Gerrit Rooks Eindhoven University/ Makerere University Business School Adam Eddy Szirmai

1. Social Capital and Innovative Performance in Developing Countries. The Case of Ugandan Entrepreneurs Gerrit Rooks Eindhoven University/ Makerere University Business School Adam Eddy Szirmai UNU-MERIT Arthur Sserwanga Makerere University Business School

2. Focus of this Paper • Networks of Entrepreneurs as Social Cappital • Relationship between network characteristics of small scale entrepreneurs in Uganda and innovative performance. • Innovative Performance of Ugandan Entrepreneurs: new to the firm, not new to the market, not new to the world • Data from recent survey amongst Ugandan entrepreneurs in May 2008. 750 entrepreneurs. • Addressing two perceived shortcomings in the literature on entrepreneurship: insufficient attention to relationship between social capital and innovative performance and neglect of entrepreneurship in the context of developing countries • Burt versus Coleman: the two faces of social capital

3. In search of the Ugandan Entrepreneur • Predominance of tiny enterprises • 64 percent of firms with only one employee • 85 percent < 3 employees • 3.7 percent > 10 employees • Most enterprises are very young • 55 percent started after 2004 • 73 % after 2002 • 11% started up in 2008 • Cooperatives • larger firms are usually cooperatives • Use of family labour • 18 % of employees are family members • Firm dynamics • 66 per cent of the enterprises had no growth of employment whatsover between 2005 and 2008. • 6.2 per cent indicated a decrease in employment. • 10.9 started up in 2008.

4. Social capital Nahapiet and Ghoshal (1998): “The sum of the actual and potential resources embedded within, available through and derived from the network of relationships possessed by an individual or social unit. Social capital thus comprises both the network and the assets that may be mobilized through that network.” • social capital comprises both the network and the amount and quality of assets • This paper only analyses network structure

5. Measurement of network characteristics • Social capital: questions about 3 types of networks • "Looking back over the last six months – who are the people with whom you discussed an important personal matters?” (Personal network) • “Looking back over the last six months – who are the people with whom you discussed an important business matter?”. (Business advice or information network) • “If you were seeking material support for your business from other entrepreneurs. Looking back over the last six months – who are those entrepreneurs?”. (material support network) • For every name a list of further questions was asked

6. Coleman versus Burt Coleman: Advantages of tightly knit networks • dense networks facilitate cooperation • dense networks provide social control and trust • dense networks allow for exchange of tacit information and facilitatie fine-grained information transfer • dense networks curbe opportunism and free riding Burt: The negative impact of constraint • Dense networks create redundant ties. Redundant relationships are ‘constraints’. One wastes time in cultivating an individual A, if one already has ties with another individual B, who has ties with A. • Networks with structural holes offer opportunities for heterogeneous information. Having contacts in multiple groups yields information advantages • Operating as the link between persons and networks who do not have links with each other provides power advantages.

7. Constraint

9. The Curvilinear Relationship between Network Constraints and Innovative Performance

10. Conclusions • Constraint has a positive and significant coefficient. Interpretation: constraints and density are highly correlated. More dense entrepreneurial networks have positive effects on entrepreneurial performance. This is in line with the Coleman hypothesis that social capital is positively related to entrepreneurial innovation • Constraint squared has a negative coefficient. Beyond an optimal level, the relationship between network constraint and innovative performance becomes negative. This is in line with the Burt hypothesis that constrained networks act as an obstacle to innovation. • The curvilinear relationship between constraint and innovative performance provides a synthesis between the two competing research traditions of Coleman and Burt. • Multiplex networks do not favour innovation. Entrepreneurs who are too strongly tied up in networks where personal and business relationships are intertwined has less scope for innovation. This finding is especially relevant for developing countries.