2007 Headlines
Political Instability Undermines Small Business in the Third World
Volatile Governments Exacerbate Risk for Entrepreneurs
Ithaca, NY—Entrepreneurial success hinges on a nation's political stability, according to a new study from Cornell University's Johnson School of Management. When governments are unable to provide the most basic protection for its people, entrepreneurs are left to fend for themselves in a climate of fear, violence, and political turmoil.
Wesley Sine, an assistant professor of management and organizations at Cornell University's Johnson School of Management, and Shon Hiatt, a Cornell graduate student in organizational behavior, will present their research findings August 8 at the Academy of Management annual conference in Philadelphia.
Called "Rising Insurgencies," the Sine-Hiatt paper examines 730 Colombian entrepreneurs from 1997 to 2001 to determine the affects of politics on business. The researchers are currently updating the data with 2007 information that will be completed by the end of the year. Sine and Hiatt discovered Colombia's violent political history significantly damaged entrepreneurship. "In our sample of entrepreneurial ventures in Colombia, political turmoil inhibited the willingness and ability of these entrepreneurs to expand their social networks and thereby grow their businesses," Sine said.
The study presents implications far beyond Colombia. A government that cannot protect the rights and safety of its people cripples the success of its entrepreneurs. "There are many countries such as Iraq, Afghanistan, Congo, and Nigeria that want to foment economic growth but are plagued with high amounts of political violence," Hiatt said. "Our study suggests that in these countries entrepreneurs may require different types of planning processes. These governments would do well to create mechanisms that create incentives for entrepreneurship and allow them to safely broaden their networks."
Many Colombian entrepreneurs in parts of the country racked by high rates of violent crime feared engaging in social or business interaction with new clients because of the high level of violence. Interviewees said that in many cases they were unsure whether potential clients or business partners were affiliated with the paramilitaries, the guerillas, or the "narcos." Entrepreneurs were afraid that doing business with any of three groups might make them a target of the competing groups.
The Sine-Hiatt study also sheds additional light on the highly debated topic of new venture planning. Despite the fact that most entrepreneurial training programs teach entrepreneurs to engage in detailed business planning, Sine and Hiatt found that planning increased the risk of new venture failure in violent areas. Firms that spent less time planning future actions and more time adapting to the turbulent environment out performed those ventures that were more future oriented. Sine and Hiatt argue that the rigidifying effects of planning negatively affects firm performance in highly turbulent environments as organizations which plan more have a greater difficulty at innovating and adjusting to changing environmental demands.
By tracking the same entrepreneurs over the four-year period, Sine and Hiatt were able to measure the effects of changing political turmoil on entrepreneurial processes from year to year and from region to region in Colombia. In addition to the questionnaires the entrepreneurs filled out, many were personally interviewed by the authors. Many of the businesses surveyed were mom-and-pop endeavors ranging from small convenience stores to auto repair shops to beauty salons and other family-run operations.
"This was sometimes pretty dicey" remarked Sine. "There were a few times when we had to avoid being captured by local gangs." During one interview, when asked about how the local paramilitaries affected his business, an entrepreneur who owned a small furniture manufacturing facility lowered his voice pointed outside at two burly armed men on motorcycles saying the paras are out front and are trying to figure out what you are up to."
When entrepreneurs are in fear for their lives or property, they are unable to devote the attention to instigate a new business venture. In Colombia, the Sine-Hiatt study found that "the failure of the state to protect personal safety, maintain order, and guard against paramilitary and guerrilla violence has created highly turbulent environments for Colombian entrepreneurs."
Many of the businesses surveyed were mom-and-pop endeavors ranging from small convenience stores to auto repair shops to beauty salons and other family-run operations. On a recent trip to Colombia in early 2007, the authors observed that many businesses were more successful due to reduced levels of violence thanks to government crackdowns on crime. This situation allows small businessmen to network with suppliers meet new customers and expand their operations.
A new business venture is always a risky endeavor, but violence and political turmoil exacerbates the uncertain nature of entrepreneurship. "Entrepreneurs we interviewed who had worked in areas of high political turmoil complained that the political violence made it difficult to obtain capital from friends and family because these potential resource providers felt that such environments were bad for business," Sine said.
