Abstract:
This exploratory study seeks to contribute to the theoretical and empirical understanding of the transition of small businesses from the informal to the formal sector. It builds on the role of the informal sector as “engines” for economic and socio-cultural development. Using selected businesses in the Mangaung area of the Free State province as case studies, this study investigates the motives for transition of informal businesses to the formal sector in South Africa, challenges encountered in the process of formalisation and the coping strategies relied upon to deal with challenges encountered in the process of formalisation.
Key indicators were identified from the literature and were further developed for investigation. A qualitative approach was used for the collection of data from selected transited businesses in the Bloemfontein area using semi-structured interviews.
Findings from the study suggest that the decision by small business owners to formalise is motivated by their desire to grow and expand their businesses; access to proper banking services; and to access government contracts and tenders.
The results also reveal that the quest for growth is however hindered by long queues endured by business applicants during the process of formalisation; lack of adequate and relevant information on the process of formalisation; coupled with the lack of government support for informal businesses’ transitioning to the formal sector. Findings further revealed that adequate information on the process of formalisation and self-trust are key coping mechanisms needed by small business owners to successfully progress/ transit to the formal sector.
Based on these findings, the study recommends that government both provincial and national play a more proactive role in regulating the informal economy by creating an environment conducive for their growth and development, and facilitating their transition to the formal sector. Informal small business owners also must be provided with information on the process of formalisation and of the existing government structures put in place to support businesses in their transition phase.
