MGT602 Entrepreneurship Assignment 1 Solution Spring 2013

Back ground:
Entrepreneurship is treated as one of the most appropriate tool to fix many socio-economic
problems faced by developing countries. This shift has been observed in all developed and
developing countries. In this decade the research conducted by many state and non-state
organizations and educational institutions have revealed the potential of entrepreneurship in
economic growth and development. The entrepreneurial process ensures the self-employment
that is the most appropriate tool to eradicate poverty and unemployment. It also ensures
improved productivity through innovation. Pakistan is going through turmoil of economic
downfall where most of the firms are falling in trenching situation. The production capacities of
firms are either squeezed or shifted to other countries that cause terrible increase in
unemployment.
CASE:
In Pakistan one of the serious socio -economic issue is unemployment. To overcome this issue
there is generally two ways. One is to create jobs and other is to establish their own enterprises.
But People are extremely risk averse and that is the main reason they do not try something new.
It is commonly observed that Pakistani graduates after completing their degrees opt to work for
someone else instead of starting up their own businesses. In Asian developing countries,
entrepreneurship development is currently an important issue related to economic development.
It is believed that in most of the countries lack of entrepreneurship is the main cause of weak
economic backwardness, limited capital, skilled workers and technology.
Requirements:
Q.1 In your opinion what are those barriers that could hinder the entrepreneurial intensions of business graduates in Pakistan. You need to provide at least 10 reasons? (10 marks)

Solution:

1. Non availability of machinery

2. Lack of Motivation

3.locus of control

4. risk analysis

5. week economic background

6.limited capitals

7. unskilled employment

8. Always interest in profit

9. lack of technology

10.professional support network lag

11. nonadhere relationship among peoples

 

Barriers to Entrepreneurship
Two trends of thought dominate research related to barriers to entrepreneurship, one highlighting
psychological variables deterring entrepreneurial endeavors, and the other accentuating variables related
to the business environment. Taormina and Lao (2007) show that budding entrepreneurs face
psychological issues such as achievement striving and optimism. Sandhu et al., (2011) suggest that
internal psychological variables that affect entrepreneurship include aversion to risk, fear of failure,
aversion to stress and hard work, while external factors include lack of social networking and lack of
resources, and have an equally significant impact on entrepreneurial inclination.
Indeed, macro-level environmental forces should not be underestimated. Factors in the external
environment, can potentially influence the start-up decision (Aldrich, 2000). Just as favorable external
factors can be considered conducive to entrepreneurship, unfavorable external factors can be powerful
barriers to it. For example, inadequate financial support, bureaucracy and inconsistency of government
policies, lack of entrepreneurial education at tertiary level and inadequacy of entrepreneurial training are
some of the important obstacles (Ahmad and Xavier, 2012). Similarly, Chowdhury (2007) explains that
political instability, corruption, lack of infrastructure facilities, education and training, lack of financial
help, all pose as barriers to entrepreneurship in developing nations. This supports the trend of thought that
highlights the business environment as a primary factor affecting entrepreneurship. It also suggests that
entrepreneurship is not only a function of internal psychological factors, but is also subject to external
environmental variables as well.
The Variables under Study
In this study, barriers belonging to both schools of thought will be examined for the purpose of
determining their effect on entrepreneurial inclination. The independent variables will be partly
psychological: aversion to risk, fear of failure, aversion to stress and hard work, partly environmental,
including lack of resources and lack of social networking, as depicted in Sandhu et al., (2011); in addition
to other environmental variables such as lack of economic stability and lack of political stability, as
suggested by Taormina and Lao (2007). The dependent variable in the study will be entrepreneurial
inclination in a developing nation.
Entrepreneurial Inclination
The entrepreneurial inclination in a country refers to the tendency of a population to engage in
entrepreneurial activity, at any stage of entrepreneurship, whether nascent, startup, or established. There
have been numerous studies about entrepreneurial inclinations around the world. There are even periodic
surveys that measure this variable across countries. Recent studies show that developing nations enjoy
higher rates of entrepreneurial intentions than developed nations (GEM, 2011). However, both developing
and developed nations are adjusting their academic curricula in a way that raises the entrepreneurial
inclination of students so as to turn a higher percentage of them into entrepreneurs. (Roffe, 2010; Frank et
al., 2005). Indeed, there have been numerous studies investigating the qualities of potential entrepreneurs.
Those who are entrepreneurially inclined seem to have greater innovativeness, more tolerance of
ambiguity and higher propensity to take risk as compared with those who are not entrepreneurially
inclined (Hian Chye Koh, 1996). Senior students that are entrepreneurially inclined are found to have
higher risk taking propensity, internal locus of control, higher need for achievement and higher
innovativeness (Gürol and Atsan, 2006). In this study, entrepreneurial inclination will be the dependent
variable under study, likely to be influenced by psychological factors, business environment factors, as
well as other external stability factors.
Aversion to Risk
Deriving wisdom from theory, this study goes back to Maslow’s hierarchy of needs (Maslow, 1954)
which identifies safety as the second basic need of the individual. Individuals need to feel secure in
making choices, such that risk of loss remains at a minimum. Herzberg et al.,(1959) pointed to the need
for security as a hygiene-type need, which if unsatisfied, will cause the individual to lose motivation for
behavior. This goes to show that people are generally risk averse, and will part away from risky
endeavors.

However, this contradicts with the intrinsic quality of the entrepreneur: being a risk taker. McClelland
(1985) shows that people who are moderate risk takers turn out to be more successful entrepreneurs. Such
contradictory evidence makes risk aversion a controversial variable that may either hinder or contribute to
entrepreneurship. On one hand, in a risk-averse society, not only is the entrepreneur risk averse but so is
the lender or investor, which makes the business startup more costly, with a lower potential for success.
This may pose a serious barrier to the entrepreneur. On the other hand, risk aversion may contribute to
entrepreneurial success. Some risk-averse people, long deemed inherently ill-suited to entrepreneurship,
might actually be well-suited to this occupation after all (Hsieh et al., 2011). In fact, it has been found that
risk taking is what differentiates entrepreneurs from managers (Mill, 1984). Nevertheless, evidence points
to risk aversion as one of the barriers to entrepreneurship. Hence, the first hypothesis in this study is:

H1
: Risk aversion has a significant negative impact on entrepreneurial inclination.

Aversion to Stress and Hard work
It can be expected that the process of initiating a business involves stressful work activities, follow up
work, meeting timelines, and dealing with exhausting demands of the startup and its ups and downs.
Hofstede (1980) classified countries according to 5 cultural dimensions, one of which is “uncertainty
avoidance”. This points to the fact that people differ in how they perceive uncertainty based on cultural
values. Since uncertainty is inherently associated with entrepreneurial endeavors, it is a condition that the
entrepreneur has to deal with. Hence, entrepreneurs generally suffer from anxiety and stress, undesirable
elements of entrepreneurship. All this may inflict aggravation on the entrepreneur and may disrupt
his/her life, routine, and work/life balance. Therefore, aversion to stress and hard work is considered a
psychological factor that posits as a barrier to entrepreneurial activity. Hence the second hypothesis in this
study is:
H2
: Aversion to stress and hard work has a significant negative impact on entrepreneurial inclination.
Fear of Failure
If the entrepreneur fails, this has many psychological implications. Failure of one’s business can have
negative ramifications on one’s image as a success story. It affects one’ self-esteem, confidence, and trust
in one’s abilities. As a result, it also affects one’s future entrepreneurial potential, thus influencing not
only one’s present but also one’s future. It is not surprising that fear of failure is yet another significant
barrier to entrepreneurship. About 21% of the Lebanese population (between 18 and 65 years of age)
declare that fear of failure prevents them from pursuing entrepreneurial ventures (Global
Entrepreneurship Monitor, 2009). It is deemed important by the researchers to further investigate the
effect of fear of failure on entrepreneurial inclination in Lebanon. Hence, the third hypothesis in this study
is Fear of Failure has a significant negative effect on entrepreneurial inclination.
Lack of Social Networking
Social networking is considered to be a common daily activity that relates to all aspects of life, especially
in developing nations. For example, in China, networking is used at all levels of social life (Luo, 2000). It
is especially important in Chinese business because an entrepreneur’s connections are often a critical
success factor (Yeung and Tung, 1996). Along the same lines, Sandhu et al., (2011) argue that in a
developing country such as Malaysia, social networking is an important factor in influencing
entrepreneurial activities. As such, lack of social networking can hinder entrepreneurial intentions, they
point out. It is argued that (social networking) structure serves as a basis for entrepreneurial activities and
innovations in the USA. Moral values support, and corporative networks from the society provide easy
solutions to the problems entrepreneurs face especially during the setting up stage of their firms. This
makes great contributions for the development of entrepreneurial activities in a society (TÜSİAD, 2002).
In a developing nation, networking has been shown to be one of the major success factors of a business.
The absence of social networking may hinder the entrepreneur’s efforts to start a business. Hence, the
fourth hypothesis in this study is:

H4
: Lack of social networking has a significant negative impact on entrepreneurial inclination.

Lack of Resources
Entrepreneurs have a universal need: the need for resources, especially adequate funding. In developing
nations, it is clearly difficult for entrepreneurs to raise funds for starting their business. Apart from banks,
there are very few funding agencies, and venture capitalists and business angels are, with a few
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exceptions, almost unheard of. This renders lack of funds a hurdle faced by small and medium-sized
companies in a developing nation like Malaysia (Edward and Chooi, 2007). Limited personal and family
savings and an absence of financial innovation severely limit the growth prospects of promising startups
in developing countries (Lingelbach, 2005). In Lebanon, sources of funds for entrepreneurs are little and
are limited to commercial banks. To help entrepreneurs obtain funds from local banks, there are
organizations like Kafalat which is a Lebanese financial company with a public concern that assists small
and medium sized enterprises (SMEs) to access commercial bank funding. Kafalat helps SMEs by
providing loan guarantees based on business plans / feasibility studies that show the viability of the
proposed business activity (Kafalat 2012). However, informal investments in an entrepreneur’s startup
have not exceeded 2% of the population (Global Entrepreneurship Monitor, 2009). This accentuates the
fact that funds are quite difficult to raise for entrepreneurial ventures, and that lack of resources may pose
as a barrier to entrepreneurship. Therefore, the fifth hypothesis in this study is:
H5
: Lack of resources has a significant negative impact on entrepreneurial inclination.
Lack of Economic Stability
Through the course of their development, economic instability remains a common characteristic of
developing countries, despite the general upward trend of their growth rates. A developing economy is
subject to variations in aggregate demand, investment, exports, and exchange rates, making it difficult for
a startup to pull off and survive. The unfavorable state of the economy may negatively affect
entrepreneurship (Baena, 2012). The negative effects are accentuated if the lending institutions become
more conservative, thereby reluctant to extend credit to entrepreneurs. Thus, the sixth hypothesis is:
H6
: Lack of economic stability has a significant negative impact on entrepreneurial inclination.
Lack of Political Stability
Political stability is essential for stimulating entrepreneurship in developing nations (Baena, 2012). In a
study using structural equation modeling to depict precursors to entrepreneurial intentions, Ali et al.,
(2010) found that political instability had negative effects on entrepreneurial intentions. On the other
hand, no significant relationship was established between entrepreneurship performance of national
economies and political stability of countries (AĞCA, 2008). Hence, there is no conclusive evidence
linking entrepreneurship to political stability, making this relationship worthy of further investigation.

Demographics
It is expected that demographic factors like age, gender, education, employment status, and income may
have some effect on entrepreneurial inclination. Many studies were conducted to examine the effect of
demographic factors, and the results were not conclusive. In one study, age, gender, and education were
found to have no significant effect on the entrepreneurial intentions of people
Q.2 In your opinion, the factors that you have mention in question no.01, how we can break those barriers to stimulate the entrepreneurial intensions among business graduates in Pakistan.

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