Entrepreneurship, Competitiveness and Development

Entrepreneurship, Competitiveness and Development December 22, 2014 Dr. Sandra Palmer, Ms. Mardene Carr and Dr. Leahcim Semaj Abstract Jamaica remains on the periphery of growth and prosperity even though it has been five decades since independence. Ordinary Jamaicans are living below their potential because the economy has failed to provide them with the desired quality of life. It is widely believed that entrepreneurship is the magic bullet that will lead to growth and economic development in Jamaica.

Such a push towards entrepreneurship will eventually move the economy

forward, essentially creating a Jamaica where individuals want to live, work, raise families and build businesses. Even though there have been several programmes to encourage entrepreneurship in Jamaica; the high discontinuance rates indicate that something is lacking. More is required in terms of skills and resources in order for entrepreneurship to be successful in Jamaica.

More than five decades after independence, the Jamaica economy has failed to provide the desired quality of life for most ordinary Jamaicans. The economy remains on the periphery of growth and prosperity. The entrepreneurship literature ( Shane & Venkataraman, 2000), would seem to suggest that entrepreneurship leads to growth and economic development. It has been stated in several circles that what is required to move the economy forward and create a Jamaica where individuals want to live, work, raise families and build businesses is to focus on entrepreneurship. Starting with the seminal work of Schumpeter (1934) and all the theories and attempts at defining entrepreneurship (Bull & Williard, 1993) this paper defines entrepreneurship as the use of creativity to produce innovation that solves a need/want/desire; exploiting the perceived opportunity by taking the required risks to build © 2015 Dr. S.Palmer, M.Carr and L.Semaj

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something of value, irrespective of the resources currently controlled. Depending on the school of thought, entrepreneurship can take place in old and existing firm or new firms. Some definitions include self-employment, others consider only nascent entrepreneurs who bring a new innovation to market and create employment for others. There have been several programmes by both political administrations to encourage entrepreneurship. However, the results have been less than encouraging. Why haven’t we been able to get it right? Could it be that the fundamentals for the formula to work are not in place? Could it be that we are focusing on the wrong elements? Several researchers in the field have provided evidence that economic development is a possible outcome of entrepreneurial activity within a country. It is their considered opinion that a flurry of entrepreneurial activity will lead to new businesses, jobs, new products and services, increased competitiveness, increased productivity and an increase in the quality of life of persons on a multiple level (Coyne, 2003) However, not all entrepreneurial efforts seem to follow that trajectory (Coyne, 2003). It is the case based on Global Entrepreneurship Reports (GEM) on Jamaica as at 2009, that the high rates of entrepreneurial start-ups have not followed that trajectory. Most start- ups lack scalability which implies that the underlying business model does not have the potential for economic growth within the company. They also lack sustainability which implies that the business cannot be maintained at a certain rate or level.

It appears that the stage of economic development whether factor driven, efficiency driven or innovation driven does impact the relationship between entrepreneurial activities and economic development (Wennekers, et al., 2005). An analysis of the drivers that facilitate sustained economic growth is provided by the World Economic Forum’s ‘Global

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Competitiveness Report. It divides countries into the three stages aforementioned; this corroborates with the literature on economic development theory. 

Stage 1: Factordriven economies, where countries compete primarily on the use of unskilled labour and natural resources and companies compete on the basis of price as they buy and sell basic products or commodities, e.g. Algeria, Zambia and India.



Stage 2: Efficiencydriven economies, where growth is based on the development of more efficient production processes and increased product quality, e.g. Jamaica, South Africa and Bosnia.



Stage 3: Innovationdriven economies, where companies compete by producing and delivering new and different products and services by using the most sophisticated processes, e.g. Israel, Japan and Germany.

According to the GEM 2013 report, there seems to be an inverse relationship between the level of economic development (stage 1, 2 or 3) and the number of persons going into business (Total Early-Stage Entrepreneurial Activity [TEA Rate/TEA index]). As countries do better, as indicated by increased per capita income a nd increased Gross Domestic Product (GDP), individuals move towards employment and out of self-employment. This phenomenon only changes at the highest level of economic development when some individuals voluntarily opt out of the labour market to pursue a perceived opportunity more along the lines of self-actualization to improve their incomes and also their degree of independence.

It is of note that not all entrepreneurship is about the pursuit of opportunity, especially in developing economies (Stage 1 and 2); the ratio of necessity to opportunity entrepreneurship seems to be systematically linked to a country’s stage of economic development (Acs & Amorós, 2008). The high rates of necessity entrepreneurship and the resultant failures © 2015 Dr. S.Palmer, M.Carr and L.Semaj

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suggests that maybe policy makers in Stage 1 and Stage 2 economies, such as Jamaica may be channelling limited resources in the wrong area.

As wages increase in a given economy or the opportunity for gainful employment increases, the opportunity cost of going into business increases. Therefore the rate at which entrepreneurs enter business decreases as per capita income increases. The data also shows that the rate at which entrepreneurs enter business increases e.g. higher rates of selfemployment, when there is poor functioning of market exchange institutions. In the Netherlands for example, the rate of persons going into entrepreneurship overall is much lower than in Jamaica (GEM Global report, 2013), however, the rate of opportunity entrepreneurship is 99% compared to less than 40%.

So it seems that opportunity

entrepreneurship occurs at the higher end of economic development where the climate is most fertile and necessity entrepreneurship is negatively correlated with increases in per capital income and by extension growth and economic development. Therefore for developing countries, an increase in the rate of nascent necessity entrepreneurs can be negative and may not be useful. But why is this so? If entrepreneurship is positively related to economic growth what is happening in the economies where we see this anomaly? According to Wenneker, et al., (2005) there is the entrepreneurial pull versus the unemployment push. The latter results in involuntary self-employment which sometimes is disguised unemployment masquerading as business start-ups. GEM 2011 national report for Jamaica (the most current available) shows one of the highest business discontinuance rates. Therefore although more persons are venturing into entrepreneurship/self-employment the rate of failure is equally high. Most of these nascent entrepreneurs are barely earning more than the unemployed and are utilising the assistance of family members at no cost. The © 2015 Dr. S.Palmer, M.Carr and L.Semaj

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limited sustainability of these start-ups is cause for concern. These limited and less ambitious business activities seem to lead to limited or no economic growth. There is a need for evidence based policy initiatives on entrepreneurship to ensure that limited resources are not misdirected and wasted. In addition it is also necessary to differentiate between necessity and opportunity entrepreneurship and be honest with entrepreneurial aspirants in factor driven and efficiency driven economies like Jamaica’s. The GEM report shows that new entrants exit due to poor financial return, less than expected positive response to the product or service, lack of financing and improved fortunes such as a job opportunity. Thus in order to get a few successes a very high number of start-ups would be required. Can we afford this? Business ownership has been a path to economic development for disadvantaged groups in many societies e.g. the Jews in America and the Chinese who came to the Caribbean as indentured labourers. What of the disadvantaged descendants of slavery in Jamaica who make up more than 90% of the population? According to Fairlie & Robb (2004), the lack of a tradition in business enterprise is an hindrance to the establishment and sustainability of new businesses. The intergenerational links in business ownership as exemplified between the differences in White and Black businesses in the United States; and Black businesses compared to Syrian, Lebanese and Chinese businesses in Jamaica is critical to business successes. White, Syrian, Chinese and Lebanese owned businesses benefit from experience in business (working in a family business), connections to established networks and contacts, access to resources - financial and non financial, education and family support. These become the established businesses, the successful entrepreneurs.

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The GEM 2013 report suggests that although 85% of Jamaicans think entrepreneurs have a high status the evidence suggests that the culture is however not supportive of risk-taking and innovativeness. The result is frustration for those who want to take this path to success, as the support is not present from the national culture. In addition, business failure is seen as personal failure. The absence of laws to protect the owners of failed ventures does not promote intelligent failure and using failure as a stepping stone to the next venture. This is even a greater challenge for new entrepreneurs without intergenerational linkages. The Wonderlic Personnel Test (WPT), one of the most widely recognized tests of general cognitive ability, was used in the local bauxite industry between 1990 and 2000 to test over 2,000 personnel. Results showed that less than 5% scored above 28 (able to gather and synthesize information easily; can infer information and conclusions from on-the-job situations). Less than 10% scored above 26 (above average individuals; can be trained with typical college format; able to learn much on their own; e.g. independent study or reading assignment). This 10% cohort represented the managers (excluding the warehouse managers). This result seems to support the view that the percentage of the population with management talent e.g. cognitive ability (a critical success factor to start, build and sustain successful businesses) is small (Semaj, 2014). Could it be that the high TEA rates represent a cohort of persons without the requisite cognitive ability to succeed in business? Policies that channel limited resources into facilitating these nascent entrepreneurs might be better used to improve the level of education of the population.

Action-based entrepreneurial education training (Gartner, 1985; Shane, 2003), that emphasizes learning-by-doing (Fiet, 2001) seems to positively impact the outcomes of entrepreneurs. This is plausible as the positive manifestation depends on the institutional

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environment to a large extent. Traditional classroom focused training practised in many of our learning institutions could benefit from the new approaches in entrepreneurial education.

Findings

There is a clear difference between hustling at the traffic light, bus stop or school gate, and coming up with a creative idea to solve a need/problem/desire and taking that idea from concept to harvesting. The former is survival/necessity entrepreneurship and the latter is driven by choice/ opportunity entrepreneurship. Entrepreneurs, self-employed persons, small business owners or any other label can fall anywhere on the continuum between hustler (almost the same as unemployed) and successful entrepreneur. The high TEA rates may indicate that persons are going into involuntary self-employment without the required skills and resources resulting in high discontinuance rates.

In any discussion on the relationship between entrepreneurship and economic growth a nd development, scalability and sustainability of the business model should be considered. It would also be useful to distinguish between a Small Business Owner (SBO) and an Entrepreneur. The labels tend to be used loosely and interchangeably but the research suggests that individuals are not the same, although there are overlaps.

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Entrepreneurs

 Wealth Creation/Financial Freedom in ~ 5 years  Focus on growth, expansion and innovation  Works on the business  Takes more risks  Strategist  Business is an asset to develop, shape, sell  Thrilling ride  Investors/Financiers  Willing to risk it all  Wants to change the word  Leave a legacy  Trouble-shooter  Visionary  Embracing the urge to create  New business model  Mindset to roam freely SBOs  Wealth creation could take a lifetime  Repetitive tasks  Works in the business  Focus on stability, improving the bottom-line steadily  Day to day manager and worker  Sentimental about business

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 Slow, steady climb  Personal funds,  Not looking to go public  No goal to be on the cover of Forbes or Fortune  Wants to make a comfortable living  Mitigating risks  Minimising mistakes  Survival

Entrepreneurship seems to be a complex process where the outcome is only partially dependent on the characteristics of the entrepreneur. Although the identification of an entrepreneurial opportunity is a cognitive act which requires a particular mental ability and mindset, the required support of the external environment is needed.

Policy Implications

1. Change the national cultural attitudes towards risk-taking 2. Build self confidence in the absence of intergenerational business linkages. 3. Relevant action-based education and training (Technical, special and soft skills) 4. Distinguish between

necessity and

opportunity entrepreneurship

in policy

development. 5. Invest in Incubators

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6. Funding (Venture Capital, pool of loan funds, crowd funding, angel network, family, friends) 7. Discourage the culture of instant gratification and getting rich quickly without doing any real work. 8. Effective mentoring programmes. 9. Effective multi-sector partnerships (CBO, Govt., NGO, Private Sector, Donors, Civil Society, Schools, Universities.) 10. Forward thinking government policies that support and nurture entrepreneurship. 11. Access to information. 12. Networking and clustering. 13. Longitudinal studies to track progress over time to inform future initiatives

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Recommendations

1. Creative ways needed to provide funding for opportunity entrepreneurs. 2. Reduce the deficit in the supply of competent entrepreneurs with technical and or special skills 3. Coordinate a multi-sector approach to create an enabling environment supportive of new and growing businesses 4. Foster an entrepreneurial educational experience across the board that is action-based. 5. Create

institutions

and

a

national

framework

that

enables

opportunity

entrepreneurship. 6. Create real employment by attracting Foreign Direct Investment to build capacity, transfer knowledge and improve economic development in order to transition to Stage three–Innovation driven economy. This will provide the environment to create entrepreneurs who voluntarily opt for self-employment.

Future Research

1. Longitudinal studies on entrepreneurs to find out the determinants of success. 2. The impact of channelling resources in education and higher order skills training compared to business start-ups for the unemployed.

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