Necessity versus opportunity-based entrepreneurship

Entrepreneurship does not necessarily imply human agency in the sense of freedom expansion. Large numbers of people in developing countries are forced to engage in informal micro-scale enterprises to survive, as either the formal econ-omy does not provide jobs, or the people do not have the skills required by the formal (and informal) job market. The Global Entrepreneurship Monitor (GEM) therefore distinguishes between opportunity and necessity-driven entrepreneur-ship (e.g. Bosma and Harding 2006; Bosma et al. 2008, 2009; Kelley et al. 2011).

Necessity-based entrepreneurship refers to those entrepreneurs who have entered self-employment because they have no better opportunity to work and generate sufficient income for themselves and their families. Opportunity-based entre-preneurship refers to those who have chosen to start a business as a result of opportunities, despite having other valuable employment possibilities. The GEM furthermore includes questions on the motivation of the entrepreneurs: whether they desire independence in their work, or engage in self-employment to maintain or increase their income. As Figure 6.2(a) shows, the percentage of the population working in early-stage entrepreneurial activities tends to be very high in many developing countries (such as Ghana, Zimbabwe or Peru), substantially lower in more developed countries (such as Japan, Belgium or Germany) and rises slightly again in the richest countries (such as Norway or the US). In other words, far more people are entrepreneurs and have their own business in developing countries than in most developed countries.

However, Figure 6.2(b) shows that a high percentage of the entrepreneurial action in developing countries is necessity-based. The necessity-based entrepre-neurial activity drops substantially when the average income level of the country increases. This implies that the slightly rising level of overall entrepreneurial activ-ity in the very richest countries (e.g. the US, Sweden or Norway in Figure 6.2(a)) are not due to necessity-based but to opportunity-based entrepreneurship.

Figure 6.2(b) implies that entrepreneurship does not necessarily result in human freedom and agency. Indeed, the decline of early-stage entrepreneurial activity can even be an indicator of a positive development in developing countries. It can indicate that more people are able to find a reasonable job and fewer people are obliged to engage in necessity-based self-employment. Moreover, studies in less developed countries with high rates of entrepreneurial action have also revealed high entry and exit rate for newly founded businesses. One good example is Peru.

The GEM 2006 (Bosma and Harding 2006; Serida et al. 2007) indicates that in Peru, two out of five people of working age are engaged in entrepreneurial actions, one of the highest rates in the world. The fact that an extremely large percentage of workers engage as entrepreneurs in Peru has little to do with qualitative or

UG

GDP per capita in Purchasing Power Parities ($), in thousands

–64 population involved in early-stage entrepreneurial activityPercentage of 18–

Figure 6.2 (a) Total early-stage entrepreneurial activity rates and per capita GDP 2010.

(b) Necessity-based early-stage entrepreneurial activity rates and per capita GDP 2010

Source: Kelley et al. (2011): GEM Global Report 2010, p. 28.

Note Permission to use figures from Global Entrepreneurship Monitor 2010 Global Report by Donna J. Kelley, Niels Bosma, José Ernesto Amorós, which appear here, has been granted by the copyright holders. The GEM is an international consortium and this report was produced from data collected in, and received from, 59 countries in 2010. Our thanks go to the authors, national teams, researchers, funding bodies and other contributors who have made this possible.

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GDP per capita in Purchasing Power Parities ($), in thousands 64 population involved in early-stage entrepreneurial activity by NecessityPercentage of 18-

18-Figure 6.2 Continued

opportunity-based entrepreneurship, but is rather due to self-employment survival strategies and a lack of formal employment opportunities (Serida et al. 2007).

However, a very good and expanding microfinance infrastructure also contributes to a high level of micro-entrepreneurship (Economist Intelligence Unit 2008).

There are a comparatively large number of domestic and international microfinance institutions (MFIs) with a considerable array of products in the Peruvian credit market. Nevertheless, while there is certainly a widespread engagement in entrepreneurial actions within the Peruvian population, the capa-bilities and opportunities for innovative and successful ventures are rather limited.

Most of the entrepreneurs engage in fairly saturated markets (e.g. commerce, retail, accommodation, restaurants or handicrafts) with low knowledge inten-sity and low potential for expansion. Indeed, according to the GEM Peru 2006 (Serida et al. 2007), only around 2.9 per cent of all enterprises have an elevated potential for market expansion, which take into account the supply of new prod-ucts, the use of new technologies and the competition in the market. Most of the ventures and small and medium-sized enterprises (SMEs) only focus on the local market and do not export; the companies that do export are predominantly large enterprises (e.g. in the mining sector). There are also problems with high entry and exit rates of firms in the market, owing to a low survival rate of ven-tures. In other words, a large number of micro-ventures are made every year, but a large percentage of them fail to become established in the market. One out of ten people of working age indicated that they had closed a business within the last twelve months. Three out of four Peruvian enterprises have recently been created, while only 12.4 per cent of the enterprises can be considered to be established (Serida et al. 2007). In addition, 68 per cent of the ventures are able to create a job for the entrepreneurs themselves alone, meaning it will create no employment opportunities for other people. Most of the newly founded businesses will fail within a few months or years and its owners will go on to open up another busi-ness soon thereafter, fail again, try another busibusi-ness and so on.