Entrepreneurship as an economic force in rural development
By Sultan Rehman Sherief
Magnus School of Business
This paper has attempted to set out the key issues related to entrepreneurship in the context of its relationship with rural development. The analysis is then broadened to understand the determinants of rural entrepreneurship and the environment conducive to its development. Consequently the policies that are necessary to make this environment favorable have been discussed in detail. The generic constraints that are faced by rural enterprises have been listed out. The paper also emphasizes the importance of rural enterprise development in
Swaziland. The conclusion is that to accelerate economic development in rural areas, it is necessary to promote entrepreneurship. Entrepreneurial orientation in rural areas is based on stimulating local entrepreneurial talent and subsequent growth of indigenous companies. This in turn would create jobs and add economic value to a region, and at the same time it will keep scarce resources within the community.
More than 1.3 billion people in this world live in extreme poverty, that is, one in every five person.(United Nations Report, 1997) As the world’s economies become more interdependent, solving a problem as big and as difficult as poverty demands international alliances. According to the International Fund for Agricultural Development (IFAD), the Millennium Development Goals set forth by the United Nations are a guiding light for international cooperation for development, in particular the target to halve the proportion of hungry and extremely poor people by 2015. But the starting point to achieve this target must be the recognition that poverty is predominantly rural. Three quarters of the world’s poor, about 900 million people, live in rural areas where they depend on agriculture and related activities for their livelihoods. The reality is that the Millennium poverty target cannot be met unless the world addresses rural poverty.
The World Bank’s new strategy launched in 2002, called ‘Reaching the Rural Poor’ focuses on improving the lives of those living in rural areas. Ian Johnson, the Vice-President for Sustainable Development states that this strategy is contributing to the increase of productivity in rural areas, which will have a very positive impact on other sectors of the national economy. Petrin (1994) affirms that rural development is now being linked more and more to entrepreneurship. Entrepreneurship stands as a vehicle to improve the quality of life for individuals, families and communities and to sustain a healthy economy and environment.
The acceptance of entrepreneurship as a central development force by itself will not lead to rural development and the advancement of rural enterprises. What is needed in addition is an environment enabling entrepreneurship in rural areas. The existence of such an environment largely depends on policies promoting rural entrepreneurship. The effectiveness of such policies in turn depends on a conceptual framework about entrepreneurship (Petrin, 1994).
This paper deals with the following three issues.
1) Firstly, it sets out the reasons why promoting entrepreneurship as a force of economic change must take place if many rural communities are to survive.
2) Secondly, it deals with what policies are necessary in order to create an environment in rural areas conducive to entrepreneurship.
3) And thirdly, it considers the generic constraints that are faced by entrepreneurs in rural areas and the initiatives that can assist their development.
2. THE IMPORTANCE OF RURAL ENTERPRENEURSHIP
a) The Entrepreneurship Concept
In order to understand the role played by entrepreneurs in developing an economy it is first important to understand the concept of entrepreneurship. (Petrin, 1992) While choosing a definition for entrepreneurship most appropriate to the rural area context, it is important to bear in mind the skills that will be needed to improve the quality of life for individuals, and to sustain a healthy economy and environment. Taking this into consideration, one can find that each of the traditional definitions has its own weakness. (Tyson, Petrin, Rogers,1994, p.4) Hence, the most appropriate definition is a combination of three, wherein, entrepreneurship can be defined as—
A force that mobilizes other resources to meet unmet market demand. (Jones and Sakong, 1980); the ability to create and build something from practically nothing. (Timmons, 1989) the process of creating value by pulling together a unique package of resources to exploit an opportunity. (Stevenson, et al, 1985)
b) Determinants of Entrepreneurship
The need to understand the determinants of entrepreneurship is as important as understanding its concept. The origins and determinants of entrepreneurship span a wide spectrum of theories and explanations (Brock and Evans, 1989; Carree, 1997; Carree, Van Stel, Thurik and Wennekers, 2002; Gavron, Cowling, Holtham and Westall, 1998; OECD, 1998a). However, it is generally accepted that policy measures can influence the level of entrepreneurship (Storey, 1994 and 1999; EZ, 1999).
Research analyzing the determinants of the decision to start a new business has so far stressed the role of individual characteristics, access to capital and institutions. Social factors may also play a role in the decision to become an entrepreneur because, as shown by a growing literature, social interactions affect the payoffs from a variety of economic decisions. (Giannetti and Simonov, 2003).A widely accepted view is the following: while personal characteristics as well as social aspects clearly play some role, entrepreneurship and entrepreneurs can also be developed through conscious action.(Petrin,1994)
Development of entrepreneurs and of entrepreneurship can be stimulated through a set of supporting institutions and through deliberate innovative action which stimulates changes and fully supports capable individuals or groups. Therefore, policies and programs designed specifically for entrepreneurship promotion can greatly affect the supply of entrepreneurs and thus indirectly represent an important source of entrepreneurship.
This view has important implications for entrepreneurship development in rural areas. If currently entrepreneurial activities in a given rural area are not thriving it does not mean that entrepreneurship is something inherently alien to rural areas. While this feeling could have some legacy due to the slower pace of changes occurring in rural areas compared to urban ones, proper action can make a lot of difference with respect to entrepreneurial behavior of people living in rural areas.
c) Role played by entrepreneurs in rural development
Entrepreneurial activity and new firm formation are unquestionably considered engines of economic growth and innovation (Baumol, 1990; Murphy, Shleifer and Vishny, 1991). As such, they are among the ultimate determinants of the large regional differences in economic performance. The importance of new firm formation for growth has been recognized since Schumpeter (1934). According to the Global Entrepreneurship Monitor Report (2000), about 70 percent of an area’s economic performance is dependent upon how entrepreneurial the area’s economy is.
Entrepreneurial orientation in rural areas is based on stimulating local entrepreneurial talent and subsequent growth of indigenous companies. This in turn would create jobs and add economic value to a region, and at the same time it will keep scarce resources within the community. According to Petrin (1992), to accelerate economic development in rural areas, it is necessary to build up the critical mass of first generation entrepreneurs.
Studies conducted by Economic Commission for Latin America and Caribbean (ECLAC) and Food and Agricultural Organization (FAO) in the Latin American and Caribbean region have indicated that rural enterprises can be an important modernizing agent for small agriculture. Governments have supported this process by creating incentives for agro-industry to invest in such regions. This has not only been in developing countries, but it has also been a clear policy of the European Union (EU) which channels a large part of the total common budget to develop the backward and poor regions of Europe.
Lyson (1995) echoes the prospects of small-enterprise framework as a possible rural development strategy for economically disadvantaged communities and provides this description of the nature of small-scale flexibly specialized firms: “First, these businesses would provide products for local consumption that are not readily available in the mass market.. Second, small-scale technically sophisticated enterprises would be able to fill the niche markets in the national economy that are too small for mass producers. Third, small, craft-based, flexibly specialized enterprises can alter production quickly to exploit changing market conditions.”
According to a study conducted in the United States it has been found that rural poverty has become as intense as that found in the inner cities, and has stubbornly resisted a variety of attempts at mitigation through economic development policies. The latest strategy for addressing this problem is the encouragement of emerging “home-grown” enterprises in rural communities. The expectation is that these new ventures-a) will provide jobs or at least self-employment; b) will remain in the areas where they were spawned as they grow; c) and will export their goods and services outside the community, attracting much-needed income. (Lyons, 2002)
Gavian, et al (2002), in a study on the importance of SME development in rural employment in Egypt, have suggested that SMEs are traditionally thought of as well poised to respond to increased demand by creating jobs.
It is important to stress here that rural entrepreneurship in its substance does not differ from entrepreneurship in urban areas. Entrepreneurship in rural areas is finding a unique blend of resources, either inside or outside of agriculture. The economic goals of an entrepreneur and the social goals of rural development are more strongly interlinked than in urban areas. For this reason entrepreneurship in rural areas is usually community based, has strong extended family linkages and a relatively large impact on a rural community.
3. POLICY IMPLICATIONS FOR RURAL ENTREPRENEURSHIP
Studies have shown that SMEs in rural areas in the UK (particularly remote rural areas) have outperformed their urban counterparts in terms of employment growth (Keeble et al,1992; Smallbone et al, 1993a). Behind each of the success stories of rural entrepreneurship there is usually some sort of institutional support. Lu Rongsen(1998), in a study in Western Sichuan highlights the important factors responsible for the rapid development of enterprises in the area. These include- uniqueness of the products in so far as they are based on mountain-specific, local natural resources; development of infrastructure; strong and integrated policy support from government; and a well-planned marketing strategy and link-up with larger companies and organizations for marketing nation-wide and abroad.
According to Petrin (1994), the creation of such an environment starts at the national level with the foundation policies for macro-economic stability and for well-defined property rights as well as international orientation. The policies and programs targeted specifically to the development of entrepreneurship do not differ much with respect to location. In order to realize their entrepreneurial ideas or to grow and sustain in business, they all need access to capital, labor, markets and good management skills. What differs is the availability of markets for other inputs.
The inputs into an entrepreneurial process- capital, management, technology, buildings, communications and transportation infrastructure, distribution channels and skilled labor, tend to be easier to find in urban areas. Professional advice is also hard to come by. Consequently, entrepreneurial behavior, which is essentially the ability to spot unconventional market opportunities, is most lacking in those rural areas where it is most needed i.e., where the scarcity of 'these other inputs' is the highest.
Rural entrepreneurship is more likely to flourish in those rural areas where the two approaches to rural development, the ‘bottom up’ and the ‘top down’, complement each other. The ‘top down’ approach gains effectiveness when it is tailored to the local environment that it intends to support. The second prerequisite for the success of rural entrepreneurship, the ‘bottom up’ approach, is that, ownership of the initiative remains in the hands of members of the local community. The regional development agencies that fit both criteria can contribute much to rural development through entrepreneurship.
The National Spatial Strategy (NSS), the national planning framework for Ireland for the next 20 years (2002-2020), recognizes the importance of making the most of cities, towns and rural places to bring a better spread of opportunities and a better quality of life. It advocates the following features as appropriate rural enterprise policy elements:
1) The nature of the enterprise encouraged to locate in rural areas must be appropriate to those areas in economic, social and environmental terms, e.g., location of overly large enterprises in rural areas should properly be avoided;
2) Enterprise policies must be flexible to facilitate local circumstances rather than being rigid national ones;
3) Policy towards enterprise must involve features which go beyond the bounds of traditional enterprise policy, eg, in relation to social infrastructure to attract and retain the necessary workforce;
4) Policies in relation to enterprise in rural areas and in smaller towns should be seen as an integrated package. There must also be flexibility in relation to how smaller towns’ enterprise functions are perceived. These vary depending on the nature of the area;
5) Policy towards rural enterprise should encompass all rural enterprise and not just traditionally grant-aidable manufacturing, i.e., in a rural context any rural enterprise is in principle equally desirable;
6) There is a need to focus on new rural enterprises other than tourism. There is a danger that an overly heavy burden in terms of expectations is being placed on the shoulders of rural tourism as the only viable alternative to farming;
7) There will need to be consistency and co-ordination regarding the choice of rural enterprise locations among the various bodies involved rather than each having its own unilaterally chosen list.
A study conducted by Smallbone and North (1997), reveals that firms that demonstrated the highest level of innovative behavior were growing in terms of sales and also generating employment, although it is important to stress that the relationship between innovation and growth is an inter-dependent and mutually reinforcing one, rather than a simple cause and effect relationship.
Piore and Sabel(1984), in their book, “The Second Industrial Divide”, outline a policy framework for small business development, which states that economic development is more likely to succeed if it takes place within a political context, where local communities actively nurture and support small-scale, industrially diverse, flexibly specialized enterprises. Within this context, small business development is one component of a comprehensive economic development strategy comprising both large-scale, mass- production enterprises and small-scale, flexibly specialized production units.
Organization for Economic Cooperation and Development’s (OECD) (1999) work on government policy for enterprise development advocates best practices in four broad areas related to SMEs. These practices are appropriate for both agro industries and other rural enterprises. Specifically, OECD advocates facilitating:
• Efficient and unbiased financial markets for SMEs;
• A suitable business environment for SMEs;
• Education, training and the capability of SMEs to compete; and
• Access to information, networking and the global marketplace for SMEs.
To summarize, Petrin (1994) maintains that policy implications for rural entrepreneurship development can be:
1) Sound national economic policy with respect to agriculture, including recognition of the vital contribution of entrepreneurship to rural economic development;
2) Policies and special programs for the development and channeling of entrepreneurial talent;
3) Entrepreneurial thinking about rural development, not only by farmers but also by everyone and every rural development organization;
4. PROBLEMS FACED BY RURAL ENTREPRENEURS
According to a study by Tarling et al (1993), in rural UK, a number of potential weaknesses in the competitiveness of rural firms, in particular certain aspects of the operating environment and the firms’ responses to them have become evident. In this respect, Vaessen and Keeble, (1995), also point out that the external environment in the more remote rural areas particularly, presents challenges for SMEs, which they need to adapt to if they are to survive and grow. These include the limited scale and scope of local market opportunities which make it necessary for firms to be particularly active in developing non-local markets if they are to grow. Another aspect of the external environment in these remote rural areas is the labor market, in which relatively low wage levels in comparison with urban areas combined with qualitative characteristics of the rural labor force (e.g. loyalty to the firm) reduce the incentive for firms to invest in labor saving process innovations, particularly in the more craft-based sectors.
A further characteristic of the remote rural business environment is the lack of a local industrial and service milieu which means that there are fewer opportunities for firms to subcontract out locally than in an urban context. From the point of view of innovation specifically, the low density of the business population results in a small number of potential collaborating firms locally, as well as more sparsely distributed research and development, educational institutions and business support providers compared with some other types of location. This raises questions about the extent to which the characteristics of remote rural environments constrain innovative activity in SMEs; another issue which concerns the implications of these features for the type of policy response that is likely to be effective.
The National Spatial Strategy of Ireland (2002) also indicates the following issues as key constraints in the development of rural enterprise in Ireland:
a) The issue of transport and accessibility in general, and of remoteness.
b) The low skill base of many rural areas emerged as important.
c) The lack of sufficient funding continues to be perceived as a major constraint.
d) The low enterprise base in many rural areas is seen as a key issue, and there is a general feeling of being caught in a vicious circle where an existing lack of enterprise contributes to a low degree of enterprise potential.
e) The absence of facilities and services both for enterprises and for their workforces emerged as important.
f) Competition from larger centers was seen as crucial in a number of areas. In some cases it was suggested that the proximity to such areas can to some extent be a disadvantage from this perspective.
g) Issues of planning and zoning were seen in some areas as significant as was the fact that it may be more difficult to obtain planning permission for certain types of enterprises in rural areas.
Smallbone and North (1997) in a study in rural England have identified the specific areas of support needs that rural SMEs require: marketing, process innovation, improving access to specialized training and assistance in the use of internet.
Gavian,et al (2002), in a study in Egypt point out that by continuing to provide supply-side solutions without expanding the market for their products and services is highly unlikely to generate employment through expansion.
UNDP’s regional program for the Former Soviet Union (FSU) has summarized the problems faced by rural SMEs and the suggested initiatives which may be undertaken to solve these issues.
Figure 1 is illustrative of this:
. High costs
. Few support institutions
. Preparation and training of national trainers / counselors;
. Application of successful experiences;
. Promotion and development of institutions for support services of technical kind.
. Tendency towards isolation
. Lack of organization and integration. Little willingness to undertake associative entrepreneurial projects.
. Entrepreneurial training and preparations;
. Dissemination of successful associative experiences;
. Support to, and co-operation with, existing business / entrepreneurial associations;
. Training and preparation of enterprising young people.
. Limited access to financing, both for start-ups and expanding enterprises;
. Lack of endorsement and guarantees.
. Association – grouping;
. Assistance in establishment of credit schemes targeting SMEs (mutual guarantee schemes etc).
Policy and Enabling Environment:
. Excessive regulations and formalities;
. Political and economic instability.
. Identification of specific obstacles and bottlenecks;
. Recommendations for change and improvement within these areas;
. Adaptation and adjustment of legal framework.
. Difficulties for women to start up businesses;
. Difficulties for women entrepreneurs to get access to support and finance services.
. Entrepreneurial training and preparation;
. Sharing of experiences and best practices for women entrepreneurs;
. Assistance in establishment of micro credit schemes geared towards women.
Qualification of Human Resources:
. Little specialization and training;
. Low level of productivity
. Low valuation and encouragement to work
. Skills training
. Managerial training
. Improvement of the work environment, organizational climate.
. Low share in the domestic market and almost no share in external markets;
. Problems in acquisition of inputs;
. Lack of expertise in the area of domestic and external marketing;
. Lack of insight into product differentiation and other competitiveness issues.
. Entrepreneurial training and preparation;
. Counseling and advisory services by qualified personnel;
. Information links, regional and international networks;
. Establishment of business / entrepreneur associations;
. Vertical integration (possible labor specialization)
5. FRAMEWORK FOR ENCOURAGING RURAL ENTREPRENEURSHIP
Jay Kayne with the Kauffman Foundation created the following figure during the Second Minnesota Academy working session in Rochester, Minnesota. This figure provides a general framework for encouraging rural entrepreneurship. In the final analysis, this framework provides the critical questions necessary to assessing the entrepreneurial opportunity in any rural place or state.
6. RURAL ENTERPRISE DEVELOPMENT IN SWAZILAND
The smallest country in Southern Africa, Swaziland is classified as a middle-income economy, but the distribution of income is unequal and nearly half the population lives below the national poverty line. Its population is largely rural and the structure of the economy has shifted over the years from an agricultural base to manufacturing. According to the National Report to the World Summit on Sustainable development (2002), despite enjoying relative peace and prosperity and good economic performance over past decades in terms of growth and fiscal stability, Swaziland now faces a number of challenges. These include maintaining macro-economic stability while providing better education and health, governance issues and gender inequality, high unemployment rates, the need to attract new investment and adapt to a changing trade environment.
The African Development Bank (1999) states that one of the main constraints in Swaziland’s economic development is a relatively low industrial resource base including the shortage of indigenous entrepreneurs. Over 70% of Swaziland’s population lives in villages, it makes it all the more necessary to make an earnest attempt to create an environment and supporting policies which will aid in the development of rural entrepreneurs. An assessment of growth potentials of Swaziland show that the major potential sources of growth are in the agricultural sector, including agro-industrial activities, as well as in tourism and mining. The country’s ecological conditions are ideal for growing a wide range of crops and diversifying commercial and traditional agriculture into high value horticultural crops, which have linkages with agro-industrial activities. Given Swaziland’s pleasant and varied landscape, tourism prospects are extremely buoyant and as yet under-exploited. There are also several opportunities for growth in the mineral sector. Keeping in mind the various guidelines which have been discussed above, the dawn of Swaziland’s rural economy lies in the hands of its entrepreneurs.
However there are a few factors which are acting as constraints to rural development. The National Report to the World Summit on Sustainable development (2002) asserts that these include inadequate access to development finance for investment; inadequate access to markets; and, there is currently no agricultural policy that would harmonize marketing, supply of inputs and extension services.
A further constraint is the lack of knowledge and self-confidence of the people in rural communities due to limited experience and lack of education. People who have never been given a chance often have difficulties responding when all too rare opportunities arise. The country’s government also has to accept that lack of knowledge and self-confidence is a very serious constraint to development and should come up with a national training plan and support infrastructure.
Another constraint faced by the country is to move away from the notion of poverty alleviation to wealth creation. Poverty alleviation focuses on the negative aspects of life and the process is often paternalistic – “we will alleviate your poverty”. Wealth creation on the other hand leads to a focus on business and ownership, a proven combination in today’s world.
To sum up in the words of Narayan J.P., (1962), “Rural industrialization would have to be based on two factors: (a) Local resources, both human and material, (b) and local needs. ‘Local’ does not mean a single village; it might mean a village, a group of villages, a block or a district - depending on the nature of the industry and the technology used. There are to be no pre-conceived limitations or inhibitions of a doctrinaire or sentimental type in regard to such matters as the use of power and technology. The aim and total long-term effect of rural industrialization should be to convert the present lopsided purely agricultural communities into balanced agro-industrial communities.”
World-wide the last three decades have seen major shifts in rural economies. Rural enterprises are important generators of employment and economic growth internationally. It is important to stress that rural entrepreneurship in its substance does not differ from entrepreneurship in urban areas. Entrepreneurship in rural areas is finding a unique blend of resources, either inside or outside of agriculture.
This paper has attempted to understand the role played by rural enterprises in economic development and how governing bodies can help to foster its growth. The promotion of entrepreneurship and the understanding where entrepreneurship comes from is as equally important as understanding the concept of entrepreneurship. The environment which is considered most favorable for their growth forms the basis for the development of policies for entrepreneurship development. Policy implications for rural entrepreneurship development can be summarized as: (a) Sound national economic policy with respect to agriculture, including recognition of the vital contribution of entrepreneurship to rural economic development; (b) Policies and special programs for the development and channeling of entrepreneurial talent; (c) Entrepreneurial thinking about rural development, not only by farmers but also by everyone and every rural development organization; d)And institutions supporting the development of rural entrepreneurship as well as strategic development alliances.
However, despite their phenomenal growth rural enterprises have common systemic constraints to their development. Governments and donors can help to address these constraints by facilitating efficient and unbiased financial markets; a suitable business environment; education, training, and competitive capacity; and access to information, networks and the global market place. To conclude the paper has also pointed out the importance of rural enterprises in the development of the economy of Swaziland.
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