Are there cultural determinants of entrepreneurship?


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Are there cultural determinants of entrepreneurship?

  1. 1. 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?
  2. 2. <ul><li>Motivation - Ethnicity & Entrepreneurship </li></ul><ul><li>History of Entrepreneurship in India </li></ul><ul><li>Indian Perceptions and Stereotypes </li></ul><ul><li>Study set up </li></ul><ul><li>Entrepreneur’s in Pen wholesale industry </li></ul><ul><li>Methodology </li></ul><ul><li>Field Setup </li></ul><ul><li>Outcome Variable </li></ul><ul><li>Major findings (1-6) </li></ul><ul><li>Conclusion </li></ul>Presentation Flow
  3. 3. <ul><li>Schumpeter’s Entrepreneurs </li></ul><ul><li>- Separate class of individuals </li></ul><ul><li>- Possessing specific skill set like </li></ul><ul><li>- High Risk tolerance </li></ul><ul><li>- Ability to create new & efficient business </li></ul><ul><li>Max Weber (1904) influence of culture on protestants </li></ul><ul><li>Grief ‘s study on Maghribi traders of 11 th century </li></ul><ul><li>Ethnic communities known for entrepreurial skills </li></ul><ul><li>- The Svabians in Germany </li></ul><ul><li>- Marwari’s in India </li></ul><ul><li>- Esfahanis in Iran and many more …. </li></ul><ul><li>But no systematic studies to document whether ethnicity influence the outcomes of business transaction </li></ul>Motivation Ethnicity & Entrepreneurship
  4. 4. <ul><li>Entrepreneurial traditions in India finds its roots in the trading practices within the Bania or Vaishya families </li></ul><ul><li>Traditional trading castes in India were </li></ul><ul><li>- Aggarwals and Guptas in the North, </li></ul><ul><li>- Chettiars in the South, </li></ul><ul><li>- Parsees, Gujarati Jains and Banias, Muslim Khojas and Memons in the West, </li></ul><ul><li>- Marwaris across the country </li></ul>History of Entrepreneurship in India Source : D.R Gadgil’s study on the origin of Indian business class
  5. 5. <ul><li>The common perceptions connecting Ethnicity and Entrepreneurship are: </li></ul><ul><li>The Business/trading communities are more adept at entrepreurship as compared to people from other communities </li></ul><ul><li>The children from such communities are taught the tricks of the trade since childhood </li></ul><ul><li>The community ties allow new entrants a favorable environment by easy access to business network and finance. </li></ul><ul><li>Two side of the stereotype are: </li></ul><ul><li>People from trading communities are seen to be very good at getting the best deal in a negotiation </li></ul><ul><li>They can be trusted to honor a contract, since they know the importance of business and are more professional </li></ul><ul><li>Source : D.R Gadgil’s study on the origin of Indian business class </li></ul>Ethnicity & Entrepreneurship: Indian Perception & Stereotypes
  6. 6. Research Question Are there cultural determinants of entrepreneurship?
  7. 7. <ul><li>In order to carry out the study we identified ‘ Pen wholesale market ’ because of the following </li></ul><ul><ul><li>- Belongs to SME sector. </li></ul></ul><ul><ul><li>- Ethnic diversity of entrepreneurs (Marwari / Tamilian/Andhrites) </li></ul></ul><ul><ul><li>- Low cost per transaction </li></ul></ul><ul><ul><li>- Option to have a customized product. </li></ul></ul><ul><ul><li>- Geographical proximity. </li></ul></ul>The Set Up
  8. 8. Wholesale market in Chennai
  9. 9. <ul><ul><li>Marwaris - Business clan from Rajasthan </li></ul></ul><ul><ul><li>- Known for shrewd business & entrepreneurial skills. </li></ul></ul><ul><ul><li>- In Chennai for more than 60-70 years </li></ul></ul><ul><ul><li>- Involved in money lending, gold business, wholesale and distributorship & stock marketing </li></ul></ul><ul><ul><li>Andhrites - Native of Andhra Pradesh </li></ul></ul><ul><ul><li>- Known as farmers & small traders </li></ul></ul><ul><ul><li>- Mainly trade in agri commodities </li></ul></ul><ul><ul><li>- Castes like Rao, Naidu, Chettiar are them main trading communities </li></ul></ul><ul><ul><li>Tamilians - Native of Tamil Nadu </li></ul></ul><ul><ul><li>- Known as educational & professional class </li></ul></ul><ul><ul><li>- Local trading Castes like Chettiar, Nadar </li></ul></ul>Entrepreneurs in Pen wholesale industry
  10. 10. <ul><li>Conduct an audit study in a large trading cluster in Chennai, South India </li></ul><ul><ul><li>Traders in the Pen and Stationary industry (> 200 enterprises) </li></ul></ul><ul><li>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. </li></ul><ul><li>Set up where we send “entrepreneurs” from different ethnic backgrounds to local businesses to negotiate purchase deal with business owners </li></ul><ul><li>Auditors have preset script of the purchase contract to negotiate with the wholesalers in which they are trained thoroughly </li></ul><ul><ul><li>Dimensions to negotiate on are purchase price, provision of trade credit (payment mode , discounts) and size of upfront payment (advance amount) </li></ul></ul>Methodology
  11. 11. <ul><li>Total sample – 508 visits 1 </li></ul><ul><li>107 Pen wholesale shops identified - with mix ethnicity. </li></ul><ul><li>47 real time entrepreneurs selected as auditors from the 3 community i.e. Marwari, Tamilian and Andhrite. </li></ul><ul><li>10-11 visits for each auditor </li></ul><ul><li>Randomly allotted visits </li></ul><ul><li>Auditor adheres to a script and predefined bargaining process 2 </li></ul><ul><li>Each visit – order size range 500-750 </li></ul><ul><li>Two pen brands – cello fine grip & Reynolds 045 3 </li></ul><ul><li>Auditor enterprise – Represented one of these - Event management, advertising agency, conference organizer and marketing company </li></ul><ul><li>Type of visit – With Customization (printed) 4 & Without Customization (plain) </li></ul><ul><li>Field monitoring – On-field monitoring </li></ul><ul><li>1 Visit = auditor goes and places order in the assigned shop and picks the delivery </li></ul><ul><li>2 Bargaining rule for all the bargaining dimensions. </li></ul><ul><li>3 Reputed brands with same MRP & wholesale list price </li></ul><ul><li>4 Company names or social messages -single color but difficult to erase </li></ul>Field Setup
  12. 12. <ul><li>Initial Price </li></ul><ul><li>Final Price </li></ul><ul><li>Upfront payment (advance) </li></ul><ul><li>Measure of perceived business acumen </li></ul><ul><ul><li>Record the first price that is offered by the business person </li></ul></ul><ul><ul><li>Record the final price agreed upon </li></ul></ul><ul><li>Measures of trust </li></ul><ul><ul><li>Fraction of upfront payment (advance) that is agreed upon </li></ul></ul><ul><ul><li>Terms of trade credit that is extended (cash discount, current cheques or post dated cheques ) </li></ul></ul>Outcome variables
  13. 13. <ul><li>Price differences between wholesalers from different communities </li></ul><ul><ul><li>Marwari traders offer significantly lower prices than others </li></ul></ul><ul><ul><li>In contrast Andhra traders offer significantly higher prices at the start of the negotiation and also as final outcome </li></ul></ul>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
  14. 14. <ul><li>Upfront payment asked for the customized pens by the wholesalers. </li></ul><ul><li>- T he risk of hold up is similar across the wholesaler of different ethnicity. </li></ul><ul><li>- 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. </li></ul>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
  15. 15. <ul><li>Price paid by the buyers from different communities </li></ul><ul><li>- The Andhra auditors paid more than Marwari & Tamil auditors for a similar product purchase </li></ul><ul><li>- The Marwari buyers have paid the least. </li></ul>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
  16. 16. <ul><li>Upfront Payment paid by the Buyer </li></ul><ul><li>- 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 </li></ul><ul><li>This is in agreement with local stereotype that Tamilians are more honest and would be asked for lower advance payment . </li></ul>Major findings 4 - Buyer
  17. 17. <ul><li>Importance of a “Match” between the Ethnicity of Buyer and Wholesaler </li></ul><ul><li>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. </li></ul>Major findings 5 - Match This suggests that wholesalers might engage in differential treatment between buyers of different ethnic groups.
  18. 18. <ul><li>Upfront payments charged </li></ul><ul><li>We took the upfront payment charged by the wholesalers and compare them between matched and non-matched visits. </li></ul><ul><li>- 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. </li></ul>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
  19. 19. Conclusion <ul><li>Wholesalers from the most entrepreneurial community(Marwaris) offer lower prices as compared to other communities . </li></ul><ul><li>When buyers and sellers of the same community contract, the price offered is lower. </li></ul><ul><li>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 </li></ul><ul><li>The soft dimensions (how well buyers are treated ), we do not find any significant differences in treatment across entrepreneurs from different communities. </li></ul><ul><li>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. </li></ul><ul><li>Also business dealings in environments where contract enforcement is weak are characterized by high levels of trust. </li></ul><ul><li>Contd.. </li></ul>
  20. 20. <ul><li>Thus through this paper we have attempted to understand the effect of ethnicity across business transactions. </li></ul><ul><li>- Learn the nature of the business transactions and variation in contract terms because of ethnicity. </li></ul><ul><li>- Get an insight into the entrepreneurial instinct of a specific community. </li></ul><ul><li>- Also it revealed that a match in the ethnicity of wholesaler and auditor does not help alleviate the hold-up problem. </li></ul>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 .
  21. 21. <ul><li>Renegotiation - Pen trader’s response to MS’s order cancellation situation dispensing off ethnicity factor. </li></ul><ul><li>Pen traders survey - to understand background of wholesalers </li></ul><ul><li>Pen auditors video/still rating - to verify whether auditor’s appearance and his approach has anything to do with final deal. </li></ul>Follow up
  22. 22. Thank You!