06.04.2004 Feature Article

The dynamics of entrepreneurship to the Ghanaian Economy

The dynamics of entrepreneurship to the Ghanaian Economy
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Interestingly, in the middle of the last century, economists predicted the dominance of large firms. Size was needed to obtain economies of scale, to exploit foreign markets and to keep abreast with regulations and new opportunities in technology. Indeed, in the 1960s and 1970s, large companies dominated the economy. Since then, the trend has started to reverse (Audretsch et al, 2002).Today, there is growing evidence of a significant causal relationship between entrepreneurship, economic growth and poverty reduction. Small, micro and medium-sized enterprises (SMMEs) are often the backbone of the private sector in the developing world, creating jobs and providing a tax base for local government. SMMEs offer the only employment available to millions of poor people, yet many developing countries have been unable to create and maintain the favourable environment needed to foster SMMEs development (, 2002).

Entrepreneurship may be defined as the visualisation and realisation of new ideas by insightful individuals, who are able to use information and mobilise resources to implement their visions. This view does not require entrepreneurs to be highly skilled in generating new ideas, but instead emphasises promotion and implementation of radical change. Although entrepreneurs who excel in this endeavour often are highly creative, they just as often base their entrepreneurship on the ideas of others. At the same time, entrepreneurs with original ideas of their own are usually highly motivated to succeed, but whether they do so depends on the their ability to market their ideas , as well as their sensitivity and openness to other people's viewpoints. Although some successful entrepreneurs are also creative inventors, this need not be and often is not the case. Many inventors, on the other hand, lack the entrepreneurial skills necessary to evaluate and promote their ideas. The entrepreneur is a visionary activist who excels in the creation of opportunities and the active handling of risks and uncertainties. He or she initially increase business risks by searching for new opportunities and experimenting to see if they are worthwhile. Simultaneously, and later on, entrepreneurs are strongly engaged in reducing risks, by actively changing prevailing conditions and also changing the rules of the game. The timing and balancing of risk creation and risk reduction is the hallmark of a successful entrepreneur (Nystrom, 1995, pp.67-68).This indicates that entrepreneurship is multi-dimensional and can occur in different contexts, economic or other, and in all type of organisation. However, this paper focuses on entrepreneurship within a business context Why is entrepreneurship important for development? The number of poor people on the planet is increasing exponentially and digital divide statistics show that technology is exacerbating the problem of inequity, not helping to alleviate it. There are now 1.2 billion people living in abject poverty out of the six billion on the planet. More people have lifted themselves out of poverty in the past 50 years than in the previous 500 years; but because the world population has grown so significantly, there are more poor people than ever before. Political upheavals and natural disasters wreck havoc, but for those living close to the edge, so do smaller tragedies such as an extended illness, death, or one season with too little rain. Having a large percentage of the population thus exposed exacerbates the cycle of poverty and leaves national economies facing disaster, where a stable tax base is difficult to achieve and needed infrastructure difficult to build or maintain. Poverty and insecurity can lead to extremism, which threatens the safety and stability of everyone in every corner of the globe. Fostering the development of SMMEs to help people employ themselves and others may offer the best hope for breaking the poverty cycle in many developing countries and disadvantaged communities. The importance of entrepreneurship should not be underestimated, and the needs of this crucial sector must be understood to frame an effective and sustainable approach to modern development aid.

Various levels of SMME employment and entrepreneurship are increasingly important to economic development. For example, over the past two decades, employment in the "informal sector" has risen rapidly in all regions of the world. The informal sector is defined as those who work in small unregistered enterprises, both employers and employees, as well as self-employed persons who work in their own or family businesses. The informal sector is responsible for 93% of new jobs in Africa and 83% in Latin America and the Caribbean. This sector represents a large and growing segment of the workforce in developing nations. According to the Global Entrepreneurship Monitor (GEM), in the 29 countries surveyed in 2001, almost 150 million people are engaged in some form of entrepreneurial activity. GEM differentiates between "opportunity entrepreneurship" – growing business to take advantage of a unique market opportunity – and "necessity entrepreneurship" – the best option available (, 2002).

Sixty-three million people reported that they started their own small businesses because there were no other choices for work. The Monitor found that the prevalence rate for necessity entrepreneurship was positively associated with economic growth, and accordingly that can drive change at a macro-economic level in developing countries.

In the United States, venture capital-backed companies created 4.3 million new jobs in 2000, and $736billion in revenues i.e. 7.4% of the GDP. While most entrepreneurs in developing countries depend on informal investments from friends and family, the end result remains the same: entrepreneurial activity makes a significant and systemic difference in the economies of developing (and developed) nations.

The benefits of encouraging entrepreneurship go beyond pure economics. As people gain confidence, financial breathing room, and access to information, they gain political will and are less likely to tolerate corrupt governments and unhealthy living conditions. It also follows that they will seek higher levels of education for themselves and their children, along with improvements in their home and community life. Challenges to entrepreneurship development in Ghana It is apparent that entrepreneurial activity is beneficial for Ghana both at a micro level – in terms of creating stable and sustainable employment for individuals – and at a macro level – where it significantly increases a nation's GDP. Yet Ghana has been unable to create and maintain the favourable environment needed to foster SMME development. There are a number of barriers which entrepreneurs in Ghana face. According to (2002), the factors affecting entrepreneurial activity can generally be divided into four categories and these portray the exact situation in Ghana:

Þ Infrastructure: Quite often the barriers to starting and maintaining a business come down to simple, yet often insurmountable factors, such as lack of roads, facilities, electricity or phones.

Þ Legal and regulatory framework: Governments need to have a positive perception of entrepreneurial activity, reduce the administrative burden on entrepreneurs, and coordinate among their agencies to ensure that the necessary resources are directed where they are needed.

Þ Financial support: A major stumbling block for many potential entrepreneurs at the lowest end of the economic spectrum is lack of access to the credit or seed funding necessary to start a business. Entrepreneurs who are starting up larger businesses face difficulty raising investment capital and a lack of sound market-based policies.

Þ Social: The concept of entrepreneurship is not native to every culture or society. The fear of failure can be a barrier. Creativity and innovation are not always valued traits. Ghana has social systems that create dependence and hopelessness. Women and minorities especially need role models to demonstrate the positive outcomes to innovation and risk-taking. An additional barrier is the overarching mindset that entrepreneurship cannot be taught, that it is a creative and innovative way of thinking that comes inherently to some people and not to others. While it is true that some individuals are gifted with creativity to develop new ways of doing things, creativity alone is not sufficient. Ideas must be matched with basic skills and an understanding of business practices– and these are things that can be taught to help burgeoning entrepreneurs create successful businesses. The way forward A comprehensive approach to promoting entrepreneurship must work on three levels-individuals, firm and society.

To motivate individuals to become entrepreneurs, they should be made aware of the concept of entrepreneurship and this should be made sufficiently attractive option. They should be equipped with the right skills to turn ambitions into successful ventures.

For entrepreneurial ventures to develop into healthy firms, supportive framework conditions are essential. These should allow firms to develop and grow, and not to unduly hinder contraction and exit.

Entrepreneurial activity depends on a positive appreciation of entrepreneurs in society. Entrepreneur's success should be valued and the stigma of failure reduced. What does it takes to produce more entrepreneurs in Ghana? Despite recent improvements, Ghanaians still consider administrative barriers as a major hurdle to starting a business. According to the European Commission's report on Benchmarking the Administration of Start-ups (2002), the average time taken to set up an individual enterprise in Europe is 12 working days and 24 for private limited liability company. However, these figures continue to fall each day. For us to succeed as a country, there should be a one- stop-shop for creating a business. These one-stop-shops could be called “Business Formalities Centres” like what pertains in Portugal. These centres in Portugal help to facilitate the registration of firms. The centre should bring together all public departments responsible for different formalities required in registering a new firm. Future entrepreneurs can also obtain advice from a help desk

Business start-ups have difficulties getting the seed and early-stage finance they need. Access to finance remains a major barrier for new entrepreneurs. They have difficulty securing bank loans or finding risk capital. Banks want a positive track record and collateral-which new firms generally do not have. The attempt by the present government to make available some funds through Exim-guaranty Company Limited is a step in the right direction. However, since the acquisition of funds are still attached to the traditional banks, entrepreneurs still complain of going through the normal and difficult routine in securing seed money or capital.

In addition to bank lending, start-ups should have a better access to alternative sources of finance. Besides venture capital, the potential of informal investments e.g. family, friends or “business angels” should be further explored. Risks sharing between banks and investors in the private sector and public financial institutions specialised in SMMEs, or through mutual guarantee societies, is an efficient way of leveraging scarce public funds and has proved to be successful in increasing funding for business start-ups.

A failed entrepreneur faces the stigma of failure. Entrepreneurs going bankrupt and losing personal property is very prevalent. In addition to the social stigma, a personal bankruptcy implies severe legal consequences. This can results in jail terms. Discharge of remaining debts may take years; bankrupts may lose their possessions and be subject to certain restriction. Such consequences are justified in cases of fraud or dishonesty, but failure is an intrinsic part of economic life and a proportion of entrepreneurs go bankrupt because they cannot compete in them market. Insolvency laws could be reviewed to reduce barriers to making a fresh start for honest entrepreneurs. This should not of course, unduly harm creditors´ interests, which might increase their reluctance to invest in small and new ventures. Belgium has adopted its solvency legislation with a view to allowing entrepreneurs to attempt to rescue businesses when facing temporary problems and to liquidate non-viable firms as quickly as possible. Courts can declare honest bankrupt entrepreneurs to be “excused” allowing them to make a fresh start in business. I hope Ghana will also quicken up with its Insolvency Bill that has been presented by the Attorney General's Department to Parliament.

People might be more willing to accept the risk of entrepreneurship if it were compensated by the prospect of reward in the event of success. A recent trend to reduce tax levels on the self-employed and small businesses is observed in the European Union and steps are being taken to reduce the tax burden on potential self-employed people. The previous and recent Ghanaian budget have attempted to provide some tax incentives to attract entrepreneurs to the northern regions of Ghana, but this has not reap the desired results hence something in the form of blanket tax holiday or otherwise to all promising entrepreneurs no matter the region should be looked at.

It is a fact that knowing about how to start a business increases the likelihood of becoming an entrepreneur. Respondents in the Eurobarometer survey with self-employed parents were found to be more self-employed oriented than those with parents who were employees. The Global Entrepreneurship Monitor's Survey also found that people who are confident about their skills and experience are between two and seven times more likely to be involved in starting or running a new business; those that know someone who recently started a business are three to four times more likely. The British Household Survey also revealed that those previously exposed to entrepreneurship (through friends, family or education) were more likely to seriously consider starting a business. Our education system should be at the forefront in providing both skills and exposure as a contribution to fostering entrepreneurship. As a benchmark, we can look at the Sivitanidios Technical School in Athens, Greece. Here, students divide their time between theoretical courses and running a virtual enterprise. This programme can be replicated and extended to all our polytechnics and universities due to its positive results. A course in entrepreneurship could be added to the curricula of tertiary institutions which can cover entrepreneurship theory and practical guidance on preparing business plans. Qualified and up to the task liaison officers could also be employed in these institutions to ensure that students receive advice and support for entrepreneurial career options.

Setting up a business calls for drive, creativity and persistence, whereas developing a business gradually requires more managerial skills, such efficiency and reliability. Considering that both personality and management skills are key elements for success, personal skills relevant to entrepreneurship should be taught from an early stage and be maintained up to university level, where the focus can concentrate on building management capacity. Within universities, entrepreneurship training should not only be for business students, it should also be available for students in other fields.

For, example in technical universities like KNUST and the numerous polytechnics, entrepreneurship training may contribute to matching entrepreneurial and technological potential. Entrepreneurship education in combination with public research programmes brings together the ingredients to match scientific excellence with the commercialisation of results. Activities in support of students in tertiary institutions through the “Students in Free Enterprise” (SIFE) programme and the Captains of Industry Programme need to be strengthened and widened. Again, the institution of the “Growing the Young Entrepreneur Competition” in the tertiary institutions should be given the needed push by industry and the government. Student organisations like Junior Business Chamber, International Association of Students Interested in Management and Economics (AIESEC), IAESTE etc should also be given a second look and their activities duly supported. Ghana can structure its campus programme in the likes of the Enterprise Ireland Programme. This programme is aimed at supporting starting entrepreneurs within the campus environment. It is part of the Irish regional growth strategy and includes a one-year incubation programme for graduates who wish to start a firm, providing hands-on and management support.

Also, business incubators are effective in delivering support to new entrepreneurs. Firms in incubators have better chances of survival than those outside and incubators are cost effective instrument for promotion of public policy objectives. This success explains why their numbers are growing rapidly; there are now over 850 in the European Union (European Commission, 2002). How can these enterprises be geared towards growth? Entrepreneurs are faced with many obstacles. Complying with administrative regulations and their related costs remains a significant burden. Public authorities must be encouraged to “think small first”, keeping regulation as simple and appropriate as possible. Also provision of information and support can help entrepreneurs in dealing with red tape. The introduction of virtual help facilities like will go a long way to help in this regard.

The structure of the tax system, including income and corporate tax, labour tax and VAT influences the ability of firms to expand. The complexity of tax systems is in itself an administrative burden for entrepreneurs. As marginal income tax rates increase, entrepreneurs tend to expand their business more slowly, to invest less and to hire fewer staff. The level of labour tax may also influence firms´ decisions to hire staff. Tax reforms made available by the present government may contribute towards a clear trend in reducing the tax burden.

As unemployment still constitutes a major challenge in Ghana, our educational institutions should ensure that skills of the labour force correspond to economic and technological evolution. For instance, the UK government provides incentives to help small higher-risk companies to recruit and retain the employees they need to help them achieve their growth potential.

Access to finance is indispensable for growth but many SMMEs have difficulties, as the risk capital market in Ghana is underdeveloped and banks increasingly avoid risky lending. Banks increasingly use mechanism to rate SMMEs which means that loan costs are adapted to the level of risk associated with an individual SMME. Furthermore, the high overhead costs of small loans make these unattractive for banks. To act as catalyst for private investors and to increase the supply of SMMEs guarantees, public institutions have to develop programmes in support of SMMEs covering a range of instruments from Micro-credits to venture capital. Eximguaranty Company Limited and the recently approved Venture Capital Fund by Parliament should be fully operationalised in this regard. Entrepreneurs should also be helped to overcome their reluctance to accept credible outside investors. Investors need quality information about firms, which the entrepreneur must be able to provide.

More so, to reap the benefits of the internal markets and to meet the challenge of fiercer competition, entrepreneurs should be encouraged to innovate and to internationalise. For this, they should have access to knowledge, relevant contacts; training and top-class business support services. This is where the Ghana Export Promotion Council, Office of the Private Sector Development, National Board for Small Scale Industries, Business Advisory Centres, Ministry of Trade and Industry and other relevant bodies come into play. The conditions for SMMEs to internationalise should be improved. Also promoting regional networks or clusters could not only help entrepreneurs to share experience about expansion, but also to gain access to knowledge, partners and advice.

Building an entrepreneurship society involves everyone. Attitudes towards entrepreneurial initiative and failure must be made more positive. Crucial to achieving this are those on whom today's and future entrepreneurs depend. One way of encouraging such positive attitudes is by providing role models through the “showcasing of success stories.” Luxembourg has introduced prizes to reward successful business projects. The ministry in charge of gender equality awards a prize for successful businesses run by women. A high profile prize for innovative business ventures should therefore attract considerable attention amongst the target audience of industry representative and young researchers. The University of Strathclyde in the U.K also offers a programme to promote a positive attitude towards entrepreneurship amongst teachers. The content of the programme is flexible and geared to learning by doing. Tasks include helping students in writing business plans and taking management decisions.

Coupled with the above, while ICT may not seem like a central concern when supporting entrepreneurs that need a good business plan and seed funding more than they need a computer, the reality is that a long term view in today's information society requires that most SMMEs should have some level of ICT use integrated into their business. An entrepreneur who uses ICT appropriately and effectively can run a more efficient business and reach markets that were previously unimaginable.

In conclusion, entrepreneurship requires a co-ordinated approach because of its horizontal nature. Policy should embrace all the influential elements within the relevant policy areas, to allow these to act in a mutually reinforcing way. Within public authorities, co-ordinating services can forge links between different departments, and regional and local authorities, to identify priorities and to ensure a coherent approach. Further benchmarking exercises could be envisaged in areas identified as vital to promoting entrepreneurship. Additionally, there is promise that entrepreneurs in developing countries can learn from the experiences of the developed world and adapt best practices to their own situations; that would help them avoid a resource intensive development stage and base new businesses on sound environmental footing. However, it must be borne in mind that different national or regional contexts will affect the effectiveness of policy measures and, while identifying priorities or implementing policy, Ghana should take its specific context into account. Robert Ankomah Opoku Research School of e-Commerce, Division of Industrial Marketing & e-Commerce Luleå University of Technology, Luleå, Sweden Views expressed by the author(s) do not necessarily reflect those of GhanaHomePage.

N.B: I must acknowledge that this article has drawn much on some ideas and strategies the writer gathered from the European Commission's Green Paper on Entrepreneurship in Europe (2003) and ´s publication titled “Entrepreneurship in Developing Countries-Survey of the field and Inventory of Initiatives (2002)”

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