CHAPTER 3 THE IMPORTANCE OF ENTREPRENEURSHIP AND FACTORS AFFECTING ENTREPRENEURSHIP

Objectives The objectives of this chapter are to: provide better understanding of the importance of entrepreneurship in a free market economy. describe important factors that affect individual inclination and interest towards entrepreneurship.

Learning Outcomes At the end of this chapter, students should be able to: gain an understanding of the importance of entrepreneurship in a free market economic setting so that they will be able to think critically whenever entrepreneurial development is discussed learn some background factors that affect a person’s inclination and interest towards entrepreneurship

The Importance of Entrepreneurship One of the main functions of entrepreneurial initiatives and activities is to provide products and services to the society (customers) that will add value and enhance the quality of their life. Numerous small entrepreneurial initiatives have evolved into big organizations that create great impact on society in terms of products, employment opportunities and other economic multiplier effects to the local and national economy.

The Importance of Entrepreneurship (cont.) A society that has a great entrepreneurial culture is bound to be more productive, competitive and prosperous than those that are yet to develop its entrepreneurial culture. Entrepreneurs are agents that mobilize effective and efficient production technology, increase labour productivity and produce output that are of higher quality, cheaper and better service delivery to serve customer’s needs.

The Importance of Entrepreneurship (cont.) A society that has many entrepreneurial individuals will be able to allocate and use capital, resources and labour productively and efficiently. Given the same amount of resources, a society that is more enterprising will be more productive and prosperous than would be otherwise .

Entrepreneurship (cont.) The Importance of Entrepreneurship (cont.) Former socialist countries like Eastern Europe and others that are centrally planned economies  find it difficult and are struggling to cultivate entrepreneurial culture. The People’s Republic of China created a dual system where entrepreneurial activities are allowed and encouraged in special economic zones. This development has proven that even socialist countries acknowledge the role of entrepreneurs in creating wealth for society.

Entrepreneurship (cont.) The Importance of Entrepreneurship (cont.) A healthy entrepreneurial culture will grow in a political, legal and economic environment that encourage entrepreneurial activities. These are enablers that provide avenues for individuals and organization to progress and move up the social and economic ladder in society. The whole process helps to create wealth and prosperity to a nation.

Entrepreneurship (cont.) The Importance of Entrepreneurship (cont.) A nation whose citizens are entrepreneurial and industrious will be more successful economically as they will be good at identifying and capturing business opportunities within their countries and globally.

Factors Affecting Entrepreneurship Sociocultural Factors: Culture and Society There are many scholars who believe that entrepreneurship is a culturally embedded phenomenon (Morris & Schindehutte, 2005; Swierczek, 2004; Co, 2003; Chrisman, Chua & Steier, 2002). The sociocultural environment which consists of the beliefs and attitudes of the members of society to what are desirable and legitimate activities is an important factor affecting entrepreneurship (Shane, 2003).

Entrepreneurship (cont.) Factors Affecting Entrepreneurship (cont.) These scholars argue that entrepreneurship will thrive in a society where entrepreneurs are highly appreciated and viewed as cultural heroes (Malach-Pines, Levy, Utasi & Hill, 2005). Entrepreneurship will not prosper if most members of the society view it with suspicion (Zapalska, Perry & Dabb, 2003), as an individual’s behaviour is largely influenced by what others think, especially when faced with ambiguities and uncertainties (Minniti, 2005).

Entrepreneurship (cont.) Factors Affecting Entrepreneurship (cont.) Socio-cultural environment may influence the development of entrepreneurship through the ‘role theory’ which emphasizes the influence of role models on entrepreneurial behaviour (Co, 2003). It is argued that the presence of successful entrepreneurs will encourage others, as their presence will convey a message that entrepreneurship is an attractive and viable career option.

Entrepreneurship (cont.) Factors Affecting Entrepreneurship (cont.) Family and close friends may also serve as role models for aspiring entrepreneurs (Co, 2003). Scholars believe that the desire to start a business can be significantly influenced by parental role models and/or exposure to entrepreneurial activities at a younger age (Drennan, Kennedy & Renfrow, 2005).

Entrepreneurship (cont.) Factors Affecting Entrepreneurship (cont.) Similarly, a study by Singh and DeNoble (2003) reports that having a close self-employed relative is one of the core antecedents of entrepreneurship. The literature also suggests that entrepreneurs often came from families where the mothers or fathers were themselves entrepreneurs (Crant, 1996, Dyer, 1992, as cited in Drennan et. al, 2005).

Entrepreneurship (cont.) Factors Affecting Entrepreneurship (cont.) There is evidence that the existence of a successful role model encourages entrepreneurial efforts. Likewise, it would be very difficult to encourage people to become entrepreneurs when they see no or few examples of others who have been successful entrepreneurs (Co, 2003).

Entrepreneurship (cont.) Factors Affecting Entrepreneurship (cont.) The level of entrepreneurship is also affected by a society’s specific cultural system that is formed and influenced by the collective values of individuals within that society (Shane, 2003). Weber (1930), argues that an individual’s inclination towards entrepreneurial activities is largely influenced by his/her cultural values and beliefs such as asceticism, deferred gratification, frugality, and thrift; virtues that are promoted by Protestantism.

Entrepreneurship (cont.) Factors Affecting Entrepreneurship (cont.) Researchers have constantly associated certain cultural values that can either encourage or discourage entrepreneurial activities. For example, values associated with power distance, collectivism (Takyin-Asiedu, 1993), femininity and uncertainty avoidance have been identified as having detrimental effects to a society’s entrepreneurial development (Hayton, George & Zahra, 2002).

Entrepreneurship (cont.) Factors Affecting Entrepreneurship (cont.) Cultural beliefs that support innovation, risk-taking and autonomy are found to have positive influences on a society’s entrepreneurial pursuits (Swierczek & Quang, 2004). Evidence also suggests that entrepreneurship thrives where values such as wealth generation, personal gain, acceptance of change and economic advancement are prevalent (McClelland, 1965).

Entrepreneurship (cont.) Factors Affecting Entrepreneurship (cont.) The Importance of Networking Entrepreneurial ventures are naturally constrained by human, informational and financial resources (Jack, Dodd & Anderson, 2004). Networking has been identified as an important prerequisite for starting a successful new venture (Reynolds, 1991).

Entrepreneurship (cont.) Factors Affecting Entrepreneurship (cont.) It is argued that as a consequence of their newness and smallness, new ventures lack capability and legitimacy to acquire the resources through the traditional market mechanism (Hite & Hesterly, 2001). Accordingly they rely to a considerable extent upon their networking ties to provide both resources and opportunities for their survival and success (Jarillo, 1989, as cited in Hite, 2005).

Entrepreneurship (cont.) Factors Affecting Entrepreneurship (cont.) This phenomenon is referred to as the ‘network success hypothesis’ (Witt, 2004: 394). In particular, the network success hypothesis argues that business founders will be better able to gain access to resources more cheaply through their network ties than through the normal market channels. Their network ties will also give them access to those resources that would not otherwise be available through normal market operations such as reputation and customer contacts.

Entrepreneurship (cont.) Factors Affecting Entrepreneurship (cont.) The theory of social embeddedness argues that all economic activity is embedded in social relations and that relationship can accordingly influence how a business is established and the way it is run (Uzzi, 1997). It distinguishes between two relationships involved in business transactions, the ‘arm’s length’ relationship and the ‘embedded ties’ (Witt, 2004).

Entrepreneurship (cont.) Factors Affecting Entrepreneurship (cont.) While the former is the typical market transaction without personal attachment between the transaction partners, the latter is based on more personal relationships and is generally governed by informal market mechanisms such as trust (Hite, 2005).

Entrepreneurship (cont.) Factors Affecting Entrepreneurship (cont.) Governmental Influence Entrepreneurship has long been recognized as a prime mover for economic development (Schumpeter, 1934). It is believed that a vibrant entrepreneurial activity may help a country to revive its slow economic growth and address social and economic injustice (Walburn, 2005).

Entrepreneurship (cont.) Factors Affecting Entrepreneurship (cont.) As a result, there is a growing interest in the use of public policy at different levels of government all around the world, to promote entrepreneurship activities such as in the United States (Gilbert, Audretsch & McDougall, 2004), Europe (Walburn, 2005) Korea, Taiwan (Swierczek & Quang, 2004) and Singapore (Shome, 2006).

Entrepreneurship (cont.) Factors Affecting Entrepreneurship (cont.) Although scholars tend to agree on the important role of the government in facilitating and providing a conducive environment for the growth of entrepreneurs and their enterprises (Dahles, 2005; Gilbert et al., 2004; Nolan, 2003), There is less agreement among scholars on the effective level of government influences (Low, 2006; Papanek, 2006; Li, 2002)

Entrepreneurship (cont.) Factors Affecting Entrepreneurship (cont.) There are three illustrative models of entrepreneurship development adopted by different countries in the world. The first is the free market model which emphasizes minimal government influence to reduce barriers of entrepreneurship and to open up new business opportunities. The second model is the guided entrepreneurship where public policy is used as a tool to create a supportive environment for the entrepreneurs. The third model is the social democratic in which government encourages enterprise development but with social protection.