Paper to be presented at theEMNet-Conference on
"Economics and Management of Franchising Networks"
Vienna, Austria, June 26 – 28, 2003
LINKING BETWEEN FRANCHISING NETWORKS FOR ENTREPRENEURSHIP AND ECONOMICAL DEVELOPMENT----- LOOKING FOR A NEW MODEL
1
Jahangir Alam
Associate Professor
Department of Finance
University of Chittagong
Bangladesh
Email:
Phone: Office: 0088-031-726311-14
Extension: 4234 (Auto)
Fax: 0088-031-726310
Mohammad Akter Hossan
Lecturer
Department of Finance
University of Chittagong
Bangladesh
Email:
Phone: Office: 0088-031-726311-14
Extension: 4234 (Auto)
Fax: 0088-031-726310
1
Abstract
Entrepreneurship is an outcome of complex balancing of opportunity initiatives, risks and rewards. Entrepreneurship is as a process by which people pursue opportunities, fulfilling needs and wants through innovations, without regard to the resources they currently control. Entrepreneurial resource is vital ingredient of economic development whereas a key element of economic development is that the 'people of the country' must be major participants in the process that brought about changes in structure of economic and population growths along with consumption pattern. Through the process of entrepreneurship, it is possible to argument the scope of capital formation, employment generation and facilitate industrialization in a country on the hand. On the other hand, entrepreneurship acts as a powerful tool of employment generation, raising productivity through innovation, facilitating transfer of technology, playing key role in commercializing new products, redistribution of wealth and income, earning foreign exchanges, promoting social welfare and the like.
Adequate information is one of the important aspects of entrepreneurship development. Entrepreneurs have to face different problems such as, knowledge about markets, about key people in buyer organizations, and so on. Such information and understanding is not easily, cheaply or rapidly acquired. As a result, networks between buyers, sellers and other related parties, which form the basis of effective communication, must be established. Networks establishment can be a demanding and time consuming process where the gap between the accentuated by physical and cultural distance barriers. There is a considerable inertia amongst buyers who feel more secure with suppliers from familiar sources and location. As a result, the new entrants have to face more problems as compared to others existing entities.
A core competence of overcoming barriers of innovation and development of entrepreneurship is franchising networks. This will reduce the costs of entrepreneurs/firms to gather information in different aspects. The benefits are enormous over and above reducing costs of information.
The paper attempts to build a model for entrepreneurship development conducive to overall economic development of a country - developing or developed- taking franchising networks as a main variable along with some other associate variables.
I. Introduction
The concept of entrepreneurship is multifaceted and used in a wide variety of contexts. At its heart are entrepreneurs, i.e. persons that are believed to have characteristic traits or behave in some characteristic way. On the basis of these characteristic traits entrepreneurship is described as an innovator who undertakes the new combinations of factors of production. Innovation may occur in the form of: i) the introduction of a new goods, ii) the introduction of new method of production, iii) the opening of a new market, iv) the conquest of a new source of supply of factors of production and v) the reorganization of any industry. Entrepreneurs are specially motivated and talented type of individuals who are to see potentially profitable opportunities and tend to exploit them (Saha, 1989). It is recognized that mere existence of resources does not guarantee economic growth (Purhit and Rahman, 1995). Experience shows that progress is basically the human effort and it takes human agents to mobilize capital, to exploit natural resources to create new markets and to carry on trade (Frederick and Myers). According to J.A. Schumpter entrepreneurship is the central figure of the development process because the entrepreneur in the modern complex economic world, can create opportunities for production technology, by expanding or discovering new market, new product, new source of resources, etc. All these activities will embrace risk and uncertainties and at the same time will increase the demand for higher or increased investment in the economy. This demand for increased investment will necessitate higher capital accumulation and thereby the demand for increased rate of savings in the economy. The cumulative effects of all these factors will increase level of income ands total production of goods and services in the economy. In other words, in totality, the net result of expansion in the volume of economic activities will lead to growth in national economy and if a proper and equitable distribution policy can be formulated by the state to suit the real development in the economy will take place (Saha, 1989).
Although entrepreneurship is a vital factor in the economic development process, in practice it has to face the problem of adequate information regarding the potential opportunities in environment, demand and choice of potential customers, sources of necessary resources for that new goods, various aspects of the markets, market penetration strategies, existing and probable competitors, suppliers of raw materials, required technology and expert personnel, etc. As a result, if entrepreneurs want to collect this information by using the traditional methods then it will cost more to the entrepreneurs and this cost also leads to increase in the production and as a transaction cost too.
So, in the world of information technology, entrepreneurs can only be benefited by gathering various information mentioned earlier, exchange views with the entrepreneurs at home and abroad, share the experience with such foreign entrepreneurs even can take suggestions from successful entrepreneurs for overcoming any difficulties through networking support provided by any parent network company. To use these network support, entrepreneurs have to pay royalties, establishment and other fees to the parent network company and this system of network support of parent company is called franchising network where entrepreneurs are called franchisee(s) and the parent company is known as franchiser(s). By collecting information from such networking system, entrepreneurs can reduce their cost of production and can contribute more to the economic development.
This paper tries to build a structural model linking between franchising network and entrepreneurship development and to evaluate whether this model will be able to reduce the cost or not.
II. Critical Evaluation of Existing Theories of Entrepreneurship
At present there are a number of entrepreneurship theories for the development of entrepreneurship. So, in this section we have tried to identify the variables used in the existing models, to find out the merits and demerits of present theories. We have also considered all these factors while we have tried to provide a new model. All the existing entrepreneurship theories are divided here into two major categories- psychological theories and sociological & anthropological theories. These theories are discussed below-
A.Psychological Theories
The essence of psychological or personal theory is the difference in individuals’ attitude. According to this theory the difference in attitude i.e. the internal attitude and ability to judge and forecast the situation lead a man to become a successful entrepreneur. Some important theories of this field are critically discussed below-
David McClelland’s theory on need for achievement is the most important one of the various psychological theories on entrepreneurship. In his theory McClelland emphasized the relationship of achievement motivation or need for achievement (symbolically written as n Ach) to economic development via entrepreneurial activities. He wrote “the presumed mechanism by which n Achievement level translate itself into economic growth is the entrepreneurial class. If the n Achievement level is high, there will presumable be more people who behave like entrepreneurs-----" (Islam, 1989). According to McClelland, one would expect a relatively greater amount of entrepreneurship in a society if the average level of need achievement in a society is relatively high. Because having a high n Ach encourages an individual to sit challenging goals, work hard to achieve the goals and uses the skills and abilities needed to accomplish them (Islam 1989). Moreover, it is the inner drive of individuals that propels them to work more and to achieve something for their own interest by taking personal risk (Islam and Mamun, 2000) . Need for achievement then, reflects a strong goal orientation, an obsession with job or task to be done. So, entrepreneurship becomes the link or intervening variable between need achievement and economic growth. Consequently, McClelland advocates increasing level of need-achievement in a society in order to stimulate entrepreneurship and economic growth (Islam, 1989) . Finally, according to McClelland, entrepreneurs are activated by the high extent of achievement motivation and he also stated a desire to do well, not so much for the sake of social recognition or prestige, but for an inner feeling of personal accomplishment, induce people to be an entrepreneur (Islam and Mamun, 2000). He also suggests that the n Ach level can be increased in an individual through training and by creating appropriate culture.
In the theory of withdrawal of status respect Everett Hagen’s argument is that certain social changes are cause of psychological changes in a group or in an individual of the society. He believes that the initial condition leading to eventual-entrepreneurial behavior is the loss of status by a group of collectivity (Islam, 1989). According to Hagen loss of status can occur in one of the four ways- i) the group may be displaced by force; ii) it may have its valued symbols denigrated; iii) it may drift into a situation of status inconsistency and iv) it may not be accepted in a new society, and the outcomes or reactions of the loss of status are retreatism, ritualism, innovation, reformism and rebellion. Among these reactions retreatism is important for entrepreneurship. Because retreatism is characterized by psychological repression of the trauma associated with the status loss. The suppressed rage resulting from the loss of status ultimately results in a later generation is standards of achievement being held up by mothers within the group to their sons. For this reason the son’s becoming innovators is increased and entrepreneurship becomes a feasible outlet for such tendencies (Islam, 1989). This theory has been criticized for two major reasons. First reason is that this theory is post hoc that means, Hagen discovered instances of the withdrawal of status respect by looking first at situation in which economic growth occurred and then by looking for status losses that might have preceded that growth. Second criticism has centered on the long period of time- as much as five or more generations are required for the withdrawal of status respect to result in the emergence of entrepreneurship.
In motive-Acquisition theory which is a revised version of McClelland n Ach theory expresses that the mentality, personality, thinking power, attitude etc. are not in-born but they are flexible and changes with situation. So, this theory advocates in favor of frequent training and development programs to influence and motivate an individual towards a goal by changing his/her thinking, mentality, attitude etc (Islam and Mamun, 2000).
Risk taking theory which is introduced by Richard Cantillon and John Stuart Mill defined entrepreneurship as a mentality to take moderate or calculated risk, because people taking a very big risk also have a great responsibility. Then, to perform this responsibility people has to take initiatives and this initiatives result entrepreneurship.
Internal-External Locus of Control theory introduced by professor J.D Rotter of Ohio University highlights the self-confidence of a person, the dependency on fortune and external environment for becoming an entrepreneur. According to this theory internal locus of control i.e. self confidence, extreme belief over one’s ability and power motivates individual of a society to take initiatives for innovation which is very much helpful for individual side by side for society too (Islam and Mamun, 2000). On the other hand, Independence Motivation theory is the similar to internal-external Locus of control theory, which also emphasizes on the independents thinking of entrepreneurs. This theory expresses that people having independent thinking, self-confidence, self-controlling ability can avoid social condemnation for becoming an entrepreneur.
Another psychological theory of entrepreneurship named Creativity or Innovation Theory highlights the physical performance as the determinant to evaluate whether an individual is creative or not, because creative individual use their talents, thinking ability to create new and fundamental ideas or views and they also find out techniques to bring new ideas into practice. On the contrary, Power Motivation Theory has given emphasis on the authority to do a certain task properly. Especially for entrepreneurship development personal power, which is related to self-interest, is essential.
B.Sociological and Anthropological theories
There are some other theories based on sociological and anthropological aspects. This is because socio-cultural factors have a substantial influence in creating entrepreneur as well as entrepreneurship (Katz et al, 1991). Moreover, social and cultural factors places a high value on innovation, risk taking and independence is more likely to produce entrepreneurial events than a system with contrasting values (Islam, 1989). Among these type of theories Max Weber’s protestant values is ancient one. In this theory Weber argued that protestant or Calvinistic logic or values were instrumental in promoting capitalist enterprise. These values included, first of all, an emphasis on the inherent goodness of work itself. A person’s work was regarded as a calling in the very literal rendering of the concept of vocation. Moreover, the experience of financial rewards from one’s work was regarded as a manifestation that one was blessed by God, a number of elect few predestined to share this grace. However, money created temptations to the flesh, whose yearnings were to be suppressed. Protestant values called for self-restraint and deferral of gratification. By investing one’s earnings in the form of capital, one could practice such self-denial. Over a period of many years, repeated investment of earnings created the capital base for the take off of Western societies into the economic break-through of the industrial revolution.
In another anthropological theory named Marginal and Tension theory introduced by Robert Park in 1928 stated that a marginal man is one whose fate has condemned him to live in two societies. The two societies are not merely different but antagonistic cultures like occidental and oriental culture. Sometimes, for their existence, the marginal men engage themselves in business because marginal man can’t be accepted widely in any society. So, from the group of marginal man there is a likelihood of creating more entrepreneurs (Islam and Mamun, 2000).
From this discussion we find some variables for the entrepreneurship development. These variables are- i) need for achievement; ii) withdrawal of status ; iii) training for changing individual's mentality, thinking and attitude, etc; iv) risk taking mentality; v) self-confidence, extreme belief over one's ability and power; vi) creative ability; vii) authority or personal power; vii) inherent goodness of work, self-restraint in the case of consumption profit and; ix) social marginality. All these variables found from existing prominent theories of entrepreneurship These psychological and sociological variables are of qualitative type that play simulative role in an individual for becoming an entrepreneur. These variables explain only the initial stage of entrepreneurship development process, that means why and when an individual acts as an entrepreneur. But these variables don't explain post initial stage of entrepreneurship development process. As a result, we don't find any guidelines relating to how entrepreneurs use their resources (capital, skill, risk taking ability, etc) and overcoming their barriers (coordination, knowledge) from these models
III. Shifted Entrepreneurial Success factors
In this section we have tried to know what are the shifted success factors for entrepreneurship development from the old factors with change of time. These factors can be used for overcoming the shortcomings of psychological and sociological models and also enhance their applicability. Anyway, the entrepreneurial success factors are broadly divided into four categories (Ahmed, 1981). These are a) psychological factors (need for achievement, risk taking, need for power, internal-external locus of control, motivation for autonomy, creativity, need for affiliation, and intelligence); b) socio-cultural factors (religious values, rural-urban orientation, marginality and tension, social cohesion, etc.); c) personal factors (family tradition in business, previous experience, birth order, age at entrepreneurial level, education etc.); d) opportunity factors (economic opportunities, peer group assistance, training opportunities and guidance, existing schemes of entrepreneurial training and guided entrepreneurship etc.). Table-1 (Islam and Nazrul, 2000) shown in the appendix reveals that among these factors risk taking is the most important success factors irrespective of business size, location and types as well for the entrepreneurs, of course according to the researchers this risk should be calculated and moderate in nature. The second, third, fourth, and fifth important success factors are innovativeness and well coordinated-flexible persistent actions that indicate the quest for something new, like managerial capability, as well as adaptability; self awareness/self motivation for achievement; self confidence and personal initiative; market knowledge relating to business environment like market demand, competition, technology development, product development, social and political issues etc. respectively. This chart also shows that the researchers before and after 90s tend to be different in their focus regarding success factors of entrepreneurs. According to them, before 1990s personal and psychological factors i.e. risk taking ability of entrepreneurs, innovativeness, and self-confidence, well coordinated flexible persistent managerial actions, personal initiative and industriousness, dynamism and self motivation are the most success factors. On the other hand after 1990s managerial and environmental factors of business i.e. market knowledge and well coordinated flexible persistent managerial action factors followed by risk taking capability, innovativeness, self motivation, moral attitudes and values, and business and other environmental consciousness, are the most important success factors for the entrepreneurs. So, it can be said that entrepreneurial success factors have been shifted from personal and psychological factors to managerial and environmental factors due to the increasing complexity in business, and development of information, demanding products and customer sophistication, globalization of business, etc (Islam and Nazrul, 2000). This trend of entrepreneurial success factors shown in following figure