Entrepreneurial sustainability –exogenous structural factors or

endogenous absorptive capacity?

Professor of Enterprise Development

Open University Business School

Colin Gray

Context - EU Distribution of Enterprises

>140 million workers

>25 million firms

50% new SMEs fail <5 years

Productivity < US, Japan

Policy focus on innovation

GEM total entrepreneurship activity

0

2

4

6

8

10

12

14

Japan Germany US France UK Canada Italy

1999

2005

Source: Global Entrepreneurship Monitor

EU19 sole–traders, micro, small, medium and large firms, 2003.

05

101520253035404550

Sole (0)

Micro (<10)

Small (<50)

Medium (<250)

Large(250+)

NumbersWorkersSales

Low productivity Time/resourceHigh churn Market power

Enterprise competitive context

Government policy/regulatory pressures + Education + R&D

Economy/business pressures + competition

E

SMEs

Large Firms

Exit

Start-up

trade

Growth-oriented

capable

Absorptive capacity R&D

Spillover

Competition

Cultural + Peer group Influences

SME internal competence differences 2003 (n = 7,750 )

Micro (<10)

Small (10 – 49)

Medium (50 – 249)

All SME

Growth intentions 28 42 52 30

Growth attained 15 25 44 17

Employee skills shortages

19 25 29 20

Written Plan for Competence development

16 37 47 18

Source: ENSR Observatory (EC, 2003).

Entrepreneurship

Organisation of Economic Cooperation and Development (OECD) - the successful development and application of new knowledge

Sources: Knight F. (1921). Risk, Uncertainty and Profit. Harper and Row. New York. Schumpeter J. (1934). Theory of Economic Development. Harvard University Press. Green Paper: Entrepreneurship in Europe. Brussels; Kirzner I. (1973). Competition and Entrepreneurship. University of Chicago Press. Chicago. Jaumotte F and Pain N. (2005). ‘From innovation development to implementation: evidence from the Community Innovation Survey’. OECD Economics Department Working Papers, No. 458.

Joseph Schumpeter (1934) – firms founded by entrepreneurs who enterprisingly and energetically seek competitive success through exploiting innovations (= a new combination of the means of production).

Frank Knight (1921) –entrepreneurs play an essential role in ‘ the process of efficient re-allocation of resources’ through their function in accepting and exploiting uninsurable risks.

EU Entrepreneurship Green Paper (2003) - Entrepreneurship is the mindset and process to create and develop economic activity by blending risk-taking, creativity and/or innovation with sound management, within a new or an existing.’

Israel Kirzner (1973) –the entrepreneur is a business person who has the ability to recognise opportunities that others have overlooked and the capability of successfully exploiting that opportunity. Opportunities need not necessarily be innovations. They may arise through the innovations of others or through social and market changes, or from chance observations..

Typology of entrepreneurship theory

RBV of firm.Absorptive capacityEdith Penrose.

Spot existing opportunities.Israel Kirzner

Create competitive opportunities. R&D. Innovate.Joseph Schumpeter

Accept ‘uninsurable’ risk. Arbitrage.Frank Knight

External/e exogenous

Observed/Reactive

Internal/endogenous

Planned /Directed

SME sustainability-cycle

Time

Growth

Survival Disappear

Maturity

Renovation

Downsizing;Decentralisation;Decline2

1

34

Crises: 1 = Launch

3 = Sustaining creativity/innovation.

4 = Resourcing growth.

2 = Delegation.

50% in 3 years

Mainly small

Mainly medium

Importance of skills gaps by firm-size

Skills gap? Sole Micro (<10)

Small (10 – 19)

Medium (20+)

All

Very important 9 23 29 46 25

Irritating but manageable 5 24 53 28 26

Only occasional 8 12 9 8 10

No problem 79 42 8 18 39

Total (n) 80 305 75 78 538

% 15 57 14 14 100

Chi2 = 121. 240; df = 9; p<0.000

Source: (2006) NatWest/SERTeam Quarterly Surveys of Small Business in Britain 22:2.

Capacity development in SMEs by entrepreneurial mindset (column %)

Low Mid High All

External courses 34 50 62 46

Time for study 20 26 46 27

Internal courses 18 28 38 26

Online 4 8 18 9

Other 7 8 6 7

No formal training 47 36 24 34

Sample (n) 277 171 84 739

% 34 25 13 100

Source: (2006) NatWest/SERTeam Quarterly Survey of Small Business in Britain. Vol.22, no. 4.

Overcoming competence gaps in SMEs by entrepreneurial mindset (column %)

Source: (2006) NatWest/SERTeam Quarterly Survey of Small Business in Britain. Vol.22, no. 4.

Low Mid High All

Develop internally 58 66 74 66

Outsourcing/contract out 25 19 22 21

Specialist consultants/freelancers 15 15 26 18

Poach directly from competitors 10 12 21 13

Use recruitment agencies 13 11 17 13

Offer higher pay 10 13 16 13

Use temporary staff 10 9 6 9

Other 8 10 8 9

Sample (n) 72 228 87 387

% 34 25 13 100

SME Owner-manager Decision-making Model

Perceivedknowledge &

resource capacity

Perceived opportunity

Perceived threats

External changes

Internal capabilities

Full set of market needs Expectations

Motivations

economic

work

personal

family

Strategic aims

Business:

Behaviour

Operations

Outcomes

Cultural

Influences

Influences

Network/Peer

Perceptions of Main Business Problems 2007

Problem Entrepreneurs Non-entrepreneurs

Business advisors

Lack of time 10 7 14

Regulations 18 19 12

Cashflow 5 5 12

Marketing 4 2 10

Lack of skills 9 5 9

Competition 7 13 7

Economic climate 6 14 6

Total tax burden 10 6 4

Sample (n) 124 114 1948

Source: SERTeam - Quarterly Survey of Small Business in Britain. Vol 23. No, 2.; Business Support Professionals in Britain 2007

SME personal career motivation 1990-2006 (column %)

Main career motive 1990 1996 1999 2004 2006

Independence/be own boss 50 52 46 50 52

Make money 19 16 17 15 13

Security for future 9 10 14 13 11

Necessity 6 11 8 6 7

Family tradition 5 5 5 6 6

Other 11 8 10 10 9

Sample size (n) 1349 753 1121 808 638

Source: Small Enterprise Research Team, OUBS

SME growth strategy by innovation

Single-activity

Multi-activity

Non-innovator

All

Growth-oriented 62 60 29 46

Exit/merge strategy

17 19 18 18

Growth averse 21 21 53 36

Total (n) 187 168 314 679

Chi2 = 83.248; df = 4; p<0.000

Source: Small Enterprise Research Team, OUBS

SME Innovation by size of firm 2004

Sole-trader

1 – 4 5 – 9 10 – 19 20+ All

New products/services

19 24 32 31 37 28

New process/methods 17 19 23 33 43 25

Marketing/distribution 14 15 21 32 31 21

Sourcing supplies/inputs

7 9 3 19 15 12

Other significant changes

6 5 7 7 5 6

No significant innovations

61 51 37 36 24 43

Sample (n) 164 333 155 108 122 808

Source: Small Enterprise Research Team, OUBS

Conclusions

• Growth-orientation is an important determinant of sustained entrepreneurial activity;

• Non-entrepreneurial firms are more daunted by exogenous factors (labour market, fiscal, regulations and the business climate) and tend to attribute performance causality to them.

• Entrepreneurial firms have more self-efficacy and are more concerned about factors over which they have little control (but more likely to treat these as a normal part of business life).

• Small firms with higher, endogenous, absorptive capacity (higher education, more experience and more staff development) are more likely to be innovative, growth-oriented, and to achieve sustained entrepreneurship.

Wider implications

Flexibility > Structure

Business culture > Administrative rules

Creative / sharing Innovation, Quality, Customers

Opportunities Entrepreneurs

Economic / structural change Opportunities

External

Internal