RAE PROJECT OUTLINE
I. INTRODUCTION
Schumpeter asserts that entrepreneurship is a key component for economic development through innovation which leads to creative destruction (Schumpeter, 1912). Innovation involves Knightian uncertainty and risk (Koellinger, 2008) and, therefore, the entrepreneurs’ capacity to innovate is associated with their attitude to risk (Naldi et al. 2007). Entrepreneurial innovation is also a function of both individual and environmental factors including employment status and education status as well as their risk tolerance (Koellinger, 2008). In general terms, for any individual entrepreneur, within limits, the greater their tolerance of risk, the greater their capacity to innovate.
In order for such a construct to be useful from a policy perspective, it is necessary to understand, inter alia, what influences an individual entrepreneurs’ tolerance of risk. One approach to this is to consider a recent theme in economic literature which has suggested classifying entrepreneurs into two groups; opportunity driven and necessity driven. The differences in motivation have been called push and pull motivations for necessity driven entrepreneurs (NDEs) and opportunity driven entrepreneurs (ODEs) respectively. Whilst entrepreneurship invariably requires risk taking, it is argued that necessity driven entrepreneurs generally are more risk averse than ODEs and that NDEs have much in common with employment (Block et al. 2015). NDEs contribute less to economic development than ODEs (Acs and Varga, 2005) and it is arguable that this is due to their lower willingness to innovate.
There are many potential reasons why NDEs may be more risk averse than ODEs and why some NDEs may be more risk tolerant than others. Inevitably, some of these will be a function of individual psychology (internal factors), others a function of institutions and culture (external factors). However, there are likely to be factors which can be influenced by policy makers. This paper will examine one such potentially key variable. A number of writers have suggested that self–efficacy has a significant impact on various aspects of human behaviour and economic activity. Tierney distinguishes between job self-efficacy and creative self-efficacy. This paper will specifically focus on job self-efficacy.
It is argued that self-efficacy is also likely to have an impact on an individual’s attitude to risk (Krueger and Dickson, 1994) and therefore, by extension of the relationship between risk and innovation mentioned above, on an individual’s willingness to innovate (Koellinger, 2008). This paper will extend consideration of this subject by analysing the relationship between self-efficacy in entrepreneurship and innovation between NDEs and ODEs. The specific research questions will be:
i) Is self-efficacy in business skills lower in necessity driven entrepreneurs compared to opportunity driven entrepreneurs?
ii) “Does greater self-efficacy in business skills encourage greater levels of innovation in necessity driven entrepreneurs?”
Given the previous literature, discussed further in the literature review, this paper will hypothesise that self-efficacy in NDEs is lower than in ODEs and that greater self-efficacy in business skills will encourage greater levels of innovation in NDEs due to the mechanism discussed above.
This area of research is particularly important in developing countries where a relatively large proportion of the population can be classed as NDEs. If it can be established that greater self-efficacy is associated with greater innovation, it can be argued that programmes which increase self-efficacy, potentially through education and training, could, through their impact on innovation, lead to improvements in economic growth.
II. LITERATURE REVIEW
This paper contributes to the existing literature by analysing the effect of self-efficacy on innovativeness in NDEs compared to ODEs. The economic importance of this is due to the relationship between entrepreneurship and economic growth discussed in the introduction. Therefore, this literature review will first discuss the literature of the contextual element; the relationship between entrepreneurship and economic growth. A review of the literature on the relationship between an individual’s self-efficacy, risk tolerance and their willingness to innovate will follow, as will, analysis of the literature on NDEs and ODEs.
Entrepreneurship and Economic Growth
Schumpeter (1912) is widely credited to be the first economists to emphasise the relationship between innovation and economic growth. However, Schumpeter built upon Smith (1776) who conjectured a theoretical link between innovation and economic growth in his seminal work. Smith stated that the division of labour (a form of innovation) and technical innovation caused a higher labour efficiency and in turn generated economic growth. Schumpeter (1942) hypothesised that economic growth occurred when entrepreneurial innovation caused creative destruction and extends this hypothesis to explain business cycles. Kuznets critiqued this work because he found that Schumpeter failed to account for the clustering of innovations. Foster reconciled the differences between these two promineant economists by noting that they both had an evolutionary perspective to economic growth and that they both hypothesised the link between innovation and economic growth despite their differing frameworks (Foster, 2015).
The Relationship between an Individual’s Self-Efficacy, Willingness to Innovate & Entrepreneurial Motivation
Bandura introduced the notion of self-efficacy to social cognitive theory in 1977 where self-efficacy is the belief in one’s self to successfully carry out the required actions to complete specific goals. Bandura and Wood empirically show that managers with low self-efficacy dwell on the risk of failure and, therefore, only effect limited change i.e. innovation (Bandura and Wood, 1989). Kanter theorises that reward systems which reward innovative performance with large incentives foster a greater sense of self-efficacy. These results imply there may be a self-perpetuating cycle whereby self-efficacy encourages greater innovation and rewarded innovation generates self-efficacy.
Krueger demonstrated that increased self-efficacy increases one’s perception of opportunity and decreases their perception of threats. This result manifests itself in a higher willingness to take risks (Krueger, 1994). Krueger’s experiment was conducted on students in laboratory settings meaning that it contains sampling bias and may not hold true in the field.
Koellinger found, using GEM entrepreneurship data, that innovativeness is significantly correlated with high educational attainment, unemployment and self-confidence (Koellinger 2008). This legitimises Krueger’s laboratory results. Koellinger states that an entrepreneur is innovative if:
• the technology for their product or service was not available a year ago
• some or all of their customers would consider the product new or unfamiliar
• there are not many other businesses offering the same products or services to your potential customers.
However, Koellinger only studied nascent entrepreneurs[1]. Nascent entrepreneurs could be those who have just started to invest time in thinking about an entrepreneurial idea and are not fully committed. This could have biased his results because people who consider entrepreneurship and do not follow through may be cognitively influenced differently. This is not an area of research which has been widely studied and therefore, the impact of these individuals is ambiguous.
Like many other researchers, Koellinger did not differentiate between NDEs and ODEs and Block et al. (2015) shows that ODEs are more willing to take risks than NDEs. Therefore, due to its non-specific nature, Koellinger’s paper is difficult to use to influence where to target entrepreneurship policy.
Block et al. used data from 1526 entrepreneurs in Germany from which it is a hard to justify generalisation across the entrepreneurial population. Therefore, Ahunov and Yusupov furthered his research to households across 30 transition economies. They concluded, like Block et al., that there is a significant positive relationship between risk tolerance and choosing to become self employed by choice (opportunity factors) rather than by necessity (Ahunov and Yusupov, 2017).
Williams, added to traditional thought on entrepreneurship motivation, through his analysis of informal entrepreneurs in England, Russia and Ukraine. Empirically, he has shown that entrepreneurship is more complex than simply sorting classifying entrepreneurs as having binary motivations. An individual’s initial motive to entrepreneurship does not necessarily remain static, instead Williams found that two thirds of necessity entrepreneurs become opportunity entrepreneurs with some movement in the counter direction too (Williams, 2008).
III. DATA
The dataset used by this paper will be the Global Entrepreneurship Monitor’s (GEM) Annual Population Survey 2013. The data is cross sectional and there is the potential to use pooled cross-sectional data from 1999 up to 2013. The survey was completed across 70 countries in 2013 and no geographic region is to be excluded by design. In each country, there is a minimum of 2000 individuals surveyed per country and it considers all individuals, in and out of the labour force unless they are visiting the country, in restraining institutions or in the military.
Due to the data available being cross sectional it is likely that Williams’ observations of the non-static nature of entrepreneur’s motives will be a limitation to the paper.
IV. METHODOLOGY/ ECONOMETRIC MODEL
The 3 key variables for the research question are:
• ALL_yyWHY – The motive for all business owners and managers (includes both Established Business Owners and Early Stage Entrepreneurs). The responses were catagorised into “Cannot code / don’t know”, “Purely opportunity motive”, “Partly opportunity motive” and “Necessity motive”.
• “Suskil – The individual perceives themselves to have the required knowledge and skills to start a business. The potential answers were “Yes”, “No”, “Don’t Know” and “Refused”. This will be the independent variable.
• A new variable that combines EB_yyNPM & TEAyyNPM will be the dependant variable.
o TEAyyNPM – For early stage entrepreneurs, is the business innovative in product or market. The responses are sorted into “Indication” and “No Indication”.
o EB_yyNPM – For established business owners/managers, is the business innovative in product or market. The responses are sorted into “Indication” and “No Indication”
V. FINDINGS
This paper expects to find that self-efficacy in NDEs is lower than in ODEs and this result is statistically significant. The expectation is that there are country, gender and age effects as discussed in other literature for which the paper will have controlled. It is anticipated that there is a strong link between NDEs having self-efficacy in their business skills and having an innovative business due to the mechanism discussed above. There are likely to be country, gender and age effects here too.
VI. CONCLUSION AND DISCUSSIONS/POLICY IMPLICATIONS
The expected conclusion is that there is a statistically significant relationship between self-efficacy and Innovation for NDEs. This result implies that improving one’s self-efficacy leads to a greater chance of them being innovative. The results in this paper combined with the literature on this topic suggests that the higher the self-efficacy in a countries entrepreneurial population, the higher the expected economic growth ceteris paribus. Further study on this hypothesis is warranted. If this hypothesis is true, then policy can be designed to encourage higher self-efficacy in entrepreneurs which the results would suggest will lead to increased economic growth. As self-efficacy is lower in NDEs, it is likely that targeting individuals who are more likely to become NDEs as opposed to ODEs would have a higher impact on GDP per entrepreneur targeted. This is another area for further research.
The categorical nature of the results in the GEM data survey is a limitation of this work and the results found by this paper could be explored further through a newly designed survey which allows for more variation in the recording of respondent’s answers, especially with regards to Self-Efficacy.
VII. REFERENCES (incl. the papers referenced in the literature review)
Acs, Z. J., & Varga, A. 2005. Entrepreneurship, agglomeration and technological change. Small Business Economics, 24(3), 323–334.
Ahunov, M., & Yusupov, N. 2017. Risk attitudes and entrepreneurial motivations: Evidence from transition economies. Economics Letters 160, 7-11.
Bandura, A. 1977. Self-efficacy: Toward a unifying theory of behavioural change. Psychological Review, 84, 191–215.
Bandura, A., & Wood, R. 1989. Effect of perceived controllability and performance standards on self-regulation of complex decision making. Journal of Personality & Social Psychology, 56, 805–814.
Block, J., P. Sandner, and F. Spiegel. 2015. “How Do Risk Attitudes Differ Within the Group of Entrepreneurs? The Role of Motivation and Procedural Utility,” Journal of Small Business Management 53, 183–206.
Foster, J. 2015. Joseph Schumpeter and Simon Kuznets: comparing their evolutionary approaches to economic business cycles and economic growth. Journal of Evolution. Economics., 25(1), 163-172
Kanter,R. M. 1979. Power failure in management circuits. Harvard Business Review, 57(4), 65-75.
Koellinger, P. 2008. Why are some entrepreneurs more innovative than others? Small Business Economics, 31 (1): 21–37.
Krueger, N., & Dickson, P.R. 1994. How Believing in Ourselves Increases Risk Taking: Perceived Self-Efficacy and Opportunity Recognition. Decision Sciences, 25(3), 385-400.
Naldi, L., Nordqvist, M., Sjöberg, K., Wiklund, J. 2007. Entrepreneurial orientation, risk taking and performance in family firms. Family Business Review, 10, 33-47.
Schumpeter, J. A. 1934. The Theory of Economic Development. New York, NY: Oxford Univ. Press.
Schumpeter, J.A., 1912/2002. The Economy as a Whole, English translation of Das Gesamtbild der Volkwirtschaft. In: Schumpeter, J.A. (Ed.), Theorie der wirtschaftlichen Entwicklung, printed in Industry and Innovation, vol. 9, Chapter 7, pp. 93–145.
Schumpeter, J.A., 1942. Capitalism, Socialism and Democracy. Harper, New York.
Smith, A. 1776. An Inquiry into the Nature and Causes of the Wealth of Nations. Edinburgh, Scotland: University of Edinburgh Press.
Tierney, P., & Farmer, S. M. 2002. Creative self-efficacy: Potential antecedents and relationship to creative per- formance. Academy of Management Journal, 45: 1137–1148.
Williams, C. C. (2008), ‘Beyond necessity-driven versus opportu- nity-driven entrepreneurship: a study of informal entrepreneurs in England, Russia and Ukraine’, International Journal of Entrepreneurship and Innovation, Vol 9, No 3, pp 157–165.