Chapter 6: Entrepreneurship and Role of Environment

Objectives
Understand what entrepreneurship is.
Classify the types of environment.
Understand the relationship between entrepreneurship and environment.
Appreciate the importance of entrepreneurial environment.
Learn about and appreciate the factors affecting entrepreneurial growth like economic,
noneconomic, governmental, social and other factors.
 Continued
What is Environment?
Environment literally means the surroundings, external objects, influences or circumstances
under which someone or something exists.
Business environment refers to a set of external factors which are uncontrollable in nature and
affects business decisions of an enterprise.
Examples of external factors:
political and legal factors
social factors
demographic factors
OR Business environment is the total surroundings, which have a direct or indirect bearing on
the functioning of business.
Note: The success of every business depends on adapting itself to the environment within which
it functions. There are external factors that are beyond the control of the business. So the
business units must have to adapt themselves to these changes in order to survive and succeed in
business
Features of business environment
• Business environment is the sum total of all factors external to the business firm and that
greatly influences their functioning.
• It covers factors and forces like customers, competitors, suppliers, government, and the
social, cultural, political, technological and legal conditions.
• The business environment is dynamic in nature that means it keeps on changing.
• The changes in business environment are unpredictable. It is very difficult to predict the
exact nature of future happenings and the changes in economic and social environment.
• Business Environment differs from place to place, region to region and country to country.
Political conditions in India differ from those in Pakistan. Taste and values cherished by
people in India and China vary considerably.
 Relationship between Entrepreneurship and Environment
There is a close and continuous interaction between the business and its environment. This
interaction helps in strengthening the business firm and using its resources more effectively
Therefore understanding the business environment helps the business in the following ways:
Determining Opportunities and Threats: The interaction between the business and its
environment would identify opportunities for and threats to the business. It helps the business
enterprises for meeting the challenges successfully.
Giving Direction for Growth: The interaction with the environment leads to opening up new
frontiers of growth for the business firms. It enables the business to identify the areas for growth
and expansion of their activities.
Continuous Learning: Environmental analysis makes the task of managers easier in dealing
with business challenges. The managers are motivated to continuously update their knowledge,
understanding and skills to meet the predicted changes in realm of business.
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• Meeting Competition: It helps the firms to analyse the competitors’ strategies and formulate
their own strategies accordingly.

• Identifying Firm’s Strength and Weakness: Business environment helps to identify the
individual strengths and weaknesses in view of the technological and global developments

• Image Building: Environmental understanding helps the business organizations in improving

their image by showing their sensitivity to the environment within which they are working.
 Importance of Entrepreneurial Environment

Reasons for the current growth in entrepreneurial activities are as follows:

• New Technologies: This factor is related to the changes in industry structure. Fundamental
changes in nature of technological development have led to diseconomies of scale.

• Deregulation and Privatization: Now companies have to deal with fewer licenses and
government controls. Many state owned- enterprises have also been privatized leading to a
greater role for the private sector in general and entrepreneurs in particular.

• Return on Innovation: Strengthening of intellectual Property Rights (IPR) has acted as a

major boost to entrepreneurs willing to take a risk on an innovation.
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• Increasing Demand for Variety: Increased wealth has led to the increase in the demand for
variety, which in turn is advantageous to the small firms.
• Service sector growth: Increase in per capita income leads to a greater share of the services
sector in the national economy.
• Government Incentives and Subsidies: Government incentives and subsidies encourage
entrepreneurship.
• Increasing flow of Information: Information is the lifeblood of business and it is being
increasingly democratized. The information technology has revolutionized the way business is
transacted.
• Easier Access to Resources: It is easier for an entrepreneur to access debt and equity finance
than ever before.
• Entrepreneurial Education and Education in General: Many universities and institutions
are nowadays offering entrepreneurship education.
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• Successful Entrepreneurs as Hero: People try to emulate them.

• High Regard for Self-Employment: Self employment is not looked down upon and is
thought of as the best way to achieve a variety of personal goals.
• Rising Dissatisfaction at Job: Employers are finding it hard to retain talented employees.
People’s confidence in their abilities, prompts them to find alternate employment.
• Acceptance of Ex-entrepreneurs in the Job Market: Companies are willing to re-employ
people who have been entrepreneurs.
 Factors Affecting Entrepreneurial Growth
Some of the major conditions which influence the emergence of entrepreneurship in an economy can be
classified and discussed under these categories: economic, non-economic and government factors.
Economic Factors
• Capital: Capital in finance and accounting, refers to the funds provided by lenders (and investors) to
businesses to purchase real capital equipment for producing goods/services. Capital is one of the most
important prerequisites to establish an enterprise and is regarded as lubricant to the process of
production.
• Labour: The quality rather quantity of labour is another factor which influences the emergence of
entrepreneurship. It is observed that cheap labour is often less mobile or immobile.
• Raw materials: Raw material is the basic material from which a product is manufactured or made,
frequently used with an extended meaning. The necessity of raw materials hardly needs any emphasis
for establishing any industrial activity and, therefore, its influence on the emergence of
entrepreneurship.
• Markets: The potential of the market constitutes the major determinant of probable rewards from
entrepreneurial function. Whether or not the market is expanding and the rate at which it is expanding
are the most significant characteristics of the market for entrepreneurship emergence.
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The main factors that affect the economic environment are:
1.Economic Conditions: The economic conditions of a nation refer to a set of economic factors
that have great influence on business organisations and their operations. These include gross
domestic product, per capita income, markets for goods and services, availability of capital,
foreign exchange reserve, growth of foreign trade, strength of capital market etc. All these help
in improving the pace of economic growth.
2.Economic Policies: All business activities and operations are directly influenced by the
economic policies framed by the government from time to time. Some of the important economic
policies are:
a. Industrial Policy: The Industrial policy of the government covers all those principles,
policies, rules, regulations and procedures, which direct and control the industrial enterprises of
the country and shape the pattern of industrial development.
b. Fiscal Policy: It includes government policy in respect of public expenditure, taxation
and public debt..
 ……….Continued
c. Monetary Policy: It includes all those activities and interventions that aim at smooth supply
of credit to the business and a boost to trade and industry.
d. Foreign Investment Policy: It includes all those activities and interventions that aim at
smooth supply of credit to the business and a boost to trade and industry.
e. Export –Import Policy (EXIM Policy): It aims at increasing exports and bridges the gap
between expert and import. Through this policy, the government announces various duties/levies.
Factors Affecting Entrepreneurial Growth
Non-economic factors:
Some major non-economic factors allege to influence the emergence of entrepreneurship is as
follows

Social Conditions: The norms and values within a socio-cultural setting have relevance for the
emergence of entrepreneurship in a particular society.

Social Mobility: Social mobility involves the degree of mobility, both social and geographical,
and the nature of mobility channels within a system. Some hold the view that a high degree of
mobility is conducive to entrepreneurship.

Security: Security is a significant factor for entrepreneurship development. This is reasonable

too because if individuals are fearful of losing their economic assets.

Political Factors: Political stability in an economy is booster of entrepreneurial activities and

lead to the development of entrepreneurial climate in that economy.
 Continued
Legal Environment: This refers to set of laws, regulations, which influence the business organizations
and their operations. Every business organization has to obey, and work within the framework of the law.
The important legislations that concern the business enterprises include:
• Companies Act, 1956
• Foreign Exchange Management Act, 1999
• Payment of Gratuity Act,
• Trade Marks Act, 1999
• Consumer Protection Act, 1986
• Environment Protection Act
• Competition Act, 2002

Psychological and Individual Factors: Many of the entrepreneurial researchers and theorists have
propounded theories of entrepreneurship that concentrate specifically psychological and individual
factors.
• Need Achievement: Need for achievement means the drive to achieve a goal
• Withdrawal of Status Respect
• Desire to do Something New
 Factors Affecting Entrepreneurial Growth
Government factors.
The government keeps formulating policies and programmes to promote entrepreneurs in different
fields.
Demand-side Intervention: This is intervention influences the accessibility of markets, which
includes reducing the market power of large firms or reducing barriers to entry. It also includes
bankruptcy laws, protection of property rights and the regulatory environment of product and
labour markets.
Input-related Interventions: This type of intervention impacts on the resources and abilities of
potential entrepreneurs. Governments can overcome finance and knowledge gaps through
increasing the availability of financial and informational resources.
.
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• Decision-making Intervention: This is directed at the decision-making processes of
individual who are considering the entrepreneurial option. Relevant policies are taxation,
business earnings, social security and labour-market legislation. This affects the risk-reward
profile such as bankruptcy.
• The Economic Rationale for Intervention: This intervention channel that is concerned with
the economic and political concerns for government intervention, and which shape the
determinants of entrepreneurial equilibrium.
• Preferential Intervention: This type of intervention deals directly with the individual
attitudes and preferences of potential entrepreneurs, and attributed to their values and culture.
Preferences are often shaped by cultural background, therefore are difficult to modify but the
government can attempt to shape these by instilling an entrepreneurial culture through the
education system and the media.
Support organizations for entrepreneurs and their role

Institutes engaged in entrepreneurial support is given below:

The National Institute for Entrepreneurship and small Business Development
(NIESBUD):
Major Activities of the Institute are :
• Evolving effective training strategies and methodology
• Standardising model syllabus for training various target groups
• Formulating scientific selection procedure
• Developing training aids, manuals and tools
• Facilitating and supporting Central / State / Other agencies in organizing entrepreneurship
development programmes .
Conducting training programmes for promoters, trainers and entrepreneurs.
• Undertaking research and exchange experiences globally in development and growth of
entrepreneurship.
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National Institute of Small Industry Extension Training (NISIET):
Roles
• Training the trainers.
• consultancy,
• research,
• extension and information services.
Its website can be accessed through www.nisiet.gov.in
Indian Institute of Entrepreneurship (IIE):
Roles
• Identification of training needs,
• Designing and organizing programmers both for development functionaries and entrepreneurs
• Evolving effective training strategies and methodologies for different target groups and location;
• Organize seminars, workshops and conferences for providing foram for interaction and exchange of views by
various agencies and entrepreneurs;
• Undertaking research on entrepreneurship development, documenting and disseminating information needed for
policy formulation and implementation on self-employment and entrepreneurship.
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Entrepreneurship Development Institute of India (EDII)
Roles
• Entrepreneurship education,
• training and research.
• The institute strives to provide innovative training techniques consultancy and quality teaching
& training material
The Institute of Small Enterprises and Development (ISED):
Roles
• Research,
• Education,
• Identification of methodologies and processes that empower one to break out of existing
‘mental models’ in order to identify new opportunities
Analysis of business opportunities in different
sectors of economy
• The various dimensions of a feasibility study are:
Market Analysis: A business cannot succeed without effective marketing. Effective marketing
can be achieved through systematic marketing research. It is important to know about the
intended market. The market analysis should be carried out in a way so as to answer the
following questions:
• What is the total size of the market?
• What percent share of the market will you have?
• Current demand in target market.
• Trends in target market—growth trends, trends in consumer preferences, and trends in
product development.
• Growth potential and opportunity for a business of your size.
• What are the barriers to entry in this market viz. :
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Technical/ Operational Analysis: Technical/ operational analysis is done to assess the
operational viability of the proposed business venture. Key questions to be answered are:
• What will be the Production techniques and costs?
• How will the Quality be controlled?
• How will the Inventory be controlled?
• What type of location will be needed? Is it important that your location be convenient to
transportation or to suppliers?
• What type of Physical requirements like Amount of space and Type of building will be
required?
• What will be the type of utilities like power, water etc, will be required?
• What kind of inventory will be required: raw materials, supplies, finished goods? How will it
be acquired?
• Who are the key suppliers
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Financial Feasibility: After the market analysis and techno- operational analysis, financial
feasibility of the proposed venture is assessed.
Following costs are estimated:
• Cost of land and building
• Cost of plant and machinery
• Preliminary cost: expenses in conducting market survey and feasibility study, establishment
expenses, expenses in raising capital, etc.
• Working capital estimates
• Cost of production: raw material cost, labour cost, overhead expenses, utilities.
• Profitability projections: Are achieved after determining gross profit through summation of
cost of production, selling expenses, administrative expenses and expected sales