The Link Between Entrepreneurship and Local Economic

University of Trento International Doctoral School on Local Development and Global Dynamics Draft Ph.D. Proposal on The Link Between Entrepreneurship and Local Economic Development: with particular reference to SMEs in Amhara Regional State, Ethiopia. By Tsehay Abuye Email: [email protected]/ [email protected] Addis Ababa, Ethiopia. July, 2009 1 1. Background
Globalization has brought new forms of economic organization i.e. knowledge -based economy,
also termed as Entrepreneurial economy. Scholars referred the new economic organization also
as entrepreneurial mode of production. The new economic growth theory identified that
knowledge and its spillovers play critical role in generating economic growth. Comparative
advantage of nations shifted from the traditional factors of production towards the factor of
knowledge and ideas. Entrepreneurship provides the key mechanism by which the new economic
knowledge transforms to commercially viable entities. Entrepreneurs considered as key
drivers/engines of economic development. SMEs are key vehicles of entrepreneurs in
transforming knowledge to growth and development. Likewise, in the era of globalization, the
concept of local economic development (LED) has gained considerable global prominence and
economic development has become a highly localized phenomenon. The consequences of
entrepreneurship on local, regional and national economic performance commonly researched to
be strong and positive except those considering reverse causality between entrepreneurship and
economic growth.
Both theoretical and empirical researches in developed countries widely acknowledged the role
of SMEs in fostering entrepreneurial economy. Such enterprises have diverse comparative
advantage which made them competitive in the globalizing economy. Small firms are key
vehicles in fostering entrepreneurship, sources of innovative activities, industry dynamics and
huge potential in employment generation (Acs, 1992). In a similar argument SMEs in developing
countries play critical roles in terms of the socioeconomic development of these countries. These
includes: they are more labor intensive(thus absorbing the huge unemployed segment of society),
efficient, equitable in distributing the income that they generate, widely dispersed
geographically, and more importantly in nurturing of entrepreneurs(Nicher and Goldmark,2005).
In spite of the multifold advantages of SMEs to developing countries little attention has been
given to the importance of innovation and entrepreneurship for generating growth and thus
reducing poverty at national level. There is sever problem in transforming entrepreneurial
knowledge creation and use into a driving force for local economic development. Scant empirical
and theoretical researches on entrepreneurship and its consequence on economic performance
2 partly contributed to the problem. Ethiopia is not exceptional to this understanding. More
importantly, research works based on empirical tests combining entrepreneurship determinants
and its impact on the economy at local level totally inexistent in Ethiopia. Thus unable to
understand the dynamics of entrepreneurship at local, regional and national levels thus
development of inappropriate policy frameworks.
Accordingly, the purpose of this proposed research is by identifying determinants of
entrepreneurship to link entrepreneurship to local economic performance in Ethiopia. More
specifically, based on conceptually developed framework, the researcher will attempt to test
empirically the determinants of entrepreneurship and its consequences at local level(Gondar
town).
2. Conceptual Framework of the study
Entrepreneurship is a multidisciplinary concept as it is related to different established disciplines
such as economics, management, psychology, and sociology. As a result it lacks universally
accepted single theoretical framework. The difficulties in defining and measuring entrepreneurial
activities is further complicated when one tries to measure its consequence on economic
performance (Carree and Thurik, 2002). Accordingly, in order to study entrepreneurship and its
consequences on economic growth one has to need a framework as various intermediate
variables and linkages determine entrepreneurial activities and its influence on economic growth
(Wennekers and Thurik ,1999). In a similar argument, Sternberg and Wennekers (2005)
identified that local entrepreneurship is a multidimensional phenomena determined by variety of
factors. As a result, this study will apply a multi-theoretical approach in order to achieve
meaningful understanding related to the determinant and consequences of entrepreneurship at the
local level.
The economic views of Schumpeter and Kirzner with regards to entrepreneurship found to be
explicitly relevant for explaining economic growth and overall entrepreneurial success
(Wennekers and Thurik, 1999). Accordingly, Schumpeter’s and Kirzner’s empirically proven
3 findings would help much for the proposed study to identify the factors affecting
entrepreneurship in the study area and its consequences on local economic development.
Economic theory solely cannot explain entrepreneurial process and its consequences on
economic performance rather psychological and sociological theories are also important among
others. Accordingly this study will depend also on sociological and psychological perspectives of
entrepreneurship. The psychological theories related to the individual characteristics such as
traits and motivational factors to be entrepreneurs. The sociological theories might involve the
social learning theory and importance of social network on the success of entrepreneurs. This
probably qualifies the study to be considered as interdisciplinary in approaches.
Particularly empirical research widely identified that there are diverse factors affecting the level
of entrepreneurship which in turn measured its consequences on economic growth. These include
entrepreneur’s characteristics (educational level, age, traits, etc), firm size and age, innovation
and capabilities, resources, institutions and policy reforms, etc. Accordingly, after due review of
the literature, I have developed the following conceptual frame work of the study. This will make
ease the process of empirical analysis of the strength of each independent variable in determining
the level of entrepreneurship which in turn would help to measure local economic growth. See
Figure:-1, for detailed observation of the independent and dependent variables considered in
the conceptual framework of analysis.
4 Macro- Level
Meso- Level
Micro-Level
Independent Variables
•
•
•
•
•
•
•
•
•
•
•
Psychological/motivational
Factors
Demographics(Education, Age,
Gender, Household)
Work experience
Type of activities/sector
Age
Location/level of urbanization
Organizational type
Formality/informality
Source of Finance/social capital
Linkages: Vertical vs Horizontal
Technology
•
•
•
•
Dependent Variable
Entrepreneurship
(ACTIONS)
Available Polices and support
programs
Institutions and regulations
Infrastructure
Socio-cultural values and
norms
5
Fig 1: Conceptual Framework of Analysis
Local Economic
Growth
2. RESEARCH DESIGN AND METHODOLOGY
2.1. Objectives and Research Questions
The general aim of this proposed research is to investigate the determinants of entrepreneurship
and its consequence on local economic growth in Gondar town. Expressed in different words, the
proposed research is aimed at identifying micro-level, meso-level, and macro-level determinants
of entrepreneurship among entrepreneurs in SMEs of Gondar town and how their level of
entrepreneurship influences the development of the town. In order to meet this general objective
of the study, three general dimensions determining entrepreneurship were (will be more
polished) identified based on past studies and due review of the literatures on entrepreneurship.
These dimensions broadly classified as Macro, Meso and Micro level determinants of
entrepreneurship. Each category includes list of independent variables as suited to multiple
regression. Based on these three dimensions, the following three general research questions are
proposed:
•
How entrepreneurs in SMEs of Gondar town are influenced by their individual
characteristics (Macro-level factors)? What are the major determining factors of their
entrepreneurial level at micro level? How this features of the entrepreneurs influence to
local economic growth?
•
How SMEs characteristics of Gondar town influences level of entrepreneurship? What
are the major determining factors of entrepreneurship at the meso-level? How SMEs
characteristic influences local economic growth?
•
How the contextual factors (institutional, socio-cultural values and norms) in the town
(thus at national level) influences entrepreneurship? What are the major determinant
factors at macro-level? How these factors influence local economic growth?
Depending on the relevance, the above general research questions will be modified to more
specific hypothesis. However, I am not that much interested to give tentative solutions
(hypothesis) for my problem under investigation rather ask relevant questions and get bold
answers.
6 2.2. Characteristics of the Proposed Research
According to Kumar(2005), the major aim of descriptive study is to describe and provide
information what is available regarding a group of people, community, a situation, etc.
accordingly this proposed research will describe and provide information on the determinants of
entrepreneurship and the consequences of entrepreneurship as it is related to entrepreneurs in
SMEs of the study area. Moreover the study will depend on established theories of
entrepreneurship and local economic development as this feature of the research would further
help to consider it as descriptive. This is due to the fact that a descriptive research to be
considered as descriptive must be supported by established theory (Hussey and Hussey, 1997).
Correlation is also another feature of the proposed research. The various identified and (will be
identified) factors affecting entrepreneurship and its impact on local economic performance, as
described in the literature review, will be analyzed. Accordingly the findings will be determined
based on their level/strengths of correlation among and between the variables. In this regards the
study will also could be considered as correlation type. According to Bryman(2004) in a study
when the strength of the relationships between variables is explored it is considered as
correlation type of research.
More importantly, the proposed research will have also exploratory characteristics as empirical
researches in the proposed area are scant in the Ethiopian context. According to Kumar (2005), a
given research is said to be exploratory in nature when extensive knowledge of the specific
problems under examination are not available before the study begins. This research will also
employ both qualitative and quantitative methodologies which imply the application of mixed
methods in the proposed study. This is basically due to the manifold advantage of such an
approach. According to Creswell etal(2007), the use of both qualitative and quantitative
approaches in combination provides a better understanding of research problems that either
approach alone.
7 2.3. Population and Sample Size
The population of the study will composed of entrepreneurs in SMEs of Ethiopia. Gondar town
(North West of Ethiopia) in Amhara Regional state will be considered as study area. The
particular relevance of the study area is the researcher born and lived for long time in the town.
More importantly, the researcher has accomplished a research work (Thesis) in this area on
SMEs and how they integrate the rural urban economy through their economic and employment
footprints. This is truly comparative advantage for the researcher in order to design research
methodologies in advance according to the context of the area and get ready for available
constrains in the study area.
Entrepreneurs’ database, found in the Municipality of Gondar Town, will be used as sampling
frame. Based on distinct criteria such as balancing the gender of the owner, the business has to
be in operation for at least one year, a business venture which exhibited entrepreneurial features,
firm size and types of the business activities a total of 250 entrepreneurs will be selected
systematically. Accordingly the quantitative data will be collected from these sample enterprises.
With regards to the qualitative data 25 entrepreneurs out of the total 250 sampled entrepreneurs
will be selected purposefully who are assumed to be potentially resourceful entrepreneurs for the
problem under investigation.
2.4. Instruments
The research will apply both quantitative and qualitative instruments. Survey questionnaire will
be used as it enables a systematic collection of predominantly quantitative data. This will be very
useful in measuring the many variables and their level of relationship with entrepreneurship
listed in the conceptual framework of this study. The questionnaires will include both closed
ended and open ended questions structured according to the conceptual frame work
With regards to the qualitative, a structured interview will be conducted with purposefully
selected entrepreneurs who are also included for the survey questionnaire as this would help for
descriptive data and to put what the entrepreneurs would say as it is. Moreover in depth
interview will be conducted with the concerned government offices such as the Zonal SMEs
8 Development Office, Regional Office, and with Leaders of the Business Associations found in
the town.
A pilot study will be employed first to ensure the reliability and appropriateness of the study
such as the whether the research questions operate well and function of instruments. This is
highly dependent on the availability of resources such as time.
2.5. Analytical Methods
The quantitative date will be analyzed using the Statistical Package for Social Scientists (SPSS)
software updated version at the time of analysis. This is useful to perform statistical tests such as
multiple regressions, correlations, reliability, factor analysis and analysis of variance (ANOVA).
To make the analysis procedural the questionnaires will be coded and entered to the SPSS for
statistical analysis.
Multiple regressions will be the main statistical technique to be used during analysis as it
measures the relationship between independent and dependent variables, as outlined in the
conceptual framework. In this case a single dependent variable (local economic growth) and
multiple variables (as listed in the conceptual framework) will be analyzed using this technique.
With the help multiple regression analysis, correlations will be produced which will able to
measure the strength of the association between any two pairs of variables. This would help to
identify the major determinants of entrepreneurship in the study area. Beta coefficients will be
used to derive information about the relative contribution of each independent variable. In
addition, ANOVA and factor analysis will be employed.
Content analysis will be the major analytical technique for qualitative data.
9 3. Literature Review: Preliminary
3.1. Entrepreneurship: Concept, Link to Economic Development and Determinants
There are various definitions on entrepreneurship forwarded by different scholars from different
perspectives and academic background. However, depending on the objectives, this proposed
research will depend on the two economic school of thought on entrepreneurship i.e.
Schumpeter’s (1934, 1954) and Kirzner’s(1973,1979) concepts as working definitions. These
scholarly definitions pay particular attention to innovation, identification of opportunities, impact
of entrepreneurship on the economic performance, and the entrepreneur as the main actor in the
entrepreneurial process.
Schumpeter (1934) stated the entrepreneur as the innovator who introduces something new into
an economy. The newness might involve a new product, a new (combination) method of
production or a new raw material supply or a new industry structure, and also it includes
newness in the organization of a given industry. More importantly, the entrepreneur is the actor
and translator of the newness. The entrepreneur is key to the dynamic of economic development
and growth via putting together new combinations and using distinctive opportunity structure,
and his/her creativity as decision makers. He also described that, of the different sources of
change particularly in capitalist society, entrepreneurial driven innovation in products and
process are crucial change agents particularly in the capitalist society. In a similar argument the
Austrian economist Kirzner (1997) described that the temporal and spatial inefficiencies in an
economy could me discovered and mitigated by entrepreneurial activities.
The 1970’s and 80’s could be considered as a turning point in paradigm shift from large firms to
small firm. This shift to smallness has been studied by different scholars mainly economists
putting forth various justification to the phenomena. According to Carlsson (1992), fundamental
changes in global economy since 1970’s such as increasing global competition, market
uncertainty and fragmentation, and changes in the character of technological progress
contributing significantly in the paradigm shift. In line with this argument, Brock and Evans
(1986) identified alternative justifications as to why the shift to smallness has occurred. These
include, among others, increase of labour supply and the level of education, changes in consumer
10 taste and flexible regulations. More importantly, Audretsch and Thurik(2000) considered the
knowledge based economy as a prime factor for the shift to small business. At the same time
they call the switch from the managed economy to the entrepreneurial economy (Audretsch and
Thurik, 2001). More importantly, entrepreneurship is considered as an endogenous promoter of
the development (Porter, 2000).
Both empirical and theoretical research works on the role of entrepreneurship in economic
development clearly revealed strong and positive correlation. Porter (1990) rightly argued that
entrepreneurship is ‘at the heart of national advantage’. This is basically due to the fact that
entrepreneurship has direct and strong impact on the performance of a given economy via
promoting innovation and then creating new and small dynamic firms. Newness through startups and innovations as well as competitions are the most relevant factors linking
entrepreneurship to economic growth. According to Baumol (1993), ‘newness’ is the key
contribution of entrepreneurship to economic growth. Newness is measured as new start –up or
based on the transformation of new inventions and ideas in to commercially viable entities.
The consequence of entrepreneurship in developing countries is not exception to the above
understandings even it seems more significance in addition to its economic functions. Dynamic
entrepreneurial firms in Africa have the potential of employment creation, the creation of
technological capabilities and physical and human capital formation (Goedhuys and Sleuwaegen,
2009). This will help to expand employment opportunities in the productive sector as there is
growing share of the non agricultural labour force in Africa. According to (Nicher and
Goldmark, 2005), if entrepreneurs in developing countries overcome obstacles such as impeding
legal and financial systems, fragmented market, and unequal access to resources they were able
to be twice as creative as their counterparts in developed countries. More importantly, fostering
productive and high growth entrepreneurship in less developed countries would contribute to
peace and transition (UNCTAD, 2006).
Innovation driven economic development has particular significance for developing countries.
Such endogenous growth leads to higher income growth, better health and more food, and more
11 importantly advancing indigenous knowledge base of the countries. According to Finger and
Schuler (2002), developing countries and development agencies are increasingly recognizing the
knowledge base in such countries and the need to focus on integrating and adapting indigenous
knowledge in the innovation system. Despite the some encouraging socio-economic and political
developments in some developing countries, there are still challenges of adapting or adopting
innovative results to the local systems of developing countries. According to World Bank (2004),
the major challenges of developing countries include challenge of low demand, physical
infrastructure and communication means, institutional capacity and set-up and economic
structure.
Based on survey of 48 countries in 2008 the Global Entrepreneurship Monitor (GEM) gathered
data on ‘nascent’ and ‘necessity’ entrepreneurship and found that early stage and necessity type
of entrepreneurship are more prevalent in low-income countries as compared to high-income
countries. In spite of the fact that, this activity does not take off in a way that would lift most
people’s out of poverty. According to the same report, however, business discontinuation rate is
higher in ‘factor- driven economies than in ‘innovation-driven economies’. The death rate should
be minimized in order to bring the desired level of knowledge based economic development on
the basis of innovation in such low income countries. Accordingly the determinant factors of
death and more new births should be identified either based on empirical or theoretical
researches.
With regards to determinants of entrepreneurship various empirical researches identified that
diverse socio-economic, institutional and cultural variables influence level of entrepreneurship.
These variables broadly classified as micro, meso and macro level factors. According to
Sleuwaegen and Goedhuys (2002), in developing countries the growth of firms is not only
influenced by learning process rather by a larger set of other variables including individual
characteristics and the supply and demand side conditions in those countries. Higher level of
education is strongly linked to higher entrepreneurial performance. Based on evidences from 20
African countries, Van Der Sluis, van Praag and Vijverberg (2004), identified that more educated
entrepreneurs show superior entrepreneurial performance. Likewise studies in Sub-Saharan
12 Africa indicated that those who completed secondary education have contributed much to the
expansion of SMEs particularly in Kenya and Zimbabwe (Mead and Liedholm, 1998). With
regards to the relationship between work experience and level of entrepreneurship, an empirical
study conducted in Kenya confirmed that entrepreneurs with at least seven years of work
experience expanded their firms more rapidly than those without such experience (Mead and
Liedholm, 1998). In developing countries women-owned SMEs constitute the largest proportion.
However, studies revealed that women-owned SMEs grow more slowly that men-owned as it is
mainly due to the fact that women-owned enterprises are located within the household((ILO,
2004). Empirical evidences also revealed that younger and smaller firms have higher growth
rates than larger and older companies. In the same way innovation and capabilities contributed
significantly to higher growth rates of SMEs.
Reforms and Regulation have direct impact investment decisions and occupational choice which
in turn affects entrepreneurial process as it requires access to new technology or new idea and
then new actions. The role of institutions in the overall economic development of a country
found to be paramount since North Douglas’s times.
Particularly in its relationship with
entrepreneurship William Baumol (1990) rightly argued that the wealth of nations is not so much
affected by the presence or absence of entrepreneurship rather by the type of entrepreneurship,
i.e. productive, unproductive, or destructive. The allocation between productive and
unproductive entrepreneurship is highly influenced by the rules in place in society. In practical
terms, Dallago(2005) based on his theoretical studies of the transformation process in Southern
and Eastern European(SEE) countries and its institutional impact on entrepreneurship, identified
that incomplete transformation undermines the productive role of entrepreneurship. Accordingly
he recommended that an institutionalization process to be effective and desirable has to be
comprehensive which considers role of informal institutions and irregular economy as in the case
of SEE countries.
The influence of institutions and policies on entrepreneurship is not always straightforward
rather the impact depends on the level of entrepreneurial activities. Institutional reform has
negative and positive effect when entrepreneurial activity is strong and weak, respectively.
13 Institutional reforms might impose cost for the existing entrepreneurs and play zero-sum game or
even helpful for new start-ups.
Contrary to the above understanding, even institutional reforms and policies aimed at
benefiting SMEs may impede growth and expansion of enterprises particularly in developing
countries. According to World Bank report (2005), in India manufacturing of certain products
is reserved to small firm which in turn disincentives firm expansion via product
diversification. Similarly India offers attractive incentives for SMEs during their early stage
and this shows growth beyond certain level ensures losing benefits (Mitra and Pingali, 1999).
Accordingly any support institutional reform and programs aimed at promoting
entrepreneurship should consider the dynamism of the sector and contextual factors as well.
Literatures confirmed that the smaller the size of the firm the more likely to innovate compared
to larger firms. Based on a survey of 71 manufacturing firms in Ethiopia, UNCTAD (2002)
found that small and medium sized enterprises were more likely to innovate than larger firms.
Statistically, 44 and 51 percent of small and medium sized enterprises respectively introduced
minor technological changes as compared to 22 percent of large firms. Similarly, 18 and 20
percent more of small and medium sized enterprises respectively introduced new products and
production process. Accordingly, the strong presence of small firms in Ethiopia can under the
right circumstances work to its advantage. This has to be complemented with both empirical and
theoretical researches in order to identify the determinants of entrepreneurship and how rightly
link it to economic development at the local level.
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