The Informal Sector, Entrepreneurship and Economic
Development
Michael H Morris, Ph.D
Donald Gordon Professor of Entrepreneurship
Graduate School of Business
University of Cape Town
Breakwater Campus
Green Point 8001
Cape Town, South Africa
Office Phone: +27-21-406-1177
Fax: +27-21-406-215510
e-mail: mmorris@gsb2.uct.ac.za
Peter Jones
Research Associate
Graduate School of Business
University of Cape Town
Cape Town, South Africa
Deon Nel, Ph.D
Professor of Marketing
Graduate School of Business
University of Cape Town
Cape Town, South Africa
Abstract
The role of entrepreneurship in economic development has been
extensively studied in the richer Western (i.e. first world)
countries, but it could be argued that entrepreneurship is even
more vital in developing countries. The informal sector in
developing countries not only makes a significant contribution
towards gross domestic product, but is a major potential source
of entrepreneurship. This study explores the emerging nature of
the informal sector, and attempts to distinguish entrepreneurial
from non-entrepreneurial business activity within this sector.
Results are reported of a series of in-depth interviews with
tavern owners within South African Black townships. Significant
relationships are identified between measures of the
entrepreneur's background, the operational sophistication of
his/her enterprise, and company outlook.
Introduction
It has been suggested that the entrepreneurial sector accounts
for as much as ninety percent of the new job creation in
countries where the relevant research has been conducted (Birch,
1987; Davidson, 1989; Reynolds, 1986). That entrepreneurship is
the major source of economic dynamism within capitalist economies
is widely acknowledged(Morris & Lewis, 1991; Schumpeter, 1934).
At the same time, there is little agreement as to what exactly
constitutes the entrepreneurial sector. Many small businesses do
not appear to be all that entrepreneurial, while examples of
highly entrepreneurial behaviour in some mid-sized and large
corporations and non-profit organizations are commonly reported
in the literature (e.g. Morris, Sexton & Lewis, 1993; Peters,
1993).
A particularly vexing question concerns the extent to which
businesses within the informal sector can be characterized as
entrepreneurial. Complicating the matter is the lack of a
generally accepted definition of the informal sector, helping to
explain significant discrepancies regarding its size in any given
country. Nonetheless, in many so-called "developing nations", the
informal sector is believed to account for well over half of GDP.
Even these sorts of statistics tell little of the story, for it
is generally assumed that informal sector businesses provide
little real economic growth or dynamism. Such businesses are
often assumed to be inefficient, survival-oriented enterprises
whose proprietors would gladly take jobs in the formal sector
were they available.
Entrepreneurship can be defined as the process of creating value
by bringing together a unique set of resources to exploit an
opportunity (Stevenson, et al., 1989). It has three key
underlying dimensions: innovativeness, calculated risk-taking,
and proactiveness (Morris & Sexton, 1996). As such, it is a
variable phenomenon, with different degrees and amounts of
entrepreneurship present in a given organization at any point in
time. There is a growing body of evidence to suggest that a
positive relationship exists between a company's entrepreneurial
orientation and performance over time (Covin & Slevin, 1989;
Miller & Friesen, 1983; Morris & Sexton, 1996).
The purpose of this study is to assess the extent to which
entrepreneurship is a characteristic to be found among informal
sector businesses. Based on a survey of tavern owners from black
townships in South Africa, we examine relationships between the
background of the tavern owners, a number of operational
characteristics of their enterprises, company performance, and
future outlooks. Implications are drawn for theory and practice.
The Informal Sector and Economic Development
The informal sector typically includes providers of economic
activities not recorded in the national accounts and not subject
to formal rules of contract, licensing, labor inspection,
reporting and taxation (International Labor Organizations 1984).
These activities can be characterized in terms of ease of market
entry, reliance on indigenous resources, small scale operation,
labor intensity, skills acquired from outside the formal school
system, and markets that are unregulated and competitive (Marius
1987).
While some of these businesses are one-person operations, in
developing countries there tends to be heavy reliance on the
family unit (Berger 1991). Specific roles are likely to evolve
for children, adult males, and older relatives. Frequently, the
female head of the family is the driving force behind the
business, providing the skills, hard labor, stamina, and an
unwavering desire to keep the business going. Alternatively, the
male head of household may go back and forth, looking for formal
sector jobs but falling back on the family business much of the
time.
The motivation behind most informal sector businesses is
generally assumed to be personal survival, as opposed to return
on investment (Rauch 1991). Although this sector will tend to
have rich and poor components, most of these businesses provide a
subsistence existence. Returns tend to be low and intermittent,
security and stability are minimal; working hours are long, and
working conditions are poor (Devarintert & Watson 1981). Thus, the
scope and importance of informal activities will tend to parallel
the levels of poverty and underemployment in an economy (Marius
1987). The tremendous growth of this sector in recent decades is
also said to parallel urbanization, with migration to cities in
developing countries far out spacing the employment capacity of
modern manufacturing and other formal sector activities
(Sethuraman 1981).
The significance and role that the informal sector can play in
the economic development of a country is a controversial issue.
On the one hand it is argued that those comprising the informal
sector are doing little more than eking out a bare existence and
their primary concern is survival. They are disadvantaged through
lack of capital, expertise, training, contacts and experience to
grow beyond mere survival income. Informal sector businesses are
often assumed to demonstrate low levels of productivity,
especially given their labor intensity, limited skill pool, and
small scale operation.
In a study on the viability of informal sector businesses,
Hirschowitz (1992) notes that "in its present form the informal
sector cannot be regarded as making a significant contribution to
creating viable employment opportunities. Employment is created
through replication of businesses that barely survive, rather
than through expansion of successful businesses". He found that
there was interaction between the formal and informal sectors,
but that the money mainly moved from the informal to the formal
sector with very little moving the other way.
An alternative point of view holds that the informal sector
serves as an incubator for a country's ongoing economic
development. It acts as a dynamic training ground for the
establishment of more formal businesses, and a major vehicle for
reducing unemployment. Further, it serves as a vital component of
the free market system by performing a number of functions, such
as reducing the bargaining power of unions, preventing
monopolies, and keeping inflationary pressures, caused by rising
costs of rentals, rigid regulations, and high overheads in check
(Thomas 1988). Others (e.g. Koray 1991) suggest that this sector
is quite efficient at generating job opportunities and satisfying
basic population needs at very low cost.
It is also assumed that the structure or make-up of this sector
is relatively homogeneous in developing economies, yet some
evidence exists of significant diversity (Berger 1998; Fall 1989).
There appear to be disproportionate numbers of retail trade and
service-oriented enterprises, but various country studies have
reported sizeable numbers of manufacturing, metal working,
construction, assembly, and wholesale operations (Lubell & Zarour
1990). Diversity has also been observed in the size and
operational sophistication of informal sector enterprises
(Halverson-Quevedo 1992; Vosloo 1988).
Informal Sector Activity in South Africa
The South African economy has experienced tremendous turbulence
in recent years, owing in large part to the dynamic process of
internal transformation towards democracy and majority rule. The
informal sector in South Africa is estimated to represent between
16 and 40 percent of gross domestic product (GDP) (Abedian &
DeSmidt 1990; DeSmidt 1988; Thomas 1989). Approximately 4 million
jobs are attributed to this sector, while the formal sector
accounts for about 7.7 million jobs (Thomas 1989). Some 22
percent of the potentially active black population is thought to
be involved in informal activities (Raine 1989), while this
sector is projected to include between 500,000 and 700,000
businesses (Vosloo 1988). One major study of informal business
activities identified four general categories: trading and
hawking (55 percent of total businesses), production and
construction (23 percent), services (16 percent), and illicit
activities (6 percent) (Raine 1989).
As a function of the dismantling of apartheid, and some general
deregulation of the economy, informal sector activity is rapidly
expanding in two arenas. The first of these is in the major
cities, where the granting of civil and economic rights to blacks
has resulted in a burgeoning unlicensed taxi industry, large
numbers of street and mall hawkers, and an abundant supply of
unrecorded domestic and household maintenance services. The other
growth area is the black townships. The removal of restrictions
on where blacks could live, work and travel produced large
migrations from rural areas to cities. However, lack of available
and affordable housing led to the development of squatter camps,
some of which rapidly evolved into substantial communities. A
number of these black townships surround every major city, and
most have experienced uncontrolled population growth.
Informal sector activity is pervasive in black townships. In one
study (Aymes 1989), it was found that an informal business was
operating in every fifth township house. Most of these were
single-person operations, with about one-third employing a family
member. Close to 70 percent were operated by females. The most
prevalent types of businesses appear to be grocery shops,
butcheries, hairdressers, seamstresses, and shebeens (liquor
establishments) (DeSmidt 1988).
Ongoing socio-economic developments in South Africa suggest that
the economy would collapse without sizeable and growing informal
sector (Broom & Joyce-Clark 1989; Ntoula 1989). The population is
on course to double its size within 27 years. The economy, which
had actually contracted in some recent years, must grow at a rate
of five percent per year to absorb the burgeoning labor pool
(Manpower Brief 1993). At issue, particularly from a public
policy standpoint, is the extent to which the informal sector
represents a viable solution to the growth needs of the country,
and so should be prioritized in ongoing economic development
efforts.
The Tavern Industry in South Africa
The history of the township shebeen stretches back to the last
century and the discovery of gold. The discovery resulted in the
establishment of the mining town of Johannesburg and surrounding
townships and this fact, together with the decline of agriculture
and cattle farming in the rural areas, led to a major shift in
the demographics of the country as both whites and blacks
migrated to the urban areas.
In the rural areas, sorghum, the primary ingredient for
traditional beer, was in abundant supply and often free. However,
in the urban areas it was regarded as a valuable commodity and
shebeens were established to cater to the emerging demand. The
word "shebeen" is of Irish origin and refers to a house selling
illicit liquor. The shebeens were soon legislated against and
laws were introduced outlawing the brewing and selling of the
traditional sorghum beer, and forbidding blacks to drink "white
man's liquor" which referred to malt beer and spirits.
In short order, a thriving industry of bootleggers became firmly
entrenched in the township as it was realized that there were
excellent opportunities to make a profitable living from beating
the system. The rate at which the industry grew spawned a mass of
prohibitive legislation aimed at creating the impossible - a
teeotalling black population. Despite the legislation, the
shebeens continued to flourish and various commissions of inquiry
were appointed to look into the matter.
An example of the kind of legislation introduced was the 1928
Liquor Act which attempted to strike a compromise between the two
points of view that prevailed at the time. On the one hand it was
believed that the non-whites had not reached a sufficient level
of civilization which entitled them to have liquor and that they
should be protected in this regard by legislation. On the other
hand it was believed that there should not be total prohibition
and that exemptions could be made in specific circumstances
allowing non-whites who had attained a certain standard of living
to have access to liquor. These exemptions normally referred to
clergymen, graduates, university students and the holders of
certain educational certificates.
In 1961 the Liquor Amendment Bill was introduced. The Bill
provided that any adult could buy liquor from bottle stores in
white areas. Blacks, however, were still not allowed to sell
liquor, and the only legal outlets in the township were run by
the Administration Boards which were a central government agent
and acted as local authorities.
Many believed that the introduction of the Liquor Amendment Bill
would effectively lead to the demise of the shebeens, as the
Administration Board could effectively supply better drinks at
cheaper prices. However, contrary to this speculation, the
shebeens continued to flourish, despite the fact that it was
during this period that some of the harshest fines were
administered to those found trading in liquor without a licence.
Those charged for a second offence received up to six months
imprisonment without the option of a fine. On top of this, all
liquor found on the premises of the offender was confiscated.
Stiff penalties also faced those found trafficking liquor from
the white bottle stores to the shebeens with the vehicle
transporting the liquor often being confiscated.
It was in this context that the shebeeners started to organize
associations that could represent them against the myriad of
prohibitive legislation imposed by the Liquor Act. The Soweto
Tavern Association was founded in the mid 1970's, closely
followed by the National Tavern Association (NTA) in 1978. The
NTA was founded so that taverners could belong to a national body
and be represented on that scale. The association achieved
success when the Liquor Act was amended to allow some shebeens to
operate legally on conditional licences. Against this background,
the first legal taverns were established. The most recent
legislation is Liquor Act 27 of 1989, which has attempted to
simplify the requirements and procedures for the acquisition of a
licence and promotion of free enterprise.
The Study
To develop further insights regarding entrepreneurial activity
within the informal sector, a cross-sectional survey was directed
to a sample of tavern owners. A convenience sample of 26 tavern
owners within four black townships situated within the Western
Cape province of South Africa, were interviewed. The research was
limited to this sector for a number of reasons. Firstly, taverns
are well established within the informal sector, having been in
existence since the turn of the century. They have a well-
documented history and a good understanding of their development
over the years can be obtained. They have also shown remarkable
resilience, surviving years of prohibitive legislation and
constant police raids and arrests.
The positioning of the industry within the informal sector is
also interesting. On the one hand they have conformed to certain
regulations through the attainment of liquor licences and
according to some definitions would fall outside of the informal
sector. However, they operate deeply within the townships and
possess other characteristics, such as non-registration for tax,
which place them firmly within the informal sector.
The tavern industry has received a fair amount of publicity over
the years. One of the reasons for this is that a number of community
leaders in the townships have emerged from the industry. Significant
capital is involved and considerable success has been achieved by
many in the industry. This would indicate the presence of
characteristics typically associated with entrepreneurial
activity, such as achievement motivation and a reward
orientation. Due to the well established nature of the industry,
as well as the large amounts of capital involved, one would also
expect the businesses to have attained a higher level of
operational sophistication than other businesses operating within
the sector. The tavern industry thus exhibits many of the
characteristics which could help in developing an understanding
of the entrepreneurial activity in the informal sector and it is
hoped that the insights that are gained can be used to foster
economic growth.
The interviews were conducted by means of a questionnaire at the
respondents place of business. Although there was initial
scepticism by some of the respondents, once the purpose of the
survey was understood the respondents were extremely helpful. All
the surveys were conducted in English and lasted approximately
one hour.
The questionnaire was designed consisting of 45 open-ended items
covering the following seven areas: motivation for starting the
business (two items), background before starting the business
(seven items), initial resources (two items), obstacles
encountered in start-up and expansion (three items), operational
sophistication of the business (fourteen items), performance of
the business (eight items) and future outlook/entrepreneurial
orientation (nine items).
Most of the items were accompanied by a scale of possible answers
if the respondent needed assistance in understanding the
question. Although some misunderstanding was occasionally
encountered it was not generally considered a problem.
Results
Descriptive Findings
The respondent businesses were located in the townships of
Guguletu (42%), Khayelitsha (27%), Langa (15%) and Paarl and
Stellenbosch (15%). The median age of the proprietors was 45
years and ranged from 35 to 64 years. As summarized in Table 1,
many of the respondents had resided in the general region for
their whole lives with the median length being 40 years. All but
three of the respondents had resided in the region for
over 30 years. Although not as strongly represented as reported
in other surveys, females comprised 39% of the respondents.
Table 1
Background and Related Characteristics of Respondents
________________________________________________________________
Background
Length of time residing in the
general region: median = 40 years
Number of businesses owned
before current one: 77% indicated none
Length of time operating without
a licence median = 5.5 years
Prior experience in the liquor
industry: 77% indicated no
Level of formal education: standard 2 = 8%
standard 5 = 31%
standard 8 = 46%
standard 10 - 15%
Sources of training for your
business: self-taught = 77%
ad hoc source = 15%
as employee = 8%
Outside help in starting
business: none = 54%
colleagues = 12%
family = 12%
suppliers = 4%
tavern assoc. = 19%
Motivation
Reason for starting business: unemployed = 15%
supplementary income=31%
me-too syndrome = 8%
new opportunity = 46%
Other employment opportunities: 76% indicated yes
Initial Resources
personal savings = 81%
family loan = 12%
SBDC = 4%
moneylenders = 4%
Obstacles
Obstacles to starting business regulations = 85%
access to finance = 73%
training = 31%
availability of sites = 4%
Level of difficulty of
regulations extremely difficult = 81%
moderate = 12%
not difficult = 4%
Level of difficulty of access
to finance: extremely difficult = 23%
moderate = 15%
not difficult = 46%
Obstacles to expansion of
business: access to finance = 73%
training = 15%
crime = 12%
________________________________________________________________
Most of the respondents had not owned any business before the
current one (77%). All of the owners had started operating their
taverns prior to attaining licences enabling them to trade
legally and had thus run the gambit of police raids and arrests.
The median period for operating without a licence was 5.5 years.
The typical respondent had obtained a licence three years ago and
had thus been involved in the informal sector for about eight
years. Only 23% had any prior experience in the liquor industry
and in the majority of cases this was at relatively low level in
a retail or liquor store. Unlike the general population in the
townships, over 60% of the respondents had attained grade ten
education or higher. However, very few had obtained any form of
job training with the majority being self taught (77%). Most had
not used any professional or formal help in the start-up phases
of their businesses. Colleagues (12%) and the tavern association
(19%) were the principal providers of initial help. Contrary to
suggestions in the literature, a significant proportion of
respondents (46%) indicated that they had started their business
as a result of identifying a new opportunity. Other major reasons
included starting the tavern to supplement their income (31%) and
the fact that they were unemployed at the time (15%). The
majority of respondents also indicated that there were other
employment opportunities available to them at the time. The
initial finance required to start the business was for the most
part extremely low with 50% requiring R300 or less, and 80%
requiring R1000 or less. The majority of this money was obtained
from personal savings (81%). Bank loans were not used at all and
only one respondent indicated that they had obtained a loan from
the Small Business Development Corporation (SBDC).
A number of factors were cited as obstacles in the start-up phase
of the business. Regulations were cited by 85% of the
respondents, access to finance by 73% and business training by
31%. The respondents also assessed the level of difficulty of the
obstacles. Regulations were rated as being extremely difficult to
overcome by 81% of the respondents. Access to finance was
considered to be extremely difficult by 23% and availability of
business training by 19%. However, in considering obstacles to
the continued expansion of their businesses, access to finance
was rated as a major obstacle by 73%, training by 15% and crime
by 12%.
Table 2
Operational Sophistication of Respondent Business
_______________________________________________________________
Marketing of business: promotions and specials = 23%
word of mouth = 42%
flyers and business cards = 31%
local newspaper = 27%
Frequency of stock orders: Twice weekly = 23%
weekly = 73%
twice monthly = 4%
Method of pricing: variable markup = 35%
price comparison = 39%
combination of above = 27%
Registration of Tax: 92% indicated no
Supportiveness of suppliers not at all = 50%
somewhat = 42%
very = 8%
Supplier payment method cash = 73%
cheque = 27%
Source of stock: producers = 86%
wholesalers = 12%
Method of transport: delivery = 89%
public transport = 4%
own transport = 35%
Ownership of premises: 100% indicated yes
Form of business entity: sole proprietor = 92%
close corporation = 8%
_______________________________________________________________
The operational sophistication of respondent firms is summarized
in Table 2. With regard to marketing, while word of mouth was
used as the sole form of marketing by 42% of the respondents, 58%
used some other method, including offering promotions and
specials, advertising in the local newspaper and distributing
fliers. In terms of inventory management, orders were
predominantly placed on a weekly basis (73%) and stock was
generally ordered based on some kind of stock count (73%). The
majority placed orders directly with the producers and had the
stock delivered to their premises. Pricing of products was based
on a variable mark-up (35% of respondents), a price comparison
with other taverns (39% of respondents), or a combination of
these two (27% of respondents). Administrative staff who dealt
with, inter alia, wages and the books of account were employed by
31% of the respondents. The primary factor cited for customers
frequenting their taverns was the level of service provided
(58%).
Performance was assessed in a number of ways (see Table 3).
Contrary to certain findings reported in the literature and other
surveys, the businesses had created relatively significant
employment. All the businesses had offered employment to other
family members, with 98% of the businesses offering employment to
two or more family members. With regard to non-family members the
statistics were also impressive, with 96% of the businesses
offering employment to non-family members and 60% of these
providing employment for two or more non-family members. Over the
past twelve months, 65% had increased both their profits and
revenues and 27% had employed more staff. All the businesses had
significantly increased the number of products that they offered
now compared to when they first started with the median
increasing from 5 to 20. The majority of the businesses also
offered other services to their customers apart from liquor, with
the most common being food (54%) and TV/stereo/video (50%). The
monthly turnover figures were exceptional with a median of R135
000. Monthly turnovers of between R50000 and R200 000 were being
attained by 42% of the respondents and turnovers of more than
R200 000 by 16% of the respondents. These exceptional turnover
figures are an indication of the taverns' role as suppliers to
the shebeens who are not in a position to deal directly with the
producers. The regulations which allow them to provide liquor for
consumption only on their premises appeared to be totally
ignored. Certain of the respondents did indicate that they only
acted as on-consumption taverns and their turnover figures
normally reflected this. The major source of finance for their
businesses was from profits from the business (62%). Other
sources included family loan (8%), SBDC (4%), bank loan (12%) and
moneylenders (4%).
Table 3
Performance and Future Outlook for Sampled Businesses
________________________________________________________________
Performance
Non-family Employees:
4% none 27% 1 19% 2 31% 3 12% 4 8% 5-more
Monthly Turnover (Sales):
23% less than R20 000 22% R150 001-R200 000
19% R20 000-R50 000 16% R200 001-R800 000
20% R50 001-R150 000
Sources of finance for expansion of business:
8% family loan 12% stokvel 4% SBDC
12% bank loan 62% profits 4% moneylenders
Future Outlook
Where business will be in three years:
8% no idea 4% out of business 15% no change
58% larger business 4% enlarged premises
12% formal sector
New business opportunities in next three years:
35% don't know 15% new customers 4% new products
45% diversification
Overall outlook for the business:
8% poor 27% good 65% very good
Plans to pass on business:
73% children 15% spouse 4% partner 8% new owner
Give up business if offered stable job:
46% no 31% with difficulty 23% yes
_______________________________________________________________
Looking to the future, respondents demonstrated a proactive
growth orientation. Considering their business plans over the
next three years, 58% of the respondents anticipated growth in
the form of a larger business, and 12% thought they would become
part of the formal sector. With respect to new business
opportunities, 46% felt that they were likely to diversify their
current offerings, while 35% did not foresee any new
opportunities. Overall, 65% felt positive about the future, 27%
believed things would remain stable and only 8% were negative.
This was further reinforced by the fact that 77% would not give up
their businesses or would give them up with difficulty, if
offered a stable job with an established company. The owner's
conceptualization of their businesses also provided insights,
with 46% saying that they perceived their businesses in terms of
return on investment, 46% seeing it as providing a comfortable
living, and only 8% viewing it in terms of personal survival.
Finally, the respondents were asked to provide an estimate of the
rate of growth which they expect to achieve in turnover over next
year. The median rate was an ambitious 40%.
Key Relationships
For the purposes of examining relationships among the variables
in the survey, summated scales were constructed for the various
measures of the respondents' background, the operational
sophistication of the business, and future outlook. For instance,
in the case of a person's background, responses to the questions
regarding prior experience, level of education, sources of
training, and use of outside help in starting the business were
recoded into values of "0" and "1" based on a subjective
classification of the responses as being reflective of a lesser
developed or more highly developed background. Thus, a respondent
would generate a score on this composite measure ranging from 0
to 4. Similarly, operational sophistication had a range of 0-10,
while future outlook had a range of 0-4. This approach involves
subjectivity, and arbitrarily places equal weights on each of the
component items, but does produce an intervally-scaled variable.
Correlation analysis was then used to assess key relationships.
Significant positive correlations were identified between a
better-developed background and the operational sophistication of
the enterprise (r = .81, p = .000),company performance (r = .64, p
(r = .001), and the future growth (or entrepreneurial) orientation of
the business proprietor (r = .62, p = .001). In addition,
operational sophistication was positively associated with company
performance (r = .61, p = .001) and with having an entrepreneurial
future outlook (r = .67, p = .001). Finally, those with an
entrepreneurial future outlook also tended to perform better
(r = .78, p = 000).
Conclusions
These findings indicate that members of the tavern industry
within the informal sector represent a dynamic subgroup who are
entrepreneurially motivated and opportunity driven. Despite
having to overcome various forms of prohibitive legislation and
the constant threat of police raids and harassment, they have
nevertheless persevered in their endeavours to act as a vital
link in the supply chain within the liquor industry. Hostile,
turbulent environments may actually give rise to more pronounced
levels of entrepreneurial activity.
The informal sector is often characterized as consisting of
businesses whose owners have limited skills, whose operations are
unsophisticated, and who create little in the way of profits or
employment growth. The results here are contrary to such
characterizations. At the same time, they may be consistent with
studies of the formal sector, which suggest that a relatively
small percentage, perhaps only 10 percent, of small business are
responsible for creating most of the growth, especially in
employment. This subset, which can be labelled the
"entrepreneurial sector", would appear to have its parallel in
the informal sector.
The sample selected here may provide telltale signs regarding the
characteristics to look for in searching for the entrepreneurial
subset in the informal sector. The individuals involved tend to
be longer-term members of the community, to have moderate levels
of education, to have alternative employment opportunities, to
self-fund their start-ups with a relatively low financial
commitment, and to demonstrate sophistication in their business
operations. They employ two or more non-family members, generate
respectable turnover, and have an optimistic, growth-oriented
future outlook with no intention of abandoning their businesses.
The significant relationships identified in this study also have
important implications. Direct positive linkages were identified
between how well-prepared a person is in terms of their
background, the corresponding level of sophistication they are
able to achieve inoperations, the subsequent performance of the
enterprise both in terms of revenues and jobs created, and the
future (optimistic) outlook that they demonstrate and these would
appear to make intuitive sense. These linkages become a potential
focal point of public policy.
Economic development cannot happen in third world environments
without the informal sector. The issue should not be one of
supporting the informal sector per se, but instead, one of
instituting policies that are supportive of growth-oriented
enterprises. Work by others (e.g. Davidson 1989) suggests policy-
makers should concentrate less on trying to "pick the winners" by
investing in certain enterprises, and more on "building the
infrastructure or environment". We believe that entrepreneurs are
not necessarily born, and that the entrepreneurial potential is
extensive throughout the population, but that certain
environmental conditions lead individuals to self-identify
themselves as potential entrepreneurs, to better prepare
themselves to become more opportunity-driven, and to "step up to
the plate".
The informal sector in countries like South Africa does not
provide an especially conducive environment for entrepreneurship.
One must start with attitudes and values. Not only must there be
a significant investment in education, but the educational system
should reinforce values of individual initiative, an achievement
orientation, adaptability and growth. Educational programs should
address opportunity identification and evaluation, as well as
organizational skills, but the real issue may be less the start-
up issues and more the issues related to business growth. Also
critical is the need to create easy to obtain growth loans and
pools of venture growth capital. Another priority concerns the
need for user-friendly regulation and long grace periods wherein
informal sector businesses can register themselves but only
become subject to various tax and regulatory stipulations over a
decade or so. Governments must strategically define the economic
role for the informal sector, and achieve effective co-ordinating
mechanisms for exchanges between informal and formal sector
activity.
The informal sector is not the ugly stepsister of the formal
small business sector. Its entrepreneurial sub-sector holds
considerable promise if properly identified and incentivized. In
much of the world, the formulation of enlightened policies that
tap the growth potential of this sector may be the only hope in
the battle to avoid economic and social disintegration.
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