Why Ethnic People Often Fail at Entrepreneurship Ventures - Coursework Example

Ethnic Entrepreneurship 05 May Introduction Many people often wonder why ethnic people often fail at entrepreneurship ventures. Although governments had tried their best to develop successful ethnic business people, they face some problems which hinder these efforts. Foremost among these problems are the ones involved in communications. When a certain ethnic businessman tries to put up his business, he usually faces difficulties of surmounting the language and cultural barriers. These 2 factors are the top reasons that hinder ethnic entrepreneurship although there are other factors as well that contribute to a high rate of failure such as the high level of competition. Other important factors are the number of immigrants in a country, the rate of growth of that ethnic population (because ethnic entrepreneurs tend to serve their niche markets first) and the general age level of that ethnic population (Audretsch, 2002:133). And because of the tendency to provide goods and services to their own ethnic group, a result is super-saturation of that business type in specific industries with the resultant high rates of failure of providing products or services in a small market that is unsustainable for a normal business size. This paper attempts to look deeper beyond language and cultural barriers as factors to explain why it is difficult to make an over-arching set of policies. A successful formulation of this set of policies could be used as guide to future policy formulation that will improve their chances of success. Entrepreneurship plays a decisive role in job creation, economic growth and international competitiveness but the lack of an over-arching set of policies makes it very difficult to have a grand plan that will work in all situations. In other words, there are also the cultural traditions and practices which might make ethnic people unsuitable as entrepreneurs. Discussion Besides language problems, another barrier to a successful ethnic entrepreneurship is the way how these new immigrants gather business information. For the native businessmen, information gathering is done through formal channels such as business associations. But for ethnic entrepreneurs, their sources of information for new business opportunities often is very limited, sometimes to only within their immediate circle of families and close friends. There is also the lingering issue of trustworthiness when it comes to granting of credit. Moreover, an additional burden is the suspicion of disloyalty when an ethnic group is not very business- minded or inclined towards individual achievement but rather promotes social unity. Many of the budding entrepreneurs have to wrestle for acceptance by their wider community in order for them to be allowed to venture on their own (Stiles & Galbraith, 2003:131). Cultural factors can work against certain ethnic groups becoming successful in their entrepreneurial ventures. For some groups, cultural attitudes towards work and money may be contributory factors to the high rates of failure. Factors include ethnic social networks that provide the necessary resources for a business start-up within the immigrant enclave. The research literature on this aspect is however not very encouraging. Immigrant networks can be described as strong ties but the very strength of these ties seems to work against the ethnic entrepreneur. In other words, the second type of social networking which is the weak type is a more accurate predictor of ethnic success in business (Sequeira & Rasheed, 2003:77). Why this is so can be partly explained by the fact that strong social ties are needed in the first stages of a venture but may later on be a hindrance when the business starts to give expansion a try outside of its immediate immigrant enclave. Unless that enclave has very big population, the ethnic entrepreneur must by necessity expand beyond his own ethnic groups. Focusing on his ethnic group is not beneficial in the longer term and is counterproductive. Latent Racism – the previous discussion gave some factors on the difficulties ethnic entrepreneurs face when they start on a business venture. The reasons given earlier can be classified as internal factors, those which are unique within an ethnic group such as culture and the native language. However, there are also external factors which impinge on ethnic businesses from the wider economic and social environment. Among the most potent of the factors is racism; this factor is not blatant but has a very big role in perpetuating the social inequalities that immigrant entrepreneurs face upon start-up (Chan, 2005:119). The impact of racism can be felt in the way ethnic entrepreneurs are treated when they apply for a bank loan or ask for a supplier’s credit. The response is usually one of scepticism. This is the crucial stage when social network resources are not available to the new budding businessman but there is systemic discrimination and prejudice when extending the credits. It can be denied on the mere whim of race or ethnicity; the entrepreneur is often viewed as the person who is not worthy of trust, as someone who cannot be entrusted with money. Different ethnic groups have different approaches to handling business finance. Ethnic groups have an ingrained bias towards the proper handling of finance themselves which vary from one group to another ethnic group. An end result is often mutual distrust between an ethnic entrepreneur and the prospective lender due to perceived biased attitudes towards each other. An example is Chinese ethnic entrepreneurs who start out small with little capital. It is usually provided by their family and other close relatives or friends within their immediate circle because the barrier of trust and language is removed by their common ethnicity. There is mutual trust between lender and borrower, money sometimes exchanging hands on a mere handshake or with very minimal documentation. Another approach is to start young people on entrepreneurship early (regardless of ethnicity). These young people should be encouraged to join investment or entrepreneurship societies (Pittaway et al. 2011:1) and learn by doing. Financial Capital – this is the funds needed to start a new business venture and policy initiatives so far implemented have not removed the impeding factors for a successful way to utilize this crucial resource for new businesses by ethnic people. The observation is policies are often too general to be effective; policy makers often respond with more similar programs but this is not the right way to do it. Fund take-up will not improve with the creation of more funding schemes (Nijkamp, 2004:201) but instead focus more on the diversity of these ethnic enterprises. A workable strategy towards increasing the chances for success is to reduce social exclusion of immigrant and ethnic entrepreneurs by bringing them within the orbit of formal economy through incentives and legal frameworks for their own protection. When a minority group tries to engage in business, the difficulties faced by them, just like any of small-scale initiatives, are effectively doubled. The solution is to offer alternatives in a formal economy. Access to entrepreneurial capital is a prime concern of any start-up and the access is difficult because the new venture is necessarily an uncertain undertaking. However, access is often denied by virtue of race, culture and segregation (racial prejudice and discrimination). This is often compounded by the barriers of language and a feeling of mistrust that the new entrepreneur could be a significant investment risk to the financier or lender. This seemed to be confirmed by a study in which it was found out many SMEs resort to multiple banking relationships whenever there is a perceived low legal enforcement process with regards to the loan contracts they incur with their banks (Hernandez-Canovas & Koeter-Kant, 2008:10. Problematic capital can be considered as merely a proximate factor in determining the success or failure of any ethnic business venture. The larger picture will point out many other factors, namely social, religious, cultural and governance issues that frame the entire enclave community in ethnic economics but what is lacking is a unifying theoretical paradigm. There is a nascent theory which is the economic theory of clubs (Dana, 2007:16). Ethnic Secrecy – ethnic groups often feel vulnerable in a foreign land and therefore tend to closely guard any information about itself. This makes it quite difficult for researchers to obtain reliable and widespread data applicable to that group and to other groups. There is a feeling of mistrust whenever an outsider tries to get some information about the group as the person is viewed with suspicion and in extreme circumstances, even hostility. An example of this lingering suspicion is when an ethnic entrepreneur has some brilliant ideas and is afraid someone might steal this idea. However, a study found that strong intellectual property rights laws have a positive effect on self-employment through the creation of new jobs and giving access to these newly-created jobs (Burke & Fraser, 2011:1). In other words, there must be a strong push for ethnic entrepreneurs to be re-assured of this legal protection for them to really venture into innovative technologies using their brilliant native ideas. An intellectual property protection has a dual effect on entrepreneurship: it can promote entrepreneurship if the firm is a creator of new innovative technology by guaranteeing its exclusive access to that creativity but on the other hand, if the entrepreneurial firm is a user, the laws prevent it from using it. Any ethnic group that values conformity will also put a premium on secrecy. This is a required trait among members of that group since it ensures survival in a hostile environment or in unfamiliar territory like a new country. Immigrant groups may have other reasons to keep secrets to themselves, such as the presence of illegal immigrants which might tip off the immigration authorities. In any case, even ethnic groups are reluctant to avail of basic social and health services for fear of inadvertently exposing themselves. This preoccupation with the need to maintain a high level of secrecy thwarts any efforts to collect any meaningful data on ethnic groups. Although researchers may have good motives, these are always interpreted as something more sinister and ethnic members are very reluctant to divulge any information. Policy makers do not know how to help them without reliable information (OECD, 2006:22). Cultural Practices – despite the best efforts, there is no single paradigm that will be made applicable to all ethnic groups with regards to financing. Sometimes, it all boils down to that particular ethnic group’s attitude towards money and business. An example would be the Maori culture which is fond of making cultural products and other handicraft items but is very reluctant to charge any price for these products. The hand-made items are usually given away as gifts and no financial value is considered, especially if given to friends. In the Maori culture, there is some resistance to wealth creation through a free market exchange. What the culture emphasizes is the so-called pre-capitalist “moral economy” where goods and services are exchanged based on community values. This is done on the basis of reciprocity and not on the aim of getting rich at the expense of someone else. Engaging in that narrow or selfish motive can lead to ostracism or social exclusion (Polanyi, 2001:45). This cultural attitude towards money and finance can be changed through education. However, many Maoris attend schools whose curricula do not put a premium on business ideas and entrepreneurship. The whole focus of their education is getting employment but not on how markets work or the nature of capitalist competition in a global economy. In a sense, it is the same cultural environment in most ethnic communities where old values and tradition prevail over more modern ideas. Attitudes towards risk-taking and personal financial growth are often not very helpful and frown on any initiative to accumulate wealth. In many ways, ethnic enclaves often have a strong tendency to cling to their cultural practices and traditions which include their attitude towards money and entrepreneurship. It can be said many of these ethnic groups have a rather primitive view of finance in modern life and would rather stick to the old notions of an economic system that is embedded in a subordinate function to the larger social organization (Deutschmann, 2009:4) where money is not given that much importance in the larger scheme of things in life. Lack of Solid Data – due to the aforementioned secretive nature and tendencies of the ethnic enclaves, researchers cannot formulate an over-arching policy because of the lack of any reliable data obtained from these ethnic communities. The lack of solid information is partly attributable to the patterns of discrimination ethnic groups face when they try to have some access to formal sources of financing and capital. When there is available an alternative but informal source of capital, then gathering and monitoring of vital information regarding the business activities of ethnic entrepreneurs is virtually impossible. This situation usually happens when there are no strong or well-developed markets where capital can be raised; it may not always be the case but in some instances, there are happy exceptions such as when there is a “capital network” formed by family and social relationships (Yeung, 2002:30). The Asians like Chinese, Koreans and Japanese are very fond of using this informal network and when they access these networks, there is no documentation in most cases as borrowing funds is based on trust and family honour unlike getting a bank loan where there is paperwork. Perhaps a good example of how informal networks can be utilized for budding ethnic entrepreneurs is the hawala system of South Asia (India, Pakistan and Bangladesh). It is the ancient method of sending and receiving remittances without actually transferring the money but through a complicated system of offsets through accounts maintained in different areas. It uses very minimal documentation because the entire system is based on trust, some family connections and regional affiliations based on ethnic origins (Jost & Sandhu, 2002:1). It is also very reliable and fast; any ethnic business person can easily raise capital this way also. It is an example of an informal system that forms part of the underground or shadow economy. China has a very similar system it developed independently which is called “flying money” based on the chop or chit that is used for identification and confirmation when the money is claimed by the recipient. In any case, these systems are outside of the formal banks. Conclusion Several factors converged to make data collection among various ethnic groups about their ethnic business endeavours difficult to accomplish. This lack of reliable data makes it virtually impossible to construct a paradigm on which to base government policies that can be used to help them out in their new country of residence. It becomes a self-reinforcing cycle of some sort as the high rate of business failures among ethnic minority businesses makes data collection almost an irrelevant undertaking. Although there are serious attempts to integrate these ethnic enclaves into the wider national society, government agencies and many non-government organizations intent on helping them are left in a serious quandary. There are likewise significant internal factors that contrive to make access to ethnic groups a bit difficult, foremost of which is the language barrier. Many ethnic businesspeople may not speak the country’s language or speak and understand it only in a rudimentary way. There are also cultural barriers which make it difficult for other groups to penetrate the walls of secrecy which ethnic groups often impose on themselves for matters of survival. Racism and discriminatory business practices may contribute to the failure of ethnic enterprises to a certain extent, such as refusal to grant loans or extend supplier’s credit when badly needed. Most ethnic firms often rely on equity capital from family and friends; they also operate on a cash basis only because of the constraints on capital for operational requirements. Entrepreneurship contributes to job creation and general economic development by a series of new job opportunities and there is a direct correlation between creativity, innovation and protection of intellectual property rights to the competitiveness of certain regions based on these factors. However, ethnic groups face a number of constraints such as their cultural practices which preclude full participation in the formal economy of their new country. The lack of regular data for monitoring purposes hampers efforts to help (Pretes, 2002:1). References Audretsch, David B. (2002) Entrepreneurship: Determinants and Policy in a European-US Comparison. Norwell, MA, USA: Kluwer Academic Publishers. Burke, A. and Fraser, S. (2011) Self-Employment: The Role of Intellectual Property Right Laws. 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(2003) “The Role of Social and Human Capital in the Start-up and Growth of Immigrant Businesses” In: C. H. Stiles and C. S. Galbraith, eds. Ethnic Entrepreneurship: Structure and Process. Oxford, UK: Elsevier Limited. Stiles, C. H. & Galbraith, C. S. (2003) Ethnic Entrepreneurship: Structure and Process. Oxford, UK: Elsevier Limited. Yeung, H. (2002) Entrepreneurship and the Internationalisation of Asian Firms: An Institutional Perspective. Glos, UK: Edwar Elgar Publishing Incorporated. Read More