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UNEMPLOYMENT AND THE CREATION OF MICRO AND SMALL ENTERPRISES
Conference Paper · August 2014
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UNEMPLOYMENT AND THE CREATION OF MICRO AND SMALL
ENTERPRISES
Kyra Law Ley Sy
Universiti Malaysia Sarawak (Unimas)
kyra_law@yahoo.com
016-8314955
Dr. Harry Entebang
Universiti Malaysia Sarawak (Unimas)
eharry@feb.unimas.my
082-222000
ABSTRACT
The emergence of micro and small businesses has been associated with unemployment
phenomenon. Past studies has confirmed two conspicuous relationship between unemployment
and small business creation. In particular, previous literature appeared to concentrate on the
relationship between unemployment and entrepreneurship among the refugees. However, the
discussion among global literature suggests that unemployment leads to small business and
entrepreneurship creation and development needs to be explored further. This paper undertakes
the main question; to what extend the entrepreneurial activities pursued by micro and small
business enterprises has been the direct result from unemployment? The contribution of this paper
is to identify the role of entrepreneurship as a career choice in order to escape from long-term
unemployment. The paper concludes that unemployment appears to contribute to the
establishment of micro and small business enterprises. Given the constraint and limited amount of
previous literature on the subject, future study should consider the potential determinants of micro
and small business start-up especially among the youth.
Keywords: entrepreneurship, micro business, small business, unemployment, career choice
Conference category: business and finance
INTRODUCTION
Since there is no expectation of a direct relationship between external forces and job displacement
(Remeikiene & Startiene, 2009), entrepreneurial activities may happen just as another career
option to pursue, with or without a direct and process-oriented linkage (Segal, Borgia &
Schoenfeld, 2005). Moreover, there is no model that clearly access to the interaction between
entrepreneurship and unemployment as entrepreneurial activities and external factors differ
among countries (Remeikiene & Startiene, 2009). The relationship between entrepreneurship and
unemployment has been hidden in vagueness (Ghavidel, Farjadi, & Mohammadpour, 2011).
Nevertheless, the impacts of unemployment towards entrepreneurship are still visible as many
low-skilled unemployed individuals opt to venture micro enterprise for survival and long-term
unemployment (Cowling & Mitchell, 1997). The unemployed job seekers have a higher
probability to enter entrepreneurship due to joblessness (Berglann et al., 2011). The creation of
micro and small enterprises (MSEs) turns out to be an opportunity to unemployed as the
employment growth in the MSE sector in developing countries is significant (Naudé, 2010).
Entrepreneurship is a strategy used to keep unemployment low and to generate new businesses
and jobs (Roed & Skogstrom, 2013). An individual opts for entrepreneurship when expected
income from employment is lesser (Pfeiffer & Reize, 2000; Remeikiene & Startiene, 2009;
Khefacha, Belkacem & Mansouri, 2012). As a result, many of the unemployed job seekers
venture in micro enterprises to escape long-term unemployment (Deli, 2011). The formation of
micro enterprises does not require high capital and due to financial constraints, micro
entrepreneurs remain small in a sector (Poschke, 2013).
The distribution of income and investment are more effective in developing countries as MSEs
play a vital role in the process of sustainability (Amini, 2004). The micro enterprises contribute
various essential impacts in its industry as it overcomes competitive advantages by focusing on its
market orientation (Alpkan, Yilmaz & Kaya, 2007). This has shown that entrepreneurship in
micro enterprises offer chances of restoring control and income that is affected by a long-term
unemployment (Wood et al., 2013). Entrepreneurship is potentially to be opted as a career option
during high unemployment (Beeka & Rimmington, 2011). Thus, this paper seeks to present a
comprehensive literature review of the transition from unemployment to entrepreneurship through
the creation of micro enterprises (MSEs).
UNEMPLOYMENT TRIGGERS ENTREPRENEURSHIP
In developing countries, unemployment is a main issue as labour resources have not been used
efficiently (Mohd Noor, Mohamed Nor & Abdul Ghani, 2007). The two-way relationship between
entrepreneurship and unemployment has been identified with ambiguity; an effect of
entrepreneurship to reduce unemployment and unemployment triggers entrepreneurship (Thurik,
2003). This study seeks to contribute to unemployment encourages entrepreneurship as it appears
to be especially vital element to push individuals into entrepreneurship (Wood et al., 2013).
Many of the unemployed eventually choose to be self-employed after being redundant for a while
to escape from long term-unemployment (Andersson & Wadensjö, 2007). They are likely to see
the reduced opportunity of generating income from employment market, thus, to think of the
options of staring a new business (Wood, McKinley & Engstrom, 2013). Andersson & Wadensjö
(2007) continues to claim that many of the unemployed may have a lower reservation income
which gradually pushes them into self-employed without an alternative to be a salaried employee.
By catalyzing transitions from unemployment to entrepreneurship, it is a strategy used to keep
unemployment low as well as to generate new businesses and jobs (Roed & Skogstrom, 2013).
Many who enter a new business not only because of market opportunities and innovative ideas
but also to seek for source of income (Vivarelli, 2012) as most of these new start-up firms are
prompted by high technology as youths are in-hands of human capital in them (Masuda, 2006).
Cowling & Mitchell (1997) illustrate that self-employed is the last resort when an individual is
facing a long-term unemployment and getting a salaried employment lessen. They tend to turn to
self-employment as best alternative due to low prospects of wage employment (Faria, Cuestas &
Mourelle, 2010). Berglann et al. (2011) state that unemployed job seekers have a higher
probability to start a new business venture as individual’s joblessness encourages
entrepreneurship. Necessity start-ups are more likely results from unemployed start-ups due to the
missing of employment alternatives (Caliendo at al., 2013). The low-skilled job seekers pick up
entrepreneurship when opportunities in employment differ (Poschke, 2013).
‘Push’ motivation implies to a person who start a business in order to avoid some undesirable
situation (Taormina & Lao, 2007). This is otherwise known as push-unemployment effect
(Verheul et al., 2010). Although push motivation often refer to unemployment push, there are
other factors which may push individuals into creating new business as well (Verheul et al., 2010)
such as lack of educations, language barrier or criminal backgrounds (Sarasvathy, 2004).
Individuals are pushed into entrepreneurship by undesirable issues which do not only come from
unemployment, but also redundancy, job dissatisfaction, inflexible work schedule and lack of
career prospects (Segal, Borgia & Schoenfeld, 2005; Kirkwood, 2009). However, with a stable
economic and business environment, entrepreneurship thus reduces the unemployment rate
(Remeikiene & Startiene, 2009).
Previous studies show that job loss and reduced opportunities in labour market lead to entry into
entrepreneurship (Farber, 1999; Parker, 2009). A person is pushed into a business when
unemployment reduces the opportunities to obtain a job and expected income from employment
(Pfeiffer & Reize, 2000; Remeikiene & Startiene, 2009; Khefacha, Belkacem & Mansouri, 2012).
Unemployment triggers creativity, in fact, individual may foster entrepreneurship since the
opportunity cost of setting up a new business is not high (Thurik et al., 2008; Roed & Skogstrom,
2010). Therefore, studies have revealed that unemployment is positively associated with
entrepreneurial activities (Highfield & Smiley, 1987; Evans & Leighton, 1990) as it triggers
creativity to adopt a new business idea (Roed & Skogstrom, 2010). In an empirical study in
Sweden, it was most common among long-term unemployed to turn to entrepreneurship
(Andersson & Wadensjö, 2007).
DEVELOPMENTS OF ENTREPRNEURSHIP
When an individual decides to take up a new venture or business, this is how entrepreneurship
begins (Ahmad, Xavier & Bakar, 2014). A variation from wage employment to entrepreneurship
takes place in a phase of general economic growth as profit expectations are higher (Pfeiffer &
Reize, 2000). Taking up and supporting new start-up by unemployed has become one of the
increasing activities in many developing countries (Caliendo & Kritikos, 2010).
Entrepreneurship is a global process and phenomenon in the past decades (Gomezelj & Kušce,
2013). It has effects on different societal level (Davidsson & Wiklund, 2007); for example,
creating new wealth (Klapper et al., 2010) and creating new businesses (Low & MacMillan, 1988)
for practitioners. Schumpeter (1911) defines entrepreneurship as ‘assumption’ of risk and
responsibility in setting up and enforcing business strategy in new business. He later refers
entrepreneurship as ‘creation’ of new business (Schumpeter, 1950) whereby founders and venture
capitalists benefit from their peers in entrepreneurship (Lerner, 2010).
According to (Remeikiene & Startiene, 2009), entrepreneurship rates are high in developing
countries. In a statistics from the 1960 to 2000, the Asian countries (Philippines, Indonesia, Nepal)
surprisingly have high entrepreneurship rate meanwhile countries like Japan, France, Norway and
Spain has declined steadily. Developed countries like the United State, Canada, Mexico, Italy,
United Kingdom, Netherlands and Australia have remained constant during the same period (cited
in Remeikiene & Startiene, 2009).
Entrepreneurship happens and seems to be vital for many unemployed who avoid being
dependent on benefits and create a job for oneself (Andersson & Wadensjö, 2007). According to
Remeikiene & Startiene (2009), it is necessary to contemplate and evaluate external factors as the
identification of interaction between entrepreneurship and unemployment is not strong enough to
prove it mathematically. However, the dynamic interaction existent between entrepreneurship and
unemployment can be described by limit cycles (Faria et al., 2010). For instance, a business
creation needs to hire new workers (reduces in unemployment), but later generated competition
that lead to another small business creation and potential increase in unemployment.
Past literature shows several related facts about entrepreneurship; for instance, individual with
very high or low levels of education are likely to be entrepreneurs, individual pursue
entrepreneurship out of necessity, many of these new firms are small and profits from
entrepreneurship have higher variance than employment (Poschke, 2013). Entrepreneurs has
created a significant role of the labour force and a vital part in employing others (Poschke, 2013).
Entrepreneurship may consume a lot of time, efforts, financial, psychological and social risks
(Gomezelj, & Kušce, 2013) due to different internal and external decisive factors that affect a
firm’s performance (Gartner, 1985).
Although entrepreneurship is defined differently, it can be concluded that it is a process to
creatively satisfying those unmet needs as well as to bear risks, coordinate, organize, innovate and
fill up gaps in a business environment (Salami, 2001). Kuratko and Hodgetts (2004) view
entrepreneurship as an activity of innovation with four elements; individual, organization,
environmental factors and process with support from government, education and constitution
(cited in Makhbul & Hasun, 2011). The interest in entrepreneurship has substantially increased as
many individuals are taking a positive attitude towards entrepreneurship (Fuad, Bohari, & Hin,
2011).
CREATION OF MSEs
Many of new start-ups are small and remain small (Poschke, 2013). However, the definition for
micro and small businesses varies. The definition of micro and small business size differ and may
be conceived in different terms; for instance, number of employees, annual turnover, sector of
business, ownership and value of fixed assets (Abor & Quartey, 2010). In Malaysia for instance, a
micro enterprise covers sales turnover of less than RM 300,000 or less than five full-time
employees (SME Corp, 2014).
The employment growth in the MSE sector in developing countries is often significant (Naudé,
2010). In developing countries, earnings from entrepreneurial activities are better than formal
wage sector (Naudé, 2010). The formation of new firms is beneficial to economic growth (Thurik
et al., 2008) and generate employment in both developed and developing countries (Hart &
Oulton, 2001). Creation of MSEs indicates distribution of both income and assets which have
gone beyond employment contribution, as a specific number of new jobs are related with new
small investments (Amini, 2004). Nonetheless, the performance of micro and small enterprises
(MSEs) are more personalized in less developed countries as they are of smaller firms and less
systematic as a result of inseparable entity of firm and entrepreneur (Mahmood & Rosli, 2013).
In an empirical study, it shows that employment and distribution of income and investment are
likely to be more effective in developing countries, which is a vital role of MSEs in the process of
sustainability (Amini, 2004). MSEs play a main role politically as it boosts job availability and
thus, it is expected to enhance wealth distribution, participation and democracy as employee’s
participation is essential to increase productivity (Amini, 2004). Entrepreneurs of micro
enterprises may engage in processes of discovering new products or markets and exploiting these
opportunities to achieve growth (Unger et al., 2009) that contribute relatively important impacts
on its industry as it is able to overcome competitive advantages by focusing on market orientation
(Alpkan, Yilmaz & Kaya, 2007).
The capital requirement to establish MSEs is minimal as to compare to SMEs (Subramaniam,
2011). The microcredit programmes, on the other hand provide smaller amount of financial
capital to MSEs entrepreneurs with a main objective to reduce poverty and provide opportunities
to engage in entrepreneurial activities (Mahmood & Rosli, 2013). Subramaniam (2011) discusses
several benefits of micro enterprises; for instance, it plays a main role in curbing unemployment,
contributes towards living standard, groom entrepreneurial talent and reduce government
dependency in providing employment. Many entrepreneurs in developing countries are involving
in MSEs which can be informal but contribute to poverty alleviation and growth (Naudé, 2010).
MSEs provide young entrepreneurs additional option and opportunity to take up entrepreneurship
which does not require high financial commitment (Subramaniam, 2011). It can be a solution to
curb the rising unemployment and job hopping especially among young individuals
(Subramaniam, 2011). Entrepreneurship in MSEs plays a significant role in economics, politics
and financial that contribute to distribution of income and wealth (Amini, 2004). It turns into a
tool for employment creation and reduce unemployment issues (Subramaniam, 2011).
ROLES OF ENTREPRENEURSHIP AS CAREER OPTION
At a point, some may raise questions of whether micro enterprises can be considered as a career
option and if entrepreneurs are born or made (Henderson & Robertson, 2000). Substantially,
entrepreneurship is feasible to opt as a career with effective training and educational practices
(Henderson & Robertson, 2000). Nonetheless, the establishment of new firms by entrepreneurs is
depending on different parameters such as individual’s characteristics and existing conditions
(Deli, 2011). It seems to be important for national economic growth as entrepreneurship
contributes to business environments, thus many young individuals are encouraged to pursue
entrepreneurial career (Henderson & Robertson, 2000).
Entrepreneurship is a career choice apart from being employed in an organization. This decision
to start a new business as career choice can be resulted from unemployment or threat of losing a
job in the future (Beeka & Rimmington, 2011). The decision on venturing into a new business is
depending on individual’s assessment of own abilities against unavoidable different professions
(ul Haq, Usman & Hussain, 2014). The perception of one’s entrepreneurial abilities is a core
influence to entrepreneurship as starting a business is a purposeful and conscious act (ul Haq et al.,
2014). An individual have the options between being employed or run a new firm as a living
(Poschke, 2013).
Venturing into a new business has various perspectives; from economic opportunity, autonomy,
challenges and engagement in process of production (Peel & Inkson, 2004). Wood et al. (2013)
suggest that the risk assessment, desirability and feasibility cognition are important as they may
affect an unemployed individual’s willingness to pursue entrepreneurship as a career option. From
the causal factors point of view, entrepreneurship can potentially be a career choice during high
unemployment (Beeka & Rimmington, 2011). To an extreme stage, entrepreneurship can be the
only possible way to attain and restore lost of income, status and control (Wood et al., 2013).
Past literature reveals that unemployed job seekers are forced to work at their own risk (Román,
Congregado & Millánuse, 2013). They portray entrepreneurial activity as a channel to escape
from long-term unemployment (Earle & Sakova, 2000; Constant & Zimmermann, 2004),
however, firms that built by unemployed may face probability of failure (Pfeiffer & Reize, 2000).
The empirical results show that majority low-skilled individuals are into entrepreneurship as
affected by high local unemployment (Deli, 2011). Having the similar results, Millán,
Congregado & Román (2012), find out that unemployment leads to entrepreneurship increases the
chances of entering paid employment or switching back to unemployment in view of
self-employment is a last resort for these job seekers.
Entrepreneurship appears to offer the chances of restoring control and income that is affected by a
long-term unemployment (Wood et al., 2013). However, unemployed individuals often have
lower endowments of human resources and talent which are required to sustain a business which
it can be a lifetime aim instead of a decision made in isolation (Beeka & Rimmington, 2011).
When it comes to predicting career choice, it is common for individuals to choose to become
self-employed if their expected business profits are larger than expected wages (Caliendo,
Hogenacker, Künn & Wießner, 2013).
Successful entrepreneurs turn to be role models in a country (Ahmad et al., 2014), for instance,
Richard Branson from Australia and in Malaysia scenario, the names of Yusuf Taiyoob and Tony
Fernandes are no longer new. Entrepreneurship does not happen immediately, but many
entrepreneurs will choose to create their business during regular employment to minimize the
future job insecurity (Henderson & Robertson, 2000). The perception of micro enterprises is
shaped by social and work experiences which influence and trigger career preferences that seek to
satisfy own ambitions (Henderson & Robertson, 2000).
THEORETICAL CONSIDERATIONS
Access to resources
Individuals’ skills and motivation differ from one another which shape their abilities to discover
an entrepreneurial opportunity which turns out to be a main dimension in social context to
influence the supply and demand of entrepreneurial actions (Solesvik, Westhead, Matlay &
Parsyak, 2013). The social context creates access to resources that affect one’s desire towards
entrepreneurship and subsequently lead to their career in it (Solesvik et al., 2013). According to
Shane (2003), environmental changes such as technological, political and regulatory, social and
demographics are events that affect the existence of competitive equilibrium in a market or
industry, thereby forming opportunities. External environment will encourage individuals to foster
entrepreneurial career option with the right entrepreneurial mindset and accumulation and
mobilization of resources (Solesvik et al., 2013).
Entrepreneurship in micro enterprises has different impacts on economic growth regardless of
barrier factors due to regional differences (Gill & Biger, 2012). However, the attractiveness of
available alternatives to entrepreneurial activities is determined by initial resources that are
accessible, for example, financial endowment, human capital, risk-taking, independence and
social connections (Pfeiffer & Reize, 2000). Formal supports of financial, technology, partnership
and industrial networks contribute to entrepreneurial success (Carrier, Raymond & Eltaief, 2004).
Access to right resources influences entrepreneurship processes (Dess & Beard, 1984; Bull &
Winter, 1991; Keeble & Walker, 1994; Reynolds, Storey & Westhead, 1994), so as it affects an
individual’s decision making (Zain, Akram & Ghani, 2010) that creates impact on the
development of a country and community (Ucbasaran, Westhead & Wright, 2001). Environmental
evaluation is essential and practical in order to identify the influences, drivers and barriers of new
business entry (Nasiri & Deng, 2009) as it significantly affect on business success and failure
(cited in Abdullah et al., 2009). A promising socio-economic environment is essential to the
growth of entrepreneurial activities (Wilken, 1979).
Labour market friction
The labour market friction may bring imbalance equilibrium in wage employment as wages are
not always well-match with ability and cause frictions (Åstebro & Chen, 2014). This suggests that
individual with best and worst ability have higher possibility of leaving wage employment for
entrepreneurship (Åstebro & Chen, 2014). Individuals may switch to entrepreneurship without
weighing their entrepreneurial ability and thus, those who are lacking of this ability will leave the
sector (Åstebro & Chen, 2014). The unemployment rate is influenced by movements in labour
market as it induces more workers to seek jobs in different sectors (Helpman & Itskhoki, 2010).
However, a better labour market may not ensure lower unemployment as it rises due to a policy
change (Helpman & Itskhoki, 2010).
In this theory consideration, employees realize that a mismatched firm or task will earn less and
find that self-employment to be a better option (Åstebro & Chen, 2014). In an empirical analysis,
it shows that a number of new recruits is possibly related to the unemployment figure and vacant
positions (Barlevy, 2011). However, there are still unemployed workers and vacancy remain
unmatched due to lack of coordination in filling vacancies available (Barlevy, 2011).
Unemployment will not be a gap between demand and supply in employment if the potential
labour market is fixed higher than the employment level at labour supply (Blanchflower, 2001).
Although the governments offer unemployment benefits to the unemployed, unemployment
should not be seen as too ‘attractive’ as there must a tactful balance between helping them
through hardship and assisting them to get a nw job (Blanchflower, 2001).
CONCLUSION
Entrepreneurs play an important roles in the labour force, apart from creating new businesses as
well as they employ others (Poschke, 2013). This paper discusses in more details of
unemployment triggers entrepreneurship that seems to be vital point to push individuals into
entrepreneurship (Wood et al., 2013). The main contribution of this paper is to review that
unemployment’s contribution to the establishment of micro and small enterprises as well as to
identify the role of entrepreneurship as a career option to escape from a long-term unemployment.
Low-skilled job seekers may likely to opt for entrepreneurship due to lack of employment
opportunities or alternatives (Caliendo at al., 2013; Poschke, 2013).
The creation of MSEs is beneficial economic growth (Thurik et al., 2008) in both developed and
developing countries (Hart & Oulton, 2001) indicates a fair distribution of both income and assets
which contribute to a number of new jobs and new related investments (Amini, 2004).
Entrepreneurship increases the chances of coming into paid employment (Millán, Congregado &
Román, 2012) through the formation of MSEs that provide another option and opportunity
without high financial commitment (Subramaniam, 2011).
The decision to do start-up as a career option is possibly resulted from unemployment or threat of
losing a job in future (Beeka & Rimmington, 2011) is much depending on individual’s assessment
of own abilities (ul Haq, Usman & Hussain, 2014). In theoretical perspectives, the current social
context creates access to resources that affect one’s desire towards entrepreneurship and gradually
lead to their career choice (Solesvik et al., 2013). Employees may realize that a mismatched firm
or task will earn less and find that self-employment to be a better option (Åstebro & Chen, 2014).
Unemployment should not be a gap between demand and supply in employment when potential
supply of labour market is fixed higher (Blanchflower, 2001).
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