On the African continent, South Africa has among the most competitive business environments with multinationals, formal small to medium enterprises (SMEs), informal township businesses, and growing foreign businesses. Recently, in some communities, a perception has developed that foreign businesses survive or perform better than South African businesses.

Typically, this perception is based on businesses operating in retail, spaza, informal import and small trading businesses operated by African and Asian immigrant entrepreneurs. The truth, however, is that business success and failure is complex and influenced by many factors such as access to markets and capital, business discipline and strategy, and competition, as well as the legal and regulatory environment and the conditions in which the businesses operate, among many others.

This paper attempts to explain the factors that seem to make some foreign businesses more resilient, the structural and behavioral factors that make businesses survive, and the lessons that can be drawn for local businesses.

The South African Business Environment

South Africa has a dual economy with a developed formal sector and a large informal sector. The large businesses have highly developed systems, while many small businesses operate under the pressures of a large informal sector, high unemployment, high crime, and limited access to business finance.

Key challenges for small businesses include:

– High operating costs
– Limited access to startup capital
– High competition
– Crime and insecurity
– Cost of compliance
– Lack of business training or mentorship

These challenges mean that many small businesses around the world struggle to survive beyond the first few years.

Based on trends, a great many small businesses fail due to poor planning and cash flow, especially in the crucial early years, regardless of ownership.

Why are foreign- owned businesses perceived as more stable, especially in small retail, spaza, and informal businesses?

Although they might not be successful in every case, there are a lot of successful South African owned businesses and a lot of successful foreign owned businesses. However, perceived stability in informal businesses such as spaza shops, foreign owned retail businesses, and some informal trade, can be attributed to a few practical differences.

Strong motivation to survive and more risk.

In many cases, foreign business owners are in South Africa due to tough or unstable economics in the country of origin. This means they have:

– Less options
– Higher pressure to succeed
– A willingness to accept lower profit margins
– A focus on survival and reinvesting rather than lifestyle spending

Survival of the business often means more disciplined spending.

Collective business models/ family and community networks.

Foreign business owners operate with the support of family or community businesses.

Family members work without formal salaries.

Labour is shared between family members or workers within extended networks.

Savings are pooled to support small businesses.

Budgeting and Expense Control

Many small, international business owners maintain strict expense controls and run their businesses on par with other small businesses by;

Minimising expenses

Establishing same styles (less brand logos)

Buying in volume from wholesalers

Maximising sales through extended hours of operation

Achieving these efficiencies helps business compete through low profit periods.

Competitiveness in Informal Markets

Many international entrepreneurs have been involved in competition in informal markets for an extended period; the high levels of competition and the unstable environments provide entrepreneurs with specific skills such as:

Strong negotiation skills

Ability to adjust quickly to changing market conditions

Ability to function in cash economies

Ability to operate in a high degree of uncertainty

These competencies translate into successful business operations in the township or informal market.

Finding Opportunities and Market Gaps

Many international entrepreneurs find market opportunities by identifying gaps in the marketplace, i.e. areas of demand with little or no supply. Examples include;

Convenience stores in high-density population areas

Affordable household goods

Imported products not easily accessible in South Africa

By focusing on niche markets, these businesses are less affected by competition from large retailers.

South African Businesses’ Inabilities Compared to International Retailers

It is important to note that many South African businesses are innovative and successful; however, there are several reasons why their businesses are not successful;

Shortage of Seed Capital

Many South African entrepreneurs start their businesses either through use of savings or obtaining an informal loan, which leads to limited capital for:

• Inventory size
• Business location quality
• Ability to survive early losses

Without capital buffer, small shocks can cause business closure.

Expectations of Operating Costs are Higher

Some locally owned businesses have relatively high fixed operating costs because they:

– Start with much higher minimum hourly wages than the market;
– Rent commercial space from landlords rather than use their own property;
– Invest heavily in their appearance and/or in brand building.

These factors, while not necessarily negative, limit the business’s operational flexibility in low-margin, competitive industries.

Skills and Business Development Gaps

Many entrepreneurs do not have access to the following training or systems:

– Financial management;
– Inventory control systems;
– Knowledge of pricing strategies;
– Long-term business planning;

This can lead to cash flow problems even when the company is profitable.

External Pressures and Security Issues

Small businesses (in some areas) are subject to the following external pressures:

– Risk of theft or burglary;
– Unregulated and unlicensed market competition;
– Lack of clarity with regulatory authorities;

Therefore, these factors contribute to increased operational stress and increased operating costs.

Clarification; Success Is Not A Function Of Nationality

There seems to be a misconception that the nationality of the business owner determines their level of success. In fact:

– Many South African-owned businesses are well-managed and operate successfully;
– Many foreign-owned businesses fail within a short period of time;
– Factors determining the success of a business include: structure, discipline, market strategy and resource availability.

The majority of the belief that foreign companies are dominant may stem from their visible presence in segments of the economy rather than the economic performance as a whole.

Lessons for South African Entrepreneurs

While there are clear distinctions between many of the groups discussed thus far, it would be better to think of the similarities as being transferable business lessons rather than simply as opposing groups of businesses.

Strong Expense Management

A firm can be successful through disciplined management of its expenses. For example,

Avoid excessive overhead at the beginning of a business’s expansion
Reinvest profits and not spend large amounts on unnecessary items.
Concentrate on buying inventory and services required for the initial start-up of your business.

Business Models Need Flexibility

The businesses that have the greatest chance of succeeding in today’s economy can do so because they can change their business model/s, they can do so by:

Changing pricing based on market conditions,
Changing the mix of products marketed based on the demand, and
Extending open hours as circumstances warrant.
Flexibility makes a business much more successful in volatile and unstable markets than one that is not flexible.

Collective or Shared Business Thinking

The idea of collective responsibility is a way to strengthen the business community as well as the individual firm.

Family members becoming involved in the business (as a partner).
Trusted partners pooling their resources to lower the risk.
Combining their skill and labour together.

This reduces the burden of single ownership.

Serving Customers Under Market

Small businesses can grow and thrive in their respective markets by:

Utilizing the customer niche, in order to meet their demands.
Establishing a presence in areas of limited customer service opportunities.
Providing products and/or services to customers for their convenience.

Financial Discipline & Reinvestment

The key to success for a business over time is:

Maintaining a positive cash flow.
Reinvesting profits back into the business.
Not having an early stage of business expansion and/or taking personal withdrawals.

The Lesson of the Economy in Motion: Surviving vs. Thriving

Many small businesses exist in a “survival” mode; the primary goal is to keep the doors open rather than grow the business. Foreign-owned firms have historically been viewed as having strong survival strategies while many local/shop owners have sought to expand or “legalize” their businesses more quickly.

Both types of firms can succeed, but the timing is critical. An established company has a greater likelihood of being able to invest in growth than a brand-new company.

The Implications of Policy and Support

Should South Africa want to see stronger local business survival rates, some of the away to improve the rate of success would be:

Accessing more details about micro-loans for start businesses
Providing more entrepreneurship training opportunities
Reducing the number of bureaucratic hurdles for small business owners
Increased safety and police activity within commerce zones
Assistance in transitioning from an informal company to a formal company

By creating a better ecosystem within the community, all entrepreneurs (no matter where they were born) will benefit from the support system.

The Effects of Foreign Owned Businesses on South African Economies and Entrepreneurs

The presence of foreign owned businesses in South Africa (particularly through townships, informal settlements and retail areas) is often visible and sometimes critiqued from an economic perspective. The diversity of foreign ownership across all sectors of the market provides a wide range of goods and services, through spaza shops, retail, wholesale exports and imports, construction and services. The presence of these businesses has been been the source of controversy through discussions regarding competition, employment, pricing and opportunity of local entrepreneurs.

The effects of foreign owned businesses on the South African economy are both a positive benefit and a challenge to the economy. Therefore, the impact of foreign owned businesses on the South African economy is a complex combination of both benefits and challenges that must be analysed in an unbiased fashion and not generalised or assumed.

1. Positive Economic Contribution: Increased Access to Goods and Services

One of the more obvious benefits of foreign owned small businesses (particularly when located within the confines of disadvantaged communities) is increased access to essential goods within the community.

In most areas of township and informal economy:

Small shops are usually open longer than large formal retail stores.
Access to essential goods is generally closer to individual homes.
Prices are often lower through bulk purchasing and reduced business operating costs.

In essence, these benefits provide greater accessibility to the economy for residents of the communities as they would otherwise have to travel to a formal retail store (such as a supermarket or wholesale) in order to access basic essential goods.

2. Informal Jobs and Creation of Jobs

Foreign businesses usually offer jobs that may not be legal or are low paying. Examples of these include:

Store assistants
Guarding helpers
Helpers delivering or loading
Working for family

Even though these jobs may not include formal contracts, they provide income to local people (especially young people) who have difficulty finding formal jobs.

This indicates that rather than eliminating jobs, many of these businesses funnel labour into the informal economy which is quite prevalent in South Africa, where the unemployment rate is currently very high.

3. Consumer Benefit and Price Competition

An important effect of foreign owned retail businesses is the increased competition in township markets, for instance.

The majority of these companies have:

Lower overheads
Have shared family workers
Bulk purchase plan

Therefore they can afford to sell many of their items for less than some of the local retailers.

In return, consumers are able to enjoy:

Affordable consumer household items
Price pressure on local pricing based on inflation
Increased efficiency in the market

Although, the same pressure can hurt local small businesses that do not have the same cost structure.

4. Pressures facing Local Small Business

The effects of foreign competition on individual local entrepreneurs have sparked a Great Deal of controversy about how small businesses overall compete in South Africa.

Many small businesses owned by South Africans have difficulty competing against foreign owned small businesses for a few reasons, including:

– Increased operating costs, such as rent and electricity, and units with many workers will have higher wages than those of foreign businesses.
– More rigid structures for employing workers in South Africa than in most countries where foreign businesses are located.
– Limited access to bulk buying wholesale pricing.
– Lower ability to reinvest profits back into businesses (South African businesses can only access a small portion of what foreign businesses can reinvest).

Foreign businesses, because they operate on such low profit margins, will frequently fill all small business retail spaces quickly.

As a result of this, many people may believe that:

– Weaker local businesses will close.
– Local spaza shops will lose market share.
– Local entrepreneurs will become increasingly unhappy.

While this is true, it must be remembered that many other factors contribute to businesses failing, rather than only foreign-owned competitors.

5. Expansion of the Informal Economy

Foreign-owned companies significantly contribute to the expansion of South Africa’s informal economy.

Examples of how this expansion occurs include:

– Cash-based trading systems.
– Informal supply networks.
– Import and export networks across borders.
– Micro distribution networks in township areas.

This expansion has the effect of increasing the amount of economic activity that occurs in areas of South Africa that would not have the number of formal businesses if there had been no informal businesses.

The expansion of South Africa’s informal economy will also create several difficulties, such as:

– Difficulties in obtaining taxes and regulations on enterprises.
– Little or no protection to consumers.
– Different laws affecting different businesses.

These two realities present challenges as well as opportunities for the communities where informal businesses will exist.

6. Innovation in Cost Efficiency and Business Models

The introduction of high-efficiency business models by foreign-owned companies includes the following:

Minimalistic shop designs
Family labour-sharing systems
Rigorous inventory tracking
Rapid turnover of stock
Development of a solid supplier network across borders

These types of models often enhance a company’s chances of succeeding in low-income, highly competitive environments where business growth is dependent on maintaining high-expense ratios or minimizing your cost of goods sold.

In addition, local entrepreneurs can adopt:

Improved stock control systems
Cost management metrics
Purchase-sharing capabilities (group buying) through cooperative examples
Longer trading hours if possible

7. Social Tension and the Perception of Challenges

While foreign-owned businesses contribute to the economy, social tension is sometimes the result of their presence.

There are common concerns about foreign-owned businesses’ entry into established markets:

Unfair competition
Undocumented trade activity
Doubts around relative pricing
Job loss due to automation and/or offshoring

These types of perceptions may establish divisions between communities, especially in high unemployment areas with limited resources.
It is important to recognize differences between economic and social competition because mixing the two will amplify existing social problems without addressing any underlying economic matter.

8. Contribution to a Supplier Data Network and the Importation of Goods

Many foreign-owned businesses have established good-import networks from around the globe (such as China, Pakistan, Somalia, Ethiopia and Bangladesh).

These established networks allow for:

An increase in the availability of privately-priced, imported goods in local or township markets.
A more rapid introduction of product or service variety into local or township markets.
The ability to trade within the international economy, enhancing the ability for locally sourced products or services to reach international markets and increasing the number of international companies entering the South African market from around the globe.

These supply chains often operate efficiently and help reduce consumer prices, but they can also outcompete local manufacturing in certain product categories.

9.Informal Skill Transfer & Learning Opportunities

An under-considered impact of informal business is knowledge transfer. By working near or in competition with foreign-owned firms, local entrepreneurs can acquire multiple skills, including;

Pricing strategies

Inventory management techniques (such as stock rotation)

Customer retention strategies

Cost-saving strategies

Over time, the accumulation of these skills through informal learning improves the skill level of local small business owners.

10. POLICY & REGULATORY IMPACT

The rise in the number of foreign-owned informal businesses has caused Government agencies like The South African Social Security Agency and other regulatory authorities to re-evaluate;

Business licensing processes;

Policies to promote township development;

How they enforce immigration laws governing informal trade; and

The levels of support afforded to small and micro-enterprises.

The trend has revealed inadequacies in support and regulation for Informal Businesses.

ECONOMIC REALITY – THE MIXED OUTCOMES

The overall effects of foreign-owned businesses operating in South Africa are mixed;

Positive outcomes;
Increased product access;

Informal-sector job creation;

Price competition for consumers;

Economic development in under-served communities;

Negative outcomes;
Competitive stresses on Local Small Businesses;

Overcrowding of informal markets;

Regulatory problems;

Social conflict in some communities;

The net effect of Foreign-Owned Business is determined by the local-regional context, the kind of business, and the level of regulation.

The Lessons For South Africa

In order to learn from this experience, South Africa will need to:

Develop better support for small local entrepreneurs
Make it easier for all small businesses to access bulk buying
Enhance business education and provide better mentoring
Create a formal space in the informal sector that does not destroy existing livelihoods
Increase the enforcement of fair competition.

At the same time, successful foreign business models (discipline, cost control, and efficiency) can influence the development of all entrepreneurs.

Foreign business activity in South Africa is multi-faceted and diverse. The positive aspects of foreign-owned businesses contribute to lower prices, greater availability of goods & services, and the creation of informal jobs. However, they have also increased competition and put additional pressure on small local businesses.

When assessing the impact of this competition and pressure from foreign businesses, it is better to view this situation almost as a negative or a positive, but rather as a part of the ongoing evolution of the informal economy based upon the issues of survival and opportunity and the underlying structures that define and support our economy.

The best way to create a sustainable solution is not by excluding foreign businesses, but by creating a more business-friendly environment for both local businesses and foreign businesses to operate under fair, well-regulated and supportive conditions that support long-term economic growth.

This article has examined the various factors contributing to the perception that foreign-owned businesses have longer lifespans than South African-owned businesses. Although this may be correct in certain circumstances, it is not an absolute truth. The ability of a business to succeed is determined by a number of different factors including: discipline in business operations, the capital structure of the business, adaptability to change within the economy, market selection, and the overall efficiency of businesses operationally. It is clear that the nationality of a business owner is irrelevant to the success of the company.

While it is often the case that foreign entrepreneurs have enjoyed successes in specific market segments where they have developed their experience through collective labour systems, have developed strong systems for controlling their costs, and have a desire to survive through appropriate motivation, many South African entrepreneurs have also experienced successes over the long run by utilising a similar philosophy of operational financial discipline and strategic market positioning.

Ultimately, the most important thing that can be learned from comparing businesses is that developing the habits of good businesses – effective cost control, adaptability and being prepared to reinvest – will result in higher levels of survival and growth of entrepreneurs within South Africa’s difficult, but opportunity-rich economy.