Are there cultural determinants of entrepreneurship?

Authored By Prof. Antoinette Schoar (Massachusetts Institute of Technology) - Principal Researcher Prof. Raj Kamal Iyer (Massachusetts Institute of Technology) - Principal Researcher Sandya Kumar (SEFC –IFMR Research )- Sr.Research Associate Are there cultural determinants of entrepreneurship?

Motivation - Ethnicity & Entrepreneurship
History of Entrepreneurship in India
Indian Perceptions and Stereotypes
Study set up
Entrepreneur’s in Pen wholesale industry
Methodology
Field Setup
Outcome Variable
Major findings (1-6)
Conclusion
Presentation Flow

Schumpeter’s Entrepreneurs
- Separate class of individuals
- Possessing specific skill set like
- High Risk tolerance
- Ability to create new & efficient business
Max Weber (1904) influence of culture on protestants
Grief ‘s study on Maghribi traders of 11 th century
Ethnic communities known for entrepreurial skills
- The Svabians in Germany
- Marwari’s in India
- Esfahanis in Iran and many more ….
But no systematic studies to document whether ethnicity influence the outcomes of business transaction
Motivation Ethnicity & Entrepreneurship

Entrepreneurial traditions in India finds its roots in the trading practices within the Bania or Vaishya families
Traditional trading castes in India were
- Aggarwals and Guptas in the North,
- Chettiars in the South,
- Parsees, Gujarati Jains and Banias, Muslim Khojas and Memons in the West,
- Marwaris across the country
History of Entrepreneurship in India Source : D.R Gadgil’s study on the origin of Indian business class

The common perceptions connecting Ethnicity and Entrepreneurship are:
The Business/trading communities are more adept at entrepreurship as compared to people from other communities
The children from such communities are taught the tricks of the trade since childhood
The community ties allow new entrants a favorable environment by easy access to business network and finance.
Two side of the stereotype are:
People from trading communities are seen to be very good at getting the best deal in a negotiation
They can be trusted to honor a contract, since they know the importance of business and are more professional
Source : D.R Gadgil’s study on the origin of Indian business class
Ethnicity & Entrepreneurship: Indian Perception & Stereotypes

Research Question Are there cultural determinants of entrepreneurship?

In order to carry out the study we identified ‘ Pen wholesale market ’ because of the following
- Belongs to SME sector.
- Ethnic diversity of entrepreneurs (Marwari / Tamilian/Andhrites)
- Low cost per transaction
- Option to have a customized product.
- Geographical proximity.
The Set Up

Wholesale market in Chennai

Marwaris - Business clan from Rajasthan
- Known for shrewd business & entrepreneurial skills.
- In Chennai for more than 60-70 years
- Involved in money lending, gold business, wholesale and distributorship & stock marketing
Andhrites - Native of Andhra Pradesh
- Known as farmers & small traders
- Mainly trade in agri commodities
- Castes like Rao, Naidu, Chettiar are them main trading communities
Tamilians - Native of Tamil Nadu
- Known as educational & professional class
- Local trading Castes like Chettiar, Nadar
Entrepreneurs in Pen wholesale industry

Conduct an audit study in a large trading cluster in Chennai, South India
Traders in the Pen and Stationary industry (> 200 enterprises)
Audit study is a research method which is an examining or investigative study to understand the issue in-depth with the help of auditors/mystery shoppers.
Set up where we send “entrepreneurs” from different ethnic backgrounds to local businesses to negotiate purchase deal with business owners
Auditors have preset script of the purchase contract to negotiate with the wholesalers in which they are trained thoroughly
Dimensions to negotiate on are purchase price, provision of trade credit (payment mode , discounts) and size of upfront payment (advance amount)
Methodology

Total sample – 508 visits 1
107 Pen wholesale shops identified - with mix ethnicity.
47 real time entrepreneurs selected as auditors from the 3 community i.e. Marwari, Tamilian and Andhrite.
10-11 visits for each auditor
Randomly allotted visits
Auditor adheres to a script and predefined bargaining process 2
Each visit – order size range 500-750
Two pen brands – cello fine grip & Reynolds 045 3
Auditor enterprise – Represented one of these - Event management, advertising agency, conference organizer and marketing company
Type of visit – With Customization (printed) 4 & Without Customization (plain)
Field monitoring – On-field monitoring
1 Visit = auditor goes and places order in the assigned shop and picks the delivery
2 Bargaining rule for all the bargaining dimensions.
3 Reputed brands with same MRP & wholesale list price
4 Company names or social messages -single color but difficult to erase
Field Setup

Initial Price
Final Price
Upfront payment (advance)
Measure of perceived business acumen
Record the first price that is offered by the business person
Record the final price agreed upon
Measures of trust
Fraction of upfront payment (advance) that is agreed upon
Terms of trade credit that is extended (cash discount, current cheques or post dated cheques )
Outcome variables

Price differences between wholesalers from different communities
Marwari traders offer significantly lower prices than others
In contrast Andhra traders offer significantly higher prices at the start of the negotiation and also as final outcome
Major findings 1 - Wholesaler The findings indicate that the different ethnic groups seem to have a very different bargaining strategy in terms of the final prices they agree upon and price they offer as the starting point of the negotiation. Type of trader Average price per type of trader (Rs.) Tamilian 4.50 Andhrite 4.72 Marwari 3.96

Upfront payment asked for the customized pens by the wholesalers.
- T he risk of hold up is similar across the wholesaler of different ethnicity.
- Results confirm that Andhra wholesalers ask for a 10% higher upfront payment whereas the Marwari wholesalers ask for 5% lower upfront payments on average compared to Tamil wholesalers. Thus on the dimension of upfront payments & price there are differences in bargaining outcomes across ethnic groups.
This contradicts the local stereotype that Marwari wholesalers will always ask for higher upfront payment because of their shrewd business skills. And such a behavior might either be a sign that the Marwari’s are most generous and trusting or alternatively it could signal that they are willing to take more risk in their relationship with customers. Major findings 2 - Wholesaler

Price paid by the buyers from different communities
- The Andhra auditors paid more than Marwari & Tamil auditors for a similar product purchase
- The Marwari buyers have paid the least.
Major findings 3 – Buyer (auditor ) The reason for such a behavior could be the difference in the bargaining skill or the difference in the treatment of the wholesalers to buyers. Buyer Ethnicity Average price per type of buyer (Rs.) Tamilian 4.50 Andhrite 4.59 Marwari 4.42

Upfront Payment paid by the Buyer
- There is not much of a significant difference between the advance payments paid by the Marwari & Andhra buyers but both Marwari and Andhra buyers on average were asked for a higher upfront payment than Tamilians
This is in agreement with local stereotype that Tamilians are more honest and would be asked for lower advance payment .
Major findings 4 - Buyer

Importance of a “Match” between the Ethnicity of Buyer and Wholesaler
Wholesalers not only offer buyers from their own ethnic group a better deal upfront and even the initial price offer of the wholesaler is more generous.
Major findings 5 - Match This suggests that wholesalers might engage in differential treatment between buyers of different ethnic groups.

Upfront payments charged
We took the upfront payment charged by the wholesalers and compare them between matched and non-matched visits.
- If community affiliation serves as a “ Trust ” indicator we would expect to see lower upfront payments asked when business parties of the same ethnic community are matched.
Major findings 6 - Match The results suggest that on average the wholesalers do not seem to ask for a different (smaller) upfront payment if the buyer is from the same ethnic group

Conclusion
Wholesalers from the most entrepreneurial community(Marwaris) offer lower prices as compared to other communities .
When buyers and sellers of the same community contract, the price offered is lower.
The average level of trust embedded in the informal contract is high. However, we do not find that the level of trust higher when people from the same community contract
The soft dimensions (how well buyers are treated ), we do not find any significant differences in treatment across entrepreneurs from different communities.
The observed in-group favoritism is not simply driven by the fact that entrepreneurs enjoy interactions with their own community more. But rather it seems to point towards a tacit understanding about how to treat member from the same community.
Also business dealings in environments where contract enforcement is weak are characterized by high levels of trust.
Contd..

Thus through this paper we have attempted to understand the effect of ethnicity across business transactions.
- Learn the nature of the business transactions and variation in contract terms because of ethnicity.
- Get an insight into the entrepreneurial instinct of a specific community.
- Also it revealed that a match in the ethnicity of wholesaler and auditor does not help alleviate the hold-up problem.
Conclusion The study suggest that all business transactions in the SME sector have a combination of formal and informal contracting and the ethnicity of the parties plays an important role in determining the features of the contract .

Renegotiation - Pen trader’s response to MS’s order cancellation situation dispensing off ethnicity factor.
Pen traders survey - to understand background of wholesalers
Pen auditors video/still rating - to verify whether auditor’s appearance and his approach has anything to do with final deal.
Follow up

Thank You!

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Are there cultural determinants of entrepreneurship?

by IFMR on Jun 23, 2010

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Are there cultural determinants of entrepreneurship? — Presentation Transcript