 Discusskey elements of an entrepreneurial environment

and the underpinning contextual and situational issues

 Explainthe meaning, purpose and role of institutions in
an entrepreneurial environment
 Analyze framework conditions and their applications to
different entrepreneurial environments
 Examine key tools with which to develop a framework
for entrepreneurial environment appropriate for
particular conditions, context and organizations
 Chapter 6: The Entrepreneurial
Environment: Context, Institutions,
Constraints and Framework Conditions

 Ontario Government - Strategic Community

Entrepreneurship Projects program:
http://www.ontario.ca/business-and-economy/start-business-young-
adults

 Government of Canada - Is
entrepreneurship for you?
http://www.canadabusiness.ca/eng/page/2858/

 http://tradecommissioner.gc.ca/innovators-innovateurs/innovators-
innovateurs.aspx?lang=eng

 http://www.cic.gc.ca/english/immigrate/business/start-
up/eligibility/entities.asp
 Classical and neo-classical thinkers reflected on the
importance of the political economy and the allocation
of resources based on maximization of utilitarian
value.
 Schumpeter (1934) had clearly identified the cultural
context of capitalism for the conduct of
entrepreneurship, arguing that the strength of
capitalism lay in its ability to support both:
 Rational thought and action in terms of planning
and forecasting
 Emotion, autonomous activity to
create something dynamic and
new for its own sake.
 Entrepreneurship is socially and culturally
embedded (i.e.- the family) and the environment
in which the entrepreneur operates is one in
which he/she is in continual tension with its
values and institutions.
 The family as a micro setting for Schumpeter’s
entrepreneur. TENSION between :
 A) mobility on the part of family members
who wish to create new things. Ask questions
of norms, explore alternatives. Incentives
available in society dictates pioneering any
change.
 B) consolidation by those who seek to
reinforce the success of their family in society.
Follow established norms and conventions.
How they can use existing institutions and
value to sustain their dominance and control of
their family.
How to detect the idea of maximization of
incentives among entrepreneurs? –
Disequilibrium and degree of monopoly prevail.
 Entrepreneurs seek to maximize profit and social prestige,
legitimacy and power. Much of this maximization takes place in
specific contexts:
 Social and Cultural background influence their
behaviours and actions: risk-taking, creative thinking,
search for autonomy.
 Social and Economic environment: Market, rules,
conventions, governance, framework conditions and
codes of behaviour and practice.
Example: Technological innovations - Produces new
technologies that could help solve production
problems, reduce costs, yield higher profits.
Relationships between buyers, suppliers, customers
and other agencies is critical.
NEED: Stable environment, law and order, facilitative
government policy, credit, bank/financial institutions and
incentives supported by government.
 Entrepreneurship occurs in both. It can be argued that entrepreneurs
succeed in seeking legitimacy in stabilizing relationships between
employees, customers, suppliers, distributors, contractors,
competitors and government. Therefore, reducing uncertainty in
unstable conditions.

 The ability of entrepreneurs to reduce uncertainty in unstable conditions is

enabled by stable institutions, including government, laws, regulations
and various codes of conduct.

Regulations – The Global Financial Crisis of 2008

 Intellectual property rights, patent, anti-trust, consumer protection
and other laws…governments role to manage firm creation and
growth.
 “Business misbehaviour, like that exemplified in the Enron and
Worldcom cases (Lehman Brothers, Goldman & Sachs) has a greater
damaging effect than terrorist attacks because it shakes investors
confidence and citizens trust in the fairness of market mechanism”
(Martinelli, 2004).
 Legitimacy & Intervention
 What engages the small firm community and
entrepreneurial firms is their place in the nexus of
other firms. They need protection from larger firms that
can overwhelm them in business.
 i.e. – Late payment and enforced extended credit,
serious cash flow consequences for small firms.
 Can be mitigated by measured interventions by
government and their agencies.

Status quo and incumbents

 Mills (1956) suggested that most of the business elite
during the American industrialization came from
landowning families or families with entrepreneurial
track records.
 Lower classes with limited access to resources or
networks contributed between 10%-20% to business
activity.
 Some societies: privilege was a function of
entrepreneurial activity.
 The idea of a self-made entrepreneur fighting against
the odds to create a successful enterprise. Schumpeter’s
idea of the entrepreneur as an outsider (socially
marginal) because of irrational actions.
 Social marginality of the outsider understood in the
context of societies that do not encourage
entrepreneurship. Example: A female entrepreneur – face
structural barriers of racism, sexism, and class.
 The growth of businesses of many of these minority
groups often takes them out of their original network
and environments. The change takes them into the
mainstream, where entrepreneurial activity demands
being associated with:
 Social networks, customs, conventions and codes of
conduct;
 Structures and institutions variables such as social
class, marriage patterns, solidarity with groups, power
relations.
• Entrepreneurs demonstrate
diverse forms of behaviour
according to the situations
they encounter.
• The behaviour of
entrepreneurs changes
constantly as they interact with
rather different social contexts,
and some of these interactions
produce innovations.
• Instead of one type of
entrepreneur, we find:
• IMPROVISERS
• REVISIONISTS
• REVERTERS
• SUPERSEDERS (Gibb &
Ritchie, 1982)
• Situations and circumstances shape
entrepreneurs in different economies.
• Poor economies – JOBS are scarce, so only
mode of survival is self-employment or
small (micro level) business activity.
• Rich economies – Range of opportunities
between paid employment and business
creation for people to make decision based
on utility functions.
• According to Global Entrepreneurship
Monitor (GEM) Reports, these conditions
create a ‘necessity or opportunity’ – driven
entrepreneurs.
• Regional variations – LA vs. Detroit
 a tradition of new ventures being founded in inclement
economic conditions
 The emergence of such firms as:
 Microsoft, Gap, HP, Texas Instruments, Polaroid, Atari,
Apple, Revlon
 All of whom were founded in a recession/depression
 Spencer Ante (2009) has found some intriguing new firms
that represent a barometer of innovation trends in the global
economy, with start-ups that are pioneering new markets in
biotechnology, clean tech, health care., web computing
 China Water & Energy, Ltd. (“CWE”) is a Hong Kong
based developer, owner and operator of infrastructure
projects and assets in China.
http://www.cwegroup.com.hk/index.php?option=com_content&view=article&i
d=54&Itemid=153
 Innovation and entrepreneurship lead to job creation,
productivity gains, wealth accumulation, new business
formation.
 In a downturn: a larger pool of talented staff available,
cost of labour, material, rent is cheaper.
 Competition flattens.
 Stricter lending. Less venture capital.
 Some firms may reach a higher level of profitability
because sharpened business model.
 Bad times can create more new firms. National Venture
Capital Association (2008) found that firms enjoying
venture capital funding were responsible for generating
12 million jobs and 20% of the US GDP (compared to
17 % of GDP in 2005)
 The role of Global links.
The context in which entrepreneurship thrives or perishes is
that in which an institutional support system works or
disengages with the entrepreneur.
Douglass North's idea of institutions and institutional change
(1990), suggests several characteristics of institutions and
what they represent;
1. Institutions are the rules of the game in a society "or more
formally are the humanly device constraints that shape human
interaction." They structure incentives in political, social and
economic environments
2. Institutions change the way societies and economies
evolve overtime
3. Institutions reduce uncertainty
4. Institutions operate in different ways with varying
degrees of potency in different countries and environments
5. Institutions have constraints which are both formal and
informal
6. Institutions are created by mediation or choice

7. Institutions have constraints that either permit people to

pursue activities or prevent certain types of behavior

8. Institutions allow for monitoring of the behavior of people

and organizations

9. Institutions are different from organizations. Organizations

depend on strategies, competencies, skills, resources and
models with which to operate within a set of rules or
conventions that constitute institutions.

10. Institutions are created and altered by human beings who

impose constraints.
An institutional approach to entrepreneurship helps us to understand
how entrepreneurs can cultivate and express their creativity.
 Rule of law and property rights
 Constitute the most important institution in society for a
prosperous economy.
 Studies have shown that these institutions hope to stop corrupt
actions such as bribery and other forms of destructive business
practice.
Different contacts and multiple factors
- Anna lee Saxenian (1996) studied Silicon Valley and Route 128 in the
United States; referred to the crucial difference between the
pioneering entrepreneurial dynamic spirit in Silicon Valley and the
culture of secrecy in Massachusetts.
- Relaxed approach of intellectual property rights in Silicon Valley.
Strong informal constraints tend to prevail over formal ones.
As society becomes more complex there is a
greater need for properly written/codified
rules and statements of practice.

Formal rules are decided by governments,

the judiciary, economic rules, and contracts.
There are five points (North, 2002)

1. Meant to facilitate exchange and smooth function

of relationships;
2. Maximize wealth creation and avoid any abuse
of power to exploit
3. These rules can be altered to suit particular
Norms of behavior -
interests
Organizational culture
4. The diverse nature of human interest is likely to
that generates informal
be reflected in economic transactions constraints. For example
5. Formal constraints can help to lower transaction food markets in
Costs. Bologna, Italy.
Social networks were people have a close understanding
of each other
-Kinship ties. Informal constraints are visible in Asian
societies and economies.

Mitra (2007) experienced informal constraints when

studying in the UK - A well-established manufacturing
firm was reluctant to embrace new technology because
they were direct descendants of "those who knew how
to do and make things." The result is what economist
referred to as a "lock-in" where no one can break out for
fear of being sanctioned by the rest of the community.
Informal constraints are concerned with cooperative
behavior
Trust is a central feature of informal constraints and is
generated in two ways one is ethical behavior on the
basis of tacit.
 In the implementation of constraints, institutions either
encourage or impede action ands social interaction.
Choices and Opportunity Costs
 In any economy, or in any economic unit, there is a
framework of actions that are held together by a certain
logic of cause and effect. Noteboom (2000) refers to an
Aristotelian theory of multiple causality where there are:
• final causes (as in goals and objectives)
(EARN A LIVING)
• efficient causes (as in an agent or an agency)
(THE PORTER)
• material causes (the inputs used to
achieve goals) (CLAY)
• formal or exemplary causes
(knowledge, skills, methods)
• conditional causes
(those that enable or prevent the other causes from operating).
 analytical framework for the evaluation of the role of institutions
 Any organization, is an institutional arrangement enabling the set of
Aristotelian causes to come together.
 The way these causes are combined in a particular environment is
through a process of institutionalization. Explicit rules
and conditions

in entrepreneurship development.
how institutional constraints can enable or

informal constraints
personal perceptions,
restrict entrepreneurship

circumstances,
motivations evaluations
 Bounded rationality (Simon 1959, 1976, 1979) prevents us
from making decisions that are based on rational conclusions
of cause and effect.
 Instead of cause and effect we see associations or certain
patterns of attitudes, behaviour, practice and response.
 The emergence of certain conditions for entrepreneurial
activity can be found in
 a) the mix of constraints and influences on behaviour of
entrepreneurs
 b) the role of institutions in that mix
 These conditions will vary between regions and countries
because of variations in the level of trust, the stage of
development of institutions and an array of other factors.
 The logical or associative link between these factors can be
examined within a framework.
 Framework conditions can help to explain which factors and
what combination of these factors can help to create and
establish an entrepreneurial environment.
 Gnyawali and Fogel (1994) suggested that the studies that described
various environmental conditions that could have an effect on the
level or rate of entrepreneurship in regions and countries can be
grouped into three broad categories:

Identify legal and institutional frameworks that can contribute to the

general environmental efficiency of private firms, the effect of experienced entrepreneurs, the
conditions for availability of skilled labour, suppliers and distributors, accessibility to
entrepreneurship customers and new markets, firm level competition, supportive
government policies and appropriate infrastructure.

descriptive studies of
the environmental Refer to the low levels of rules and regulations, a good range of tax and
conditions of regions or other incentives, and the provision of training and counselling services to
countries promote the prospect of start-ups.

Different policy options, such as venture capital fund provision,

the role of public policy government procurement programmes, intellectual property protection,
in shaping such
investment in education, and pronounced and explicit support for
environment
entrepreneurship, including entrepreneurship education, can help to
foster entrepreneurship.
 A stable environment. New businesses are more likely to
emerge in conditions that are conducive to a positive business
environment. These conditions boost confidence among
people because there are greater opportunities, and also
because the combinations of skills, access to information
financial assistance can help to realize such
opportunities.
 OECD (1998) study ‘Fostering Entrepreneurship’ &
‘Entrepreneur- ship: A Catalyst for Urban Regeneration
(OECD, 2004) emphasized the central significance of the
three key factors for entreprenurship development:
 a) framework conditions
 b) well- designed government policies
 c) supportive cultural attitudes
GEM classifies economies as factordriven, efficiency driven, and innovation driven.
The categories are derived from the World Economic Forum (WEF) Global
Competitiveness Index which categorizes three phases of economic
development based on GDP per capita, and the export share represented by
primary goods. Canada is in the innovative economy classification, exhibiting
sufficient reliance on business sophistication and innovation.
Different conditions apply in particular environments, depending
both on the state of development in that environment and on the
critical elements in the venture creation process (Gnyawali and
Fogel, 1994).
These core elements in the venture creation process are as follows:

Propensity to Ability to
Opportunity
enterprise enterprise

These elements of the venture creation process need to be linked

with the conditions to understand how those conditions interact
with the critical elements.

conditions critical elements helps us to create a framework for

understanding the real value of entrepreneurial environments.
 Mini case study 6.1: Singapore: Talent and creativity capital
 the importance of social capital and its key component of trust,
networks and institutions that help to develop the entrepreneurial
capital of different environments.
 The 3 T’s of Florida
Talent Technology Tolerance
Is creativity or is talent that matters when the entrepreneurial or
economic strength of a country or a region is evaluated?
a) Glaser (2005) explained that talent or human capital has more
significance for driving economic growth, especially in urban areas.
b) Acs (2008b) - Education is a key variable for creating a successful
economic environment, and countries or regions making clever use
of local factors together with the improvement or attraction of human
capital demonstrate an innovative approach to creating a growing,
entrepreneurial economy
c) (Lee et al., 2004) The presence of a diverse and rich pool of human
capital, coupled with cultural diversity, facilitates the inflow of a
particular kind of human capital that promotes innovation,
accelerates information flow and develops new ideas, leading to a
higher rate of new firm formation
MACROECONOMIC ISSUES: Policy makers are expected to
concentrate on these issues and develop good banking systems,
attractive interest and exchange rates, and stable tax structures
alongside the need to deregulate, privatize and invest in
infrastructure.
1. The Free Market Model : The role of government is fairly
limited. Examples: United States & Canada
2. The Guided Individualism Model: This model based on
the encouragement of individual enterprise. The role of
public policy points out the sectors and industries in which
entrepreneurial energies can most usefully be directed.
Examples: Singapore & Taipei
3. The Social Democrat Model : This model combines the
encouragement of enterprise with an emphasis on social
protection. Social partnerships are determined by
negotiations between employers, employees and
government. Examples: Sweden & Germany
4. The Human Capability Model. Based on the well-being
of people stemming from their capability for, and freedom
of, functioning. Technology should provide the knowledge
so that people make informed choices.