Environmental Factors Affecting Entrepreneurship

The environment is the conditions, circumstances, etc. affecting a person’s life.

It consists of the actors and forces that affect the success and sustaining of people and organizations.

The emergence and development of entrepreneurship is not a spontaneous one but a dependent phenomenon of various environmental factors.

These factors may have both positive and negative influences on the emergence of entrepreneurship.

Positive influences constitute facilitative and conducive conditions for the growth of entrepreneurship, whereas negative influences create inhibiting conditions to the growth and development of entrepreneurship.

Factors of Environment that Affect Entrepreneurship

Factors of Environment that Affect Entrepreneurship

Entrepreneurship does not grow without environmental support.

People in society live within the umbrella of a certain environment. Therefore, entrepreneurship emerges within the environmental context in every society of the world.

The specific elements of the environment that arc external that affects entrepreneurial growth and development are still a debated issue among experts.

Several authors have approached this topic by identifying a set of factors that constitute the environment for entrepreneurship.

William Naums (I978) pointed out financing, technology, management and productive capacity as conditions for external support for entrepreneurial venture success

Draheim (1972) identifies similar factors in the entrepreneurial environment.

Vesper and Albaum (1979) identify environmental factors responsible for entrepreneurial growth is –

  • Presence of local market contacts
  • Presence of incubator industries
  • Technical manpower resources
  • Universities with the doctoral programs, funded research in engineering and physical sciences, and affiliated research laboratories.
  • Research laboratories of major companies and government.
  • Sources of venture capital.
  • Favorable government policies (tax incentives, government, research contracts, industrial parks, and incubator facilities).

Cooper (1973) lots the following environmental factors as important in entrepreneurial decisions;

  • example of entrepreneurial action,
  • knowledge about entrepreneurship,
  • societal attitudes toward entrepreneurship,
  • salary and taxation levels,
  • availability of venture capital,
  • availability of personnel and support services,
  • accessibility of customers,
  • accessibility to universities,
  • opportunities for interim consulting, and
  • general economic conditions.

Danilov (1972) discusses research parks and regional development as major contributors to entrepreneurship development.

The factors identified as most important are;

  • availability of adequate above-average schools,
  • availability of adequate land,
  • availability of air transportation,
  • proximity to universities,
  • availability of technical manpower,
  • proximity to corporate headquarters,
  • cost of lump,
  • cost of taxes,
  • proximity to other research activities,
  • proximity to recreational opportunities,
  • proximity to new markets,
  • availability of skilled labor and
  • availability of a technical library.

The classical approaches categorize environmental elements into;

  • Business environment.
  • Political environment.
  • Economic environment.
  • Legal environment.
  • Technical environment.

Specific elements are indeed grouped into any of those broad categories; nevertheless, there are 12 common essential factors of environment which have been drawn by different experts;

12 common factors of the environment affecting entrepreneurship are;

  1. Venture capital Availability.
  2. Presence of experienced entrepreneurs.
  3. Technically skilled labor force.
  4. Accessibility of suppliers.
  5. Accessibility of customers or new markets.
  6. Favorable governmental policies.
  7. The proximity of universities and research institutions.
  8. Availability of infrastructural facilities.
  9. Accessibility of transportation.
  10. Receptive population.
  11. Availability of supporting services.
  12. Attractive living conditions.

These are explained below;

1. Venture Capital Availability

Venture funding of some form is usually essential if a new venture is to be started.

In an environment where entrepreneurial activity is well established, one source of venture capital is the already successful entrepreneurs in the area.

They will often be sympathetic to other new ventures as managerial and financial outlets.

Many people who provide venture capital developed their capital base as entrepreneurs.

According to Cooper (1970), an important source of initial capital for many firms is stock held by the founders in the firms for which, they previously worked.

In the U.S. electronics industry, stock options that were intended for the executives to firms sometimes make it financially feasible for them to leave the firm and become entrepreneurs.

In Austin, an atypical situation meant that venture capital was not a critical environmental factor.

Most companies were formed with internal sources of capital because most were not highly capital-intensive. The initial capital needed was only in the tens of thousands of dollars.

As Hoffman (1972) observes, if local banks or other local sources will not provide loan money because they lack experience in financing .technical companies, then entrepreneurs will go elsewhere.

This lack of experience arises from regional ‘economic history and strongly affects loan policies and practices.

Cooper (1970) points out that most new firms were financed locally because:

  1. The founders did not know potential investors in other areas.
  2. Investors in the local area were more likely to understand and be sympathetic to technologically-oriented businesses.
  3. Potential local investors could easily check into the background of the aspiring entrepreneur. Often, they knew the individual personally.
  4. Investors could keep in close touch with the new firm.
  5. Presentations and proposals to local investors did not need to be elaborate.

2. Presence of Experienced Entrepreneurs and Incubator Organizations

The notion that entrepreneurial activity precipitates more activity is the thesis of several authors.

Cooper (1970) argues that “technical entrepreneurship in a particular area appears to be related closely to the incubator organizations (established firms) already there.

Unless such incubator organizations exist in a region, it is unlikely that there will be any new, technologically-based firms born there”.

If the first technology companies are successful, they begin to change the environment and attract other entrepreneurs.

Naumes (1978) states that “the mere fact that there are other entrepreneurs in the vicinity who have succeeded at new venture initiation draws entrepreneurs to the area and. encourages potential entrepreneurs already in the area”.

Particularly, successful entrepreneurs can draw upon the experience and knowledge derived from previous successes and failures. If they study their predecessors, they can understand the formula for success.

Spin-off companies can draw on an existing talent pool. That talent is more likely to leave secure positions m the area if the risks associated with the new enterprise are controlled and easily assessed.

A source of debate is whether small companies or larger companies are better incubators for new start-ups.

On the one hand, it can be argued that employment in a small company exposes the potential entrepreneur to the full range of problems and decisions the entrepreneur can expect to encounter m his start-up.

On the other hand, it can be argued that the experience of working for some large companies seems to precipitate entrepreneurial yearnings in the employee.

The incubator organization is important to the potential entrepreneur, can acquire managerial insights to supplement his technical expertise, and he can gain familiarity with customers and suppliers while on someone else’s payroll.

The networks he develops are bound to the environment of the incubator organization so that when he starts up a venture it tends to be in the same area.

3. Technically Skilled Labor Force

A technically skilled labor force is another important environmental factor conducive to entrepreneurial activity.

In the Twin Cities of USA, the hearing aid industry provided a technical base; many technicians and engineers were employed in the area (Draheim 1972).

Labor skilled in a particular area of the new venture facilitates the formation of new companies.

A Stanford Research Institute (SRI) (1962) study of small businesses in the electronics industry concluded that the “availability of the type of labor required in the industry is one of the most important considerations in determining the location of electronics companies”.

Since a new firm is viewed as a high-risk place of employment, skilled labor is not willing to relocate. The new firm must locate where the labor pool already exists.

4. Accessibility of Suppliers

Although several authors (Cooper 1970, Shapero 1972, Schollhammer and Kunloff 1979) have noted the importance of supplier access to entrepreneurship, no published research has been found to support this proposition.

In some situations, good access to suppliers has likely had a positive impact on the decision to start a company.

One suspects, however, that this is the exception rather than the norm, and that accessibility’ to suppliers is seldom a deciding factor.

The consideration is likely to be highly specific to particular industries, depending upon the bulkiness of raw materials and the degree of personal service desired from suppliers.

Again, little published research is available.

In general, this factor appears to be more significant when the entrepreneurial activity has local rather than national or international scope, or when customers are geographically concentrated. It should also depend on the amount and frequency of personal interaction required by customers.

5. Accessibility of Customers or New Markets

This factor is particularly important when the entrepreneurial activity has local rather than national or international in scope or when customers are geographically concentrated.

It should also depend on the amount and frequency of personal interaction required by customers.

The new entrepreneur found it difficult to enter into a new market or inaccessible market due to its incapacity in respect of lower means and efficiency.

Socio-political as well as cultural barriers also deter entry into a new market. A market structure may be a strong barrier for entrepreneurs to have access to the market.

Therefore, environmental support for having entered into the new market or customers is primacy for the entrepreneurship in any country.

6. Favorable Government Policies

Taxation rates, licensing policies, and other government activities can have a positive or negative’ impact on entrepreneurship.

Several researchers address the governmental influence factor to observe that state and local legislation on taxation and licensing can make one location more attractive than another.

Cooper (1973) maintains that this legislation affects the ability to collect “seed” capital with which to start new ventures. Mahar and Coddington (1965) observe that taxes on business must bear some relationship to the services provided, but assert that if lax costs were the only consideration.

Certain parts of the USA, like Boston. Palo Alto and Los Angeles would never have developed as centers of entrepreneurial activity since California and Massachusetts have high taxes.

Vesper and Albaum (1979) point to the area’s unfavorable business tax structures as deterrents to new start-ups.

Galvin (1978) notes that taxation laws often defer rather than forwarding the decision to start a new business.

7. Proximity of Universities

It is a popular Relief that universities are the source of technical spin-off companies, but this is the exception, not the’ rule.

If it does occur, it is due to the positive encouragement by the administration or its passive acceptance of entrepreneurial activity on the part of the faculty, and the presence of contract research, contract research centers, or laboratories (Shapeno 1972).

Cooper maintains that universities have undoubtedly played a role in attracting able young men and women to particular regions, and sometimes in giving the firms located there competitive advantages in recruiting and retaining these people.

They also provide sources of consulting assistance and opportunities for continuing education for professional employees.

However, the degree to which universities play a central or essential role in technical entrepreneurship appears to vary widely (1973).

Mapes observes that “many professors and laboratory researchers at big universities throughout the country are going into business for themselves. Mostly they take theories that they develop while doing uni­versity research work and put them to practical use in highly specialized new products”.

There is also some evidence that the university spin-off is more likely to succeed than the average new business venture.

One advantage is their connection with university research labs and the government agencies that finance them.

Mapes quotes F. Turman of. Stanford University, the USA as saying “more universities now believe a spin-off is in their enlightened self-interest.

It builds the community as a more attractive place for faculty and students, and it keeps scientists in touch with the engineering problems that exist in the practical world”(1907).

Allison (1965) concedes that schools with strong engineering and science capabilities and policies that encourage entrepreneurship to stimulate new enterprises. The presence of academic institutions, however, may be merely a facilitating factor and not a necessary one.

For example, Dallas did not have a “natural attractiveness” in terms of climate or academic institutions but was able to develop an industrial community by creating a connection between its research centers and the rest of the community.

Hennings’ (1979) empirical investigation of organizational births found the presence of a university to be insignificant.

8. Availability of Land or Facilities

Mahar and Coddington (1965) emphasize the importance of low-cost facilities for newly-formed companies since they have little capital with which to operate.

They recommend the construction of shell-type buildings with easily movable partitions if incubator space is not available in older buildings.

They maintain that high-quality industrial space is also essential since firms usually do not want to worry about the ‘availability of water, power, sewage, roads, or zoning”.

Recent researches in various countries of the world suggest the negative impact that land availability and related factors can have.

Quirt (1978) points out that California-based high-technology companies are not building their new plants in California because of rising labor costs, environmental regulations, high’ business taxes, and generous unemployment compensation rates.

The uncertainty over energy supplies, the absence of industrial revenue bonds, and soaring housing costs also influence decisions to locate plants elsewhere.

9. Accessibility of Transportation

Accessibility to transportation and transportation costs are cited as important environmental factors by several authors. It affects the establishment and progress of the business and industry.

Mahar and Coddington (1965) emphasize the importance of airline transportation while Schary (1979) says that industry type, competition, general and specific location, firm size, product, markets, energy, and regulation affect the importance of transportation to businesses in the certain areas of the world.

It exhibits that transportation along with other variables is a significant contributive factor that influences business decisions.

But it is highly affected by the nature of industry or business.

Cooper (1973) observes that transportation costs may not be very important with many high-technology products but the ability to work closely with customers is sometimes essential.

10. Receptive Population

Cooper (1970) notes that public reception of new issues of stock can “substantially affect the availability of venture capital, an important factor for success. Societal attitudes toward business and entrepreneurship.

Undoubtedly influence individual decisions. Manhar and Coddington (1965) conclude that it is difficult for a firm lo to operate successfully in an unsupportive environment.

They define an encouraging environment as “an attitude which recognizes that small firms are making important contributions to the economic development of the area (1965).

A supportive population would promote the law, labor and materials supply, financing, distribution and selling of goods or services and promotion of the firm and the product.

11. Availability of Supporting Service

Support services are auxiliary activities that are vital for the operation and survival of new ventures.

Thus, this factor usually affects a firm after the initial formation stage. These services are provided by accountants, tax experts, lawyers, and consultants specializing in new ventures and small businesses.

Naumes (1978) mentions that these advisors understand the typical problems present in starting a new enterprise.

He further opines that they help entrepreneurs overcome many of the initial stumbling blocks to successful new venture initiation.

The existence of supporting services further assures that new ventures will be more successful in the future.

12. Attractive Living Conditions

The cultural, climatologically and recreational amenities are the greatest important factors for the growth and development of entrepreneurial ventures.

A community must become an exciting and attractive place if it is to attract and retain the technical professional workforce that is the chief productive factor in high technology industries.

The highly-trained body of workers is relatively young, highly mobile, in great demand and has a choice of places to work and live, it will not stay in a community that does not have within it a selection of amenities that are available elsewhere (Shapero, 1972).

Mahar and Coddington (1965) mention that primary and secondary schools are very important because qualified people want good educational facilities for their children.

Environmental Impact: Measurement Model

The impact of the environment on the entrepreneurship development and growth is to be empirically measured to understand the essentiality of the environmental support for the emergence of entrepreneurship in any society.

Bruno and Tyebjee (1982) suggested a model explain the measurable impact of the environment on the entrepreneurial activity.

They opined that entrepreneurial activity can be measured in terms of three types of outcome: start-up outcome, performance outcome, and residual outcome.

The impact of the environment on entrepreneurship activities and its outcomes are presented in the model.

Start-up outcomes include the number of start-ups, equity and legal structure of start-ups/new ventures, and scale of start-ups. They record the impact of the environment on emerging entrepreneurs.

Available resources and the cost of doing business influence the prospective entrepreneurs to take the venture imitative. The scale, the number and the size of the ventures are also dependent on environmental variables.

Performance outcomes record how entrepreneurs fare in various environments.

Profitability measures such as ROI, ROA, return on sales, growth and market share, ability lo am act new customers, the establishment of a market position arc the indicators of the performance outcomes.

Failure of the firm, of course, is a negative performance outcome.

Residual outcomes occur in the latter stages of the firm’s life cycle. Changes in the capital structure, particularly the exit of venture funds from the equity base, are residual outcomes.

The issue of shares “going public” on the market is another. Merger and acquisition activity is third.

Finally, new start-ups by the firm’s principal and the development of new products, markets, or technologies are evidence of residual entrepreneurial activity.

Environmental influences have been classified into two groups and linked to the three outcome levels. The first group includes the resources necessary to start a firm.

The second group includes factors that influence the cost of doing business.

Resource availability will affect start-up outcomes and residual outcomes.

The projected cost of doing business will influence start-up outcomes, particularly the decision to start a venture, and the realized cost of doing business will influence performance outcomes.