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November 21, 2018

How do we measure our level of entrepreneurship?

advice: US President Barrack Obama at a past Young African Leaders Initiative forum . He will be visiting Kenya next month
advice: US President Barrack Obama at a past Young African Leaders Initiative forum . He will be visiting Kenya next month

As Kenya co-hosts the Global Entrepreneurship Summit we look forward to the impetus it will provide to grow the country’s entrepreneurship ecosystem to the next level of development. As more effort is put to build an entrepreneurial ecosystem, it is only fitting and natural to wonder what outcomes to expect and track. This is the only way to measure our level of entrepreneurship and the progress we make going forward. 

At the basic level the more, the better. We need more entrepreneurs, more companies and more jobs. We also need more catalysing inputs. Catalytic inputs include more funding for research and development at universities, more investment capital and more engineering degrees and other facilitating skills. These are traditionally tried and tested inputs associated with an entrepreneurial ecosystem. 

Four guidelines have been developed by the Kauffman Foundation to help answer the question of the level and direction that entrepreneurship is taking in a region or economy. They measure the vibrancy and growth trajectory of entrepreneurship and guides leaders and policy makers in decision making that is supportive to entrepreneurship.

First and foremost is the density of entrepreneurship. The main focus is the number of entrepreneurs as measured by the number of new and young firms in a given area. These are not necessarily the same as the number of informal micro-enterprises, which may involve individuals trying to elk a subsistence living. The focus is on formally established organisations. The number of new and young companies per 1,000 people may then be the density of entrepreneurship in a city or county with young for instance being companies less than five years old. 

To capture the vibrancy of the companies, the employment impact of those new and young companies is also critical.  The ability to attract and support more employment is a measure of vibrancy and relevance of the firms. For instance a county attracting ten new companies which employ 50 people each may be regarded as more vibrant than one attracting 100 companies employing one person each. The impact of the former is more desirable and consistent with entrepreneurship as a source of employment. 

Density may also be measured with regard to a particular sector. For instance the Mombasa county has tourism as the centrepiece of its economy. The activities in tourism in this county are a good measure of the density of entrepreneurship, with a multiplier effect on other sectors of the economy. A different county may have a different sector as the centrepiece of its economy and spurring growth in such a sector becomes a catalyst for growth in other sectors. 

The second indicator of entrepreneurial vibrancy is fluidity. Ways of measuring this is in labour market reallocation and population flux. The ability and ease of movements are critical to building an entrepreneurial culture. Vibrancy means people coming and going freely and adapting quickly to new environments where they can be more productive. This is not only geographical movement but also from one organisation to another. The ease of labour market reallocation has been witnessed particularly in the banking sector, as staff move from one branch to another or move from one bank to another, contributing to sharing of best practices and improving quality of services across the sector.  

A third measure of entrepreneurship vibrancy and growth is connectivity. Entrepreneurship cannot thrive in isolation. It needs connectivity to various supportive as well as catalysing resources, companies and individuals. Connections allow for high productivity and continuous improvement. It promotes understanding of the markets and customer needs, in the process driving more innovation. Connectivity also manifests itself through spin-offs, as existing companies create the next generation of companies. Sometimes employees see an opportunity not being adequately served and leave to start their own outfit, building more companies and vibrancy in the market. Also in connectivity is the existence of social capital, where individuals have built the necessary relationships and trust to attract contracts and new businesses. 

The fourth and last indicator of vibrancy and growth in entrepreneurship is diversity. An economy needs to have different industries instead of over relying on one industry. Even though building on specialisation can bring comparative advantage, this needs to be build across different industries and sectors. Diversity may also cover the ease to which an economy is able to attract foreign direct investment. A mix of local and foreign investments creates a blend of industry that allows acquisition of new skills and higher growth opportunities. Diverse opportunities are also created for different skill levels, creating jobs, improving lifestyles and growing prosperity. Young companies are likely to target and attract young workers, giving them an opportunity to be productive and start careers. 

Going forward, the growth and vibrancy of entrepreneurial ecosystem needs to be deliberately measured in order to be able to put in place measures facilitating growth rather than hinder it. As the country and county governments target to grow local entrepreneurship and attract investment, perhaps tracking the vibrancy and growth in entrepreneurship can support decisions making and policy formulation. 

 

Karen Kandie is a financial and risk consultant with First Trident Capital and a PhD candidate in finance at Catholic University of Eastern Africa.  [email protected]

 

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