Fundamentals of Entrepreneurship

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CHAPTER

THE IMPORTANCE OF
ENTREPRENEURSHIP AND
FACTORS AFFECTING
ENTREPRENEURSHIP
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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.

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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 persons
inclination and interest towards entrepreneurship

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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.

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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 customers needs.

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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 .

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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 Peoples 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.

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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.

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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.

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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).

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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 individuals behaviour is largely influenced by
what others think, especially when faced with ambiguities
and uncertainties (Minniti, 2005).

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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.

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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).

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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).

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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).

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Factors Affecting
Entrepreneurship (cont.)
The level of entrepreneurship is also affected by a societys
specific cultural system that is formed and influenced by the
collective values of individuals within that society (Shane, 2003).
Weber (1930), argues that an individuals 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.

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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 societys
entrepreneurial development (Hayton, George & Zahra, 2002).

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Factors Affecting
Entrepreneurship (cont.)
Cultural beliefs that support innovation, risk-taking and
autonomy are found to have positive influences on a
societys 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).

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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).

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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).

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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.

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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 arms length relationship and the embedded
ties (Witt, 2004).

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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).

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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).

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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).

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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)

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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.

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