Entrepreneurial sustainability – exogenous structural factors or endogenous absorptive capacity?

1. Entrepreneurial sustainability –exogenous structural factors or endogenous absorptive capacity? Colin Gray Professor of Enterprise Development Open University Business School

2. Context - EU Distribution of Enterprises >140 million workers >25 million firms 50% new SMEs fail <5 years Productivity < US, Japan Policy focus on innovation

3. GEM total entrepreneurship activity Source: Global Entrepreneurship Monitor

4. EU19 sole–traders, micro, small, medium and large firms, 2003. Low productivity Time/resource High churn Market power

5. Enterprise competitive context Economy/business pressures + competition E SMEs Start-up Exit Large Firms trade capable Growth-oriented Competition Absorptive capacity R&D Spillover Cultural + Peer group Influences Government policy/regulatory pressures + Education + R&D

6. SME internal competence differences 2003 (n = 7,750 ) Source: ENSR Observatory (EC, 2003).

7. Entrepreneurship Frank Knight (1921) –entrepreneurs play an essential role in ‘ the process of efficient re-allocation of resources’ through their function in accepting and exploiting uninsurable risks. Joseph Schumpeter (1934) – firms founded by entrepreneurs who enterprisingly and energetically seek competitive success through exploiting innovations (= a new combination of the means of production). Israel Kirzner (1973) –the entrepreneur is a business person who has the ability to recognise opportunities that others have overlooked and the capability of successfully exploiting that opportunity. Opportunities need not necessarily be innovations. They may arise through the innovations of others or through social and market changes, or from chance observations.. EU Entrepreneurship Green Paper (2003) - Entrepreneurship is the mindset and process to create and develop economic activity by blending risk-taking, creativity and/or innovation with sound management, within a new or an existing.’ Organisation of Economic Cooperation and Development (OECD) - the successful development and application of new knowledge Sources: Knight F. (1921). Risk, Uncertainty and Profit. Harper and Row. New York. Schumpeter J. (1934). Theory of Economic Development. Harvard University Press. Green Paper: Entrepreneurship in Europe. Brussels; Kirzner I. (1973). Competition and Entrepreneurship. University of Chicago Press. Chicago.Jaumotte F and Pain N. (2005). ‘From innovation development to implementation: evidence from the Community Innovation Survey’. OECD Economics Department Working Papers, No. 458.

8. External/e exogenous Spot existing opportunities. Israel Kirzner Accept ‘uninsurable’ risk. Arbitrage. Frank Knight Observed/ Reactive Planned / Directed RBV of firm. Absorptive capacity Edith Penrose. Create competitive opportunities. R&D. Innovate. Joseph Schumpeter Internal/endogenous Typology of entrepreneurship theory

9. SME sustainability-cycle Renovation Growth Mainly medium Maturity 4 = Resourcing growth. 4 3 Downsizing;Decentralisation;Decline 2 Mainly small Survival Disappear 3 = Sustaining creativity/innovation. 50% in 3 years 1 Time Crises: 1 = Launch 2 = Delegation.

10. Importance of skills gaps by firm-size Source: (2006) NatWest/SERTeam Quarterly Surveys of Small Business in Britain 22:2.

11. Capacity development in SMEs by entrepreneurial mindset (column %) Source: (2006) NatWest/SERTeam Quarterly Survey of Small Business in Britain. Vol.22, no. 4.

12. Overcoming competence gaps in SMEs by entrepreneurial mindset (column %) Source: (2006) NatWest/SERTeam Quarterly Survey of Small Business in Britain. Vol.22, no. 4.

13. SME Owner-manager Decision-making Model Cultural External changes Motivations Perceived threats Influences Business: Behaviour Operations Outcomes Strategic aims economic Fullset of market needs Perceived opportunity Expectations work personal Network/Peer Internal capabilities Perceived knowledge & resource capacity Influences family

14. Perceptions of Main Business Problems 2007 Source: SERTeam - Quarterly Survey of Small Business in Britain. Vol 23. No, 2.; Business Support Professionals in Britain 2007

15. SME personal career motivation 1990-2006 (column %) Source: Small Enterprise Research Team, OUBS

16. SME growth strategy by innovation Source: Small Enterprise Research Team, OUBS

17. SME Innovation by size of firm 2004 Source: Small Enterprise Research Team, OUBS

18. Conclusions • Growth-orientation is an important determinant of sustained entrepreneurial activity; • Non-entrepreneurial firms are more daunted by exogenous factors (labour market, fiscal, regulations and the business climate) and tend to attribute performance causality to them. • Entrepreneurial firms have more self-efficacy and are more concerned about factors over which they have little control (but more likely to treat these as a normal part of business life). • Small firms with higher, endogenous, absorptive capacity (higher education, more experience and more staff development) are more likely to be innovative, growth-oriented, and to achieve sustained entrepreneurship.

19. Wider implications External Flexibility > Structure Economic / structural change Opportunities Opportunities Entrepreneurs Internal Business culture > Administrative rules Creative / sharing Innovation, Quality, Customers