The effect of entrepreneurial ecosystems on performance of SMEs in low middle income countries with a particular focus on Pakistan

Ullah, Sami and Bradley, Steve (2019) The effect of entrepreneurial ecosystems on performance of SMEs in low middle income countries with a particular focus on Pakistan. PhD thesis, Lancaster University.

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Abstract

The entrepreneurial ecosystem is a relatively new perspective within the field of entrepreneurship but is now one of the most discussed topics in that field. It emphasizes the role of broader framework conditions that promote or constrain entrepreneurial activity in any region. The supportive institutional framework (reduced number of government regulations, ease in compliance of taxation system and control over corruption) and physical conditions (ease in access to finance, developed infrastructure, stability in political environment, the availability of an educated workforce and reduced competition with informal sector) create an entrepreneurial ecosystem where entry, survival and growth of firms will be at the highest rate. These elements of the institutional framework and physical conditions are interactive in nature, therefore, policymakers around the world are trying to achieve a balance between these components of the entrepreneurial ecosystem. There is a paucity of research on the entrepreneurial ecosystems of developing countries, therefore, the findings of this thesis will not only be an addition to the literature but will also be useful for policymakers in these countries. In this study, pooled cross-sectional data for Pakistan and 41 low-middle income countries (LMICs) covering the period 2006-13 have been used to identify different entrepreneurial ecosystems and explain their impact on the performance of small and medium enterprises (SMEs). The performance of SMEs has been measured through the annual change in sales growth, employment growth and labour productivity growth. The findings based on the analysis of the entrepreneurial ecosystems for the group of LMICs show that all of the identified components can have a negative effect on the performance of the SMEs. However, ranking of components on the basis of magnitude and statistical significance of effect shows that corruption has the most negative effect on firm performance, which warranted further examination. Therefore, we compare the firm performance of the most corrupt and least corrupt LMICs through the use of propensity score matching (PSM) methods. The results of matching methods show that firm performance in the most corrupt countries is at least 10% lower than firms in the least corrupt countries. Thus, LMICs need to take steps to improve their control over corruption in order to achieve better performance of their SMEs. However, only the individual components of the entrepreneurial ecosystems could be assessed for LMICs because of the heterogeneity of the institutional frameworks and physical conditions of these countries. Therefore, the entrepreneurial ecosystem of Pakistan has also been analysed to determine its existence and composition, and its effects on the performance of SMEs. The entrepreneurial ecosystem of Pakistan is examined using firm level survey data provided by the World Bank Enterprise Survey (WBES) for the years 2007 and 2013. A cluster analysis and canonical discriminant analysis (CDA) is undertaken to identify the composition of the entrepreneurial ecosystem existing in Pakistan. This bottom-up approach, recommended in the literature, has been used to measure the interactive effects of components of the entrepreneurial ecosystem of Pakistan. None of the studies in the literature has measured and empirically tested the entrepreneurial ecosystem of Pakistan using this approach. The findings indicate that the entrepreneurial ecosystem of Pakistan is a combination of elements of the institutional framework and physical conditions. Except for government regulations and political stability, all other components contribute negatively to the entrepreneurial ecosystem of Pakistan. Thus, the aggregate effect of the entrepreneurial ecosystem is negative on the performance of SMEs. Moreover, an index was calculated using the interactive weighted effect of the components of the entrepreneurial ecosystem of Pakistan. The regression estimates based on the index values affirmed the negative effect of the entrepreneurial ecosystem of Pakistan as a system. Our findings for Pakistan can be used as a guideline for policymakers in other developing countries with similar institutional frameworks and physical conditions. However, it can be inferred that there is no shortcut to create a supportive entrepreneurial ecosystem. The gradual improvements, with government acting as facilitator, are required to make the entrepreneurial ecosystems in LMICs conducive for entry, survival and growth of businesses. The specific recommendations for both policymakers and entrepreneurs are given at the end of the thesis.