Entrepreneurship & The Economic Injection

Thu, 02 Apr 2009 10:57

How valuable is entrepreneurship in a developing nation? Dr. Jose Barreira deconstructs the start-up mentality.

Ever since the fall of Rome (circa 476 CE) in the eighteenth century, there was practically no growth in per capita wealth generation in the West. With the rise of entrepreneurship, however, per capita wealth generation and income grew exponentially - 20% in the 1700s, 200% in the 1800s, and 740% in the 1900s.

Entrepreneurship has been a topic of study for centuries, but has only come to the fore in the last five decades. Entrepreneurial thought has evolved through unpredictable turns and profound developments, resulting in various paradigm shifts (globalisation & international commerce, demand and supply curves, competition as a discovery mechanism, the opportunity construct), offering new ideas of what it means to be entrepreneurial. As a topic of growing interest among management scholars and social scientists, business schools the world over have embraced the growing legitimacy of the entrepreneurship phenomenon.

Today, two thirds of millionaires in the USA are self-employed. America's 'entrepreneurial revolution' has resulted in a mere five percent of small organisations contributing to 77% of the 34 million new jobs created between 1980 and 1998.

The results of entrepreneurship globally are incredibly profound. They are the architects of economic wealth, a source of growth and job creation, all of which result in an increased stream of taxpayers and contributors to charity. As a global phenomenon, it has been estimated that there are about 73 million entrepreneurs active in 34 nations, introducing the world to entirely new industries of products and services. Research has confirmed that a country's national growth is deeply entwined with the volume and caliber of its entrepreneurial capital.

Entrepreneurial capital, based on D. Ulrich's definition of intellectual capital, is the product of competencies and commitments, which translates into the present value (PV) of generated future entrepreneurial behaviour. Briefly formulated, it is:

Entrepreneurial Competencies x Entrepreneurial Commitment = Entrepreneurial Capital (PV)

The combined and sustained effect of entrepreneurial competence and commitment should equal future entrepreneurial behaviour. Over time this would add up to the quality of the entrepreneurial capability and its ability to generate future income. Hence, the net worth of the capability to exploit future opportunities can be termed entrepreneurial capital.

Exploring the Concepts

Entrepreneurial competency is perceived self-efficacy, which reflects confidence in the ability to perform a series of tasks, such as identifying opportunities and acquiring resources. Entrepreneurial commitment reflects a persons capacity to see ventures through from birth to fruition. It embodies the emotional, intellectual, and physical energy employed in order to reach the ventures' main objective.

It is imperative to understand that the relationship between entrepreneurial competency and commitment is multiplicative, and not additive. The most important resource and main competitive advantage of an emerging venture is human capital.
So, zero commitment or zero competency results in a zero entrepreneurial capital. In other words, it is a waste of both time and resources.

The depth and quality of an entrepreneur's actions are the essence of human capital, which is the product of education, work experience, and the knowledge gained through these experiences. It is fundamental to anyone who seeks to use resources effectively in a new venture, and if used properly, can lead to superior performance and even a sustainable, competitive advantage.

Knowledge is either tacit or explicit. Tacit knowledge, or 'know-how', is highly personal and the result of human experience and human senses. Often considered as more valuable because it provides context for people, places , ideas and experiences, tacit knowledge is difficult to convey and requires a great deal of trust and personal contact. It is difficult to extract. For example, one cannot learn to be a brilliant manager by reading textbooks and attending lectures. Managers become brilliant through years of hard work, experience and apprenticeship.

Explicit knowledge, or 'know-what', consists of the type of information conveyed in normal interactions, processes or procedures. It is easily and readily transmitted to others. Wikipedia, database management, manuals and intranet systems are all examples of explicit knowledge

Business knowledge refers to different types of expertise in entrepreneurial success and is constructed to varying degrees of management knowledge (planning, organising, leading, coordinating and controlling), technical knowledge (technical nature of the products/services offerings), and financial knowledge (finances are obviously pivotal and the management of cash-flows for sustainability is absolutely critical).

Formal education as a component of human capital assists in the accumulation of explicit knowledge, providing many skills useful to entrepreneurs. Research has shown that formal education is central to high-growth or opportunity entrepreneurs. Human capital theorists such as Davidsson and Honig postulate that education is an investment that produces higher wage compensation in return for an individual's variations of skills, training, and experience.

These findings are further strengthened by the results by the research done by Peterman and Kennedy. They have found that despite early notions that entrepreneurs were less educated than the general population, their research evidence suggests that entrepreneurs have a higher level of education than non-entrepreneurs. Turbulent changes in the business environment - specifically the growth of knowledge economies - have made it essential for entrepreneurs to obtain some formal education to be able to compete successfully.

A study in South Africa investigating the effects of entrepreneurship education, conducted among University students by Urban and Barreira, revealed that entrepreneurial propensity increased after exposure to an entrepreneurship intervention. Based on a pre-test-post-test quasi-experimental design, survey results indicated a significant increase in self-employment intentions; all were significantly higher once the students were exposed to entrepreneurial education. The following parameters were used in the survey:

1. The student's perception of starting an entrepreneurial venture him or herself
2. The student's perception of his or her opportunity recognition
3. The student's perception of his or her ability to draw up business plans
4. The student's confidence in managing his or her own entrepreneurial venture.

In high-income countries (such as the United States, the United Kingdom and Australia), 57 per cent of entrepreneurs have a post-secondary education, suggesting that in these countries the education systems tend to build a suitable skills base for entrepreneurs. In poorer countries (such as Mexico, Brazil and many African countries), only 23 per cent of entrepreneurs have a post-secondary education.

It is important to note that when undertaking new ventures, potential entrepreneurs must ensure that they can demonstrate business knowledge and work experience towards possible stakeholders, and they should be able to prove that they have supplemented their general qualifications with industry-specific experience as well as functional education and experience.

The overwhelming majority of people starting a business are already employed. Being employed allows a certain sense of security for people to pursue further opportunities. Work experience is especially useful when it has included start-up issues such as generating sales, developing marketing avenues and tactics, obtaining finance, and dealing with internal financial and management issues.

Moreover, apprenticeship/ learnerships have been found to be a reliable path for entrepreneurs to follow to ensure future success. This 'learning-by-doing' approach allows entrepreneurs to gain in-depth and applied appreciation of work situations. This path dependency helps people develop skills in a specific field or industry, which can then be transferred to a new job or a start-up business.

Entrepreneurship can be broadly divided into two radically distinct camps, opportunity/pull and necessity/push entrepreneurship. It's important to hold onto this entrepreneurship dualism, so that one is aware what both camps require and produce in terms of economic inputs and outputs. There is a general misconception from many institutions that “one size fits all” in entrepreneurship.

Our Place in the World

It is imperative to realise that South Africa has a dual-logic economy, on the one side there is a highly developed economic sector and on the other side one struggling for survival. This disparity influences the numbers and types of entrepreneurs which in turn has a bearing on South Africa's total entrepreneurship activity rating. Research has shown that South Africa's overall entrepreneurship activity rate is lower when compared with the averages of different categories of countries, as evident from the table below. The Total Entrepreneurial Activity index (TEA) provides a harmonised measure of prevalence of individuals involved in the creation of new firms. This measure indicates a substantial variation in entrepreneurial activity among countries.

Macro comparisons for 2006 GEM Report

Country	Real GDP growth for 2006 (%)	World Competi- tiveness Book ranking 2006	Index of economic freedom 2006 (0 = most free)	Average number of hours worked 2005	Unemploy-ment 2005 (% of population)	TEA rates for 2006 (%)
Argentina	7.3	55	3.30	2044	10.1	10.18
Australia	2.9	6	1.84	1757	5.1	11.96
Belgium	2.1	27	2.11	1722	8.4	2.73
Brazil	3.5	52	3.08	1931	9.9	11.65
Canada	3.1	7	1.85	1869	6.8	7.12
Chile	5.5	24	1.88	2205	8.1	9.19
China	9.5	19	3.34	1958	4.2	16.19
Colombia	4.8	40	3.16	1987	11.7	22.48
Croatia	4.1	59	2.78	n/a	13.1	8.58
Czech Rep.	6.0	31	2.10	1946	7.9	7.85
Denmark	2.7	5	1.78	1658	4.8	5.32
Finland	3.5	10	1.85	1714	8.3	4.99
France	2.0	35	2.51	1561	9.5	4.39
Germany	1.3	26	1.96	1674	9.5	4.21
Greece	3.3	42	2.80	1744	9.9	7.90
Hungary	4.4	41	2.44	2012	7.2	6.04
Iceland	5.5	4	1.74	1762	2.7	11.26
India	7.3	29	3.49	2347	9.5	10.42
Indonesia	5.2	60	3.71	2175	9.9	19.28
Ireland	5.0	11	1.58	1779	4.3	7.35
Italy	1.2	56	2.50	1764	7.7	3.47
Jamaica	3.7	n/a	2.76	n/a	n/a	20.32
Japan	2.8	17	2.26	1864	4.4	2.90
Latvia	9.0	n/a	2.43	n/a	n/a	6.57
Malaysia	5.5	23	2.98	2152	3.5	11.09
Mexico	3.5	53	2.83	2281	3.6	5.26
Netherlands	2.5	15	1.90	1741	4.7	5.42
Norway	2.2	12	2.29	1703	4.6	9.14
Peru	5.0	n/a	2.86	n/a	n/a	40.15
Philippines	5.0	49	3.23	2301	8.1	20.44
Russia	6.0	54	3.50	1775	8.1	4.86
Singapore	5.5	3	1.56	2056	3.2	4.85
Slovenia	4.0	45	2.41	1830	6.1	4.63
South Africa	4.3	44	2.74	1910	26.5	5.00
Spain	3.3	36	2.33	1763	9.2	7.27
Sweden	3.5	14	1.96	1775	5.8	3.45
Thailand	5.0	32	2.99	2184	1.7	15.20
Turkey	5.0	51	3.11	2154	10.3	5.96
UK	2.5	21	1.74	1787	4.7	5.77
United Arab Emirates	11.5	n/a	2.93	n/a	n/a	3.74
United States	n/a	1	1.84	1895	5.1	8.82
Uruguay	4.6	n/a	2.69	n/a	n/a	12.56

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