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