1

Entrepreneurship and economic development

Unit one

1. concept and general overview of the entrepreneurship

Meaning

Entrepreneurship is the process of bearing the risk of buying at certain prices and selling at
uncertain prices.

An Entrepreneur is someone who organizes, manages, and assumes the risks of a business
or enterprise. An entrepreneur is an agent of change

Some common characteristics among entrepreneurs

Need for achievement,

Perceived locus of control,
Orientation toward intuitive rather than sensate thinking, and
Risk-taking propensity.

Entrepreneurship is the development of a business from the ground up coming up with an idea
and turning it into a profitable business.

Entrepreneurship is the journey of opportunity exploration and risk management to create value
for profit and/or social good,

Entrepreneurship entails recognizing the right opportunity, finding resources such as funding and
tools to pursue the opportunity and creating the right team to do so.

Characteristics of Entrepreneurship:

Entrepreneurship is characterized by the following features:

1. Economic and dynamic activity: Entrepreneurship is an economic activity because it

involves the creation and operation of an enterprise with a view to creating value or
wealth by ensuring optimum utilization of scarce resources. Entrepreneurship is regarded
as a dynamic force.
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2. Related to innovation:

Entrepreneurship involves a continuous search for new ideas.

Entrepreneurship is a continuous effort for synergy (optimization of performance) in

organizations.

3. Profit potential:

Profit potential is the likely level of return or compensation to the entrepreneur for taking on the
risk of developing an idea into an actual business venture.

4. Risk bearing:

The essence of entrepreneurship is the willingness to assume risk arising out of the creation and
implementation of new ideas.

Types of Entrepreneurs:

Entrepreneurs can be classified on the basis of their

Socio-cultural backgrounds,
Scale or potential of operations, or
Timing of venture creation in relation to their professional lifespan.

Depending upon the level of willingness to create innovative ideas, there can be the following
types of entrepreneurs:

1. Innovative entrepreneurs:

Have the ability to think newer, better and more economical ideas of business
organization and management.
They are the business leaders and contributors to the economic development of a country.

2. Imitating entrepreneurs:

Are people who follow the path shown by innovative entrepreneurs

3. Fabian entrepreneurs: Fabian entrepreneurs are those individuals who do not show initiative
in visualizing and implementing new ideas and innovations. Wait for some development which
would motivate them to initiate
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4. Drone entrepreneurs:

Drone entrepreneurs are those individuals who are satisfied with the existing mode and
speed of business activity and show no inclination in gaining market leadership.
In other words, drone entrepreneurs are die-hard conservatives and even ready to suffer
the loss of business.

5. Social Entrepreneur:

Social entrepreneurs drive social innovation and transformation in various fields

including education, health, human rights, workers rights, environment and enterprise
development.
They undertake poverty alleviation objectives with the zeal of an entrepreneur, business
practices and dare to overcome traditional practices and to innovate.

Classification Based on the Timing of Venture Creation:

Based on the timing of venture creation, entrepreneurs are classified as

Early starters,

Experienced and

Mature.

Early Starters:

An early starter starts the venture with little or no full-time work experience.

Often, early starters are from business families and have participated in the family
business.

An early starter is generally convinced of the great potential of his/her business idea and
feels that the opportunity may cease to exist if he/she waits too long.

Experienced:

This type of entrepreneur has spent a few years working in the family business or in
some other large company.
Usually, the venture is related to the type of work the entrepreneur was previously
engaged in.
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The entrepreneur brings a lot of experience, skills, and personal credibility into the
venture.

Mature:

A lot of very senior professionals, some at the level of CEO, are quitting their jobs to start
their own ventures.
This is probably because they have very high confidence in their abilities and have a
desire to do things in a way that may not be totally acceptable to their erstwhile
employers.

Classification Based on Socio-cultural Variables:

First-Generation Entrepreneurs:

Consists of those entrepreneurs whose parents or family have not been in business and
were into salaried service.

Entrepreneurs from Business Families:

It is argued that entrepreneurship becomes easier for someone from a business family or
from a business community as there is a very solid support structure to help in times of
need.

Minority Entrepreneurs:

There are many small ethnic groups that have traditionally not ventured into business.
It has become important for them to venture out and create lasting enterprises.
They will serve as examples for the rest of their community.

Women Entrepreneurs:

Women as entrepreneurs have been a recent phenomenon in Africa.

The social norms in Africa had made it difficult for women to have a professional life.
Now this has changed.
Progressive laws and other incentives have also boosted the presence of women in
entrepreneurial activity in diverse fields

Classification Based on Entrepreneurial Activity:

Based on entrepreneurial activity, entrepreneurs are classified as

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Novice, Portfolio entrepreneur.

Serial entrepreneur, and

Novice:

o A novice is someone who has started his/her first entrepreneurial venture.

o Not to be confused with an early starter, a novice can also be a 50 year old with over 25
years of experience in the industry.

Serial Entrepreneur:

A serial entrepreneur is someone who is devoted to one venture at a time but ultimately
starts many.
It is the process of starting that excites the starter.
Once the business is established, the serial entrepreneur may lose interest and think of
selling and moving on.

Portfolio Entrepreneur:

Starts and run a number of businesses.

It may be a strategy of spreading risk or it may be that the entrepreneur is simultaneously
excited by a variety of opportunities.
Also, the entrepreneur may see some synergies between the ventures.

Entrepreneurial Process:

Entrepreneurship is a process, a journey, not the destination; a means, not an end.

To establish and run an enterprise it is divided into three parts

The entrepreneurial job,

The promotion, and

The operation.

Entrepreneurial job is restricted to two steps, i.e.,

Generation of an idea and

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Preparation of feasibility report.

Figure 1: The Entrepreneurial Process

1. Idea Generation:

To generate an idea, the entrepreneurial process has to pass through three stages:

a. Germination:
b. Preparation:
c. Incubation:

a. Germination:

This is like seeding process, not like planting seed.

It is more like the natural seeding.
Most creative ideas can be linked to an individuals interest or curiosity about a specific
problem or area of study.
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b. Preparation:

Once the seed of interest curiosity has taken the shape of a focused idea, creative people start a
search for answers to the problems.

Inventors will go on for setting up laboratories;

Designers will think of engineering new product ideas and
Marketers will study consumer buying habits.

c. Incubation:

This is a stage where the entrepreneurial process enters the subconscious

intellectualization.
The sub-conscious mind joins the unrelated ideas so as to find a resolution.

2. Feasibility study:

Feasibility study is done to see if the idea can be commercially viable.

It passes through two steps:
a. Illumination:
b. Verification:

a. Illumination:

This is the stage when the idea is thought of as a realistic creation.

The stage of idea blossoming is critical because ideas by themselves have no meaning.

b. Verification:

This is the last thing to verify the idea as realistic and useful for application.
Verification is concerned about practicality to implement an idea and explore its
usefulness to the society and the entrepreneur.

Characteristics Successful Entrepreneurs Have in Common

Here are some of the most common characteristics shared among entrepreneurs who have
achieved great success.
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1. Type-A personality

People with a Type A personality are generally

More ambitious,
More driven, and
Have more follow-throughs.

They're not dreamers; they're doers.

2. Morning people

Morning people are more successful in their careers (and in many other aspects of their
lives) than night owls.

The reason morning people get more done is that they're not as prone to procrastination,.

3. Just likable enough

You need to be sociable enough to network and build a solid reputation, but being too
much of a social butterfly (or a complete hermit) is going to make people not take you
seriously.

4. Written goals and Plans

This is where the dreamer in you can take over.

You need to have a written business plan with objectives that are regularly updated and
pored over.

5. Passion

Passion can be defined subjectively, but what's important is that you're excited to come to
work every day.

Only when you're truly passionate about your work will be able to find the success you
yearn for.

6. Resilience.

Triumphant entrepreneurs have a level of resilience, which allows them to face an almost
constant slew of challenges without ever weakening their resolve.
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7. Agility.

As the leader of your startup, you must be nimble as well.

Agile (active) entrepreneurs are able to treat every problem they encounter quickly and
adeptly, without taking too long to address them. This agility allows entrepreneurs to
remain proactive and vigilant, preventing small problems from becoming major ones.

On a larger scale, this ability also allows entrepreneurs to constantly change, and therefore
improve, their businesses.

8. Patience.

Successful entrepreneurs realize that all great things take time, and aren't impeded
when their great ideas don't take off immediately.

9. Trust.

Mutual trust is a necessity when working in a position of leadership, especially in the

context of a small team that typically defines startups..

Of course, workers, partners, and investors all need to trust you as an entrepreneur as
well.
You can cultivate this trust by maintaining constant, transparent lines of communication,
which will also facilitate greater productivity and a tighter sense of collaboration within
the team.

Skills and abilities that entrepreneurs should have

Ability to plan Marketing skill

Interpersonal skill Basic management skill
Communication skill Leadership skill

Some of the most important functions performed by an entrepreneur are as follows:

1. To Prepare Plan:

The first and foremost function of an entrepreneur is to prepare the plan or scheme of production
I. e. The scale of production, Types of goods to be produced and its quantity.
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2. Selection of the Site:

The entrepreneur makes the selection of the site for the factory to be installed.
The place should be near the market, railway station or bus-stand.
The selection of the place may be near the source of raw materials also.
The selection of the place has an important bearing on the cost of production.

3. Provision of Capital:

Capital is required to install a factory or an industry.

Capital is required at all the stages of business.
He tries to obtain capital at the lowest possible rate of interest.

4. Provision of Land:

After making provision of capital and selection of site, he has to arrange for land.
Land is either purchased or hired.

5. Provision of Labor:

The entrepreneur has to make provision for labor from different places.

6. Purchase of Machines and Tools:

It is the function of the entrepreneur to purchase machines and tools in order to start and
continue the production.

7. Provision of Raw Materials:

He purchases the best quality of raw materials at the minimum cost.

He also knows the sources of raw materials.

8. Co-ordination of the Factors of production:

One of the main functions of the entrepreneur is to coordinate different factors of production in
proper combinations, so that the cost of production is reduced to the minimum.

9. Division of Labor:

The splitting up of production into different parts and entrusting them to different
workers is also the function of an entrepreneur.
Thus, the entrepreneur decides the level and type of division of labor.
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10. Quality of Product:

Keeping in view the competition in the market, the entrepreneur has to determine the
quality of his product.
He is to decide whether the goods produced should be of superior quality only or both of
superior and ordinary qualities.

11. Sale of Goods:

The entrepreneur employs a good number of salesmen to market the goods.

He makes arrangement for publicity to push up the sales.

12. Advertisement:

Advertisement is done to create and increase the demand or sale of his goods.

13. Search for Markets:

The entrepreneur has to explore markets for his products.

14. Supervision:

An entrepreneur is to supervise all the factors engaged in the production process.

He has to supervise every little detail so as to ensure maximum production and economy.

15. Contact with the Government:

The entrepreneur has to make contacts with the government because the modern
production system is controlled by the government in several ways.
A license is taken before the start of production.
The entrepreneur has to abide by certain rules and regulations of production and has to
pay taxes regularly.

16. Payment to Factors of Production:

The rewards of the various factors of production have to be decided by the entrepreneur.
He makes payments to the landlord, labor and capitalist in the form of rent, wages and
interest.
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17. Quantity of Production:

The entrepreneur determines the quantity of production keeping in view the demand for
goods and the extent of market.
How much goods are to be produced is the main decision taken by the entrepreneur.

18. Risk-Taking:

Risk-taking is the most important function of an entrepreneur.

The risk-bearing is the final responsibility of an entrepreneur.

19. Innovation:

The entrepreneur makes arrangements for introducing innovations which help in

increasing production on the one hand, and reducing costs, on the other.

Significance of entrepreneurship

Benefits of Entrepreneurship to an Organization:

1. Development of managerial capabilities:

2. Creation of organizations:
3. Improving standards of living:
4. Means of economic development:

1. Development of managerial capabilities:

Entrepreneurship helps in identifying and developing managerial capabilities of

entrepreneurs.
This exercise helps in sharpening the decision making skills of an entrepreneur.

2. Creation of organizations:

Entrepreneurship results into creation of organizations when entrepreneurs

Assemble and coordinate physical, human and financial resources and

Direct them towards achievement of objectives through managerial skills.

3. Improving standards of living:

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By creating productive organizations, entrepreneurship helps in making a wide variety of

goods and services available to the society which results into higher standards of living
for the people.

4. Means of economic development:

Entrepreneurship involves

Creation and use of innovative ideas,

Maximization of output from given resources,
Development of managerial skills, etc., and all these factors are so essential for the
economic development of a country.

Functions of an Entrepreneur:

The important functions performed by an entrepreneur are listed below:

1. Innovation:
2. Assumption of Risk:
3. Research:
4. Development of Management Skills:
5. Overcoming Resistance to Change:
6. Catalyst of Economic Development:

Likely qualities of entrepreneurs

Entrepreneur is a person who perceives the market opportunity and then has the
motivation, drive, and ability to mobilize resources to meet it.

Major talents of entrepreneurs

1. Self-confident and multi-skilled.

They have the confidence that lets them move comfortably through unchartered waters.
Confident in the face of difficulties and discouraging circumstances.

Ethical

Entrepreneurs often answer only to themselves and must therefore possess a "strong
sense of basic ethics and integrity,"

Clients and investors will lose interest in doing business with an entrepreneur who lacks
credibility.
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Self-Motivated

An entrepreneur is intrinsically motivated as there is typically no financial reward in the

beginning stages of starting a business.

Innovative skills

The ability to not only come up with new ideas but develop and improve them as the
business grows is an essential characteristic of a good entrepreneur.

Results-orientated

To make be successful requires the drive that only comes from setting goals and targets
and getting pleasure from achieving them.

A risk-taker.

To succeed means taking measured risks.

The successful entrepreneur exhibits an incremental approach to risk taking, at each stage
exposing him/her to only a limited, measured amount of personal risk and moving from
one stage to another as each decision is proved.

Leadership Skills

Entrepreneurs must have strong leadership qualities.

An entrepreneur must have the ability to motivate his employees to work together toward
their goals, which requires earning their trust and respect.

Entrepreneurs must also have excellent communication skills as they will work with a
variety of types of personalities in dealing with employees, clients and investors

Total commitment.

Hard work, energy and single-mindedness are essential elements in the entrepreneurial
profile.

Visionaries and Managers

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In new and emerging businesses, the person who starts the business is often an
entrepreneur or a visionary.
The visionary wants to do something that no one else has done because they can; it is
interesting and exciting, and thus meeting a need.

Expert Quality of Entrepreneurs

Successful entrepreneurs are persons with special knowledge or ability who performs
skillfully and accurately.

Expert defined as: Somebody with a great deal of knowledge, or a high degree of skill,
training or experience in a particular field or a certain subject and who performs
skillfully.

As an entrepreneur you have to note the following points concerning expert.

Solving Problems:

As an expert you have to solve other peoples problems.

Helping Others:

As an expert you have to help others solve their own problems. .

Proficiency in Skills:

As an expert you have to show proficiency in practical skills.

Expert Advice:

You have to give expert advice to problems when requested by others.

Specialized Knowledge:

As an expert you have to devote to a special area of knowledge and work.

Starting a Business:

You have to be able to start a business by your expertise knowledge.

Knowing Mistakes:
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As an expert you have to know the worst mistakes and how to avoid them.

Depth Knowledge:

You have to have depth understanding of your field in order to be called an expert.

Look a Professional:

You have to show professionalism and follow procedures when performing tasks.

Tips on Expert:

Successful entrepreneurs do not search the market instead the market searches them for
their expertise.
Try to know everything about something but not something about everything.
The bigger your expertise, the more power you will have.

Serious/grave/ quality of Entrepreneurs

Serious

Carrying out activities or talking in earnest or genuine and careful manner , instead of in
a joking or half-hearted fashion.

Understanding being Serious

As an entrepreneur you are serious enough if you are:

Concerned with important work Truly believe in your business

matters Focusing your resources on your job
Allocating proper time to your Not jumping from opportunity to
business opportunity

Therefore, it is necessary to be careful about your business to get success.

Continuous Learning by Entrepreneurs

Continuous learning is striving to get knowledge and skills related to the business.
This is done by permanent learning process.
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There are various different ways to get learned such as

Short term training, Reading,

On the job training, Sharing ideas with experienced
Long term training, people

Successful entrepreneurs attach themselves with individuals who either understand more
than they do or know things that are unlike from what they know.
Understanding Continuous Learning
Continuous Learning will:

Clarify difficult ideas and concepts Assist in utilizing full potential

Enable self-discovery Assist calculated risk taking
Encourage creativity Maximize your potential
Enhance innovation Increase self-confidence
Increase idea generation Increase motivation
Assist behavior modification Enhance discipline
Enhance analytical ability Make you open minded
Enhance communication skill Make you self starter
Enhance decision making Increase management skill
Increase visionary skill Increase leadership skill
Increase productivity Make you an expert
Increase time management

Developing Continuous Learning

In order to develop continuous learning and be a successful entrepreneur you have to

perform the following:

Read business related and make full use of the information obtained.

Books Newspapers Websites

Magazines Reports Industry
Trade Association Journals Publications
Magazine Newsletters

Follow up business issues through:

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Television and Radio

Attend:

Seminars Forums
Workshops Business courses

Tips on Continuous Learning

Successful entrepreneurs are made as well as born.

To be the best, learn the essential skills of entrepreneurs through formal, informal training
and on-the-job experience.
Always be on the look-out for opportunities to learn important lessons.
Take a refresher course if you observe you need to refresh on previous skills.
Use coaching sessions to be trained as well as to train.
Experience is the accumulation of knowledge or skill that comes from direct
involvement in events or activities.
Learn the best skill, copy it, and then improve it.

Collective musts of prosperous entrepreneurs

Some of the more important business musts that are required to start, operate and grow a
profitable home business are:-

1. Do what you enjoy.

if you don't enjoy what you're doing, in all likelihood it's safe to assume that will be
reflected in the success of your business--or subsequent lack of success.

2. Take what you do seriously.

Far too many home business owners fail to take their own businesses seriously enough,
getting easily sidetracked and not staying motivated and keeping their noses to the
grindstone.

3. Plan everything.

Planning every aspect of your home business is not only a must, but also builds habits that
every home business owner should develop, implement, and maintain.
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The act of business planning is used to

Analyze each business situation,

Research and compile data, and
Serves a second function, which is having your goals and how you will achieve them, on
paper.
You can use as map to take you from point A to Z and as a yardstick to measure the
success of each individual plan or segment within the plan.

4. Manage money wisely.

All home business owners must become wise money managers to ensure that the cash
keeps flowing and the bills get paid.

There are two aspects to wise money management.

1. The money you receive from clients in exchange for your goods and services you provide
(income)

2. The money you spend on inventory, supplies, wages and other items required to keep
your business operating. (expenses)

5. Ask for the sale.

A home business entrepreneur must always remember that marketing, advertising, or

promotional activities are completely worthless, regardless of how clever, expensive, or
perfectly targeted they are, unless one simple thing is accomplished--ask for the sale.

6. Remember it's all about the customer.

Your business is all about your customers, or clients, period.

Your customers are the people that will ultimately decide if your business goes boom or
bust.

You must know who your customers are inside out and upside down.

7. Become a shameless self-promoter (without becoming obnoxious).

Self-promotion is one of the most beneficial, yet most underutilized, marketing tools that
the majority of home business owners have at their immediate disposal.
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8. Project a positive business image. 12. Become known as an expert.

9. Get to know your customers. 13. Create a competitive advantage.

10. Level the playing field with 14. Invest in yourself.

technology.
15. be accessible.
11. Build a top-notch business team.

Course of action for being successful social entrepreneurs

Measuring social value is a very challenging task in comparison to a private value

measurement. When measuring social value, the assessor must consider several aspects
besides the profitability of the company.

Another way of assessing social enterprises is through Social Return on Investment, a

means of measuring value creation.

Some lesson on starting your own business

1. Solve your own problem

What keeps you up at night? What makes you angry or upset? What makes you excited?
These are questions every entrepreneur should ask themselves before jumping into any
venture.

2. Build a community first, business second

Your community is the tracks to your roller-coaster, carrying you through the uncertain
times while you figure out what youre doing. Theyre your biggest fans, your
cheerleaders, your best critics, your first customers, and your connection to the
opportunities beyond your reach.

3. Bake a good story

Your story is your brand. It will be the thing that gets customers to choose you over
cheaper alternatives, and the reason media will call to write about you. It will attract
members to your community and keep them engaged. Always share what youre building and
why youre building it. It will keep you honest and tether you to your principles. Bake your
story deep into your business. It should be the ingredient that everyone can taste and the
reason theyll share you with their friends. Make people feel something.
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4. Launch often

Its tempting to hold back from sharing a new product or idea with the world before its
polished. The best products are not built in a vacuum. Theyre shared early and improved.

5. Work for a purpose

Solving big problems in a sustainable way takes time, a lot of time. Most overnight
successes had at least 10 years of hard labor behind them before they suddenly shot to
fame.

6. Take care of yourself

Starting anything is hard. Starting something you truly care about is even harder. The
pressure youll put on yourself to succeed will end up being greater than anything youll
experience in your average career. The weight of it will be the sum of your own
expectations, the expectations of others, the financial pressure, and the uncertainty, the
worry of neglecting family and friends, the criticism, the endless options, the limited
options, the hustle, the doubt.

7. be proud of yourself

Chances are what you have as an idea. A vision of how the world should be. An urge to
leave it a better place. A need to change the world and to change yourself in the process.
The journey is hard, but the fact that youre still reading this says a lot about who you are.
Be proud of yourself, take that step and build something that matters.

How social entrepreneurs attract right talents for their organization

Several interesting strategies are followed by social entrepreneurs to get the right people
on board.
First, train employees within the company. This is an extremely effective and efficient
way to manage and utilize all the resources in a social enterprise.
Create a business model that will generate revenue and provide economic value for those
that invest in the company.
Finding the right people to be a part of a social enterprise,
Have the best resources, which can also be considered top talent.
Bring in outside talent to facilitate a business plan.
Look to other businesses for the proper technologies to make their business plan work.

Some myths about entrepreneurship

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(i) Entrepreneurs, like leaders, are born, not made:

The fact does not hold true for the simple reason that entrepreneurship is a discipline
comprising of models, processes and case studies.

One can learn about entrepreneurship by studying the discipline.

(ii) Entrepreneurs are academic and socially misfits:

This description does not apply to everyone. Education makes an entrepreneur a true
entrepreneur

(iii) To be an entrepreneur, one needs money only:

Finance is the life-blood of an enterprise to survive and grow. But for a good idea whose
time has come, money is not a problem.

(iv) To be an entrepreneur, a great idea is the only ingredient:

A good or great idea shall remain an idea unless there is proper combination of all the
resources including management.

(v) One wants to be an entrepreneur as having no boss is great fun:

It is not only the boss who is demanding; even an entrepreneur faces demanding vendors,
investors, bankers and above all customers.

Factors affecting Entrepreneurship:

1. Personality Factors:

Personal factors, becoming core competencies of entrepreneurs, include:

i. Initiative (does things before being asked for)

ii. Proactive (identification and utilization of opportunities)
iii. Perseverance (working against all odds to overcome obstacles and never
complacent with success)
iv. Problem-solver (conceives new ideas and achieves innovative solutions)
v. Persuasion (to customers and financiers for patronization of his business
and develops & maintains relationships)
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vi. Self-confidence (takes and sticks to his decisions)

vii. Self-critical (learning from his mistakes and experiences of others)
viii. A Planner (collects information, prepares a plan, and monitors
performance)
ix. Risk-taker (the basic quality).

2. Environmental factors:

Environmental factors such as

Political climate,
Legal system,
Economic and social conditions,
Market situations, etc. contribute significantly towards the growth of entrepreneurship.

For example, political stability in a country is absolutely essential for smooth economic
activity.

Frequent political protests, bandhs, strikes, etc. hinder economic activity and
entrepreneurship.

A roadblock to the growth of entrepreneurship.

Unfair trade practices, irrational monetary and fiscal

policies, etc.

The factors that stimulate entrepreneurship.

Higher income levels of people,

Desire for new products and sophisticated technology,
Need for faster means of transport and communication, etc

Thus, it is a combination of both personal and environmental factors that influence

entrepreneurship and brings in desired results for the individual, the organization and the
society.
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Key tips for those wanting to enter the world of entrepreneurship

Tips for aspiring entrepreneurs
If you're ready to enter the world of entrepreneurship, here are a few important tips to
keep in mind.
Learn from others' failures.
Rather than admiring the small percentage of businesses that grow to become successful,
study those that end up failing.
Make sure this is what you want.
Because entrepreneurship entails so much hard work, it is critical to ensure you're
following the right path. "If this is something you really want, then think long-term, and
be persistent,"
Solve problems.
Entrepreneurs should always be in search of problems to solve, and not the other way
around. They should not start with a solution looking for a problem.
Be passionate.
To be successful, you should find your passion and then build a business around that,
Gottlieb said. "The passion is what will get you through the stumbling blocks and prevent
you from quitting in the middle of the race.
Get advice from those who have done it. Would-be business owners to find mentors
who are successful, as well as to read books, network with people they admire and look
into great educational programs to help them throughout the process.
Open-Minded

The ability to be ready to entertain new ideas

They utilize these ideas to improve overall business activities.
They are always finding new ways through reading and researching to make the business
better. Entrepreneurs are open to change.
They always adjust themselves to the changing or new situations.

Try to possess a general management and leadership knowledge.
An entrepreneur is someone who organizes, operates, and takes the risks of business
venture.
Unit two
Basics of small and micro enterprises
Meaning of micro small and medium enterprises
Statistical definition of enterprise size varies by country and is usually based on the
number of employees, and value of sales and/or value of assets.
The lower limit for small-scale enterprises is usually set at 5 to 10 workers and the
upper limit at 50 to 100 workers.
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The upper limit for "medium-scale" enterprises is usually set between 100 and 250
employees.
Small- and medium-scale enterprises (SMEs) are a very heterogeneous group.

Microenterprises are

Normally family businesses or self-employed persons

Operating in the semi-formal and informal sectors;

Most have little chance of

growing into larger scale firms,

accessing bank finance, or
Becoming internationally competitive.

In contrast, SMEs usually operate

In the formal s sector of the economy,

Employ mainly wage-earning workers, and
Participate more fully in organized markets.
Access to formal finance is a desirable possibility, and
Are more likely than microenterprises to grow and become competitive in domestic and
international markets.

International donors have provided targeted assistance to advance MSE development in

developing countries with the same assumptions that

MSEs positively affect economic growth and poverty reduction.

The SME sector is believed to be able to

Bridge the informal and the formal sectors and provide economic opportunities for both
the poor and the non-poor,
Leading to more equitable growth opportunities and outcomes.

Relative to large firms, small firms are believed to, among other things,

Create more jobs at a faster rate;

Be more labor intensive and thus create employment and
Training opportunities for unskilled labor;
Be more efficient;
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Serve as a safety net against sudden economic or household shocks;

Be a seedbed for technological innovation and entrepreneurship; and
Provide broader non-financial, non-wage benefits to the working poor, such as greater
access to health care or education.

COMMON MSE CHARACTERISTICS

There are many common assumptions about the characteristics MSEs possess, such as:

They employ few workers,

Are run out of the home,
Do not generate high income nor experience much growth, and
Do not produce for markets outside their local environment.

Poor, self-employed people (often referred to as survivalists) and those with enough
capital to produce growth (often referred to as entrepreneurs) are one and the same as
they both produce products for consumption but face different obstacles in growing their
businesses based on the type of resources each may have access to.
The following demonstrates the common characteristics and diversities of MSEs
1. Share of firms and employment. In many developing countries, microenterprises and
small-scale enterprises account for the majority of firms and a large share of employment,
mainly consisting of small firms with one person working alone or with unpaid family
members.

Self employment is a central element in these economies.

In low-income countries, the vast majority of firms are micro- or small-scale, existing
alongside a few large-scale enterprises.
As countries develop, small-scale enterprises play a declining role.

2. Location.

MSEs located in urban or commercial areas are more likely to survive than their
counterparts in rural areas.
Those that operate in commercial districts or on roadsides typically show greater growth
rates than those that are based in the home.

3. Gender.
An increasing number of small firms in Africa and Latin America are headed by women.
MSEs headed by women are more likely to be based out of their homes.
Since home-based MSEs tend to be hidden and overlooked, women owners of MSEs are
more likely to be invisible entrepreneurs.
4. Composition of Activities.
27

A significant number of small firms are involved in manufacturing activities. Among

these, three activities have been consistently identified as the most important categories:

Textiles and apparel,

Food and beverages, and
Wood and forest products.

5. Sector Distribution.
Small retail trading firms face the highest risk of closure.

Real estate,
Wood processing,
Wholesale traders, and
Non-metallic mineral enterprises are the least likely to close,
While trading, transport and chemical MSEs are the most likely to close.

6. Initial Enterprise Size.

Initial enterprise size has no significant influence on firm survival.

So, smallness, by itself, is not an impediment to firm survival.
However, growing enterprises are more likely to survive than those that remained the
same size.
Expanding MSEs become more efficient and thus are more likely to survive.

7. Firm Creation/Contraction.

MSEs are constantly changing; not only are new firms being created (new starts or births)
while others are closing, but existing (surviving) firms are expanding and contracting in
size.

These changes are usually summarized in two concepts:

Net firm creation (new starts minus closure), and

mobility or net firm expansion (firm expansion minus firm contraction)

The determinants of new starts differ between high and low return (profit) activities.
28

For high return activities, barriers to entry like initial capital requirements are found to be
inversely related to the new start rate;
For low return activities, new starts rates only inversely relate to the aggregate level of
economic activity.

8. Labor Intensity.

Small firm expansion boosts employment more than large firm growth because

Small firms are more labor intensive,

Coinciding with the factor market structure of most developing countries.

9. Job Creation.

Small firms are important for employment growth (i.e. job creation).
While small firms experience both high job creation and destruction rates, it appears that
job destruction during recessions is lower in small enterprises than in large enterprises
perhaps due to greater wage flexibility in small firms.
In other words, small firm owners may temporarily accept lower compensation during
recessions in order to hold on to their business.

The net job creation of MSEs is not necessarily higher and is frequently lower than for
larger enterprises.

10. Wages and Benefits.

Larger employers offer better jobs in terms of wages, fringe benefits, working conditions,
and opportunities for skills enhancement, as well as job security.

In low-income countries, small enterprises have much lower productivity levels than
larger firms, which lead to the lower wages and non-wage benefits paid by small firms
compared to large firms.

However, while wages may typically be lower in small firms, MSE growth may lead to a
more equitable distribution of income among MSE owners and workers who are in the
lower half of the income distribution.
29

11. Efficiency and Innovation.

The returns per hour of family labor for those enterprises with two to five workers are
significantly higher than the returns of a one-person enterprise.

It is often argued, that small firms are more innovative, particularly when they follow
niche strategies, using high product quality, flexibility, and responsiveness to customer
needs as means of competing with large-scale mass producers.

Measures of enterprise efficiency (e.g., labor productivity or total factor

productivity) vary greatly both within and across industries.

Policy imposed distortions may reduce the number of MSEs below efficient levels by
imposing fixed costs that bear more heavily on MSEs.

MSEs also play a distinctly subordinate role in export creation. As suppliers for
exporters, MSEs often add flexibility and efficiency to the development of competitive
advantage, but export development is generally instigated and sustained by large
enterprises

12. Market Linkages.

Market linkages amongst small firms are quite limited. The majority of small firms in
these areas sell directly to final consumers, although some use subcontracting and
clustering. The studies suggest that those MSEs that sell to traders and manufacturing
firms are more likely to grow than their counterparts who sell directly to final consumers.
The linkages to smaller suppliers may be stronger, as well, given their smaller size or
limited scope.

Smaller businesses may import fewer intermediate goods than large firms, which may
produce a larger local multiplier effect in which a greater amount of products are
purchased from labor-intensive SMEs. This, in turn, can lead to increased opportunities
for locally sustainable growth and employment.

Correlation of entrepreneurship and small business in the economic system

Entrepreneurship and small business are related but certainly not synonymous
concepts. Entrepreneurship is a type of behavior which concentrates on opportunities
rather than resources. Small businesses can be a vehicle for those entrepreneurs
introducing new products and processes that change the industry and for people who
simply run and own a business for a living.
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The world has changed

In today's world small businesses and particularly new ones are seen as

A vehicle for entrepreneurship contributing to employment

Social and political stability,
innovative and competitive power

In short, the focus has shifted from small businesses as a social good that should be
maintained at an economic cost to small businesses as a vehicle for entrepreneurship.
With this shift came the renewed perception of the important role of entrepreneurship.
Indeed, recent econometric evidence suggests that entrepreneurship is a vital determinant
of economic growth.

Confronted with rising concerns about unemployment, job creation, economic growth
and international competitiveness in global markets, policy makers have responded to this
new evidence with a new mandate to promote the creation of new businesses, i.e.,
entrepreneurship. Evidence of the change

There is ample evidence that economic activity moved away from large firms to small
firms. The most impressive and also the most cited is the share of the 500 largest
American firms, the so-called Fortune 500.

Their employment share dropped from 20 per cent in 1970 to 8.5 per cent in 1996.

Causes of the change

Scholars provide evidence concerning manufacturing industries in countries in varying

stages of economic development.

They advance the following explanations for the shift toward smallness.

The first deals with fundamental changes in the world economy from the 1970s on-wards.
These changes relate to the intensification of global competition, the increase in the
degree of uncertainty and the growth in market fragmentation.
The second explanation deals with changes in the character of technological progress.
They show that flexible automation has various effects resulting in a shift from large to
smaller firms.
31

The pervasiveness of changes in the world economy, and in the direction of technological
progress results in a structural shift affecting the economies of all industrialized countries.
Also others argue that the instability of markets in the 1970s resulted in the demise of
mass production and promoted flexible specialization.

Loveman and Sengenberger (1991) stress the influence of two trends of industrial
restructuring:

That of decentralization and vertical disintegration (the breaking up of large plants and
businesses) and
That of the formation of new business communities.

In their view globalization and technological advancements are the major determinants of
this challenge of the Western countries

Consequences of the change

Four consequences of the increased importance of small firms:

A vehicle for entrepreneurship,

Routes of innovation,
Industry dynamics and
Job generation.

We can claims that small firms

Play an important role in the economy serving as agents of change by their

entrepreneurial activity,
Being the source of considerable innovative activity,
Stimulating industry evolution and creating an important share of the newly generated
jobs.

Clearly, there are many more consequences of the increased share of small firms than the
four mentioned.

For instance, an increase in the share of small firms may lead, ceteris paribus, to

A lower orientation towards exports,

A lower propensity to export employment,
32

A qualitative change in the demand for capital and consultancy inputs,

More variety in the supply of products and services or in the manner and aims of
conducting research and development.

The growth penalty

The industry structure is generally shifting towards an increased role for small
enterprises.

The shift in industry structures has been heterogeneous and apparently shaped by
country-specific factors.

Technology is the most important determinant of industry structure.

Innovation and special issues with regard to micro, small, and medium enterprise

An innovation is the implementation of

A new or significantly improved product (good or service),

A new process,
A new marketing method,
A new organizational method in business practices, workplace organization or external
relations.

The minimum requirement for an innovation is that the product, process, marketing
method or organizational method must be new (or significantly improved) to the firm.

Main types of innovation

1) A product innovation

Is the introduction of a good or service that is new or significantly improved with respect
to its characteristics or intended uses.

This includes significant improvements in

technical specifications,
components and materials,
incorporated software,
User friendliness or other functional characteristics.
33

Product innovations can utilize new knowledge or technologies, or can be based on new
uses or combinations of existing knowledge or technologies.

2. A process innovation Is the implementation of a new or significantly improved

production or delivery method.

This includes creation of a new means of producing, selling, and/or distributing an

existing product or service.

3. A marketing innovation is the implementation of a new marketing method involving

significant changes in product design or packaging, product placement, product
promotion or pricing.

Marketing innovations are aimed at better addressing customer needs, opening up new
markets, or newly positioning a firms product on the market, with the objective of
increasing the firms sales.

4) An organizational innovation is the implementation of a new organizational method

in the firms business practices, workplace organization or external relations.

Organizational innovations can be intended to increase a firms performance by

reducing administrative costs or transaction costs, improving workplace satisfaction (and
thus labor productivity), gaining access to non-tradable assets (such as non-codified
external knowledge) or reducing costs of supplies.

5. Technical innovation

Technical innovation involves creation of new goods and services. Many technical
innovations occur through research and development efforts intended to satisfy
demanding customers who are always seeking, new, better, faster and/or cheaper
products.

6. Administrative innovation

Administrative innovation occurs when creation of a new organization design better

supports the creation, production and delivery of goods and services.

Economic models of innovation have typically focused on product innovation, and

distinguish further two distinct types.
34

The first type is horizontal innovation, which consists of producing a new product
that does not displace existing products, thereby expanding the variety of products
produced.

The second type is vertical innovation, where the introduction of one product makes an
existing product obsolete.

The link of SMEs development with the process of poverty reduction

The concept of poverty includes material deprivation (i.e. food, shelter) and access to
basic services (i.e. health, education).

It now also tends to encompass a range of non-material conditions, such as a lack of

rights, insecurity, powerlessness and indignity.

Poverty is a situation or condition in which people

Lack satisfactory material or resources (food, shelter, clothing, housing),

Are unable to gain access to basic services (education, water, health, sanitation),
Are constrained in their own capacity and ability to exercise rights, lend their voices to
the institutions, share power and processes which affect social, economic and political
environments in which they live and work.

Poverty is a vicious circle of poor health, reduced working capacity, low productivity
and shortened life expectancy

The approach to poverty reduction through small enterprise development

The strategy is based on the promotion of the four elements of decent work, namely,

Productive,
Remunerative employment;
Rights at work;
Social dialogue; and
Social security.

The private sector, including small enterprises, creates and sustains the jobs necessary for
poor people to work and earn the income needed to purchase goods and services.

A consensus is emerging in the area of small enterprise development (SED) about what is
needed to support the creation and expansion of enterprises.
35

Key areas include:

A policy, regulatory and legal environment that is simple, fast, inexpensive and free from
corruption;
Finance that is accessible at low cost and does not require the poor to provide physical
collateral; access to affordable business development services;
Workers who are trained in appropriate skills;
Basic health and education that strengthens human capital;
A culture that supports and rewards entrepreneurship;
Access to domestic and global markets on a fair and equal basis with large enterprises;
and reliable infrastructure (transport, energy, telecommunications, etc.).

The process of Working out of Poverty has set out seven technical areas which contribute
to poverty reduction:

vocational training, working to end child labor,

entrepreneurship, ensuring income and
micro-finance, Basic social security and work
cooperatives, safety.
reducing discrimination,

There are a range of approaches to SED that can be poverty reducing and in which
Different countries are currently engaged.

These include:

Reform of the policy, legal and regulatory environment to make it easier for enterprises to
set-up, grow and create employment; the building of representative small-business
associations which can advocate for members and provide growth-enhancing services;
The creation of private-public partnerships which simultaneously create employment and
improve pro-poor services (such as waste and sanitation):
Improvements in job quality that increase productivity, thereby increasing income and
wages;
Better market access;
The development of rights and services for the informal economy;
Facilitating business development services such as management training; and
The promotion of womens entrepreneurship and gender equality.

The nature of poverty and the Millennium

Agenda
36

Work is central to poverty reduction but working out of poverty provides only general
guidance on how to achieve that ultimate goal.

Small enterprise development (SED) is about creating an environment so that owners and
workers can work smarter, work safer and work more productively. In doing so, they can
reduce their poverty. This is the challenge of poverty reduction through small enterprise
development.

An emerging consensus

There is an emerging consensus on poverty reduction and small enterprises that is

comprised of two central elements.

The first is that much of the population in poor countries operates or works for micro and
small enterprises (MSE) and that even in richer countries, a substantial portion of the
population is employed in small and medium enterprises (SMEs). In poor countries,
MSEs are where the poor are working either out of choice or out of necessity.
The second element of the consensus is that the general functional areas of how to
support private sector development in general and SED in particular, are being
established.

There are three major concerns.

First, while MSEs are important for employment in poor countries, we have not yet fully
grasped the long-term process by which a MSE sector that provides low incomes and
poor working conditions is transformed into a vibrant SME sector that provides stable
employment, a good income and decent, productive working conditions.

Second, the impact of SED activities on poverty reduction is not proven. Most often, it is
assumed. Our understanding is growing but it is still not clear how to assess impact and
even those techniques that are known are often not used. This is a critical problem for
donors, NGOs, governments and international agencies including the ILO in terms of
knowing how best to invest their time and money in the area of SED.

And third, the appropriate balance between freeing up markets and commercially driven
processes, on the one hand, and support and intervention from non-private actors is still
not known

Special issues of small business economies

37

The process of entrepreneurship from an entrepreneurs perspective is centrally

concerned with opportunity recognition, discovery and/or creation and appropriation of
value.

Care should be taken with the analogy of an ecosystem as human systems differ to
systems of nature due to three principle factors;

foresight/intentionality,
communication and
technology

Debates on and major problems of micro and small enterprises

In the process of poverty reduction and unemployment minimization, micro and small
enterprises come to the front to play an indispensible role.

Successful small business is the primary engines for economic development such as
income growth and poverty reduction in many of developing countries.

These businesses can also build foundation for stable communities and gender equality.
However, poor infrastructure, weak public service, inadequate mechanisms for dispute
resolution and lack of markets to their product and formal financing remain major
impediments to small business growth.

Arguments on Small Enterprises

What is a small enterprise?

The World Bank Enterprise Survey classifies enterprises with 5-19 employees as small
and those with 20-99 as medium.

The World Bank Group in-house definition considers enterprises with 10-49 employees
as small, 0-10 as micro-enterprises and 50-299 as medium-sized.

Small enterprises can also refer to wider categories, for instance, of SMEs, Micro and
Small Sized Enterprises (MSEs) and Micro, Small and Medium Sized Enterprises
(MSMEs).

Do they drive job employment and creation?

38

Donor support to small enterprises is often justified by their significant employment

share. Nearly a fifth of jobs are with small enterprises (5-19 employees),

Nearly half are with SMEs (5-99), with both shares rising in low income countries.

The key justification, though, is more often that small enterprises are especially effective
at creating new jobs.

Some scholars classify micro and small sized-enterprises (MSEs) into

New starts,
Non-growing enterprises,
Small growers and graduates.

Non-growing enterprises, carrying out survival activities, are most common. However
graduate enterprises, starting small but growing to 10+ staff, account for only 1% of
MSEs but a quarter of new jobs created by existing MSEs; 'it is especially young small
enterprises that make disproportionally high contributions to employment' .

How productive are they?

A common criticism of small enterprises is that they have lower levels of productivity
Small firms are also less likely to engage in innovative activities, such as adding new
product lines and incorporating new technologies

Are they more pro-poor than other firms?

Small enterprises also receive significant support because they are seen as providing
more opportunities for poorer people. This is in part as there are not enough economic
opportunities directly available in larger firms.

Smaller firms also tend to have lower entry requirements, in terms of skills, education
and qualifications.

Small enterprises are also important employers of marginalized groups who have
difficulties finding employment in larger firms.

What is holding back small enterprises?

Small enterprises report more business obstacles than larger enterprises.

39

Access to finance is often viewed as the most significant obstacle .This is in part because
banks see small enterprises as higher risk and more expensive to service, in proportion to
the loan amount.

Small enterprises also face significant obstacles in other aspects of the business
environment, such as taxes and regulation, inflation, corruption and street crime.

Yet inadequate workforce skills are prioritized more as a problem by larger firms.

Note that productivity is particularly affected by management practices, and those

management skills among small enterprise.

How can development actors support small enterprises?

Development agencies use a number of approaches, with the aim of enabling small
enterprises

To grow faster
To employ more people,
To pay higher wages and to better serve the poor.

Note that 'access to finance and entrepreneurship training can contribute to income
generation and the creation of more and better jobs, especially when they are provided as
a package.

Development agencies also use programme approaches which increasingly aim to build
up markets sustainably, such as value chain development, local economic development
and Market Systems

Central problems which in turn affect the performance of SMEs

Some of the central problems that are faced by every economy of a country are as
follows:

a. What to produce?
b. How to produce?
c. For whom to produce?

Allocation of resources refers to the problem of assigning the scarce resources in such a
manner so that maximum wants of the society are fulfilled.
40

1. What to produce problem

Involves

Selection of goods and services to be produced and

The quantity to be produced of each selected commodity.

Every economy has limited resources and thus, cannot produce all the goods. More of
one good or service usually means less of others.

The problem of What to produce has two aspects:

(I) What possible commodities to produce:

(II) (ii) How much to produce:

Guiding Principle of What to Produce:

Allocate the resources in a manner which gives maximum aggregate satisfaction.

2. How to produce problem

Refers to selection of technique to be used for production of goods and services.

A good can be produced using different techniques of production.

By technique, we mean which particular combination of inputs to be used. Generally,

techniques are classified as:

Labor intensive techniques (LIT) and

Capital intensive techniques (CIT).

In Labor intensive technique, more labor and less capital is used.

In Capital intensive technique, there is more capital and less labor utilization.

Guiding Principle of How to Produce:

Combine factors of production in such a manner so that maximum output is produced at

minimum cost, using least possible scarce resources.

3. for whom to produce problem

41

Refers to selection of the category of people who will ultimately consume the goods, i.e.
whether to produce goods for poorer and less rich or richer and less poor.
This problem is concerned with distribution of income among the factors of production
(land, labor, capital and enterprise), who contribute in the production process.

The problem can be categorized under two main heads:

(I) Personal Distribution:

It means how national income of an economy is distributed among different groups of

people.

(ii) Functional Distribution:

It involves deciding the share of different factors of production in the total national
product of the country.

Guiding Principle of For whom to produce:

Ensure that urgent wants of each productive factor are fulfilled to the maximum possible
extent.

It must be noted that in addition to Allocation of Resources, there are two more Central
Problems:

(I) Problem of fuller and efficient utilization of resources;

(ii) Problem of Growth of resources.

Major problems of micro and small enterprises

1. Problem of Raw Material:

The problem of raw material has assumed the shape of:

(i) An absolute scarcity,

(ii) A poor quality of raw materials, and

(iii) A high cost.

42

1. Problem of Finance:

The problem of finance in micro and small sector is mainly due to two reasons.

Firstly, it is partly due to scarcity of capital in the country as a whole.

Secondly, it is partly due to weak credit worthiness of micro and small enterprises in the
country.

3. Problem of Marketing:

These units often do not possess any marketing organization. In consequence, their
products compare unfavorably with the quality of the products of the large-scale
industries. Therefore, they suffer from competitive disadvantages adversative to large-
scale units.

In order to protect micro and small enterprises from this competitive disadvantage, the
Government of a country has

Reserved certain items for the small- scale sector.

Help the small-scale industries in organizing their sales.
Helping the small units in obtaining the government orders and locating export markets.

4. Problem of Under-Utilization of Capacity:

There are studies that clearly bring out the gross under-utilization of installed capacities
in micro and small enterprises.

On an average, we can safely say that 50 to 40 per cent of capacity were not utilized in
micro and small enterprises.

There are two aspects to the problem:

One, power supply is not always available to the small units on the mere asking, and
whenever it is available, it rationed out, limited to a few hours in a day.
Second, unlike large-scale industries, the micro and small enterprises cannot afford to go
in for alternatives; like installing own thermal units, because these involve heavy costs.

5. Other Problems:
43

The micro and small enterprises have been constrained by a number of other problems
also.

These include

Technological obsolescence, Inadequate availability of credit

Inadequate and irregular supply of facility,
raw materials, Constraint of infrastructure facilities
Lack of organized market channels, including power, and
Imperfect knowledge of market Deficient managerial and technical
conditions, skills.
Unorganized nature of operations,