Puzzling Over Business Turnover in South Africa: Creative Destruction or Simple Reshuffling?

The entry and exit of businesses generally signify healthy competition and economic vitality. In theory, new entrants introduce fresh ideas, products, and techniques that spur economic modernisation, diversification and sustainable employment creation. This is the idea behind Jospeh Schumpeter’s concept of ‘creative destruction’ in which firms must continually reinvent themselves to remain profitable, often at the cost of jobs, products, and industries that become obsolete and disappear. Lack of churn can cause economies to ossify and stagnate. The World Bank’s recent diagnostic report points to precisely this problem in South Africa. It states that too few new firms have been created and too many old firms have survived when they should have folded. The strong assertion by the Bank is that “…many of South Africa’s markets lack dynamism” [1] and that “creative destruction, the natural process of new firms entering the market and mori­bund ones exiting … has been largely absent ” [2] . This view reflects the conventional wisdom that markets in SA are heavily concentrated with little change in ownership or industrial structure over time. Labour market rigidities, monopoly power, and overregulation have shielded incumbents from competition and produced inertia, thereby preventing more productive new entrants from reinvigorating the economy. In fact, the evidence to support these views is thin and questionable. It may also be a mistake to assume that concentrated ownership necessarily means few new entrants and exits. Using a new and more comprehensive spatial tax panel database, we have monitored business and employment flows in much greater detail than hitherto [3] . How does the evidence stack up concerning South Africa’s level of business and labour market churn? Contrary to expectations, South Africa performs relatively well when measured by conventional metrics of business dynamism, such as rates of firm entry, exit and firm turnover (see figure 1). Figu