data comparing the the business environment and entrepreneurship in U.K vs Mexico. Use data from the Doingbusiness website, entrepreneurshipsurveys, GEM consortium as well as other sources you might find useful.
Please also use some of the following
How does the Business environment affect new business formation?
Using a comparison of one of the leading economies of the developed world i.e. the U.K and Mexico which is a MINT member (Mexico, Indonesia, Nigeria and Turkey), this research will look at the business environment and its effect on entrepreneurship in these two extremities. The reason behind the selection of Mexico is that it is projected to have a higher GDP per capita than most European economies. The research will touch on the external aspects such as market entry regulations, industry concentration, type of competition most common in the economy i.e. oligopoly, monopoly, perfect competition etc. It will also look at the DB (Doing Business) inputs of business which are the costs, bureaucracy, expenditure on R&D as a percentage of GDP. This paper will aim at showing that high costs and heightened levels of bureaucracy as well as costly regulations deter or slow the creation of new firms, especially in economies that not only have economic policies and frame works that don’t support small business but also economies that have a high number of industries that high entry barriers. Although it’s well known that economically barriers to entry are an important tool in ensuring industry stability, if the business environment does not regulate this then it’s a problem.
Entrepreneurship; Business incorporation; Regulatory barriers; Economic growth
In today’s ever changing economy, people are now more accepting of entrepreneurship as a career. Although many entrepreneurs state different motivations for starting a new business such as passion, career freedom, a cause or profit they all face the same financial, regulatory and industry obstacles. These obstacles are part of the business environment and a modern business will need to go through these things because it doesn’t function in isolation. A business is a an economic and social part of the society therefore as it endeavours to achieve its economic goal it must do so while satisfying the interests of society, industry and the government it’s under. The government of the country formulates business policies, puts in place regulations and legislations which all influence the entrepreneurial activities in an economy.The business environment is made up of economic, legal, political, social and technological situations in which a business operates in. Other definitions of the business environment state that it’s the sum of all conditions and influences that affect the business. Apart from the hypothesis of protecting certain industries, government regulators aim to deter frauds and corruption in business as well as help during tax collection by improving the collection process or assist in the business census collection accuracy. However if these safe guards are not put in place with the growth of the economy in mind then they are ineffective.
New business or firm growth has been studied by researchers such as (Burns, 2011), (Deakins and Freel, 2012) and (Acs and Audretsch, 2010). These studies have come up with different terms that look at and define the stages of an upstart business and its growth, although some of the stages that businesses go through are or might be different from other businesses in any market or region, one thing remains common and that is the implementation of the business idea and the execution phase. Academics and researchers agree that each business needs to go through the early business stage and then mature all the while facing various challenges and crises, however not all of them will finally mature and/or decline (Ács and Audretsch, 1990)There are numerous factors which will contribute to the success of a new business as well as many aspects or phases before each stage also that will ensure that the business moves from one growth stage to another. For the purpose of this research, I will instead only look at the business environment aspects that determine the formation of new business as well as the regulatory and financial aspects which are the costs of starting the business, the number of procedures or bureaucracy involved, time taken to complete these procedures, expenditure on R&D as a percentage of GDP, as well as other entrepreneurial activities such as established business ownership rate, new Product early stage entrepreneurial activity and the perceived Opportunities.These are important aspects as they also act as barriers to entry for entrepreneurs.
Many researchers and academics agree that entrepreneurship is vital in ensuring or driving economic growth through the creation of jobs, increase in cash flow and etc.(Soto, 2002);(Djankov et al., 2002);(The World Bank Research Program 2004, 2005); (Aghion et al., 2009);(Klapper et al., 2006). However many countries still have regulations that make starting a new business difficult. It was argued that policy makers had to intervene in the issue of entrepreneurship and business environment by either assisting small business through tax payer money or by reducing regulations by allowing the entrepreneurial activity to take place as quickly as possible with minimal costs or to minimise the number of procedures that a business needs to go through as well as reduce the regulations that it needs to adhere to while it’s in operation, the U.K and the U.S are examples of economies with low bureaucracy practices.
Businesses with a lot of investment capital and market power have the advantage over smaller firms due to industry entry requirements and government regulations on entry.
The e Global Entrepreneurship Monitor (GEM) has come up with factors that drive entrepreneurship in different countries GEM groups these into geographic regions which are sub-Saharan Africa, the Middle East and North Africa, Latin America and the Caribbean, Asia Paciﬁc/ South Asia, Europe (distinguishing economies that are part of the European Union from those outside the EU), and North America. GEM groups these geographic regions into three levels of classification which are factor driven, efficiency driven and innovation driven. European countries such as Germany, Norway, Switzerland Spain, Sweden, Portugal, Italy, France and the United Kingdom as well as the United States, Canada and Puerto Rico as well as Latin America& Caribbean countries like Trinidad & Tobago, Israel in the middle east & North Africa and Asia Paciﬁc & South Asian countries like Japan, Republic of Korea, Singapore and Taiwan are grouped into innovation driven regions. Efficiency driven regions are made up off Latin America & Caribbean countries; like Argentina, Brazil, Barbados, Chile, Colombia, Ecuador, Guatemala, Jamaica, Mexico, Panama, Peru, Suriname, and Uruguay. Sub-Saharan countries like; Namibia and South Africa. Asia Paciﬁc &South Asia countries like; China, Indonesia and Malaysia. European countries such as Croatia, Estonia, Hungary, Latvia, Lithuania, Poland, Romania, Slovak, Republic, Thailand, Bosnia and Herzegovina, Macedonia, Russian Federation, Turkey. Middle East & North Africa, Asia Paciﬁc & South Asia and Sub-Sahara Africa countries like Algeria, Iran, Libya & Angola, Botswana, Ghana, Malawi, Nigeria, Uganda, Zambia, India, Philippines, Vietnam make up the Factor- Driven Economies.
This research will be covered within five important chapters. The next chapter which is Chapter 2 will be the Literature Review in which literature on the business environment and entrepreneurship. In regards to business environment, part of the review will be made up of literature that discusses the costs, bureaucracy, time, new business ownership rate and industry concentration.
First of all it’s important to clarify the relationship between the business environment, entrepreneurship and the immediate effect it has on the economy through employment. Doing this is important to support the need for policies that can be put in place both on the industry level and the entrepreneurial level. A business environment that does not support new business makes it difficult for firms to introduce new business ideas to the market as well as it humpers innovation and growth and firm profit (Pagés and Inter-American Development Bank, 2010).
In the book Theory of Economic Development Schumpeter states that the entrepreneur is an agent of innovation, this idea is the source of the creative destruction theory. An entrepreneur introduces a new product or service or even a new manufacturing process, he can also open or create a new market, discovers a new source of supply creates a change in the organisation of an industry. In doing these things the entrepreneur can enter an industry through creative destruction or disrupt the industry through innovation therefore bringing an end to the traditional way of doing things and sets a new bench mark or standards which if successful will be imitated by other existing firms and entrepreneurs. Such success “presupposes a great surplus force over the everyday demand and is something peculiar and by its nature rare” (Schumpeter, 2011).
Since this research looks at a comparison between two extreme types of business environment with different motivations for taking part in entrepreneurial activities, it is important to first come up with a definition that will fit across the board. The definition which best suits this research and analysis is one which states that entrepreneurship as the activity of an individual or group which is aimed at initiating economic enterprise in the formal sector under a legal form of business, therefore the work done by (Djankov et al., 2002) will be used to a certain extent as it covers a few aspects however it does not look at entrepreneurship under the legal form and it includes the informal and illegal features of different economies such as bribes. The informal and illegal features are important to look at however it’s difficult to compile data on the informal business sector across the regions as it is not documented in legal government and global business data bases.
With this definition of entrepreneurship, a uniform measurement can be used to compare to business environment extremities. This measurement will take into account the data availability, consistency across countries, relevance and it should focus on the formal sector therefore data will be only gathered for private limited companies as these firms are separate legal entities and the value of investment from shareholders limits their financial liability.
Following a definition of entrepreneurship, a standard unit of measurement was created. The proposed unit of measurement takes into account the availability of the data, its consistency across countries, its relevance to entrepreneurship and focus on the formal sector. As such, data is gathered only for private companies with limited liability. These firms are separate legal entities, and the financial liability of shareholders is limited to the value of their investment in the company. Notably, this is the most prevalent business form in most economies around the world ( Doing Business, 2010).
Theories by (Aghion and Bolton, 1997), (Parker, 2009) and empirical studies by (Bates, 2011) and (Parker and van Praag, 2006)sugest that people with higher personal net worth and higher human-capital capabilities than the non-entrants are more likely to start businesses. The reason behind this rational is that high net worth individulas are capable of investing more in a new business venture as well as being in the position to put up their assets as collateral in order to gain financial assistance from institutions. (Berger and Udell, 1990) and (Coco, 1999). (Shane, 2000) further adds education as a factor by stating that it facilitates entrepreneurial entry by providing the skills that are needed for efficient business operations.(Casson, 1995) also states that because education improves an individual’sanalytical abilities and provides the individual with skills that are essential in engaging in entrepreneurial activities, it increases the possibilities of pursuing entrepreneurship.
However evidence provided by (Hurst and Lusardi, 2004) as well as other academics shows that neither wealth nor education background/level had any effect on the creation of an SME. The evidence shows that wealthy individuals preference of entrepreneurship is higher than that of the less wealthy individuals. (Gimeno et al., 1997) states that the only relation between education and entrepreneurship is that the more educated the individual is the greater their options are in finding well-paying employment, this increases the opportunity costs of entrepreneurship.
Bartelson et al., 2004 states that in a perfectly competitive market, established firms that are in profitable industries generate high profits. This is very attractive to small businesses/entrepreneurs looking to have a share of this profit assuming there are no barriers to entry. This will eventually decrease the profits on an industrial scale and make it impossible for the incumbent firms to maintain their profits above the new normal levels. It is for this reason that barrier entry has served as an economic tool used to increase industry competition at the expense of small businesses. This shows that creative destruction is important for supporting productivity growth and market competitiveness.
(Ayyagari et al., 2007)also defined that a greater share of SMEs in the economy could be either the result of a regulation framework that facilitates the constant entry, growth and exit of SMEs or the result of a stifling business regulation which imposes a burden to the private sector by, sometimes unnecessary, heavy and costly regulation of contracts, registries and hiring processes among others
2.3 Entrepreneurship and its Relation to business environment
It was suggested in 1998 that analysing the regulatory, legal and policy environment is important due to the fact that small firms and start-ups do not have the managerial or monetary capabilities to deal with certain complex procedures or deal with the fiscal and monetary policies put in place by the government.(Activities of the ILO 1996-97, 1998). Beck et al (2005) stated that the business environment view is not solely on the SMEs but on the whole business environment affecting all forms of business large medium and small, however what they do not mention is that the environment affects these types of businesses differently and to some extent the business environment is tailored or modified to benefit larger businesses at the detriment of the small businesses. Countries with high frim entry rates benefit entrepreneurs with fewer procedures, simplified legal forms, reduced red tape, stable political climate and good governance which can in turn improve innovation and competition. Klapper et al. (2009).
2.4 The business environment and entrepreneurship in Mexico
In recent years Mexico has increased its focus on improving entrepreneurship, earlier last year (2013) the National Entrepreneur Institute was created by the Mexican government with the aim of developing the entrepreneurial environment. Seeing that Mexico is an emerging country and one of the fastest growing, this would be a good case to base the relationship between a good business environment, entrepreneurship and the benefit which is development. In taking this action the Mexican Government showed its intentions of making Mexico more competitive in terms of trade.
The effect of business entry policies on new firm formation
3.1. Sample and Method
Descriptive qualitative data will be used to show the correlation between the business environment, entrepreneurship and innovation and how the business environment fosters not only a higher or lower rate of business growth but also how it interacts with innovation. The data will be made up of entrepreneurial activity of domestically owned businesses such as;
• Established business ownership rate. This will measure the population who are currently owner managers of an established business, i.e., owning and managing a running business that has paid salaries, wages, or any other payments to the owners.
• New Product early stage entrepreneurial activity. This will measure Percentage of entrepreneurs who indicate that their product or service is new to at least some customers.
• Perceived Opportunities. Percentage entrepreneurs who see good opportunities to start a firm in their country.
Other types of data that will be compiled from the Doing Business database will be focused on the costs and procedures of starting a business as well as the time it takes to go through these procedures, the following is a detailed criteria that the business needs to meet;
• Should be a limited company or equivalent, if an economy has different types of limited companies the limited liability type that is the most prevalent form the domestic companies will be used to compile data. Doing Business database uses the information from the statistical office.
• Carries out its various operations and conducts its business in the economy’s largest business city.
• Should be completely domestically owned therefore no FDI or international mergers.
• Has start-up capital of 10 times income per capita, paid in cash.
• To help compile accurate cost data, the business should not have or be eligible for subsidies or has special tax provisions, the business should also not engage in foreign trade activities and it must perform general industrial or commercial activities, such as the production or sale to the public of products or services.
• Should have at least 10 to 50 employees a month after it has officially begun its business operations.
• Has a turnover of at least 100 times income per capita.
For the purpose of this data compilation and analysis, the procedures will be defined as the steps that the company founders must meet to setup their business and this will involve liaising with patent lawyers and government regulatory agencies. Due to the fact that these businesses are start-ups, the owners should carry out these procedures by themselves unless the founders have different backgrounds and responsibilities such as accounting or law. This is done to create a level comparison as most businesses will not have the capability of having a third part to carry out these procedures for them.
The time will be recorded in calendar days and it will consist of the median time spent in practice to complete each procedure with little to no follow up with regulatory agencies and no extra payments. According to the Doing Business database and entrepreneurship surveys, it takes 1 day to complete a procedure with procedures that can be completed online being the exception, for these the time that will be recorded will be half a day. Procedures cannot be started and completed on the same day however they can be done simultaneously with online procedures being the exception. Completed procedures are procedures that result in the firm receiving the final incorporation document such as tax number or registration certificate.
For procedures that can be started and completed quicker for an additional cost, the fastest procedure will be chosen under the condition that it’s of more benefit to the ranking of that particular economy. The data is compiled under the assumption that time is not wasted in undertaking or completing a procedure, time spent researching the procedure will not be accounted for. The data also assumes that all the criteria that is needed as well as the sequence in which this criteria should be met is known to the entrepreneur from the beginning without the need of any official or third party.
The cost is the percentage of the economy’s income per capita and it includes all legal and official fees and professional services as well as purchasing and ligalising company books that are required by law, therefore it doesn’t use costs of bribes and under the table or undocumented payments. Value added tax will not be included in the incorporation tax for the data collection however the registration for it will be included as a separate procedure. To calculate costs specific regulations, fee schedules, company law and commercial codes are used however a government officer’s estimates can be used in place of fee schedules the same way that estimates of incorporation lawyers can be used in place of government officer’s estimates and if several estimates are provided then the average value will be used.
Paid-in minimum capital
This is the amount that is deposited in a bank before the firm registration and 3 months after the firm becomes incorporated and it’s recorded as a percentage of the economy’s income per capita. This amount is specified in the commercial code or company law and is a legal requirement in economies however most SMEs are allowed to pay in instalments before registration and after the first year of operation.
4 Data analysis
Economies are ranked on their ease of doing business, from 1 – 189. A high ranking on the ease of doing business index means the regulatory environment is more conducive to the starting and operation of a local firm. This index averages the country’s percentile rankings on 10 topics, made up of a variety of indicators, giving equal weight to each topic. The rankings for all economies are benchmarked to June 2013
However the data set below only shows four economies that are developed and four of the MINT economies and compares the U.K and Mexico with the rest of the countries serving as a wider comparison of the two types of economies.
Below is a table representation of these economies and it shows their ranking.
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