Entrepreneurial ecosystems: why does entrepreneurship thrive in some locations and not in others?

entrepreneurial ecosystems
entrepreneurial ecosystems

Entrepreneurial ecosystems: why does entrepreneurship thrive in some locations and not in others?

Increasingly both home-grown and international SMEs and start-ups are taking advantage of the UAE’s reputation of an environment conducive to risk-taking.

Why is a location such as Dubai becoming an entrepreneurship hub? Why are entrepreneurs attracted to Dubai?

For example, according to a Channels TV report – “there’s so many Nigerians right now going to the UAE, trying to set up their businesses to contribute to the economies of both host and home countries”.

The news isn’t surprising – a conducive environment provides the necessary support and resources to encourage risk-taking.

Entrepreneurial ecosystems and new venture creation

Entrepreneurship is an economic process that involves new venture creation for the purpose of finding creative solutions to identified problems or needs in the marketplace.

New venture creation consists of three dimensions

The environment – the resources in the environment and the constraints in the environment.

The individual – personal resource base, demographics and sociological factors.

The organisation – structures, resource-based, functional and generic strategies.

Strategy analysis looks at the big picture, exploring the environment. The entrepreneurial environment is critical to venture creation because the entrepreneur needs to access resources in the environment.

The entrepreneurial environment consists of both the internal and the external environment.

The PESTLE analysis and the SWOT analysis are examples of frameworks that help to identify the environmental forces (opportunities and threats) that affect the new venture creation.

The entrepreneurial ecosystem framework

The entrepreneurial ecosystem is a framework that can be applied to model answers to questions such as why does entrepreneurship thrive in some locations and not in others?

The entrepreneurial ecosystem is a complex system of interactions between the entrepreneurial process, the ecosystem elements, and the ecosystem actors and institutions, which leads to productive entrepreneurship.

The components of an entrepreneurial ecosystem

The components of entrepreneurial ecosystem are:

The entrepreneurial process

Value creation is the primary aim of any business. The entrepreneurial process starts with an entrepreneur’s decision to exploit identified opportunities (needs or problems) in the market.

entrepreneurial ecosystems

The new venture creation is a value creation activity.

That is, turning factors of production into a product or service that meets the needs of others and which gives the venture competitive advantage.

In addition to the decision to exploit entrepreneurial opportunities, location choice is another decision an entrepreneur makes.

The entrepreneur considers the best place to launch the new venture.

Location decision could be a decision about a city, a region, or even another nation.

Location economies are the economic benefits of performing a value creation activity in the optimal location for that activity – wherever that location might be.

Therefore, differences in the extent to which entrepreneurship thrives in locations could be as a result of dimensions such as cost and the quality of the factors of production.

The entrepreneurial ecosystem elements

The entrepreneurial ecosystem elements are the factors and resources that the entrepreneur depend on for venture creation and growth.

entrepreneurial ecosystems

They are all that is needed to ensure that there is a thriving entrepreneurship in a particular location.

Entrepreneurial ecosystem elements are the resource endowments (such as finance, human capital, knowledge, physical infrastructure) of that location.

There is a mutual interdependence between the entrepreneur and the ecosystem elements.

The supporting relationships between the three entrepreneurial ecosystem attributes (material, social and cultural) are the key success factors of a particular location.

The entrepreneurial ecosystem actors

These are the independent actors pursuing their interests in the ecosystem. The actors – individuals, entrepreneurial peers, organisations and the other actors – care about ecosystem health.

Entrepreneurial ecosystems

The entrepreneurial ecosystem actors use their agency to create and transform their context. The collaborations and interactions between the ecosystem actors contribute to the development, reproduction, and outputs of entrepreneurial ecosystems.

As stakeholders, entrepreneurial ecosystems actors influence the extent (or circulation) and quality of the ecosystem elements.

Although they may have conflicting interests, from a stakeholder theory perspective, value creation occurs at the point of intersection or alignment of the interests of the entrepreneurial ecosystem actors.

The entrepreneurial ecosystem institutions

These are the formal and informal elements that, in addition to entrepreneurial ecosystem resources and activities, provide a stable and sustainable ecosystem.

The formal institution refers to the regulatory and governance structures – the rules, regulations, the way things are done in a location.

The informal institution refers to the values, attitudes (e.g. toward entrepreneurship), cultural norms, tradition and history which have impact on the entrepreneurial process.

No matter how well endowed a location is and no matter how much is spent on physical infrastructure, without strong institutions, a planned innovation hotspot becomes an empty real estate – a white elephant project. An example is the Tinapa project in Nigeria –

“in the minds of its creators, the Tinapa resort in south-eastern Nigeria will rival Dubai or London as a shopping and trading paradise for rich and enterprising Nigerians”. Today, the estimated $340 million project is abandoned.

Entrepreneurial ecosystems: Tinapa

Entrepreneurship thrives in some locations and not in others due to differences in how resources are put to either productive or unproductive use.

Weak and unstable formal institutions as well as norms and societal values might foster unproductive entrepreneurship.

Productive entrepreneurship

Productive entrepreneurship is human action in pursuit of value creation activity that contributes directly or indirectly to the output of the economy or the capacity to produce additional output.

Higher institutional quality (e.g. a less hostile environment) is associated with a higher level of productive entrepreneurship.

In order words, productive entrepreneurship is the outcome of a thriving entrepreneurial ecosystem.

Mofoluke Akiode