What Matters for the Entrepreneurial Activities in the US - Research Paper Example

Abstract The United States of America offers a wide range of opportunities that connect with entrepreneurial activity and new business set ups. However, there are also constraints associated with it. Through a study of all the social, economic, cultural and demographic factors in the US, the scope of entrepreneurial activity is analyzed within the country. The country exhibits high levels of entrepreneurial activities, mainly based on opportunities and also individual propensity to undertake risk. Opportunities are forwarded by the culture of the nation and also the technological and social aspects. On the other hand, constraints to entrepreneurial activities stem from the geography, legal tax structures and local competition. Constrains and Opportunities Related to Entrepreneurial Activity in USA Introduction Entrepreneurial activity is one that seeks to offer a positive outcome to any business endeavor and hence contributes to its success. Entrepreneurial activity and new firm construction are taken to be as drivers of economic growth and innovation (Schumpeter, 1934; Baumol, 1990). However, there are several constraints as well as opportunities that entrepreneurial activities come across with respect to the geographical and cultural background of the region where an entrepreneur intends to set up. With reference to this, the constraints and opportunities faced by entrepreneurial activities in the United States of America are identified. The present situation of economic crisis brought in by the global economic recession has shrunk the growth rate. The main question that dominates with respect to this current condition is whether USA, or for that sake all the countries together would be able to restore the high growth rate that prevailed before the recession. The solution to this problem is chiefly determined by the extent of entrepreneurial activities. Through the generation of employment opportunities, increasing productivity and boosting innovations, entrepreneurs drive growth in the economy. An entrepreneurship is characterized by its search for and recognition of opportunities. In other words, it means that entrepreneurs are renowned by their propensity to identify opportunities. On the other hand, innovation and firm formation is associated with the outcomes of entrepreneurship (Gartner, 2001). Entrepreneurship is a complicated and multifaceted phenomenon where entrepreneurial activities intend to work lucratively. The Kauffman Index of Entrepreneurial Activity, established in the year 2005, takes into account the dynamic nature of business creation in the United States. Reflecting the percentage of the populace of adult non-business owners who sets up a business every month, the Kauffman Index validates the relative steadiness of the nationwide interest in business creation and implies that American optimism constantly fuels new start-up businesses. Problems United States is a geographically big country and is home to almost all the ethnic groups in the world. It is a technologically advanced country and is one of the leading developed nations in the world. It has a huge domestic market and an extended global network that are fostered through trade and international relations. While starting an entrepreneurial activity in any region, the social, cultural, economic, political and geographical environment should be borne in mind. Only a keen study of these factors would lead to the success of such activities and result in the successful establishment of the business. The enormous potential of the U.S. market is accessible to only those entrepreneurs who are ready to figure out its multiplicity and complexity and come up with intelligent choices in cultivating their business plans. A new competitor in the market would be snowed under with the presence of such plentiful of choices that the US offers to its business opportunists. The issues that are faced by a new entrant mainly related to the place for setting up the new firm, the accessibility to the market, availability of resources, amount of investment and the type of customers or people in that society. Hence, in extending entrepreneurial activities, the entrepreneur has to take into account the legal dimensions, tax structures, market norms (for instance, wage rates and salary standards), location and the psyche of the workers. Further, environmental conditions, socio-economic factors and technical factors pose different constraints and opportunities to entrepreneurial activities in any region. Analysis In identifying the constraints and opportunities of entrepreneurial activities in USA, a detailed analysis of the geographical and cultural background is carried out. Given below is a detailed analysis of all the factors that may affect to entrepreneurial activities in the US. Business Environment: The US economy has been a good performer at the global level and has recently deteriorated, along with other nations due top the financial crunch that hit the global market. However, the economy is recovering and trying to walk again on the steps of success. Its productivity growth has been considerably high and it alone accounted for almost 33 percent of the total economic growth across the world. However, its economy was largely founded on consumption and borrowing. As a result its economy became unsustainable and ultimately collapsed with the Lehman Brothers episode. This was followed by a very difficult phase of readjustment which is still continuing. Nevertheless, entrepreneurial activity has increased, even though slightly, in the US. The total entrepreneurial Activity (TEA) had increased from 9.6 percent in 2007 to 10.8 percent in 2008 (Cornwall, 2009). The business environment in the United States was ranked fifth compared the other nations in the world for the previous five year period of 2001-05. However, it slipped down to the eighth position in the forecast period of 2006-10 (The Economist Intelligence Unit, 2006). Although it is expected that the US investment climate would go on to gain from major strong points like a deregulated labour market, decent market opportunities and well-developed infrastructure yet a number of weaknesses are responsible for its lower ranking. These consist of serious matters related to macroeconomic stability that has stalked mainly from the rapidly increasing current account deficit, security risks, overwrought international commerce and political relations, and the persistent problems of political lobbying. In the United States, education and skills are valued quite highly and have recently increased dramatically. This is reflected in the way less skilled workers receive lesser pay or restraint on pays and simultaneously face more competition for work. It has been further aggravated by the immigration of low skilled workers. This result in high levels of job churns, that is, higher creation of job as well as a higher loss of jobs (Porter, 2009). Climate and Geographical Factors: The climate of the United States and its geography influence the amount of entrepreneurial activity. The climate of any region obviously affects business decisions. While the colder mountain regions can be good for lumber-jacking activities, the Texas and the desert regions would offer opportunities in oil and oil-related activities. Again, the coastal regions of the Country can be used lucratively by fishing industries. Thus, a favorable climate is always important for staring any new business. Depending on the climate and geography of the nation, the industries often tend to develop into geographically concentrated groups. This mainly arises from the economic efficiencies associated with the regions. In the US, the high-technology industry is recognized for Silicon Valley, the area between San Francisco and San Jose, and the region along U.S. Route 128 around Boston. Los Angeles acts as a center for most of the entertainment industry businesses, like motion pictures, T. V., computer graphics, and music recording companies. The region around Tijuana, a Mexican town near to the California border, has surfaced as an important production hub for consumer electronics. A large section of the more established industries of the world, like textiles, leather supplies, furnishings and ceramic tiles are set up in small Italian cities of Carpi, Como and Prato, Ancona, and Sassuolo (Sorenson and Audia, 200, p. 424-426). The industries of automobile manufacturing, steel fabrication, machine tooling, and garment production reveal a huge regional concentration. Different regions offer different entrepreneurial opportunities and hence, the existing geographic allocation of production identifies significant constraints on entrepreneurial activity. Economic Scenario: the recent economic meltdown is a well-known phenomenon that has affected the economies worldwide. United States is no exception, and is by large the focus of the financial crisis. This has obviously led to the fall of economic activity and macroeconomic parameters like employment and output. The economy has decelerated as a whole. The economic scenario of the US consists of both strengths and weaknesses. The main factors that emerge as core strengths for the economy are entrepreneurship, innovation, institutions for higher education or learning, profound and efficient capital markets, free as well as open competition and economic decentralization. Probing further with these strengths would make way for greater entrepreneurial activities and thud higher economic growth in the country. On the other side, the economy is also subject to several weaknesses that might slow down the pace of entrepreneurial activities and adversely affect the economy. The negativities mainly arise from the distortion in the international trading system which includes inefficient policies in protecting intellectual property, constrained admittance to markets for services in other nations along with subsidies and non-tariff barriers. Again, the company has to bear several unnecessary costs in doing any business. Such costs are associated with the regulation, legal action and complicated tax systems along with infrastructure blockages, energy and environmental inefficiencies. The other challenges come up with the access to higher education and ineffective retraining system which ultimately results in a dearth of human resources (Porter, 2009). The rates of entrepreneurial activity vary across different industries. The 2005 Kaufman index by industry showed that the real estate industry had the maximum entrepreneurial activity registering a rate of 1.14 percent. It was followed by the service industry at 0.38 percent and then trade with a rate of 0.28 percent. The manufacturing sector depicts the lowest rates reflecting that very few individuals set up business in this industry. However, the rate of entrepreneurial activity, although high for the construction and service industry, has decreased from 2004 to 2005 (Fairlie, 2005, p. 11). The construction and the real estate sector have experienced a major blow in the recent economic recession resulting in acute credit crisis. Legal Factors: An entrepreneur has to deal with a lot of bureaucracy. The laws that run the United States are legislated and enforced by the Federal (that is, the central) government, the state governments, county governments, city, town and village governments and other community entities. The process is quite complicated because every state has numerous, cities, town, counties and villages. For instance, in a country with 50 states, the State of Texas has something around 255 counties and about 1,200 cities and towns the governments of which can write and pass laws, impose taxes and ask for business compliance reporting. In point of fact, Texas is one of the worst examples of such complicated structures in the US. The hierarchy of U.S. laws is such that if a business activity is not governed by the Federal Law, it implies that it is either governed by the state, county, city, town or village laws. In general, federal law is applicable uniformly all through the country. However state and municipal laws that can affect a business or entrepreneurial activity in that specific area may not be the same for any two or more communities (The U.S. Business Environment, 2004). Salary and Labor Rates: Salary and labor rates are also quite variable and differ considerably through out the nation. Rates are in general higher in the Northeast, the upper Midwest, the West Coast and lower in the South. However, this does not convey a rule of thumb since there are differences across sectors. The labor rates are equally affected by state rules, competitive environment, social costs and cost of living as well as local cultural manners (The U.S. Business Environment, 2004). The entrepreneurial activities are obviously affected by the wage rates. Generally, an entrepreneur would want to go for lower wages to reduce its cost and hence favor low wage regions for its activities. However, labor rates are not the only determinant of entrepreneurial activities, location, economic viability and environmental factors are also among the key determinants. Demography and Age: According to the Global Entrepreneurship Monitor individuals between the age of twenty five and thirty four have the maximum involvement in entrepreneurial activity. These adults have a total entrepreneurial activity (TEA) rate of 17.3 percent (Minniti and Bygrave, 2003, p. 16). The findings of the GEM portray a strong age and entrepreneurial activity in all the studied nations. It also shows that the level of entrepreneurial activity rises with age, reaches a maximum and then again declines with the increase in age. The TEA rate of individuals between the age eighteen and twenty four exhibit the same type of activity as of individuals between the age forty five and fifty four. There are approximately 10 percent entrepreneurs in both of these age groups. The tendency to start a new business rapidly decreases when individuals approach retirement age. Age is a crucial factor in entrepreneurial activity and plays a significant role due to its policy implications. As a matter of fact, the result of GEM reflects that the distribution of population across different age groups is crucial since entrepreneurial decisions are not unaffected with respect to age. Hence, demographic changes bear the potential to be an essential driver of changes in the level of aggregate entrepreneurial activity. Again, the report by Minniti and Bygrave suggest that gender and entrepreneurial activity is strongly related. The males have a greater involvement in starting up a new business project than females. More specifically, males have a Tea rate of 15.7 percent while females show an 8.2 percent TEA rate. That is to say that for each woman engaged in entrepreneurial activity, almost 2 men (1.9 specifically) (Minniti and Bygrave, 2003, p. 16) were involved in the same. Also males are twice as likely to begin a business of their own than females. The cross-country evaluation of GEM also confirms that the gender gap in the United States is marginally higher than the other nations. The GEM findings on the ethnic background show that African American have the highest TEA, followed by Hispanic American and then by white Americans. Both the African Americans and Hispanic Americans go for opportunity-driven entrepreneurship compared to Asian Americans and white Americans (Fairlie, 2005, p. 6; Minniti and Bygrave, 2003, p. 20). Immigration is quite positively related to entrepreneurial activity in the United States. The Kauffman Index of Entrepreneurial Activity showed that the immigrants have a considerably higher level of entrepreneurial activity compared to the native-born individuals. Again, the rate of entrepreneurial activity differed for different regions as reflected by the Kaufman Index by region in 2005. The West showed the highest rate of activity followed by the South. The Northeast and Midwest registered the lowest rates of entrepreneurial activity. However, the 2005 report showed that the North and the South suffered a slight decrease in entrepreneurial activity from that of 2004 while, the Northeast and the Midwest registered a marginal increase (Fairlie, 2005, p. 8). Social Factors: The demography and the social factors are somewhat interlinked and thus, their effects on the entrepreneurial activity are also not mutually exclusive. Social factors like education, social status and interaction determines entrepreneurial activities to a certain extent. Education plays quite a significant role in determining entrepreneurial activity. Individuals holding special degrees of professional, business schools or technological exhibit the highest TEA rate of 17.8 percent and also the highest percentage of opportunity driven entrepreneurship estimated to 13.3 percent. The TEA rate for mere grade school pass outs is the minimum. Yet, due to the shortage of alternative employment options, the individuals in this educational group are the ones having the highest propensity to take on in necessity entrepreneurship, which is about 3.6 percent. Thus, entrepreneurial activity and education do not have a strict linear relationship but, it is believed that good education or skill affects entrepreneurial activity positively (Minniti and Bygrave, 2003, p. 18). The availability of financial resources is also vital in starting a successful business. However, the GEM results showed that although access to financial resources is important yet there is strict association between increase in TEA rates and higher household income. The main reason for this inconsistent relationship is probably the fact that the household income does not reveal the actual wealth of the individual. Rather, there are other assets that determine an individual’s wealth like real estate, bank savings and stocks. Hence, the measure shown by the overall wealth could be a better substitute in assessing the total financial resources. Social interactions are believed to affect entrepreneurship and entrepreneurial activity. For instance, individuals may want to take up entrepreneurship following their peer groups. Although, it is not often the case, yet it is believed that peer groups engaged in entrepreneurial activity may instill that desire in the individuals in the group. Social communication can also give rise to non-pecuniary advantages from entrepreneurial activity. An individual’s social characteristics like wealth, education, salary, labor market status, and age in determining entrepreneurial activity and the propensity to start any business (Giannetti and Simonov, 2009, p. 665-709). Technology plays a key role in setting up any business and in increasing the rate of entrepreneurial activity. The United States is considered as the heart of technology since it is one of most the advanced nations in the world. Cultural Factors: Entrepreneurial activity may also be affected by national culture either through direct or through mediating (indirect) effects, which is shown by the effect by variations in national cultural values on entrepreneurial activity and also on entrepreneurial development. The four cultural measures proposed by Hofstede that distinguish different national cultures throughout the world are power distance, individualism-collectivism, masculinity-femininity, and uncertainty avoidance (Hofstede, n.d.). Conventionally, the culture of the United States of is characterized as of one in search of opportunities and undertaking risks. This has been shown to be consistent with the professional informants' evaluation of the characteristics of USA. In actual fact, the indices assessing the presence of entrepreneurial opportunities, competence, and motivation are all greater than the standard rates prevailing in the world. The indices are also consistent with GEM result on the subject of the individual dispositional characteristics of the country’s population, which reflects a strong awareness of having adequate skills and ability to set up a new business. Such characteristics are accompanied by a relatively less fear of failure and comparatively high preparedness to exploit opportunities that have not been discovered before. Taken as a whole, like in previous the entrepreneurial culture in the U. S., as evident from the past continues to be a potential discriminating factor between the United States of America and nearly all other GEM countries. Based on the above analysis, an entrepreneur can take up several strategies in context of setting up a successful business in the United States of America. Marketing is an important strategy mainly in markets exhibiting oligopolisitic characteristics. Since, product differentiation is an important aspect of oligopoly, innovations play a key role in the success of any firm. Mainly firms use a mix of marketing and innovation strategies. However, any business venture is associated with a risk of failure. The risk mainly emanates from the failure of the product or the service to attract the consumers. An entrepreneur knows that the market is filled with products and services of all sorts and hence, strategies to acquire the consumer market need to be formulated wisely. The innovation and pricing strategies along with the promotional activities are used as tools to establish businesses successfully. Nevertheless, there are risks coupled with the strategies. Failure of capturing the market, inadequate marketing results and unappreciated or useless innovations as perceived by the customers would adversely affect the expected strategic outcomes. Also, a new entrepreneur often faces barriers to entry from the existing firms. The complicate tax structure in the U. S. may also create difficulties in setting up a firm. Competition with the local businesses leads to price wars and under cutting. However, for a new firm, participation in the price wars is not possible because it has to cover its high initial costs of investment. Conclusion Having discussed all the factors that influence entrepreneurial activities, it would be easy to draw up the likely opportunities and restraints that relate to entrepreneurial activities in the United States of America. Opportunity still maintains to be the main propeller for entrepreneurial activity in the United States. It is reflected in the increasing number of opportunity-driven entrepreneurship compared to necessity-driven ones. The country also continues to remain at or close to the crest of the world's innovation-driven nations with respect to early-stage entrepreneurial activities. Apparent opportunity is considerably high in spite of a greater apprehension of failure. This dread of failure has increased substantially in the United States and in all the other GEM nations because of the recent global financial condition. Perceived opportunity has fallen in the United States and in the other innovation-driven nations. However, the decline in apparent opportunity is only lower than its high standards of 2007. Therefore, perceived opportunity is even now substantial in spite of a stronger fear of failure. This is in contrast with the marked decline across the board in GEM nations for individuals who look forward to to start a business in the current situation. Entrepreneurship in the United States persists to flourish at very high levels and appears to be moving faster than the general economic revival of the country. The United States surpasses the rest of the countries on crucial entrepreneurial framework conditions like financial support, entrepreneurship edification and training and social standards that favor entrepreneurship. The large segment of entrepreneurial firms and the considerable number of jobs provided by smaller, newer and budding firms in the United States offer a strong signal that the entrepreneurial sector, with its litheness and capacity to adapt promptly, is primed to take an even more significant leading role in the future economic growth of the nation. Technological advancement, cultural and socials strengths, availability of resources, fewer barriers to entry by the government, political peace offer additional opportunities to entrepreneurial activity. A big country, with a large demography offers a variety of good opportunities. A huge consumer base is also vital in the success of any business because it offers a bigger market. However, along with the array of opportunities offered by the country, there are several associated constraints. Finding an appropriate location to set up business, proper cooperation from the neighborhood and associated members are also important. Entrepreneurial activities become difficult with respect to the hierarchy of the present tax structure in the US and legal complications. Aggressive competition from local firms, distorted labor union demands, current financial crisis act as constraints to entrepreneurial activity. Hence, entrepreneurial activity has several opportunities as well as constraints within the context of the United States of America. Reference 1. Baumol,W., 1990, “Entrepreneurship: Productive, and Destructive,” Journal of Political Economy, 98, 893–921. 2. Schumpeter, J., 1934, The Theory of Economic Development, Cambridge, MA: Harvard University Press. 3. Gartner, W, 2001, “Is there an elephant in entrepreneurship? Blind assumptions in theory development,” Entrepreneurship Theory and Practice Vol. 25 No. 4, p. 27-39. 4. Cornwall, J, 2009, “The Face of Entrepreneurship in the US”, Available from: http://www.drjeffcornwall.com/2009/11/the-face-of entrepreneurship-i.html (Accessed on Feb 16, 2010). 5. The Economist Intelligence Unit, 2006, “Britain, US slip down the Business Environment Rankings”, Available from: http://globaltechforum.eiu.com/index.asp?layout=rich_story&doc_id=8372&categoryid=&channelid=&search=considers (Accessed on Feb 16, 2010). 6. Porter, M. E., 2007, “American Competitiveness in a Global Economy”, Available from: http://www.isc.hbs.edu/pdf/20090520_IC100_Awards_Luncheon.pdf (Accessed on Feb 16, 2010). 7. The U.S. Business Environment, 2004, “Leveraged Management Services”, Available from: http://www.lmsco.com/US%20Business%20Environment.pdf (Accessed on Feb 16, 2010). 8. Fairlie, R. W., “Kaufman Index of Entrepreneurial Activity National Report 1996-2005”, Available from: http://www.kauffman.org/uploadedFiles/KIEA_national_052206.pdf (Accessed on Feb 16, 2010). 9. Giannetti, M and Simonov, A, 2009, “Social Interactions and 10. Entrepreneurial Activity”, Journal of Economics & Management Strategy, Vol. 18, No. 3, p. 665–709 11. Sorenson, O and Audia, P. G., 2000, “Entrepreneurial Activity”, AJS Vol. 106 No. 2, p. 424–620. 12. Hofstede, G, n.d, “Cultural Dimensions”, Available from: http://www.geert-hofstede.com/hofstede_united_kingdom.shtml (Accessed on Feb 16, 2010). Read More