Entrepreneurship and Business Cycle - sustainable development and

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SUSTAINABLE DEVELOPMENT AND POLICY ANALYSIS This is a blog by Imran Zawwar, AIMM Senior Partner | Knowledge Now a knowledge based executive consulting firm. This blog presents authors articles and research findings on public policy issues and economic development strategies.

Saturday, 19 January 2013

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Entrepreneurship and Business Cycle Since industrialization the world has witnessed several ups & downs in overall economic activity. It has been noted that economic expansion (period of rapid growth) is periodically interrupted by periods of declining production (GDP), low income & rising unemployment (economic recession). But, this recession is again followed by a resumption of economic growth. This repeated sequence of expansion giving way to temporary decline followed by recovery has wide spread effects and this causes the main problem as no one knows how long will the expansion or recession last. Apart from affecting many economic indicators and indices it also impacts the entrepreneurial ventures launched in or evolving during these recession and expansion periods. This article focuses on the performance of new ventures launched in and evolving across boom and slump periods. These environmental factors both affect the opportunities available to new ventures as well as their ability to exploit them; particularly in relation to the ability of start-ups to raise finance. According to the US Economic Policy Institute the US labor market alone lost nearly 8.4 million jobs during the economic recession of 2008 and 2009. As a result confidence and trust in the corporate sector has been badly tempered and even till now the economy has not been able to create enough jobs to keep pace with the normal population growth. Contrary to the role of Corporate Sector the role of Entrepreneurship has been very different if not completely opposite. Entrepreneurship development has the potential to create jobs through the formation of new business ventures; utilization of available labor and resources to create wealth, stimulate growth, boost the economy and increase a nation's GDP. US National commission on Entrepreneurship states that small entrepreneurs are responsible for 67% of inventions and 95% of radical innovations in the US since World War II. In the late 1990s a small group of high growth entrepreneurs, only 5% to 15% of all firms, created about two third of net new jobs. And as of now in many parts of the US, small entrepreneurial firms are contributing new jobs at the same time as larger firms are cutting back employment. Through their innovation and creativity, entrepreneurs are transforming existing business sectors that are competitive throughout the world. Evidence suggests that behavior of entrepreneurial ventures during the recessionary economic cycles have been really positive but more important is to understand the performance of early stage entrepreneurial activity during such periods as early stage entrepreneurs are more volatile to such economic fluctuations. Further the research has to be industry specific as entrepreneurial behavior has its root in the type of industry or sector in which the venture is operating, as industries that produce durable goods (cars, houses) are more affected than nondurable & service industries (food).

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Imran Zawwar Imran Zawwar, is an Entrepreneurial Economist and a PhD Scholar at School of Management, Cranfield University, UK. He is Senior Partner at Knowledge Now a knowledge based executive consulting firm and Partner Adelaide Alumni Research Network. His academic profile includes,MS Public Policy and Management (with Highest Academic Distinction, Excellence Award and Public Policy & Management Award), MBA Fin/Mkt. (Overall Academic Gold Medal and Corporate Gold Medal), BS Engineering Sciences and BS Management Sciences.

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According to the Global Entrepreneurship Monitor (GEM 2010) 37% of early stage entrepreneurs in Pakistan believe that the global downturn has no impact and there are prospects for opportunities. This behavior has its roots in Timmons (1999) definition of an entrepreneur which states that an entrepreneur is opportunity obsessed, holistic in approach and leadership balanced. Primarily it is these characteristics that shape the entrepreneurial behavior. The Timmons model of entrepreneurial process suggests that the most important factor in entrepreneurial setting is not the resources but the opportunity. According to this definition one may expect that performance of an entrepreneurial venture should not be affected as a result of business cycle downturn but any such implication renders research into entrepreneurial performance during periods of business cycle fluctuation. During recessions, real wages grow more slowly, workers are less likely to receive promotion/bonuses, & new graduates have tough time finding attractive jobs. Therefore researchers have tried to conclude a model suggesting that falling wages in recession lowers the opportunity cost to start a business thus encouraging entrepreneurial ventures, but there is no study that relates to the performance of such ventures formed up during these periods. Present researchers have made attempts to explore the relationship between entrepreneurship and business cycle. The analysis and research conducted by Koellinger & Thurik (2009) concludes ‘global fluctuations in entrepreneurship are an early indicator of the world business cycle: they Granger-cause increases in GDP’, but they have not gone far enough to explore early stage entrepreneurial performance against the business cycle. Bernanke and Gertler (1989) have come up with a neoclassical model analyzing influence of entrepreneurs’ net worth on borrowing conditions, and resulting investment fluctuations. They believe entrepreneurs’ net worth is likely to be pro-cyclical i.e., entrepreneurs are more solvent during good times and vice versa. Although this study explores important aspects related to the entrepreneurs’ balance sheet and investor behavior during business cycles, but critiques argue that the focus of this research is on real effects causing random fluctuations in net worth and not on entrepreneurship in particular. From macroeconomic point of view Parker (2009) in his analysis on entrepreneurship and business cycle conclude that pro-cyclical behavior of interest rates exhibited during business cycle may lower the rate of entrepreneurship. As economy grows interest rate tends to rise to control inflation and higher interest rates increase the cost of financing thus increasing the operating cost of entrepreneurs and lowering the rate of entrepreneurship. Keeping in view the labor impact and market economics, Caballero and Hammour (1994) argue that recessions have a ‘cleansing’ effect, thus eliminating low-quality enterprises. Whereas Ghatak et al. (2007) proposes that as wages fall in recessions, it causes lowability marginal type to enter entrepreneurship. On the other hand, Burke and Shaukat (2012) have tried to analyze how business cycles impact business establishment/entry and exit and how they contribute in the adjustment process to achieve market equilibrium. They conclude ‘entrepreneurs and corporations operate with a herd instinct thereby increasing establishments in a cyclical over shoot and decreasing them in an under shoot’. Author, Imran Zawwar, AIMM MBA Finance, MS Public Policy & Management Posted by Imran Zawwar at 15:06

Labels: Business Cycle, Business Performance, Entrepreneurship

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