Economic Barriers to Entreprenuership

Submitted To:- Submitted By:-

Prof. A.K Sahni Kamal Gupta

Roll No-06217003909

(MBA-3RD SEMESTER)

Barriers to EntrepreneurshipKAMAL GUPTA.06217003909MBA-3RD SEMESTER

A significant obstacle to understanding and fostering entrepreneurship results from the basic difficulty in reaching consensus on the answer to “what is an entrepreneurship?”

Entrepreneurship is the act of being an entrepreneur, which is a French word meaning "one who undertakes innovations, finance and business acumen in an effort to transform innovations into economic goods". This may result in new organizations or may be part of revitalizing mature organizations in response to a perceived opportunity. The most obvious form of entrepreneurship is that of starting new businesses (referred as Startup Company); however, in recent years, the term has been extended to include social and political forms of entrepreneurial activity. When entrepreneurship is describing activities within a firm or large organization it is referred to as intra-preneurship and may include corporate venturing, when large entities spin-off organizations.

Entrepreneurship ranges in scale from solo projects (even involving the entrepreneur only part-time) to major undertakings creating many job opportunities. Many "high value" entrepreneurial ventures seek venture capital or angel funding (seed money) in order to raise capital to build the business. Angel investors generally seek annualized returns of 20-30% and more, as well as extensive involvement in the business.[3] Many kinds of organizations now exist to support would-be entrepreneurs, including specialized government agencies, business incubators, science parks, and some NGOs. In more recent times, the term entrepreneurship has been extended to include elements not related necessarily to business formation activity such as conceptualizations of entrepreneurship as a specific mindset (see also entrepreneurial mindset) resulting in entrepreneurial initiatives e.g. in the form of social entrepreneurship, political entrepreneurship, or knowledge entrepreneurship have emerged.

Entry regulations hamper the creation of new firms, especially in industries that naturally should have high entry. Value added per employee in such industries grows more slowly, and older firms are slower to expand and thus remain smaller. Such are the adverse effects of the lack of competition from new entrants. Regulations beneficial to entrepreneurship are those that improve access to finance and protect property rights.

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Following are some of the economic barriers to Entrepreneurship

1. Credit Access and Liquidity Constraints

Despite the multiplicity of findings and opinions regarding the roots and nurturing of entrepreneurship, empirical research consistently suggests that liquidity constraints — arbitrary limits on the amount an entrepreneur can borrow — inhibit the rate and growth of business formation. By raising the costs or limiting the availability of credit, such constraints prevent entrepreneurs from optimizing their performance over time.

The Community Reinvestment Act (CRA) of 1977 requires that banks channel a portion of their funds to the communities in which they are located. This might lead one to assume that CRA would limit credit constraints, and that the share of bank lending to the low-income (LI) and low- to-moderate income (LMI) communities in a service area would mirror the LI/LMI share of population in the area.

2. Excessive Licensing and Regulatory Requirements

The regulatory and licensing barriers are the continuation of the Soviet “system of permissions” whereby one must obtain approval from the authorities to embark on eventhe smallest tasks. Although Central Asian governments are vocal in their support andpraise for the open and free market system, the businesspeople appear to have to seekpermission from the government at every step of operations. The “permissive” entrepreneurial climate, characterized by abundant overregulation, continues to inflictlosses on entrepreneurial activity across all sectors of the economy.

When entrepreneurs attempt to seek legal redress to register, they soon discover a different level of hurdles: those who pay bribes can keep prices artificially low and forcecompetitors out of business. Such arrangements have extremely negative effects on the overall competitive nature of the economic system and the free interplay of market forces. Many see joining the informal sector as the only way to remain in business.

3. Excessive, Complex, and Arbitrary Taxation

The taxation system throughout Central Asia is complex, subject to abuse by government officials (and businesses), and appears to change frequently. The net effect of an excessive, abusive, and arbitrary system of taxation is that SMEs find it virtually

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impossible to conform to all the laws and tax regulations, making the informal sector the only chance for survive in the market.

Example:-In Kazakhstan, a 1995 Tax Code was in effect until 2002 and was considered to be among the most comprehensive pieces of tax legislation in the former Soviet Union. Today, however, this tax code is often blamed as a major cause of capital flight. A new Tax Code was adopted in 2002, but it, too, causes SMEs difficulty in staying in business.

4. Inadequate Banking System and Poor Banking Practices

Inadequate banking systems in Central Asia impose impossible demands on entrepreneurs. The roundtable discussions in all three countries highlighted the fact that the timeframes and terms of credit for repayments are unreasonable, collateral is difficult to provide, and finding a guarantor to help secure a loan is very difficult.

Additionally, banks have little incentive to extend credit since over half of their profit is from teller and cash operation services. One of the underlying reasons for the poor banking practices is the high risk of delinquency or bad loans.

5. Lack of Government’s Commitment to Reduce Administrative Barriers

The business community perceives that the governments are doing little to reduce administrative barriers impeding investment and regional trade. Entrepreneurs across Central Asia blame their governments for having little qualification and a poor understanding of the importance of addressing these problems. In fact, they contend that the government has a poor understanding of how a free market works and how it benefits the whole society. As a result, the informal sector continues to grow and the income the governments would have otherwise collected is lost, in turn losing the money with which to pay their employees. In short, the institutionalization of the systemof bribery allows some government workers to profit greatly from the situation and resist any changes in the status quo. The “government profiteers” have an entrenched interest in preserving the current policies and legislative acts that give rise to the administrative barriers.

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Findings: Barriers to entry slow down business growth

Growth in value added is relatively lower in naturally high-entry industries in a country with substantial bureaucratic barriers to entry. There may be two explanations for this finding: slower growth could be attributed to incumbents having more monopoly power and restricting quantities, or incumbents may be less efficient as they are less subject to the discipline of competition. We find evidence for the latter explanation: older firms in naturally high-entry industries grow relatively more slowly in countries with high bureaucratic barriers, while the relative growth of young firms is indistinguishable. Since age should not affect the incentive to restrict quantities, older firms working in a more competitive environment in countries with low entry barriers become relatively more efficient and continue to grow.

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