The Economics of Entrepreneurship

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The Economics of Entrepreneurship

• Dr. Joan Fulton
• Professor and Associate Department Head
• Department of Agricultural Economics
• Purdue University

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Nobel Prize in Economics - 2010

• Peter Diamond, Dale Mortensen, Christopher
  Pissarides
• For their analysis of markets with search
  frictions.

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Nobel Prize in Economics - 2009

• Elinor Ostrom and Oliver Williamson
• For her analysis of economic governance,
  especially the commons. and his analysis of
  economic governance, especially the boundaries of
  the firm.

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Nobel Prize in Economics - 2008

• Paul Krugman
• For his analysis of trade patterns and location
  of economic activity

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Nobel Prize in Economics - 2007

• Leonid Hurwicz, Eric Maskin and Rober Myerson
• for having laid the foundations of mechanism
  design theory.

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Nobel Prize in Economics - 2004

• Finn E. Kydland, Edward C. Prescott
• for their contributions to dynamic
  macroeconomics the time consistency of economic
  policy and the driving forces behind business
  cycles.

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Nobel Prize in Economics

• 2003
• Engle III and Granger for methods of analyzing
  economic time series with time-varying volatility
  (ARCH)
• 2002
• Daniel Kahneman and Vernon Smith for having
  integrated insights from psychological research
  into economic science, especially concerning
  human judgment and decision-making under
  uncertainty. and for having established
  laboratory experiments as a tool in empirical
  economic analysis, especially in the study of
  alternative market mechanisms.

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Nobel Prize in Economics

• 2002
• George Akerloff, A. Michael Spence and Joseph E.
  Stiglitz for their analyses of markets with
  asymmetric information.
• 2001
• James Heckman and Daniel McFadden for
  development of theory and methods for analyzing
  selective samples and for development of theory
  and methods for analyzing discrete choice

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Joans Journey through The Economics of
EntrepreneurshipTheory and Application
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Undergraduate Studies - Excitement
Accounting 101 Economics 101
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Undergraduate Studies Disillusionment Wow
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Undergraduate Studies Practicality

• The Dilemma
• Change Majors or Get a Degree in 4 Years
• The Solution
• Bachelor of Commerce (business)
• Honors in Economics
• This path allowed me to complete my Bachelors
  degree in 4 years while still focusing on
  economics
• So my career has combined business and economics
  from the start

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Graduate Studies

• University of Western Ontario
• London, Ontario, Canada
• MA in Economics
• Very Theoretical
• Mathematical models of economics with no
  application was not sufficient for me at that
  time
• Decided that I needed to experience the business
  world

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Corporate Experience

• Spent 2 years as Strategic Analyst in Corporate
  Planning Department of the Potash Corporation of
  Saskatchewan

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Back to Economics

• Pulling It All Together with Economics
• 5 years teaching intro and intermediate economics
  at University of Saskatchewan
• You really learn something when you have to
  teach it.

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PhD. Studies

• Taking Economics to the Next Level
• After 2 years working in a corporate environment
  and 5 years teaching introductory and
  intermediate economics I was prepared to see the
  value of theoretical modeling of economic
  concepts using high level mathematics
• Applications of economics to business environment
  (farm business management, cooperative
  management, logistical examples) were an integral
  part of the program

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Ph.D. Dissertation Research

• Centralized versus Decentralized Decision Making
  in Grain Marketing Cooperatives
• Professors Prescott and Hurwicz were both on my
  Ph.D. committee
• Initial theory suggested we should see more
  decision making activity at centralized level
  but my empirical results found bulk of activity
  at decentralized level
• Revisiting the model to consider the extent of
  the uncertainty

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Research on Cooperatives

• Following Ph.D. my research examined
• Member Commitment to their Cooperatives
• Situations where cooperative structures CAN and
  DO work
• Where joint ownership and joint responsibility
  are recognized by all of the decision makers so
  people do not free ride
• Factors affecting success with Joint Venture and
  Strategic Alliance agreements
• Effectiveness of New Generation Cooperatives

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Research on Cooperatives/Agribusiness

• Customer Satisfaction with their Cooperatives
• Managing multi location facilities for grain
  marketing cooperatives
• Consolidation of agricultural cooperatives over
  time
• Effectiveness of Word of Mouth Marketing

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Small Business Development

• Value Added Businesses can be important
  especially in agriculture
• Challenge for small business owners can be the
  lack of business skills (marketing, finance,
  planning)
• Often they have the skills for the technical
  production aspect of the business
• Large percentage of small businesses fail
• Business planning significantly increases chance
  of success

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Importance of Business Planning

• Although building a plan does not guarantee
  success, it does increase your chances of
  succeeding in business.
• Research has shown that attempting to write a
  business plan increases your chances of starting
  a business by 24.
• A plan is like a road map.

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Women Entrepreneurs
Fighting Poverty
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Factors Affecting the Success of Women Street
Food Vendors in Niger

• Miriam Otoo
• Graduate Student, Dept. of Ag. Econ, Purdue
  University
• Germaine Ibro
• Economist, Institut de Recherche Agronomique du
  Niger
• Joan Fulton
• Professor, Dept. of Ag. Econ, Purdue University
• James Lowenberg-DeBoer
• Assoc. Dean Int. Programs in Ag., Purdue
  University

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Informal Sector and Street Foods

• Women hold a central role in this sector,
• They use traditional skills and little capital to
  prepare food from scratch using local cereals and
  grains.  
• Provide important nutrition
  for all consumers and especially the
  urban poor
• Important product from cowpeas
  Kosaï

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Kosaï

• Essential source of inexpensive ready-to-eat food
  for workers of every class and occupation.
• Kosaï consumed at anytime of day for breakfast
  and as a snack between lunch and dinner.

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Objective

• The objective of this work is to identify the
  factors that affect the success or women
  entrepreneurs involved in kosaï production and
  sales in the three largest cities of Niger
  (Niamey, Maradi and Zinder)

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Data

• Census of Kosai Vendors
• Niamey
• Maradi
• Zinder
• One-on-one Interviews with Random Sample of
  Vendors

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Educational Level of Vendors

• Between 50 and 60 of vendors have no formal
  education
• Primary education 25 in Niamey, 8 in Zinder
  and 4 in Maradi

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Expenditure Outlets for Income from Kosaï

• Savings
• 80, 77 and 67 of vendors in Niamey, Zinder and
  Maradi respectively
• Maradi and Zinder vendors used earnings for
  immediate expenditures

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Regression Analysis

• Two Measures of Success Considered
• Size
• Quantity of cowpea used per day is proxy for size
  of business operation
• OLS regression analysis with size as dependent
  variable
• Growth
• Self reported perception of the women. Variable
  equal to 1if she was experiencing growth, 0
  otherwise
• Binary Logit analysis

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• Success f(education, experience, business
  constraints)

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OLS Analysis with Size as Measure of Success

• R2 values are low
• Experience (years in business)
• positive and statistically significant for all
  models
• indicates that vendors with more experience are
  more successful
• Capital Constraint variable
• negative and statistically significant for two of
  the models
• vendors identifying capital equipment as an
  important constraint are less likely to be
  successful
• Cowpea Constraint variable
• negative and statistically significant for all
  models
• vendors who find purchasing cowpea as an
  important constraint are less likely to be
  successful.

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OLS Analysis with Size as Measure of Success

• Dummy variables for education
• not statistically significant
• Indicates that level of education does not affect
  the level of success for the Kosaï vendors.
• Dummy variables for city
• statistically significant but suggest that may
  be picking up some other factors

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Binary Logit Analysis with Growth as Measure of
Success

• Likelihood ratio tests show that all models are
  statistically significant.
• Experience (years in business)
• positive and statistically significant for all
  models.
• corroborates the results of the OLS model.
• Capital Constraint
• Negative and statistically significant
• Cowpea Constraint
• Negative and statistically significant
• This supports Esims (2001) findings, who cites
  non-availability of raw materials as a major
  constraint faced by women micro-entrepreneurs in
  developing countries

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Binary Logit Analysis with Growth as Measure of
Success

• Dummy Variable for Education
• Coefficients are negative and significant , not
  expected
• Vendors with more education have other employment
  opportunities
• Vendors with secondary education usually younger
  and single and enter into Kosaï production just
  to save enough money for continuing their
  education or for their trousseau
• Family Size
• variable is positive and statistically
  significant, implying Kosaï vendors with larger
  family size were more likely to experience
  growth
• family members provide free or inexpensive labor.
  
• Dummy variables for city
• Similar to OLS results, these variables are
  statistically significant but are most likely
  picking up other effects

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Conclusions

• The production and selling of Kosaï by women
  street vendors in West Africa is an important
  economic activity
• Uses a significant amount of cowpea
• Provides nutritious food for general population
• Provides important income for the women who spend
  the money on their families
• Experience is an important factor contributing to
  success
• Production constraints are also important
• Capital
• Purchasing the cowpea every day
• Preparing the batter

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Next Steps

• Explore other measures of success
• Explore the production constraint of Preparing
  the Batter
• Joint work with Food Scientists
• Have identified a potential new line of business
• Making a dry cowpea product for quick mix of kosaï

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Women Entrepreneurs
Fighting Poverty
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What do Kids Need to Know
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What are the Basic Business Skills Needed?

• Profit Revenue Costs
• Revenue equals
• Selling Price times Number of Units Sold
• Costs
• Fixed Costs
• Those costs that you incur even if you
  produce/sell nothing
• Variable Costs

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Revenue and Costs Projections

• THE
• BUDGETING PROCESS

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Revenue Projections

• Marketing Plan
• Consider each Market Segment
• Number of customers who are potential and who
  will BUY
• Number of units each customer will buy
• Price customer will pay
• Price times Quantity REVENUE from that segment
• Add up Revenue Across all Segments

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Cost Projections

• Go through all aspects of the operation and
  identify the costs
• Fixed Costs you will get a total
• Variable Costs most of these will be on a per
  unit of product produced basis
• Add up all costs for the amount you project to
  product to get Total Costs

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Remember

• Profits Revenue - Costs

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Competitive Analysis

• Careful evaluation of ALL of your competitors
• 5 Forces Publication is excellent resource here
• There is ALWAYS Competition
• Sometimes it is do nothing
• Your entry into the market may cause an
  unexpected reaction by a competitor plan for
  this as much as possible

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Marketing Plan

• What is the Core Benefit your product/service
  provides?
• What are the needs that your primary customers
  have?
• How does the Core Benefit of your product fit
  with the needs of your customers?
• What are the implications for marketing?

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Planning

• Planning is extremely important because
• It provides a ROAD MAP
• Following the plan is the best way for all people
  involved in the business to be on the same page
• If things dont go as expected you can look to
  the map to see what the appropriate detour will
  be
• Research has shown the value of planning -
  attempting to write a business plan increases
  your chances of starting a business by 24.

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Available Tools
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• Purdues On-Line Business Planning Tool
• InVenture
• For more information see the lecture
• from the first evening
• https//www.agecon.purdue.edu/planner/

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• Purdues AICC/New Ventures Publications
• We have a set of over 20 publications targeted
  for small business management. Check out these!
  They are all free of charge!
• https//www.agecon.purdue.edu/planner/resources/

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Marketing's Four P's First Steps for New
Entrepreneurs, EC-730

• The publication on the 4Ps of Marketing is
  closely related to the material covered in the
  2nd session.
• Note that the publication is all about Marketing
  material but is presented a bit differently than
  the material in the 2nd session in other words
  dont expect it to be just the same.
• http//www.ces.purdue.edu/extmedia/EC/EC-730.pdf

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Industry Analysis the Five Forces, EC-722

• The publication that helps entrepreneurs think
  about the competitive environment
• they are operating in may be helpful for many
  people
• http//www.ces.purdue.edu/extmedia/EC/EC-722.pdf

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General Licensing, Regulatory and Tax
Requirements for Indiana Businesses, EC-733

• For people who are just starting to think about
  the new business the following publication can
  help entrepreneurs sort through the process of
  taking care of all licenses.
• https//www.agecon.purdue.edu/newventures/var/EC73
  3.pdf

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• Check out this page with all of the list of
  publications we just had a sampling this
  evening!
• https//www.agecon.purdue.edu/planner/resources/

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On-Line Materials on Grant Writing

• https//www.agecon.purdue.edu/newventures/Grant_Wr
  iting/index.html
• Here you will find a set of resources that will
  be useful when you are preparing to develop and
  submit a grant proposal. The resources include
  a Quick time video with background,A Quick Time
  video with a specific example, A publication(with
  important worksheets) on Grant Writing.

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• http//in.marketmaker.uiuc.edu/

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Thank you and I look forward to your questions.