University of Stirling Waswa Balunywa Portfolio Entrepreneurs and Economic Growth: The Case of Uganda A thesis submitted for the degree of Doctor of Philosophy i Abstract Many developing countries have not benefited from the technological changes that have taken place over the last 30 years. Uganda has been no exception. The country continues to have over 30 percent of its people below the poverty line. This is despite the appropriateness of macro economic policy and government action in many of these countries. Even in the developed countries, slowness in growth has been attributed to lack of enterprise rather than policy and government action. For this reason, governments and multilateral institutions like the World Bank, have attributed the continued poverty or the slow growth to other factors like governance, institutions but more importantly, entrepreneurship. Classical, and indeed neo-classical economists, did not pay much attention to entrepreneurship as a determinant of growth and therefore this relationship has not been explored in most of the research that has attempted to explain determinants of economic growth. It was Schumpeter who suggested that the entrepreneur had a role in economic growth but no empirical studies have been undertaken to verify this. Thus was until recently when the Global Entrepreneurship Monitor (GEM) studies were initiated in 1999 led by Paul Reynolds who had done some previous research in this area. The current GEM studies have focused on small firms and yet the model has existing large firms. This study identifies this gap and it is that gap that the study attempts to explain. Having no firm theoretical foundation, the study adopted an inductive approach using mainly qualitative techniques but also adopted quantitative techniques given the nature of the relationship among the variables. ii Theoretical sampling was used initially to identify the study population. The study identified large scale portfolio entrepreneurs as a unit of analysis and Uganda being a small country, it was possible to assume some kind of laboratory conditions in which the study was undertaken. The study’s overall aim was to establish whether a relationship existed between entrepreneurship and economic growth. To achieve this, the study examined the patterns of growth in the Uganda economy between 1962-2005, the opportunities, the macro economic policy in place, the opportunities that emerged and the role of the entrepreneur in those conditions. The study also examined the emergence of new industries in the economy, the start-ups and exits of firms in the respective industries and the role of the entrepreneur and how this related to economic growth. To secure the data, the study used a case study design for portfolio entrepreneurs combined with a survey for small and medium and corporate entrepreneurs. Unstructured interviews were conducted with portfolio entrepreneurs and self administered questionnaires were used for the other respondents. Secondary data were collected from numerous published sources. The study confirmed that there existed a relationship between macro economic policy and economic growth which confirmed assertions by mainstream economists. The study also established that a relationship existed between entrepreneurship and economic growth. The Uganda economy as a small economy gives that ability to see the relationship. The study reveals, using the Uganda economy, that large scale portfolio entrepreneurs have an important role to play in orchestrating economic growth through their activities of start-up, job creation and infrastructural development. iii The study further confirms that liberalization of an economy as in the case of Uganda creates opportunities and that these opportunities are seized by entrepreneurs. Portfolio entrepreneurs play a key role in this process. Technology too has an important role among other factors. As an industry is formed, many new firms enter it. This creates competition. Competition may lead to development of new technologies, products, services and processes. This leads to firm exiting the industry. The start-up and exit of firms in an industry leads to job creation and loss. It is this process that Schumpeter called the creative destruction where job creation and job losses that creates growth. This study brings out the importance of the large scale portfolio entrepreneurs, how they start business, perceive opportunities, and compete. The conclusions from the study are that a relationship exists between entrepreneurial activity and economic growth, and that large scale entrepreneurs have a major role to play in an economy. They are job creators, tax payers, wealth creators, and through the multiplier effect. There is need for deductive studies in an attempt to confirm this relationship. iv Acknowledgements I am highly indebted to Prof. Peter Rosa, my initial supervisor, despite his transfer of services from the University of Stirling to the University of Edinburgh and Prof. Andrew McAuley, for the encouragement, guidance and assistance but most of all for understanding my unique circumstances of having a full time job as head of a growing institution and not giving up on me. But most important for their guidance in the methodological issues that led to discovery of many new things about entrepreneurship. I wish to thank most sincerely Ms. Serina Nyakoojo Ateenyi, who has worked with me throughout my study including encouraging me to carry on despite the heavy work load and all that happened in my office work. Of course I must thank my employer for providing the funds and time, and my colleagues for the support. My special thanks go to my wife, Asha Balunywa, who understood that I had to put up with more work pressure because of studies. Waswa Balunywa November 2009 v TABLE OF CONTENTS Abstract (ii) Acknowledgements (v) Table of Contents (vi) List of Tables (xvi) List of Figures (xviii) Abbreviations (xix) Bibliography 428 Appendices 442 CHAPTER ONE: INTRODUCTION 1.1 Background …………………. 1 1.2 Theories of Economic Growth …………………. 7 1.3 Entrepreneurship …………………. 8 1.4 Entrepreneurship in large firms in Africa …………………. 10 1.5 Empirical Studies on Growth ………................. 14 1.5.1 Studies by Storey on firm growth ………………….. 15 1.5.2 Studies by Reynolds on firm growth ………………….. 15 1.5.3 The Global Entrepreneurship Monitor (GEM) studies ….. 16 1.6 Aims and Objectives of the study …………………. 19 1.6.1 Overall aims of the study ………………….. 19 1.6.2 The specific objectives of the study ………………….. 21 1.7 Approaches to the study ………………….. 23 1.7.1 Methodological challenges ………………….. 23 1.7.2 Uganda as a case study ………………….. 26 1.8 Importance of the study ………………….. 28 1.9 Contribution of the study .............................. 29 1.10 Organization of the study ………………… 30 vi CHAPTER TWO: THEORIES OF ECONOMIC GROWTH 2.1 Introduction ………………… 32 2.2 What is economic growth and/or development ………………… 36 2.3 Developed and developing countries ………………… 39 2.4 Indicators of under-development ………………… 41 2.5 Characteristics of an under-developed or developing economy ……… 43 2.5.1 Low incomes …………………. 44 2.5.2 Agriculture as the main occupation …………………. 44 2.5.3 A dual economy …………………. 45 2.5.4 Underdeveloped natural resources and economic backwardness 46 2.5.5 Demographic features …………………. 46 2.5.6 Unemployment and disguised unemployment …………. 47 2.5.7 Lack of enterprises and initiative …………………. 48 2.5.8 Insufficient capital equipment and technological backwardness.. 49 2.5.9 Conclusions: Characteristics of developing economies ….. 49 2.6 Theories of Economic Growth …………………. 50 2.6.1 Classical economist theories on growth …………………. 50 2.6.2 Neo-classical theories of growth …………………. 51 2.6.3 Baumol’s growth model …………………. 55 2.6.4 The Austrian School …………………. 55 a) The Schumpeterian growth model …………………. 56 b) Kirzner’s growth model …………………. 61 2.7 Empirical Studies …………………. 62 2.7.1 GEM studies …………………. 62 2.7.2 Audretsch and Keibach’s entrepreneurship capital …………. 67 2.8 Conclusions …………………. 70 CHAPTER THREE: PORTFOLIO ENTREPRENEURS AND GROWTH 3.1 Introduction, Description and Functions of the Portfolio Entrepreneur 73 3.1.1. The portfolio entrepreneur ………………… 73 3.1.2 Who is an entrepreneur ………………… 74 vii 3.1.3 Functions or roles of an entrepreneur ………………… 75 3.1.4 The entrepreneurship process ………………… 78 3.2 Different types of entrepreneurs ………………… 79 3.3 Cantillon, industry maker, administrative entrepreneurs and small business owners ………………… 79 3.4 Entrepreneurs, Intrapreneurs and Corporate Entrepreneurs ………… 80 3.4.1 The entrepreneurs ………………… 80 3.4.2 The intrapreneurs ………………… 81 3.4.3 Corporate entrepreneurs ………………… 82 3.5 Nascent, Novice and Habitual Entrepreneur ………………… 83 3.5.1 Nascent and novice entrepreneurs ………………… 83 3.5.2 Habitual entrepreneurs ………………… 84 3.6 Importance of portfolio entrepreneurs ………………… 88 3.7 Characteristics of portfolio entrepreneurs ………………… 92 3.8 Motivation of portfolio for start-up ………………… 94 3.9 Roles of portfolio entrepreneurs in growth ………………… 97 3.10 Large scale portfolio entrepreneurs and economic growth ………… 99 a) The Forbes list of the world’s richest people ………………… 100 b) Interlocking directorship ………………… 100 3.11 Conclusions ………………… 101 CHAPTER FOUR: BUSINESS CHURN AND ECONOMIC GROWTH 4.1 Introduction ………………… 104 4.2 New firm formation ………………… 108 4.2.1 Schumpeterian views ………………… 108 4.2.2 Kirzner’s views ………………… 110 4.2.3 Approaches to firm formation ………………… 111 viii 4.3 Factors influencing new firm formation ………………… 118 4.3.1 Economic