Most entrepreneurs start businesses out of opportunity not necessity
By Anushia Kandasivam March 21, 2018
- Improvement-driven opportunity entrepreneurship found in all economies
- More participation from women across the board in early-stage businesses
THE Global Entrepreneurship Monitor 2017/18 report shows that 74% of entrepreneurs around the world have started businesses in pursuit of an opportunity rather than out of necessity.
And, consistent with past years, it reveals that men are more likely to be involved in entrepreneurial activity than women regardless of level of economic development, which reflects differences in culture and customs regarding female participation in the economy.
The report was released in February this year by the Global Entrepreneurship Monitor with sponsors Babson College (US), Universidad Del Desarallo (Chile), Universiti Tun Abdul Razak (Malaysia) and Korea Entrepreneurship Foundation (South Korea).
Fifty-four economies participated in the 2017/18 annual Global Entrepreneurship Monitor survey, covering 68% of the world's population and 86% of the world's gross domestic product (GDP).
"There is often a misperception that necessity drives most entrepreneurs in regions such as Africa or Latin America. The reality is that opportunity is overwhelmingly the most common driver of entrepreneurship in nearly every economy we surveyed in 2017. This finding is consistent – we have observed a stable pattern in recent years," said Global Entrepreneurship Monitor’s executive director Mike Herrington.
Economic development, motivation
The survey tracks entrepreneurship across various phases of entrepreneurial activity, identifying three economic development levels – factor driven, efficiency driven and innovation driven.
As categorised by the World Economic Forum, factor-driven economies are in Stage 1 of development, where countries compete primarily on the use of unskilled labour and natural resources and companies compete on the basis of price as they buy and sell basic products or commodities.
Efficiency-driven economies are at Stage 2, where growth is based on the development of more efficient production processes and increased product quality. Innovation-driven economies are at Stage 3 where companies compete by producing and delivering new and different products and services by using the most sophisticated processes.
The Global Entrepreneurship Monitor survey monitors entrepreneurial activity using three indicators: total early-stage entrepreneurial activity (TEA – the percentage of adults who have started or are running a business up to 3.5 years), entrepreneurial employee activity (EEA – the percentage of employees developing new goods and services for their main employer) and established businesses rates (business more 3.5 years old).
The report states that TEA, measuring both necessity and opportunity entrepreneurs, is highest in Latin America and the Caribbean (LAC) where just under one-fifth of working-age adults are engaged in early-stage entrepreneurial activity. TEA rates are lowest in Europe at 8%.
In Malaysia, the 2017 TEA rate was 21.8%, up significantly from the 4.7% in 2016. Interestingly, TEA rates in Indonesia went down significantly in 2017 to 7.5% from 14.1% the previous year. Both countries are categorised as efficiency-driven economies.
While improvement-driven opportunity entrepreneurship predominates in all economies except India, economies with higher levels of economic development generally report higher levels of opportunity-driven entrepreneurship and higher levels of innovation (measured by the extent to which entrepreneurs are introducing new products that are unfamiliar to all or some customers and offered by few or no competitors).
North America tops the motivation index in 2017/18 with 5.2 improvement-driven opportunity entrepreneurs for every necessity-driven entrepreneur. Europe comes next with 3.4 more improvement-driven opportunity entrepreneurs than necessity-driven entrepreneurs, then Asia/Oceania with 3.2, LAC with 2.2 and Africa reporting the lowest levels with a ratio of just 1.5.
Industry sectors, gender parity
Because entrepreneurship disrupts most industrial sectors, forcing significant changes in product and service offerings, new logistics processes, and new business models, the survey measures the degree of entrepreneurs’ participation in various industries, including agriculture, mining, manufacturing, transportation, wholesale/retail, ICT and finance.
The most prevalent industry sectors in the factor-driven economies are wholesale/retail (55%), ICT, financial and other services (22%), and agriculture (13%). In the efficiency-driven economies, wholesale/retail (51%) and ICT, financial and other services (26%) are followed by manufacturing (13%).
On a country level, the wholesale/retail industry exhibits intense entrepreneurial activity in Malaysia (78.4%), Vietnam (76.1%), and Indonesia (69.6%). The Netherlands (11.8%), Israel (11.1%), and the United Kingdom (9.6%) lead entrepreneurship activity in the ITC sector.
Entrepreneurial activity in the financial sector is led by Japan (14.4%), USA (9.3%), and Switzerland (9.2%). Sweden, Canada, and Italy report 20% of entrepreneurial activity in professional services.
A consistent finding in 2017 as with previous years is that men are more will be more involved in entrepreneurial activity than women regardless of economic development levels. This reflects culture and customs regarding female participation in the economy.
In 2017, the highest average female TEA necessity rates are in efficiency-driven economies at 30.9%, and not in factor-driven economies as in 2016.
While this observation requires further analysis, it may mean that the increase in female TEA rates in the factor-driven economies is coupled with a change in the women’s entrepreneurship motivation. In other words, more women entrepreneurs are opting for opportunity-based entrepreneurial ventures.
The report shows that women report higher equal or higher entrepreneurship rates than men in certain economies. The countries with the highest level of opportunity-motivated female TEA are Poland at 90.7%, Malaysia at 90.2%, and the USA at 88%.
Improvements to economic growth
According to Herrington, entrepreneurship and innovation remain key levers to job creation and contribute to economic growth and stability.
While change in the environment for entrepreneurship generally happens slowly, positive signs can be seen in the fact that among the efficiency- and innovation-driven economies that participated in the Global Entrepreneurship Monitor in both 2016 and 2017, most entrepreneurial framework conditions stayed relatively the same or showed small increases.
Among 25 efficiency-driven economies, small improvements were seen in entrepreneurial finance, and in government and education conditions, from 2016 to 2017. Both government policies and programmes received higher ratings in 2017, as well as entrepreneurship education at both the school and post-school stage.
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