The Impact of Institutional Support on Entrepreneurship
Graduate School of Business and Law
Doctoral Symposium
The Impact of Institutional Support on Entrepreneurship
Key words: Entrepreneurship, Institutional Support, developing and developed economies, developing economies
Author: Thamer ALKHALDI
Email address:
Early Researcher track: Extended abstract
The Impact of Institutional Support on Entrepreneurship
Abstract
The aim of this study is to explore the role of institutional support for entrepreneurship. This study will be based on questionnaires that will be distributed among entrepreneurs and it may require a usage of macro-level archival data collected from major national and international organizations. In addition, this study will identify and explore the relationship between institutional support and entrepreneurship. It will also consider the impact of formal institutional support to entrepreneurship on developed and developing economies. This present research will bring attention to the importance of formal and informal of institutional supports in enhancing entrepreneurial activities in developing and developed economies like Saudi Arabia and the United Kingdom (UK).
Introduction
As a developing country, Saudi Arabia is a leading Islamic, Arab, and Gulf Cooperation Council (GCC) nation, which occupies a land area of about 2.15 million square kilometres in the Arabian Peninsula (Almobaireek and Manolova, 2012). It has a population of 29 million with a Gross Domestic Product of $746.2 billion (World Bank, 2015). In response to global economic challenges, rising youth unemployment and attendant consequences, the policymakers in Saudi Arabia have embraced a sustainable economic policy aimed at ensuring stable economic growth and job creation (Almobaireek and Manolova, 2012). At present, it is estimated that half of the Saudi population is within the average age bracket of 15- 24 years and the unemployment rate stands at 28.4% (Ministry of Economy and Planning, 2010). In recent years, there has been a concerted movement toward entrepreneurship in Saudi Arabia to stimulate the economy (IFC, 2014). In addition, the national economic policy with an entrepreneurial focus seeks to stimulate nine million new jobs through graduate/youth employment within a few years in Saudi Arabia (Alshumaimri et al., 2010).
The United Kingdom, as a high income developed country (World Bank, 2015) is located in Western Europe, between the North Atlantic Ocean and the North Sea, and occupies a land area of 243, 610 square kilometres. “One of five permanent members of the United Nation Security Council and a founding member of NATO and the Commonwealth, the UK pursues a global approach to foreign policy. The UK is also an active member of the European Union” (CIA.gov, 2015). It has a population of 64.51 million with a Gross Domestic Product of $2.942 trillion (World Bank, 2015). The UK government is encouraging the start or the expansion of a business as an ideal policy. Promoting new businesses, the UK government claims that it has “one of the lowest corporation tax rates in the G20”. Also, it provides a fast registration process where a new business can be registered within 48 hours. In addition, “four of the world’s top 10 universities are based in the UK”. The labour force is the second largest in Europe. Most importantly that “the UK government offers support to start-ups and entrepreneurs” (UK Trade & Investment, GOV.UK, 2015).
In its efforts to support start-up companies and entrepreneurs, the UK government through UK Trade and Investment’s (UKTI) Global Entrepreneur Programme (GEP) provides “access to mentoring programmes and funding through working with the private sector” and “helps overseas entrepreneurs and early stage technology businesses or start-ups that want to relocate their business to the UK” (UK Trade & Investment, GOV.UK, 2015). This programme, for example, which has helped 340 businesses relocating to the UK, offers more than 1000 new jobs, and raises more than £1 billion “of private investment for companies”. Furthermore, the programme provides free services such as developing business plans, assisting with relocating to the UK, providing introductions to investors, directing on how to grow on an international base and providing mentoring services by experienced entrepreneurs. This aims to encourage foreign entrepreneurs to set up their head offices in the UK (UK Trade & Investment, GOV.UK, 2015). Another institution that is willing to help entrepreneurs, start-ups and small businesses is the Department for Business Innovation & Skills, which provides tools and guidance for businesses (Department for Business Innovation & Skills, GOV.UK, 2015).
Some of the Saudi’s entrepreneurial initiative is targeted at university students with the ultimate aim of alleviating youth unemployment and creating new enterprises in both the industrial and service sectors of the economy (Almobaireek and Manolova, 2012). The entrepreneurship initiative is preferred in Saudi Arabia because it supports the Ninth Development Plan (2010-2014), which seeks to make the Kingdom of Saudi Arabia a knowledge-based economy. The plan further aims “to continue raising the real income of citizens, to improve the quantity and quality of services offered to them, to contain poverty and eventually eliminate it and to maintain price stability” (Ministry of Economy and Planning of the Kingdom of Saudi Arabia (2010:8).
More importantly, it was found that the graduate entrepreneurship programmes are encouraged by governmental institutions because university graduates exhibit a greater likelihood of establishing their own businesses as well as demonstrating a higher potential to start innovative new enterprises (Lüthje and Franke, 2003). Similarly, it has been ascertained that the graduate entrepreneurship initiative is supporting economic growth (Nabi and Linan, 2011). In their study, Nabi and Linan discussed how a developing country’s entrepreneurial activity is formed by distinctive cultural, “national and institutional characteristics and contexts” (2011:329). Gartner (1985) argues that the regional entrepreneurial environment has a major influence on new venture creation rates. In addition, Krueger et al. (2013) have also researched the correlation between culture and entrepreneurship. They have found that it is very important to understand the relationship between these two elements to stimulate entrepreneurial activity. Furthermore, Mitchell et al. (2002) conducted a study that used data collected in eleven different countries, and they found that national culture is as significant determinant of entrepreneurial cognition.
This study aims to present a research being undertaken in the area of entrepreneurship. The focus of this research study is intended to be on institutional support, both formal and informal, on entrepreneurship among developing and developed economies (for example, United Kingdom and Saudi Arabia). Aiming to explore the impact of institutional support on entrepreneurship, a comparison study will take place between Saudi Arabia and the United Kingdom. The framework shown below identifies the research area where it will take place on the overlapped spot among the three circles of institutional support, entrepreneurship, and United Kingdom-developed and Saudi Arabia-developing economies.
Figure 1: Research framework, by author
Literature Review
Entrepreneurship
Entrepreneurship has an application across multidisciplinary boundaries such as economics, history, sociology, anthropology, finance, marketing and management (Kaufmann and Dant, 1999; Ahmad and Seymour, 2008; Gutterman, 2012). Therefore, selecting a suitable definition of entrepreneurship has been challenging to the academic community (Cunningham and Lischeron, 1991). In their study, Cunningham and Lischeron (1991) stated, “the term has been used to define a wide range of activities such as creation, founding, adapting, and managing ventures. “No single discipline provides the tools for managing an entrepreneurial venture” (Cunningham and Lischeron, 1991: 46). In addition, Schumpeter (1943) explained the role of the entrepreneur as an innovator who makes positive changes in the economy by bringing new products or services to the market. Moreover, Nijkamp (2003: 396) argued that although “the entrepreneur is defined as a person who creates new businesses, brings a new product to the market, or develops new processes of production”, this simple definition does not fully describe the literature that extensively discusses the role of entrepreneur. Nijkamp continues, stating that a modern view on entrepreneurship was presented by Say, in 1803, defining the entrepreneur as “a coordinating manager in the production and distribution process of goods, through which welfare for society was created” (2003:397). In this vein, Johnson (2001:138) gives a definition of entrepreneurship, which “in its narrowest sense, involves capturing ideas, converting them into products and/or services and then building a venture to take the product to market”. Another important definition is stated by Venkataraman when he takes a different approach by defining the field of entrepreneurship as “a scholarly field that seeks to understand how opportunities that bring into existence "future" goods and services are discovered, created, and exploited, by whom are they exploited, and with what consequences” (1997: 120). This early twenty-first century buzzword term of entrepreneurship was used with little clarity (Johnson, 2001). He states that by concentrating on this challenging task, the difficulty can be overcome. Summing up the various definitions, Kuratko (2004:3) stated that entrepreneurship extends beyond the “creation of business”; it is concerned broadly with “seeking opportunities, taking risk and having the tenacity to push an idea through to reality.” Although the field of entrepreneurship is unknown to many people, most of them agree it is an important field of investigation (Venkataraman, 1997).
Institutional supports
Institutions are defined as the “rules of the game in a society”. Formally, institutions “are the humanly devised constraints that shape human interaction” (North, 1990: 3). Furthermore, these rules include formal (i.e. constitutional, legal, and organizational frameworks for individual actions), and informal institutions (i.e. codes of conduct, values, and norms) (Welter and Smallbone, 2011). Moreover, Hopp and Stephan (2012) argue that institutions can either be formal like property rights or informal like beliefs, values and norms; however the focus of this paper is on the formal and informal institutions. Nevertheless, Welter and Smallbone (2011) claim that “In all countries, the development of entrepreneurship and the behaviour of entrepreneurs are influenced by the appropriateness and operation of formal institutions” (p. 109). As Hopp and Stephan (2012) point out, entrepreneurship is an important contributor to job creation, society’s productivity and economic growth. They argue that entrepreneurship is impacted by socio-cultural norms, mainly through the underlining culture. They argue that culture impacts on important beliefs, which further impacts and determines success in the future venture of an individual. Furthermore, Hopp and Stephan (2012) propose that the support of government and community groups impact the key beliefs and probability of the success of entrepreneurs’ businesses. Also they propose that the performance-based socio-cultural norms individually impact entrepreneurial activity and success. They also argue that entrepreneurs who fit in a community’s cultural context have the higher probability of success, and ones that have high motivation and self-efficacy will be the ones that thrive. In addition, the institutional environment that is supporting and allows access to resources positively affects entrepreneurial motivation and self-efficacy and allows for a successful positive outcome of the business venture creations.
The Saudi government, for example, under the transition to a knowledge economy, is supporting its citizens to engage in entrepreneurship by investing in higher education institutions inside and outside the country, providing scholarships to developed countries. Also, it established a new entrepreneurship centre in Prince Sattam University (Salem, 2014) as part of the supports to the entrepreneurial activities in the country. In addition, several organizations were included in this movement, for example, the National Entrepreneurship Institute, Saudi Credit and Savings Bank, Technology Incubator and Innovation Centres, The King Salman Entrepreneurship Institute and Umm Al-Qura University. Moreover, Nabi and Linan (2011) point that some authors now talk about the “entrepreneurial economy” (2011:325). However, it is widely believed that entrepreneurship is useful for economic growth (Naude, 2013; Owusu-Mintah, 2014; Mohamed et al. 2012) which is important for developing economies around the globe.
Developing and developed economies
The Cambridge Business English Dictionary defines a developing country as “a country with little industrial and economic activity and where people generally have low incomes”. It also defines a developed country as “a country with a lot of industrial activity and where people generally have high incomes”. It also offers a definition of a less-developed country as “a country that does not have a lot of industrial activity and where people have low incomes”. (Cambridge University Press 2015, http://dictionary.cambridge.org/, 2015). However, the World Bank classified Saudi Arabia’s income level as “High income: non OECD” and the United Kingdom’s income level as “High income: OECD”, (World Bank, 2015), which shows the importance of the OECD membership among countries. OECD stands for The Organisation for Economic Co-operation and Development that was established in 1961 in Paris, France and its mission “is to promote policies that will improve the economic and social well-being of people around the world”. Currently, it has 34 member countries, most of whom are developed while some are emerging economies such as China, India and Brazil (http://www.oecd.org/, 2015).
In “Doing Business.org” 2015 data, the United Kingdom ranked 8th in the ease of doing business (out of 189 economies), while Saudi Arabia ranked 49th. This may explain the importance of these periodical reports published by the World Bank Group as it give some indication to entrepreneurs and business community. (World Bank Group Doing Business, 2015). This report goes into detail where it summarizes how easy or difficult it is for entrepreneurs to start a business. The Doing Business report also measures any changes that have happened to the regulations affecting different areas of the business. There are 11 areas in the life cycle of a business, summarised as follows: (starting a business, dealing with construction permits, getting electricity, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, resolving insolvency and employing workers), (World Bank Group Doing Business, 2015).
In their study of “Identifying high potential entrepreneurs in a developing country”, Sserwanga and Rooks (2013) mentioned that the researchers in developing economies “agree that basic entrepreneurial goals (autonomy, opportunity, moderate risk taking) remain primary motives for successful business start-up and growth in developing countries” (P. 1350010-3).
Some issues maybe arises in developing countries, such as inequality of treating entrepreneurs. According to Farid (2007) that the municipality of Cairo can take a decision of who can obtain loans and supports from World Bank loan programmes, and that might be based on relationship or personal some benefits. On the other hand, developed countries might have different environment, political, social and economic system which may influence the entrepreneurial activities in the country (Parker, 2006).