Most studies in entrepreneurship focus on small firms. Studies on portfolio entrepreneurship so far focus on small size portfolio enterpreneurs (Ucbasaran et al, 2003). Yet evidence suggests that it is the large portfolio entrepreneurs who have the greatest impact on growth. The tendency to focus on simply new jobs created by small firms had created the impression that small firms were more important than large firms (Storey, 1999). Schumpeter (1942) was convinced that large corporations were the future of business. Studies by Blau (1987), and Acs and Audretsch (1993) showed a re-emergence of small businesses. Small businesses have thus been seen as the key to growth. However, there is evidence that large firms have a greater impact. The evidence emerges from an examination of various publications.
100 a) The Forbes list of the world’s richest people
Forbes magazine surveys and publishes a list of the world’s richest persons. The list shows that the richest are businessmen and women who have either created the wealth themselves or inherited it from entrepreneurial ancestors. Most of these business men or women own groups of companies and can thus be considered as portfolio entrepreneurs. These include people like Warren Buffet, Bill Gates and Carlos Helen. These three are listed with combined assets totaling to US$172 billion more than the GDP of all African countries put together. Infact, there were 1,125 dollar billionaires listed in 2008, with a total worth of US$4.4 trillion.
These billionaires dominate many economies through their different companies and range of products they offer. Their businesses may either be growing as a result of the strong economic growth trends or the economies are growing because of their activities. While Uganda has no billionaire entrepreneurs listed, a handful of portfolio entrepreneurs dominate the economy as will be shown later.
b) Interlocking directorship
Studies of interlocking directorship in Scotland in the 1970s and 1980s also reveal evidence of impact of large scale portfolio entrepreneurs on the economy. A study by Scott and Hughes (1979) demonstrated how capital
101 in Scotland was dominated by a handful of entrepreneurial families. As their assets grew and the firms grew, they converted their companies into public companies. However despite minority shareholding in most of these companies, the families still managed to control the corporate companies through a system of interlocking directorships reinforced by intermarriage between the families. Through these relationships, a small group of families controlled the economy of Scotland. For Uganda, several families have controlled a wide range of companies giving them a big role in the economy as will be shown.
3.11 Conclusions
In the search for those factors that may explain growth, entrepreneurship has been one of the major factors besides those in the earlier growth model. GEM studies, Wennekers and Thurik (1993), Audrestch and Keibach (2004) have considered the entrepreneur as a major factor.
The entrepreneur is not considered in the mainstream economic theory as a factor in the growth process. Schumpeter had mentioned him as an innovator and instigator of growth. Governments around the world and multilateral institutions like the World Bank have started pursuing entrepreneurship in a bid to explain the factors that will cause the necessary growth among others, especially in the developing countries. Entrepreneurs are known for their usually creativeness, perceiving opportunity, taking risks and the desire to achieve. The entrepreneur is acknowledged as a person who starts up
102 businesses, innovates and manages businesses, among other functions. But entrepreneurs are of different types. The literature discerns different entrepreneurs including novice, serial and portfolio. While attention has been largely on the small entrepreneur, the large scale, multiple owning entrepreneur tends to be more important in the economy. This is the portfolio entrepreneur.
Portfolio entrepreneurs are those who start, own, manage or control a multiplicity of business at any one time. Because they own more than one business, they tend to contribute more than those with single businesses and thus tend to be more important than others in the economy. The large scale operation portfolio entrepreneurs are naturally more important. Since they have multiple start-ups, they have more experience and have better access to resources. This enables them accumulate more knowledge and resources. The multiplicity of business gives them more and varied human resources and improves their network. They usually have the financial resources required to start and run business. Examining the activities of entrepreneurs and relating them to economic growth and development, it is clear that the activities of these large scale portfolio entrepreneurs have a bearing on economic growth.
Entrepreneurs combine resources to produce goods and services and create value. They employ themselves and also employ others. They thus create jobs, may make profit and create wealth. These productive activities of the entrepreneur result into other attendant outcomes, they build infrastructure,
103 pay taxes and those who are large scale operators have a multiplier effect. They contribute to both economic growth and development. The extent to which entrepreneurs make contributions to an economy has never been tested empirically. This is what this study is attempting to do.
The competitive nature of entrepreneurs coupled with their extra knowledge makes them start new business, buy existing ones, merge with others and now and again close, sale a business or even leave an industry. This collective activity of entrepreneurs of start-up and closure of business may result into formation of an industry or even its collapse. This is what Schumpeter called the process of creative destruction or churn in the GEM model underlying which was growth. The next chapter deals with this process.
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CHAPTER FOUR
BUSINESS CHURN AND ECONOMIC GROWTH
4.1 Introduction
Schumpeter was the first economist to depart from mainstream economic thought to attribute economic growth to the entrepreneur. He attributed growth to the process of creative destruction which is a result of entrepreneurial activity. An entrepreneur destroys the existing economic order by introducing new products, new services, new processes and /or new raw materials or even creating new forms of organization. This process of introducing new things is innovation. As innovations are introduced to the market, the old products, services, raw materials, processes and even organizations are displaced. The entrepreneur therefore destroys the existing order by carrying out new combinations. These new combinations cause disequilibrium in the economy and leads to increased production and growth. Growth therefore comes from creative destruction.
This study sought to establish whether a relationship exists between entrepreneurship and growth. Schumpeter had said that growth emerged from a creative destruction process where the entrepreneur was the instigator. Creative destruction is what the GEM studies call the business churn and forms an important part of the GEM model. The business churn is therefore important for understanding growth. This chapter reviews the literature on the churn.
105 Writing in the Federal Reserve Bank of Dallas 1992 Annual Report, Robert D. McTeer, Jr., President and Chief Executive Officer, remarked:
“The credit crunch continues to impede job growth in small and medium size businesses that rely on banks for credit. Despite these tight credit conditions, small to medium sized businesses have continued to lead the economy to the creation of jobs in the 1990s. This phenomenon of job creation during a period of slow employment growth has led us to explore some of the issues highlighted in our Annual Report essay. The churn: the paradox of progress. The small change in total employment and unemployment gives the impression that not much is happening when, infact those small net changes mask huge gross changes that are revolving the economy” (Pg.2 FRB of Dallas Annual Report 192)
McTeer was highlighting the phenomenon of growth in the American economy that came amidst the height and resultant controversy of job losses. While the American economy was losing jobs as a result of business closures, the economy was growing. The growth came from the new businesses created by entrepreneurs that created new jobs. Business closures and lay offs of workers in many businesses in Europe and North America was and continues to be a cause of worry for workers in these countries. Most of the big and most well known companies in the United States laid off workers in large numbers in the 1980s and early 1990s. These included General Motors, Sears,
106 IBM, and Boeing among others (FRB of Dallas Annual Report, 1992) But as some organizations laid off workers, others created new jobs.
“New jobs trickle in but they don’t usually make news. As Sears struggled, WalMart added new jobs. As IBM trimmed its work force…Microsoft climbed from 19,208 workers to 26,000 workers in 5 years. General Motors downsized as Honda, Toyota and Nissan and other Japanese companies opened plants in the United States” (Pg.4 FRB of Dallas Annual Report, 1992).
Job losses were more visible than job gains. But despite the losses, the American economy was growing. Day in, day out, jobs are created and destroyed through business openings, closing, expansions, contractions and relocations. It is entrepreneurs who do this. They start-up companies, they expand, acquire and/or relocate business. As new companies come up they eclipse existing ones through newer and better products and services. The new and better products if successful out-compete existing ones, usually because they are cheaper or better. The existing products, and possibly even the companies that produce them, may downsize or close as they lose market share to the new ones. Downsizing or closing leads to loss of jobs but those businesses that open or expand usually create new jobs. In this way, an economy continuously recreates itself through the process of creative destruction, (Schumpeter, 1934).
107 This natural process of replacement of business enterprises by new ones, redefines existing jobs and creates new industries. This is called business volatility and churn, as described by McTeer (1992) and earlier by Reynolds and Maki (1981). This process eventually and continually reconstitutes and restructures the nation’s economy. The process spurs income growth and creates wealth. This is the dynamic process of creative destruction. The paradox that economic progress destabilizes the world.
The process of firm start-up in a specific industry is a result of opportunity recognition in that area. It is entrepreneurs who perceive these opportunities and start-up new businesses to exploit these opportunities (Schumpeter, 1934; Kirzner, 1973). Once an opportunity is spotted and business is started, many other new players who gain information about the opportunities rush to join the process (Schumpeter 1934). This activity of rushing in by different players may result in the formation of an industry if the idea is economically viable. As more and more firms join, the industry grows. The industry goes through various phases, the birth, growth, maturity, saturation and possibly even decline and death. This is the industry life-cycle. In the various phases of the life-cycle, many firms may join depending on the type of industry and industry competitive forces. But others may also exit the industry. The reasons for exist could be uncompetitiveness, declining margins or new opportunities elsewhere.
108 New products or services or processes introduced by entrepreneurs keep an industry in constant change. This change leads to growth of firms, new jobs and job losses, and may also eclipse firms from the industry. Thus firms are created and may die. Similarly industries are created and change continually and may also die. Associated with this activity is growth in an economy. The person central to this is the entrepreneur (Schumpeter, 1934; Reynold and Maki,1981; and McTeer, 1992). The entrepreneur is therefore a growth instigator. Growth in an economy therefore can be attributed or associated with entrepreneurial activity.