How South Africa Can Improve The Economy Of The Country With Technological Start-Ups

As the economy of a country is important for the advancement of the country, countries try their best to keep the progress of their economy in check. While no economy stays the same for a very long period, fluctuations are inevitable. On the 4th September 2018, the statistics department of South Africa declared that the country’s economy had lapsed into recession. The department arrived at this conclusion when it realized that the country’s Gross Domestic product had decreased by 0.7% in the first few months of 2018. While explaining the circumstances that led to the recession the department stated that the revenue produced by the real estate, business sectors, and the finance industry increased by 1.9% which caused a total 0.4% to the GDP. However, the poor revenue generated by the agricultural sector, manufacturing, trade, government, and transport affected the economy thereby causing the recession. The Statics South Africa have previously stated that one industry that positively influences the economy of the country was the agricultural industry. However, the drought the industry experienced which caused a decrease in output, has made the industry unproductive for some time. In the first quarter of 2018, it was recorded that the agricultural sector contributed -2.2% to the setback the economy experienced.

Earlier in 2017, the Statistics South Africa stated that the agricultural sector contributed about 0.8% to the total 3.1% economy outcome experienced by the country even though the sector only makes up 2.5% of the economy. In the third quarter of 2017, the Gross domestic product was revised from 2% to 2.3%, and towards the end of the year, it had increased to 3.1%

While the first and second quarter of 2018 proved quitedifficult forthe economy, there were traces of significant upward push. The finance, real estate, andbusiness had an increased growth rate of 2.8%, manufacturing recorded 1.6%, catering and accommodation recorded 0,9% water, has electricity recorded an increase of 1.4%. Governmentservices recorded 1.0% while transport and communication recorded a 1.2% growth rate. While 2018 could have ended a better note for South Africa, mining and quarrying industry recorded -3.5%, -1.9% for construction and 0.6% compared to the previous 1.0% yielded by personal services. Despite this, the change has been notedas the strongest since the major breakthroughin 2017. 

While the statistics showed a considerable increase in the economy, the growth is still not enoughto solve the consistentproblem of unemployment. While the economy is still trying to gain itsbalance, the increased tax and VAT rate imposed on organizationswill continue to influence the state of the country. 

To improve the economy, different bodies have risen to argue that South Africa’s economy can only be better if the government create jobs and give grants to startups and small business owners. While the unemployment status of the country which indirectly is a factor for recession, has remained the same for a long period of time, the government has been advised to create employment by empowering small business owners. Amongst other businesses, technological start-ups have been unable to raise funds due to the economy of the country. Much more, they have been unable to find the legislation uneasy compared to other countries. All these have eventually led to the fluctuating growth of start-ups.

While it seems like these technological start-ups continue to rise, it has been noted that most of them try their best to pass the traction stage, get enough to serve as the business revenue, begins to speedily grow but end up incorporating their business in Delaware, USA. While different means have been used to persuade these start-ups from doing such, they all claim their actions were stemmed from requests of their investors.

While the trend has grown over time, there are ways that canbe incorporated to elicit a positive change. Let’slook at  importantactions the South African Government can take to enable permanentincorporation of technological companies without these companies struggling for investors

  • Reduction of Tax: So many startups have not been able to keep up with their businesses because of the Tax Levies. It is important to know that startups are different from established companies. Hence, the government should endeavor to drop the allocated tax to 8%. In essence, startups will only have to pay 8% of income rather than the usual price. This change will make it easy for people to compare Delaware to SouthAfrica in terms ofTax payment. More so, it is best for the government to withdraw the Intelligent Property Tax(IPT) which investors see as a means for the government to place extra taxes on the income generated by startups. 
  • Flexibility of Labor Laws: Every country has laws guiding its labor force. However, some ofSouth Africa’s labor laws do not seem to go well with the interests of investors. Much more, some of them are not constructed to favor employers in the long run. For instance, the labor law permits startups to participate in the activities of their trade union. Being a member of the trade union, strike activity will surely affect the company’s productivity thereby leading to low returns. Having low returns will automatically cause the startup to give less amount of money to shareholders. 
  • EasyAccess to Skill Visa: Every company needs smart people to work with them o enable the development of the country. With the availability of technological innovations, it is possible for intellectuals in other parts of the world to apply for work and get hired. While some positions require onsite availability, it has been difficult for foreigners to fill their positions in the companies situated in South Africa due to the difficulty in getting a permit. Those who try to get Skill Visa also find it difficult to get their visa within a particular period of time. Currently, the process of getting one is more tedious than before. This has limited the number of technologists that could have been employed to improve the technological state of the country. If South Africa aims to keep in technological startups, the country must give easy entrance to hired global talents. That way, the country can compete with other countries.
  • Availability of IP Transfer: IP transfers usually involve a transfer from the legal owner to a second party. This transfer is subjected to various conditions including transfer charges. The transfer process may take time if close monitoring is not involved. There should, therefore, be certainty that the transfer period should not exceed two weeks
  • Limited Liability: The government must also ensure that specific laws are put in place to protect from individual liabilities. Basically, companies should be under limited liability protection. 
  • Medical Coverage: Tax deductions on medicals should be maximize enough to cover the health of workers. However,this can only be done by improving the strategy used by the National Health Insurance to be of benefit to those working for startups. They indirectly work for the government. 
  • Stock Structure: The stock structure is quite rigid. South Africa should work towards making the structure flexible and easy for everyone to maintain. Much more there should be no restriction to the availability of stock. There should be classes for people to opt for. More so, the scheme should make it easy for investors to make use of documents like SAFES, convertible notes or warrants. They shouldnot be subjected to the use of a particular document. 
  • Use of land: the deprivation of start-ups from making use of their landed property or the act of denying them their private property rights until that gave been clearedby ANC will further make start-ups stay away from investing with substantial capital in the country. Start-ups will see greateropportunity in investing in a county that is open to foreigners and innovations. 

While some have stated that the best way out of this recession is the provision of grants to fund startups, I personally think that it is too risky for government to funda business that can either fail or yield great income. It would be bad to see that these startups have nothing to show at the end of the business year. However, introducing Direct Foreign Investment (DFI) to startups would be a better idea. This relationship will be guided by strict rules and policies that will favor both parties. The rules guiding the matching will be strict, double dipping will not be allowed as well as rules guiding the ownership of assets and profits. 

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