South Africa is far from international best practice in 13 of the 15 indicators that make up the Organisation for Economic Co-operation and Development (OECD)'s product market regulation index (see what the most recent report says).

For founders, this isn't abstract. Product market regulation is the set of rules that govern how businesses operate and compete: licensing, permitting, compliance costs, barriers to entry and everything else between having an idea and actually running a company. When that regulatory environment is the most restrictive in your entire peer group, it shows up in the economy. In South Africa, it shows up as a missing middle.

Here's the shape of the South African economy: a small group of large, highly productive incumbents at the top and a vast number of small firms churning in and out at the bottom. Almost nothing in the middle.

The numbers are striking. In manufacturing, the top 20 firms account for more than 30% of sector income. In agriculture, 6.5% of commercial farms generate two-thirds of all farm income. The top 5% of exporters control a disproportionately large share of export value compared with peer economies.

South Africa doesn't lack entrepreneurial energy. Firm churn, the rate at which businesses enter and exit the market, is comparable to that of developed countries. But as Fouché Venter noted in Currency News, drawing on firm-level research by Justin Visagie, Ivan Turok and Andrew Nell presented at the ERSA Growth Conference, this churn isn't translating into growth. Researchers call it "simple reshuffling" rather than creative destruction.

That matters because young and growing firms are the primary drivers of net job creation. When those firms can't scale, the whole economy pays the price.

The barriers that stop a manufacturer in Johannesburg from scaling from 20 employees to 200 are the same ones that stop a township business from growing past five. Licensing and permitting processes that the IMF has flagged as significantly more burdensome than those of peer economies. Compliance costs that consume time and money, a growing company doesn't have. Regulatory fragmentation across national, provincial and local government that turns expansion into a paperwork marathon.

South Africa's regulatory environment doesn't just make it harder to start. It makes it harder to grow. And the cost falls hardest on the firms that would otherwise be creating the most jobs.

This is perhaps the most important finding in the research. South Africa's binding constraint is not the absence of productive firms or technology. It's what researchers call a "diffusion failure."

The country has world-class firms with cutting-edge practices. But the knowledge, technology and innovation inside those firms aren't spreading to the broader economy. Low-productivity firms aren't catching up with high-productivity firms. Smaller high-productivity firms aren't scaling. Foreign investment benefits remain trapped among firms already in global supply chains rather than spreading across industries.

Excessive regulation suppresses firm growth, limits competition and allows less productive incumbents to retain market power. The causes reinforce each other: infrastructure costs, weak competition, the mismatch between where people live and where opportunities exist, and the regulatory burden sitting over all of it. But the OECD data make clear that regulation is where South Africa is furthest from its peers.

We've been tracking the reform picture closely. The 2026 Budget delivered real wins for small businesses: the VAT registration threshold moved from R1 million to R2.3 million for the first time in 17 years, turnover tax limits were raised and capital gains tax exemptions for small business asset disposals increased. These changes mean fewer small businesses get dragged into compliance regimes before they're ready.

The Labour Law Amendment Bill went further than many expected. Probation dismissal was simplified, removing much of the procedural risk that made early-stage hiring feel dangerous. New businesses with fewer than 50 employees got a two-year exemption from bargaining council agreements. The updated Code of Good Practice now explicitly recognises that small businesses can't be expected to run the same processes as corporate HR departments.

These are meaningful steps. They respond to exactly the kind of reforms we called for in our letter to the president, and they show the conversation is moving in the right direction.

But the OECD data tells us how far there is still to go. Thirteen of 15 indicators are far from best practice. More restrictive than China. More restrictive than Brazil. A VAT threshold adjustment and a probation simplification, while welcome, don't close that gap.

The deeper structural challenges, capital access, ESOP regulation, angel investor incentives, and the diffusion failure that keeps innovation trapped at the top, remain largely unaddressed. Tax reform has landed. Labour reform is on the table. But unlocking capital without wasting it is still the missing piece, the third pillar we identified and the one still waiting for action.

For every founder trying to grow from 10 employees to 100, the question isn't whether South Africa has the talent, the market or the ideas. It does. The question is whether the rules will let them compete, or whether the system will keep working for the incumbents who already made it through.

The SA business reform momentum is real. The distance still to travel is enormous.

This news first appeared in our 27 March ‘26 newsletter on how the Firefinch birding app.

See what the 2026 Budget delivered for SMEs. Read what changed for founders in the Labour Law Amendment Bill. And see the original call that started it all in our letter on small business reform in South Africa.

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