Impact of Malaysia's Recession on Undergraduate Start-up
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This part contains research background which illustrates basic knowledge for readers to understand better on the research. Problem statement and objectives tell the reasons why this research is done. Basically this part is significance for introducing the whole research. Other information includes scope and assumption, definition and abbreviation, limitation and significance of the research and research outline.
1.1 Research Background
Recession occurs when the GDP (Gross Domestic Product) of a country falls below 5-10 per cent, lasting for two or more quarters consecutively. The GDP is the total market value of services, goods, investment and labour created within a country in a given period of time, which is usually one year. Frankly speaking, it is said that a recession is a less severe downturn in the economy, and it has a tendency of getting resolved faster compare to the great depression.
The differences between a recession and a depression is, recession is a regular economic downturn that lasts for about 6 months to 1½ years, and a depression is a sharp downturn lasting a number of years. Generally a recession occurs when there is more than 5% people are unemployed for a period of 6-18 months, whereas a depression occurs when more than 10% people are unemployed for a longer period of time lasting years.
Different people had different perception towards a recession. For example, it means a recession for a retailer when his sales drop from 5% to 20%. To stockbrokers, it means a fall in the prices of stocks. The fall of demand and production means a recession for manufacturers.
For normal people, recession can happened in two ways either a significant increase in prices, known as inflation, or a decrease in prices, known as deflation. If there is a decrease in prices, it caused by people that are having less money to spend or chooses not to spend as much money; it leads to the lowering of the GDP. Whereas, when there is an increase in the prices it will reduce of public as well as private purchase power and it causes the GDP to decrease. (Makhsudul Islam, n.d.)
As a highly open economy, Malaysia has been affected by the deepening global economic recession. After growing by 7% in the first half of 2008, the Malaysian economy recorded a growth of 0.1% in the fourth quarter of 2008, and contracted by 6.2% in the first quarter of 2009, as a result of a sharp decline in exports. Given the expectation of a more pronounced global recession, the Malaysian economy is projected to contract by 4 - 5% in 2009. Conditions are expected to improve in the second half year particularly in the fourth quarter and going into 2010. Amidst the unfavourable external conditions, support to the economy will be from domestic demand, following the implementation of a significant fiscal stimulus, the cumulative accommodative monetary policy actions and the continued access to financing. The Malaysian economy is expected to experience the full impact of the global economic downturn in 2009. In response, several policy measures have been put in place with a primary focus on supporting domestic demand as well as mitigating the impact of the global slowdown on the affected segments of the economy
A great deal of emphasis has been placed on nurturing the next generation of Malaysian entrepreneurs with programmes and initiatives that expose youth to business culture and cultivate entrepreneurship. This was designed to prepare youth to be independent and self employed later in life, if they choose this career path.
In 2008, the Small and Medium Industries Development Corporation (SMIDEC) in collaboration with the Ministry of Higher Education (MOHE) introduced the "SME - University Internship Programme" to train and develop budding entrepreneurs among graduates. The programme links SMEs to universities, thus enhancing the synergy between industry and academia to upgrade the capacity and capability of SMEs. Under this Programme, final-year students under the tutelage of their lecturers, SMIDEC's SME Business Counsellors and the SME Expert Advisory Panel (SEAP) provide consultancy, advisory and mentoring services to SMEs with the aim to upgrade the companies' operations in packaging, branding, marketing, accounts and technical areas. As for the graduates, the programme provided exposure to industry and "real-life" day-to-day issues faced by SMEs, enabling them to make practical applications of their studies and sharpen their interests to venture into business.
Meanwhile, to facilitate unemployed graduates and school leavers to venture into the retail sector, the Ministry of Domestic Trade, Cooperatives and Consumerism (MDTCC) conducted the "Train and Work Programme" benefiting 1,000 individuals. The programme was aimed at providing training and career development in operating hypermarkets, exposing participants to the retail sub-sector and inculcating entrepreneurial culture. To assist start-up businesses, the Ministry of International Trade and Industry (MITI) continued to provide Matching Grant for Business Start-ups via its agency, SMIDEC which benefited 1,400 SMEs. (SME AR, 2008)
In this paper, we are going to discuss factors that affecting undergraduates' start-up decision in entrepreneurship point of view. During the recession, most of the start-up is a necessity entrepreneurship. The 2004 Global Entrepreneurship Monitor (GEM) report shows that there is great variability in the relative distribution of opportunity and necessity entrepreneurship across the 34 countries in the GEM sample. GRM 2004 had distinguished between "necessity entrepreneurship," and "opportunity entrepreneurship." According to GEM 2004, a necessity entrepreneurship is which has to become an entrepreneur because no better option and an opportunity entrepreneurship is an active choice to start a new enterprise based on the perception that a unexploited, or underexploited business opportunity exists. The opportunity entrepreneurs are more prevalent in high-income countries (such as France, the United Kingdom and the United States), while necessity entrepreneurs are more common in the low-income countries (such as Hungary and Poland).
Accordingly, it may be argued that in developed countries opportunity entrepreneurship is linked to economic growth, while in most developing countries necessity entrepreneurship exists because of low growth. It may be that because richer countries are characterized by a more developed labour market or access to stronger safety nets (social welfare), there is a lower need for starting up a business and that therefore these countries exhibit lower necessity-based entrepreneurial activity rates.
(Reynolds, Bygrave & Autio, 2004)
1.2 Problem Statement
The factors that affecting undergraduates start-up decision was chosen to be area of study with due of the following reason: Malaysia is having recession, various policies had been made to counter this crisis and we could see that government is stressing on the role of entrepreneurs in helping Malaysia to come out from the recession. We need to identify undergraduates' perception and their supportiveness to entrepreneurship as they maybe the pool of unemployment in this crisis. Graduates unemployment rate had keep increasing; it is believe to reach a critical high rate in this long recession. Start-up can be a good ways for them in overcoming this problem. Now we need to recognize what are the forces that push undergraduates to start-up in despite of recession. Basically the main problem statement and research direction is to answer this question:
1) What are the factors that influence undergraduates to start-up during recession?
1.3 Research Objectives
The objectives of this research are:
1) To understand how undergraduates perceive the role of entrepreneurship and start-up in stimulating Malaysia economic during recession.
2) To identify factors that influence undergraduates to start-up in despite recession
1.4 Significance of the Research
This research is significant because it distinguish undergraduates' perception on entrepreneurship role in this economic crisis. Economists had clarified the importance of entrepreneurship in economic recovery, but many people didn't realise it. Most of the people are fear to start their business in the downturn even they are jobless. In their view, start-up during recession is too risky and couldn't create enough benefits for them to try it compare to the loss possibility. This perception is negative in helping Malaysia economic recovery and relief jobless people from the unemployment. In this paper, undergraduates are tested on their willingness to start-up and what are the causes that may influence them to make such decision. This is significance as undergraduates' unemployment rate had being an issue in Malaysia for many years. A large number of undergraduates will jobless in the recession and this incident could be solve by start-up.
1.5 Limitation of the Research
Some of the respondents may not have sufficient background knowledge about this research so they may not understand or misunderstand the question asked. There are a lot of economics terms which maybe unfamiliar and create confuse for the respondents. It also cannot be discounted that the respondents might have completed the questionnaire without giving serious review on the question in the survey as they could try to be compassionate and sympathetic to assist the undergraduate to complete the project.
As this research is a non-sponsor research, the limited expense budget has significant influence on the population sample size. Therefore, there were some limitations with respect to the analysis and data that may affect the accuracy of the results.
1.6 Outline of the Research
This study is divided into 5 chapters.
Chapter 1: Introduction
It introduces general information of this research, especially in the Malaysia context. It also briefly discussed the background of the study. This is followed by a brief on problem statement and objectives of the study, which is the most important section of this chapter. In addition, the, limitations of the research, the significance of the study, the scope and assumption are described.
Chapter 2: Literature Review
Literature review presents some basic knowledge and theories relating to the research variables. This chapter will provide the information needed to answer the research question. The review is the foundation for developing a conceptual framework in the next chapter.
Chapter 3: Methodology
This chapter is an important chapter of this study. It includes the research variables, conceptual framework, hypothesis and the research methodology. This chapter describes the conceptual framework which is the basis for designing questionnaire. The hypothesis formed will be tested too by the result of the questionnaire.
Chapter 4: Results and Discussions
This chapter presents and statistical analyses the raw data collected from the survey. The statistical relationship of the data is logically interpreted, discussed and argued to make sense on the findings. The results and findings will be discussed deeply on the consequences and effect for each variable.
Chapter 5: Conclusions and Recommendations
This section will precede an overall summary of the study and propose discussion after conducting the entire research. Moreover, in this chapter it will also stated the limitation of the study and yet it will propose the suggestion for future research. A conclusion is made and which must answered the problem statement propose before.
1.7 Definition and Abbreviations
Definitions used by researchers are often not conform, so it is important to define the positions and views taken in this thesis in regards to some key concepts. Definitions of core constructs will also be dealt with in more depth when the various literatures are discussed. Providing an overview here will give readers a clearer understanding of important concepts.
Recession: A period of general economic decline; typically defined as a decline in GDP for two or more consecutive quarters. A recession is typically accompanied by a drop in the stock market, an increase in unemployment, and a decline in the housing market.
Entrepreneurship: The assumption of risk and responsibility in designing and implementing a business strategy or starting a business.
Start-up: A new business venture
SME: Small Medium Enterprise
GEM: Global Entrepreneurship Monitor
Fiscal Policy: The use of government spending and revenue collection to influence the economy
Monetary Policy: The process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy
Market concentration: Is a function of the number of firms and their respective shares of the total production (alternatively, total capacity or total reserves) in a market
FRB: Federal Reserve Bank
1.8 Scope and Key Assumptions
The scope of the population sample covers undergraduates majoring in Bachelor of Business Administration in Malaysia. The sample is selected from the final year student of a university. All of the respondents are assumed to have basic business knowledge and some acquiring knowledge on entrepreneurship, economic recession and government policy implemented in Malaysia. Most of the population samples are chosen from Malacca region.
Assumptions on the respondents are as follows:
l Respondents have basic business knowledge and understand economic terms used in the questionnaire
l Respondents are familiar with current economic condition and policy implemented in Malaysia
l Respondents are honest in their responses to the survey and are not influenced by hearsays in completing the questionnaire.
This chapter has laid the foundation for this research. It introduced the research objectives and raise up the research question.. The research was justified, definitions were presented, the scope and assumption was briefly described, the report was outlined, and the limitations were given. On these foundations, this paper can proceed with a detailed description of the research.
2.0 Literature Review
This chapter gives an overview of literature that is related to the research problem presented in the previous chapter. This chapter will introduce the factors that affecting undergraduate's start-up and how this factor influence their decisions. Besides, it still covers some definition and expert's opinion about the variables in order to give a clear idea about the research area.
2.1 Job Opportunity
Tay (2009) point out that in Malaysia, traditional medicine company Hai-O has successfully helped thousands of ordinary Malaysian bumiputeras becomes millionaires through its entrepreneurship development business model. In times of economic slowdown, Malaysian companies should emulate Hai-O's example to create opportunities and employment for the people. The government should also quickly initiate an entrepreneurial development campaign for all races based on merit, since this is one of the measures to create self-employment and counter the economic crisis.
In the midst of record unemployment, a new Kauffman Foundation-funded U.S. Census Bureau study reports that startup companies are a major contributor to job creation. The Business Dynamics Statistics (BDS) also indicate that while business startups decline slightly in most of the cyclical downturns, startups remain robust even in the most severe recession over the sample period (in the early 1980s).
"Job growth is essential for our economy to rebound, and this study shows that new firms have historically been an important source of new jobs in the United States," said Robert E. Litan, vice president of Research and Policy at the Kauffman Foundation, which funded the BDS. "Our research into the early years of business formation consistently shows how vital new firms are to our economy, and this data should give policymakers and budding entrepreneurs alike great hope for how we can solve our current crisis—create and grow jobs through entrepreneurship." (Ewing Marion Kauffman Foundation, 2009 Jan)
The BDS data show that employment accounted for by U.S. private-sector business startups over the 1980-2005 period was about 3 percent per year. While still a small fraction of overall employment, these jobs from startups reflect new jobs, which is a large percentage compared to the average annual net employment growth of the U.S. private sector for the same period (about 1.8 percent). This pattern implies that, if you exclude the jobs from new firms, the U.S. net employment growth rate is negative on average.
Micro firms (firms with one to four employees) accounted for a large percentage of new jobs in any given year—about 20 percent on average. Although substantially larger startup firms (those with 250 to 499 employees) created a considerably smaller percentage of jobs in any given year—about 1.3 percent of employment in this firm-size class—their numbers still are substantial relative to net growth. Although the overall business startup rate in the BDS does not exhibit much of a trend, the data do reveal a declining trend in the micro-firm business startup rate. This may reflect compositional changes in sectors such as retail trade, where there is ample evidence of substantial shifts away from small, single-establishment firms to large, national firms. (Haltiwanger, Miranda, & Jarmin, 2009)
"Entrepreneurs will be the foundation of our nation's economic recovery because they start and grow businesses that create jobs. Research indicates that former employees are often receptive to starting a new business during a recession. A Kauffman Foundation-funded U.S. Census Bureau study released in January reports that startup companies are a major contributor to job creation. The Business Dynamics Statistics (BDS) also indicate that while business startups decline slightly in most of the cyclical downturns, startups remain robust even in the most severe recession over the sample period .( in the early 1980s) (Ewing Marion Kauffman Foundation,2009 Feb)
The relationship between entrepreneurship and unemployment is analyzed by Audretsch, Carree, & Thurik (2001) in an econometric model covering 23 OECD countries between 1974-1998. They find a complex relationship between the two variables. Defining entrepreneurship as firm start-ups there is both a positive effect of unemployment on entrepreneurship (the "shopkeeper" or "refugee effect") as well as a negative relation (the "Schumpeter effect").
The GEM (2000) concludes that there is a strong relationship between entrepreneurial activities, defined as start-up activities, and economic growth. In the study, this definition of entrepreneurship is claimed to constitute the singularly most important factor for economic growth. In an econometric analysis of Sweden 1976-95, Fölster (2000) finds significant support for the hypothesis that an increase in self-employment has a positive effect on overall employment.
Another study of Sweden by Davidsson, Lindmark, & Olofsson (1994) finds that 70 % of the new net jobs are generated in the small business sector in the period 1985-89. A further emphasis is that most of the new firms are not growth oriented, but are founded on a hobby or subsistence motive. Thus, small firms are important to the economy because of their large number but a vast majority of the upstarts will remain micro firms. Blanchflower (2000) does not support the hypothesis that increases in the level of self-employment increase the real growth rate. Furthermore, making a comparison of the level of self-employment in 23 OECD countries 1966, 1976, 1986 and 1996, Blanchflower finds that the level of non-agricultural self-employment has decreased in most of the countries.
The relative importance of small firms is not undisputed as Davis, Haltiwanger, Schuh, (1996) and Bednarzik (2000) remark in their studies. Although important, entrepreneurship through start-ups is claimed to make a smaller contribution to job growth than expansion within existing firms in the U.S., Davis et al draw their conclusion from a study of data from the U.S. Census Bureau during 1972-1988, whereas Bednarzik has studied the mid-1990s. Although smaller firms have a higher gross job creation rate, large firms supply more in terms of net job creation.
In a comment on Davis et al, Carree and Klomp (1996) contest its conclusion, arguing that small firms created more net jobs in the 1972-1988 periods relative to their employment share. Davidsson et al (1998) empirically test the "regression fallacy," one reason for overestimating the importance of small firms according to Davis et al. The test by Davidsson et al covers Sweden 1989-96 and concludes that the bias does not imply a qualitative change on the overall result. Baldwin and Picot (1995) have studied the Canadian manufacturing sector 1970-90 and in order to avoid a regression-to-the-mean bias three different methods of estimation are used. A consistent finding is that small firms have a higher gross volatility in job growth and destruction but also a higher net employment growth than large firms. While an international comparison of the relative importance of small firms with respect to net job creation is interesting, the results are likely to differ between countries due to institutional reasons. For example, Davis and Henrekson (1999) show that the Swedish institutional environment prior to the economic crisis in the beginning of the 1990s significantly disfavored Swedish intensive-intensive, small, and/or managed-owned family businesses as well as entry of new firms compared to similar types of firms in the United States and other European countries.
Using data from the U.S. manufacturing sector 1972-93 Haltiwanger and Krizan (1999) find that young firms exhibit high average net employment growth rate but also high volatility compared to mature establishments. Furthermore, among newly started firms there is no evidence of any systematic pattern by employer size of net employment growth. The conclusion is that in the context of employment growth, the age of firms appears to be more important than size, with the caveat that attributing a principal role to a single factor might be misleading.
The survey, conducted by pollster Schoen, reveals that 63 percent to 23 percent, survey respondents prefer giving individuals the incentives they need to start their own businesses as opposed to allowing the government to create new jobs directly or through big corporations. Further, as a means of leading the country out of the economic crisis, 63 percent of respondents say the United States government needs to encourage the creation of new businesses, which will create sustainable, long-term employment opportunities and economic growth, while only 22 percent favor the government creating new jobs in the public and private sector. 79 percent of respondents say entrepreneurs are critically important to job creation, ranking higher than big business, scientists and government.Besides, Americans think the government does little to encourage entrepreneurship, despite its importance; 72 percent of respondents say the government should do more to encourage individuals to start businesses. Almost half of respondents think the laws in America make it more difficult to start a business.(Schoen,2009)
Tay (2009) study illustrate (cited from Professor Russell Sobel of West Virginia University), that infusions of venture capital funding do not necessarily foster entrepreneurship. Funding does not create new ideas — it is people who create new ideas. Funding merely follows and flows to those with new ideas and helps to commercialise the venture. In Malaysia, the government encourages ideas and provides seed funding through Cradle Sdn Bhd for commercially viable ideas.
FRB of Dallas's publication Entrepreneurs and the Economics say that the market system rewards those who create opportunities for employment and further innovation. When new products, processes and services are introduced by the entrepreneur, and when customers vote favorably with their dollars, even more opportunities arise. New products or service lines develop to further enhance the recently introduced products. The computer, for example, paved the way for the Internet, which, in turn, paved the way for search engines and software to explore the World Wide Web, which, in turn, created a new way for people to shop and obtain valuable information, and on and on. A wealthy economy is one teeming with superior contributions and the entrepreneurial opportunities created by them.
The director of the U.S. Patent Office during 1899 was wrong when he said that everything that could be invented had already been invented. But the actual is most of the modern conveniences we take for granted today did not exist 100 years ago. According to FDB of Dallas in its publication Entrepreneurship and the Economics, the progress sparked by entrepreneurs' ideas does not simply happen. A tremendous amount of work and a great deal of risk go into every new idea that eventually makes its way into the marketplace. And even though entrepreneurs create wealth and opportunity with their ideas, they are not always appreciated for what they do in the economy. One reason for this is that entrepreneurs can be extremely disruptive. When entrepreneurs take bold leaps and break contact with the familiar, they often leave behind a clutter of obsolete products and processes. This force is called creative destruction. For example, manual typewriters used to be in great demand, because they served a useful function. Now, one would be hard-pressed to find a manual typewriter, or even an electric one, at work in a business. The same fate awaits countless other products, processes and services. New technologies replace old ones, and entrepreneurs spark the change. A healthy economy is one that allows creative destruction to occur because, overall, more people benefit than lose. Each act of creation brought about by entrepreneurs more than offsets the losses associated with products or processes becoming obsolete. (Federal Reserve Bank of Dallas, n.d.)
Sobel stated that a vibrant, growing economy depends on the efficiency of the process by which new ideas are quickly discovered, acted on, and labeled as successes or failures. Just as important as identifying successes is making sure that failures are quickly extinguished, freeing poorly used resources to go elsewhere. This is the positive side of business failure. Successful entrepreneurs expand the size of the economic pie for everyone.
Sam Walton, the founder of Wal-Mart, was an entrepreneur who touched millions of lives in a positive way. His innovations in distribution warehouse centers and inventory control allowed Wal-Mart to grow, in less than thirty years, from a single store in Arkansas to the nation's largest retail chain. Shoppers benefit from the low prices and convenient locations that Walton's Wal-Marts provide. Along with other entrepreneurs such as Ted Turner (CNN), Henry Ford (Ford automobiles), Ray Kroc (McDonald's franchising), and Fred Smith (FedEx), Walton significantly improved the everyday life of billions of people all over the world. Schumpeter stressed the role of the entrepreneur as an innovator who implements change in an economy by introducing new goods or new methods of production. (Sobel, nd)
In the Schumpeterian view, the entrepreneur is a disruptive force in an economy. Schumpeter emphasized the beneficial process of creative destruction, in which the introduction of new products results in the obsolescence or failure of others. The introduction of the compact disc and the corresponding disappearance of the vinyl record is just one of many examples of creative destruction: cars, electricity, aircraft, and personal computers are others. (Schumpeterian, 1911)
In contrast to Schumpeter's view, Kirzner focused on entrepreneurship as a process of discovery. Kirzner's entrepreneur is a person who discovers previously unnoticed profit opportunities. The entrepreneur's discovery initiates a process in which these newly discovered profit opportunities are then acted on in the marketplace until market competition eliminates the profit opportunity.
Unlike Schumpeter's disruptive force, Kirzner's entrepreneur is an equilibrating force. An example of such an entrepreneur would be someone in a college town who discovers that a recent increase in college enrollment has created a profit opportunity in renovating houses and turning them into rental apartments. Some empirical studies have attempted to determine the contribution of entrepreneurial activity to overall economic growth. The majority of the widely cited studies use international data, taking advantage of the index of entrepreneurial activity for each country published annually in the Global Entrepreneurship Monitor. These studies conclude that between one-third and one-half of the differences in economic growth rates across countries can be explained by differing rates of entrepreneurial activity. Similar strong results have been found at the state and local levels.(Kirzner, 1997)
Entrepreneurship and competition fuel creative destruction. Schumpeter summed it up as follows:
The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers' goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates. (Schumpeter, 1939)
Entrepreneurs introduce new products and technologies with an eye toward making themselves better off—the profit motive. New goods and services, new firms, and new industries compete with existing ones in the marketplace, taking customers by offering lower prices, better performance, new features, catchier styling, faster service, more convenient locations, higher status, more aggressive marketing, or more attractive packaging. In another seemingly contradictory aspect of creative destruction, the pursuit of self-interest ignites the progress that makes others better off.
(Alm & Cox, n.d.)
Romer, a leading scholar of Economic Growth, has explained that innovation results from a combination of growth-fostering social institutions and new ideas. Because ideas, unlike objects, can be shared by many at the same time, they greatly increase the speed of technological advancement. Capital, social institutions, and new technology, therefore, do not alone cause growth; they must be combined with the ability and willingness to think and act creatively, which in turn means that innovation, has philosophical and psychological requirements. (Sandefur, n.d.)
Novus ordo seclorum, characterized by greater uncertainty, asymmetry, and reliance on knowledge as a factor of production, has increased the importance of small entrepreneurial firms. Acs and Audretsch (2001) conclude that there are significant differences in the importance of small firms regarding innovative activity across sectors. Specifically, they mention computers and process control instruments as industries where new entrepreneurial firms are an important part of the innovation process. This adds to a list of Baldwin and Johnson (1999), who mention the importance of small firms regarding electronics, instruments, medical equipment, steel, and biotechnology.
Acs (1996) presents an innovation measure, defined as the total number of innovations per 1000 employees in different industry sectors. Applying this measure on data on the U.S. market 1982 indicates that small firms (
In specific studies of the semiconductor industry through patent data between 1977-89, Almeida and Kogut (1997) and Almeida (1999) argue that small firms tend to innovate in relatively unexplored fields of technology. In this way, they differ from large companies, which seem to concentrate their research, measured as patents, in more established fields. Rothwell and Zegveld (1982) made a study of 380 innovations made in U.S., UK, B.R.D., Japan, and France between 1953 and 1973. They found that small firms contributed 31 % and large firms 54 % of all innovations. In estimating how radical the innovations were they also concluded that the entire output of small firms in UK consisted of radical breakthroughs.
The U.S. small firms produced 27 % of the "radical breakthroughs" made in the country as well as 30 % of the "major technological shifts" and 37 % of the "improvement-type innovations." Geroski (1994) finds a strong and negative relationship between market concentration and innovation. This conclusion receives support in a study of industry innovations in 1982 by Acs and Audretsch (1990). Furthermore, the latter support the notion of two technological regimes, an entrepreneurial one, and a routinized one. They note that the entrepreneurial regime, in which small firm innovation is of importance, is characterized by a relative reliance on skilled labor and that large firms control a significant share of the market. By contrast, the routinized regime is recognized as being capital-intensive, concentrated, unionized and producing differentiated products.
A study of growing small and medium sized enterprises (GSMEs) in Canada 1984-88 by Baldwin (1995) indicates that the more successful firms are on average focusing to a greater extent on innovative strategies and activities than the less successful firms. In conclusion, innovation is found to be the most important determinant of small firm success.
New firms play a vital role in the process that links churning to productivity gains. According to a research "Turmoil and Growth: Young Businesses, Economic Churning and Productivity Gains", new and growing businesses create millions of jobs each year. At the same time, exiting and declining businesses destroy millions of jobs. The study, conducted by researchers from the University of Chicago, University of Maryland and the U.S. Census Bureau, points out that the contribution of new businesses extends beyond initial entry, with surviving businesses having very rapid employment growth in their early years. The report's analysis of productivity data shows that young businesses have higher productivity levels and faster productivity gains than more mature businesses, particularly in the early years. In effect, the churning process replaces lower productivity businesses with new, more productive ones, thereby increasing productivity and raising living standards. (Haltiwanger, Jarmin, & Davis, 2009)
The Economic growth from Encyclopedia Britannica stressed the influence of entrepreneurship. If the allocation of resources changes during the course of growth and development, it does so under the leadership of an entrepreneurial class. The quality of entrepreneurship is seen by many economists as an important explanation of differences in the rate of technical progress between countries. Decisions must be made somewhere along the line as to whether a new product or process will be introduced. It has been argued that two countries undertaking similar amounts of investment leading to more or less identical rates of growth in the capital stock will not necessarily show the same rate of technical progress. In one country entrepreneurs may be undertaking enterprise investment that has as its aim the introduction of the most advanced types of production techniques, those that will lead to a rapid growth of labour productivity. In the other, because of hesitation or ignorance, the investment program may lead only to marginal changes in productive processes; the resulting growth in labour productivity and GNP will be small. For example, much has been said since World War II about the more aggressive nature of German businessmen as compared to their English counterparts. The emphasis on the role of the entrepreneur in economic growth stems from the theoretical work of the economist Joseph A. Schumpeter, but many others have echoed it. Modern growth theory can be said to have started with Joseph A. Schumpeter.
Unlike most Keynesian or pre-Keynesian theorists, Schumpeter laid primary stress on the role of the entrepreneur, or businessman. It was the quality of his performance that determined whether capital would grow rapidly or slowly and whether this growth would involve innovation and change—i.e., the development of new products and new productive techniques. Differences in growth rates between countries and between different periods in any one country could be traced largely to the quality of entrepreneurship. The latter in turn reflected certain historical and cultural values carried by the business class. Schumpeter also attributed much of the growth of technical progress and of the supply of labour to the entrepreneur. Thus, in more modern terminology, Schumpeter's explanation of why demand and supply have grown more or less at the same rate would be that supply adjusted to demand while demand in turn reflected the activities and investments of the entrepreneur. (Economic Growth, 2009)
An article by Russell S. Sobel in Concise of Encyclopedia of Economics says that Bill Gates, who as an undergraduate at Harvard developed BASIC for the first microcomputer, went on to help found Microsoft in 1975. During the 1980s, IBM contracted with Gates to provide the operating system for its computers, a system now known as MS-DOS. Gates procured the software from another firm, essentially turning the thirty-dollar pair of jeans into a multibillion-dollar product. Microsoft's Office and Windows operating software now run on about 90 percent of the world's computers. By making software that increases human productivity, Gates expanded people ability to generate output (and income), resulting in a higher standard of living for all. (Sobel, nd)
Sugars has mentioned several reasons to start-up during recession. According to him, recession normally followed by an average of 50-months growth cycle. During recession, everything is cheaper, more and better- qualified people are available at affordable rates, suppliers are giving better credits because the credit markets have virtually shut down, the B2B credit flows are keeping money circulating out of sheer necessity., aware of good opportunities others have buggered up, and finding deals where people could get an entire business simply by taking over a lease. Some other reasons including tax incentives, better public relation and to get out from unemployed. (Sugars, 2009)
Barclays Commercial examining recessionary behaviour amongst established UK companies revealed strong evidence that the recession was significantly and permanently transforming the UK economy, with 60 per cent of businesses claiming their organisation has been transformed for good due to the impact of recession, while less than a quarter of companies have continued to operate unchanged. Paul Harvey, Head of Gloucestershire Barclays Commercial Bank, said: "These results show that far from being focused solely on survival, many companies are using this period to make a renewed push for growth and market share. We are also seeing a grass roots economic transformation in the UK as businesses change what they produce and how they produce it en mass." Other survey findings include: 62 per cent of business owners/managers said they were currently streamlining their business processes to combat recession. Thirty seven per cent said they are diversifying product and service offerings in order to protect against the recession. (Southwest business, 2009)
Aghion and Saint-Paul (1991) formalize the idea that economic fluctuations can stimulate productivity growth with a simple model in which firms' investment in such growth in the reorganization of their production or in technical progress is greater during recessions that are expected to be followed by an expansionary phase. Productivity growth increases because the opportunity cost (in terms of forgone profits) of investing capital or labour resources in technological improvements or managerial reorganizations is low during depression phases the more so when the discrepancy between booms and slumps is large.
Aghion and Saint-Paul first study a one-firm (or one-sector) model, in which the sole producer decides at each instant how to distribute labour between reorganization (or R&D) and production activities. They find that the average growth rate is an increasing function of the amplitude of the economic fluctuations which are assumed to occur randomly and increases with the frequency of recessions, provided that the latter are initially less frequent than expansionary phases. For a multi-firm (or multi-sector) version of this model, in which firms are subject to uncorrelated idiosyncratic shocks of the same type, they find that the average growth rate again depends on the amplitude and frequency of fluctuations. The growth process introduces an additional discounting effect, however, which works through relative prices over time to an extent that increases with the intersectoral substitutability of products.
Aghion and Saint-Paul then analyse the combined effects of idiosyncratic fluctuations and aggregate recessions, which they find reinforce one another the more so when firms incur (large) fixed production costs. More generally, large fixed production costs tend to increase the impact of economic fluctuations on growth. Finally, they show that under a natural interpretation of the model where firms continually hire or fire workers for both `reorganization' and `production' activities their main results are consistent with those found in recent empirical evidence on the cyclical behaviour of job reallocation.
As reported by the Bureau of Labor and Statistics, productivity increased 9.5 percent in the nonfarm business sector during the third quarter of 2009 as unit labor costs fell 5.2 percent (seasonally adjusted annual rates). In manufacturing, productivity increased 13.6 percent while unit labor costs fell 7.1 percent. An article by Kathryn Vercillo (2009) says that employees tend to be more loyalty to the company as unemployment rate is high during recessions. This sense of loyalty is a major contributing factor as to why the recession is actually increasing employee productivity.
Kedrosky report mentioned that cross-section of successful public companies was founded during recessions, including such recent examples as Genentech, Microsoft, Southwest Airlines, Genzyme, and many others. And prominent companies being founded during a recession are not just a recent phenomenon, with Morgan Stanley, Allstate, Krispy Kreme, and Knoll, among others, all able to trace their founding dates to the Great Depression. According to Paul S. Kedrosky the relationship between company success and economic conditions at the time of a company's founding is ill-understood. He further rises up several critical questions such as:
Do weak economic conditions at the start lead to fewer companies founded?
Do weak conditions lead to fewer successful companies?
Do companies founded in better economic times fare better than those founded during recessions?
The answers to these questions are important because of the central role that entrepreneurial ventures play in our economy, from job creation, to innovation, to improvements in our overall standard of living and GDP. In his research he found out that it is slightly more likely a post-1975 IPO (initial public offering) came from a non-recessionary period. That group's productivity was eighty-three companies per year, while the recession subset's productivity was seventy companies per year that went public. If, however, remove the Great Depression and WWII, both of which introduce some unrepresentativeness, result end up with 138 companies/year from expansion periods, and 140 from recession periods. In other words, these data suggest that the likelihood of a company being part of the public IPO set post-1975 is unrelated to whether it came from a recessionary or non-recessionary period. Finally he conclude that at least as evidenced by having gone public—does not give us any information about whether that company was founded during a recessionary or non-recessionary period. At least in a general sense, that is suggestive in that, given smaller numbers of companies founded during recessionary periods, the implication is that companies founded in such times have a higher likelihood of turning out to be economically important. (Kedrosky, 2008)
In Sobel opinion to an entrepreneur, they take the resources necessary to produce a pair of jeans that can be sold for thirty dollars and instead turns those into a denim backpack that sells for fifty dollars will earn a profit by increasing the value those resources create. He makes such a comparison because in competitive resource markets, an entrepreneur's costs of production are determined by the prices required to bid the necessary resources away from alternative uses. Those prices will be equal to the value that the resources could create in their next-best alternate uses. Because the price of purchasing resources measures this opportunity cost— the value of the forgone alternatives—the profit entrepreneurs make reflects the amount by which they have increased the value generated by the resources under their control. (Sobel, n.d.)
Acs (1996) suggests that one explanation for employment growth in the U.S. is increased competition. Manifestations of increased competition include rising import competition, antitrust, deregulation, new structures of vertical integration and reductions in economies of scale.
An econometric study by Geroski (1994, p. 88) leads to the conclusion that "competition plays a significant role in stimulating productivity, with both new firms and new ideas provoking movements to, and outwards movements of, the production frontier which, the data suggest, would not have occurred in their absence." Furthermore, Geroski (p. 149) finds that innovative activities tend to deconcentrate markets and concludes that "it is almost certainly the case that small-firm and entrant activity drives the negative association between changes in concentration and innovative activity which appears in the data."
An econometric study of the US telephone industry by Gort and Sung (1999) yields the conclusion that increased competition has led to greater efficiency within the industry. Gort and Sung assume that competition can affect efficiency in four ways; greater incentive to stimulate demand, higher quality of capital inputs, lower monitoring costs, and greater efficiency of firm-specific organizational capital as well as rivalry stimulating innovation. Regarding the fourth effect, the authors mention that it is possible that the incentive to innovate might be greater under monopolistic conditions due to better opportunities for capturing the returns from innovation. Furthermore, monopolistic enterprises might have more resources to invest in innovation.
Nickell (1996) finds, in a study of firms based in the UK, that there is only weak empirical evidence in favor of the hypothesis that competition improves corporate performance. On the other hand, when measuring competition, as either increased numbers of competitors or lower levels of surplus profits, it appears that there is a positive correlation between the level of competition and total factor productivity growth Financing Activities
Barclays Commercial examining recessionary behaviour amongst established UK companies says that a majority of UK businesses view the ability to leapfrog struggling competitors as their key opportunity in the current recession, according to new research by Barclays Commercial examining recessionary behaviour amongst established UK companies. The Turning the Corner survey, carried out at Barclays Commercial events around the UK, found corporate attitudes remained focused on competition over consolidation as 54% of the 305 business owners and managers questioned viewed the challenges faced by competitors as their key recessionary opportunity, followed by a third (31 per cent) who viewed staff loyalty, retention and productivity as their greatest opportunity during the downturn. (Southwest business, 2009)
Contrary to widely held beliefs that startup companies rely heavily on funding from family and friends, a Kauffman Foundation research paper reported that external debt financing such as bank loans are the more common sources of funding for many companies during their first year of operation. According to the study, nearly 75 percent of most firms' startup capital is made up in equal parts of owner equity and bank loans and/or credit card debt, underscoring the importance of liquid credit markets to the formation and success of new firms.
The KFS (Kauffman Foundation Study) surveyed nearly 5,000 businesses founded in 2004 and tracks them annually over their early years of operation. The survey focuses on the nature of new business formation activity and characteristics of the firms and owners over time. This dataset provides a rich picture, and a first-time glimpse, of the early capital structure decisions of new firms.
Interestingly, the KFS also found that high-tech firms are more likely to get outside equity investments in their first year of operations than any other type of company. According to the data, high-tech firms received an average of $31,216 in this type of financing, compared with firms overall, which received only $7,000 on average. (Robb, & Robinson, 2008)
2.5 Government Policy
During recessions, the government invariably pursues policies to stimulate aggregate demand, that is, to increase spending by households, firms, and government. (In this context, spending refers to consumer purchases, business and housing investment, government purchases of goods and services, and exports net of imports.) Monetary policy can stimulate aggregate demand by expanding the money supply and thereby lowering interest rates, which increases households' and firms' desired spending. Fiscal policy is another available tool. A variety of tax and spending measures can stimulate aggregate demand by increasing the amount of spending that households and firms wish to do at any given interest rate. An increase in government purchases of goods and services directly increases spending. Under some circumstances, simply giving households or firms more money through tax cuts or government transfer payments may increase consumer or investment spending to some extent. Moreover, tax measures can provide incentives, or reduce disincentives, for firms and households to engage in investment and consumer spending. Both monetary policy and fiscal policy have been used to stimulate aggregate demand before and during the current recession.
Fiscal stimulus does not create output and jobs from thin air, but simply "borrows" them from the future. Viard observes that fiscal stimulus to aggregate demand must be properly timed because stimulus "borrows" output and jobs from the future rather than creating them from thin air. He also argues that increases in government purchases do not necessarily provide a larger (correctly measured) stimulative effect than tax cuts and advocates more generous tax deductions for business losses during recessions. (Viard, 2009)
A new paper from the Center for Economic and Policy Research shows that, in spite of a reasonably sized fiscal stimulus package, Costa Rica's economy continues on a downward path, partly because fiscal policy is being offset by a tightening of monetary policy. The International Monetary Fund (IMF) is urging this monetary tightening.
The paper, "Costa Rica During the Global Recession: Fiscal Stimulus with Tight Monetary Policy," by Jose Antonio Cordero, examines how Costa Rica's monetary policy has undermined its fiscal policy as the government has sought to respond to the global recession.
"Costa Rica would do better by listening to those who advise that inflation shouldn't be a major concern during such a deep recession," Cordero said. "Instead, the Costa Rican government seems to have listened to the IMF, and this has hurt the economy."
In February 2009, the Costa Rican government launched the "Plan Escudo," a rescue package supposedly designed to serve as a "shield" against the global crisis, and providing a stimulus of about 2.8 percent of GDP. Recent data, however, shows that the recession appears to be deepening in spite of the stimulus. The paper notes that the IMF has insisted that Costa Rica's monetary policy remain tight due to worries over inflation targets and a perceived risk of a balance of payments crisis. However, the author notes that the IMF could help prevent a balance of payments crisis through the provision of a credit line of foreign currency, as it has done, for example, in Mexico -- a vastly larger economy.
The paper also examines the government's macroeconomic policies in recent years, prior to the world recession, to see what alternative policies might have done better. (Cordero, 2009)
Christenstock explain the pros and cons using fiscal and monetary policy tools in the case of a recession and robust economic growth. By using taxation as a fiscal policy tool, the pros are:
a) Reducing income taxes can cause unemployment to decrease and provide an optimistic financial strategy for majority of the employed workforce. It also increases productivity and healthy business ethics, both of which are beneficial for businesses, employers, and overall commerce.
b) Reducing income taxes provides and is the majority of income for the government. Taxation gives the government the ability to function and the ability to focus on the publics' interests of expenditures in a specific sector of the fiscal policy.
The cons are:
a) Entering and exiting recession can cause cyclical unemployment. Therefore, dependent on the economy's current business cycle, increasing taxation during a recession will cause unemployment to increase higher and higher, lengthen the timeframe and term of economic growth from recession, and provide difficulty in projecting economic growth.
b) In a recessed economy, increasing taxation decreases worker productivity, income, and most importantly, the optimism of a workforce.
By using interest rate as a monetary policy tool, the pros are:
a) Decreasing interest rates can assist to control a recession in the economy. By decreasing such rates, strength to sustain economic growth is foreseeable.
b) With regard to credit and lending, when the Federal Government appropriately continues to decrease interest rates and attempts to decelerate an obvious decline in a specific market or recover from a recession toward economic stability, the demand for lending and credit increases.
The cons are;
a) Extraordinary interest rate increase can cause recession and may inadvertently decelerate economic growth.
b) Numerous and extraordinary interest rate increases can cause specific markets to suffer toward recession based on the lack of demand and overabundance of supply.
The Obama administration's $787 billion stimulus package has yielded results as the U.S. economy grew for the first time since the second quarter of 2008. However, it's unlikely the U.S. economy can sustain growth in the near term without help. Such measures could include:
- Keeping Interest Rates Low: Inflation was largely kept in check in the third quarter, rising just a half a percentage point when energy and food is excluded, compared to a 0.8% increase in the second quarter. The Fed is expected to keep the key interest rate at its record lows of 0% to 0.25% after it meets next week, and isn't expected to raise rates until next year. However, when the U.S. economy does start to show signs of consistent growth, the Fed will have the crucial task of correctly timing an interest rate hike to counter any inflation.
- Extending the First-Time Homebuyer Credit: Congress will likely extend this incentive, which is slated to expire after November 30. While both parties agree the credit should be extended, there's some debate on certain amendments to the bill, such as giving existing homeowners a chance at the credit if they've owned their current homes for at least five years.
- Purchasing Mortgage-backed Securities: The Fed last month reiterated its commitment to buy $1.25 trillion of mortgage-backed securities and another $200 billion of debt issued by the government-controlled finance firms Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE), which will continue at least through the end of the year.
- "Dollars for Dishwashers": Think Cash for Clunkers, but on a smaller scale. This $300 million program is designed to encourage consumers to purchase Energy Star-rated appliances and will once again boost the durable goods category. The government has divvied up the money among the 57 states and territories based on population, and it's likely to begin in the first quarter of next year. (Blandeburgo, 2009)
Federal Government typically creates many incentives for consumers to spend money and save on their taxes. For example, the 2009 Economic Stimulus plan authorized the first-time homebuyer tax credit, which expires on December 31, 2009. For first-time homebuyers, who do not have enough money saved (or gifted) to qualify for a loan, this newly enacted legislation, provides a tax credit of as much as $8,000. Another tax break that was changed in 2008 pertains to widows and widowers. In the past, a single person could only exclude up to $250,000 from capital gains tax after the sale of a primary residence. Effective in 2008, a surviving spouse can now exclude up to $500,000 after selling their primary residence (same as a couple), as long as the sale is within two years of the other spouse's death.
The above are just two examples of the kind's things that the Federal Government will provide and that you should take advantage of during hard times. The recently enacted 2009 Economic Stimulus Package provides many other tax credits and incentives. (Saving and Managing Your Money during a Recession, n.d.)
Global trade flows and the economic stimulus policies of individual national economies will play an important role in the recovery from the current global recession. This is especially true of the world's two largest economies, the United States and China. As economist John Ross has emphasized, China's stimulus is not just a matter of deficit spending. China's government has other tools available, and is using them in a big way. The state controls most of the banking system, and has used this control to double the amount of bank lending in the first half of this year, as compared to 2008. It has greatly increased investment by state-owned enterprises, which are a large share of investment in the Chinese economy. The money supply has increased 28.5 percent over the past year. Nonetheless, most developing country governments can still use expansionary fiscal and monetary policies as much as possible to counteract the downturn. Unfortunately, the International Monetary Fund, which supports such counter-cyclical policies in rich countries, has been promoting the opposite - including fiscal and monetary tightening - in many low-and-middle-income countries. The rich countries also seem to be more hamstrung than China. The United States has approved a stimulus package that for 2009 and 2010 - taking into account the spending cuts and tax increases by state and local governments - is only about 0.9 percent of GDP. This is a small fraction, perhaps not even a tenth, of the expected decline in private spending from the bursting of our $8 trillion housing bubble. (Weisbrot, 2009)
In Mini Budget Speech, Datuk Seri Najib Tun Razak mentioned that the programmes and projects under the First Economic Stimulus Package totalling RM7 billion are being actively implemented. In view of the deteriorating global economy, the Second Stimulus Package is significantly larger and more comprehensive, encompassing various economic sectors and target groups. This includes workers, consumers, investors, small and medium businesses, exporters and unemployed graduates. There government implementing is four thrust including:
i) Reducing unemployment and increasing job opportunities- providing training and creating job opportunities through public and private sectors, encourage graduates to venture into business activities and add value to existing small and medium enterprises (SMEs), giving welfare to retrench workers and etc.
ii) Easing the burden or rakyat including vulnerable group- The Government provides various subsidies, incentives and assistance for fuel consumption, food security, scholarships and educational assistance as well as social welfare programmes. Improving Public Infrastructure etc.
iii) Assisting the private sector in facing the crisis- Working Capital Guarantee Scheme, industry Restructuring Loan Guarantee Scheme, facilitating Access to Capital Market, reducing Cost of Doing Business, promoting the Automotive Sector, accelerated Capital Allowance and carry Back Losses, enhancing tourism etc.
iv) Building the capacity for the future- promote domestic private investments, agricultural projects to be implemented, Private Finance Initiative, education and etc. (Mini Budget Speech by Datuk Seri Najib Tun Razak, 2009)
In conclusion, start-up creates job opportunities and it tends to influence undergraduates decision during recession. A lot of necessity entrepreneurs appear during recession. Undergraduates are the most vulnerable group in losing job during recession. This satiation will affect undergraduates' start-up decision. Innovation is prior to the success of firm. It is believe that undergraduates are having greater creativity in innovating compare to the other social group. Research shown innovative output is increasing at the vicinity of university. This phenomenon shows that innovation is the biggest capital hold by undergraduates in recession start-up. Therefore, undergraduates may think of start-up during recession if they are innovative enough. Productivity is important to firm as increasing of productivity decreasing the cost of production and generating more revenues. During recession, the productivity tends to be higher as staff loyalty is increase. Staffs are appreciating when they get a job during recession, and this mind of appreciate will motivate them to work harder. Another reason of increasing productivity is because the elite workers retention. Beside, some of the resources like human resource, second hand equipment and etc are available and cheaper during recession. The increasing of productivity during recession will affect undergraduate start-up decision. Competition environment bring positive impact to new firm. If new firms able to survive in harsh competition during recession, it means they are very competence and are on the path to success. Such firms often go further compare to firm establish during inflation. Besides that, a lot of chances appear and market space available as many firms had closed down during recession. Therefore, competition during recession may affect undergraduates' start-up decision. Finally, Malaysia government policies are encouraging entrepreneurial activities during recession. A lot of benefits provided such as working capital scheme, capital allowance, lower tax rate and etc during recession. It may motivate undergraduate to start-up during recession.
This part will provide the conceptual framework based on literature review and an overview of the research m
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