance (Internet 7).
2.3.3 Regulation, Subsidies and Taxation
Besides financial and business support, SMEs may also under the law relating to the
promotion of creative activities of SMEs, qualify for special depreciation and tax credits
pertaining to investment in capital equipment (Internet 7).
Subsidies of up to two thirds of expenses incurred are available to SMEs that undertake
research and development activities under an approved business plan (Internet 7).
The state provides low-interest loans to SMEs, to encourage ICT investment to meet with
shifting business conditions. Added to financial support, SME support centres send out ICT
experts and SME consultants to SMEs that are considering the introduction of ICT (Internet
7).
Support to create employment of middle and older aged people is facilitated by the granting of
subsidies of wages for all new employees when the SME employs a new worker that is 45
years or older. The subsidy is the extended to all new employees whether they are older than
45 or not.
When the SMEs employ workers who have been obliged to quit their jobs for non-voluntary
reasons, or those who have undergone public vocational training, they are eligible to receive a
special subsidy.

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The state also provides special financial incentives to create employment in nascent and
growth environments (Internet 7).
2.4 The Approach of the United States
According to Reynolds et al., (1999:7), “the conjunction of intense entrepreneurial dynamism
and rapid economic growth in the United States (US), coupled with low unemployment and
low inflation, seemingly points to only one conclusion: entrepreneurship fuels economic
growth, creating employment and prosperity”.
Acs and Armington, (2003) find for the US economy as a whole that, during the five-year
period of the early nineties, employment in 1996 of new businesses that started up after 1991
accounted for 26.3 percent of the mean employment over that period. The growth from
establishments that existed in 1991 was only 17.7 percent. Furthermore, this increase was
offset by the loss of 13.5 percent of employment from shrinking establishments, and another
20.5 percent loss from the demise of some of those 1991 establishments.
2.4.1 Small Business Administration
The US Small Business Administration (SBA) was founded in 1953 and is tasked with aiding,
counselling, assisting and protecting the interests of small businesses.
The approach undertaken by the SBA is highlighted by four key initiatives. These initiatives
relate to technical (framework conditions), financial and contracting assistance and a special
interests category (Internet 8).
Technical assistance relates to the training and counselling function of the SBA.
Entrepreneurial development is undertaken through a nationwide network of Small Business
Development Centres (SBDC) that assist individuals and small businesses. SBDCs differ
slightly from SBIs in that they provide services to established and new businesses where SBIs
focus on start-ups (Internet 8).

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Score is non-profit organization formed in 1964 that offers small business advice and training.
Score is a resource partner of the SBA with a network of volunteers that imparts their insight
and experiences gained in business. Volunteers are working and retired business owners,
executives and corporate leaders. Through Score, small businesses are able to obtain a
personal consultation with a business professional, and Score counsellors are able to provide
specialist assistance in a wide range of business areas.
Score presents more than 6,500 local business workshops each year throughout the country
and have a comprehensive web site where nascent and small businesses are able to obtain on-
line assistance (Internet 9).
The Small Business Training Network (SBTN) provides quality and focussed, on-line training
to meet the needs of nascent and existing small business owners. It is a government-hosted
programme that provides a wide-ranging selection of business courses, aimed at delivering
more options for small businesses, more efficiently (Internet 10).
Financial assistance is offered though numerous loan programmes the SBA offers to assist
small businesses. It is important to note, however, that the SBA is primarily a guarantor of
loans made by private and other institutions and does not offer loans to small businesses
(Internet 11).
‘Loan Guaranty’ is the SBA’s main business loans programme designed to assist competent
small businesses obtain financing when they might not qualify for business loans through
normal funding channels. It is also the most versatile business loan programme as financing
under this programme is guaranteed for different general business purposes (Internet 11).
The SBA’s 504 loan provides long-term, fixed-rate financing to small businesses to acquire
real estate or machinery or equipment for expansion or modernization. Normally a 504 project
includes a loan secured from a private sector lender and a contribution of at least 10 percent
equity from the borrower (Internet 11).

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The SBA offers various special purpose loans that assist SMEs to grow their business to meet
international demand, aid businesses that have been impacted by North American Free Trade
Agreement (NAFTA), assist in implementing employee ownership plans and help institute
pollution control mechanisms (Internet 11).
Small Business Investment Companies (SBIC) are licensed and regulated by the SBA and are
privately owned and managed investment firms that provide venture capital and start-up
financing specifically for small businesses (Internet 12).
2.4.4 Tax Incentives
By reducing the capital gains tax rate and giving small business investors other incentives the
US government encourages economic growth through investment in SMEs. These incentives
include:
• Tax-free rollovers for direct investments by all investors in small business.
• Additional incentives and reducing inhibiting regulations for investments in small
companies by pension funds, institutional and/or corporate investors.
• Tax loss rules for net operating loss carry forwards.
• Research and experimentation tax credits.
• Indexing of the cost basis of assets held more than one year.
• A targeted capital gains exclusion of 50 percent of the indexed gain for an investment
in a qualified small business held more than three years.
• A maximum tax of 10 percent on the sale of a majority interest in a qualified small
business held for more than 15 years.
• A deferral of the gain on the sale of an interest in a qualified small business if the gain
is reinvested in another qualified small business within two years.
• Businesses receive tax incentives for financially supporting entrepreneurship-training
programmes in their area (SBA, 2004).

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2.4.5 Access to government contracts
Government contracting assistance programmes of the SBA have a primary objective of
assisting small businesses in obtaining an equitable share of US federal government contracts,
subcontracts, and property sales. Five main programmes include:
• Prime contracting assistance.
• Sub-contracting assistance.
• Government property sales assistance.
• The Certificate of Competency programme.
• Assistance for small business concerns owned by service-disabled veterans (Internet
13).
2.4.6 Special Programmes
The SBA presents a number of programmes for minority and special groups.
The first is targeted at women to assist them to start and operate successful businesses,
regardless of social or financial position, race, ethnicity, or business background.
The integral components for training and counselling are the Online Women's Business
Centre and the Office of Women's Business Ownership (Internet 14).
Young entrepreneurs are exposed to business knowledge from a young age as an element for
success. Key programmes include the Centre for Entrepreneurial Leadership, aimed at
individuals that display entrepreneurial talent, Teen biz, that encourages the youth to start up
businesses, Teen Business link that connects young entrepreneurs and learning programmes
for the youth (Internet 15).
After two years of decline from 2000 to 2001, entrepreneurial activity in the US increased
from 10.5 percent in 2002 to 11.9 percent in 2003 placing the US as the seventh highest
nation in Total Entrepreneurial Activity (TEA) among the 31 countries surveyed that year.
The US also displayed the greatest TEA rate among the United Nations Group of Seven (G7)
countries (Minniti and Bygrave, 2004).

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In 2005, the US entrepreneurial activity climbed to 12.4 percent, being the second-highest
level since GEM introduced the measurement in 1999 (Bullvaag et al., 2006).
Fairlie (2006) found that in 2005, approximately 464,000 people, or 290 out of 100,000 adults
created a new business each month in the US.
2.5 The Indian Approach
Software Technology Parks of India (STPI), founded in the 1980s, gave export-oriented
software firms tax exemptions for five years, access to High-Speed Data Communication
(HSDC) services, and reliable electricity, removing some of the obstacles that start up
ventures faced in globalisation. The STPI Scheme, which is a 100 percent export oriented
scheme, has attracted many entrepreneurs in the area of software and services.
More than 3,500 units registered under STPI umbrella are exporting and exported software in
excess of 51 billion rupees during the 2003 to 2004 financial year, representing in excess of
85 percent of the national software exports. Today more than 80 percent of STPI member
units in India are SMEs (STPI, 2005).
The Indian ministry of small-scale industries (SSI), in collaboration with various
organisations and stakeholders, develops policies and initiatives to support the promotion and
growth of SMEs. The ministry advocates policy on behalf of the SME sector with other
ministries and departments of the central government and the state and union territories
(Internet 16).
The implementation of the policies and initiatives to provide infrastructure and support
services to SMEs is performed through the Small Industry Development Organisation and the
National Small Industries Corporation Ltd, which is a public sector undertaking under the
direction of the ministry (Internet 16).
The Small Industry Development Organization (SIDO) provides a broad range of business
services, technology support services, marketing assistance and training through a widespread
network of offices. These include:

31
• Thirty Small Industries Service Institutes (SISI).
• Twenty-eight branch SISIs.
• Seven field testing stations.
• Four regional testing centres.
• Two small entrepreneur promotion and training institutes.
• One hand tool design development and training centre (Internet 16).
The National Small Industries Corporation Ltd (NSIC) was created to focus on the national
framework aspects of developing SMEs in India. The NSIC provides assistance through the
following programmes and initiatives:
• Affordable purchase terms for local and imported machinery and equipment.
• Composite term loan schemes.
• Procurement, supply and distribution of local and imported raw materials.
• Marketing of SME products.
• Export of SME products and developing export skills and merits of SMEs.
• Enlisting and facilitating access of SMEs to the Government Stores Purchase
Programme.
• Training in numerous technical trades.
• Developing ICT skills and usage through STPI and Technology Transfer Centres.
• Advisory and mentoring services.
• Technology business incubators (Internet 16).
Indian State Financial Corporation (SFC) and twin-function State Industrial Development
Corporation (SIDC) at state level are the main sources of long-term finance for the SME
sector (SSI, 2006).
As a result, the SSI with the Reserve Bank of India (RBI) formulated a scheme in 2005 for a
strategic partnership between branches of commercial banks and the Scheme of Small
Enterprises Financial Centre (SEFC). This proposal is important in the context of intensifying
the outreach of banks and improving credit flow to the SME sector (SSI, 2006).

32
The Credit Guarantee Fund provides cover of up to 75 percent of the credit extended by
eligible lending institutions to new and existing SMEs subject to maximum guarantee limits
(SSI, 2005).
2.5.2 Regulation, Subsidies and Taxation
Under the General SSI Exemption Scheme, SMEs receive numerous incentives by means of
the reduction of excise and import duties and service taxes.
A programme for Credit Linked Capital Subsidies (CLCSS) was launched in 2000. The
principle of the initiative is to encourage SMEs in specified products and sub-sectors to adopt
and upgrade technology by providing a twelve percent capital subsidy for the implementation
of proven technologies approved under the scheme (SSI, 2005).
Incentives are created to develop market sectors and industries, for example, to promote the
food processing industry, SMEs are entitled to a 100 percent deduction of profits for 5 years
and 25 percent of profits for the next 5 years when new enterprises are established to process,
preserve and package fruits and vegetables (SSI, 2005).
Income tax holidays of up to 10 years are afforded to SMEs in certain regions and industries
and to enterprises that are investing in substantial expansion of plant and machinery (SSI,
2004).
The scheme for ISO 9000 reimbursement, in operation since March 1994, was enlarged to
include reimbursement of expenses for acquiring ISO 14001 certification with effect from
October 2002 (SSI, 2005).
Regulation has been instituted to identify and assist ailing SMEs. A combination of three
measures is used to identify faltering SMEs namely, delays in repayment of loans over one
year, a decline in net worth of 50 percent, and a decline in output over the previous three
years (SSI, 2005). Debt restructuring, concessionary loans and one time write offs are used to
assist the recovery of ailing SMEs (SSI, 2006).

33
The SSI has implemented a financial assistance programme to enable registered SMEs to
register patents in India and internationally (SSI, 2005).
To provide assistance to SMEs for technological enhancement, export opportunities and
economies of scale, certain items are reserved for exclusive manufacture by SMEs. In the
2004 to 2005 fiscal year, there were 506 items reserved for this purpose (SSI, 2006).
The advertising and publications division of SIDO disseminates information about
government policies, programmes, incentives, facilities and institutional support services that
are available to the SMEs. “Laghu Udyog Samachar” is a quarterly journal published in
English and Hindi for both prospective and existing SMEs.
The publication represents a vital print delivery mechanism that provides current facts on a
range of topics. It creates awareness and disseminates information on policies and
programmes of the central and the state governments, government of India orders, circulars,
gazette notifications, field activities, statistical and economic information as well as articles
on various issues pertaining to SMEs (SSI, 2006).
The Information and Facilitation Counter (IFC) provides updated information for the benefit
of the prospective and existing SMEs. The IFC provides immediate and simple access to
information regarding the services and activities of SIDO and related institutions. Utilising
computerised (touch screen kiosks) supplemented by brochures, pamphlets, books and other
hard copy media, SMEs are provided with information relating to:
• Counselling and supervision on how to set up an SME.
• Documentation relating to technical schemes, project reports and details of various
programmes implemented by the SIDO.
• Policies concerning SSI and schemes of various state governments for promotion of
SMEs.
• Method of enterprise registration and registration forms.
• Government credit policies.

34
• SME statistics.
• Technical and marketing information.
• Items reserved for exclusive manufacture by SMEs (SSI, 2006).
Process and product development centres, have been created to cater for the technical and
human resource needs of SMEs. The centres are tasked with improvement in existing
technology, quality control, and internal research and development activities and provide
workshop and testing facilities. The human resources objective provides training on industry
specific and related subjects (SSI, 2006).
Four week long, entrepreneurship development programmes are routinely organized to instil
in the youth the requisite skills for starting up a SME. The training includes preparing
business plans and their assessment and adaptation. The Small Entrepreneur Promotion and
Training Institute, provides managerial and technical training to the youth to prepare them for
setting up micro enterprises in the rural and urban areas (SSI, 2004).
Management training courses covering various aspects of management are presented for
owners, managers and supervisors of SMEs. Course content is constantly updated in keeping
with area demands and local industry requirements (SSI, 2005).
2.5.4 Promotion of SMEs
The NSIC acts as a catalyst to promote SME products and has implemented a variety of
programmes to assist SMEs in their marketing efforts, both within India and abroad. These
include:
• Tender and consortia marketing.
• Single point registration for government procurement.
• Participation in national and international trade and technology fairs.
• Facilitation of exports to other countries (SSI, 2006).
India has shown annual year on year growth in excess of four percent in SME employment,
SME creation and fixed investment in SMEs from 2001 to 2005. Exports by SMEs have
nearly doubled since 2000 (SSI, 2006).

35
2.6 The Approach of the DTI in South Africa
GEM (2004) distinguishes between entrepreneurs based on their motivation. The primary
distinction is between opportunity entrepreneurs and necessity entrepreneurs. Opportunity
entrepreneurs are people who are taking advantage of a business opportunity while necessity
entrepreneurs are people who have no better options for work. In 2004, SA necessity entrepre-
neurial activity accounted for about 45 percent of total entrepreneurial activity, which is
relatively high when compared to other countries in the GEM at 21 percent.
In keeping with the vision of the DTI of developing SMEs and fostering growth and
development in South Africa, the Small and Medium Enterprise Development Programme
(SMEDP) was founded, to create and manage a number of initiatives. Support for SMEs is
provided by the DTI by means of three primary units, namely development finance,
regulatory and specialist services (Internet 17).
In addition to these public sector initiatives, the DTI has collaborated with private sector
organisations such as Business Partners to further their objectives. Business Partners reported
that during the 2005/2006 financial year 633 investments to the value of R740 million were
approved, representing an improvement of 12 percent on the previous year, (2005: 538
investments to the value of R660.5 million). More than 7,250 (2005: 7,550) employment
opportunities were facilitated through Business Partners’ investment activities (Business
Partners, 2006).
The Export Credit Insurance Corporation of South Africa (Pty) Ltd (ECIC) is tasked to
develop the South African export trade by underwriting bank loans and investments outside
the country in order to enable foreign buyers to purchase capital goods and services from the
Republic (Internet, 18).
The Industrial Development Corporation (IDC) is a self-funded public development finance
institution designed to promote economic development in Southern Africa and economic
empowerment of the population. SMEs are largely supported by the IDC’s services sector
division (Internet 19).

36
The IDC’s pro SME jobs scheme was created to promote SME development and employment
creation by encouraging businesses to embark on labour intensive start-ups or expansions.
Financing is available at competitive interest rates for businesses that will employ more than
ten employees, display acceptable profitability prospects and comply with the IDC’s standard
funding criteria (Internet 20).
Khula Enterprise Finance Ltd (Khula) is a limited liability company of which the DTI is a
major shareholder that provides loans and credit guarantees to SMEs. Business, capitalisation
and seed loans in addition to institutional capacity building and mentorship services are
provided by Khula Loans to Retail Financial Intermediaries (RFI) that meet the qualifying
criteria (Internet 21).
Khula Credit Guarantee provides a range of guarantee products to registered commercial
banks and other private sector financial institutions that offer financial services to the SME
sector. The guarantee scheme is based on a risk-sharing arrangement with Khula assuming a
portion of the risk associated with lending in the SME sector (Internet 21).
The National Empowerment Fund (NEF) was established to redress the economic inequalities
of the previous government and is tasked to support and apply innovative investment and
transformation initiatives to advance sustainable black economic participation (Internet 22).
The Business Partners-Khula Start-Up Fund is aimed at new entrepreneurs and new
enterprises. As part of its new strategic approach, Khula conceptualized the establishment of a
start-up fund that would offer economic citizens not already in business an opportunity to
enter the business arena. The fund is structured as a VCF capitalised at R150 million that will
primarily provide equity and part-equity risk capital for start-up and early stage businesses.
Additional investors are being sought to raise the capitalization to at least R300 million
(Internet 23).
Target SMEs are exclusively black owned, managed and empowered and particular focus is
given to female entrepreneurs and the minimum target is to realize a portfolio mix in which at
least 33 percent of the SMEs funded are owned by women (Internet 23).

37
In addition to the Khula start-up fund, Business Partners provides equity capital for SMEs
who have an established, profitable venture and requires capital for expansion and risk capital
to SMEs that have limited capital to contribute to the venture and limited security for either a
start-up or expansion phase (Internet 23).
Business Partners also offers contract financing assistance for SMEs to assist them to
complete state tenders or contracts and property financing options to assist SMEs in
purchasing their own premises (Internet 23).
2.6.2 Regulatory Environment
The Companies and Intellectual Property Registration Office (CIPRO) provides consolidated
products, information and services from a central point for the registration of companies and
maintenance of intellectual property rights and business entities through a legal framework
that provides protection and the flow of information (Internet 24).
The CIPRO website is an access portal allowing customers and stakeholders to retrieve
information on-line at all times. New or existing Close Corporations (CC) are able to reserve
company names and download forms to register businesses or amend business details.
Presently all forms are required to be sent to the CIPRO offices for approval. Processing time
for CC’s is currently six to ten working days, excluding postage time. Other company
registrations require the services of professional agents, for example attorneys (Internet 25).
In addition to the registration of the company as above, Patricio [s.a.] identifies the following
requirements the new company will be required to meet:
• Patents and, or trademarks must be registered with the CIPRO offices to be valid.
• The company owners/directors will be required to register the company as a taxpayer,
for Valued Added Tax (VAT) if his turnover will exceed the threshold, for employee’s
tax if the SME will be employing staff and the skills development levy. These
registrations are performed at the South African Revenue Service (SARS) offices.

38
• The SME must register with the Department of Labour’s Unemployment Insurance
Fund (UIF) to contribute to and deduct unemployment insurance contributions, from
employee’s wages.
• Furthermore some businesses may fall under one of the 59 bargaining councils
registered in SA and must abide by the regulations of the council. SMEs will be
required to determine this from the Department of Labour.
• The SME is also required to obtain a copy of the Basic Conditions of Employment Act
from the Department of Labour to display on the premises.
• All SMEs that employ one or more employees are required to register according to the
Compensation for Occupational Injuries and Disease Act and pay annual assessments
to the compensation fund.
• The SME will need to enquire at the local town or city council to ascertain if they
require special permission to operate the business in the area. Businesses that are
operated from the owner’s home require authorisation from the local city or town
council as well the neighbours.
• If the SME is going to be a food business or “nursery school”, the owners will be
required to consult the health department at the local town or city council and obtain
clearance.
• Any signage for the business will require authorisation from the local town or city
council before it may be erected.
• The SME will be required to register for annual levies with the South African Music
Rights Organisation (SAMRO) if the business will be playing music for the enjoyment
of their staff or customers.
• If the SME requires a liquor license, he will need to approach either the provincial or
national liquor board, although it is recommended to enlist the services of a qualified
attorney for this.
• The SME must register with the SA Numbering Association, if barcodes will be
required for products.
• The Wage Determination Act sets out the minimum wage the SME is required to pay
the employees. This would be obtained from the Chamber of Commerce or the
government printer.

39
Unfortunately, the list is not exhaustive, there are a myriad of other state organs and
legislation that the SME may need to register with or comply with, that go beyond the realms
of this study.
Strategic Business Partnerships for growth in Africa (SBP) reports in a survey conducted in
2005 that, South African firms spent about R79 billion on recurring regulatory compliance in
2004. Mean recurring costs for a company within a band of 10 to 50 employees amounted to
almost R 104,000 per year (SBP, 2005).
The DTI’s support services are primarily delivered to SMEs by the Small Enterprise
Development Agency and Technology for Women in Business (Internet 26).
The core function of the Small Enterprise Development Agency (SEDA) is the dissemination
of information to SMEs and would be entrepreneurs to assist them to develop viable
enterprises. Information is distributed primarily via a national information centre,
comprehensive website, monthly newsletter and other on-line publications and brochures
(Internet 27).
SEDA has numerous branches in all the provinces and in excess of 20 Enterprise Information
Centres (EIC). There are also more than 250 SEDA registered affiliates that provide business
support and training. Services in the SEDA branch offices and EIC are provided at no cost but
affiliates charge for their various services such as consultations, training, preparation of
business plans and managing applications (Internet 28).
Technology for Women in Business (TWIB) is an initiative aimed at enhancing the
accessibility of science and technology to women in business and in particular in SMEs
(Internet 29).
The SEDA Technology Programme (STP) is a special initiative of the national DTI and is
responsible for technology transfer and business incubation. The STP has established ten
technology business centres for technology transfer and is currently in the process of

40
establishing another five. Three SBIs have are currently operating directly under the STP
(Internet 30).
2.6.4 Taxation and Subsidies
SMEs in South Africa are not subject to the normal company taxation rate of 29 percent of
profit given that the profit does not exceed R 300,000 per annum. No tax is payable should the
profit be less than R 40,000 per annum and tax is payable at 10 percent of profit between R
40,001 and R 300,000. Thereafter normal rates of tax apply (Internet 31).
All companies in SA are required to register and charge VAT at the standard rate if their
income exceeds R300,000 per annum (Internet 32).
There are currently no tax incentives in place for SMEs to expand their businesses and invest
in technology, capital equipment or human capital as were identified in a number of the
countries discussed earlier. Private or institutional investors also have no tax or other
incentives to invest in SMEs in SA as have been implemented in other countries that were
highlighted earlier in this chapter.
Finmark (2006) found that there was a broad agreement among the private-equity fund
managers they interviewed in their survey to conclude that a large pool of ‘relatively cheap’
funds exists for investing in SMEs. With the appropriate tax incentives there would be
significant interest among existing firms as well as new firms to manage such investments
The funds are referred to as ‘relatively cheap’ because the tax incentive provided to the
investor reduces the required pre-tax return on the investment to a level that would allow fund
managers to invest in SMEs.
2.6.5 Small Business Incubators
The South African Business and Technology Incubation Association (SABTIA) are tasked
with creating awareness of SBIs and advancing business incubation and entrepreneurship.
SABTIA is a Non-Profit Organization (NPO) based in Johannesburg and currently has 13
SBIs registered with them in major centres throughout the country (Internet 33).

41
2.7 Concluding Remarks
This chapter covers the core aspects of literature pertaining to the importance of the
involvement of government structures to the development of SMEs. What is evident is that
irrespective of country, nation, or continent, a core focus is required for the growth of SMEs.
Albeit in access to finance, tax incentives, skills development, access to markets, business
incubators, a firm national plan for developing SMEs is required.
Pertinent to the results of this study are the following key measures for success, which have
been identified in the countries surveyed and are relevant for the development of
entrepreneurs and SMEs in SA:
• Streamlined registration processes
• Comprehensive communication of information
• Reduction of regulations and compliance costs
• Tax incentives for SMEs
• Tax incentives for capital and technology expansion
• Tax incentives for private investors in SMEs
• State sponsored venture capital funds
• Programmes for rehabilitating non-fraudulent bankruptcy’s
• Developing young entrepreneurs
• State support at regional level
• State sponsored business opportunities
• Widespread use of business incubators
The following chapter focuses on research methodology and how the research was conducted.

42
3 CHAPTER 3: Research Methodology
3.1 Introduction
With exploratory research, the problem being considered is only partly understood and the
research is conducted to obtain a better understanding (Stebbins, 2001). In this quantitative
study, the researcher has chosen to use structured telephone interviews with interviewer-
administered questionnaires in order to obtain primary data.
Secondary data was obtained through a review of literature published by GEM and Business
Partners on performance of entrepreneurs and SMEs over the last three years. In addition to
this, initiatives undertaken by other countries were studied to compare differences with local
undertakings and the efficacy thereof.
3.2 Research Methodology
For the purposes of this quantitative study the researcher employs a philosophy of
interpretivism to better discover what Remenyi et al., (1998) describe as the “details of the
situation to better understand the reality or perhaps a reality working behind them”.
Weber (1949) insists that sociology as a science attempts to understand social practices in the
pursuit of a causal explanation. Researchers combine individual purpose of conduct and the
pursuit of objectivity in terms of cause and effect. Ideal types are concepts that researchers
construct purely for research purposes that are rational constructs, for example a rational
concept of bureaucracy.
The research follows an inductive approach to better understand the nature of the problem,
analyse the data and formulate a theory based on the findings. Inductive reasoning works by
moving from specific observations to broader generalisations and theories (Trochim, 2006).
Grounded theory in turn, attempts to reach a theory or conceptual understanding through an
inductive process (Rice-Lively, 2005).

43
Strauss and Corbin (1990) advocate that grounded theory is inductively derived from the
study of the phenomenon it represents. It is discovered, developed, and provisionally verified
through systematic data collection and analysis of data pertaining to that phenomenon. The
researcher does not begin with a theory, and then prove it, he begins with an area of study and
that which is relevant to the area of study is allowed to emerge.
They describe grounded theory as a "qualitative research method that uses a systematic set of
procedures to develop an inductively derived grounded theory about a phenomenon" (Strauss
and Corbin, 1990).
Data collected via structured telephone interviews will be tabulated and analysed and whilst
being from a relatively small sample can, by inference, yield representative and broadly
generalisable information about all SMEs in the country and this is the approach used in this
study.
Cross-tabulation or a contingency table is a combination of two (or more) frequency tables
arranged such that each cell in the resulting table represents a unique combination of specific
values of cross-tabulated variables. Thus, cross-tabulation allows the researcher to examine
frequencies of observations that belong to specific categories on more than one variable. Chi
square tests can also be performed at the same time (Saunders, Lewis & Thornhill, 2003).
In the stage of inductive theory building, researchers recognize and make explicit what
differences in attributes and differences in the magnitude of those attributes, correlate most
strongly with the patterns in the outcomes of interest. Techniques such as regression analysis
typically are useful in defining these correlations (Trochim, 2006).
Logistic regression, according to Garson, (2002) can be used to predict a dependent variable
based on continuous and/or categorical independents and to determine the percent of variance
in the dependent variable explained by the independents to:
• Rank the relative importance of independents.
• Assess interaction effects.
• Understand the impact of covariate control variables.

44
Logistic regression allows one to predict a discrete outcome, such as group membership, from
a set of variables that may be continuous, discrete, dichotomous, or a mix of any of these.
Generally, the dependent or response variable is dichotomous, such as presence/absence or
success/failure. Discriminant analysis is also used to predict group membership with only two
groups.
However, discriminant analysis can only be used with continuous independent variables. Thus
in instances where the independent variables are categorical a mix of continuous and
categorical logistic regression is preferred.
As mentioned previously, the independent or predictor variables in logistic regression can
take any form. In other words, logistic regression makes no assumption about the distribution
of the independent variables. They do not have to be normally distributed, linearly related or
of equal variance within each group. The relationship between the predictor and response
variables is not a linear function in logistic regression; instead, the logistic regression function
is used.
The goal of logistic regression is to correctly predict the category of outcome for individual
cases using the most economical model. To accomplish this goal, a model is created that
includes all predictor variables that are useful in predicting the response variable. Several
different options are available during model creation. Variables can be entered into the model
in the order specified by the researcher or logistic regression can test the fit of the model after
each coefficient is added or deleted, called stepwise regression.
Stepwise regression is used in the exploratory phase of research but it is not recommended for
theory testing (Menard 1995). Theory testing is the testing of a-priori theories or hypotheses
of the relationships between variables. Exploratory testing makes no a-priori assumptions
regarding the relationships between the variables, thus the goal is to discover relationships.
Backward stepwise regression appears to be the preferred method of exploratory analyses,
where the analysis begins with a full or saturated model and variables are eliminated from the
model in an iterative process. The fit of the model is tested after the elimination of each
variable to ensure that the model still adequately fits the data. When no more variables can be
eliminated from the model, the analysis has been completed.

45
There are two main uses of logistic regression. The first is the prediction of group
membership. Since logistic regression calculates the probability or success over the
probability of failure, the results of the analysis are in the form of an odds ratio. Logistic
regression also provides knowledge of the relationships and strengths among the variables
(Menard 1995).
The process by which coefficients are tested for significance for inclusion or elimination from
the model involves several different techniques. The chosen technique is discussed below.
Hosmer-Lemeshow Goodness of Fit Test
The Hosmer-Lemeshow statistic evaluates the goodness-of-fit by creating 10 ordered groups
of subjects and then compares the actual number in each observed group to the number
predicted by the logistic regression model. Consequently, the test statistic is a chi-square
statistic with a desirable outcome of non-significance, indicating that the model prediction
does not significantly differ from the observed.
The ten ordered groups are created based on their estimated probability; those with estimated
probability below 0.1 form one group, and so on, up to those with probability 0.9 to 1.0. Each
of these categories is further divided into two groups based on the actual observed outcome
variable (success, failure). The expected frequencies for each of the cells are obtained from
the model. If the model is good, then most of the subjects with success are classified in the
higher deciles of risk and those with failure in the lower deciles of risk.
Welman and Kruger (2001) suggest an approach for data analysis of recurrent themes in
qualitative research via systematic coding through content analysis. Content analysis looks for
common themes and records their frequency in a quantitative way, thus allowing for a
quantitative analysis. Frequencies of common themes could be listed for the secondary data
and differences could be identified using t-tests or chi-square analysis.
3.3 Sample
The research makes use of probability sampling. The sample frame will be a stratified random
sample of 180 companies within South Africa registered after January 2004. This will be

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