Office of Research The Influence of Political Factors on Entrepreneurship Intentions Wee-Liang Tan, Denis H Y Leung, and Thomas M Begley This project is funded by the Wharton-SMU Research Center of Singapore Management University
The Influence of Political Factors on Entrepreneurship Intentions 1 Wee-Liang Tan * Denis H Y Leung Singapore Management University and Thomas M Begley, Northeastern University Abstract: With entrepreneurship being key to economic development, the question arises what factors explain interest to start a business. This paper reports a study exploring the relationship between political freedom and interest in starting a business on the part of individuals. Keywords: entrepreneurship interest, democratic freedoms, status of entrepreneurs JEL:M13, O12, O100 * Wee-Liang Tan, Singapore Management University, School of Business, #03-07, 469 Bukit Timah Road, Singapore 259756, Tel: 68220157, Fax: 68220333, email: wltan@smu.edu.sg 1
Introduction Economic freedom, political freedom and economic development have been found to be inter-related (Ali and Crain, 2002) and democratic freedoms have been linked to greater economic development (Barro, 1996; Farr Lord and Wolfenbarger, 1998). At the same time entrepreneurship has been associated with economic freedom and regarded as an engine of economic growth (Holcombe, 1998). Yet research has only recently begun to pay attention to the environmental factors that account for entrepreneurship, examining the effects of sociocultural factors and business environmental factors (also referred to as politico-economic factors) such as government regulations, market conditions and workforce conditions. However, few have examined the effects of political freedom factors such as press freedom and political rights on individuals interest in starting a business. This paper reports an exploratory study examining the relationship between political freedom and entrepreneurship intentions. It entails a twelve country study of political freedom and interest in entrepreneurship. Relevant Literature While policy-makers are interested in spurring entrepreneurship among their citizens, relatively little research has been done to identify factors that encourage people to think about starting a business. The role of the environment on entrepreneurship is seen in population ecology theory and (Aldrich, 1979) and in resource dependence theory (Pfeffer & Salancik, 1978). Entrepreneurship literature suggests that socio-cultural values and business environment factors as major aspects of the environment. Socio-cultural factors include status and value of entrepreneurship and innovation, and the shame associated with business failure. Business environment factors include adequate technology, skilled labor, capital, and an 2
appropriate organizational form, the existence of customers and favorable market conditions, the role of government, either as a hindrance or a help to new business formation (Begley, Tan & Schoch, 1998). Methodology Individual responses (n=1070) to a questionnaire on entrepreneurship intentions, and perceptions of the socio-cultural and business environment factors from twelve countries are employed in this study. The countries are Australia, Canada, India, Indonesia, Korea, Pakistan, the Philippines, Sri Lanka, Thailand, Mexico, New Zealand and USA. Data collection occurred from September of 1995 to December of 1996, before the Asian financial crisis in 1997. The respondents are MBA program participants (where possible part-time participants). They were chosen because we could control for education level, limit the age range of respondents, and focus the occupational status on aspiring or actual professional and managerial employees. They were also familiar with their business environments. The English survey instrument was used in Australia, Bangladesh, Canada, India, New Zealand, the Philippines, Sri Lanka, USA and also in Thailand (because the MBA program requires English proficiency for admission and is taught in English). The survey instrument was translated by collaborators and bi-lingual colleagues into Bahasa Indonesia, Korean, and Spanish. The translations were back-translated by bilinguals employed for this purpose. Only respondents who were citizens of the country were included further analysis. The average respondent was thirty years old and had worked for seven years. 67 percent were male, and 40 percent were married. 3
For the political freedom variables, we relied on the UNDP Human Development Report. The analysis employed multivariate regression techniques. Variables We used three socio-cultural scales developed by Begley and Tan (2001), one each to represent social status of entrepreneurship (four items), shame associated with failure (three items), and value placed on innovation (two items). We used business environment scales developed by Begley et al., (1998); seven scales measuring perceptions of the business environmental factors - supportive infrastructure, access to financing, government regulation, personal connections, and supply of labor, market opportunities and competitive situation. We used the political freedom indices of polity, civil liberties, political rights, press freedom, voice and accountability 2 published in the UNDP Human Development Report 2002. In the study, a composite measure was derived from the five measures using principal component analysis. The first principal component, POLFREE= -.877 polity +.984 civil liberties +.971 political rights +.975 press freedom -.868 voice and accountability, accounts for 87% of the variability and is subsequently used as a composite measure in this study. The value of POLFREE ranges from -.42 (New Zealand) to 66.25 (Sri Lanka and Bangladesh). Therefore, high political freedom corresponds to a low value of POLFREE. The model that we use is: Y β + β X +... + β + ε = X 0 1 1 n n where Y = interest to start a business, X 1,, X n are the exogenous variables (business environment, political freedom, etc.) and their interactions. The final model is chosen based on a stepwise regression. 4
Findings The final model from the stepwise regression gives (t-statistics in parentheses): INTEREST = 2.142 +.413STATUS +.017 POLFREE +.141 MKT (7.386) (9.758) (8.221) (4.240) R=.401 P< 0.001 No. of Observations= 1070 The model indicates that the average interest to start a business is higher in respondents who believe that starting a business is associated with high social status. It also suggests that the average interest is higher in respondents who believe that the market environment is favorable. On the other hand, there is a negative correlation between interest and political freedom. This final result is consistent with the distribution of interests by countries (Figure 1), which shows that the overall interests in countries with low political freedom (Bangladesh, India, the Philippines, Sri Lanka) are higher than those in countries with high political freedom (such as New Zealand, USA, Canada and Australia). Discussion The findings need to be considered as a whole. It is clear that apart from political freedom other environmental factors influence interest. By itself, political freedom explains some seven percent of the individual s interest. Status has greater explanatory value. It also points out to the fact that environmental factors do not weigh as much in the interest in entrepreneurship. Other non-environmental factors that we have not examined, such as personal situational factors, may; for example negative displacement from unemployment. Turning our attention to political freedom, it can be seen that interest in starting a business is high in countries with low political freedom. Where there is higher political freedom, there is 5
less interest in starting a business. This finding prima facie runs counter to the espoused view that greater political freedom should be associated with greater interest in entrepreneurship. However, one must remember that the level of political freedom is correlated with economic development; hence, where there is low political freedom, there is also less economic development. Individuals in such a situation would give credence to the physiological needs. The economic sphere is more important is such situations; hence the negative coefficient. Unemployment may be high and self-employment (entrepreneurship) becomes an avenue for survival and subsistence. At the same time, where there is greater political freedom, there is also greater government regulation with developed government bureaucracy. This situation favours entrenched entrepreneurs (Schumpeter, 1950:84) and discourages creative destruction and hence discourages interest in entrepreneurship. There is a need for further research into this area as the interrelationships between political freedom and the other environment factors has not been explored in this study. The presence of a certain requisite level of political freedom may facilitate the presence of the market conditions favorable to startups. What is interesting from our study is that is substantiates prior studies that indicate that developing countries with lower political freedom grow faster [in growth rate] than developed countries through entrepreneurship (Holcombe, 1998). The findings show that there is greater entrepreneurship interest in these countries. Conclusion 6
It contributes to understanding how the presences of democratic freedoms, including the opportunity to be informed of government policy changes and to comment thereon, may impact perceptions and attitudes towards entrepreneurship. 7
References Aldrich, H. 1979. Organizations and environments. Englewood Cliffs, NJ: Prentice-Hall. Ali, A.M. and W.M. Crain, 2002, Institutional distortions, economic freedom and growth, Cato Journal, 21:3, 415-426. Barro, R.J., 1996, Democracy and growth, Journal of Economic Growth, 1:March, 1-17. Begley, T.M. and W.L. Tan, 2001, The socio-cultural environment for entrepreneurship: A comparison between East Asian and Anglo countries, Journal of International Business Studies 32(3), 537-554. Begley, T.M., W.L. Tan and Schoch H., 1998, Politico-economic factors associated with interest in starting a business: A study of pacific rim countries, Frontiers of Entrepreneurship Research, Entrepreneurship Research Conference, Brussels, Belgium, May 1998. Farr, W.K., R.A. Lord and J.L. Wolfenbarger, 1998, Economic freedom, political freedom and economic well-being: A causality analysis, Cato Journal, 18:2, 247-262. Holcombe, R. G. 1998, Entrepreneurship and economic growth, The Quarterly Journal of Austrian Economics, 1:2, 45-62. Pfeffer, J. & Salancik, G.R. 1978, The external control of organizations: A resource dependence perspective. New York: Harper & Row. Schumpeter, J.A., 1950, Capitalism, Socialism and Democracy, 3d ed., New York: Harper and Row. 8
1 Funding for this research was received from the Wharton-SMU Research Centre at the Singapore Management University. 2 Information on the indices is available from the UNDP Human Development Report. 9