South Africa’s minibus taxi industry is an interesting case study of entrepreneurship in a challenging environment, believes Fulton Christopher (Chris) Eaglin, a PhD student at Harvard Business School. Eaglin is busy with his thesis on building inclusive economies.
This topic brings Eaglin’s wide-ranging experience into focus. He received a BA in Economics and Mathematics from Morehouse College in 2003 and later the Marshall Scholarship and studied economic development at the University of Oxford. He then helped develop large energy infrastructure projects in Africa, Latin America, and Europe before running a non-profit organisation focused on supporting innovative youth education and community development social programmes in Southern Africa and consulting to financial institutions.
When he embarked on his PhD, Eaglin knew that he wanted to look at the role of entrepreneurs. While he says there’s a body of literature around high-growth enterprises and very small-scale businesses, there’s less research available on those in between. “Those are really the backbone of sustainable development,” he says. “The firms that employ five, 10, 20 or 50 people. I wanted to dedicate myself to understanding how these entrepreneurs manage in challenging circumstances. My thesis looks at the minibus taxi industry in South Africa as a case study.”
Eaglin has worked with the full range of stakeholders in the taxi environment, from the taxi owners and operators to riders and finance institutions. When last in South Africa in 2021, he conducted interviews, met with other SMEs that offer financing options, developed survey questions, and connected with Rabbi Gideon Pogrund, the founding director of the Ethics and Governance Think Tank at GIBS.
Understanding strategic misconduct
As he’s investigated the strategies that taxi businesses employ to remain in business and to grow, one of Eaglin’s focuses has become what he terms “strategic misconduct”. This is the idea that taxi misconduct, such as speeding or aggressiveness, is employed for strategic business reasons rather than for the sake of misconduct.
“From academic literature, there are two main reasons for strategic misconduct,” he explains. “The first is that in a really competitive environment where there’s not much room for differentiation, firms may end up in a ‘race to the bottom’. They may then turn to illegal strategies for attracting clients. We see this in how taxi firms will get aggressive with each other to gain or protect their access to riders.”
The second reason for strategic misconduct is weakly regulated environments, where firms adopt a multiplicity of approaches to overcome challenges. “Again, we see this in the taxi industry with corruption, where firms will bribe government officials when it comes to apportioning routes or pay off the police,” says Eaglin. “But I believe there’s also a third reason for strategic misconduct, and that is capital constraints.”
In his research, Eaglin argues that the lack of access to finance and the financial pressures taxi firms face are significant factors in bad behaviour. “The data shows that when there are lower capital constraints – when these guys have more financial flexibility – taxi drivers speed less; they're less aggressive with each other and with other people on the road. They generally operate better.”
Drivers of bad behaviour
Eaglin’s research highlights a major reason for taxi misconduct. “For these individuals, the penalty of failure exceeds far beyond the loss of assets,” he says.
Taxi owners are often the primary breadwinners in their families and have dependents they’re supporting (often above and beyond their immediate family members). “If you’re in this situation, the pressure for you to earn is really intense,” says Eaglin. “It drives you to work harder. And because you don't have a lot of options for differentiation and there’s weak regulation, a lot of the ways you can work harder come in the form of misconduct.”
For example, drivers may speed to fit in more trips, overcrowd taxis to be able to take in additional fares or spend more hours on the road than they should, leading to unsafe driving. Eaglin says that many of the drivers he has interviewed say they have no feeling in their legs by the end of their working day.
In addition, failure in the taxi industry also results in a loss of status in the industry and community. “When other people observe that you are unable to operate on your routes, they try to take them over from you, and if you protest, there’s real violence attached. I’ve been told by owners and drivers that if someone protests, ‘we go and shoot him or burn his bus’,” says Eaglin. “Owners will engage in misconduct to avoid this outcome.”
Interestingly, Eaglin says, the data also shows that when taxi firms engage in misconduct, it’s damaging to their productivity, as well as to public safety. “This implies there are great gains to society for reducing financial pressure,” he says.
Reducing financial pressures
Eaglin hopes to plan an academic experiment that will assess innovative methods to reduce capital constraints for taxi businesses. For example, he suggests it’s worth exploring the option to reduce repayments on taxi vehicles for the first 12 months to allow owners to establish their business and develop a level of stability.
“Another idea is to offer a working capital facility,” he says. “For example, as a lender, you could oversize their loan. So, rather than borrowing R500,000, they could borrow R550,000, and then they would be able to draw down on that additional R50,000 when they hit proverbial bumps in the road. The working thesis is that operators are generally unable to withstand the shocks that come with running a business. If you gave them a little working capital, maybe that would help tide it over those shocks to remain profitable.”
A further avenue worth exploring is the issue of incentives. “Taxi operators may see the vehicle as something that they should just run into the ground and then give back to the company when it's done. Perhaps, if you created a loan contract that aligns financing with the owner results, it could help address this,” says Eaglin.
Finance providers could offer a minimum monthly payment (lower than the typical average repayment amount) but adjust the total monthly amount payable depending on how profitable the taxi business was. “For instance, if you were very successful one month, the company would ask you to pay R15,000 rent, whereas if you were only marginally successful, they might ask you to pay R11,000,” says Eaglin. “This gives you more flexibility over time to repay the vehicle cost and not feel like you had to make up the maximum every month.”
Documenting best practice
“In the taxi industry, there's a lot of anecdotal evidence and received tacit knowledge about how one ought to be a good owner and a good operator, that's not backed up by any data,” says Eaglin. “Another project that I'm doing is looking at the 120 days in the business, and which kinds of operational strategies and behaviours are more likely to lead you to be successful if implemented.”
He suggests that data on things such as the efficacy of different route strategies and ways of attracting passengers could be captured and then used to develop a best practices guide and training interventions. “The working thesis here is that if it’s not payments that are the problem, it may be how to operate the business effectively that is,” suggests Eaglin, noting that his experience of interviewing owners and operators has shown that they are interested in understanding how to improve their businesses and willing to adapt if they believe it will help them to operate more successfully and sustainably.
Supporting taxis as a public service
Eaglin says that while the taxi industry is often vilified, it is one of the most effective services to the South African public, especially in terms of reaching historically marginalised people. However, very little is available to most taxi operators by way of social support services.
Operators work long and sometimes awkward hours and don’t get paid if they don’t work, so it’s often difficult for them to access things like healthcare without sacrificing their earnings. Better support mechanisms could help create safer and more effective public transport systems.
Wider application
Eaglin believes that the findings from his research and the projects he still hopes to run in the South African minibus taxi industry have broader implications for understanding entrepreneurship models, strategic misconduct and public transport ecosystems in other countries and continents, among other things. In particular, he believes the lessons on strategic misconduct could be relevant in understanding behaviour in a wide range of situations where underlying drivers might be similar.
He hopes the research will contribute to understanding the challenges facing entrepreneurs operating in very difficult environments and the strategies available to them (and potential solutions) to help them operate more sustainably.
