ARE UGANDAN ENTREPRENEURS THAT INSULATED FROM THE GLOBAL ECONOMY?

Rebecca Namatovu, Samuel Dawa, Fiona Mulira Makerere University Business School, Kampala, Uganda rybekaz@yahoo.com samdawa@gmail.com fmulira@yahoo.com Abstract Objectives: The study focused on the following objectives; to determine the effect of the global economic crisis on the entrepreneurial environment in Uganda. To compare entrepreneurs perceptions of the entrepreneurial environment in the other factor driven economies with those of entrepreneurs in Uganda during the last twelve months. Factor driven economies are described as those countries with low levels of economic development, with a typically large agricultural sector, which provides subsistence for the majority of the population who mostly still live in the countryside. They include Uganda, Venezuela, Saudi Arabia, Kingdom of Tonga, Yemen, Jamaica, Guatemala, Algeria Lebanon, Syria and West bank and Gaza strip Methodology: Data is derived from the Global Entrepreneurship Monitor survey which uses a multi stage random sampling. It was conducted in all four regions of Uganda; with a sample size of 2091 adults (1864years). Similar data collection was done in the other factor driven economies. The findings of the study show that although the Total Entrepreneurial Activity (TEA), in Uganda has improved albeit not significantly since 2004 to 2009 when a similar study was done, 35.91% of the Ugandans believed that starting a business during the economic crisis was more difficult than it was a year ago. This figure however is lower than the 42% average of the other factor driven economies. Furthermore, 35.66% of the Ugandans believed that growing a business this year was more difficult than it was a year ago which in comparison is lower than the 43% average of the other factor driven economies. Only 47% of Ugandan entrepreneurs in comparison to 65% of other factor driven economies believe that there are fewer business opportunities. 52% and 42% respectively, of the established businesses owners in Uganda believed that starting and growing a business this year was more difficult than it was a year ago. All these are below the factor driven economys average. In summary Ugandan entrepreneurs unlike their counter parts in other factor driven economies perceive a lower negative effect of the crisis to their entrepreneurial effort. Key words: Entrepreneurship, Global Economic Crisis, Uganda, Factor Driven economies, Total Entrepreneurial Activity

1 Background

Globalization which has been thought to bear the potential to elevate the quality of life through increasing reach for organizations both big and small to markets and raw materials (Sachs 2005; Friedman 2006) has yielded a fair amount of discontent / disproportionate mix of good and evil as evidenced by the 2002 riots in Seattle (Stiglitz 2002) and the China miracle (Friedman 2006). Since the financial crisis spilled over from the US and hit Europe with full force in September 2008, the effects of the crisis have become increasingly felt also in developing and emerging countries. The global economic crisis which is described as an economic problem characterised by contraction of liquidity in the global credit markets and banking system, has already affected remittance flows from industrialised to developing countries, an important source of income for many countries (ODI 2008). The financial sector has been the hardest hit and subsequently the reverberations spread to practically all sectors in every economy. With liquidity drying up and financial institutions around the world being under stress and withdrawing funds from wherever they can to remain liquid, it has become difficult if not impossible for many countries to refinance themselves in international financial markets (CNN World News 2 April 2010). The uncertainty of the current global economic situation is unprecedented, as shown by the frequent downward, revisions in global forecasts of growth and trade by both official and independent sources (Kryticous 2009). These effects continue to be felt to date with news of the US economy continuing to shed and dismal economic growth in several countries the world over. The International Labour Organizations (ILO) Global Employment Trends 2009 report estimated an increase in the global unemployed in the range of 18 to 30 million people by the end of 2009, with more than 50 million forecasted to lose their jobs in a worst case scenario (ILO 2009). On the other hand, developing economies like Uganda that have relatively under developed financial systems that are not well integrated with international markets just may have been shielded from the vagaries of this downturn. The governor of the central bank in Uganda at a speech on 24th September 2008 stated that Uganda would not be affected by the economic crisis (Mutebile 2008). This despite announcements by development partners that they would be cutting back on aid and data emerging showing that remittances from Ugandans living in the diaspora were dropping dramatically (Ssewanyana & Bategeka 2010). These remittances make up a large amount of seed money for entrepreneurial ventures in Uganda while development aid is used for key infrastructural development in the road and energy sectors, both of which are key in entrepreneurial development.

The recession in the developed world contributed significantly to low demand for Ugandas traditional export commodities, especially coffee, fish and flowers. Despite this, Uganda reaped significant benefits from informal cross-border trade (ICBT), especially in non-traditional exports such as maize, beans and

manufactured goods, including cement and steel products. Trade especially with post conflict nations in the great lakes region which include Southern Sudan, Eastern DRC, Rwanda and Burundi thrived. The dual structure of Ugandan private sector which is made up of a small number of large enterprises mostly foreign owned and a large number of small enterprises, mainly informal making up almost 70% of all enterprises (Islam 2009) may have been of an advantage because of non-dependence on global finance or international markets. Although, Uganda has maintained an impressive economic growth rate of above 7% it is still below the projected 8.9% and revenue collections did drop by 120bn/= from pre-crisis levels. Therefore with a burgeoning public sector and a small number of large firms coupled with a very high population growth rate of almost 7%, it is imperative that the Ugandan entrepreneur seizes his/her destiny to survive. This is especially so in a country with poor social services and failing infrastructure. 1.1 Objectives of this study were;

To determine the effect of the global economic crisis on the entrepreneurial environment in Uganda To compare the entrepreneurs perceptions of the entrepreneurial environment in the other factor driven economies with those of entrepreneurs in Uganda during the last twelve months.

2.0 Literature Review 2.1 To determine the effect of the global economic crisis on the entrepreneurial environment in Uganda. Walter Canons (1915) theory of acute stress response states that animals will fight or flee in situations of uncertainty. This theory informs the debate on entrepreneurship in times of crisis with several companies ceasing to exist e.g. Lehman Brothers. Financial sectors in sub-Saharan Africa are vulnerable to several risks that could still unfold in this crisis period. However, unlike in developed economies, there has been no systemic banking crisis in sub-Saharan Africa. Commercial banks and other financial institutions here so far remain largely sound. Cross-border banking system linkages are minimal; there is less exposure to complex financial products, and financial systems are not well integrated with other global financial markets (IMF 2009). Therefore, it can be deduced from Schumpeters (1934) missive on creative destruction that entrepreneurship replaces obsolete economic activities by innovation, thus creating new and better products to help overcome recession. This could partly explain the effect of the world economic crisis on

different economies with those in the western world suffering because of saturated inefficient enterprises that needed to be weeded out. The worlds leading entrepreneurs are a diverse group but in the broad array of their experiences are commonalities a willingness to suffer doubt and potential failure (Ernst & Young 2009). And so the occurrence of an economic crisis serves as such an opportunity for would be entrepreneurs to shine. Periods of economic challenge can drive entrepreneurs to sharpen their focus on the services they offer; to determine how to stand out from the competition, and review what is absolutely necessary in the budget (Ernst & Young 2009). Barlett (2008) states that economic crises provide good opportunities for enterprises; through strategic acquisitions and hiring of talented employees released by downsizing companies. He agrees with Ernst & Young (2009) that the current crisis offers the same opportunities based on evidence that upturns in 1945, 1990 and 2001 were driven by creative destruction of private enterprise. The global financial crisis has caused a considerable slowdown in most developed countries. Stock markets suffered losing up to 50% of their value in Europe, Asia and the US (Shah, 2009). Investment banks like Lehman Brothers collapsed, stimulus packages were drawn up involving more than a trillion US dollars, and interest rates were cut to almost 0% in the US and the EU. Many developing countries' economies continued to grow albeit at rates lower than previously forecasted (India 8%, China 9%, Russia 7%) (Te Velde 2008). Many countries in sub-Saharan Africa enjoyed robust economic growth in recent years that strengthened their balance sheets. Sound economic policies were an important factor, as was the favorable external environment and increased external support in the form of debt relief and higher inflows (IMF 2009). Nevertheless the economic downturn could affect the developing world through reduced remittances, FDI, aid and other official cash flows (IMF 2009; ADB 2009). Te Velde (2008) singled out countries with the following characteristics as being at the greatest risk: countries with exports to crisis affected countries, countries whose exports have very high income elasticitys, countries dependent on remittances, FDI, countries with weakly regulated markets for securities, countries with high government deficits and dependent on aid. It has been argued though, that remittances and aid are not conducive to entrepreneurship or private sector development and reduce labor supply. These have been framed as disincentive effects or crowding-out effects. On the other hand, there is also evidence that remittances can support private sector development (Demirgc Kunt, Klapper and Panos 2009). On the other hand, Hurst and Lusardi (in Paulson &

Townsend, 2005) find no evidence that entrepreneurial activity (in the U.S.) is affected by financial constraints. Crises create opportunities for entrepreneurship. For example, more than half of the companies on the 2009 Fortune 500 list were launched during a recession or bear market (Leigh 2010). Tough economic times do generate more innovative ideas because you have people who are fleeing the corporate environment and branching out on their own, says Michael Peck, Managing Partner for Open Prairie Ventures. When people are forced into the marketplace through layoffs or economic disruption, thats when you tend to see an entrepreneurial spirit emerge (Ernst & Young 2009). However, crises also stifle growth of entrepreneurial ventures and start-ups through unavailability of credit. With banks short of capital and wary of risk, its not easy to find funding for new ventures. When the downturn depresses the returns on past investment, it gets harder to rally shareholders behind new projects (Ernst & Young 2009). The inadequate performance of financial markets can lead to the limited entry of new firms, low production in the firms on hand, and greater financial constraints for small and medium enterprises. (Paulson & Townsend 2005)

As companies across all sectors of the worlds economies announce losses and job cuts, entrepreneurship has become one of the most viable and most potentially long term rewarding employment for workers already made redundant by this desperate situation. From small-scale enterprises to large conglomerates and banking institutions, companies have been forced to make employees redundant; announcing restructuring strategies and more cost efficient processes in the wake of the global economic crisis. With job security almost nonexistent and the unemployment rates steadily increasing, entrepreneurship is fast becoming the only form of potentially gratifying employment available to employees who suddenly find themselves on the firing line. However, while some recently made redundant workers create self employment out of their lifelong dreams, the monetary insecurity and self liability may prove daunting to the new entrepreneur (Kasanda 2009). At a time when entire economies and industries are reeling from the financial crisis, business leaders are struggling to balance the near-term needs of survival with the long-term demand to find new sources of growth. Never has the need to innovate and be entrepreneurial been more urgent. A large body of academic research and real-world business experience has established a clear connection between entrepreneurship, innovation and economic growth. By developing new products and services, revamping organizational processes or adopting fresh approaches to partnerships, companies can take advantage of the downturn to transform their businesses (Ernst & Young 2009).

In light of the poor economic conditions in developing countries, entrepreneurial activity is showing some positive signs, according to the Global Entrepreneurship Monitor (GEM) and its 2008 report. It is assumed that during this economic down turn, the small and medium size enterprise sector (SME) can play a significant role in the growth of the country; they serve by creating new job opportunities, and have the potential to respond to the changes in environment in the global context (OECD Summit 2008). 2.2 Entrepreneurs perception of the entrepreneurial environment during the global economic crisis Anna and Robert (2005) divided the general entrepreneurs into three groups, Pre-crisis; crisis and Postcrisis businesses and found that not only the business performances were affected during that pre-crisis period but also the crisis and post-crisis groups were less willing to start up a business with considerable capital. On the other hand, considering the role of Entrepreneurship in the crisis, Won (2007) states that due to its ability of innovation and growth of investment, entrepreneurship is able to play a vital role in the current financial scenario by creating job opportunities and economic growth. Barlett (2008) states that economic crisis and downturns provides good opportunities for medium sized enterprises; they can undertake counter-cyclical moves that strengthen their competitive position; Lean enterprise campaigns; strategic acquisitions; hiring of talented employees released by downsizing companies and etc; He further stated that current crisis offers the same opportunities. However, small firms are facing tightened credit term in contemporary financial conditions; moreover the entrepreneurs are showing noteworthy concern about access over credit (Shahzad et al. 2009). Msoka (2009) summarises entrepreneurs perceptions by stating that the current global economic crisis has two interpretations to the entrepreneurs. First it is a challenge because of reduced opportunities. Reduced opportunities mean that more and more entrepreneurs will be taken out of business and hence they will have problems in getting jobs and or starting new businesses. This has a larger implication in the society as a whole. Secondly it is an opportunity for them to rethink about some of the assumptions and decision frames made earlier. Although economic crisis is a challenge that reduces opportunities to entrepreneurs, ideally it can be taken as an additional business challenge that entrepreneurs have to take onboard and hence overcome. That is push for innovation and creativeness, look for better ways of getting capital, mobilize people to start spending with confidence, surviving the crisis and finally expanding their business. 3.0 Methodology

The sample was drawn from that of the Global Entrepreneurship Monitor (GEM) 2009, a research consortium dedicated to understanding the relationship between entrepreneurship and economic development. The sample involved 11 developing countries, referred to as factor driven economies in the GEM country classifications. This classification is based on GDP per capita and the extent to which countries are factor driven in terms of the shares of exports of primary good in total export. They are primarily extractive in nature (Bosma and Levie 2010). They include Algeria, Guatemala, Jamaica, Lebanon, Saudi Arabia, Syria, Kingdom of Tonga, Uganda, Venezuela, West Bank and Gaza strip and Yemen. It is from these 11 countries that a sample of over 20,000 adults was drawn. An adult population survey that measures the entrepreneurial behavior and attitudes of the adult working age (18-64 years old) was conducted using structured questionnaire. This instrument was tested and showed significant results of reliability. The instrument was translated into the different languages of the participating countries to ensure that bias based language was eliminated. Respondents were selected using stratified random sampling and face to face interviews were used to collect data in all the countries except Saudi Arabia where telephone interviews were used. 3.1 Effect of the global economic crisis on the entrepreneurial environment in Uganda Ugandas Total early stage Entrepreneurial Activity, which is a measure of the level of entrepreneurship in a country based on Global Entrepreneurship Monitor studies, has steadily increased over the years, from 29.2% in 2003 to 31.2 in 2004 and 33.6% in 2009. This implies that out of ten Ugandans, three will start a business venture.

Table 1:

Entrepreneurs Perceptions of the change in opportunities during the global economic

crisis period in the different regions of Uganda Region Central More Business Opportunities 5.9 About Same Less opportunities 49.8

opportunities 44.9

Eastern Northern Western Total

8.7 7.0 3.2 5.7

27.5 36.8 63.5 46.4

65.2 45.6 34.1 47.3

Table 1 above shows the entrepreneurs perceptions of opportunities in the crisis era. It revealed that only 5.7% of the entrepreneurs perceived more opportunities, 46.4% perceived about the same opportunities and 47.3% perceived fewer opportunities.

3.2 Entrepreneurs perceptions of the entrepreneurial environment in Uganda in comparison to other factor driven economies in the past twelve months Figure 1: A Graphic presentation of the Total early stage Entrepreneurial Activity in Factor Driven Economies

As shown in figure 1 above, the levels of Entrepreneurship in Uganda are higher than those of other factor driven countries as shown in the figure above.

Figure2: Perception of Factor Driven Economies Entrepreneurs on how difficult it is to start a business in the global economic crisis compared to a year ago

Entrepreneurs at different stages (start up (nascent) businesses and established businesses) in the different countries were asked about their perception of how difficult it was to start a business in the global economic crisis compared to a year ago. In most Factor Driven Economies (FDE) the difference in perception based on the stage of entrepreneurship was worth noting with the majority of the countries having established business owners perceiving more difficulty than the nascent business owners. In Tonga, the nascent entrepreneurs perceived higher levels of difficulty compared to the established business owners. In Uganda, although the nascent entrepreneurs also perceived higher difficulty it was a negligible difference between the two. This implies that for the Ugandan entrepreneur the stage of entrepreneurship does not affect the perceptions of the entrepreneur.

Figure 3: Perception of Factor Driven Economies Entrepreneurs on how difficult it is to grow a business in the global economic crisis compared to a year ago

The nascent entrepreneurs and established business owners in the different countries were asked about their perception of how difficult it was to grow a business in the global economic crisis compared to a year ago. It was found that the established business owners perceived higher levels of difficulty compared to the nascent entrepreneurs, in all countries except Yemen and Guatemala where the reverse holds. The difference between the perceptions of the two types of entrepreneurs in Uganda, like it is for most countries is negligible, except in Syria and Yemen. This implies that when it gets to growth of the business the stage of entrepreneurship may not affect the perceptions one has on the entrepreneurial environment.

Figure 4: Perception of Factor Driven Economies Entrepreneurs on if there are fewer opportunities in the global economic crisis compared to a year ago

The entrepreneurs were asked if they perceived fewer opportunities during the global economic crisis compared to a year ago and it was revealed that in Uganda, the established business owners perceived fewer business opportunities during the global economic crisis compared to a year ago, than the nascent entrepreneurs. This was the case for most other factor driven economies entrepreneurs except those from Saudi Arabia and Yemen where the reverse holds. The differences in perception amongst the various countries are in the range of 10% and below except Saudi Arabia and Guatemala with ranges of 30% and 50% respectively. This implies that in most countries the stage of entrepreneurship will not greatly affect the entrepreneurs ability to perceive the available opportunities

4.0 Discussion of findings

There are different theories about the nature of crisis entrepreneurship; some researchers posit that crises diminish entrepreneurship while others argue that crises birth innovative entrepreneurship. At the peak of the global economic crisis many economies crumbled and as a result many jobs were lost, and levels of disposable income tremendously reduced (CNN World News April 2010). Such conditions have been argued to motivate entrepreneurship. Venture capitalists agree that the entrepreneurial floodgates open wider during economic declines. Tough economic times do generate more innovative ideas because you have people who are fleeing the corporate environment and branching out on their own When people are forced into the marketplace through layoffs or economic disruption, thats when you tend to see an entrepreneurial spirit emerge. Entrepreneurs are, by nature, innovative. So during recessions, you see more entrepreneurship and therefore more innovation. (Ernst & Young 2009). Others believe crises birth necessity entrepreneurship, as stated by Msoka (2009) the economic crisis affects entrepreneurs by increasing the level of risk and in this case a known risk which has a challenge. Rather than taking a risk, people make informed decisions to deal with a pre-known crisis, reduce spending, and reduce credit, change life styles and consumption patterns. All of which affect the total entrepreneurial activities. In our discussion, we undertake the latter theorists belief that crises birth necessity entrepreneurship. The environment in most developing economies like Uganda is born of insufficient systems that push people into entrepreneurship. (Walter et al. 2003) In Uganda the level of entrepreneurship has not been altered significantly, it has continued to grow steadily; this may be because the harshness of the environment is not a key influence to entrepreneurial activity in times of crisis. For instance in many developing countries, entrepreneurs have long been constrained by access to credit. The lack of well defined property rights/land titling which limits their ability to use their real estate assets as collateral for loans. As Hernando De Soto has pointed out, this lack of effective land title in developing countries means that the assets of poor and middle class households are 'dead' capital. As a result, declines in the value of land in developing countries may not have a large effect on entrepreneurs' ability to borrow. If this turns out to be true (and there is not a banking crisis in emerging markets), then it may lead to a small decrease in wealth inequalities between countries, to the extent that it is entrepreneurs in advanced countries that are more disproportionately impacted. Furthermore, many of the events in the aftermaths of the economic crisis were conditions/situations not new in the Ugandan economy, the unemployment levels in Uganda have gradually grown to 3.5%, the GDP per capita in Uganda is at 14.5 billion dollars (UBOS 2009), the ordeal of inaccessible or un affordable credit facilities has continued in the country and some regions that has been subjected to civil war conflict over the last two decades. It should therefore come as no surprise that there was no major change in the entrepreneurial activity of Ugandans.

On the other hand it is other factors such as cultural support and individual perception that influence the nature of entrepreneurship in Uganda. Therefore to test this assumption we run Pearsons correlation with a 0.01 significance level, for the Total early stage entrepreneurship (TEA), cultural support for entrepreneurship index (CSEI) and individual perception to entrepreneurship index (IPEI) and we found theres a significant positive correlation between TEA and CSEI (r= 0.83, sig, 0.001)and IPEI ( r= 0.81, sig.0.001). A positive and significant relationship also exists between CSEI and IPEI (r=0.110, sig, 0.000). A linear regression further shows that beta r square = 0.039 sig (0.131) and beta r square=0.064 Sig (0.012) respectively. The r square between CSEI and IPEI is 0.110 sig (0.000) This implies that TEA levels are influenced by culture and individual perceptions and that the individual perceptions are dependent on the cultural support one receives. In Uganda, the entrepreneurial energies are more geared toward the persons survival and not the contribution to the economy. And the society has facilitated that by supporting all entrepreneurial efforts that crop up. In Uganda, regardless of the stage of the entrepreneur (start up or established business), their perception of the ease with which each individual can start or grow a business in crisis time did not differ greatly which is not the case for other factor driven economies where significant differences were observed in perceptions on the difficulty of starting a business. This implies that when international organizations are drafting policies to improve entrepreneurship then a one size fit all policy cannot not be adequate for the entire factor driven economies, as entrepreneurs perceptions may differ. Ugandan entrepreneurs are not insulated from the crisis per se; it is just that the rest of the world has experienced the conditions that the Ugandan entrepreneurs have cogently thrived in over the years. It is only normal for entrepreneurs in other environmental circumstances to change in stamina during a crisis and for the Ugandan entrepreneurs to continue working on their ventures uninterrupted in a crisis such as this. 5.0 Conclusion and recommendations In conclusion Ugandan entrepreneurs being insulated from the economic crisis, the country misses out on the opportunities for innovation. Therefore full integration of Ugandas economy into the global market is of essence. Eric Parker (2008) in his book, "Run your own Business and make lots of Money," summed it up perfectly, Far from allowing these developments to cause them anxiety, those who are blessed with entrepreneurial spirit will recognize this new world order for what it really is, namely the emergence of untold opportunities that are there for the taking. Now is the time for policy-makers and business leaders to focus on the long term by identifying, supporting and inspiring entrepreneurs and innovators at all levels of the economy, in every market.

During a global economic crisis innovation needs help. The creative process is stunted whenever ideas, capital or talent cant move freely. Without public or private sector funding and support, even the best ideas can fail and in this daunting economic environment, failure has grave consequences. Governments and business owners must do everything they can to nurture and stimulate creative thinking across organizations, teams and processes. Global economic recovery depends on it. Business sectors should be given independence and autonomy by Government in order to nurture and protect one of their most important engines of economic growth: entrepreneurs (Ernst & Young 2009). Therefore in spite of the economic crisis, Governments should develop well thought out policies that encourage entrepreneurship and increased innovation.

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