CHALLENGES FACING ENTREPRENEURS IN NIGERIA
INTRODUCTION:
In recent years a strong belief that ‘entrepreneurship’ is a
crucial driver of economic growth for both developed and developing nations has
emerged among both scholars and policy makers (see, for instance Audretsch,
Keilbach and Lehmann, 2006 and, for a comprehensive survey, Van Praag and
Versloot, 2007).
However, moving from macroeconomic scenarios to the micro
foundations of entrepreneurship, since the seminal contribution by Baumol
(1990) we have known that ‘Shumpeterian innovative entrepreneurs’ coexist with
‘defensive and necessity entrepreneurs’, the latter being those who enter a new
business not because of market opportunities and innovative ideas, but merely
because they need an income to survive. For obvious reasons, this kind of ‘survival-driven’
self-employment is particularly diffused in the Developing Countries (DCs) (see
Naudé, 2009 and 2010), where poverty and lack of formal opportunities in the wage
sector often push a large number of people into ‘entrepreneurial’ activities
ranging from street vending to traditional and personal services (in most cases
within the informal sector of the economy, see Ihrig and Moe, 2004; Maloney,
2004).
Empirically a world-wide research project, the ‘Global
Entrepreneurship Monitor’ (GEM), has been collecting survey data using
standardized definitions and collection procedures on potential and actual
entrepreneurship since 1999, and now covers 60 developed and developing
countries; see Zacharakis, Bygrave and Shepherd, 2000; Reynolds et al.,
2005; Acs, Desai and Klapper, 2008. This project reports the rates of business
start-up and of self-employment across different countries of the world, but
makes it clear that these statistics comprise both ‘opportunity-motivated’
entrepreneurs and those driven by necessity, the latter being defined as those
who have started their own firms as a consequence of the following personal
situation: “because they cannot find a suitable role in the world of work,
creating a new business is their best available option” (Reynolds et al.,
2005, p.217).
Within this context, the purpose of this paper is to provide
a contribution to the identification of the role of entrepreneurship in
economic growth by mapping out: 1) the different microeconomic determinants of
new firm formation; 2) the relationship between ex-ante characteristics (of the
founder) and post-entry performance (of the new firm); and the possible scope for economic policy aimed
at distinguishing progressive entrepreneurship from defensive and regressive
forms of firm formation.
In particular, the macroeconomic and sectoral scenarios
remain in the background in this study, being briefly discussed in Section 2,
where we attempt to throw some light on the concept of entrepreneurship,
extending what has already been mentioned in this Introduction. Section 3
shifts to the core of our analysis, which is microeconomic in nature; factors
determining the foundation of a new firm are discussed, distinguishing between
‘progressive’ and ‘regressive’ entry drivers. Section 4 is devoted to
investigating newborn firms’ patterns of learning, survival and growth, and the
possible links between ex-ante entrepreneurial features and post-entry
performance. Finally, Section 5 briefly discusses some possible policy implications.
Where possible and appropriate, throughout the paper
particular attention is devoted to the specific features characterizing
entrepreneurship in the low- and middle-income countries, although most of the
relevant literature has focused on the richer countries.
WHAT
IS ENTREPRENEURSHIP
According to Schumpeter (1934), entrepreneurship is a
driving force of innovation, and more generally an engine for economic
development. Indeed, while endogenous growth theorists (see Lucas, 1988; Romer,
1986 and 1990; Grossman and Helpman, 1991; Aghion and Howitt, 1997) highlighted
the importance of human capital and R&D as additional explanations for
increasing returns in the aggregate production function, more recently several
scholars have proposed entrepreneurship as a third driver of economic growth.
According to this hypothesis, entrepreneurs, through their new companies, are
able to exploit the opportunities provided by new knowledge and ideas that are
not fully Shane (1997) reviewed 472 published articles on entrepreneurship and
found that the 13 main authors are all
resident in advanced economies and their works deal exclusively with developed
countries.
More recently, Teixeira (2011), using a bibliometric analysis, has
singled out the main authors in the field of entrepreneurship, finding that all
of them are based in the developed countries, mainly the US; by the same token,
Nyström (2008) has surveyed 37 studies devoted to the analysis of the
relationship between entrepreneurship and employment, productivity and economic
growth, finding that only 3 of them also considered DCs. understood and
commercialized by the mature incumbent firms (see Acs et al.
, 2005;
Carree and Thurik (2006); Audretsch, Keilbach and Lehmann, 2006; Braunerhjelm et
al. 2010). Thus, according to these authors entrepreneurship represents the
missing link between investment in new knowledge and economic development,
serving as a conduit for both entirely new knowledge and knowledge spillovers
(see Carlsson et al., 2009; Audretsch and Keilbach, 2011; for a very
recent comprehensive survey based on this view, see Braunerhjelm, 2011).
However, before continuing, the question of what is intended
by entrepreneurship and how it can be measured needs to be addressed. In the
industrial organization literature the answer is unequivocal: entrepreneurship
is the process by which new enterprises are founded and become viable.
In this
approach, the most common way of measuring entrepreneurship is to look at new
firm formation, i.e. at entry rates (either gross or net, that is entry
flows minus exit flows). Indeed, according to the OECD (2003), industrial dynamics
(i.e. the entry and exit of firms) would account for between 20 and 40% of
total productivity growth in eight selected OECD countries, therefore
supporting the idea that entrepreneurs represent one of the driving forces of
economic growth and structural change (see Audretsch and Keilbach, 2004;
Foster, Haltiwanger and Syverson, 2008; Fritsch, 2011).
The reasoning is that
new entrants can displace obsolescent firms in a process of ‘creative
destruction’ (see Schumpeter, 1939 and 1943; for an account in an endogenous growth
framework, see Aghion and Howitt, 1992), which may be considered an important micro
determinant of productivity dynamics, eventually resulting in economic growth.
From such a perspective, entrepreneurs are those individuals
Schumpeter labeled “energetic types” who display their “essential features” by
introducing the “new” into various activities and by “breaking with the
established routines” usually adhered to by managers (see Santarelli, 2006a, p.
xii). In more general terms, it has been argued that new firm formation can be
beneficial for economic growth (see Van Stel, Carree and Thurik, 2005),
employment generation and unemployment reduction both in developed and
developing countries (see Hart and Oulton,
2001; Thurik, 2003; for a recent study assessing the impact
of young firms on employment generation and also covering the DCs, see
Ayyagari, Demirgüç-Kunt and Maksimovic, 2011). However, recent studies based on
GEM evidence have identified a U-shaped relationship between a country’s rate
of entrepreneurial activity and its level of economic development (see Reynolds
et al.
, 2001; Wennekers et al., 2005). Indeed, this evidence that
new firm formation is very high in both highly developed and extremely poor countries
opens the way to considering entrepreneurship as a multi-faceted concept, not necessarily
associated with innovation, productivity growth and economic development.
Indeed, only when ‘opportunity entrepreneurs’ (those
motivated by innovative and progressive drivers) are distinguished from
‘necessity entrepreneurs’ (those who are selfemployed and pushed by defensive
and regressive drivers, such as the fear of unemployment), a positive linear
relationship between economic development and entrepreneurship is restored (see
Carree et al.
, 2007; Acs, Desai and Hessels, 2008; Acs, 2008)2. By the
same token, when the focus is on DCs, a positive relationship between entrepreneurship
and job creation is detectable only when purely self-employment and informal
companies are excluded from the analysis (see Ghani, Kerr and O’Connell, 2011a and
2011c).
Turning our attention from the macroeconomic to the sectoral
level, the empirical evidence concerning industrial dynamics also casts much
doubt on the progressive potentialities of business start-ups. Firstly,
survival rates for new firms are strikingly low: according to
Bartelsman, Scarpetta and Schivardi (2005), who worked on
data for ten OECD countries, about 20-40% of entering firms fail within the
first two years of life, while only 40 to 50% survive beyond the seventh year
(see also OECD, 2003, p. 145). The econometric evidence at the sectoral and
microeconomic levels is largely consistent with this outcome; studies on different
countries and different sectors reveal that more than 50% of new firms exit the
market within the first five years of activity (see Dunne, Roberts and
Samuelson, 1988 and 1989; Reid 1991; Geroski, 1995; Mata, Portugal and
Guimaraes, 1995; Audretsch and Mahmood, 1995; Audretsch, Santarelli and
Vivarelli, 1999a; Johnson, 2005).
CHALLENGES
FACING ENTREPRENEURS IN NIGERIA
Social entrepreneurs have been around
for many years, but the explosion in global connectivity and intense
competition for philanthropic funds seems to have propelled the sector into a
more central position in the business world. The essential difference between
social enterprises and traditional businesses is that the mission is central to
the business of a social enterprise, and income generation takes an important,
but secondary, supportive role. The social entrepreneur seeks to implement
innovative and creative ideas to solve large-scale social problems in a sustainable
way.
A social enterprise faces the same issues that any traditional business
faces in its growth and operations. But social entrepreneurs also face unique
challenges in delivering the social value, social returns or social impact of
the enterprise in addition to commercial value.
Funding
Social enterprises can be run as
for-profit or non-profit and sit somewhere in the middle of the traditional
corporation and a purely charitable organization. Some organizations are able
to generate sufficient income through the sale of socially beneficial goods or
services, but many are not. Other funding opportunities include corporate
investment, donations and government funding.
Approaching investors may not be
easy, however, if the organization is perceived as more non-profit than
profit-oriented and not likely to make a reasonable return for investors. On
the other hand, many donors are distrustful of a social enterprise being run as
a for-profit company where too much focus may be placed on wealth generation
and too little on social value.
Communicating Value
Objectively
The social enterprise delivers more
than commercial value, and it is the additional social value that often ignites
the passion of the social entrepreneur. This in combination with the fact that
social value is not easily measured can make it difficult to communicate the
bottom line to investors, donors or the community at large.
It is important to
stay objective to remain convincing, and to make the right decisions in moving
the enterprise toward its goals.
Strategy and
Long-Term Focus
It is important to any business to
identify a long-term strategy, define appropriate goals and drive growth in a
sustainable manner. Difficulties for social enterprises again stem from the
fact that the purpose of the organization is to create social benefits. It is
often the case that multiple social benefits can mean multiple goals, all of
which must be evaluated in terms of cost of provision to ensure true value
creation.
A strong strategy will identify a unique value proposition compared
to other organizations and indicate clearly what the organization will not do.
Activities of the social enterprise should work together and reinforce each
other.
Lack of Credit Facilities: Potential Nigeria
entrepreneurs go through many hardships when trying to access credit for their
businesses. Though there is a wide range of financial institutions that offer
business loans, they usually charge high interest rates deterring aspiring
entrepreneurs.
For instance, major banks have pegged their lending rates to as
much a 28% deterring potential entrepreneurs who are mostly low income earners.
Other obstacles faced by our entrepreneurs include severe collateral conditions
set by banks and other lending institutions.
Corruption: Widespread and all present
corruption that makes the procurement of licenses, permits, goods and services
from government agencies and even the payment of taxes and levies difficult
without playing the game i.e. paying bribes and kickbacks.
Inconsistent Government Policies:
Government inconsistency is really a challenge
an entrepreneur will have to tackle if he must succeed in Nigeria. Governance
is something entrepreneurs have no control over; all entrepreneurs can do is to
influence government’s policy with respect to enacting favorable business laws.
But he must have political clout and massive resources to be able to influence
government laws. Now he may not have the political clout or financial muscle to
influence government’s policy so the best strategy to combating the ever
changing policy of the government is to keep a keen eye on government laws and
swiftly adjust your business to align with the policies.
Multiple Taxation: One other sensitive
challenge that is encountered by majority of Nigerian entrepreneurs is multiple
taxation. Although entrepreneurs in a country have a responsibility of funding
the government through paying taxes, most of the taxes charged on entrepreneurs
are not lawful and have the effect of increasing the cost of doing business.
Although Nigeria's Companies Income Tax Act (CITA) has approved only 39 taxes
and levies, there are over 500 various levies and taxes that are imposed by
state and local government agents.
These taxes are questionable and in the case
where they are genuine, they are mostly duplicated and this has the effect of
increasing the cost of doing business.
Poor State of the Country's Infrastructure: The state of Nigeria’s
infrastructure can be deemed to be a nightmare to both entrepreneurs and the
rest of the country's population.
With the existing infrastructure
deteriorating and in some places it is non-existent; the cost of doing business
has tremendously gone up. The state of the country's road network makes it hard
for entrepreneurs in the agricultural sector to transport harvested produce
from farms to processing factories. According to a report released by the World
Bank, Nigeria's pace of socioeconomic development and growth is way below what
we can achieve.
This is mostly because of the erratic supply of electricity
which has negatively affected many businesses. The outcome of power problems
has prompted entrepreneurs to generate power through expensive ways that have
in turn increased their production costs and made their products uncompetitive
due to high prices.
Failure to Adapt to the Changing Business
Environment: Majority of those who venture into MSMEs (Micro, Small and Medium
Enterprises) do so because of their need to make money and in almost all cases,
such entrepreneurs lack relevant and adequate information about the businesses
they engage in. In the event where problems arise, most of these business
owners lack sufficient problem solving skills and in the end they find it hard
to survive. With the growth in the telecommunications sector since the
introduction of GSM in 2002, Nigeria has become one of the fastest growing ICT
market not only in Africa but also worldwide. This presents a challenge to
entrepreneurs who have not embraced technology, and who are now finding it hard
to remain relevant in the competitive business environment.
For existing and
potential MSMEs to survive and be relevant, it must adapt to the changing
business environment and embrace technology.
Low Standard of Education: There is no gainsaying the
fact that education is the key to knowledge and that it plays a strong role in
forming the burgeoning entrepreneur. The world today is a global village and
since an intending entrepreneur must be conversant and in tune with events
around and about him, education becomes a critical factor in preparing and
empowering the entrepreneur with the qualities required of him.
Security Issues - When there is no
guarantee of security of lives and properties, it is difficult to run a successful
venture. According to Arizona (2009), Nigeria has become a den of kidnapping
and resulting in incessant hostage taking, kidnapping and unjust harassment.
The Way Forward To Entrepreneurship Development in
Nigeria
It is strongly believed that
entrepreneurs in Nigeria are faced with numerous challenges and problems; not
withstanding every identified problem most have a solution.
The solution to the
challenges faced by entrepreneurship development in Nigeria lies in both the
hands of government and the up coming and future entrepreneurs who wishes to
venture into business. The future entrepreneurs have a very serious role to
play to see that the challenges faced by entrepreneurs is reduced or totally
eliminated.
The researcher strongly believes that the following points will
serve as a solution to the challenges and problem of entrepreneurship
development in Nigeria.
a. Future and upcoming entrepreneurs
should concentrate during their period of studies in higher institutions of
learning so as to acquire the required technical skills which will help them to
identify business opportunities, take advantage of such opportunities, venture
into business and become a successful entrepreneur which will result to
national development.
b. Strong patent law should be provided
by the government of the federation so that local entrepreneurs will be
protected from foreign producers. Government should encourage the production
and consumption of local products made in the country; in this way, the
indigenous entrepreneurs will be encouraged to venture into business.
c. The government should give loan to
entrepreneurs as at when needed. The interest rate of such loan should be such
that is affordable by the entrepreneurs, commensurate directives should be
given by the C.B.N to commercial banks, the C.B.N should encourage the
commercial banks to give loan to entrepreneurs at a lower interest rate.
d. Finally, government officials
should discourage corruption tribalism, religious bias and favoritism and
ensure that every individual is treated with equal right and respect in terms
of giving loan, issuing business certificate, signing of patent law as well as
issuing certificate of incorporation.
CONCLUSION
In conclusion, this paper has tried to unfold
various issues that cluster and affect the development entrepreneurship in
Nigeria. Attempts have also been made on the challenges of sustaining and
creating conducive environment for Entrepreneurs to grow and prosper. So far,
explicated evidence and arguments that highlight that Nigeria’s Entrepreneurs
have a long way to go before they can effectively drive changes in the economy.
The entrepreneurship miracle in other country is
an engine for job creation; innovation and diversity. The role of
entrepreneurship in global business of developing countries like India is also
significant.
The wide range of significant contributions that entrepreneurship
makes include promotion of capital formation, creation of immediate large-scale
employment, promotion of balanced regional development, and effective
mobilization of capital and skills. Nigerians are probably one of the most entrepreneurial
people on earth. But this is not enough.
For the entrepreneurs to be fully developed in
the country, they need to significantly create wealth and employment
opportunities thereby reducing poverty.
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