the economics of entrepreneurship
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Dr. Joan Fulton Professor and Associate Department Head Department of Agricultural Economics Purdue University . The Economics of Entrepreneurship. Nobel Prize in Economics - 2010. Peter Diamond, Dale Mortensen, Christopher Pissarides For their analysis of markets with search frictions. - PowerPoint PPT PresentationTRANSCRIPT
Dr. Joan Fulton Professor and Associate Department Head Department of Agricultural EconomicsPurdue University
Peter Diamond, Dale Mortensen, Christopher Pissarides
For their analysis of markets with search frictions.
Elinor Ostrom and Oliver WilliamsonFor “her analysis of economic
governance, especially the commons.” and “his analysis of economic governance, especially the boundaries of the firm.”
Paul KrugmanFor his analysis of trade patterns and
location of economic activity
Leonid Hurwicz, Eric Maskin and Rober Myerson
for “having laid the foundations of mechanism design theory.”
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.”
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.”
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”
Accounting 101
Economics 101
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 Bachelor’s degree in 4 years while still focusing on economics
So my career has combined business and economics from the start
University of Western Ontario London, Ontario, Canada
MA in EconomicsVery 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
Spent 2 years as Strategic Analyst in Corporate Planning Department of the Potash Corporation of Saskatchewan
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.”
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
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
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
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
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
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.
23Fighting Poverty
Women Entrepreneurs
Miriam OtooGraduate Student, Dept. of Ag. Econ, Purdue University Germaine IbroEconomist, Institut de Recherche Agronomique du Niger Joan FultonProfessor, Dept. of Ag. Econ, Purdue UniversityJames Lowenberg-DeBoerAssoc. Dean Int. Programs in Ag., Purdue University
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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
25
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. 26
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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Census of Kosai Vendors Niamey Maradi Zinder
One-on-one Interviews with Random Sample of Vendors
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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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Savings:- 80%, 77% and
67% of vendors in Niamey, Zinder and Maradi respectively;
Maradi and Zinder vendors used earnings for immediate expenditures
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 analysis32
Success = f(education, experience, business constraints)
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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• 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
35
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 Esim’s (2001) findings, who cites
non-availability of raw materials as a major constraint faced by women micro-entrepreneurs in developing countries
36
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 37
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
38
Explore other measures of successExplore 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
39
40Fighting Poverty
Women Entrepreneurs
Profit = Revenue – CostsRevenue equals
Selling Price times Number of Units SoldCosts
Fixed Costs▪ Those costs that you incur even if you
produce/sell nothing Variable Costs
THE BUDGETING PROCESS
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
Go through all aspects of the operation and identify the costs
Fixed Costs – you will get a totalVariable 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
Profits = Revenue - Costs
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
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?
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 don’t 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%.
Purdue’s On-Line Business Planning Tool:
InVentureFor more information see the
lecture from the first evening
https://www.agecon.purdue.edu/planner/
Purdue’s 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/
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 don’t expect it to be just the same.http://www.ces.purdue.edu/extmedia/EC/EC-730.pdf
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
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/EC733.pdf
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/
https://www.agecon.purdue.edu/newventures/Grant_Writing/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.
http://in.marketmaker.uiuc.edu/