The trade-offs of business location in an informal economy

This research summary is brought to you by John Molson’s National Bank Initiative in Entrepreneurship and Family Business.

Despite being one of South Africa’s largest municipal economies, Cape Town is also a city that is afflicted by high levels of unemployment and resource-scarcity, especially in the impoverished neighborhoods of the city classified as “townships”. Nonetheless, the people of these townships are resilient and innovative in how they pursue business opportunities.

Joel Bothello, Concordia University Research Chair and Associate Professor in Management at Concordia’s John Molson School of Business, partnered with a non-governmental organization, Sustainable Livelihoods Foundation (SLF) to investigate how informal economy entrepreneurs locate their businesses and capture opportunities within such uncertain environments. The implications of their work challenge how we traditionally think about entrepreneurship in non-Western contexts and have implications for policymaking around economic development.

SLF operates in Cape Town and takes a grassroots approach to understanding how economic activity occurs in the townships, mainly by building relationships with community members, entrepreneurs and other township inhabitants. The credibility fostered by SLF allows for accurate and reliable data collection that paints a more authentic picture of Cape Town’s business landscape in the informal economy.

For instance, one of the early findings from this work challenge the Western premise that more publicity, good marketing and/or advertising for entrepreneurs increase business success. This visibility is often thought of as the key to generate stakeholder awareness, grow your customer base or even create greater investment opportunities.

However, the townships highlight the risk of increased visibility. Many of these entrepreneurs are determined to maintain a discrete presence and low profile to avoid the gaze of unwanted attention. Business strategies and success are pursued very differently and can serve as a good example of how a ‘one size fits all approach’ to visibility does not apply to non-Western contexts. 

Take, for instance, the choice of location: entrepreneurs might decide to establish the location of their business either from their residence (lower visibility) or along the main street (higher visibility). Each option is associated with different risks and opportunities.

* In many townships, zoning regulations have traditionally prohibited entrepreneurs from conducting business outside of commercial zones, despite these individuals having insufficient resources to open a separate store front.

Importantly the decision to operate a business in a residential area or the high street is not primarily a commercial consideration. Rather, these business decisions were largely made as a consequence of non-commercial factors, such as resource constraints or familial obligations (e.g. childcare demands). South African entrepreneurs locate their businesses and make business decisions based on circumstances that occur in their personal lives.

In South Africa, visibility is not necessarily favourable.

An important implication is that entrepreneurship is practiced very differently according to different contexts, but nonetheless contains a logic: “applying a business practice that works very well in one area, and trying to apply it elsewhere, can often times be counterproductive and less effective. The first thing entrepreneurs, business people, or consultants, should do is to understand how locals operate and the logic they have in terms of how they build their business or create strategies.”

The success garnered in one geographical location does not promise future success in a different location – a business is the product of its environment.