Issues in Entrepreneurship and Unemployment - Essay Example

Entrepreneurship and Unemployment Introduction The association between entrepreneurship and unemployment has, since it was first mentioned, been ambiguous in nature. The income choice theory, on one side, suggests that unemployment leads to an increase entrepreneurship due to a decline in opportunity costs of not setting up a self-owned business (Maloma, 2012: p29). However, unemployed people are more likely to possess less endowment of entrepreneurial talent and human capital for the set-up and sustenance of a new business, which suggests an association between high rates of unemployment and low levels of entrepreneurial activities. Low entrepreneurship levels could also result from low levels of economic growth that are also symptomatic of high unemployment levels. Whereas unemployment has a significant influence on the rate entrepreneurial activity, Audretsch et al (2011: p32) also claim that entrepreneurship has an equally significant impact on unemployment because of the low rates of survival for entrepreneurial activity that limits the influence of entrepreneurship on unemployment. Therefore, there is ambiguity as to whether unemployment is related to increased entrepreneurship or whether unemployment and entrepreneurship are inversely related. As a result, it can be argued that unemployment causes an increase in entrepreneurship and self-employment uptake, while entrepreneurship may also cause unemployment (Faria, 2013: p289). The unravelling of the association between unemployment and entrepreneurship is essential because most policies are based on assumptions that fail to reflect such ambiguity, thus requiring a robust economic analysis of the available policies. Policies for Self-Employment/Entrepreneurship Sub-national governments like the Welsh Assembly Government have the capacity to design and implement policies that support self-employment and entrepreneurship, specifically in complementing the effects of national policies to reduce unemployment levels. While there are numerous policy programs that can be used in support of entrepreneurial activity to reduce unemployment in the South Wales Valleys, there are generally three forms of policies: entrepreneurial education and training; financial assistance; and consultancy, advice, and general assistance. Consultancy, Advice, and General Assistance Entrepreneurs in the South Wales Valleys who might want to set up a business may sometimes require advice on the best types of businesses to pursue, required formalities, management implications, and planning required. Indeed, according to Williams and Nadin (2012: p900), majority of people who want to be self-employed only vaguely conceive how they will form the enterprise, as well as it is to be managed. Although public information is available all over the UK that offers guidance on such issues, such information may require structuring and compilation in a manner that is useful and relevant to the citizens of South Wales Valleys. The Wales Assembly Government would be justified in intervening in such a policy, specifically by offering advisory services in the early phases of self-employment and entrepreneurship. Some advisory services, for example, are not likely to be offered by private entities sans support from government authorities, despite their importance to promoting entrepreneurship, as well as reducing unemployment (Williams & Nadin, 2012: p900). Using such a policy, however, does not mean that the WAG has to provided it directly as it may also be implemented through outsourcing, in turn creating and increasing competition between potential providers in the private sector. Felzensztein and Gimmon (2012: p366) identify business incubation as a promising type of systematic general assistance, which provides the entrepreneur with a physical space to conduct their business, while also offering them consultancy services. Vecchi et al (2014: p260) report that, according to survey data conducted in former Eastern Germany during the mid-2000s, over 90% of the government-assisted entrepreneurs in business incubators stated that the subsidized rented space offered under the government policy had a substantial role in entrepreneurial development. Under this policy, the WAG could establish dedicated offices that advice and inform potential entrepreneurs concerning support opportunities and alternatives. They may also provide ex ante assistance via entrepreneurial idea analysis, as well as implementation of spin-off entrepreneurial projects brought forward by potential entrepreneurs (Vecchi et al, 2014: p260). Moreover, they may also offer ex post assistance to new businesses over a period of 18 months following their establishment formally. Education and Training On top of providing consultancy and advice, WAG may also use policies aimed at providing entrepreneurial education and training in basic skills of management, as well as to undertake various tasks needed in early phases of self-employment, such as investment proposals, business plan drafting, or application for loans (Leitch et al, 2012: p150). This policy can be justified by the fact that entrepreneurs in deprived areas like South Wales Valleys may not be aware of the forms of training required in the early phases of self-employment. In addition, education and training during the heavy investment stage may be too expensive for WAG. Finally, it is unlikely that the private sector will supply education and training opportunities to potential entrepreneurs without presence of a critical mass. In this case, WAG may partner with other partners in the South Wales Valleys, including non-governmental organizations. For this policy of training and education, there are common synergies with the policies of consulting and advice, including strategic lines like business plan preparation (Leitch et al, 2012: p150). According to Urbano and Alvarez (2014: p708), an entrepreneurship education policy will provide the population in deprived areas with an opportunity to develop interpersonal skills and exercise leadership, which are both critical aspects of an entrepreneur, especially for those who will become future employers. Moreover, potential entrepreneurs in South Wales Valleys will learn how to communicate their concepts and ideas, as well as to influence others effectively by teaching them conflict resolution skills. In addition, entrepreneurship training and education enables potential entrepreneurship to engage in critical thinking and problem solving skills, which are valuable attributes for self-employed people who may become employers in the future. Finally, entrepreneurship training and education policy will offer the potential entrepreneurs with opportunities to develop management, financial literacy, and planning skills. This policy will be essential in enabling the potential entrepreneurs to manage money, time, and other resources, as well as to set goals for their business (Urbano & Alvarez, 2014: p709). By collaborating with local partners in the South Wales Valleys region, WAG can offer a pool of entrepreneurship professionals and experts to train potential entrepreneurs. Financial Support Nathan and Lee (2013: p370) suggest that because capital markets do not work in deprived areas, there is a need for public interventions at the sub-government level to provide entrepreneurs with financial support. Potential entrepreneurs in deprived areas like South Wales Valleys face several obstacles with regards to accessing finances to set up their own businesses. These include a high level of perceived risks for businesses in economically deprived regions and their low survival rate, absence of a track record in entrepreneurship, and inability to give financial institutions the required collateral usually required by lenders. Moreover, there is a relative absence of accounting skills and expertise needed for loan applications and business plan presentations, and cash flow deficiency-related risks (Nathan & Lee: 2013: p370). Public policies aimed at providing financial support for potential entrepreneurs may, to some extent act to remedy some of these challenges. For instance, WAG may act alone or in collaboration with other partners in the area to act as loan warrantors. Financial support policies are also important in increasing the rate of survival for new enterprises, which has a significant association with a decline in lending risks. Ribeiro and Galindo (2012: p9) argue that because theory and practice provide evidence for the implementation of financial support policies in regions where availability of risk capital and loans is low, sub-national governments should promote financial support policies targeted at entrepreneurs and aimed at overcoming the significant challenges in access of capital. However, this does not mean that Wag will be directly involved in the provision of capital. Instead, the government may help in making information on alternative means of financing more accessible to the potential entrepreneurs, as well as promoting venture capital fund activities and providing tax breaks (Ribeiro & Galindo, 2012: p9). For instance, Wag could assist potential entrepreneurs in the area to access loans aimed at financing fixed asset needs, as well as gain access to finance for expansion and start-up. Moreover, such policies could offer tax credits for investors wishing to make equity capital investments in potential small enterprises in South Wales Valleys. Pros and Cons of Entrepreneurship Policies to reduce Unemployment Using entrepreneurship policies to reduce unemployment in New South Wales can help WAG to induce economic growth and introduce innovations into what is a deprived area. Entrepreneurs with requisite advice, training, and financial support usually develop new process or product innovations, create new technologies, and identify and open up potential markets (Žnidaršič et al, 2010: p233). Such radical innovations are important in economic growth, specifically because these entrepreneurs bring new innovations to the deprived area, offering critical value-generating contributions to progress in the region’s economy. The enterprises that already exist in the area are not likely to pursue innovation due to organizational inertia, whereas new businesses are more likely to invest the financial support from entrepreneurship policies in identifying and pursuing new opportunities. Organizational inertia for existing businesses numbs them to market changes. Innovation that will result from entrepreneurship in the region is, in essence, one of the best ways for potential entrepreneurs to commercialize their ideas (Žnidaršič et al, 2010: p233). Another advantage of public entrepreneurship policy is that the self-employed individual will portend positive effects on employment over the long and short term. Self-employment acts to reduce unemployment by stimulating employment through the generation of new jobs on entering the market. However, Faria et al (2010: p1288) show that beyond the initial effect that entrepreneurship has on unemployment, there is a more complex and S-shaped impact over a period of time, where the new creation of jobs arising from new businesses creates a direct employment effect. After the immediate impact, a phase of stagnation or a downturn in employment follows as the business attempts to acquire more market share from businesses already in existence that cannot compete, as well as the failure of some new entrants. Following an interim period or phase of existing business displacement or potential failure, an increase in supplier competitiveness may cause further gains in employment (Faria et al, 2010: p1289). In this case, after a period of 7-10 years, the impact of forming a new enterprise fades away. The Wales Assembly Government’s use of entrepreneurship polices to reduce unemployment has another advantage, which is that the new businesses created will boost productivity in the deprived region. Whereas there is challenge that competition between these new enterprises and existing businesses may lead to a decline in overall employment, these new businesses may foster productivity in the medium-term when the initial increase in employment is hindered by displacement of current firms and businesses (Millan et al, 2014: p90). As competition increases in South Wales Valleys’ markets, the market power of current businesses is diminished, forcing them to enhance efficiency. Exits, entrances, and turbulence result in a positive effect overall on productivity. Thus, using public entrepreneurship policies increases the productive utilization of scarce resources available in deprived areas. Finally, such policies also encourage structural change by edging out “worn-out” businesses that are no longer creating employment, while also creating new industries and markets that will drive the future process of growth in South Wales Valleys (Millan et al, 2014: p91). This is because existing businesses are less likely to adapt to changing market conditions, failing to make necessary adjustments internally to increase productivity and employment. However, using entrepreneurship policies to reduce unemployment also faces several challenges. The most common limitation of such policies is that only a few individuals have the drive and attributes to become and remain entrepreneurs. Gohmann and Fernandez (2014: p293) identify four vital personality attributes required for one to succeed in entrepreneurship; openness to experience, willingness to take and bear risks, extraversion, and internal loci of control. Potential entrepreneurs specifically possess these traits because success in entrepreneurship is based on the ability to bear risks in an unpredictable environment, thus risking a loss. Inability to bear such risks by being open to experience and ready to take opportunities may lead to low survival rates for businesses under the policy. Moreover, entrepreneurship is accompanied by a significant level of failure, especially in the first five years with Marič et al (2010: p92) showing that the rate of failure in entrepreneurship is almost 50%. This challenge ties in with the previous one on personal attributes, since not everyone who has the funds and means to start a business has the required traits of an entrepreneur. In addition, a lack of customers in South Wales Valleys, which is a deprived area, increases the risk of failure. Harkiolakis et al (2012: p74) argue that self-employment levels are not especially indicative of entrepreneurial activity, noting that entrepreneurship and self-employment are not synonymous. While entrepreneurial activity levels may provide information regarding economy dynamics, self-employment levels do not have a necessary association with economic activity and development, which is critical in improving deprived regions. In fact, Laguna (2013: p255) notes that economies with high self-employment levels also tend to be less developed because they have fewer larger firms that are important for providing scope and economies of scale. Therefore, the policies have to be geared towards innovative entrepreneurship. However, even in cases of innovative entrepreneurship, unsecured intellectual property rights and high regulatory obstacles could prove detrimental to the policy in South Wales Valleys. Overregulation has been shown to hinder entrepreneurship as it decreases the flexibility of entrepreneurs, which affects their ability to react immediately to opportunities and to experiment (Laguna, 2013: p255). Also, oft-changing, opaque, unclear, or complex regulations make the legal environment too difficult for first-time entrepreneurs to understand. Regulations at the national level may also pose a challenge to Wag’s policies because they may prohibit or restrict entry into some economic sectors that a resident of South Wales Valleys may have a viable idea in, specifically through strict license controls. In such a case, first-time entrepreneurs may tend towards unproductive activities that do not create employment, rather than potentially productive businesspeople (Laguna, 2013: p256). Finally, as aforementioned, only ~50% of new enterprises survive over the initial five years, although it is important to note the difference between closure and failure in evaluating the program’s success. According to Kum and Karacaoglu (2012: p401), some of the businesses that close during this period are successful and are closed because the entrepreneur had a planned strategy for exit, rather than because they failed. Thus, an entrepreneurship policy may contain an education component on how to successfully execute an exit strategy. Failure to do this could result in loss of employment and exacerbating the unemployment problem in the future. In addition, a high rate of failure in the program may discourage future potential entrepreneurs from buying into the policy program (Kum & Karacaoglu, 2012: p401). Techniques for Examining the Potential of Policies Determining the potential of success for the entrepreneurship policies aimed at reducing unemployment in South Wales Valley is important in light of the need for an assessment of trade-offs, identifying priorities, and decision making on how to allocate finite public resources, especially where there are competing uses for the resources. One technique for evaluating these trade-offs is the cost-benefit analysis, which is a systematic approach that can be used in identifying weaknesses and strengths of alternative entrepreneurial policies. This technique will be specifically useful in determining the best policy options for adoption with regards to cost savings, time, and labour benefits. Seth (2010: p376) proposes the use of cost benefit analyses for the calculation, as well as comparison, of a government policy’s costs and benefits. Broadly, a cost-benefit analysis will be used to determine whether the selected policies are sound, justified, and feasible investment decisions that will reduce unemployment. Also, the cost-benefit analysis will provide a basis to compare policies with regards to their total expected benefits against total expected costs to identify policies with more overall benefits than costs (Congregado, 2013: p44). The cost-benefit analysis will especially help in appraising each policy’s desirability relative to alternatives, which should enable the selection of a policy with the lowest cost/benefit ratio in reducing unemployment. The social return on investment technique or tool may also be used in order to quantify and understand the economic and social value that specific policies will create, especially with regards to reducing unemployment and economically-empowering the deprived region of South Wales Valleys. While it is similar to the cost-benefit analysis in some ways, this technique is participative in nature that captures the value of diverse outcomes in monetary form without considering whether these outcomes have financial values (Tsai & Kuo, 2011: p8347). It will also produce a narrative on how the Wales Assembly Government will destroy and create value in decreasing unemployment through entrepreneurship, as well as a ratio to explain the amount of social value that the policy program will create for every unit of investment. The methodology involved in conducting a social return on investment analysis will include establishing the stakeholders and scope of the policy, mapping outcomes, giving value to evidenced outcomes, establishing impact, and calculation of the social return on investment (Cumming & Fischer, 2012: p470). In the latter stage, all the costs will be subtracted from the benefits, after which the resulting value is compared to the investment. Finally, this technique will also involve a report on the findings and embedding the good outcomes from the policy process in the Wales Assembly Government’s future programs. This tool will ensure that the policy selected is informed by stakeholders, transparent, and robust. Finally, the cost-effectiveness analysis could also be used as a decision-making tool to identify the most economically efficient policy for promoting entrepreneurship in South Wales Valleys. The tool is focused on the policy program’s major results, such as the number of created jobs, and will estimate the cost of each created job using specific measures (Martin, 2013: p216). By comparing different policy program options that portend similar impacts, it will be possible to compare the costs that are generated by every created job, as well as to gather quantitative indicators to select comparative approaches or methodologies. As mentioned, the tool is important for its ability to compare policy programs and projects, presenting alternatives so as to determine the one that is most appropriate to reduce unemployment at the least possible cost. Using the cost effectiveness analysis will also contribute to more knowledge about the costs of all entrepreneurship policy programs in comparison to the costs of a specific element of the policy’s objective, in this case the reduction of unemployment (Klein et al, 2013: p83). Moreover, it will also provide information on whether it is preferable and feasible to invest funds and resources in a policy program so as to achieve the identified target to another policy program’s detriment. References Audretsch, D. B., Carree, M. A., Thurik, R., & Tinbergen Institute. (2011). Does entrepreneurship reduce unemployment? Amsterdam: Tinbergen Institute. Congregado, E. (2013). Measuring entrepreneurship: Building a statistical system. New York: Springer. Cumming, D. 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