Taking stock: researching entrepreneurs and the recession

9th September 2009

Rebecca Harding

I have spent the summer researching the impact that the recession is having on entrepreneurs across the world.  It's not been an easy task but the results are intriguing.

The financial crisis originated in developed, Anglo-Saxon, countries but its effects will be felt for years to come across the world.  This is because it is very different to previous financial and economic crises:

• The scale and cost of the crisis in the developed world is still unclear since the full exposure to credit risks across the financial system have not yet fully worked through the financial and non-financial system.
• The immediate lock-down of credit, as early as December 2007, has caused a slump, both in consumer and business demand for credit itself and therefore also in the demand for consumer goods and services.
• Because the crisis originated in the financial markets it has been immediate and global in its impact.

The speed with which financial markets locked down and demand slumped at the end of 2008 has stunned commentators and practitioners alike.  By September 2009, it appears that financial markets and economies are showing tentative signs of recover although no-one is yet sure whether or not this is a false dawn and the debate about a “V” shaped or “W”-shaped recession still dominates commentary.

Yet the real impact, on sustainable enterprises, entrepreneurs, perceptions of entrepreneurs and decent work are likely to be felt for many years to come.

Because credit tightened and demand slumped simultaneously across the world, companies have, in the words of one interviewee, “gone bust where they should never have gone bust.”  Under tight financial and market circumstances, small and medium sized enterprises face unique challenges around whether or not to retain workers, enter new markets or simply to ride out the storm.  Companies that have high levels of indebtedness or weak cashflow are seriously threatened.

Small companies across the world appear to be approaching the crisis in a similar way.  They are not taking risks, not borrowing, and trying not to let their workforces go in the interests of being ready to resume growth once market conditions pick up.  However, independently commissioned country-level studies in selected OECD countries (the UK, Australia, Canada and Germany) do suggest that companies are not investing in training or innovation to the extent that they were, and while they are still investing in environmentally-friendly measures, these are part of long term cost reduction or regulatory compliance strategies rather than a desire to operate on a more comprehensively sustainable basis.  Sustainability at the moment is couched in economic terms.

In the words of one venture capital investor, “There’s no money out there, and we finding that entrepreneurs are amazed at how well they can live on nothing.”  Entrepreneurs in the developing and the developed worlds are facing similar difficulties – they are using retained earnings to finance current cashflow where they can.  Global companies, similarly hit by a slump in demand have tightened up on their contracts with suppliers and have lengthened their payment terms.  This has exacerbated cashflow problems to the smallest entrepreneurs who may also be unable to access loans to bridge the finance gap.

Yet entrepreneurs themselves appear eternally optimistic.  One African entrepreneur commented, “For every downturn there are a million possibilities and new and emerging markets are the jewel in the post-crisis global crown.”  Yet this optimism is not backed up with ready money to take advantage of the opportunities out there:

• Banks are reluctant to lend despite government rescue packages across the world that provide generous guarantees to them.
• Private equity and venture capital markets have collapsed across the world and capital inflows to developing nations have fallen off restricting both cashflow and investment capital to growing firms.
• Micro-finance has continued to grow as a support vehicle for micro businesses in the developing world, but alongside this, remittances have fallen as jobs in OECD countries have become more scarce impacting both on subsistence income and on the capacity of individuals to repay their microloans.

Key sectors such as manufacturing, construction and mining have been devastated by the crisis and have shed blue collar and unskilled jobs.  In South Africa this is having a very real impact on the labour market as jobs go in mining and construction in particular.  The social and political effects of joblessness are already manifesting themselves as protests on the streets. Without clear routes to help people into sustainable work, the long term effects across Africa could be to undo much of the good that has been done to promote entrepreneurship and sustainable enterprise.

One support agency argued that the credit crisis itself has made little difference to entrepreneurs – “they couldn’t get money before and they can’t get it now. Nothing has changed.”  The number of banked enterprises is small and this affects their long term sustainability.  Of more importance, argued an academic with a specialism in the effects of the crisis on vulnerable work, is the impact that the outflows from employment is having on the informal jobs market in India: micro-entrepreneurs set up in unregulated, informal sectors and, in boom times, can rely on the income that this provides.  However, as people move from paid employment, they are entering the informal market too making it more contested.

Two groups are of particular concern:

• Women in emerging economies appear to be bearing the brunt of the crisis.  They are responsible for holding families together, paying microcredit loans and generating additional household income.  In a depressed developing economy this becomes difficult and data from across the emerging regions of the world suggest that women are “Working harder and eating less” as the recession bites hard.  Existing problems of high food prices and under-development are now inter-twined with the financial and economic crisis and this is hitting women hard.
• Young people across the world are, according to one interviewee, “a lost generation.”  Companies of all sizes are unlikely to return to pre-crisis levels of employment and are likely to have made substantial productivity gains as they have adjusted to post-crisis market conditions.  Evidence that the 18-25 year old age group is particularly badly hit is compelling.

There is evidence in some OECD countries that the downturn is providing entrepreneurial opportunities.  Individuals are reportedly using their redundancy pay in the UK and the US to set up enterprises, while government programmes to help people out of unemployment are important in increasing self-employment, especially amongst women.  Similarly programmes to help young people gain entrepreneurial skills could be invaluable in addressing the issue of mass youth unemployment.

Interviewees were keen to stress that although this crisis is deep, the sustainability agenda itself offers huge potential for the post-crisis world.  Some argued that the form of capitalism that generated the crisis is discredited with entrepreneurs, especially financial entrepreneurs, taking substantial criticism from the public about their role. However, this presented an opportunity, they argued, to address the new challenges we face of mass unemployment, reduced disposable income and climate change through sustainable entrepreneurship.