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11.0 The Entrepreneurial Firm Capital Resources: Entrepreneurs and entrepreneurship in Africa

Written by: Journal of Development Entrepreneurship

Article Overview: The degree to which capital by itself is a major obstacle to the growth of African entrepreneurship remains debatable.

11.0 The Entrepreneurial Firm Capital Resources: Entrepreneurs and entrepreneurship in Africa

(Journal of Developmental Entrepreneurship, Oct 2002 by Kiggundu, Moses N)

The degree to which capital by itself is a major obstacle to the growth of African entrepreneurship remains debatable. Consistent with other findings (Dia, 1996; Godsell, 1991; Hart, 1972), Harper (1996) found that the need for additional capital is often not warranted and can be overcome by ingenuity and initiative. Kallon (1990) found that the amount of capital with which the firm was begun is significantly negative when related to the rate of growth of the firm's real assets. It was found that access to commercial credit did not contribute to entrepreneurial success to any significant way, and if it did, "the relationship would be negative" (p. 217). Hart also concluded that apparent problems of capital shortage are a result rather than cause of managerial shortcomings. It is therefore misleading to isolate the question of capital from the complex constellation of forces, which determine entrepreneurial success or failure.

At the same time, there is no doubt that most SMEs are under capitalized. Entrepreneurs tend to depend on own or family savings, and continuing access to capital remains a challenge. Most of them cannot meet the requirements for commercial loans, and those who do find them costly (Gray, Cooley, & Lutabingwa, 1997; Kiggundu, 1988; Trulsson, 1997; Van Dijk, 1995). Typical of other studies, Kallon found that 65.6 % of the firms depended on personal savings as the sole source of capital, 10.9% had access to family savings, 9.4% used commercial banks, 7.8 % drew resources from partners and shareholders, and 3.1% from Lebanese merchants and 3.1 % from other sources. Keyser et al. (2000) found that in Zambia, lack of starting capital was a common problem for entrepreneurs as only 24 percent of the entrepreneurs received a loan to start their business.

Koop, de Reu, and Frese (2000) found that the amount of starting capital was positively related to business success. In the Ugandan study, they found that while 45 percent of those with starting capital greater than US $1000 were successful, only 10 percent of those with less that US $1000 were successful. The fact that the study used the US $1000 as the cut-off for the sample's level of initial capital is indicative of the degree of under capitalization among the small and micro enterprises. Of those firms receiving bank loans, mostly the bigger firms, 44 percent were successful. Receiving a bank loan can be both a cause and effect of business success because banks screen out those with minimal entrepreneurial competencies or weak organization forms.

In order to understand entrepreneurial capital problems, it is necessary to differentiate between micro and small enterprises (MSEs) and small and mediumsized enterprises (SMEs) and their respective requirements for initial, working and expansion capital. Most MSEs are one-person operations, poorly managed, sometimes temporary, less productive, and undercapitalized because they do not attract capital investment either from the owners or other potential investors. They are more of a pastime activity than a serious business undertaking. SMEs, on the other hand, tend to be bigger, better organized and managed, potentially more profitable, and attractive to capital investment. While the problems of initial capital may be common to all entrepreneurs, those who scale up become more profitable and attract capital from both social and commercial sources. They also learn how to use and preserve capital better than the MSEs. It may well be that MSEs, lacking entrepreneurial competencies and proper organization forms, should not be given easy access to capital because their chances of success are limited.

Technology is another capital resource that African entrepreneurs have not exploited fully. Studies continue to document evidence of problems in understanding, acquiring, installing, operating, maintaining and upgrading technology in Africa (Kiggundu, 1989; Trulsson, 1997). While efforts are being made to assist entrepreneurs in choosing appropriate technology for their businesses (Frese, 2000), instances of technological upgrades are few (Mead, 1999), and the local technological capacity remains low, especially for the more competitive computer and information technologies.

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Article Tags: African entrepreneurs, capital investment, capital resource, expansion capital, initial capital, Journal of Developmental Entrepreneurship, source of capital



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