The Economics of Entrepreneurship

1. Dr. Joan Fulton Professor and Associate Department Head Department of Agricultural Economics Purdue University The Economics of Entrepreneurship

3. Nobel Prize in Economics - 2010 • Peter Diamond, Dale Mortensen, Christopher Pissarides • For their analysis of markets with search frictions.

4. Nobel Prize in Economics - 2009 • Elinor Ostrom and Oliver Williamson • For “her analysis of economic governance, especially the commons.” and “his analysis of economic governance, especially the boundaries of the firm.”

5. Nobel Prize in Economics - 2008 • Paul Krugman • For his analysis of trade patterns and location of economic activity

6. Nobel Prize in Economics - 2007 • Leonid Hurwicz, Eric Maskin and Rober Myerson • for “having laid the foundations of mechanism design theory.”

7. Nobel Prize in Economics - 2004 • Finn E. Kydland, Edward C. Prescott • “for their contributions to dynamic macroeconomics: the time consistency of economic policy and the driving forces behind business cycles.”

8. Nobel Prize in Economics • 2003 • Engle III and Granger – “for methods of analyzing economic time series with time-varying volatility (ARCH)” • 2002 • Daniel Kahneman and Vernon Smith – “for having integrated insights from psychological research into economic science, especially concerning human judgment and decision-making under uncertainty.” and “for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms.”

9. Nobel Prize in Economics • 2002 • George Akerloff, A. Michael Spence and Joseph E. Stiglitz – “for their analyses of markets with asymmetric information.” • 2001 • James Heckman and Daniel McFadden – for “development of theory and methods for analyzing selective samples” and for “development of theory and methods for analyzing discrete choice”

10. Joan’s Journey through The Economics of Entrepreneurship:Theory and Application

11. Undergraduate Studies - Excitement Accounting 101 Economics 101

12. Undergraduate Studies – Disillusionment – Wow

13. Undergraduate Studies – Practicality • The Dilemma • Change Majors or Get a Degree in 4 Years • The Solution • Bachelor of Commerce (business) • Honors in Economics • This path allowed me to complete my Bachelor’s degree in 4 years while still focusing on economics • So my career has combined business and economics from the start

14. Graduate Studies • University of Western Ontario • London, Ontario, Canada • MA in Economics • Very Theoretical • Mathematical models of economics with no application was not sufficient for me at that time • Decided that I needed to experience the business world

15. Corporate Experience • Spent 2 years as Strategic Analyst in Corporate Planning Department of the Potash Corporation of Saskatchewan

16. Back to Economics • Pulling It All Together with Economics • 5 years teaching intro and intermediate economics at University of Saskatchewan • “You really learn something when you have to teach it.”

17. PhD. Studies • Taking Economics to the Next Level • After 2 years working in a corporate environment and 5 years teaching introductory and intermediate economics I was prepared to see the value of theoretical modeling of economic concepts using high level mathematics • Applications of economics to business environment (farm business management, cooperative management, logistical examples) were an integral part of the program

18. Ph.D. –Dissertation Research • Centralized versus Decentralized Decision Making in Grain Marketing Cooperatives • Professors Prescott and Hurwicz were both on my Ph.D. committee • Initial theory suggested we should see more decision making activity at centralized level – but my empirical results found bulk of activity at decentralized level • Revisiting the model to consider the extent of the uncertainty

19. Research on Cooperatives • Following Ph.D. my research examined • Member Commitment to their Cooperatives • Situations where cooperative structures CAN and DO work • Where joint ownership and joint responsibility are recognized by all of the decision makers so people do not “free ride” • Factors affecting success with Joint Venture and Strategic Alliance agreements • Effectiveness of New Generation Cooperatives

20. Research on Cooperatives/Agribusiness • Customer Satisfaction with their Cooperatives • Managing multi location facilities for grain marketing cooperatives • Consolidation of agricultural cooperatives over time • Effectiveness of Word of Mouth Marketing

21. Small Business Development • Value Added Businesses can be important – especially in agriculture • Challenge for small business owners can be the lack of business skills (marketing, finance, planning) • Often they have the skills for the technical production aspect of the business • Large percentage of small businesses fail • Business planning significantly increases chance of success

22. Importance of Business Planning • Although building a plan does not guarantee success, it does increase your chances of succeeding in business. • Research has shown that attempting to write a business plan increases your chances of starting a business by 24%. • A plan is like a road map.

23. Women Entrepreneurs Fighting Poverty

24. Miriam Otoo Graduate Student, Dept. of Ag. Econ, Purdue University Germaine Ibro Economist, Institut de Recherche Agronomique du Niger Joan Fulton Professor, Dept. of Ag. Econ, Purdue University James Lowenberg-DeBoer Assoc. Dean Int. Programs in Ag., Purdue University Factors Affecting the Success of Women Street Food Vendors in Niger

25. Informal Sector and Street Foods • Women hold a central role in this sector, • They use traditional skills and little capital to prepare food from scratch using local cereals and grains.   • Provide important nutrition for all consumers and especially the urban poor • Important product from cowpeas: Kosaï

26. Kosaï • Essential source of inexpensive ready-to-eat food for workers of every class and occupation. • Kosaï: consumed at anytime of day: for breakfast and as a snack between lunch and dinner.

28. Objective • The objective of this work is to identify the factors that affect the success or women entrepreneurs involved in kosaï production and sales in the three largest cities of Niger (Niamey, Maradi and Zinder)

29. Data • Census of Kosai Vendors • Niamey • Maradi • Zinder • One-on-one Interviews with Random Sample of Vendors

30. Educational Level of Vendors Between 50% and 60% of vendors have no formal education Primary education: 25% in Niamey, 8% in Zinder and 4% in Maradi

31. Expenditure Outlets for Income from Kosaï • Savings: • 80%, 77% and 67% of vendors in Niamey, Zinder and Maradi respectively; • Maradi and Zinder vendors used earnings for immediate expenditures

32. Regression Analysis • Two Measures of Success Considered • Size • Quantity of cowpea used per day is proxy for size of business operation • OLS regression analysis with size as dependent variable • Growth • Self reported perception of the women. Variable equal to 1if she was experiencing growth, 0 otherwise • Binary Logit analysis

33. Success = f(education, experience, business constraints)

34. OLS Analysis with Size as Measure of Success • R2 values are low • Experience (years in business) • positive and statistically significant for all models • indicates that vendors with more experience are more successful; • Capital Constraint variable: • negative and statistically significant for two of the models • vendors identifying capital equipment as an important constraint are less likely to be successful; • Cowpea Constraint variable: • negative and statistically significant for all models • vendors who find purchasing cowpea as an important constraint are less likely to be successful.

35. OLS Analysis with Size as Measure of Success • Dummy variables for education: • not statistically significant • Indicates that level of education does not affect the level of success for the Kosaï vendors. • Dummy variables for city: • statistically significant – but suggest that may be picking up some other factors

36. Binary Logit Analysis with Growth as Measure of Success • Likelihood ratio tests show that all models are statistically significant. • Experience (years in business) • positive and statistically significant for all models. • corroborates the results of the OLS model. • Capital Constraint • Negative and statistically significant • Cowpea Constraint • Negative and statistically significant • This supports Esim’s (2001) findings, who cites non-availability of raw materials as a major constraint faced by women micro-entrepreneurs in developing countries

37. Binary Logit Analysis with Growth as Measure of Success • Dummy Variable for Education • Coefficients are negative and significant , not expected; • Vendors with more education have other employment opportunities; • Vendors with secondary education usually younger and single and enter into Kosaï production just to save enough money for continuing their education or for their trousseau; • Family Size • variable is positive and statistically significant, implying Kosaï vendors with larger family size were more likely to experience growth; • family members provide free or inexpensive labor. • Dummy variables for city: • Similar to OLS results, these variables are statistically significant but are most likely picking up other effects

38. Conclusions • The production and selling of Kosaï by women street vendors in West Africa is an important economic activity • Uses a significant amount of cowpea • Provides nutritious food for general population • Provides important income for the women who spend the money on their families • Experience is an important factor contributing to success • Production constraints are also important • Capital • Purchasing the cowpea every day • Preparing the batter

39. Next Steps • Explore other measures of success • Explore the production constraint of “Preparing the Batter” • Joint work with Food Scientists • Have identified a potential new line of business • Making a dry cowpea product for quick mix of kosaï

40. Women Entrepreneurs Fighting Poverty

41. What do Kids Need to Know

42. What are the Basic Business Skills Needed? • Profit = Revenue – Costs • Revenue equals • Selling Price times Number of Units Sold • Costs • Fixed Costs • Those costs that you incur even if you produce/sell nothing • Variable Costs

43. Revenue and Costs Projections THE BUDGETING PROCESS

44. Revenue Projections • Marketing Plan • Consider each Market Segment • Number of customers who are potential – and who will BUY • Number of units each customer will buy • Price customer will pay • Price times Quantity = REVENUE from that segment • Add up Revenue Across all Segments

45. Cost Projections • Go through all aspects of the operation and identify the costs • Fixed Costs – you will get a total • Variable Costs – most of these will be on a per unit of product produced basis • Add up all costs for the amount you project to product to get Total Costs

46. Remember • Profits = Revenue - Costs

47. Competitive Analysis • Careful evaluation of ALL of your competitors • 5 Forces Publication is excellent resource here • There is ALWAYS Competition • Sometimes it is “do nothing” • Your entry into the market may cause an unexpected reaction by a competitor – plan for this as much as possible

48. Marketing Plan • What is the Core Benefit your product/service provides? • What are the needs that your primary customers have? • How does the Core Benefit of your product fit with the needs of your customers? • What are the implications for marketing?

49. Planning • Planning is extremely important because • It provides a ROAD MAP • Following the plan is the best way for all people involved in the business to be “on the same page” • If things don’t go as expected you can look to the map to see what the appropriate “detour” will be • Research has shown the value of planning - attempting to write a business plan increases your chances of starting a business by 24%.

50. Available Tools