AGSE 2009 THE CONTRIBUTION OF PORTFOLIO ENTREPRENEURS TO ECONOMIC DEVELOPMENT AND GROWTH: THE UGANDAN LABORATORY CASE Waswa Balunywa: Makerere University Business School, Kampala, Uganda Peter Rosa: University Of Edinburgh Business School, Edinburgh, United Kingdom ∼ Contact: Peter Rosa, University of Edinburgh Business School, William Robertson Building, 50 George Square, ., EH8 9JY Edinburgh, UK, (T) 0044 131 650 3798, Email: [email protected] INTRODUCTION It is now twenty two years since MacMillan (1986) recommended that to understand entrepreneurship we should study serial entrepreneurs. Since then there have been many studies on habitual and portfolio entrepreneurs, covering a range of themes. Early studies concentrated on definitional issues, distinguishing serial entrepreneurs (those that start a series of businesses, but close each one before starting another) and portfolio entrepreneurs, (entrepreneurs who start more than one business but do not necessarily close those started previously, hence leading to the ownership of a portfolio of businesses)(Birley and Westhead, 1993). They also focused on whether there were detectable differences in the nature of businesses started by novice and habitual entrepreneurs, and whether the creation of a group of companies by an entrepreneur is an entrepreneurial process linked with growth. Their contribution to growth, it was argued, could only be fully appreciated by switching the unit of analysis from the firm to the entrepreneur (Rosa, 1998, Scott and Rosa, 1999). Since 2000 there have been three themes of research. First considerable attention has been paid by Westhead, Ucbasaran and Wright in a series of articles to what characterises habitual entrepreneurs, in particular whether their human capital (education, but crucially experience) is a critical factor in the success of habitual entrepreneurs (Ucbasaran et al. 2008). Second Rosa and Iacobucci have specialised in understanding the process of forming business groups by habitual entrepreneurs (e.g. see Iacobucci and Rosa, 2004). Recent articles have shown that entrepreneurial motives are important for instigating entrepreneurial diversification, but the decision whether to accommodate this diversification within the existing firm or by starting a new one is complex, and often related to the need to manage new key incomers into the business. Third there is a growing interest in habitual entrepreneurship in a family context, the fact that family businesses are not just a single business, but a group of businesses started and grown by various family members. There is one theme, however, which has been little studied, that is the role of habitual entrepreneurs in economic development and growth (Ucbasaran, et al. 2008). Why this is the case is unclear, but there are several possible reasons that suggest themselves. First the study of habitual entrepreneurs has not been on the main research agenda in the USA, where the emphasis has been much more on nascent and start-up novice entrepreneurs, or small business. Even the studies of habitual entrepreneurs to date have been located in the small firm sector where businesses by definition have been relatively small, and individually not a dominant force in their sectors. Where the focus has been larger firms, research has been mostly concerned with corporate entrepreneurship, not with highly successful entrepreneurs heading large businesses. These are inevitably portfolio entrepreneurs. Second there has been little attention paid to how existing entrepreneurs contribute to wealth creation and jobs. This is most apparent in the GEM model, (Reynolds et al., 2001) where existing businesses appear as an important element of the model in predicting how entrepreneurship leads to economic growth, but have yet to be seriously researched. Third the geographical focus of studies on habitual entrepreneurs has been mainly Europe, where national economies are large, complex and where the general view is that it is 587 AGSE 2009 corporate blue chip companies, not entrepreneurs, that drive the economy. It is very difficult to be able to research what effect individual entrepreneurs have on these complex economies. Third there are issues of access. Europe's top entrepreneurs are not easy to even locate, never mind contact and interview. The present paper addresses the theme of the contribution of habitual entrepreneurs to economic development and growth by locating the study in Uganda. Unlike in Europe the prominent entrepreneurs are relatively few and easier to access, the complications posed by corporate blue chip companies are less (they hardly exist except as multinational subsidiaries), and the economy is much smaller. Uganda thus offers a kind of laboratory context to research the influence of habitual entrepreneurs on economic development and growth. The paper illustrates this through doctoral research carried out by one of us, Balunywa. What is the role of habitual entrepreneurs in economic development and growth? Neoclassical economic theory traditionally has had no room for the entrepreneur in explaining economic growth, but recent developments now allow it a limited role. Audretsch and Keibach (2004) have argued that though most economic growth is a function of labour, capital and, to some degree, knowledge (as advocated by theorists such as Solow and Romer), there is a place for entrepreneurship where knowledge is uncertain. Thus the role of entrepreneurship in economic growth is small but significant. Entrepreneurs thus have some role to play through their ability to accept uncertainty, and to build up knowledge of managing businesses better from start-up. This contrasts with economists outside the neo-classical paradigm, where entrepreneurs are important generators of growth. Much of the theory of entrepreneurship and economic growth is inspired by Schumpeter (1934), in which economic growth occurs as a result of innovation cycles of creative destruction led by radical entrepreneurs. This, as Bhide (2000) has recently demonstrated, is not just linked to innovations in products or services, but also in the ability of entrepreneurs to envisage and apply revolutionary business concepts and models. Most entrepreneurs, however, are not radically innovative. They create wealth for themselves rather by exploiting information asymmetry, and being alert to new high margin opportunities (Kirzner, 1973 and 1984).. These opportunities do not necessarily stem from innovation in the Schumpeterian sense,, but also from changes in legislation or other economic conditions where information asymmetry can be created. New opportunities are spotted by alert entrepreneurs who have the knowledge and skills to turn them into profits. How far Kirznerian entrepreneurs enhance wealth creation in the wider economy is a matter for debate (it could be argued that they merely recirculate existing resources). In our view, however, entrepreneurs in an economy are the conversion mechanism in which opportunities translate into profit. Without them there would be no economic transactions at all. There are arguments as just shown to explain why entrepreneurs can create economic growth. Is there anything special, however, by habitual entrepreneurs? Does it make a difference whether they grow a single business or a variety of businesses? In a Schumpeterian scenario, an entrepreneur can grow a single business into a large entity so great that its impact on the economy is obvious. Examples of this is the oil empire of Rockefeller, the first entrepreneur to fully realize the new importance of oil in the 19th century; or of Bill Gates, a radical exploitation of the rapid advent of the PC and its need for an operating system. However most entrepreneurs are more “Kirznerian” in character, spotting opportunities which require no fundamental innovations, just the possibility of good profit margins. Most firms no longer seek to grow a single business and dominate a mass market, but rather seek to grow new businesses in a series of different markets. The classic example of this in the UK is the Virgin Group, whose founding entrepreneur, Sir Richard Branson, has started over 150 businesses, and each in a high growth market segment of the economy. He has effectively started a system of constant new venture creation, based on a very strong brand. By setting up the group he also is able to operate a system of competitive churn in which a new companies displace those that are performing less well. In time the portfolio of companies changes quite dramatically but the group as a whole continues to exist and prosper. This, it could be argued, is a typical “Kirznerian” situation. This new type of business group formation, associated with the activities of a habitual entrepreneur, is thus, it could be argued, highly relevant to economic development and business growth. Such entrepreneurs have the flexibility and knowledge to quickly exploit new innovations and opportunities, and to respond sensitively to market forces. They tend to be in a better position to cope with new lines 588 AGSE 2009 of business and corporate businesses which have a more bureaucratic and inflexible culture. Indeed it an examination of the world's top companies reveals that a surprisingly high number are business groups owned, controlled and strategically managed by a portfolio entrepreneur or his or her family. When a habitual entrepreneur learns to combine entrepreneurship with corporate knowledge, performance tends to be enhanced. Portfolio Entrepreneurs and