Abstract
Factors influencing Entrepreneurship
Cross-Cultural Research of Germany and the UK
1. Introduction
1.1 Top-level research questions
2. Preliminary Literature Review
2.1 Definition of Entrepreneurs
2.2 Culture
2.3 Personality traits
2.4 Public Policy and Human Capital
3. Research Methods
3.1 Research approach
3.2 Information requirements
3.3 Data collection techniques and procedures
3.4 Ethical issues
4. Findings
Conclusion
Recommendations
Bibliography
Appendices
1. German Questionnaire
2. UK Questionnaire
This research investigates in what context national culture, personality traits and external influences have an impact on entrepreneurial activity. The cross-cultural research has been conducted in Germany and the UK.
Two sets of questionnaires, issued in German and English language, have been distributed to entrepreneurs in both countries. 117 replies have been qualified for the research analysis
The research has identified similarities of both countries in key traits of entrepreneurial behaviour such as assertiveness, emphasis on work goals and materialism. In addition, differences in cultural characteristics could be detected. Germany showed to be less risk loving as the UK that can be reflected by the higher level of bureaucracy. Gender, bureaucracy and financial issues have been established as main entry barriers and threats of business start-ups.
Recommendations have been drawn from the survey and it has been proposed that a simplification of bureaucracy in Germany due to an elimination of the ‘advance return for tax on sales and purchases’ would support entrepreneurs in the business start up stage. Additionally, it has been suggested that a decrease of taxation for angel and venture investors would create additional financial support for entrepreneurs.
The cross-sectional research is aimed to compare and analyse factors that trigger entrepreneurship in Germany and the UK. Prior research suggests that the amounts of start-ups not only depend on economical factors, as on culture and priorities (Burns 2007, p. 99). The analysis of two different national cultures will support the objectives and identify how national and personal characteristics influence entrepreneurial intentions.
Research on the phenomenon of entrepreneurship has been growing over the last decade (Dowling & Schmude, 2007, p. 1). Primarily, this is due to the common disposition that entrepreneurship plays an essential role in creating innovation, socio-economic well-fare and in the creation of workplaces (Amaral et.al 2008, p.10). The general attention of conducted research was pointed to large corporate companies, economics of scale and mass-production (Burns, 2007 p. 4). Now many governments have discovered the importance of entrepreneurship for its economy. Small and medium sized enterprises (SMEs) employ more people than big corporations and generate the most income. Therefore, it is very important for a government, to understand what factors stimulate entrepreneurial behaviour in the society, to find ways to encourage a further growth of small enterprises. The rate of new business births in the UK in 2009 was 10.9% (236,000) (Office for national statistics). In 2007 small businesses with no more than 49 employees make up 81.3% of all enterprises in Germany. (Statistisches Bundesamt Deutschland, 2010) In 2009 the number in the UK of small business with less than 50 people was 99.2% of all registered ventures (BIS). SMEs are an important contributor to the Gross Domestic Product (GDP) and the employment within a country. Comparing the numbers of Germany and the UK a significant difference in SME’s in numbers can be seen. The research will analyse and compare the socio-cultural, individual characteristics, situational and economic differences in the two countries, which might are the reason for the difference in numbers for small businesses. The ultimate aim of this research is to give recommendations and suggestions to enhance entrepreneurial activity within a nation based on the findings.
This study is based on data collected in Germany and the UK and investigates individual’s decision to start a business. The explanatory study incorporates a cultural analysis, applying the theory of Hofstede’s cultural dimensions on Germany and the UK to identify cultural consentaneity. Personality characteristics are researched on patterns of entrepreneurial traits. In the final part the economic situation, public policy and human capital characteristics are surveyed on their significance in entrepreneurial behaviour. Those factors have been applied in a logical procedure into a questionnaire including comparative questions.
The primary and secondary collected data is analysed to test the following research questions:
- Q1: What are the different or common cultural and personal attributes of an entrepreneur in Germany and the UK?
- Q2: How does the national culture of Germany and the UK associate with the level of entrepreneurialism?
- Q3: What are the biggest threats for business start ups in the UK and Germany?
- Q4: What are the perceptions of entry barriers?
- Q5: Can the government introduce or change policies to encourage entrepreneurial behaviour?
- Q6: How can threats and barriers for business start-ups are alleviated?
The focus in this study lies on entrepreneurs in all stages of the business creation. Starting from the idea stage to being serial entrepreneur.
Many definitions have been established for entrepreneurship or an entrepreneur. In 1734, Richard Cantillon, cited in Boyett (1997), describes as first an entrepreneur as a person “which is driven by a desire for profit and possessing in the ability to risk buying cheap and selling dear.” Low et. al. (2003) describes entrepreneurship primarily as “creation of new enterprise”. Stevenson et. al. (1989) adds elements of the process to it: “Entrepreneurship is the process of creating value by bringing together a unique package of resources to exploit an opportunity.” Ultimately, Burns (2007, p. 11) combines those definitions in one single and coherent definition:
“Entrepreneurs use innovation to exploit or create change and opportunity for the purpose of making profit. They do this by shifting economic resources from an area of lower productivity into an area of higher productivity and greater yield, accepting a high degree of risk and uncertainty in doing so.“
According to Louw, et. al. (2003) entrepreneurial incentives vary depending on the culture and the socio-economical environment which an individual is brought up in. Shane et al. (1993) suggested that levels of entrepreneurial activity are related to the national culture. Given credence into prior research, and the connection of entrepreneurial activity within a country, the study of triggers of entrepreneurship has to include cultural aspects. With the application of Hofstede’s cultural dimensions it will be observed what are entrepreneurial attributes and if distinctive national characteristics are the activator of it. Hofstede (2003) defines culture as:
“a shared set of beliefs and values within a national society that create social acceptance of behaviour.“
Consequently, cultural values set the level of entrepreneurial behaviour performed within the society measured on the readiness of risk taking and independence (Hayton et. al. 2002).
In Hofstede’s (2003, p.80) individualism vs. collectivism index (IDV), it can be observed that the UK ranks higher in the desire of individualism than Germany (see Figure 2.1).
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Figure: 2.1
The IDV dimension is defined as the level an individual is striking to focus or satisfy its own interests or the collective interests of the society one belongs to (Hofstede G. , 2003). Hayton et al. (2002) linked individualism to entrepreneurial characteristics describing that individualistic cultures tend to be more competitive and achievement orientated. Whereas cultures that emphasise on group interests and minimization of risk due to extended laws and regulations have less entrepreneurial activity (Herbig et al. 1992). Germany with rank 67 and the UK with 89, score both relatively high in the index. The fairly higher level of individualism is reflected in the UK’s entrepreneurial activity. Comparing to the business start up statistics mentioned above, the UK has a higher start up quote than Germany.
The power distance index (PDI) reflects entrepreneurship on the degree how much hierarchical distance and unequal power distribution is accepted within a national society (Hofstede G. , 2003). Germany and the UK score rank relatively low at 35 in the index (see Figure 2.1). A low PDI suggests that a nation does not have a wide gap between rich and less wealthy people. This implies that for members belonging to a low level within the society, it is possible to rise in the society. It is important for entrepreneurial activity within a country, that the ability to innovate, the desire to be successful and the drive to work hard is noted and rewarded instead of the status of individuals in the society.
Again in the Masculinity vs. Femininity index (MAS), Germany and the UK score the same at rank 66 (see Figure 2.1). This evaluates that both countries have a distinctive emphasis on work goals, are assertive and value materialism highly (Hofstede G. , 2003). Hayton et al. (2002) linked a high masculinity score to a high entrepreneurial disposition.
A substantial gap in the ranking can be noticed in the Uncertainty Avoidance Index (UAV), which specifies the level members of a culture are comfortable with in unstructured, uncertain and vague situations and their the willingness to adapt to changes (Hofstede G. , 2003). High-ranking countries such as Germany (rank 65; see Figure 2.1) are said to reduce the potential occurrence of situations like that by enforcing strict regulations and laws (Hofstede G. , 2003). The UK, scoring rank 35, leans towards being less risk averse and having a higher ability to adapt to changing situations (Hofstede G. , 2003). Shane (1993 p. 64) states that cultures with high uncertainty avoidance show less innovation, which can be explained with a high, level of tension and stress when facing unconsidered situations. Starting a venture is thoroughly intertwined with risk and unexpected situations. Furthermore, Hofstede (2003, p.84) establishes that the uncertainty avoidance index in Germany is 30% higher than in the UK and deducts that German citizens have a greater need for security and are not as willing to take as much risk as British entrepreneurs. Attempting to minimize unexpected situation can result in higher levels of bureaucracy and entry barriers for business start-ups.
The fifth dimension Hofstede (Hofstede G. , 2011) established is the Long-Term Orientation index (LTO). Germany (rank 31) and the UK (rank 25) both score low on the LTO index. Short-term oriented cultures in accordance to the LTO are seen as possessing a personal stability and being steady (Hofstede G. , 2011). Whilst high-ranking countries are identified as being more persisted. Petrakis (2009) linked LTO to entrepreneurship by suggesting that the combination of being willing to take risk and the level of future orientation affects innovation and entrepreneurial behaviour.
Altogether, Germany and the UK show cultural similarities in the hierarchical structure and in individualism. However, in other dimensions, particularly in the willingness to take risk, the German culture shows less cultural affinity to entrepreneurial disposition. Hayton et al. (2002, p.37) argues that an entrepreneurial drive within a national culture is more facilitated in high individualistic and masculine scoring and low uncertainty avoidance and power-distance scoring nations.
The study of cultural characteristics only gives a broad selection of factors that trigger entrepreneurship. Research, in the field of personal traits of entrepreneurs, argues that individualism and uncertainty avoidance is connected on the individual’s ability of being innovative, having a locus of control and willingness of taking risk (Pruett et. al. 2009, p. 574). Furthermore, Mueller et al. (2007) argues that the cultural environment influences personal characteristics that lead to entrepreneurial behaviour. Subsequently, this demonstrates that not only the culture itself influences the individual to create a venture; moreover personal attributes have an impact on it too (Mueller et. al. 2007, p. 80).
In entrepreneurial research, motivational factors are referred to as Push and Pull factors. Push factors are situations where a person is pushed into self-employment. Here external factors create the necessity for an individual to start an own business. Those situations could be the fear of or being in unemployment or redundancy, insufficient income and disputes with superiors (Burns, 2007, p. 99). Scheinberg et. al. (1988) established distinctive characteristics and clustered personality traits of entrepreneurs into following dimensions: desire for wealth, personal development, personal approval and communitarianism. Those described dimensions are known as positive motivation or pull-factors (Burns, 2007, p. 100) where the wish of self-employment, i.e independence (Florida, 2001) comes from the entrepreneur himself or herself and are not influenced by external factors. Florida (2001) also adds self-fulfilment and realization of an idea into a business as pull-factors. Shane et. al. (2003, p. 257) explains that it elementarily depends on the individuals willingness of a person to commit. Motivational pull factors identified as one of the most common incentives to become an entrepreneur (Burns, 2007, p. 101).
Mitchell et. al. (2000, p. 984) established a set of cognitive factors correlated with entrepreneurship which included: knowledge, willingness and opportunity recognition. In an comparative study of novice and serial entrepreneurs in Germany, Mueller et. al. (2007, p.84) discovered behavioural patterns of serial entrepreneurs. The paradigm showed that entrepreneurs have a history of more job changes while novice entrepreneurs favour a more constant employment course. In a cross-cultural study of contrasting personal attributes of entrepreneurs and non-entrepreneurs, McGrath et. al. (1992, p. 425) establish that entrepreneurs have a higher willingness to lead, a positive attitude towards change and believed that they can control their own destiny. Ultimately, Mueller et. al. (2007, p. 84) conclude that being an entrepreneur is a lifestyle choice instead of opportunity recognition or necessity.
Other aspects such as the need of capital, missing knowledge and support, often block those personal traits described (Burns, 2007, p. 6).
Hayton et. al. (2002) argue that the cultural framework of a nation affects entrepreneurial behaviour only to a narrow extent. They further suggest that the economy, venture capitalists and public policy regulations play a greater role in the creation of an entrepreneurial mind-set.
Wagner (2003, p. 265) discovered that serial entrepreneurs face the negative public perception of being a failure because the market exit proves the incapability of the person to run a business. This creates a start up barrier, of a second business, for the entrepreneur. Barriers can be: a high requirement of capital, product differentiation, the presence of economies of scale and restricted access to necessary inputs (Burns, 2007). Financial institutions and venture capitalists consider the risk of a second failure to high to approve investment (Wagner, 2003, p. 267).
A large driver to choose entrepreneurship as carrier is the necessity occurring through unemployment or redundancy (Mueller et. al. 2007, p. 82) The German government supports unemployed individuals to start up a business with the introduction of a new legal form for one person businesses (Ich-AG) (Foerderland, 2009). This contributed to a an increase of three times more business creations out of unemployment from 2001 to 2004 in Germany (Mueller et al. 2007, p. 82)
Ideas and knowledge are seen as distinctive factors contributing to an increasing productivity (Florida, 2001; Jungwirth, 2007). To foster entrepreneurialism; the social environment has to have creative energy that creates innovation and ideas. Florida (2001) argues that in a diverse environment a more varied set of innovative ideas are available. He further states that places with a high diversity again attract other diverse individuals that produce a high level of human capital. Human capital is the combination of knowledge, personal attributes and competences that add up in the professional skill of creating businesses, which contributes to economic growth (Jungwirth, 2007, p.217). A country with a high level of human capital contains individuals with many different nationalities. According to Florida (2001, p.) the pivotal factor is not the culture or the public policy; moreover the diversity of the social environment is what creates entrepreneurialism. Mueller et. all. (2007, p.80) adds to this that people surrounded by a high amount of human capital are more knowledgeable about how to turn opportunities into a business. Since the Second World War, Germany had 20 million people immigrating (Klauder, 1993, p. 483). Additionally, Klauder (1993,p 482) states that the migration had a positive effect on job creation and therefore on the economy as a whole.
Dhaliwal et. al, (2007, p.39) argues that migration not necessarily contributes to the creation of human capital. Ethnic minority enterprises tend to cover only a niche market with limited changes to expand and are known as businesses with low-entry barriers operating low value activities (Dhaliwal et al. 2007, p. 34).
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