Subsistence Entrepreneurship: The Interplay of Collaborative Innovation, Sustainability and Social Goals (Contributions to Management Science) 3030115410, 9783030115418

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Contributions to Management Science

Vanessa Ratten Paul Jones Vitor Braga Carla Susana Marques Editors

Subsistence Entrepreneurship The Interplay of Collaborative Innovation, Sustainability and Social Goals

Contributions to Management Science

More information about this series at http://www.springer.com/series/1505

Vanessa Ratten • Paul Jones • Vitor Braga • Carla Susana Marques Editors

Subsistence Entrepreneurship The Interplay of Collaborative Innovation, Sustainability and Social Goals

Editors Vanessa Ratten Department of Entrepreneurship, Innovation and Marketing La Trobe University Melbourne, VIC, Australia Vitor Braga Polytechnic Institute of Porto Porto, Portugal

Paul Jones ICTE Coventry University Coventry, UK Carla Susana Marques University of Trás-os-Montes and Alto Douro Vila Real, Portugal

ISSN 1431-1941 ISSN 2197-716X (electronic) Contributions to Management Science ISBN 978-3-030-11541-8 ISBN 978-3-030-11542-5 (eBook) https://doi.org/10.1007/978-3-030-11542-5 Library of Congress Control Number: 2019936558 © Springer Nature Switzerland AG 2019 This work is subject to copyright. All rights are reserved by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, express or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland

Contents

Subsistence Entrepreneurship: The Role of Collaborative Innovation, Sustainability and Social Goals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vanessa Ratten, Paul Jones, Vitor Braga, and Carla Susana Marques

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Firm Founders’ Passivity as a Source of Serendipitous Opportunity Discovery . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Antti Kauppinen

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Commonomics: Rhetoric and Reality of the African Growth Tragedy . . . Jerry Kolo, Nnamdi O. Madichie, and Chris H. Mbah Entrepreneurship in the Solidarity Economy: A Valuation of Models Based on the Quadruple Helix and Civil Society . . . . . . . . . . . . . . . . . . . José Manuel Saiz-Álvarez and Jesús Manuel Palma-Ruiz Evaluating the Business Model of a Work Integration Social Enterprise in Cantabria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Elisa Baraibar-Diez, María D. Odriozola, Ignacio Llorente, and José Luis Fernández Sánchez

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Encouraging Indigenous Self-Employment in Franchising . . . . . . . . . . . Scott Weaven, Lorelle Frazer, Mark Brimble, Kerry Bodle, Maurice Roussety, and Park Thaichon

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Shadow Economy Index for Moldova and Romania . . . . . . . . . . . . . . . . Talis J. Putnins, Arnis Sauka, and Adriana Ana Maria Davidescu

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Survivability and Sustainability of Traditional Industry in the Twenty-First Century: A Case of Indonesian Traditional Furniture SME in Jepara . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 131 Danu Patria, Petrus A. Usmanij, and Vanessa Ratten The Minimum Wage Fuels Romania’s Shadow Economy? . . . . . . . . . . . 155 Adriana Ana Maria Davidescu and Friedrich Schneider v

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Gamifying Innovation and Innovating Through Gamification . . . . . . . . 183 Agnessa Shpakova, Viktor Dörfler, and Jill MacBryde Work Hard, Play Hard: Work-Life Balance in Small Business . . . . . . . . 195 Robyn Young, Lorelle Frazer, Scott Weaven, Maurice Roussety, and Park Thaichon Stay Ahead of a Game or Stay Still: The Impact of Learning and Development on Business Performance . . . . . . . . . . . . . . . . . . . . . . 215 Janette Timms, Lorelle Frazer, Scott Weaven, and Park Thaichon

List of Contributors

Elisa Baraibar-Diez University of Cantabria, Santander, Cantabria, Spain Kerry Bodle Department of Accounting, Finance and Economics, Griffith University, Southport, QLD, Australia Vitor Braga Porto Polytechnic, Porto, Portugal Mark Brimble Department of Accounting Finance and Economics, Griffith University, Nathan, QLD, Australia Adriana Ana Maria Davidescu Department of Statistics and Econometrics, Bucharest University of Economic Studies, Bucharest, Romania Department of Labour Market Policies, National Scientific Research Institute for Labour and Social Protection, Bucharest, Romania Viktor Dörfler University of Strathclyde, Glasgow, Scotland, UK Lorelle Frazer School of Business, University of the Sunshine Coast, Sippy Downs, QLD, Australia Paul Jones Swansea University, Swansea, UK Antti Kauppinen College of Business, School of Management, RMIT University, Melbourne, VIC, Australia Jerry Kolo College of Architecture, Arts and Design, American University of Sharjah, Sharjah, United Arab Emirates Ignacio Llorente University of Cantabria, Santander, Cantabria, Spain Nnamdi O. Madichie Centre for Research and Enterprise, Bloomsbury Institute London, London, UK Jill MacBryde University of Strathclyde, Glasgow, Scotland, UK

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Carla Susana Marques Universidade de Trás-os-Montes e Alto Douro, Vila Real, Portugal Chris H. Mbah School of Business and Entrepreneurship, American University of Nigeria, Yola, Adamawa State, Nigeria María D. Odriozola University of Cantabria, Santander, Cantabria, Spain Jesús Manuel Palma-Ruiz Universidad Autónoma de Chihuahua, Chihuahua, Mexico Danu Patria Universitas Teknologi Surabaya, Surabaya, Indonesia Talis J. Putnins Stockholm School of Economics in Riga (Latvia), Riga, Latvia Vanessa Ratten Department of Entrepreneurship, Innovation and Marketing, La Trobe University, Melbourne, VIC, Australia Maurice Roussety Department of Marketing, Griffith University, Nathan, QLD, Australia José Luis Fernández Sánchez University of Cantabria, Santander, Cantabria, Spain José Manuel Saiz-Álvarez EGADE Business School-Tecnologico de Monterrey, Zapopan, Jalisco, Mexico Arnis Sauka Centre for Sustainable Business, Stockholm School of Economics in Riga, Riga, Latvia Friedrich Schneider Johannes Kepler University of Linz, Linz, Austria Agnessa Shpakova Heriot-Watt University, Edinburgh, Scotland, UK Park Thaichon Department of Marketing, Griffith University, Southport, QLD, Australia Janette Timms School of Business, University of the Sunshine Coast, Sippy Downs, QLD, Australia Petrus A. Usmanij Department of Entrepreneurship, Innovation and Marketing, La Trobe University, Melbourne, VIC, Australia Scott Weaven Department of Marketing, Griffith University, Southport, QLD, Australia Robyn Young Department of Marketing, Griffith University, Nathan, QLD, Australia

Subsistence Entrepreneurship: The Role of Collaborative Innovation, Sustainability and Social Goals Vanessa Ratten, Paul Jones, Vitor Braga, and Carla Susana Marques

Abstract The goal of this chapter is to discuss the role of subsistence entrepreneurship in the society. Increasingly both business and government are focusing at low-income consumers and the role they play in the innovation process. This has meant greater emphasis has been given to understand the role of these consumers who are called ‘subsistence consumers’ because they live at the bottom of the pyramid and exist on low income and wages. This chapter discusses subsistence consumers in terms of how they can be innovative and also the importance that collaboration plays in achieving social goals. Managerial and social implications are discussed in terms of how business can harness the collective power of subsistence entrepreneurs in order to create a better global community.

1 Introduction The world population is growing and there are a number of people who live in poverty. This has led to a need to produce products and services at an affordable rate. The goal of this book is to understand the way low-priced products and services are being produced by subsistence entrepreneurs through a variety of different contexts. This book offers an analysis of the practices of subsistence entrepreneurs through V. Ratten (*) Department of Entrepreneurship, Innovation and Marketing, La Trobe University, Melbourne, VIC, Australia e-mail: [email protected] P. Jones Swansea University, Swansea, UK e-mail: [email protected] V. Braga Porto Polytechnic, Porto, Portugal e-mail: [email protected] C. S. Marques Universidade de Trás-os-Montes e Alto Douro, Vila Real, Portugal e-mail: [email protected] © Springer Nature Switzerland AG 2019 V. Ratten et al. (eds.), Subsistence Entrepreneurship, Contributions to Management Science, https://doi.org/10.1007/978-3-030-11542-5_1

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their cultural and social endeavours. This chapter begins by discussing the literature on subsistence entrepreneurship, which is followed by some implications for research and public policy. Subsistence entrepreneurs are individuals at the base of the pyramid who are considered poor and barely make a living (Viswanathan et al. 2010). The base of the pyramid market ‘is characterized as illiterate, in poor health, of meager resources, inaccessible by media, geographically isolated and inexperienced with consumption’ (Nakato and Weidner 2012: 21). Individuals living a subsistence existence tend to have few resources and focus on short-term objectives. Subsistence entrepreneurs help to alleviate poverty by operating small businesses. Viswanathan et al. (2014: 1) define subsistence entrepreneurship as ‘entrepreneurial actions, undertaken in the informal sector of the economy, by individuals living in poverty in bottom of the pyramid (BOP) or subsistence marketplaces to create value for their consumers’. The bottom of the pyramid has also been referred to as ‘the base of the pyramid’, ‘low-income consumers’ and ‘subsistence consumers’ (Nakato and Weidner 2012). Many subsistence entrepreneurs have social vulnerabilities due to where they work and their living conditions (Ratten 2014). This has led to subsistence entrepreneurs needing to think and act differently to other forms of entrepreneurs (Dana and Ratten 2017). The unique setting for subsistence entrepreneurship requires a consideration of the context in terms of sustainability and social goals. The large population in emerging economies like China and India have required a reexamination of low-income consumers in these countries as their sheer number makes them an important consumer segment (Ratten 2017). Subsistence markets are defined as ‘markets in which consumers barely have sufficient resources for day-to-day living’ (Rivera-Santos et al. 2012: 1722). These markets comprise subsistence entrepreneurs who are also referred to as subsistence consumer-merchants because they both consume and operate small businesses (Venugopal et al. 2015). Subsistence consumers are different to other types of consumers as they face uncertainty in their daily activities. This results in a lack of control over whether they are able to buy and consume certain products. Weidner et al. (2010: 559) state that ‘subsistence consumers, both individuals and families, live in substandard housing and have limited or no education; they also have limited or no access to sanitation, portable water, and health care, and earn minimal income’. This makes it challenging for businesses focusing on these consumers as they struggle to understand their buying patterns (Ratten and Ferreira 2017). In addition, many subsistence consumers have limited transportation, which makes them reliant on certain geographical areas for their product needs. This is reflective in the low levels of education amongst subsistence consumers and the lack of infrastructure in these geographic locations (Ratten and Welpe 2011). Work on subsistence entrepreneurship has been limited in the mainstream entrepreneurship literature due to the emphasis on corporate entrepreneurship. This omission has resulted in an increase in social entrepreneurship, but still the research on subsistence entrepreneurship is lacking (Ratten et al. 2016). However, this is changing as there is both kudos and money to be gained from researching subsistence entrepreneurship. This derives from governments and international aid organizations wanting to help people at the bottom of the pyramid. Moreover, there is an

Subsistence Entrepreneurship: The Role of Collaborative Innovation. . .

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awareness from business people about market potential in subsistence markets. Due to innovation being a necessity for those in subsistence markets, it can breed business creation. In addition, the entrepreneurial spirit of consumers at the bottom of the pyramid is interesting. The aim of this book is to fill a gap in the literature by providing a number of studies on subsistence entrepreneurship and collaborative innovation. The motivation for this book is to expand the knowledge on subsistence entrepreneurship in order to guide future research. By doing so, a better understanding of the way to manage innovation can be presented. The chapters in this book are both exploratory and explanatory in nature, thereby presenting a broad overview about the role subsistence entrepreneurship plays in society. We hope that the chapters in this book will spur more work into what makes subsistence entrepreneurship unique and deserving of more attention.

2 Goal of Book The chapters in this book constitute a preliminary effort to examine the role of subsistence entrepreneurship in the global economy. The chapters vary in scope and detail with a range of geographic settings included. This enables a comprehensive understanding about the role of subsistence entrepreneurs in society. Accordingly, whilst the results of each chapter are somewhat exploratory in nature, the findings contribute to our knowledge about subsistence entrepreneurship. There needs to be more emphasis on the uniqueness and vitality of subsistence entrepreneurs, who are very useful in linking social and cultural conditions with business activity. Interesting questions still remain about the specifics of subsistence entrepreneurship such as: How do entrepreneurs in subsistence marketplaces use their networks to find information? Do they rely on social networks to facilitate word-of-mouth marketing, or do they use technological devices?

3 Overview of Chapters The chapters in this book all relate to the interplay of collaborative innovation, sustainability and social goals. The second chapter of this book titled ‘Subsistence Entrepreneurship in Ethnic Religion and Sociocultural Spaces: A Case Study’ focuses on the social aspects of subsistence entrepreneurship. As religion and culture have an impact on subsistence consumers, it is important to understand the role ethnicity can play. The third chapter titled ‘Firm Founders’ Passivity as a Source of Serendipitous Opportunity Discovery’ focuses on a new context for subsistence entrepreneurship in terms of chance encounters leading to business ventures. This is an interesting chapter as it analyses the discovery process leading to subsistence entrepreneurship. The fourth chapter titled ‘Commonomics: Rhetoric and Reality of

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the African Growth Tragedy’ analyses the context of emerging economies and subsistence entrepreneurship. This is an important context given most subsistence entrepreneurship occurs in developing countries. The fifth chapter titled ‘Entrepreneurship in the Solidarity Economy: A Valuation of Models Based on the Quadruple Helix and Civil Society’ focuses on a new form of economic evaluation leading to social change. This is an important part of understanding how government, business and education interlink to enable entrepreneurship. The sixth chapter titled ‘Evaluating the Business Model of a Work Integration Social Enterprise in Cantabria’ focuses on social issues surrounding entrepreneurship. The seventh chapter is titled ‘Encouraging Indigenous Self-Employment in Franchising’ and focuses on disadvantaged communities. The eighth chapter is titled ‘Transformational Entrepreneurship Through Social Innovation and Public Sector Management’ and examines the public sector. The ninth chapter is titled ‘Shadow Economy Index for Moldova and Romania’ and analyses the informal economy in Europe. The tenth chapter is titled ‘Survivability and Sustainability of Traditional Industry in the Twenty-First Century: A Case of Indonesian Traditional Furniture SME in Jepara’ and highlights how emerging economies in Asia are utilizing sustainable forms of entrepreneurship. The eleventh chapter is titled ‘The Minimum Wage Fuels Romania’s Shadow Economy?’ and analyses the informal sector. The twelfth chapter is titled ‘Gamifying Innovation and Innovating Through Gamification’ and discusses the technology aspects surrounding social innovation. The thirteenth chapter is titled ‘Work Hard, Play Hard: Work-Life Balance in Small Business’ and focuses on the small enterprises in communities. The fourteenth chapter is titled ‘Stay Ahead of a Game or Stay Still: The Impact of Learning and Development on Business Performance’ and provides a good overview of future innovation scenarios.

4 Managerial Implications The chapters in this book present promising research avenues for subsistence entrepreneurship. It is worthwhile noting that whilst subsistence entrepreneurship can occur in any economic setting, most of it tends to be in developing economies. Subsistence entrepreneurship can be used as a social action tool in broadening consumer engagement and achieving better societal interaction with low-income consumers. The availability of low-priced goods and services is needed by the poor and marginalized communities. Large multinationals are realizing the potential of this market and deliberately devising products to suit these consumers. For entrepreneurship practitioners, the chapters in this book highlight the need for a holistic approach to subsistence business practices. The chapters in the book point out that there are various forms of subsistence entrepreneurship. Entrepreneurship practitioners need to use marketing in terms of integrating social needs with business practices. In order to improve rates of subsistence entrepreneurship, entrepreneurs need to make their products in a way that appeals to consumers. This includes designing products that fit into subsistence consumer’s lifestyles. The practice of

Subsistence Entrepreneurship: The Role of Collaborative Innovation. . .

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subsistence entrepreneurship is complex and requires dedication. As the chapters in this book demonstrate, there are some hindrances to successful subsistence entrepreneurship that can be alleviated by proper planning. An implication of this is the need for entrepreneurs to rethink the development process. Traditionally, subsistence products have been less costly forms of existing products in the market. But this approach should change with a realization that some products are naturally for subsistence consumers. Due to unforeseen events and occurrences in the international market, different approaches to the innovation process for subsistence entrepreneurs need to be taken into account.

5 Research Implications The chapters in this book have important research implications for the general field of subsistence entrepreneurship but also related fields such as marketing, innovation and management. As shown in the chapters of this book, not all subsistence entrepreneurship is the same. In developing countries, subsistence entrepreneurship is likely to be related to product market differentiation rather than technological innovation. This is due to the need for low-cost products that can be used for a number of reasons. In addition, an appreciation of the requirements of bottom-of-the-pyramid consumers is needed to understand adoption behaviour. At the moment, we still do not know whether the innovation adoption process differs amongst developed and developing countries in terms of subsistence products. Thus, another research implication is to study the determinants and outcomes of adoption behaviour for subsistence entrepreneurship. Amongst the questions to address are what cycle of adoption behaviour is used by subsistence consumers and whether context affects the consumer experience. Additionally, more information about how to predict and explain subsistence entrepreneurship is needed. This includes focusing on consumers as co-creators of product innovations. The foregoing chapters leave some interesting areas for future research. First, there needs to be more work on the different levels of analysis in subsistence entrepreneurship such as the entrepreneur, government and surrounding environment. This will enrich the literature by providing different perspectives about stakeholder engagement in subsistence entrepreneurship. Second, a deeper understanding is required about the different forms of subsistence entrepreneurship. Past research has tended to use developing countries as the context, but there are other contexts also prone to subsistence entrepreneurship. This includes rural and peripheral communities that have fewer resources than urban localities. There is little research on subsistence entrepreneurship in developed countries. This leads to intriguing research possibilities that can delve deeper into how context affects entrepreneurship. The pioneering nature of this book lends itself to some unique research findings. Subsistence entrepreneurs have a different experience in new product development as they learn by experience. This provides an opportunity to compare different practices for managing in subsistence marketplaces. This is of great benefit for

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entrepreneurs who intend to be in subsistence markets that can be in turn applied to other market places. This book provides an opportunity to broaden our understanding about the resource barriers to subsistence entrepreneurship. We bring into focus the need for subsistence entrepreneurship by emphasizing its importance.

References Dana L, Ratten V (2017) International entrepreneurship in resource-rich landlocked African countries. J Int Entrep 15(4):416–435 Nakato C, Weidner K (2012) Enhancing new product adoption at the base of the pyramid: a contextualized model. J Prod Innov Manage 29(1):21–32 Ratten V (2014) Future research directions for collective entrepreneurship in developing countries: a small and medium-sized enterprise perspective. Int J Entrep Small Bus 22(2):266–274 Ratten V (2017) Gender entrepreneurship and global marketing. J Glob Mark 30(3):114–121 Ratten V, Ferreira J (2017) Future research directions for cultural entrepreneurship and regional development. Int J Entrep Innov Manage 21(3):163–169 Ratten V, Welpe I (2011) Community-based, social and societal entrepreneurship. Entrep Reg Dev 23(5–6):283–286 Ratten V, Ferreira J, Fernandes C (2016) Entrepreneurial network knowledge in emerging economies: a study of the Global Entrepreneurship Monitor. Rev Int Bus Strateg 26(3):392–409 Rivera-Santos M, Rufin C, Kolk A (2012) Bridging the institutional divide: partnerships in subsistence markets. J Bus Res 65:1721–1727 Venugopal S, Viswanathan M, Jung K (2015) Consumption constraints and entrepreneurial intentions in subsistence marketplaces. J Public Policy Mark 34(2):235–251 Viswanathan M, Sridharan S, Ritchie R (2010) Understanding consumption and entrepreneurship in subsistence marketplaces. J Bus Res 63:570–581 Viswanathan M, Echambadi R, Venugopal S, Sridharan S (2014) Subsistence entrepreneurship, value creation, and community exchange systems: a social capital explanation. J Macromark 34:1–14 Weidner K, Rosa J, Viswanathan M (2010) Marketing to subsistence consumers: lessons from practice. J Bus Res 63:559–569

Firm Founders’ Passivity as a Source of Serendipitous Opportunity Discovery Antti Kauppinen

Abstract This chapter focuses on understanding how subsistence entrepreneurs utilise chance discoveries in their marketplace. A case study method is utilised to understand the process of serendipitous opportunity discovery in terms of obtaining market advantages. Case studies from Finland and Denmark are utilised to analyse the subsistence entrepreneurship process from a transformational perspective. The results indicate that some passivity can generate a serendipitous opportunity discovery. Suggestions for future research are stated that highlight the link between the transformational and subsistence entrepreneurship literature.

1 Introduction An entrepreneurial opportunity is a key element of subsistence and transformational entrepreneurship (see Ratten and Jones 2019), because an opportunity is a situation, in which products, services, raw materials, or organising methods could be introduced with a higher price than their cost of production (Shane and Venkataraman 2000). These situations are often platforms for creating wealth and well-being through their transformational effect of making new products and/or services available through a firm (Venkataraman et al. 2012), because these products and services might make a positive impact on the lives of their end users. Using products and services to transform an end-user’s life for the better originates in the definition of transformational entrepreneurship, that is, “the creation of an innovative virtuebased organisation for the purpose of shifting resources out of an area of lower and into an area of higher purpose” (Miller and Collier 2010: 85). Although the work on opportunities would wish it so, not all the opportunity content (i.e. a requirement for an innovative virtue-based organisation and/or product or service) can be predicted (Merrilees et al. 1998; Reynolds 2005). In fact, the

A. Kauppinen (*) College of Business, School of Management, RMIT University, Melbourne, VIC, Australia e-mail: [email protected] © Springer Nature Switzerland AG 2019 V. Ratten et al. (eds.), Subsistence Entrepreneurship, Contributions to Management Science, https://doi.org/10.1007/978-3-030-11542-5_2

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activities that result in the discovery of an opportunity might happen accidentally (cf. Kirzner 1997), for example, as a result of a person having nothing else to do (Martello 1996). The prior research recognises that opportunity discovery is often a serendipitous process and that its domains are (1) the prior knowledge of the sector’s products, (2) contingency (i.e. a lucky accident where the discovery occurs), and (3) an active search for opportunities (Dew 2009). In this chapter, alongside individual notions from the prior research (e.g. Görling and Rehn 2008), I problematise the concept of an active search always being one of the domains of a serendipitous opportunity discovery. I remove the active search domain from the serendipity model (Dew 2009), explore the driving forces of passivity, and show empirically how this assumption changes the current understanding. The current exploration of examples of passivity opens up a new dimension in the fields of subsistence and transformational entrepreneurship, because traditionally passivity has a connotation of something not done or not started, which is the opposite to one of the requirements of entrepreneurship (i.e. an active search) (Minniti 2008). This chapter examines opportunities in which entrepreneurs apply the method from subsistence entrepreneurship, that is, generating subsistence income (Schoar 2010). I show interview examples (two software developers, one mobile phone application and game developer, and one dating consultant) that were parts of my deviant case study material [i.e. a study, which has a target to present a surprise (Seawright and Gerring 2008)]. In those examples, discovery of an opportunity is not only associated with entrepreneurs’ profit-seeking ambitions (compare with Ratten and Jones 2019), but in contrast, the opportunity discovery activities reported how entrepreneurs develop a transformational effect through their products or services while creating profits for themselves (compare with Viswanathan et al. 2014). The common denominator of those examples (i.e. the criteria determining they were selected as deviant, surprise-inducing cases) was that they resulted from serendipity and as a consequence of their discovers’ passivity rather than activity. The primary antecedent of this passivity was frustration, which originated in internal tensions relating to the entrepreneurs’ lives. This finding as a part of the subsistence and transformational entrepreneurship notion might offer some interesting avenues for future research on the topic to explore. This chapter is structured as follows. First, it reports on notions on an individual’s passivity suggested in prior literature; doing so involves examining the antecedents of passivity and also the discovery of serendipitous opportunity. Second, I will explain the data I collected during a deviant case study in Finland and Denmark. It is important to note that I call the participants in this study firm founders (although in prior research, such individuals might be called entrepreneurs), because that is the exact term that they used themselves in interviews. Using the exact same wording is a critical form of grounded theory-based research and narrative coding, which I used in this study. Third, in this chapter, I will explain those methodological procedures. Fourth, I will explore the details of the categories, which emerged from the interview data. Fifth, I will conclude the chapter by discussing how the findings might offer insights useful to the literature on subsistence and transformational entrepreneurship.

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I will also discuss the limitations of this study and directions for the future research in the field.

2 Prior Research As an example of the critical research in the field, Görling and Rehn (2008) found that sometimes a person’s passivity towards work triggers productive outputs, such as opportunity discovery. The reason behind this argument is that passive people often have a large repertoire of creative thoughts in mind (Styhre 2006). More precisely, Frith et al. (2000: 358) define passivity as an experience in which a person feels that “his own actions are being created, not by himself, but by some outside force”. The research on entrepreneurial serendipity—which introduces its basic domains as prior knowledge, contingency, and active search (Dew 2009; see also Kirzner 1997)—does not, however, yet apply the insights from this passivity research (see Blakemore et al. 2000). In this chapter, I develop the current understanding on serendipity by removing the active search domain from it, attach the passivity element into it, explore the driving forces of this passivity, and energise this analysis with a sample of interview data. The field in general primarily considers successful opportunity discoverers as active and passionate people, who want to discover opportunities in their sector (Cardon et al. 2009). Because this assumption of activity being a critical force of discovering an opportunity contradicts some notions from the field—for example, Görling and Rehn (2008), who argued that passivity could be the force involved—this chapter clarifies the reasons for this fragmentation and offers empirical examples, in which an opportunity was discovered serendipitously. One of the newest research results in the field suggested that gestation activities of those who were discovering opportunities did not contribute to their firms’ subsequent performance (Arenius et al. 2017). This surprising finding gives a boost to the approach, which might clarify the reasons why activity does not always lead to success, even if one might assume otherwise. One of the additional reasons why activities are considered so important for entrepreneurship is the theory on affect. For example, Foo et al. (2009) explained that positive and negative emotions that entrepreneurs experience strengthen their new venture creation efforts. In a similar vein, Wolfe and Shepherd (2013b) found that a firm’s improved profitability, which in many cases is a result of someone’s deliberate action (Cardon et al. 2009), magnifies the positive effect between positive/ negative emotions and performance in entrepreneurship-related topics (Wolfe and Shepherd 2013a). Because those effects suggested earlier in this chapter are derived from samples, which try to generalise the effects and show trends rather than details, I used the opposite approach, which entails showing outliers. Because my target is not to generalise and relate how these effects would function similarly in every empirical context, I do not offer a model to be tested but instead frame the concentration of the empirical examples around the topics of entrepreneurs’ passivity and

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serendipities that are interesting outliers in the fields of subsistence and transformational entrepreneurship.

3 Deviant Case Study Examples from Interviews I collected the material for a deviant case study from Finland and Denmark. This case study follows the deviant case study logic, because in this case study form a researcher tries to find surprises or outliers (such as those related to firm founders’ passivity instead of activity as a driver of serendipitously discovered opportunities) instead of trying to generalise the findings empirically (Seawright and Gerring 2008). In this chapter, I report on the interview material of that deviant case study. My target is to offer a theoretical generalisation of the topic (i.e. passivity), an implication that can potentially provide a boundary condition (see Strauss and Corbin 1990) for the prior research on serendipitous opportunity discovery. The case study material offers descriptions of seemingly passive firm founders who had discovered a transformational opportunity [one intended to change the lives of end users (Miller and Collier 2010)], for their businesses serendipitously. Below, I briefly describe the firms and their founders’ backgrounds. The first firm is based in Denmark, but it employs people all over the world, because it applies an open source technology. The founder of this firm started envisioning his business after he broke his back and he was required to stop work. During his recuperation, because he had nothing else to do, he began to think of a business he could establish. This firm founder is a lawyer. This firm runs an online application for hospitals, which medical doctors use to treat and investigate brain strokes in order to save patients’ lives. The second firm comes from Finland (a partner of the former), and it offers online platforms for computers and mobile phones (e.g. the one used for the hospital product). The firm founder of this company started thinking of starting his own business when he was frustrated having been fired from his job. The idea of starting a business idea in the same sector as his previous employer appealed in that it offered a potential form of revenge on that past employer. This firm founder gained a master’s degree in computer science. The owner of the third firm is Danish and studied in a famous business programme (Bachelor’s level) at a Danish business school. His business runs in an office in Copenhagen, and offerings include mobile phone applications and games. This firm founder got the idea for his company serendipitously at a time when he was bored at a lecture. This firm founder claims that these products make their users’ lives happier. The founder of the fourth firm is of African origin but lives in Denmark, and his firm offers dating consultancy services for men (e.g. books, seminars, and personal coaching) to help its customers find a partner. His idea came into his mind after his girlfriend left him and he wanted to help other men to succeed in their relationships (especially during the phase of building of their relationships). This founder has no further education qualification.

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4 Methods I followed Strauss and Corbin’s (1990) grounded theory method to collect this deviant case study data. Of this material, two open interviews from four firms are explored in this chapter. The target of this case study was to try to find a specific construct from real life: a driving force for passivity that might result in a serendipitous opportunity discovery. Before starting to analyse this data, a professional transcriber transcribed this data (530 minutes of talk in total) verbatim. In the analysis, I applied open (i.e. finding the critical categories), axial (i.e. comparing the categories), and selective codings (i.e. reorganising the categories to find the grand category) (Corbin and Strauss 1990; Strauss and Corbin 1990). In line with this coding method applied in the entrepreneurship field (e.g. Singh et al. 2015), my aim was to concentrate not on individuals but on categories that emerge from the data. That is why I removed the identifiers to each interviewee in order to concentrate on analysing narrative content. First, when analysing the interviews, I coded the opportunity narratives: the situations which occurred because of serendipity (i.e. the open coding). A crucial individual-level factor, which was often encapsulated with those opportunity situations, was firm founders’ frustration (examples in Table 1). Second, I reorganised those categories to encompass descriptions of how firm founders spoke of their opportunities occurring because of serendipity (including as a result of frustration) in accordance with their analysed reasons (i.e. the axial coding). I found that the primary reason for serendipities and their antecedents (frustration) was that these firm founders were passive instead of active. Third, I coded the grand category to explore the driving forces of those reasons for serendipity, frustration, and passivity (i.e. the selective coding). The most important driving force turned out to be an internal tension that these firm founders experienced in relation to their previous or current work. The next chapter offers examples of those descriptions.

5 Internal Tension Generating Positively Channelled Passivity When analysing the interview data from the deviant case study conducted in Finland and Denmark, two common basic categories of serendipity emerged from the open coding. Those two categories (i.e. firm founders’ frustration types) are explored in Table 1 with examples from interviews. In fact, when the firm founders explained why they discovered some of their opportunities by chance, they related how frustrated they were particularly in two different areas—business life and higher education (the categories emerging from the open coding). These two frustration types reported above made the focal firm founders passive in different forms: passivity towards what is traditionally expected at work (e.g. be a good employee and follow your leader) and passivity towards what is traditionally expected to be true (e.g. theory learned at business school). The future firm founders’ bad experiences meant they did not want to participate in those institutions at all, which led them to

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Table 1 The categories emerging out of codings Categories from the open coding Frustration of working for another firm, examples: “I woke up and I quite a bitch took a cigarette and lit up. You know. . . everything was down down down. So, I decided that I wanted to go out and find a way out from this and how to become more successful” “I want to work alone. I found it better, because this is not for like everybody. If a guy comes into this, there are three things. First, he has to feel that nobody is doing this on the field. The third part, he has to make a turnaround. And the last part that is that he has to be able to be trained. He has to be able to take the learning from his mind to another person. So, it’s a hard process and I prefer to work alone” “I simply broke my back, as a little personal thing and that was session for my stuff. We had to carry our people that I had problem with my back and so I had to be at home. Then after half a year, actually I had to quit my work, I couldn’t work. And that time, actually, I take care of the pains so was working a lot with the software. I mean it was kind of it was my job was a course of buying a software and at home I could do nothing, but just being myself and try find out what was happening at the other side of the table so to speak” “He saw this way of handling things as a simple way. Because it is not actually a job contract, but also it could a simple client contract with this my side contract consultancy was about three pages. It’s extremely simple also. And he liked that approach, I mean, he told why not to try another project. He had this, we arranged a meeting in Stockholm on a day I was working there with the project my side and then I met this sits people, I mean those brain project people and we had a talk and came up with some, yeah, initial ideas of how much it costs to take the core system, this SAS-based system that I mean what would be the percent of the costs and some competition. And then we

Categories from the axial coding Passivity towards what is traditionally expected at work (e.g. to follow one’s leader) Alternative solutions (a product or service for an own business): (1) mobile phone applications, (2) software for hospitals, (3) platforms for computers and mobile phones, and (4) dating consultancy

Grand category from the selective coding Internal tension in a person’s mind which triggered those firm founders to actually start their entrepreneurship journey and which resulted in their serendipitous opportunity discoveries (i.e. an activation of their passivity in thoughts originating in their frustrations)

(continued)

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Table 1 (continued) Categories from the open coding just got a meeting and they came back a few months later and wanted to take a new meeting in Stockholm and where they really wanted to get into the details and how to do this brain project” Frustration against to higher education, examples: “I always wanted to start a company. I just looked for the right opportunity. I’ve never been hired. I’ve been, yeah I had one paying job that hand in your tax card and everything. Otherwise, I always had my own company, that would then invoice” “What is behind the numbers? Can I trust these numbers you learn in school? How do I, what does a number mean? How do you analyse reports, source criticism. Many people just don’t think, when they see. . . 37 percent increase in something. They think, “oh fuck that’s a lot” but, if that’s from 1 to 1.37 units, that’s not a lot. That’s nothing” “There is no one reason how one finds an idea. It cannot be found from statistics or theory, because those predict that generally this is going to happen in companies. For us it has always been a result of many people’s discussions and a result of many factors” “After hours it is passive what we do. We cannot close the work, and the activitylevel of being able to react is enough, because then the serendipities bring those opportunities and not the theory. I think it’s about personalities and a wish to develop the company”

Categories from the axial coding

Grand category from the selective coding

Passivity towards what it traditionally expected to be true (e.g. theory leaned in the school) Alternative solutions (a product or service for an own business): (1) mobile phone applications, (2) software for hospitals, (3) platforms for computers and mobile phones, and (4) dating consultancy

Source: Author’s own table

explore personal ways to discover alternative opportunities; those ideas became the foundations of their businesses (i.e. the categories emerging out of axial coding). This significant power of being frustrated (found in the categories emerging during open coding) flowing from trying to find alternative opportunities (found and clarified during the axial coding) seemed to be the most important reason why these firm founders considered starting their own businesses instead of working for someone else. Thus, after analysing the reasons for that negatively oriented power of ignoring the existing institutions (e.g. other employers and business schools) and trying to act upon

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other chances, it turned out that each of those firm founders experienced an internal tension (i.e. the grand category emerging out from the selective coding) (see Table 1). This internal tension can be characterised as a contraction in a person’s mind as a realisation that it would be wise to follow what workplace leaders or staff at education institutions say, but they did not want to do so. I controlled for potential bias related to education level in the data by including one firm founder without any further education beyond basic schooling. However, this person offered similar narratives to other firm founders, so the level of education did not change the insights from the grand narrative. The grand narrative (i.e. the internal tension in a person’s mind) can be related to stress in the literature on individual psychology (Mark et al. 2008). Studying those internal tension levels (i.e. the grand category emerging from the selective coding) more precisely would require an in-depth case study. Mark et al. (2008) suggested that stress can be a reason for such internal tension in a person’s mind and that this stress might, for example, be caused by interruptions at work. A case study, which would clarify the elements (e.g. internal tensions in one’s mind, interruptions at work, and stress), might require observation data (see Czarniawska 2008), which was unfortunately not available to this research because the interviewees could not offer any other data. Given one of the crucial components of a case study method is that a researcher uses multiple data sources (Eisenhardt 1989); the interview-based analysis presented here offers a potential approach for future scholars. This notion does, however, offer some interesting insights into passivity and its potential to support serendipitous opportunity discovery. The driving force of this passivity included firm founders’ frustration with business life and educational institutions in general, alternative solutions to organise their work (their own business ideas), and internal tensions in their minds (which can be a result of stress and interruptions at work). These insights can be interesting, because the prior research has primarily considered entrepreneurs as active individuals (see Cardon et al. 2009).

6 Discussion and Conclusions This chapter offers a new perspective on the understanding of serendipitous opportunity discovery as a part of subsistence and transformational entrepreneurship literatures. I offered insights from my deviant case study that explored the reasons why some passivity can generate a serendipitous opportunity discovery. I removed the active search domain from the prior model by Dew (2009) and then attached the passivity element into it. In the grounded theory analysis, it turned out that surprisingly passivity, instead of an active search (compare with Arenius et al. 2017), was the primary source of opportunity discovery in these serendipity cases, despite the prior research on serendipity (e.g. Dew 2009; Merrilees et al. 1998; Reynolds 2005) and on opportunities (e.g. Kirzner 1997; Shane and Venkataraman 2000; Venkataraman et al. 2012) suggesting otherwise. The exploration of cases in this study shows that opportunity discoveries took place, because the focal firm founders were not interested in working for any single

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existing firm (suggesting passivity) but created their own firms. More precisely, they built their businesses because their passivity was transformed into an active mood through their frustration about educational and business organisations (of which they were a part and which were applied in their previous workplaces). These two forms of frustration proved to be results of the focal firm founders’ wishes to control their own work instead of being controlled by someone else (e.g. a boss). Being controlled was one of the reasons that made them passive towards any work at existing firms and towards any studying efforts at higher-education institutions. Thus, being passive was a result of their experiencing internal tensions in their minds between what they should do and what they wanted to do. They used this internal tension as an excuse to convince themselves to stop work and studies and start their own businesses. Future research could extend the analysis of those internal tensions to encompass the stress perspective, for example. Doing so would align with the suggestion of Mark et al. (2008) that one’s internal tensions in mind as well as interruptions at work can cause stress: one of the potential triggers for people starting businesses. It is critical to note that these firm founders, unlike those identified in the prior research (e.g. Cardon et al. 2009; Venkataraman et al. 2012), did not grow their businesses because of a wish to be active society members (firm founders) but because they wanted to avoid of being controlled by anyone else who they associated with causing them frustration (and thus: passivity). In fact, one of the interviewees stated the following strong opinion when talking about chances to grow a business: No. We don’t want. No. Not 100 employees. Not more than 30. Also, the products that we build target automation. And recurring revenues, a monthly revenue. We do not build products that would require a large sales department. Because we don’t want many people. We want, our products are targeted, the first target is 10,000 users that will pay us each month for a product.

This chapter extends the serendipitous opportunity discovery perspectives by offering a view in which a person’s passivity might produce opportunities for wealth generation and well-being, a critical aspect of subsistence and transformational entrepreneurship literatures (see Miller and Collier 2010). The chapter discussed these ideas further and offered two forms of frustration (about business organisations and education institutions) as sources of generative passivity and suggests that these passivity elements can trigger positive outcomes, such as opportunity discovery through correctly handled psychological effects of self-control over one’s internal tensions (compare with Blakemore et al. 2000; Frith et al. 2000).

References Arenius P, Engel Y, Klyver K (2017) No particular action needed? A necessary condition analysis of gestation activities and firm emergence. J Bus Ventur 8:87–92 Blakemore S-J, Smith J, Steel R, Johnstone EC, Frith CD (2000) The perception of self-produced sensory stimuli in patients with auditory hallucinations and passivity experiences: evidence for a breakdown in self-monitoring. Psychol Med 30:1131–1139 Cardon MS, Wincent J, Singh J, Drnovsek V (2009) The nature and experience of entrepreneurial passion. Acad Manage Rev 34:511–532

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Corbin J, Strauss A (1990) Grounded theory research: procedures, canons, and evaluative criteria. Qual Sociol 13(1):3–21 Czarniawska B (2008) Organizing: how to study and how to write about it. Qual Res Org Manage 3 (1):4–20 Dew N (2009) Serendipity in entrepreneurship. Org Stud 30(7):735–753 Eisenhardt KM (1989) Building theories from case study research. Acad Manag Rev 14(4):532– 550 Foo M-D, Uy MA, Baron RA (2009) How do feelings influence effort? An empirical study of entrepreneurs’ affect and venture effort. J Appl Psychol 94(4):1086–1094 Frith CD, Blakemore S-J, Wolpert DM (2000) Explaining the symptoms of schizophrenia: abnormalities in the awareness of action. Brain Res Rev 31:357–363 Görling S, Rehn A (2008) Accidental ventures – a materialist reading of opportunity and entrepreneurial potential. Scand J Manage 24(2):94–102 Kirzner I (1997) Entrepreneurial discovery and the competitive market process: an Austrian approach. J Econ Lit 35(1):60–85 Mark G, Gudith D, Klocke U (2008) The cost of interrupted work: more speed and stress. Conference proceedings of SIGCHI 2008 conference on human factors in computing systems, Florence, Italy, April 5th to 8th 2008, pp 107–110 Martello WE (1996) Developing creative business insights: serendipity and its potential in entrepreneurship. Entrep Reg Dev 6(3):239–258 Merrilees B, Miller D, Tiessen J (1998) Serendipity, leverage and the process of entrepreneurial internationalization. Small Enterp Res 6(2):3–11 Miller RA, Collier EW (2010) Redefining entrepreneurship: a virtues and values perspective. J Leadersh Account Ethics 8(2):80–89 Minniti M (2008) The role of government policy on entrepreneurial activity: productive, unproductive, or destructive. Entrep Theory Pract 32(5):779–790 Ratten V, Jones P (2019) Transformational entrepreneurship. Routledge Frontiers of Business Management/Routledge, London/New York Reynolds PD (2005) Understanding business creation: serendipity and scope in two decades of business creation studies. Small Bus Econ 24(4):359–364 Schoar A (2010) The divide between subsistence and transformational entrepreneurship. Innov Policy Econ 10:57–81 Seawright J, Gerring J (2008) Case selection techniques in case study research: a menu of qualitative and quantitative options. Polit Res Q 61(2):294–308 Shane S, Venkataraman S (2000) The promise of entrepreneurship as a field of research. Acad Manage Rev 25(1):217–226 Singh S, Corner PD, Pavlovich K (2015) Failed, not finished: a narrative approach to understanding venture failure stigmatization. J Bus Ventur 30(1):150–166 Strauss A, Corbin J (1990) Basics of grounded theory methods. Sage, Beverly Hills Styhre A (2006) Organization creativity and the empiricist image of novelty. Creat Innov Manage 15(2):143–149 Venkataraman S, Sarasvathy SD, Dew N, Forster WR (2012) Reflections on the 2010 AMR decade award: whither the promise? Moving forward with entrepreneurship as a science of the artificial. Acad Manage Rev 37(1):21–33 Viswanathan M, Echambadi R, Venugopal S, Sridharan S (2014) Subsistence entrepreneurship, value creation, and community exchange systems: a social capital explanation. J Macromark 34 (2):213–226 Wolfe MT, Shepherd DA (2013a) “Bouncing back” from a loss: entrepreneurial orientation, emotions, and failure narratives. Entrep Theory Pract 37(4):1–26 Wolfe MT, Shepherd DA (2013b) What do you have to say about that? Performance events and narratives’ positive and negative emotional content. Entrep Theory Pract 37(6):1–31

Commonomics: Rhetoric and Reality of the African Growth Tragedy Jerry Kolo, Nnamdi O. Madichie, and Chris H. Mbah

Abstract This exploratory study addresses the question of a feasible complementary economic model for the teeming population in sub-Saharan Africa (SSA) that lives at the subsistence level. The study rationalized the contention that SSA is in a development straitjacket and its much-touted economic rise is more rhetoric than reality. Postmodern Keynesian economics has failed in most of SSA; therefore, an economic paradigm shift is advocated toward “commonomics.” The study draws upon documentary evidence to posit that SSA’s rise is trumpeted by international organizations, nongovernmental organizations (NGOs), and SSA governments for various “selfserving” reasons adduced in the study. Despite this purported rise, in 2018, 17 of the world’s 20 least competitive economies are in SSA; the middle class is rapidly disappearing; corruption has become a means of livelihood across all socioeconomic classes; and the youth are fleeing their countries, as exemplified by the treacherous transatlantic crossings into Europe. In SSA’s quandary, Africans who are nostalgic about the “good old days” opine that, until the postcolonial era, SSA’s resource base enabled people to meet their basic needs cost-effectively and sustainably and that the consumerism and greed that typify the postmodern era of Keynesian economics were nonissues in traditional SSA contexts. In these societies, commonomics, the term used for the model prescribed in this study, was the economic ideology and model. Commonomics aims to meet people’s basic needs through collaborative grassroots initiatives, where the inputs and outputs of production, distribution, and consumption of goods and services are initiated, governed, managed, and sustained by grassroots citizens. Guidelines for implementing commonomics are outlined in the study. J. Kolo College of Architecture, Arts and Design, American University of Sharjah, Sharjah, United Arab Emirates e-mail: [email protected] N. O. Madichie (*) Centre for Research and Enterprise, Bloomsbury Institute London, London, UK e-mail: [email protected] C. H. Mbah School of Business and Entrepreneurship, American University of Nigeria, Yola, Adamawa State, Nigeria © Springer Nature Switzerland AG 2019 V. Ratten et al. (eds.), Subsistence Entrepreneurship, Contributions to Management Science, https://doi.org/10.1007/978-3-030-11542-5_3

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1 Introduction The narrative of Africa’s economic rise has never gained traction and, as this study contends, the perfunctory evidence of the rise is inconsistent with the negative economic and quality of life indicators across the continent. In a review of the 2018, the latest Global Competitiveness Report published by the World Economic Forum, Anoba (2018) noted that “17 of the 20 least competitive economies in the world are in Africa.” Not surprisingly, the various reasons he identified for SSA’s retarded competitiveness border mostly on the dictates of classical Western economic models. Similarly, in an incisive review of the 2018 Ibrahim Index of African Governance (IIAG), Leteane (2018) alluded to the finding in the report that “the continent’s economic growth over the last decade . . . has failed to translate into progress in Sustainable Economic Opportunity. Africa’s GDP has grown by 39.7% over the same period; almost half (43.2%) of Africa’s citizens live in one of the 25 countries where Sustainable Economic Opportunity has declined in the last 10 years.” Also worrisome among the findings of the Index report are the decline in education and security across the continent, two critical factors for both foreign investment and domestic entrepreneurship. This study opines that ineffective national and international macroeconomic initiatives to fight abject poverty in Africa through classical Western economic models beg for alternative and complementary paradigms of growth and development, especially for the masses of the continent who live at the subsistence level and currently contribute little or nothing to the global economy. Similar views and for a paradigm shift have been expressed for economies around the world where more and more people are being marginalized and impoverished by the global economy. One of the world’s foremost development aid agencies and advocates, OXFAM (n.d.), is currently on a global campaign that urges “governments to listen to ordinary people and choose to build an economy that works for everyone, not just the fortunate few.” UNDP (2011: 2) submitted that “people must be at the center of human development, both as beneficiaries and as drivers, as individuals and in groups. People must be empowered with the tools and knowledge to build their own communities, states and nations.” Eisler (2009) argued that “rather than trying to just patch up a system that isn’t working, let’s use our economic crisis to work for a system that really meets human needs.” Brower (2013) advanced what he called “ten smart responses you can use when people tell you there’s no alternative to the capitalism that’s cooking the planet.” It is in the context of the growing need and calls for a shift in Africa’s economic development paradigm that this study proposes “commonomics” as a model, complementary to extant classical economic models, as a means to lift grassroots African from the grinding poverty that has a choke hold on the continent. The concept of commonomics is reviewed further later in the study. This study formulates a conceptual framework for implementing commonomics within the extant structures of governance in SSA. It rationalizes the contention that SSA is in a development straitjacket and its much-touted economic rise is more miasma than reality. Burdened by numerous problems, including the so-called

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resource curse (Auty 1994), it seems ever more persuasive to argue that postmodern Keynesian economics has been ineffective in SSA; therefore, a paradigm tilt is advocated in this study toward “commonomics.”

2 Literature Review There is an extensive and insightful pool of literature on the key concepts that underpin this study. Briefly reviewed below are three of these concepts, namely, Africa Rising, African growth tragedy, and commonomics.

2.1

Africa Rising Narratives

Africa Rising as a phrase and concept emerged toward the end of the first decade of the twenty-first century, as what this study labels naïve and premature celebrations of observations of a small bump in Africa’s economic growth rate began around the world. As Kayizzi-Mugerwa et al. (2014) noted, “Africa’s growth resurgence during the past decade and its persistence have taken many watchers of the continent by surprise. The international media have been busy coining labels to match this unexpected turn of fortune—‘Africa rising’ being the commonest and most misleading label to date.” Sarfo (2013) noted that: Recent high growth rates and increased foreign investment in Africa have given rise to the popular idea that the continent may well be on track to become the next global economic powerhouse. This “Africa Rising” narrative has been most prominently presented in recent cover stories by TIME Magazine and The Economist. Yet both publications are wrong in their analysis of Africa’s developmental prospects—and the reasons they’re wrong speak volumes about the problematic way national economic development has come to be understood in the age of globalization.

The global financial crisis of 2008 did not deter adherents of what was fast becoming the myth of Africa Rising. Even way into the second decade of the century, Western media continued project this myth, for example, CNN’s article by Page (2015), titled “326 billion reasons Africa is on the move.” On these adherents, this paper conjectures that the myth continued to be perpetuated by international organizations, such as the IMF and World Bank, as a “psychological therapy” for SSA, while most nongovernmental organizations (NGOs) accentuated the rise to justify their work and secure more local and international grants. Yet, most SSA governments used the growth statistics to their advantage to cover up for failed governance. This leadership failure has been substantiated time and again by credible analytical sources on governance in Africa, such as the Mo Ibrahim Index of African Governance (Mo Ibrahim Foundation 2018) and Transparency International.

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Counterpoints on Africa Rising

Hardly had the euphoria over Africa’s purported economic rise sunk in when the global economic crisis and recession of 2008 hit. This quickly dampened, but for a few hardened cheerleaders on the rise, the euphoria and enthusiasm around the world about Africa’s prospects as the world’s emerging economic growth frontier. In light of the impacts of the global crisis, questions about the sustainability of the rise or growth were being raised as part of the discourse. For example, Johnson (2015), in the Financial Times, highlighted Africa’s growth in the context of the global financial slowdown and stated that the “slowdown calls ‘Africa rising’ narrative into question.” Also, reviewing a research that examined the traction or sustainability of economic growth in Rwanda, the so-called Africa’s Singapore and economic wonder, Kopf (2017) opined that the country’s growth may, in the long run, be a mirage, in light of the authoritarian and manipulative political system in the country. Like Rwanda, the case of Africa at large was one in which, as observed by Fabricius (2015), macroeconomic figures led, mistakenly, to the “Africa Rising” euphoria, causing some to wonder if the Rising is, instead, “Africa Uprising.” It is important to note that several African development scholars were also clear in offering counterviews to the myth of Africa Rising. The views expressed by the likes of Kayizzi-Mugerwa et al. (2014) and Sarfo (2013) were vivid cautionary illustrations on the encomiums that greeted the short-lived surge in economic growth in Africa. Kayizzi-Mugerwa et al. (2014) questioned the methodology used in highlighting success stories about SSA. According to him, “given Africa’s atrocious data quality we cannot know for sure whether Africa is indeed ‘rising’ or by how much. Moreover, that even if Africa was rising, we are not able to tell how this is impacting the general welfare of its population.” This view supports an earlier observation by Wadongo (2014) that “much of the overhyped economic growth is fueled by the exploitation of gas reserves, investment in the telecommunications industry, and infrastructure development. Most of the profits and benefits from this growth go into the pockets of investors, shareholders, and government officials.” He referenced evidence of an increasing wealth gap in SSA in particular, and the continent in general, where just ten people own the same wealth as half of the continent. Concluding on a terse note, he submitted that “despite booming economies, the “middle class” is still in poverty,” adding that “just because some African economies are recording annual growth rates of more than 6% does not mean that the lives of average citizens are necessarily improving apace; wealth disparity is rising even faster.” In his counterview, John Ashbourne (2016), African economist at Capital Economics described Africa’s rise as “irrational optimism,” arguing that “people misunderstood” the concept.”1 He observed that Africa’s rise “was always going to be a

1 According to Thompson (2016), “In 2016 John Ashbourne, African economist at Capital Economics, told the FT that people misunderstood the concept of Africa Rising and is critical of the ‘irrational optimism’ surrounding the weight of expectation for African countries to become the next Denmark or Malaysia.”

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very difficult and lengthy process” and that “the current slowdown should be food for thought for adherents of the Africa rising concept, which has been ‘overplayed’.”

2.3

African Growth Tragedy

The notion or concept of “African growth tragedy” first emerged when Easterly and Levine (1997: 1203) noted that “Africa’s economy since 1960 fits the classical definition of tragedy: potential unfulfilled, with disastrous consequences. Sub-Saharan Africa’s growth tragedy is reflected in painful human scars.” This trend has continued well into the 1990s and beyond. Commenting on the genesis of the concept, Kayizzi-Mugerwa et al. (2014) pointed out: During the late 1990s, and amid Africa’s “darkest hour,” when everything that African governments were trying to do to generate growth and bring economies back on track, including structural adjustment policies, seemed to be failing, researchers in Western academia/development agencies began to refer frequently to Africa’s “growth tragedy.”

The African growth tragedy concept reverberated in the discourse of Africa’s development as Africa Rising began to lose steam in the second decade of the twentyfirst century. Yet, over the decades, underlying the extensive discussions about the African growth tragedy is what this paper deems to be the elusiveness of the sustained growth that Africa and the international community yearn, plan, and collaborate for. Quite disheartening is the evidence that continues to confirm the severity of the challenges of growth in Africa, such as the poignant findings of the IIAG. Also, reviewing the 2018 Global Competitiveness Report by the World Economic Forum, Anoba (2018) noted that “out of the 140 countries studied, the highest placed African economy was Mauritius, at 49, and the closest after that was South Africa, which came in at 67. The majority of the ranked countries from the continent languish in the bottom third. The only non-African countries in that category are Venezuela, Haiti, and Yemen.” He added that “this abysmal performance in one of the key reports on measuring economic progress reiterates the deplorable state Africa’s economy finds itself in, at least with regard to the recent past.” While contentions remain about the causes and ways out of the African growth tragedy, the argument and position in this paper are that a paradigm of growth that fits the realities of the impoverished majority of Africans should be adopted side by side with the Western growth models that have been in place since the colonial eras. The idea is not to supplant the extant with the proposed models but to align them in a way that enables impoverished Africans to meet their basic needs through commonomics, while the extant macroeconomic model continues to link African with the global market and economy.

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2.4

Commonomics: A Proposition

Surmising from the vast literature on commonomics and its variants, this paper views the term as referring to a model of economics that aims to meet people’s basic needs through collaborative grassroots initiatives, where the inputs and outputs of production, distribution, and consumption of goods and services are initiated, governed, managed, and sustained by grassroots citizens. Ownership and/or control of the means and dividends of production and collective self-reliance are the essence of commonomics. Commonomics bears attributes of various popular or mainstream economic models, such as Schumpeterian and Schumacherian economics. For example, Bunting (2015) noted that “what Schumacher wanted was a peoplecentered economics because that would, in his view, enable environmental and human sustainability. It was a radical challenge which, like many of the ideas of the late 1960s and early 1970s (feminism is another example), were gradually adopted and distorted by the ongoing voracious expansion of consumer capitalism.” The other models with which commonomics shares attributes include the new economy (Korten 2014), circular economy (Esposito et al. 2018), sharing economy (Godelnik 2017), caring economy (Eisler 2009), inclusive capitalism (Doane 2015; Boleat 2014), and what the UN Development Program dubbed people-oriented development in the 1980s. In essence, commonomics as an economic concept and model is neither new nor abstract. Korten (2014) stated that “the ideas are not new. Some are ancient. Many have been advocated for years in places deeply affected by poverty, pollution, and racism. What’s changed is that so many communities are coming together under a common umbrella, forming new alliances and lifting up new messengers.” In both discourse and practice, commonomics, like its variants, is gaining adherents all over the world. For example, Korten (2014) noted that “the New Economy Working Group, based at the Institute for Policy Studies (est. in 1963 in DC), formed just 6 years ago in 2009. The group was one of the first to adopt the term “New Economy” to describe an economy that supports ecological balance, shared prosperity, and deep democracy.” He noted further that, in the USA, commonomics, also called the New Economy, is being embraced and implemented in communities across the country, while in Europe and Asia, the term “inclusive capitalism” is widely used. It must be reiterated that at the heart of commonomics is what accounts for a strong, self-reliant, and sustainable local economy, one which enables people to meet their basic needs by wresting power from what Korten (1999) described as faceless and greedy corporations and multinationals. Commonomics makes people the centerpiece of growth and development policies and plans. This view has been echoed nationally and internationally through the years as the most appropriate policy and philosophy for Africa’s development in particular and global sustainable development in general. For example, the United Nations Development Program (UNDP) stated: We believe strongly that people’s well-being and their quality of life is the most important measure of whether ‘development’ is successful. Thus, people must be at the center of

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human development, both as beneficiaries and as drivers, as individuals and in groups. People must be empowered with the tools and knowledge to build their own communities, states and nations.

Echoing the UNDP’s view, Adesina (2018), president of African Development Bank, stated that “at the end of the day development is about people. We must put people at the very heart of development.” Wadongo (2014) argued that: Instead of becoming complacent about how the “Africa rising” narrative will ultimately lift up the region, we should be “Afro-realistic” about the challenges faced by the region and focus on developing practical solutions to meeting these challenges. Ultimately, it is the people, not the elite, who must ensure that a rising Africa, like the proverbial incoming tide, will raise all their boats, create jobs for the extremely high unemployed youth, and lift millions of out poverty into real middle class.”

The UNDP was unequivocal when it stated that “development can only thrive when there is investment in people and institutions and where governments are responsive and accountable to their citizens.” The paper argues that, without the paradigm shift in the extant economic model in SSA, and coupled with the risks of consumerism, population explosion, technological advances, and exploits, and the lack of consensus about what constitutes sustainable development, SSA will plunge further into the abyss of underdevelopment. The need and search for feasible and contextual economic models for SSA are exemplified by proposals by African development scholars such as Madichie (2003) and his idea of “Afronomics,” Tony Elemelu and his idea of “Africapitalism” (Onyibe 2017); the idea of “afro-realism” (allafrica.com 2018; Wadongo 2014), and entrepreneurs such as Jim Ovia (Onyibe 2018). Commonomics, as advocated in this paper, is predicated on the seven steps prescribed by advocates of the new economy movement who, as Korten (2014) observed, “are converging regarding the actions to take.” The steps below are used in this paper to propose an implementation framework within the existing structures of government in SSA. We refer to these as the seven steps toward commonomics (ethos of shared prosperity): • Place ownership in the hands of real people, not globalized corporations. • Localize control of food, energy, land, housing, and retail. • Advance cooperative enterprises where workers share in profits and decisionmaking. • Shift from fossil fuels to renewables and from destructive to regenerative agriculture. • Expand credit unions, community banks, and public banks so that finance benefits communities rather than Wall Street. • Reform trade rules to reduce the power of global corporations and enable local economies to flourish. • Adopt a worldview that we humans are part of the ecosystem and our economy must work with nature rather than against it.

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3 Discussion In proposing a tilt from the classical macroeconomic model to commonomics as a parallel economic model for Africa, this paper sides with the cautionary views, critics, and even skeptics of the Africa Rising narrative. One such view is by Sarfo (2013), who opined that the narrative “is only half of the truth of Africa.” Another is Kazeem (2018a, b, c), who used the Global Competitiveness Index report to reflect on the Africa Rising narrative, stating that “Africa’s economies are still too far off fulfilling the ‘Africa rising’ narrative.” He noted that, on the global index, “while the global median score is 60, the median in sub-Saharan Africa (45.2) is the lowest for all the regions analyzed.” He summed up by stating that “African economies will require significant work to compete at on global scale.” Besides this study’s critical position on the narrative, the study deems ongoing discussions of both the rising and the tragedy to be fueled and tainted by the following four main reasons. Firstly, the discourse fails to, or seems silent on, the stark distinction between growth and development. Almost frequently, development, which this study deems to be the qualitative and distributive aspects of progress or advancement, is subsumed under, or used interchangeably with, growth, which is the quantitative and allocative aspects of progress (Kolo et al. 2016; Madichie 2002, 2007). As noted in the IIAG report, for example, “the continent’s economic growth over the last decade . . . has failed to translate into progress in Sustainable Economic Opportunity” (Leteane 2018). Secondly, even for economic growth, the classical macroeconomic measurement indicators used by national and international entities ignore, or are prioritized above, measures about human and psychosocial conditions. It is in this light that Sarfo (2013), while critiquing the media coverages and views on the Africa narrative, opined that the media are wrong in their analysis of Africa’s developmental prospects—and the reasons they’re wrong speak volumes about the problematic way national economic development has come to be understood in the age of globalization. Thirdly, three leading “trumpeters” of the narrative share a common self-serving interest: (1) the Western development experts and institutions are practically removed from the daily experiences of grassroots Africans and, therefore, report only half of the African story that relates to national economic figures—raw, cooked, and genuine; (2) national leaders, often in cahoots with their Western advisors, lenders, and technocrats, eagerly showcase leading economic figures in order to stay in the favors of the foreign experts, foreign lenders, and investors and for local political gains; and (3) development and aid advocacy and nongovernmental or philanthropic agencies join in touting misleading economic growth statistics for psychological and motivational reasons and sometimes to secure more funding from their donors worldwide. Fourthly, the final main factor that taints the narrative is overzealous scholars and analysts whose gains including coining nomenclatures that earn them recognition in their fields of research, make them experts on African development, and earn them consultancy projects on African development.

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On the more pragmatic and empirical level, unassailable evidence exists that macroeconomic models are necessary but insufficient to stem the litany of human/ psychosocial, environmental, economic, and political challenges paralyzing development and quality of life for majority of Africans. The development literature and discourse are littered with evidence of Africa’s growth and development challenges, as illustrated by the following six cases (Kolo et al. 2016). 1. First, on the attractiveness of countries for foreign investment in 2018, Mays (2018) and Teso et al. (2018) reviewed major global reports that showed that SSA countries rate very poorly compared to countries in other developing regions. 2. Second, on innovation, Lijadu (2018) reviewed the Global Innovation Index 2018 report and noted that worldwide, “of the ten countries with the least success in innovation, eight were Sub-Saharan African countries.” On an upbeat note, he gleaned from the report that, although “Sub-Saharan Africa has the lowest average rate of innovation in the world . . . there continue to be improvements in innovation on the continent.” 3. Third, on population explosion, reviewing a recent UN Population report, Kazeem (2018a, b, c) observed that “by 2050 around 2.2 billion people could be added to the global population and more than half of that growth will occur in Africa.” On the debate about whether the teeming population is a liability or an asset for development, this paper submits that there is evidence that it is a liability and will be the foreseeable future. 4. Fourth is Africa’s spiraling foreign debt. This, along with population explosion, was among what Dahir et al. (2018) described as “some of the issues that are set to face the continent in 2018.” They termed the debt as “Africa’s ticking debt bomb” and viewed Africa’s exploding population as “bursting at the seams.” 5. Fifth is the food crisis or hunger. Hendriks et al. (2018) reviewed a recent report by the United Nations’ Food and Agriculture Organization and noted that “for the third year in a row hunger is rising across the world. And . . . the situation is worsening in most regions in Africa. Almost 21% of the continent’s population of 1216 billion is undernourished.” 6. Sixth is overall poverty. Kazeem (2018a, b, c) reviewed the report by the World Poverty Clock on “the country with the most extreme poor people in the world” and noted that seven of the ten top poorest countries are in SSA. The examples of development challenges previewed above are not outliers. The picture of each of the examples becomes gloomier and disconcerting when put within the context of comparable regional data around the world. In virtually every comparative regional data and reports presented by international development agencies, reputable research agencies, leading media outlets worldwide, and even credible blogs on quality of life and development issues, from political empowerment to investment environment, tourism, and happiness, SSA is often missing from the positive skew of indicators (Kolo et al. 2016; Adibe 2014; Nwankwo 2011; Madichie and Ibeh 2002; Madichie and Hinson 2013). What this study finds troubling about this picture is the often “skewed” analysis, narrative, and discourse of the root causes of, and appropriate and feasible

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ameliorative measures for, the challenges that retard SSA’s development. The narrative on Africa Rising falls into this category of “half-truth.” Kolo (2017). It obscures the need, as advocated in this study, for a paradigm shift in how economic growth and development are undertaken in SSA. As Wadongo (2014) clearly emphasized, “while there is no denying that economies are growing rapidly across the continent, this feelgood narrative, risks distorting reality, making it even more difficult to develop and adopt effective policies to truly improve African lives.” Also, commenting on global poverty during the 2018 “End Poverty Day,” Nilsen (2018) stated quite tersely that “if we are to have a serious debate about world poverty on End Poverty Day, we have to start by acknowledging that the global problem of poverty is far more extensive than World Bank rhetoric would have us believe.” He noted that, generally, for the developing countries experiencing the so-called “strong economic growth . . ., the growth strategies these countries have practiced create and reproduce poverty.” These examples show that, to a large extent, the failure or ineffectiveness of macroeconomic models in SSA is attributable to analyses, discourse, and policy initiatives that either naively or inadvertently prioritize growth over development, instead of growth integrated with development. The latter necessitates that people, not exports, serve as the thrust of public policies and programs.

4 Conclusions and Implications The argument has been made in this study, substantiated with evidence about declining quality of life indicators, that the extant macroeconomic model in SSA is grossly ineffective. This is vivid for over 75% of Africans who live at the subsistence level. Not only are conditions dire for this segment of the region, but the middle class that is supposed to trigger and sustain meaningful development has been virtually decimated by the hardships of life. The massive waves of illegal immigration by SSA’s middle class have become another global crisis, with inhumane impacts on both immigrants and citizens in the origin and destination countries. This study ventured to advocate commonomics as a parallel economic model to the existing macroeconomic model. Ardent advocates of market capitalism, which is at the heart of the extant macroeconomic model in SSA, argue strongly that commonomics is collectivism that destroys individual creativity and subjugates the individual to the tyranny of the collective (Brownstein 2018; Carrasco 2018). The view in this study is that the evidence of the ineffectiveness of market capitalism in SSA is overwhelming. Even in the West where market capitalism has been embraced for centuries, there are growing questions about its sustainability into the future. For example, Korten is optimistic that “as those identifying with the New Economy expand, the movement gains power. And a wider embrace brings the danger of cooptation, corporations will be happy to put on a New Economy gloss.” It is not the position of this study to advocate replacing macroeconomic model with commonomics. Rather, both models would complement each other in addressing local and national needs and priorities in SSA, especially as commonomics fits the

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primordial self-reliant and collaborative system of economic development in rural SSA where most people live. Currently, the former is subjugated under the latter, and this has left the overwhelming majority of Africans impoverished. Implementation of the model will not require radical or drastic institutional and structural changes as much as a governance system that reprioritizes policies and budgeting; shifts decision-making power to the grassroots; and ensures that the dividends of development improve peoples’ lives appreciably. For example, in agriculture, the main sectors in which most Africans are engaged, while the agencies responsible for delivering services to rural farmers would refocus and repurpose, the current trend of declining budgetary allocations to agriculture would simply be unacceptable and illegal under the commonomics model because grassroots citizens, not government bureaucrats, would “control” decisions and policies about agriculture. In Tanzania, for example, where agriculture accounts for 67% of the labor force, budget allocation for agriculture in 2018/2019 was 0.52 of the total national budget, steadily declining from the highest it has been at 2.71 in 2010/2011, leading to pleas and a campaign by the Eastern and Southern Africa Small-Scale Farmers Forum (ESAFF) that East African countries target a minimum of 10% of their budgets to agriculture (Said 2018). Agriculture across the continent has been suffocated by lack of funds, making it impossible for Africans to feed themselves and exacerbating the global food crisis (Igwe et al. 2018). Commonomics, as advocated in this study, requires that people’s basic quality of life needs, not the dictates and demands of foreign markets, must be the cornerstone of economic growth and development plans. Thus far, since independence, Africa has adopted what this exploratory study terms the “hop-step-and-jump” approach, also known as the “leapfrog” approach, to development. This has impoverished majority of Africans at the grassroots; weakened or decimated the capacity of domestic industries and markets to meet local demands for basic goods and services; provided cover for political malfeasance, bureaucratic ineptitude, and entrenched corruption in the political and technocratic echelons; and left the entire region at the abyss of underdevelopment. Acknowledgment An earlier version of this paper was presented at the 18th EBES Conference, School of Business Administration, American University of Sharjah, United Arab Emirates, 8–10 January 2016.

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Entrepreneurship in the Solidarity Economy: A Valuation of Models Based on the Quadruple Helix and Civil Society José Manuel Saiz-Álvarez and Jesús Manuel Palma-Ruiz

Abstract From its pre-Columbian origins, the implementation of the Solidarity Economy has been growing during these last decades in the countries of Latin America and the Caribbean and accelerated the process as it has been developing in the continent of the denominated “New Economy.” This work is a theoretical article with the objective of analyzing the two modern ways of implementing the Solidarity Economy: through the creation of quadruple helix models based on solidarity (Mexico) or through the practical application of McClelland’s N-effect using civil society from virtuous circles of community economic drivers (Puerto Rico). Because of this implementation process, the Solidarity Economy has ceased from being a guild and welfare, to become an economic and financial alternative for economically disadvantaged sectors based on shared values and a shared project. These analyses are complemented by a SWOT analysis and by the theoretical study of the direct relationship between the Solidarity Economy and the combination of social entrepreneurship and transformational entrepreneurship to create, in a novel way, virtuous circles of economic growth. The article concludes with ideas that briefly emphasize the importance of applying open cooperativism in the fight against inequality and poverty.

1 Introduction Solidarity Economy (SE) is a form of production complementary to capitalism that is based on the conjunction of cooperation, self-management, consumption, and distribution of wealth. Faced with a traditional capitalist system based on the accumulation of capital, generation of cash flow to maximize EBITDA (Earnings Before Interests, Taxes, Depreciation, and Amortization), and the advance of R&D J. M. Saiz-Álvarez EGADE Business School-Tecnologico de Monterrey, Zapopan, Jalisco, Mexico e-mail: [email protected] J. M. Palma-Ruiz (*) Universidad Autónoma de Chihuahua, Chihuahua, Mexico e-mail: [email protected] © Springer Nature Switzerland AG 2019 V. Ratten et al. (eds.), Subsistence Entrepreneurship, Contributions to Management Science, https://doi.org/10.1007/978-3-030-11542-5_4

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and innovation, the SE mainly develops in rural and poor areas (Vélez-Tamayo 2017) for the realization of pre-Columbian practices and the creation of agricultural cooperatives in economically isolated regions of the countries of Latin America and the Caribbean, especially in the Andean regions. In fact, since pre-Hispanic times, the Quechua and Aymara communities continue to constitute ayni (“mutual aid”) in indigenous communities (ayllus in the Quechua language) as a form of local cooperativism focused on optimizing the use of productive resources, mainly of natural origin (land, water, and seeds). These practices complement the “principle of reciprocity” (homo reciprocans—giving and receiving to achieve communal justice) to live in balance and harmony with the community thanks to a correct valuation of the individual as a human being according to their knowledge and abilities (SaizÁlvarez 2004, 2013). Thus, ayni is a clear example of the SE in the Andean regions of the American continent. For example, when the members of the indigenous community know about a sick companion, they sow the land for them, and when they recover from his or her disease, this individual must return the support and work the land of those who helped. As with ayni, money is not used, nor is there monetary consideration with the mink’a, which consists of caring for the animals in exchange for a plate of food (pikcheo or k’awki). Additionally, umaraqa is used when there is a need for labor hand (minimum of ten people) formed by relatives and neighbors, mainly at the time of sowing and harvesting, and that includes an offering of thanks (ch’alla) to Mother Earth (Pachamama in the Quechua language). In the case of umaraqa, in addition to food, it is almost mandatory to offer chicha, coca leaves, and k’awki (Ledezma 2003). A second example of a SE in the Andean region is given by the construction of palafitos, rafts and floating islands (Khili in the Aymara language) in Lake Titicaca, between Bolivia and Ecuador, made with totora leaves by the Uro ethnic group, Iruito in the Bolivian part and the Uro Chulluni ethnic group in the Peruvian slope. In this case, the SE rests on two principles: the “principle of reciprocity” seeking justice in the community, for which it is necessary to return to the partner the same hours of work for the realization of a concrete activity, and the “beginning of complementarity,” depending on the knowledge and specialty of those who carry out the work. In the Andean region, this type of SE, based on these two principles of reciprocity and complementarity, leads to societies being characterized by a deep-rooted tradition, a feeling of self-sufficiency, a growing trend toward barter, and the achievement of a sustainable subsistence economy over time and in harmony with nature and the Mother Earth (Pachamama) (Ledezma 2006). With these ancestral traditions in mind, the SE has recently been formally institutionalized in the official document entitled The National Plan of Good Living, also known in Bolivia as suma qamaña (in the Aymara language) and in Ecuador as sumak kawsay (in the Quechua language). In both plans it is intended, regarding the social and economic aspects of the program, to achieve a harmonious and sustainable development of the territory respecting the environment with the aim of improving the quality of life of the population and to socially integrate

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vulnerable population and the most isolated indigenous communities regarding human rights. The application of the SE is growing in Latin America and the Caribbean countries, as the so-called New Economy has developed in the continent. The following section conceptualizes and describes the SE classified within the so-called New Economy. Next, its role as a generator of wealth and its relationship with transformational entrepreneurship are illustrated, as an example of a four-helix model (formed by collaboration between companies, public administrations, universities, and nongovernmental organizations), with the example of the entrepreneurship ecosystem of Tecnologico de Monterrey (Mexico). This type of SE, born of quadruple helix models, is complemented by the implementation of measures based on SE from the civil society, as happens with “Puerto Rico 4.0,” a comprehensive development plan based on the mixture of SE and transformational entrepreneurship that is now developing on such island after its declaration of sovereign bankruptcy in May 2017. Finally, a SWOT analysis of the SE is carried out in nations of Latin America and the Caribbean, followed by a discussion and conclusions.

2 Solidarity Economy: Concept and Characteristics Several definitions are associated with SE, such as “Human Economics” (Loebl 1978), “Economics of Emancipated Labor,” “Popular Economy,” “Solidary Socioeconomics” (Arruda 2005), “Social Economy,” “Popular Economy of Solidarity,” “Social and Solidarity Economy,” “New Cooperativism” (Jurado 2016), and “Economy of Reciprocity” (Carranza 2013). Saiz-Álvarez (2013) refers to the socioeconomy of solidarity mainly based on Christian values (charity, respect, and brotherly love) and humanistic values (solidarity, non-fraudulent or corrupt behavior, cooperation, and mutual aid), which aims to produce—through respect for the environment—and consume democratically and solidarily, to grant power to people, and not to capital, to achieve a fairer, more equitable, and solidary economy for both the social group affected and, by extension, for all of the society (Saiz-Álvarez 2013, p. 72). According to Singer and Primavera (2017), and although the term Social Economy is generally associated with the cooperative movement, in France, Spain, Italy, and Canada, the terms “social” and “solidarity” are often joined, so that the term “Social and Solidarity Economy” is used interchangeably with the term “Solidarity Economy.” Seminally conceptualized by Razeto (1990), the SE has had a significant drive to pursue a dual objective: Firstly, to generate a consolidated theoretical knowledge that can serve as a basis for theoretical models to create sustainable economic growth over time as alternative models to capitalism. Secondly, to replicate and transfer initiatives based on the SE to achieve widespread social change. However, against these ideas of Razeto (1990), the SE must be a complement, rather than an alternative to capitalism, seeking to integrate the best of both models. Through the SE, it will be possible to unite very depressed indigenous communities

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Table 1 Classification and objectives of the New Economy Classification Blue Economy The Economy of the Common Good Circular Economy

Collaborative Economy Gray Economy Purple Economy Social Economy Solidary Economy Green Economy

Objectives Obtain monopolies in the respective sectors of activity Favoring its stakeholders with common values and social goals “to humanize the economy” (Zamagni 2008) Achieve the complete recycling of waste to achieve the sustainability of the entire economy without there being a waste of productive resources Achieve a common goal through collaboration among related groups It is one that is related to the circulation and brain drain, as well as the acquisition of knowledge Focused on the search for new business opportunities in a highly competitive environment Based mainly on cooperativism, its purpose is to increase the standard of living of its members Based on solidarity and values (social or religious), it aims to achieve common objectives Preserve the environment to give a cleaner world for future generations

Source: Author’s own table based on Lamoneda (2016)

that do not even use currency exchange but barter. The concept behind the SE is the harmonious double balance, both inside the individual following a spiritual and philanthropic aspect (harmonious human balance) and with the natural environment (natural harmonic balance). The SE constitutes a humanization of the social being which, being an Aristotelian zoon politikon, develops its activity in society. Hence, the individual itself, by its very nature and with some exceptions, needs to interact with other people in order to carry forward their projects. Unlike Abad and Abad (2014), Hintze (2010) and Bastidas-Delgado and Richer (2001), among others, affirmed that the social and SE constitutes an alternative to capitalism by going beyond a mere profit and is a more just and democratic model. The “globalization” in which the current economy is inserted makes the SE become a complement of capitalism, rather than a substitution, in certain specific situations in time, forming part of a subsistence economy. This complementarity is carried out at three levels: first, the micro-socioeconomic, through which the solidarity activity is carried out at the level of the individual; second, the meso-socioeconomic, which seeks the creation of networks and associations based on solidarity; and third, the macro-socioeconomic or systemic that generates structural changes both in the economic structure and in the social fabric (Coraggio 2013, p. 123, cited by Jury, 2016, p. 2). In addition, this triple level when applying SE has led to the emergence of the so-called New Economies (Table 1) that complement the traditional “Social Economy,” where cooperatives have a great role, as well as the “Green Economy,” characterized by its environmental awareness to preserve the environment (Lamoneda 2016). In today’s world, and given the dispersion of economic and social interests, the seven “New Economies” are produced simultaneously in different markets, even

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considering barter, as is the case in most of the indigenous communities in large part of the American and African continent. These seven “New Economies” have a double center: the human being and nature. As a result, it is the defense of a New International Economic Order that is more sustainable for all of humanity. In this process of change, both the Circular Economy and the SE have a central role to play in order for the human being to find a balance both with society and with their natural environment. In this sense, both are anthropocentric, with the particularity that the circular economy is also repairing environmental damage by following two paths: first, through the full recycling of waste to reinsert them into the industry value chain with the creation of semifinished products with different uses, and second, through a constant process of mutual aid for the resolution of problems or for the achievement of objectives, which in turn leads to social change and maximization of individual welfare. However, concerning the Circular Economy, the world walks at two different speeds; since while in the most developed economies its inhabitants tend to present a high environmental awareness, in developing nations they usually suffer from this lack of awareness of environmental preservation. This difference is especially visible among Europe, whose efficient use of resources is part of the Europe 2020 strategy, an initiative supported by the European Parliament and the European Council, to achieve sustainable and inclusive economic growth rates within the European Union, as well as to succeed in the fight against climate change. Indirectly, the implementation of a Circular Economy favors both the processes of innovation within companies carried out through intra-entrepreneurship, like the design and implementation of quadruple helix models to achieve sustainable economic growth, leading to change the productive chains of semifinished goods and consumer products, while seeking to maximize efficiency avoiding the waste of productive resources (Moreau et al. 2017). This combination of innovation, intraentrepreneurship, and quadruple helix models fosters the creativity and competitiveness of countries, as well as guaranteeing security in the supply of essential products and services. The change from a linear economy (Old Economy) to a circular one (New Economy) based on social awareness, the preservation of the environment, and solidarity increases the quality of life of individuals due to the positive externalities that it generates in society. That is why, for example, in Colombia, the SE is having a great boom in the post-conflict era due to the positive externalities that it provokes (Martínez-Collazos 2017). Within the New Economies, the difference between the collaborative economy and SE must be highlighted. While the collaborative economy seeks to achieve a common goal through collaboration among related groups, these groups may not be related in the SE, although they have the same common objective. In other words, the SE has a broader vision than the collaborative economy when it comes to involving individuals toward a common goal, and like the economy of the common good, it humanizes the economy. As Tirole (2016) stated, treating the world as a commodity raises doubts about its effectiveness since there are common goods (the planet, water, air, biodiversity, and

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natural and cultural heritage) that must be preserved and that cannot be exchanged. Moreover, the misuse of these common goods generates negative externalities that affect the core (center) of the organization both in the loss of corporate reputation and in the decrease of customers, both current and future. In the New Economy, both the environment and society are taking a much more relevant role to the detriment of EBITDA because business organizations are heavily influenced by social networks where corporate reputation is always hanging by a thread, especially in those organizations that carry out business practices that go against the mission, vision, and values of the company. Moreover, once an organization has lost its reputation, it is tough to rebound. This reputational loss due to the absence of values is noticeably reflected in agricultural markets whose consumers want to see the traceability of the products they buy, as well as the corresponding quality stamps in them. For this reason, the establishment and implementation, often spontaneously, of relations of reciprocity and redistribution of agricultural goods seeking food self-sufficiency are characteristic since the ancestral times of SE (Ledezma 2003). The low levels of technification of the soil are compensated with the rotation of crops and the good use of the biodiversity of the land favoring the cultivation of native plants more adapted to the terrain and the local climate. Therefore, in these cases, which are numerous in large regions and developing countries, the SE constitutes a way of life that has been applied for centuries. As a result, the traditions and the subsistence economy have been maintained in these territories without their inhabitants wanting to evolve toward other forms of cultivation by needing investments in machinery and chemical fertilizers that, although they would increase production in the short and medium term, would harm long-term production, especially if transgenic seeds are used. This greater environmental and social awareness by final consumers has accelerated with the use of social networks. Such impact is becoming increasingly more significant when the influencers are also involved, whose behavior determines, in good measure, the corporate reputation and the attraction of corporate clients, regardless of their size and position in the sector. All this defines the creation of wealth by the company and its social impact. These relationships are addressed in the next section.

3 SE and Wealth Creation Depending on the degree of economic development, two large groups in the process of wealth creation by the SE can be distinguished. The first group develops from ancestral times in the most impoverished and most isolated indigenous communities of the Third World that continue betting on the barter of goods of primary necessity. They are survival economies where the creation of wealth is minimal and the behavior of individuals is guided by joint work and solidarity. An example of this type of behavior is the Huichol community of the Sierra Madre Occidental of the states of Jalisco and Nayarit in Mexico. The economic activity of the Huichol

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community is guided by the cultivation of coamil, a variant of corn, whose production is not dedicated to trade but to the acquisition of rights to participate in Huichol religious acts and to participate in the usufruct of the land (Neurath 2003), such as livestock, wage labor during seasonal migration (e.g., during the harvesting of fruit and vegetables in other regions of Mexico or the southern United States) and, above all, with the sale of handicrafts, hand embroidery textiles with indigenous tradition, and jewelry made with chaquiras (crystal beads). The second group was born in developed countries with the start-up of cooperatives, NGOs, and foundations. In fact, from the beginning of capitalism, they were characterized by the creation of cooperatives to improve the quality of life of their associates through productive chains of solidarity and the democratic management of the enterprises to improve the quality of life of the cooperative members (Eid et al. 2010). Personal relationships, the spirit of work and sharing knowledge, and a high degree of mutual trust are the basis for the creation and proper functioning of a cooperative movement. Also, the term “movement” is important because the cooperative must be in continuous development and improvement if it wants to survive over time and if it wants to start up systems inspired by the Solidarity Economy that creates value chains as they add wealth. Therefore, according to Sahakian and Dunand (2015), the SE includes a set of activities that share common values, including solidarity and mutual aid with a focus on community development. The significant difference between the two previous groups based on SE is given by the term “development,” because the first group is characterized by the preservation of traditions, which may even be linked to the religious sphere of the individual, while, in the second group, there is a desire for a socioeconomic change that generates higher levels of well-being from the creation of a virtuous circle of growth (Fig. 1). The starting point for the creation of the said virtuous circle of growth is the intellectual capital, formed by the sum of the human capital constituted by the formation and experience. Second, the relational capital defined by the number of contacts or friends that shape the person’s network of acquaintances. Third, the structural capital is determined by the sum of tacit and implicit knowledge (Nonaka and Takeuchi 1995) that the company has internalized and that is latent in people and equipment to increase efficiency and effectiveness in the organization (Edvinsson 1997). The higher the training (formal and informal) for the said intellectual capital and the stronger the cooperative network, the more easily products and services with higher social value will be generated. A growing social value that will increase a social benefit defined by being shared, by creating positive externalities, and by strengthening social cohesion within the cooperative movement. Good results desired by the cooperative members will lead to economic growth, both cooperatives among themselves, having more resources to carry out new social assistance projects, and the locality and the region as a whole having a positive impact on the ecosystem. This economic growth will also positively impact both the intellectual capital of the cooperative and its stakeholders (interest groups), which creates a feedback effect that favors the creation of quadruple helix models within the productive and distributive ecosystem where the cooperative is located.

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Fig. 1 SE and the virtuous circle of growth. Source: Author’s own figure

This socioeconomic change is stronger when intellectual capital has low levels of training and reduced relational capital, as is the case in much of the rural areas of the Latin American and Caribbean nations. The SE is formed by experiences that arise “from the bottom up” by the (almost) excluded from the system, as a form of resistance to the abuses of the capitalist model. An example of such abuse is given, for example, by the excessive number of intermediaries in the trade of agricultural products from the farmer (for instance, indigenous farming communities) and the final customer, with the indigenous population being the hardest hit. In this way, the Solidarity Economy is constituted as an alternative model to benefit the producers and make another economy possible, wherever the goal is personal and communal well-being and not the mere benefit, and all collaborate in common to achieve it (Díaz 2015).

4 SWOT Analysis of Social Entrepreneurship from the SE However, not everything is positive in the SE when it is related to social entrepreneurship. In order to have a holistic view of this relationship, a SWOT analysis is shown next. Weaknesses (a) By being driven by civil society, there are financial limitations that could be solved by involving more Public Administrations throughout the process.

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(b) All social entrepreneurship, to be sustainable and efficient in the long term, must have a global vision. Also, to have a substantial local impact, it must be continuously financed, especially at the beginning when the project is unknown. (c) With some exceptions, one of the main problems of developing countries is the absence of well-specialized training in a good part of the entrepreneurs. Hence, it is desirable to update the knowledge with the implementation of new businesses with the active participation of universities and other higher education centers. Threats (a) The SE must be exempt from individual interests when the community has to prevail. The new generations must anchor their business in values, ethical behavior, and social responsibility practices. Institutions that do not do so will not be able to compete internationally and will not be ready to face new business opportunities. (b) It is essential to have a business reputation, both in the production of goods and services and in a good brand image, in order to obtain business success that is sustainable over time. In this sense, it will be desirable to design a good communication policy to protect the image and the reputation of the company. (c) One of the keys for organizations to be modern and efficient is given by the intellectual capital they own. Failure to do so means the reputational loss in the short term and the closure of the institution in the long term. Strengths (a) Organizations that work with quadruple helix models or have a sufficient number of incubators and accelerators attract the best intellectual capital existing in the market, favor the signing of strategic alliances, and improve the entrepreneurial spirit within the organization, primarily if it is based in solidarity. (b) Nations and institutions of solidarity lead to the reduction of social imbalances concerning extreme poverty and social injustice while stimulating economic growth. (c) The high number of entrepreneurs in a locality, region, or nation creates a spirit of collective entrepreneurship that generates positive externalities for the entire population. (d) The entrepreneurial spirit encourages the promotion of companies and organizations of all kinds abroad through the creation of networks, especially when the internal market has become small or mature. (e) The signing of strategic alliances between NGOs and companies, both nationally and internationally, strengthens the corporate reputation and helps attract future clients. Opportunities (a) ICTs offer new business opportunities for entrepreneurs and help boost both the company and social change.

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(b) The new generations (Millennials, Centennials, and Alpha generation) tend to have a more globalized behavior, based on the intensive use of ICT. (c) In an economically globalized world, teamwork and knowledge of foreign languages are crucial to success in entrepreneurial activities. (d) The intensive use of ICT and low transport costs facilitate cooperation among highly internationalized institutions. As a result, entrepreneurship will be driven by the creation of new projects based on collaboration, efficiency, and teamwork.

5 SE and Transformational Entrepreneurship Once the SWOT analysis has been carried out, and together with the SE, the good development of the product and service offered to the community is more easily provided when there is a decisive transformational leadership in the organizations. In other words, transformational entrepreneurship turns start-up companies into solid companies in the market (Chen et al. 2014). Transformational leadership is reinforced when social entrepreneurs are guided by the attempt to meet the needs of the most vulnerable population. In this sense, Schoar (2009) distinguished between “subsistence entrepreneurs” and “transformational entrepreneurs” and stated that when Public Administrations take this difference into account, the recipes of economic policy aimed at promoting entrepreneurship are more effective. Transformational entrepreneurship connects both the micro and macro foundations of entrepreneurship, which leads us to study what is the optimal level of entrepreneurship in countries that helps entrepreneurs and public decision-makers to successfully carry out their decision-making (Hoskisson et al. 2011). As a result, when legislative initiatives focused on fostering Social Economy, and SE takes place, it helps generate crowding-in effects that improve the levels of economic and social well-being throughout the community. Closely linked to transformational leadership, strategies focused on R&D play a fundamental role in driving transformational leadership so that it achieves higher levels of efficiency. When organizations give priority to the use of R&D, transformational entrepreneurship, innovation, and the creation of companies are accelerated (Chen et al. 2014). As a result, socioeconomic changes within countries are accentuated. Thus, the expansion of their companies in international markets is more considerable. The transformational leadership has been especially intense at the Tecnológico de Monterrey (TEC), especially since 1991, the opening year of the Guadalajara campus, one of the three most significant and most modern campuses of the University. One of the most critical roles of universities in emerging countries should be to support the promotion of start-ups (Finkle et al. 2013), where incubators are a cornerstone in the entrepreneurial process to create R&D+i2 (innovation and incubation), entrepreneurship, the promotion of centers guided by social assistance

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Table 2 Types and number of centers based on entrepreneurship at Tecnológico de Monterrey (Mexico) Business Incubators Virtual Incubators Business Accelerators

98 1 16

Social Incubators (micro and SME) Technology Parks

65 15

Source: Author’s own table

strategies toward the most economically disadvantaged communities nearby (Table 2). The social assistance programs carried out by the entire TEC community has strengthened the excellent image and corporate reputation of the institution throughout the metropolitan area of the city of Guadalajara (El Salto, Guadalajara, Ixtlahuacán de los Membrillos, Juanacatlán, San Pedro Tlaquepaque, Tlajomulco de Zúñiga, Tonalá, and Zapopan) that exceeds seven million inhabitants, not counting the floating population (1.5 million). SE is one of the expressions of the Solidarity Economy, a fact that is strengthened by direct assistance and collaboration programs with local authorities (e.g., “Made in Zapopan”), as well as by carrying out regional studies published in the Global Entrepreneurship Monitor (GEM), when TEC conformed GEM teams in Mexico: the first in León since 2001 to later move to Mexico City to analyze the entrepreneurial reality of the Mexican Republic, a second in Guadalajara since 2015 to examine entrepreneurship in the state of Jalisco. More recently, in 2018, similar initiatives are conducted in the states of Chihuahua, Guanajuato, and Yucatan. This participation is complemented with the support of GEM together with Babson College (USA), Universidad del Desarrollo (Chile), the Universiti Tun Abdul Razak (Malaysia), Korea Entrepreneurship Foundation, International Development Research Centre (Canada), and International Council for Small Business (ICSB). What the SE channeled through social entrepreneurship is essential since it aims to favor both solidarity and mutual aid in the most disadvantaged local communities, such as fostering the entrepreneurial spirit in the region. Both objectives are achieved with the Entrepreneurship Center whose primary activity is to support the creation of newly created companies and implement business incubators and accelerators. All these activities are grouped into four educational business initiatives called Spaces, Programs, Moments, and Alliances, as described below.

5.1

Spaces

Formed by entrepreneurial parks connected with technology-based laboratories, collaborative workspaces (Co-working Spaces) where entrepreneurs are virtually or physically connected to interact with each other, the Innovaction Gym where innovation interacts with entrepreneurial action to promote the Entrepreneurship, and the Change Center focused on social entrepreneurship. These entrepreneurial spaces are designed to stimulate the development of ideas and to promote collective

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work. The impact of these programs is active in the poor communities near the University, and as a result, these entrepreneurs have received numerous national and international awards.

5.2

Programs

The conversion of entrepreneurial ideas into start-up companies is done from four programs based on business incubators. These four programs are the following: • The Business Incubators that complement each other in educational topics, Young Entrepreneurs Program, creation and acceleration of new companies (TECLEAN Accelerator), and the growth of companies (ScaleUp Program) • Promotion of new technology-based start-ups (Enlace+E) • Innovation centers connected with external companies (INOLABS) • Intensive immersion programs, seeking to boost global businesses based on R&D These programs strengthen the students’ entrepreneurial spirit who, as entrepreneurs, have to include corporate social responsibility (CSR) in their businesses.

5.3

Moments

Formed mainly by significant events, meetings, and experiences of entrepreneurship. They aim to strengthen the relational capital generated in business. Precisely, this program consists of four events: Seed, where entrepreneurs (internal and external) expose their problems and ideas they find in their companies; Enigma as a Hackathon sponsored by Facebook; Crowded, where entrepreneurs show their plans to future investors and investor angels; and iTuesday, where external entrepreneurs are invited to give lectures and recommendations to students.

5.4

Alliances

Strategic relationships play a fundamental role in entrepreneurship making possible the creation of quadruple helix models, in programs such as ASEM (Association of Entrepreneurs of Mexico), ASHOKA, Plug and Play, and The Global Shapers Community Yerevan. Concerning the partners, the relationship between TEC and ASHOKA, the most important organization in the world in social entrepreneurship, is intense, being TEC a change-maker for Mexico and Central America. As a result, more than 500 students collaborate each year with 700 ASHOKA fellows and 30 NGOs in SE projects to improve the living conditions of people at risk of social exclusion and with

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disabilities, in addition to trying to achieve gender equality with practices directed toward environmental preservation and responsible consumption. These objectives are made through the implementation of three projects: First is the Institute for Sustainable Social Development to implement social incubators in low-income areas near the University, as a result of which 50 newly created companies are created annually, although with a low technological profile. Second is the Inclusive Engineering Program, where students implement ideas related to their knowledge areas that benefit impoverished communities. Third is the Community Service Program, where students develop personal and professional competencies to serve as agents of social transformation. All these entrepreneurship-based programs are supported by an Office of Technology Transfer (OTT) to develop, transfer, and market the research results achieved by professors, students, and start-ups. As a result, these OTTs based on entrepreneurship manage public and private funds, contribute to protect the intellectual property inherent in the entrepreneurial process, promote innovation by joining the collective efforts made in different faculties and knowledge areas existing in different faculties and other universities, and disseminate strategic information related to entrepreneurship research. In short, both the SE and Social Entrepreneurship are mainly focused on helping the economically disadvantaged populations of developing countries, Mexico among them, with the ultimate goal of creating a broad middle class that makes the entire economic, financial, social, and even political system sustainable. It is a bottom-up movement, as the McClelland N-effect shows. As a result of all this, socioeconomic changes take place gradually and with great effort, but they are achieved in the medium and long term, both in the fight against poverty and in the generation of wealth through the increase of GDP (see Table 2). However, in the Commonwealth of Puerto Rico, the situation is precisely the opposite as the middle class continues to decline (Table 3), primarily because of the refusal of the Donald Trump government to continue financing the PROMESA Plan (Puerto Rico Oversight, Management, and Economic Stability Act) signed by former President Barack Obama on June 30, 2016. This Plan allowed the island’s government to protect it from financial restructuring processes in the event of sovereign bankruptcy, as guarantor the United States to help financially if necessary. As a result, Puerto Rico needs a broad structural reform with an optimization of the economic and financial resources existing on the island, and given the circumstances, the civil society is gaining increasing prominence with the use of SE. In this sense, the implementation of diversified programs to reach the maximum number of sectors, decentralized to avoid bottlenecks in decision-making (inefficiencies X) and based on the SE, can constitute an avenue to strengthen both the social structure of the island, in addition to the maintenance of the middle class as the economic structure with the creation of microenterprises and SMEs integrated into business networks. When a fragile institutionalism and a high external dependence is present, as in the Commonwealth of Puerto Rico, more supportive societies are needed to strengthen civil society to put social capital at the service of social policies (Díez-Villa 2007). In this sense, the solidarity initiatives that are emerging in Puerto Rico and integrated within the so-called Puerto

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Table 3 Decalogue for a virtuous circle of economic growth for Puerto Rico I

II

III

IV

V

Puerto Rico has to compete with advantages of first order or higher rank (R&D+i) and not with competitive advantages of second order or lower rank (low labor costs) It is not good for Puerto Rico to restructure the public debt. Achieve a consensual debt relief Progressive replacement of oil by alternative energies, especially by solar energy Economic dependence on the United States is excessive. Look for new business partners

It is good to promote initiatives based on SE so that it can become a high-impact community economic development sphere

VI

It is necessary to modernize traditional tourism (sun and beach tourism) and complement it with other types of tourism

VII

Instead of reducing unit labor costs, it is better to increase labor productivity with the use of new technologies Puerto Rico must have its own and differentiated image of other Caribbean islands to attract tourism The outsourcing of goods and services is a socially just and economically viable strategy to achieve competitive and profit-generating businesses in Puerto Rico Throughout this process, education is fundamental, and the brain drain must be avoided, but not the circulation of them

VIII

IX

X

Source: Saiz-Alvarez (2015)

Rico 4.0 program are complementing the traditional economic policies emanated from the public powers. It is the empowerment of civil society that leads to the social and economic change that once detonated, it is tough to stop it.

6 Puerto Rico 4.0: Bases for a Structural Transformation One of the keys for the SE to transform the Commonwealth of Puerto Rico in an effective and lasting way in time is given by the implementation of joint programs based on social economy approved in popular assemblies and based on systems of participatory democracy. So, the economic and social groups that are more representative of the community agents participate, with the ultimate objective of increasing the economic and social well-being of the populations involved in the process. This process of effective social change has fundamental importance in education in values oriented toward political, cultural, and pedagogical self-management and solidarity actions (Oliveira and Paiva 2016). Although at the beginning of the twenty-first century, the first attempts had been made to introduce the SE in Puerto Rico and integrated it into the productive and commercial structure of the island as a source of employment and wealth, the change for the transformation of Puerto Rico into an economy based on SE, without neglecting the traditional capitalist model, accelerated in mid-July 2015 with the creation of the Decalogue for the formation of the virtuous circle of economic

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development (Table 3), as a seed for the subsequent virtuous circle of economic growth, and as a way to economically develop the island. The virtuous circle of economic growth is based on three main pillars. The first is the “Education for Sustainability” program based on technological development, based on the “Law for the Promotion of Innovation, Social Incubators, and Productive Investment,” and environmental sustainability with the “Law for Sustainable Development and Environmental Protection (Clean Laws).” These two laws are united in order to achieve greater collaboration of business-university and educational plans aimed at acquiring professional skills. The second pillar is the attraction of foreign capital that is currently carried out with Law 22 of January 17, 2012, entitled “Law to Encourage the Transfer of Individual Investors to Puerto Rico” as with Law 93 of June 30, 2013, entitled “Puerto Rico Investment Companies Law.” Finally, the third pillar is the development of free zones in the island as it is a place of transit between countries of Latin America and the Caribbean. In this way, harmonious development of Puerto Rico is achieved since the municipalities are poles of local development. The union of these three pillars has led to the design and implementation of a virtuous circle that is a generator of well-being and wealth in a harmonious way on the island, formed by North-South growth axes between almost a quarter of the 78 provinces of Puerto Rico (Quijano and Saiz-Alvarez 2017). Specifically, the Puerto Rican regions that have at least one project based on Solidarity Economy and that are part of the virtuous circle of economic growth are Aguadilla, Arecibo, Caguas, Carolina, Cayey, Ceiba, Guánica, Gurabo, Humacao, Isabela, Lajas, Mancao, Mayagüez, Ponce, Rincon, Sabana Grande, San Germán, San Juan, and Yauco. The set of these companies is part of the so-called Social Transformation Puerto Rico 4.0 which aims to achieve a local and endogenous economic development of the island. Specifically, at the end of September 2017, this transformation initiative is made up of the following microenterprises, cooperatives, and associations: @dumorfosis, Arroyo and Associates, Camina Borinquen, Eastern Ecotourism Center “Isabel Rosado Morales”-APRODEC, Center of Development for Community Recreation, Center for Global Enterprises 4.0, Center for Micro-enterprises and Sustainable Agricultural Technologies Yauco, Community Eco-Museum of Lajas, Neuroboricuas, Institute for Full Human Development, Citizen Digital Literacy Laboratory, Legend Surf Classic-Puerto Rico, PECES-Education and Community Business Development, Surf 4, US Green Building Council, Active Voice, and XJTT Hospitality Inc. All this associative and cooperative movement born of civil society in order to achieve higher levels of solidarity and economic development could be strengthened with an active intervention of the Public Administrations throughout this process of change. State intervention generates both positive (crowding-in) and negative (crowding-out) effects that usually appear when the degree of intervention is extreme. For this reason, the positive outcomes arising from a state intervention (crowding-in effects) favor the solidarity economy in particular, since these effects are dispersed much more quickly and efficiently in the productive and commercial structure of society. Contrary to neoliberalism where companies tend to group for such crowding effects when they occur, this dilution in the social structure tends to

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improve society as a whole and encourages social change. Therefore, aware of this fact, for example, “in Ecuador, the ‘Interinstitutional Committee of the Popular and Solidarity Economy’ was created as responsible for dictating and coordinating the policy of promotion, incentives, financing and control of activities, while that the Superintendence exercises control over economic activity, grants legal personality to productive forms, authorizes financial activities, raises statistics, and imposes sanctions” (Boza-Valle and Manjárez-Fuentes 2016, p. 213). With the use of the SE born in civil society movements seeking the common good, the cooperative movement has ceased to be based on trade union and assistance to become an economic and financial alternative for the most economically disadvantaged sectors, as the social economy is based on shared values and a shared project. This is the solidarity dimension of the community that breaks with the rationality of the market and distributes the wealth generated according to the social needs existing in the market.

7 Conclusions In an economically globalized world, entrepreneurial organizations must increase their efforts to create business networks. In this case, it is mandatory to develop incubators and accelerators in collaboration with technological and industrial parks to form four-helix models that allow sustainable economic development over time. One of the significant advantages of solidarity is that, when applied with a Global Corporate Citizenship approach, it multiplies its impact on society (Von Hoivik and Mele 2009), because the company, regardless of its size, is based on solidarity, preservation of the environment, improvement in working conditions, hiring people at risk of social exclusion, and participation in development actions born from the Public Administration. All this behavior determines the DNA of the organization. The SE can be an attractive complement to diminish social differences between individuals and thus create a broad middle class that participates in processes of “open cooperativism” (Pazaitis et al. 2017) to benefit the whole society and not only to the cooperatives. This open cooperativism can accelerate the process of social change that is necessary for the countries of Latin America and the Caribbean in their fight against poverty.

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Evaluating the Business Model of a Work Integration Social Enterprise in Cantabria Elisa Baraibar-Diez, María D. Odriozola, Ignacio Llorente, and José Luis Fernández Sánchez

Abstract The uprising of new business models within the sphere of social economy has led to the appearance of the term hybrid organizations, which pursue a social mission and sustain their operations through commercial activities. In this sense, those organizations compete not only on the quality of products or services but also on the capacity to have a social and/or environmental impact. Work integration social enterprises (WISEs) represent hybrid organizations, since they are a type of social companies dedicated to help people at risk of social exclusion to join the ordinary labour market, in addition to its commercial activity. The objective of this contribution is twofold. First, it reflects the evolution and comparison of business model representations through canvases facing the appearance of new types of hybrid organizations. Second, the analysis of the business model of a WISE in Cantabria is proposed. The use of different business model representations shows how the visibility of the WISE’s information is modulated depending on the type of canvas used, so that not all of them are suitable to reflect the two purposes (social and economic) in hybrid companies.

1 Introduction The emergence of social values and the development of a social economy lead to rethink the role of companies in the market. In this context, new forms of organizations emerge competing not only in the field of “quality of product and services, but also on the ability to effect positive social and environmental change” (Haigh and Hoffman 2012, p. 126). Haigh and Hoffman (2012) adopt the term hybrid organizations for those business models in between for-profit and non-profit worlds, but they collect other terms such as Fourth Sector (Brandsen et al. 2005); L3C (a low-profit limited liability company) (Avdeev and Ekmekjian 2011); Blended

E. Baraibar-Diez (*) · M. D. Odriozola · I. Llorente · J. L. Fernández Sánchez University of Cantabria, Santander, Cantabria, Spain e-mail: [email protected]; [email protected]; [email protected]; jluis. [email protected] © Springer Nature Switzerland AG 2019 V. Ratten et al. (eds.), Subsistence Entrepreneurship, Contributions to Management Science, https://doi.org/10.1007/978-3-030-11542-5_5

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Value (Emerson 2003; Kickul et al. 2012); For-Benefit, Values Driven (Barrett 2006); and Mission Driven or Benefit Corporation (Hiller 2013). A paradigmatic example of this type of hybrid organizations can be work integration social enterprises (WISEs), which emerge with the aim of “help poorly qualified unemployed people who are at risk of permanent exclusion from the labour market return to work and to society in general through a productive activity” (Vidal 2005, p. 807). Although studies can be found on the social role of this type of companies (Ho and Chan 2010; Battilana et al. 2015), the truth is that the analysis of their business models is less developed. Most of academics agree on not existing a consistent definition of “business model”. However, a generalized idea is that business models explain how firms “do business” (Zott et al. 2011) and “seek to explain both value creation and value capture” (Zott et al. 2011, p. 1020). After a literature review on “business models”, George and Bock (2011) found that a business model is “commonly described and reflects on (1) organizational design, (2) the resource-based view (RBV) of the firm, (3) narrative and sensemaking, (4) the nature of innovation, (5) the nature of opportunity, and (6) transactive structures” (George and Bock 2011, p. 85). All of them are theoretical approaches related to the understanding of business models, which can also be applied to hybrid organizations. Another line of research is devoted to how to represent a business model through a “mixture of informal textual, verbal and ad hoc graphical represenations” (Zott et al. 2011, p. 1026), understanding it as a conceptual tool that represent reality (Morris et al. 2005; Shafer et al. 2005; Osterwalder et al. 2005). The objective of this contribution is twofold. First, it aims to reflect the evolution and comparison of business model representations facing the appearance of new types of hybrid organizations. Taking into account the literature gap on the evaluation of business models in hybrid companies, the second aim of this contribution is to acquire greater knowledge about these business models through the application of different frameworks to a real WISE located in Cantabria. The use of different business model frameworks shows how the visibility of the WISE’s information is modulated depending on the type of canvas used, so that not all of them are suitable to reflect the two purposes (social and economic) in hybrid companies.

2 Evolution of Business Model Representations There are many attempts to represent business models by means of diagrams, maps, or graphs. To cite some examples, Morris et al. (2005) define business models as “a concise representation of how an interrelated set of decision variables in the areas of venture strategy, architecture, and economics are addressed to create sustainable competitive advantage in defined markets” (Morris et al. 2005, p. 727). They consider that business models are characterized by six components: factors related to offering, market factors, internal capability factors, competitive strategy factors, economic factors, and growth/exit factors (Morris et al. 2005). Shafer et al. (2005)

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Table 1 Description of nine building blocks Block Customer segments Value propositions Channels Customer relationships Revenue streams Key resources Key activities Key partnerships Cost structure

Description Different groups of people or organizations and enterprise aim to research and serve Bundle of products and services that create value for a specific customer segment How a company communicates with and reaches its customer segments to deliver a value proposition Types of relationships a company establishes with specific customer segments The cash a company generates from each customer segment (costs must be subtracted from revenues to create earnings) The most important assets required to make a business model work The most important things a company must do to make its business model work The network of suppliers and partners that make the business model work All costs incurred to operate a business model

Source: Osterwalder and Pigneur (2010)

state that “a business model is a representation of a firm’s underlying core logic and strategic choices for creating and capturing value within a value network” (Shafer et al. 2005, p. 202) and propose an affinity diagram including strategic choices, create value, value network, and capture value. Alexander Osterwalder represents a before and an after in business model representations. Since he proposed his Business Model Canvas in 2008, many researchers have implemented different frameworks to design, analyse, and improve business models. Osterwalder et al. (2005) define “business model” as “a conceptual tool containing a set of objects, concepts and their relationships with the objective to express the business logic of a specific firm. Therefore we must consider which concepts and relationships allow a simplified description and representation of what value is provided to customers, how this is done and with which financial consequences” (Osterwalder et al. 2005, p. 3). The Business Model Canvas is based on descriptions of nine building blocks: customer segments, value propositions, channels, customer relationships, revenue streams, key resources, key activities, key partnerships, and cost structure. Each block is described in Table 1. Other types of business model valuation frameworks have been proposed in line with a more social and sustainable context, although they have appeared in contexts far from the academic literature. These new frameworks are the Lean Canvas, the Social Canvas, the Social Business Model Canvas, the ONG’s Canvas, and the Mission Model Canvas. With the idea of building a successful start-up and focusing on the entrepreneur, Maurya proposed the Lean Canvas in 2010. Considering the idea of capturing what is most risky, he included the following boxes, problem, solution, key metrics, and

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unfair advantage, and took out the blocks of key activities, key resources, customer relationships, and key partners (Maurya 2012). This Lean Canvas model was adapted by Rowan Yeoman and Dave Moskovitz into a version that will enable a start-up social enterprise (Akina Foundation 2018). In this Social Lean Canvas, focus is on purpose and impact. The structure of this canvas has evolved, as previous versions of the canvas focused first on the purpose of the initiative and, finally, on the impact. In the last version of the canvas, purpose and impact appear first. The original Business Model Canvas created by Osterwalder was developed under the licence Creative Commons, and this allows other institutions and organizations to adapt the canvas towards several contexts. Skylance.org has proposed the Nonprofit Business Model Canvas (nBMC), which was remixed to better fit the non-profit, NGO, and charity context. The canvas is also divided into nine sections, but there are two additional sections: the operations level on the left side (backstage) and the engagement level on the right side (front stage). The backstage is formed by key partners (government agencies, other NGOs, suppliers, etc.), key activities, key resources, the social value proposition, and cost structure. The front stage includes relations, cocreators, channels, and outcome streams (Alexandros 2016). The most recent modification of Business Model Canvas comes from Steve Blank and Osterwalder himself. In 2016, they proposed the Mission Model Canvas, suitable for organizations that “mobilize resources and a budget to solve a particular problem and create value for a set of beneficiaries (customers, support organizations, war fighters, Congress, the country, etc.)” (Blank 2016). In the Mission Model Canvas, customer segments is changed to beneficiaries; cost structure is changed to mission cost/budget; channel is changed to deployment; and customer relationships is changed to buy-in/support. Table 2 includes a comparison of these five business model representations, including the description of each block in each model.

3 PLIS Servicios: A Work Integration Social Enterprise in Cantabria The uprising of new business models within the sphere of social economy has led to the appearance of the term hybrid organizations (Battilana et al. 2015; Santos et al. 2015) pursuing a social mission and sustaining their operations through commercial activities. Social performance of work integration social companies (WISEs) is determined both by its social purpose and by its economic productivity (Battilana et al. 2015), and the question that arises is whether Business Model Canvas is suitable for this type or organizations.

(2) Bundle of products and services that create value for a specific customer segment

Value propositions

(3) (Unique value proposition) Single, clear, compelling message that states why you are different and worth paying attention

(2) Target customers or users

(1) Different groups of people or organizations and enterprise aim to research and serve

Customer segments

Lean Canvas

(1) (Instead of key partners) Top 1–3 problems

Business Model Canvas

Problem

Impact

Block Purpose

Table 2 Comparison of models. Source: Authors

(5) Unique value proposition. What is the unique combination of benefits your product or service will offer to overcome problems the customer has?

Social Canvas (1) Your reason for doing this venture, clearly defined in terms of the social or environmental problems you want to solve (2) What is the intended social or environmental impact of your venture? (4) What are the specific problems each of the different customer type face? (3) Who do you need to move to make your business model work? (1) (Cocreators) Who are our stakeholders? For whom are we creating value? Who helps us create outcomes or our value proposition? (2) (SVP—social value proposition) What programmes and services do we deliver? What problems or challenges are we trying to solve? What value do will we deliver to cocreators?

Nonprofit Business Model Canvas

(continued)

(2) Bundle of products and services that create value for a specific customer segment

(1) (Beneficiaries) Other key players in addition to customer segments

Mission Model Canvas

Evaluating the Business Model of a Work Integration Social Enterprise. . . 55

Business Model Canvas

(3) How a company communicates with and reaches its customer segments to deliver a value proposition

(4) Types of relationships a company establishes with specific customer segments

(5) The cash a company generates from each customer segment (costs must be subtracted from revenues to create earnings)

(6) The most important assets required to make a business model work

Block Solution

Channels

Customer relationships

Revenue streams

Key resources

Table 2 (continued)

(6) Sources of revenue

Lean Canvas (4) (Instead of key activities) Outline a possible solution for each problem (5) Path to customers (inbound or outbound)

(8) What are ongoing flows of income that will create financial sustainability for this venture?

(7) How will you reach your customers in a scalable way?

Social Canvas (6) What is your product or service?

(6) Which key resources do our value proposition require? What other resources are needed at the engagement level? The operations level?

(4) (Relations). What kind of relationships do cocreators want from us? What bonds do we establish and maintain with them? (5) (Outcome streams) What value is the cocreator truly willing to return or contribute?

(3) How do we reach cocreators? How do they want to be reached? How do we provide ongoing communications, support, and awareness?

Nonprofit Business Model Canvas

(3) (Deployment) What will it take to deploy the product/service from our current minimum viable product to widespread use among people who need it? (4) (Buy-in and support) For each beneficiary, how does the team get “buy-in” from all the beneficiaries? (5) (Mission achievement/impact factors) The value you are creating for the sum of all of the beneficiaries/the greater good (6) The most important assets required to make a business model work

Mission Model Canvas

56 E. Baraibar-Diez et al.

(7) The most important things a company must do to make its business model work (8) The network of suppliers and partners that make the business model work (9) All costs incurred to operate a business model

Source: Author’s own table

Unfair advantage

Key metrics

Cost structure

Key partnerships

Key activities

(8) (Instead of key resources) Key numbers that tell you how your business is doing (9) (Instead of customer relationships) Something that cannot easily be bought or copied

(7) Fixed and variable costs

(11) Why will this venture succeed ahead of the competition?

(9) What are the major costs associated with running this social enterprise? (10) What are numbers that will show your business model is working?

(9) What does it really cost to run our non-profit operations?

(8) Who are our key partners or suppliers?

(7) Which key activities do our social value propositions require?

(7) The most important things a company must do to make its business model work (8) The network of suppliers and partners that make the business model work (9) (Mission budget/cost) All costs incurred to operate a business model

Evaluating the Business Model of a Work Integration Social Enterprise. . . 57

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PLIS Servicios1 is one of the two registered WISEs in Cantabria, together with Koopera Santander. It was created by Brumas Association, which was born more than 25 years ago on the initiative of several parishes in Santander in response to the situation of many kids who were in the street, without any kind of training or profession (Cubría 2016). PLIS Servicios arises as acronym of “Proyecto Laboral de Inserción Social” (Labour Project of Social Insertion) and is dedicated to the cleaning of vehicles and sanitation, as well as the commercialization of ecological paper (PLIS Servicios 2018): – Ecological and manual cleaning of vehicles: car wash is done manually and ecologically, without using polluting products and using the minimum consumption of water (only two litres) and biodegradable products. – Commercialization and distribution of ecological sanitary toilet paper: this paper is called “Eco Natural” and recovers the cellulose from Tetra Brik. They have contacted institutions for large purchases, such as schools or public administrations. – Industrial cleaning: there are many activities involved, such as cleaning of sewage treatment plants, septic tanks, downpipes, and containers or graffiti.

3.1

Business Model Representations in PLIS Servicios

The description of the blocks has been developed mostly through secondary information (website, newspapers) and has been validated with the promoters of the PLIS Servicios. The description of each of the blocks is shown below, following the scheme in Table 2 and being summarized in Table 3. Purpose In an interview conducted to a representative of PLIS Servicios (BaraibarDiez et al. 2018), they said that this WISE was created because the Brumas Association detected needs in youth groups at risk of social exclusion and wants to respond to them. Within the social economy companies, WISEs fulfil the role of accompanying people to improve their basic skills and thus increase their employability in order to insert workers in an ordinary company. The statutes of the WISE indicate that the purpose is to promote social development in a manner compatible with ecological balance and environmental improvement (PLIS Servicios 2018). In fact, they are not the most inexpensive option nor the best one, but they sell ethics, making sure that when a customer decides to be connected with PLIS Servicios, it is the most ethical and socially responsible option. Impact In the case of PLIS Servicios, social impact is related with increasing the possibilities of hiring people in the regular labour market. With WISEs, a “passive person” becomes an active citizen fulfilling all the fiscal obligations they have, as

1

PLIS Servicios is a commercial brand. The company is called Inserción Brumas S.L.U.

(3) Beyond creating jobs, promoting the local

(1) Individuals (ecological cleaning of cars, recycled paper) Institutions (recycled paper, industrial cleaning)

(2) Beyond creating jobs, promoting the local

Value propositions

Lean Canvas

Customer segments

Business Model Canvas

(1) Unemployed people at risk of social exclusion Indifference (2) Individuals (ecological cleaning of cars, recycled paper) Institutions (recycled paper, industrial cleaning)

Problem

Impact

Block Purpose

Table 3 Blocks applied to PLIS Servicios Social Canvas (1) Help people at risk of social exclusion to join the regular labour market. “Promote social development in a manner compatible with ecological balance and environmental improvement” (2) To increase possibilities of hiring people in the regular labour market. So far, two workers integrated (4) Unemployed people at risk of social exclusion Indifference (3) Workers and customers (individuals, ecological cleaning of cars, recycled paper, and institutions, recycled paper, industrial cleaning) (5) Beyond creating jobs, promoting the local (1) Workers and customers (individuals, ecological cleaning of cars, recycled paper, and institutions, recycled paper, industrial cleaning) (2) Beyond creating jobs, promoting the local

Nonprofit Business Model Canvas

(continued)

(1) Workers and customers (individuals, ecological cleaning of cars, recycled paper, and institutions, recycled paper, industrial cleaning) (2) Beyond creating jobs, promoting the local

Mission Model Canvas

Evaluating the Business Model of a Work Integration Social Enterprise. . . 59

Channels

Solution

Block economy or sharing values, PLIS Servicios talks about people and opportunities. It is a project of social transformation (6) Work integration social enterprise. In this case PLIS Servicios provides ecological cleaning for cars, commercialization of recycled paper, and industrial cleaning, but the problem is solved by the creation of a WISE. Activity is secondary (7) Ecological cleaning of cars: PCTCAN and MARISMA Wellness Center (appointment via website or WhatsApp) Recycled paper: retailers Industrial cleaning: website and telephone www.plisservicios.com

economy or sharing values, PLIS Servicios talks about people and opportunities. It is a project of social transformation (4) Work integration social enterprise. In this case PLIS Servicios provides ecological cleaning for cars, commercialization of recycled paper, and industrial cleaning, but the problem is solved by the creation of a WISE. Activity is secondary (5) Ecological cleaning of cars: PCTCAN and MARISMA Wellness Center (appointment via website or WhatsApp) Recycled paper: retailers Industrial cleaning: website and telephone www.plisservicios.com

economy or sharing values, PLIS Servicios talks about people and opportunities. It is a project of social transformation

(3) Ecological cleaning of cars: PCTCAN and MARISMA Wellness Center (appointment via website or WhatsApp) Recycled paper: retailers Industrial cleaning: website and telephone www.plisservicios.com

Social Canvas

Lean Canvas

Business Model Canvas

Table 3 (continued)

(3) Workers: Recruitment tools and Brumas Association Customers: Ecological cleaning of cars: PCTCAN and MARISMA Wellness Center (appointment via website or WhatsApp) Recycled paper: retailers

economy or sharing values, PLIS Servicios talks about people and opportunities. It is a project of social transformation

(3) Workers: Recruitment tools and Brumas Association Customers: Ecological cleaning of cars: PCTCAN and MARISMA Wellness Center (appointment via website or WhatsApp) Recycled paper: retailers

Mission Model Canvas economy or sharing values, PLIS Servicios talks about people and opportunities. It is a project of social transformation

Nonprofit Business Model Canvas

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(5) Income from the cleaning services and the distribution of recycled paper

(6) Professional and motivated workers Ecological cleaning services (7) HR management (insertion itineraries) Ecological cleaning services Customer relationship Promotion of WISEs (8) Friendly organizations (organizaciones amigas):

Revenue streams

Key resources

Key partnerships

Key activities

(4) Website, WhatsApp, retailers, social networks

Customer relationships

(6) Income from the cleaning services and the distribution of recycled paper

(8) Income from the cleaning services and the distribution of recycled paper

Industrial cleaning: website and telephone www.plisservicios.com (4) Working itineraries are the way to bond with workers. Website, WhatsApp, retailers, social networks to contact customers (5) Inserted workers Public saving from the transformation of a passive unemployed to an active worker (6) Professional and motivated workers Ecological cleaning services (7) HR management (insertion itineraries) Ecological cleaning services Customer relationship Promotion of WISEs (8) Friendly organizations (Organizaciones (continued)

Industrial cleaning: website and telephone www.plisservicios.com (4) Working itineraries are the way to bond with workers. Website, WhatsApp, retailers, social networks to contact customers (5) Inserted workers Public saving from the transformation of a passive unemployed to an active worker (6) Professional and motivated workers Ecological cleaning services (7) HR management (insertion itineraries) Ecological cleaning services Customer relationship Promotion of WISEs (8) Friendly organizations (Organizaciones

Evaluating the Business Model of a Work Integration Social Enterprise. . . 61

Fundación Botín, Sodercan, MARISMA Wellness Center, Ayuntamiento de Santander, Agencia Desarrollo Santander, Fundación Fernando Pombo, Fernández Sanz Abogados, Clínica Jurídica, Celsa Group, Edscha, paper supplier, retailers (9) 50% Human resources 35% Purchases 15% Overheads

Business Model Canvas

Source: Author’s own table

Unfair advantage

Key metrics

Cost structure

Block

Table 3 (continued)

(7) 50% Human resources 35% Purchases 15% Overheads (8) Number of workers that have been integrated in the regular labour market (9) Insertion itineraries and social purpose

Lean Canvas

(9) 50% Human resources 35% Purchases 15% Overheads (10) Number of workers that have been integrated in the regular labour market (11) Social approach

Social Canvas

Mission Model Canvas amigas): Fundación Botín, Sodercan, MARISMA Wellness Center, Ayuntamiento de Santander, Agencia Desarrollo Santander, Fundación Fernando Pombo, Fernández Sanz Abogados, Clínica Jurídica, Celsa Group, Edscha, paper supplier, retailers (9) 50% Human resources 35% Purchases 15% Overheads

Nonprofit Business Model Canvas amigas): Fundación Botín, Sodercan, MARISMA Wellness Center, Ayuntamiento de Santander, Agencia Desarrollo Santander, Fundación Fernando Pombo, Fernández Sanz Abogados, Clínica Jurídica, Celsa Group, Edscha, paper supplier, retailers (9) 50% Human resources 35% Purchases 15% Overheads

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WISEs transform the expense of subsidies into an investment in employment. So far, PLIS Servicios has achieved two workers integrated in the ordinary labour market. In addition to its social impact, the WISE also minimizes the environmental impact, by offering ecological cleaning services and commercializing recycled paper. Problem The main problem detected by the Brumas Association that served to create the company was the impossibility of accessing decent work for a segment of people. PLIS Servicios, providing goods and services (which in turn satisfy the needs of consumers in terms of cleaning services and toiletries), is seen as a means to achieve that end. In turn, they also try to combat the indifference that both consumers, society and institutions, manifest in their relationship (or lack of relationship) with the company. Customer Segments They offer mainly three types of services to different customer segments: ecological cleaning for cars (mostly individuals), commercialization of recycled paper (organizations, schools, institutes, academies, residences, individuals), and industrial cleaning (public institutions, neighbourhood associations, individuals, etc.). This is the block with the greatest differences among canvases, since Social Canvas, Nonprofit Business Model Canvas, and Mission Model Canvas include, respectively, “Who do you need to move to make your business model work?”, cocreators and beneficiaries. In this sense, this block changes depending on the canvas use, so that workers should be added in here, in addition to regular customers. Workers in PLIS Servicios are the reason for living and also a key to success. Value Propositions Beyond creating jobs, promoting the local economy, or sharing values, PLIS Servicios talks about people, dignity, and opportunities. It is a project of social transformation. They believe that it is necessary to bet on an economic and business model different from the current ones that puts in the centre the person, justice, the environment, and the common good. Solution The solution to the problem that originated the company was precisely the creation of the WISE. The WISE provides services and products that fulfil other types of needs in customers, but they are secondary. PLIS Servicios is a means to achieve the end of improving employability. Channels The website (www.plisservicios.com) and social media (Facebook site) are the main channels of communication. Customers of PLIS Servicios can make appointments via website or via WhatsApp, but they are placed periodically in the parking lot of PCTCAN and MARISMA Wellness Center in order to meet customers that want to clean their cars. Recycled paper is sold through retailers around the region (the NGO Gira por el Desarrollo or the charity bookstore AIDA Books & More). Regarding the relationship with cocreators and beneficiaries, PLIS Servicios contact with workers through recruitment tools and, specifically, Brumas Association. Customer Relationships Relationship with customers is built through the channels exposed before but also through word of mouth. Networks and interpersonal

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relationships are important to make the organization and the project known. Regarding workers (co-workers/beneficiaries), it is important to say that the way of bonding with them is through working itineraries, identifying their objectives, and planning the actions that will lead them to be inserted in the traditional labour market. Revenue Streams PLIS Servicios obtains revenue from their services (cleaning) and the distribution of recycled paper. Prices of cleaning services are available in the website (ranging from 9.4 € to 25.90 €). In the Nonprofit Business Model Canvas and the Mission Model Canvas, this sense of revenue is replaced by the outcome and the impact, related to the value generated by the company. This impact can be understood not only as the number of inserted workers but also as the public savings due to the transformation of a passive unemployed into an active worker, willing to be part of the labour market. Also, PLIS Servicios is supported by Brumas Association, and it has received specific aids from the Government of Cantabria. Key Resources The workers who join a WISE are trained in socio-labour and personal competencies, so that they are motivated workers who focus on quality in service. In addition to the service provided, workers are the most important asset in PLIS Servicios. Key Activities In order to have professional and motivated workers, PLIS Servicios needs to implement insertion itineraries (HR management). Regarding the commercial activity, key activities are the providing of services but also customer relationship actions and promotion of the WISE. Key Partnerships In the website of PLIS Servicios, there is a section of the so-called friendly organizations (organizaciones amigas). There, one can find public institutions, foundations, and other enterprises. They state that “To date, private companies are very important for our sustainability. Our services have been requested by Aquarbe and Viesgo, and the sports club Marisma and Imesapi collaborate with us leaving their facilities for cleaning vehicles” (Baraibar-Diez et al. 2018). Also, the provider of recycled paper and the retailers are essential to distribute these products. The role of associations like the Federation of Business Associations of WISEs (FAEDEI) and the Spanish Association of Recuperators of Social and Solidarity Economy (AERESS) is also important to promote and help WISEs to develop their activities. Cost Structure More than half of the cost structure come from salaries and social security costs. In addition, 35% comes from purchases of consumables (mainly recycled paper). Finally, 15% is overheads. In addition, the nature of the WISE implies that workers need to be accompanied in a socio-labour insertion itinerary. This also generates costs since accompaniment is not a productive workforce. In this sense, the Brumas Association usually supports these insertion itineraries. Key Metrics The main key metric in a work integration social enterprise is the number of workers that have been integrated in the regular labour market. In this case, PLIS Servicios has already inserted two workers.

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Unfair Advantage The advantage that cannot easy be bought or copied in PLIS Servicios is the combination of social, labour, and environmental approach.

4 Discussion Work integration social enterprises, as sustainable companies with social purposes, fight against poverty and exclusion, while they are profitable for society (Cubría 2016). This model of social company is growing in Europe, but they adopt different business approaches depending on the social needs detected in each country. Business model representation in a hybrid organization is challenging, since the models focus on different components directly related to strategy, relationships with other agents and value creation. Hopefully, there have been options that try to solve the representation of new business models from a social perspective (e.g. Social Lean Canvas, Nonprofit Business Model Canvas, Mission Model Canvas). However, the peculiarity of hybrid organizations raises the question of which representation is more efficient, taking into account the duality of these organizations. To answer this question, the business model of the Cantabrian WISE PLIS Servicios has been represented with five different canvases. After having answered each of the blocks, the following conclusions can be obtained. First, understanding the purpose and social impact is essential for a WISE as PLIS Servicios, and only the Social Canvas allows representing these key aspects. This is clearly more than a value proposition, as PLIS Servicios wants to question the current system by betting on a different business model that focuses on the person, justice, the environment, and the common good. The relationship problem/solution, included in the Lean Canvas and the Social Canvas, is not related to the commercial activity but to the reason of living of PLIS Servicios. They created the company as a means to achieve the end of improving employability in a segment of people at risk of social exclusion. The block “customer segments” presents the higher differences, since in the Business Model Canvas and the Lean Canvas, this block is only oriented to customers. But those representations with a social approach (Social Canvas, Nonprofit Business Canvas, and Mission Model Canvas) incorporate one of the key factors of PLIS Servicios, the workers. They are not understood as customers, but they represent co-workers or beneficiaries without whom the WISE would be meaningless. The value proposition is common in all business model representations, and specifically, PLIS can be understood as a project of social transformation. PLIS Servicios provides ethics. They do not provide the best service nor the most inexpensive, but customers know that dealing with PLIS Servicios is ethical and socially responsible. Beyond creating jobs, promoting the local economy, or sharing values, PLIS Servicios talks about people and opportunities. Channels of communication are also quite similar, considering that PLIS Servicios also needs to connect with workers at risk of social exclusion. Reaching

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the customer and the society in general is essential, as three of the difficulties identified by PLIS Servicios (Baraibar-Diez et al. 2018) were the lack of knowledge about this type of organization, the indifference of society, and little social awareness. Revenue streams and cost structure are also quite similar in all the business model representations. However, the Nonprofit Business Canvas and the Mission Model Canvas substitute the revenue streams by outcome streams and mission achievement or impact factors. In this sense, we must say that profits in PLIS Servicios (just in case they have it) must be invested in the company. PLIS Servicios provides services that are not profitable, but they are globally sustainable balancing the most profitable lines (where the margin is higher but they need less workforce) and the loss making lines (they demand more labour, so that workers are working and learning more time, although costs are higher). Paradoxically, business model in PLIS Servicios, and other WISEs, is against business. From an economic point of view, rotation of workers attached to WISEs is very damaging: the worker leaves the WISE when it is already trained, which implies a vicious circle of investment in training which is not going to return to the organization in the long-term, inefficiency, and inability to take advantage of the experience effect. Key resources, key activities, and key partnerships are avoided in Lean and Social Lean Canvases, but they remain in Business Model Canvas, Nonprofit Business Canvas, and Mission Model Canvas. Collaboration and support of key partners are essential for PLIS Servicios. Not only the Brumas Association but also the “friendly organizations” provide a network of advisors, volunteers, and partners that generate synergies that allow developing the key activities (HR management, customer relationship, promotion of WISE) and enhancing the key resources (professional and motivated workers). In the opposite way, key metrics and unfair advantage are provided by Lean and Social Lean Canvases but not by Business Model Canvas, Nonprofit Business Canvas, and Mission Model Canvas. Key metrics could be understood as the measurement of a key activity and in the case of PLIS Servicios is the number of inserted workers in ordinary markets. Finally, the unfair advantage is provided by a combination of facts. They wanted to promote employability, and they created a work integration social enterprise, so that they save public resources and they are committed to labour sustainability. Also, the type of activity they carry out minimizes the environmental impact, so that they are also committed to the sustainability of resources. It is the combination of several blocks (mainly Business Model and Social Lean Canvas) what leads to the understanding of the business model of a hybrid organization. As expected, representations of business models oriented to social approaches complement the traditional business model representation. In the case of PLIS Servicios, survival derives from their capacity for resilience, enduring due to the support of key partners and because of the fact that they are deeply rooted in the territory, performing essential social tasks.

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Acknowledgement We thank the work integration social enterprise PLIS Servicios for the support and provision of information.

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Encouraging Indigenous Self-Employment in Franchising Scott Weaven, Lorelle Frazer, Mark Brimble, Kerry Bodle, Maurice Roussety, and Park Thaichon

Abstract Although originally touted as a business mechanism to encourage selfemployment for minorities, franchising has not lived up to initial expectations. While minority ownership in franchising in the USA has shown considerable growth over the last two decades, this has not been the case for Indigenous Australians. Indigenous business ownership in franchising remains low, even though a majority of franchisors are willing to recruit Indigenous employees and franchisees. This chapter aims to open a dialogue on the relative merits of utilising a transitional self-employment pathway for Indigenous Australians through franchising. We argue that such a hybridised approach may ameliorate systemic disadvantages that many Indigenous Australians face when considering entering small business. Data was gathered from a series of interviews with Indigenous business owners, franchise (third-party) advisors, Indigenous government agency representatives, franchisors and franchising educators. Our results highlight the pressing need to better address areas of disadvantage that have been raised in prior Indigenous Entrepreneurship and small business studies. Overall, our GROWTH-pathway approach and recommended courses of action, answer calls to encourage private sector involvement in Indigenous S. Weaven · P. Thaichon (*) Department of Marketing, Griffith University, Southport, QLD, Australia e-mail: s.weaven@griffith.edu.au; p.thaichon@griffith.edu.au L. Frazer School of Business, University of the Sunshine Coast, Sippy Downs, QLD, Australia e-mail: [email protected] M. Brimble Department of Accounting Finance and Economics, Griffith University, Nathan, QLD, Australia e-mail: m.brimble@griffith.edu.au K. Bodle Department of Accounting, Finance and Economics, Griffith University, Southport, QLD, Australia e-mail: k.bodle@griffith.edu.au M. Roussety Department of Marketing, Griffith University, Nathan, QLD, Australia e-mail: m.roussety@griffith.edu.au © Springer Nature Switzerland AG 2019 V. Ratten et al. (eds.), Subsistence Entrepreneurship, Contributions to Management Science, https://doi.org/10.1007/978-3-030-11542-5_6

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employment, so as to repair economic and social damage caused by the introduction of a Western enterprising culture.

1 Introduction Encouraging Indigenous entrepreneurship remains a prominent policy area in many nations throughout the world as it is viewed as a mechanism for mitigating the economic and social deprivation currently experienced by many Indigenous minorities (Hindle and Lansdowne 2005; Hunter 2015). We argue that franchising may provide a means for encouraging Indigenous business ownership and employment. However, although originally considered as a business arrangement that would encourage self-employment for minorities, franchising has not entirely lived up to these initial expectations (Hunt 1972). Indeed, Indigenous business ownership and employment within franchising remains low, with no remedial prospects. While franchises are structured and controlled business models that assist in minimising experiential and financial barriers to business entry, it appears that these systemic benefits are unknown to, or misunderstood by Indigenous Australians. In comparison, minority ownership of franchises in the United States of America (USA) exceeds that of non-franchised businesses by 8.3% (IFA 2011; PriceWaterhouseCoopers 2009) and Australian Indigenous franchise ownership by 8.5% (Frazer et al. 2014). Moreover, a recent national study found that only 11% of franchise systems had previously engaged Indigenous Australians as employees or franchisees (Frazer et al. 2014). This undesirable trend in self-employment amongst Indigenous and non-Indigenous Australians is supported by the ATO (2009), finding that in 2006 only 6% of Indigenous Australians were self-employed compared with 17% of non-Indigenous Australians. Although more recent data by Hunter (2013) suggests a growth in Indigenous self-employment to 12,500 in 2011, most commentators concur with Hunter’s (2014: 49) assessment that ‘. . . the prevalence of selfemployments in the Indigenous population is still around one third of that for other Australians’. The literature proposes several core reasons for the low levels of participation in self-employment centring on a lack of education and business experience, poor financial literacy, limited capital accessibility as well as community caveats relating to participation in traditional self-employment models (Brimble and Blue 2013; Foley 2006; Schaper 1999). Franchising is a business arrangement between two independent parties, where the franchisor generates upfront and ongoing revenues by granting franchisees access to its proven business model which may include financial assistance, training and ongoing advice (Dant et al. 2013a, b). That is, franchising has the functional attributes to attenuate an individual’s experiential and capital barriers to entry (Dant et al. 2013a). Inevitably, this begs the question as to why franchising is not perceived as an optimal business model for Indigenous Australians, especially given that over half of Australian franchisors support the transition of Indigenous Australians from that of franchise employee to franchisee ownership (Frazer et al. 2014). This phenomenon may be explained by a misalignment between traditional franchise

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models and the self-employment dispositions of Indigenous people. In support of this, Altman (2009: 131) suggests ‘the notion of cultural difference embedded in the articulations between kin-based societies and capitalism’ presents a key challenge for Indigenous self-employment. Moreover, Fuller et al. (1999) emphasise the need to develop on-the-job vocational skills that could proficiently equip Indigenous Australians to successfully enter self-employment. More specifically, given the prevalence of substandard business and financial management skills amongst Indigenous Australians, Hunter (2015) argues that existing training and support mechanisms offered by franchisors may be inadequate. This observation could explain why minorities in the USA are more likely to fail than their (nonminority) counterparts even though they are ‘twice as likely to start a business’ (Oyelere and Belton 2013: 27). This may signal an opportunity for traditional franchise systems to tailor their franchise offerings to the needs of Indigenous Australians who are seeking selfemployment opportunities. Accepting the above claims and the proposition that cultural and skill factors encumber Indigenous Australians when considering the franchise option, and the public policy imperative to encourage private sector investment in Indigenous small business (Fleming 2015; Hindle and Lansdowne 2005), we submit a conceptual GROWTH-Pathway approach of employment-to-franchise ownership as a strategy to moderate the impact of these impediments. The pathway contemplates a contractual relationship that is operationalised as a structured programme that fosters positive engagement by the franchisor and Indigenous participants from employment to franchise ownership. The GROWTH-Pathway model is systematically represented in a six-stage progression of goalsetting, resourcing, ownership, warranting, tiding and handover. These stages are designed to deliver two key objectives, namely, to attract and grow a pool of experienced franchises cadets from the Indigenous community and (ultimately) increase franchise ownership by Indigenous Australians. Knowing that franchisors stress the lack of suitable franchisees as a primary hindrance to their growth plans (Frazer et al. 2012), the GROWTH-pathway approach has potential to alleviate this problem for franchisors as well as richly contributing to the economic participation of the Indigenous community as a whole. The GROWTH-Pathway approach requires careful mapping to ensure that identifiable cultural, sociological and economic barriers inherent in the employment-tofranchise ownership experience of Indigenous Australians are mitigated while maintaining commerciality in the franchisee/franchisor relationship during each of the six stages. This submission is advanced in six sections. Section A considers the theoretical background to the problem of Indigenous Australian employment-tofranchise ownership in a literature review and clarifies the terms Indigenous Australian, Indigenous business, franchise business and non-franchise SME business. The research methodology and findings are contained in section B leading to a discussion of those findings in section C. Next, the GROWTH-Pathway approach is recommended and rationalised in section D followed by sections E and F, which deal with the research limitations and concluding comments, respectively.

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2 Literature Review and Definitions The theoretical background of this research is framed around key concepts relating to Indigenous Australians, Indigenous business, franchise business and key differences between franchise and non-franchise businesses. As these concepts mean different things to different people in different contexts, they are defined below to ensure contextual clarity and consistency throughout the ensuing review.

2.1

Identity of Indigenous Australian: Definition

Effective prospecting, qualifying, recruiting and evaluation of participants for the GROWTH-Pathway cannot be facilitated without defining the term ‘Indigenous Australian’. The Australian Bureau of Statistics defines an Indigenous person as a person of Aboriginal or Torres Strait Islander descent who identifies as an Aboriginal or Torres Strait Islander and is, as such, accepted by the community in which they live (ABS 2012). Therefore, there are three operative components to the definition, descent, self-identification and community acceptance, which the pathway will have to consider when identifying potential candidates. While it appears that the population of Indigenous Australians has steadily increased by 21% in the 6 years leading to 2011 (ABS 2011), researchers generally agree that this can be partially attributed to the willingness of more Aboriginal and Torres Strait Islander people to identify their status and their heritage (Biddle 2012; Closing the Gap: Prime Minister’s Report 2013). The conceptual demarcation of business and self-employment often eludes researchers. Business refers to an organised ecosystem where at least one person superintends, risks capital and employs others for commercial rewards. Conversely, self-employment requires an individual, to risk personal capital and exert personal effort in generating income. In the Indigenous Australian context, income generation model is widely practised as not-for-profit, commercial enterprises or communitybased trading entities (Foley 2003). Notably, this research is delimited to the smallto medium-sized commercial enterprise (SME) context. In spite of the subjectivity involved in applying the three prescriptive characteristics of descent, self-identification and community acceptance in identifying an Indigenous Australian, the clinical identification of Indigenous businesses appears more problematic. Overall, the accepted definition of an Indigenous Australian business is primarily determined by Supply Nation as a business with at least 51% of its ownership and control by Indigenous Australians as defined above (Hunter 2013). However, Hunter (2013) asserts that a more appropriate definition, explicating what constitutes an Indigenous business, will increase the number of reported Indigenous businesses covered by government policy targets. However, notwithstanding the definition of Indigenous business, building the capacity of Indigenous businesses remains a public policy priority (Hunter 2015) lending further support for our proposed GROWTH-Pathway approach.

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Franchise Business

As detailed above, franchising is a unique business model that reduces both the psychological and performance risk of entering self-employment by reducing capital, experiential and managerial barriers (Dant et al. 1996, 2011). Accordingly, it has often been promoted as a means of providing an opportunity for minorities and as an easier method for entering self-employment and business ownership (Hunt 1972; Kaufmann and Dant 1996). Overall, franchising is celebrated as a popular business model alternative to fully independent business ownership that affords satisfactory levels of independence while providing the requisite training and support that is often lacking in non-franchise business operations.

2.3

Franchise vs Non-franchise Business

The choice of self-employment as a franchisee or an independent proprietor (owning a non-franchise business) may be easier for some individuals than others and certainly poses a different set of challenges for Indigenous Australians. This is mainly on account of cultural, relational, operational and legal differences that exist between franchised and fully independent business models. Franchisees, as common law agents, enjoy less independence, and their businesses are created, governed and terminated by contract. Moreover, they retain an inherent connection to their principal/franchisor for the duration of the franchise term (Sardy and Alon 2007). At their best, these contracts contain regulatory mechanisms for a franchisor to monitor its franchisees, to provide performance incentives, to allocate risk, to manage externalities and information asymmetry and to facilitate entrepreneurship and interdependence (Spencer 2008; Burkle and Posselt 2008). Independent businesses exhibit a different set of relational, operational and risk-bearing characteristics to those of franchisee-operated businesses. Ultimately, what distinguishes a franchisee-operated business from an independent private and public enterprise is its inability to manage risk autonomously and free of restrictions. However such operational limitations may prove problematic for Indigenous Australians who may be culturally bound by caveats of ‘free spirit and kinship’. Since franchisee and independent entrepreneurs are motivated by three main economic outcomes: growth, innovation and flexibility (Foley 2003), one could question whether Indigenous Australian entrepreneurs possess divergent motivations. Wood and Davidson (2011) assert that monetary rewards alone are not a highly ranked motivator for Indigenous Australian entrepreneurs. Similarly, Foley (2005) maintains that Indigenous Australians will tend to measure business success in egalitarian terms, such as by their ability to employ relatives and support their community. More recently in a study of Mexico’s Indigenous population, Perez and Pavon (2014) found that indigenous societies adopted egalitarian norms developed to survive colonialism. Over time, these norms became entrenched in powerful kin-centric cultural norms, beliefs, values and rituals to achieve equitable social

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and economic outcomes. This focus on communal outcomes, prima facie, may be at odds with what a typical franchisor would expect of their franchisees. We believe that this may represent a critical challenge for the GROWTH-Pathway approach.

2.4

Indigenous Self-Employment

Historically, Indigenous Australians have largely been excluded from building businesses in Australia (Schaper 1999). Although Indigenous disadvantage exhibits considerable inertia, recent improvements in Indigenous skills (Hunter 2013) may have resulted from concomitant impact of positive government policies and a host of private sector initiatives. The advocacy of Indigenous businesses by Supply Nation and the direct support provided by Indigenous Business Australia (IBA), the Department of Education Employment and Workplace Relations (DEEWR) and the Indigenous Capital Assistance Scheme (ICAS) have all contributed to an increase in Indigenous Australian self-employment and Indigenous business initiation. The private sector also contributes through initiatives such as the Indigenous Chambers of Commerce (AICC). However, repeated calls have been made for the private sector to assume a lead role in supporting Indigenous entrepreneurship and small business creation (Fleming 2015; Fuller et al. 2005; Ivory 1999). Such strategic cross-sectoral collaboration has been shown to deliver sustainable economic benefits, mend social tensions amongst ethnic groups and promote self-reliance in other country contexts such as Fiji (Fiji Development Bank 1998; Fairbairn 1988). Furthermore, it is well established that successful Indigenous business ownership affords direct participation in the Australian economy and can create the subsequent flow-on of wealth to others, contributing to intergenerational asset accumulation in Indigenous communities. Of particular note is evidence that businesses that Indigenous Australians lean towards are well represented within the Australian franchise sector (Hunter 2013), thus supporting the proposed GROWTH-Pathway approach. The literature has contributed to the mapping of the employment-to-franchise ownership pathway in several ways. Firstly, constraints relating to the definition of Indigenous Australians and Indigenous businesses have been identified. Secondly, social, cultural and economic inhibitors that have resulted in a continuation of historical disadvantage in employment, self-employment and business ownership have been confirmed, and thirdly, facilitating factors to counteract these inhibitors have been detailed in the significant and effective efforts of both the public and private sector aimed at Closing the Gaps (Closing the Gap: Prime Minister’s Report 2013). Although relating specifically to the employment of Indigenous Australians, these initiatives can be extended with theoretical justification to Indigenous Australian self-employment and Indigenous business ownership (Hunter 2013). At this stage, it is worth reiterating that the specific intention of the GROWTH-Pathway is to increase direct self-employment of Indigenous Australians which is considered the most effective means of increasing Indigenous Australian employment by a number of leading Indigenous researchers such as Gray et al. (2012) and Young et al. (2007).

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3 Methodology and Findings Given the paucity of prior research in this area, we adopted an unstructured inductive approach to gathering in-depth information from key industry stakeholders. In all, 12 telephone interviews were completed with consent given to record and transcribe the interviews for subsequent thematic analysis. Given that any inductive and largely unstructured data collection approach will invariably lead to the misinterpretation of information or researcher bias (Eriksson and Kovalainen 2015), we employed specific interviewer strategies of reflexivity (Funder 2005) and negative scenario sampling (Morse and Cheek 2015; Patton 2002) to understand and control for researcher bias. NVivo 10 software was utilised for coding and recoding around emergent themes. The key stakeholders in the mapping of the pathway are Indigenous Australians initially recruited as employees, franchisors selected to support the programme, IBA who are franchising experts from the Asia-Pacific Centre for Franchising Excellence, Griffith University. Overall, there were five key themes arising including preferred characteristics of the franchise systems, financial modelling supporting the pathway, training and education supplied over the initial term, the process of prospecting and recruiting and the effect of the predicted success. In order to emphasise pertinent comments provided by participants, selected parts of their transcribed texts are offered. In order to preserve the anonymity of each voice, the participants are coded as follows: Indigenous Australian, franchisor representative (For), franchise adviser (FrAd) and representative body spokesperson (Rep).

3.1

Preferred Characteristics of the Indigenous Australians Initially Recruited as Employees

The need to capture the preferred characteristics and personal qualities that those invited to join the pathway should display was one of the most important themes expressed by participants. All interviewees self-identified the need for a rigorous selection process to ensure involvement of franchisees that were motivated to succeed. The following comment by an Indigenous Australian captures the sentiment in all responses. I think that just comes down to selecting the right person. If you can find the right person . . . a person that’s got a long-term view and can see the benefits of creating wealth.

Though a level of consistency was observed in carefully defining ‘the right person’, cultural imperatives and concerns complicated consideration of what a ‘right person’ actually was. The following statements are indicative of a majority of responses. If you promote publicly . . . and attract potentially a different type of candidate—not someone who is in denial about their Indigenous heritage but someone who would not

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and, One of the biggest differences I find between Indigenous and non-Indigenous is the Indigenous peoples’ families. Often they’re loath to leave their own community. And the other side of it, too, is if there’s a problem or a drama in their family, work comes a distant, distant second . . . (Indigenous Australian)

Overall, and on account of the challenging nature of the employment-to-franchise ownership pathway, all participants voiced an imperative for Indigenous Australians to possess what are viewed as the core franchisee qualities of commitment, desire, enthusiasm and energy. These types of qualities were expected to determine part of a template for franchise recruitment and are held to be independent of ethnicity. In terms of the characteristics of the franchise systems targeted to employ the Indigenous Australians as employees, generally, participants were convinced of the need to identify ‘the right’ franchise for the employment-to-franchise ownership pathway. For example, a franchise organisation representative suggested that choosing the wrong franchise system would represent a ‘great danger’ and a franchisor commented that an unsupportive franchisor would result in failure. Similarly, the careful qualification of the geographical representation, performance, motivation and cultural sensitivity of franchise systems was also identified as central to franchise system selection by an Indigenous Australian: So having a franchise that has an established customer base certainly would help people make that transition . . . I think for me the thing has got to be a bit like a joint venture—on behalf of the Indigenous people as well—it’s not just selling a franchise.

In addition, one franchise organisation representative suggested: I think it faces great challenges in many ways. A lot of people who enter into franchises, as franchisees, are not technically competent to do that, and the failure rate can be very high. If you have a disadvantaged group such as Indigenous people who need both finance support and training support, you would have to choose the franchisors very carefully.

One franchise advisor advocated for considering location in the investment decision: But here in Australia I think the biggest challenge is going to be the geographies in which a business is located.

Overall, participants voiced greater concern in choosing a franchise system than choosing Indigenous Australians for the pathway. They advocated for franchise systems with well-developed brands and proven training, financial and marketing systems. In addition, these systems were considered to be less reliant on initial capital contributions by incoming franchisees and have a geographical reach that would facilitate the support of Indigenous Australians in not only urban but regional and subregional centres. Importantly, all participants self-identified the need for franchises to show a degree of cultural sensitivity in recruitment and operational stages.

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Financial Modelling and Assistance Supporting the Pathway

We use the term financial modelling as a vast majority of participants voiced financial concerns that extended beyond the restricted view of whether or not an Indigenous Australian could access the capital to purchase or part-purchase a franchise. Such terminology is in recognition that most interviewees agreed that non-standard and unfamiliar means of financing the franchise purchase should be given consideration. A franchise adviser initiated the idea of financial models: Where you’re converting employees to franchisees a significant impediment regardless of Indigenous orientation is capital . . . I think that where you’re talking about Indigenous Australians they’re not bringing a lot of capital to the table themselves. Oh it’s critical—yeah no hurt money means no commitment to it—they’ll walk away.

Two franchisors suggested different financial models that could be utilised on the employment-to-franchise ownership pathway. While one advocated for the use of a graduated buy-in process in which successful staff members would be permitted to buy a percentage of a store in partnership with the franchisor, another franchisor detailed particulars of his current transitional programme: The management programme to a franchisee is a two to three-year programme depending on how they want to take it on. In that two years they must complete certain courses, being trained in business management, and as well, too, they must hit certain goals through that two to three-year period, being the two-year is they get at the end of that $45,000 taken off the price of a franchise, or if they do the three-year they get the full franchise fee and another $10,000 on top of that, too, taken off, and that becomes a credit onto their account. But they must hit certain KPIs during that time otherwise time is added on to the programme.

However, one franchise advisor showed some scepticism regarding the value of progressive ownership and internal financing models. He also promoted the idea of ‘skin in the game’, an alternative vernacular to ‘hurt money’: Generally speaking, where we’ve seen employee-sponsored proprietorship we’ve found little success in that . . . they didn’t has to have enough skin in the game and it’s ended up causing problems.

The thematic results reveal that ‘Skin in the game’, ‘Hurt money’ and ‘Leave it and lose it’ are well-known expressions within franchising. Each participant group voiced that each employee that becomes a franchisee must have a significant financial commitment to the pathway, for it to be a successful (and long-term) business partnership.

3.3

Training and Education Over the Duration of the Pathway

Training and education are fundamental advantages associated with franchising as opposed to independent small businesses. In supporting Indigenous Australians who

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join the pathway, intense and consistently provided training, education and support for the duration of the pathway are considered to be central by all groups. For example, one franchisor commented: I think franchising, the way it’s set up is take unskilled people and train them in how to operate their brand and their systems and their procedures, and people follow that and that’s a proven concept and . . . you know, if people follow it and they’re in a reasonable location then they should be able to make money, if it’s a proven concept.

However, many participants identified financial training and mentoring as the most important aspects of such training and education. For instance: I reckon the financial side is where I think a lot of people struggle . . . budgeting and planning properly, and that sort of stuff. IBA runs their individual’s workshop and that covers a lot of that off. That’d be possibly one area I’d say the main spend needs to be with that financial acumen side of it. (Indigenous Australian)

and a franchisor added: And so I would think . . . that mentoring programme might not only be one of their peers within the system, a franchise owner, and typically the best mentors have got the time to do so and the inclination to. And they might be a multi-store operator who’s got some businesses run under management who could spend a bit of time mentoring on a regular basis.

Two Indigenous Australians particularly reinforced the need for qualified mentors who had both ‘awareness of the issues Indigenous Australians face’, and ‘[business] experience that they were willing to share.’ Thus, people choosing a franchised business primarily do so to access support, training and education. Each participant group overwhelmingly recommended a focus on improving financial literacy and the appointment of a mentor, preferably for the duration of the programme.

3.4

Process of Prospecting and Recruitment of Indigenous Australians as Employees

In order to select ‘the right’ Indigenous Australians to join the pathway, most participants emphasised the importance of careful planning in designing approaches to prospecting and recruiting appropriate individuals into the programme. A franchise advisor suggested how this might be achieved: I think Indigenous Business Australia developed quite a sophisticated recruitment screening and selection process. I would use advertising and marketing within the Indigenous community, and PR more importantly, of both press and TV, and then the other themes of the community, and these are simple as sort of notice boards in the right appropriate places, and indeed even a mailing campaign to alert people that there is an opportunity and you’re looking for expressions of interest.’

Participants offered several ideas to optimise participation of Indigenous Australians in the pathway process. While there was little agreement as to the inclusion of Indigenous groups, most participants agreed for the need to cast a

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‘wide’ prospecting net to increase visibility amongst Indigenous Australians. One participant suggested that the recruitment process should be a long-term and ‘inhouse’ recruitment drive, while another suggested that this function be delegated to qualified recruitment agencies currently working with Indigenous Australians.

3.5

Success of the Pathway from the Participants’ Perspectives

Participants were specifically asked to describe the likelihood of success for the pathway and what success for the pathway would look like from their perspective. The following comment is indicative of a majority of responses. That the business is operating in one or five years. Success is survival. (Franchise organisation representative)

In addition, the following comment from an Indigenous Australian was representative of all comments in this group. Success would be achieving your outcomes financially and the opportunity to create other employment opportunities for Indigenous Australians. Because I think you then become a role model for other people thinking if they can do it maybe I can do it.

Generally, all Indigenous Australian participants considered success in financial terms together with other relevant positive outcomes provided to Indigenous families. However, non-Indigenous participants generally emphasised financial outcomes. Importantly, there was strong consensus that the pathway would contribute to wider social and cultural objectives for Indigenous communities.

4 Discussion It is well accepted that the stimulation of Indigenous small business ‘. . . has the potential to repair much of the damage through the creation of an enterprising culture . . . [that] empowers Indigenous people as economic agents in a globally competitive modern world’ (Hindle and Lansdowne 2005: 8). However, it is of particular concern that a meagre 7% of franchisors have recruited Indigenous Australians, even though more than half have shown a willingness to do so (Frazer et al. 2014). This highlights the inadequacies of current franchising arrangements to provide selfemployment opportunities for Indigenous peoples and reveals a distinct ‘disconnect’ between intentions and outcomes. Importantly, our proposed pathway is consistent with recommendations (from scholars and industry representatives) to initiate programmes that support the shift from publicly provided incentive programmes to the private sector (Agrawal 1995; Hindle and Moroz 2010). In fact, involvement from the private sector is deemed an important ‘second wave’ for the continuing

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economic development of Indigenous enterprises internationally (Peredo et al. 2004; Stevens 2001). More generally, a number of studies provide clear evidence in support of the proposed employment-to-franchise ownership pathway both theoretically and as an affirmative action tool that involves the private sector in providing direct employment opportunities and small business ownership for Indigenous Australians. Overall, our results confirm that the GROWTH-Pathway approach of employment-to-franchise ownership is consistent with government policy, is theoretically underpinned as an affirmative action mechanism that results in the direct employment of Indigenous Australians and is supported by all participant interviewees, in that no group presented a categorically dissenting voice. However, a majority of respondents indicated that the success or failure of the pathway will be dependent on gaining the firm commitment of Indigenous Australians and franchise systems for the envisaged duration of the pathway, with most suggesting that the pathway should be 1–3 years in duration (for each Indigenous participant). Moreover, most interviewees self-identified that the provision of comprehensive and culturally sensitive on-the-job and off-the-job training, including specific mentors (Purcell and Scheyvens 2015) being assigned to each Indigenous Australian was a critical element that should be available along all stages of the pathway. Of note, all interviewees agreed that franchisors should provide a suitable financial structure such as stepped pathway, discounted franchise fees, loans and assistance when dealing with financial intermediaries to ensure Indigenous participants ‘buy in’ and are committed to the business model. Such strategies were seen as beneficial in promoting a group of keen and committed Indigenous participants who would be more likely to transition to self-employment, be successful as franchisees and ultimately provide future employment opportunities for Indigenous Australians within their franchise unit. It is also apparent that such approaches have longstanding support in the literature (e.g. Gray and Hunter 2005). Thus, our findings reveal that current training practices may need to be augmented to accommodate the unique needs of Indigenous Australians. In particular, these relate to financial literacy and business management skills. This directly supports the notion that to be successful, Indigenous entrepreneurs need to be well-educated and business savvy (Foley 2003; Hunter 2015). While some of our research participants suggested that these programmes could be developed ‘in-house’, other interviewees suggested that external educational providers could be accredited to assist in this process. As mentioned above, our interviews revealed that the likely success of this pathway would be reliant on the initiation of a dialogue between stakeholders who possessed an integral understanding of Indigenous issues and culture. In fact, Van Gelder et al. (2007), commenting on the Fijian context, argue government and banks ought to assume a bigger role in the selection and training of future entrepreneurs. This approach can assist Indigenous employees to make informed decisions and concurrently build their self-esteem and personal development at each stage of the pathway. Moreover, our findings suggest that franchisors also need to engage with Indigenous bodies and/or representatives to better understand and accommodate personal and cultural imperatives during the employment and transitional phases.

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Additionally, interviewees favoured the establishment of a working party consisting of both internal and external stakeholders to monitor the progression of each individual Indigenous employee on the pathway. The role of communication in the pathway was seen as central to the ‘relational health’ of franchising partnerships (Chiou et al. 2004) argue that a variation on traditional communication models appears necessary when managing the recruitment and employment of Indigenous Australians. While unilateral and bilateral communication has been advanced as a critical element in establishing cooperative intent, reducing conflict and generating satisfaction in franchising relationships (Gassenheimer et al. 1996; Koza and Dant 2007), the scope and frequency of communication appears unique in the context of Indigenous people. In particular, many interviewees commented on the importance of providing daily vocationally centred communication between the franchisee and Indigenous employee. Another critical factor pertained to the role of monitoring in ensuring adherence to set standards so as to support brand value and favourable service delivery outcomes (Brickley and Dark 1987; Weaven et al. 2014). Although there is some suggestion that excessive monitoring may diminish franchise unit performance (Dahlstrom and Nygaard 1999; Weaven et al. 2014), most interviewees appreciated the positive benefits of closely monitoring Indigenous employees and franchisees. They maintained that monitoring allows progress relating to key personal attributes, skills and professional development that can be measured against a series of individualised waypoints and key performance indicators along the pathway. Thus, monitoring techniques and systems that extend beyond current evaluation practices should be considered.

5 Recommendations This following recommendation synthesises the findings and accommodates central concerns and recommended courses of action in designing and implementing a successful GROWTH-Pathway. The 6-stage model comprises a symbiotic process of goalsetting, resourcing, ownership, warranting, tiding and handover that transitions an Indigenous Australian from being employee to a retiring business owner. It relies on the corporation and goodwill of various stakeholders such franchisors, financiers, educators and the Indigenous community. The GROWTH acronym captures the essence of the pathway in that it allows all stakeholders to grow. For the Indigenous Australian, growth will be manifested in terms of career advancement and wealth creation, for the franchisor, growth is likely to be measured in terms of increasing the pool of credentialed franchisees and community brand value, and for the community, growth will be reflected in community attitudes and advancements in Closing the Gap (Fig. 1).

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Resourcing •Profiling •Education •Qualification

•Cadetship •Networking •Job mentoring

•Rewards •Acquisition •Business mentoring

Goalsetting

Ownership

Warranting •Financial planning •Budgeting •Succession planning

Handover •Peer mentoring •Community sponsor •Exit strategy

•Divestment •Mentoring •Sponsor

Tiding

Fig. 1 GROWTH-Pathway model of Indigenous self-employment. Source: authors’ own figure

5.1

Stage 1: Goalsetting

The goalsetting stage comprises three main strategies that allow a recruit to be profiled, educated and qualified to ultimately own a franchise. The profiling process is aimed at assessing an Indigenous Australian for having the prerequisite characteristics for franchising in context of the structural and functional differences highlighted above. This might consist of a psychometric test coupled with other rudimentary literacy assessments to understand the candidates’ motivations, ambitions and skill level. Education and counselling is then tailored and delivered over a specific time frame to fill any gaps identified in the assessment. At the end of the qualifying period and having responded positively to the process, the candidate progresses to the next stage.

5.2

Stage 2: Resourcing

The candidate progresses to the resourcing stage as a cadet with a franchisor or franchisee and as beneficiary of a paid job and vocational training. During that process the cadet is required to learn specific job functions with the franchise system. This might involve rotating amongst various franchise businesses within the system or head office of the franchisor with a mentor assigned to the cadet. This process is intended to expose the cadet to developing interpersonal skills, build self-confidence and grow a network of individuals with common personal and career interests.

5.3

Stage 3: Ownership

During the ownership stage, the cadet enters a pre-franchise programme where they are provided with performance-based rewards. Structured key performance indicators (KPI) that the franchisor deems indispensable in operating a successful franchise will drive these rewards. The rewards for meeting certain KPIs are accumulated as points, which can subsequently be converted into currency that can be traded

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towards purchasing a franchise after a qualifying period. This represents both ‘skin in the game’ and ‘equity’ for the purposes of financing. When the cadet attains a set number of points, a business acquisition plan (including finances, structuring and budgeting) is developed to prepare for an actual purchase of a targeted existing of greenfields business. The cadet exits the job mentoring phase and is mentored by a well-credentialed franchisee and becomes a franchise owner.

5.4

Stage 4: Warranting

The warranting stage requires the franchise owner to engage and work closely with accredited advisers to assist in long-term financial planning, budgeting and succession planning. This process will ensure that the franchise owner remains grounded and does not succumb to short-term excesses caused by a potential jump in earnings. The franchise owner can warrant a preferred succession arrangement for existing employees or family members, which allows a smooth transfer of intellectual and financial capital.

5.5

Stage 5: Tiding

During this phase, the franchise owner experiences the ebbs and flows of being a business owner/operator. The mentoring role now shifts from being mentored to mentoring other cadets and becomes a sponsor of other young Indigenous Australians. The franchise owner may also develop and implement an exit strategy.

5.6

Stage 6: Handover

The final stage triggers a divestment of the franchise asset and the franchise owner may wish to become a community mentor and sponsor of Indigenous Australians who wish to enter self-employment of any type. The knowledge accumulated during the goalsetting through to the tiding stages can now be imparted to and benefit the Indigenous community as a whole.

6 Conclusions and Recommendations for Further Research This research introduces and evaluates an employment-to-small business ownership pathway that leverages the systemic strengths of the franchise business model to better accommodate the unique needs of Indigenous Australians. Such an approach

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accommodates prior recommendations to provide Indigenous Australians with business-related qualifications and skills, provide assistance in maximising access to social and financial capital and build culturally supportive working environments (Hunter 2015). Moreover, such sentiments have been consistently detailed in other Indigenous country contexts (e.g. Anderson et al. 2006; Foley and O’Connor 2013; Page et al. 1999; Yusuf 1995). The major lessons learnt from this study are that successful implementation of such a pathway is reliant upon the selection of suitable Indigenous candidates who have access to franchise systems that can provide tailored training, support and mentoring, financial and business education, financial assistance and customised communication strategies. Although the practical implementation of the GROWTH-Pathway approach requires commitment by a number of key stakeholders, the promised benefits to Indigenous employment and small business ownership are manifold. Given that more than half of the population of Australian-based franchisors have indicated a willingness to recruit Indigenous Australians, a major hurdle to the successful implementation of this strategy appears to have been overcome. Moreover, the realisation of this proposed community and sector wide initiative may, in part, assist in delivering on Hunt (1972: 34) early prediction that ‘Franchising appears to offer potential business opportunities to minority group members because of the substantial benefits of franchise systems’. Moreover, with increased visibility of this employment approach, more franchise systems may be encouraged to develop their own indigenous initiatives (e.g. reconciliation action plans) (Hunter 2015) which will undoubtedly encourage indigenous employment. Furthermore, given the analogous context of Indigenous peoples and the popularity of franchising in geographies such as Canada, New Zealand and Mexico, the GROWTH-Pathway approach could perform an important role in growing a whole new generation of business-savvy business owners. Acknowledgement We are grateful for financial support from the Centre for Tourism, Sport and Services Research at Griffith University for this project. We are indebted to the work of Senior Research Assistant, Dr. Ken Billot, in conducting the research and for advice from David Brudenall, former Senior Manager Strategic Engagement & Research, Indigenous Business Australia, in framing the research project and providing introductions to research participants.

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Shadow Economy Index for Moldova and Romania Talis J. Putnins, Arnis Sauka, and Adriana Ana Maria Davidescu

Abstract This report presents estimates of the size of the shadow economy in Moldova and Romania during the years 2015–2016. The estimates are based on surveys of entrepreneurs in both countries, following the method of Putniņš and Sauka (Journal of Comparative Economics 43:471–490, 2015). The components of the shadow economy captured by this approach include misreported business income, unregistered or hidden employees, and ‘envelope’ wages. Our findings suggest that both Moldova and Romania exhibit high levels of bribery, which is influenced by the number of unregistered companies. The results of this chapter highlight the importance of focusing on different forms of entrepreneurship particularly in transition economies.

1 Introduction The aim of this chapter is to present estimates of the size of the shadow economies in Romania and Moldova and to explore the main factors that influence participation in the shadow economy. We draw on a methodology developed by Putniņš and Sauka (2015), which allows us to compare the size of the shadow economy in Moldova and A prior version of this chapter or some of its contents have been presented/published in Centre for Sustainable Business at SSE Riga discussion paper series. T. J. Putnins Stockholm School of Economics in Riga (Latvia), Riga, Latvia e-mail: [email protected] A. Sauka Centre for Sustainable Business, Stockholm School of Economics in Riga, Riga, Latvia e-mail: [email protected] A. A. M. Davidescu (*) Department of Statistics and Econometrics, Bucharest University of Economic Studies, Bucharest, Romania Department of Labour Market Policies, National Scientific Research Institute for Labour and Social Protection, Bucharest, Romania © Springer Nature Switzerland AG 2019 V. Ratten et al. (eds.), Subsistence Entrepreneurship, Contributions to Management Science, https://doi.org/10.1007/978-3-030-11542-5_7

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Romania with shadow economies in the Baltic countries (Estonia, Latvia, and Lithuania) and Poland. We also compare the results with estimates from other methodologies to get a sense of how the estimated size of the shadow economies in Moldova and Romania vary across methods. We use the term ‘shadow economy’ to refer to all legal production of goods and services produced by registered firms that is deliberately concealed from public authorities.1 The Shadow Economy Index has already been estimated in the Baltic countries (since 2010), and with this report, it is extended to Moldova, Romania, and Poland to provide policymakers with information for making justified policy decisions as well as to foster a deeper understanding of entrepreneurship processes and the structure of the economy in Moldova and Romania. This report analyses the dynamics of the shadow economy in Moldova and Romania during the period of 2015–2016. It also provides evidence on the main factors that influence entrepreneurs’ involvement in the shadow economy and offers some policy recommendations. We also measure the proportion of unregistered businesses in Moldova and Romania and, where possible, provide comparative figures from other countries. The Shadow Economy Index is based on representative surveys of entrepreneurs in Moldova and Romania. The approach, introduced by Putniņš and Sauka (2015), is based on the notion that those most likely to know how much production/income goes unreported are the entrepreneurs that themselves engage in the misreporting and shadow production. The Index combines estimates of misreported business income, unregistered or hidden employees, and unreported ‘envelope’ wages to obtain estimates of the size of the shadow economies as a proportion of GDP. The method used in this report requires fewer assumptions than most existing methods for estimating the size of the shadow economy, in particular compared to methods based on macro indicators. Furthermore, the Shadow Economy Index can be used through time or across sectors and countries and thus is a useful tool for evaluating the effectiveness of policy designed to minimise the shadow economy. Survey-based approaches face the risk of underestimating the total size of the shadow economy due to non-response and untruthful responses given the sensitive nature of the topic. Our method minimises this risk by employing a number of survey and data collection techniques shown in previous studies to be effective in eliciting more truthful responses.2 These include confidentiality with respect to the identities of respondents, framing the survey as a study of satisfaction with government policy, gradually introducing the most sensitive questions after less sensitive questions, phrasing misreporting questions indirectly, excluding inconsistent responses, and, in the analysis, controlling for factors that correlate with potential untruthful response 1

This definition corresponds to what the Organisation for Economic Co-operation and Development (OECD), in their comprehensive 2002 handbook ‘Measuring the Non-observed Economy’, as well as the System of National Accounts (SNA 1993) refer to as ‘underground production’. It is also consistent with definitions employed by other researchers (e.g. the World Bank study of 162 countries by Schneider et al. (2010)). We elaborate further on the components of the unobserved economy in Sect. 2. 2 For example, Gerxhani (2007), Kazemier and van Eck (1992), and Hanousek and Palda (2004).

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such as tolerance towards misreporting (see Putniņš and Sauka (2015) for more detailed discussion). The next section describes how the Index is constructed, starting with the survey and then the calculations. Section 3 of this report presents estimates of the Index and analyses the various forms of shadow activity. Section 4 analyses the determinants of entrepreneurs’ involvement in the shadow sector and their attitudes towards shadow activities. In Sect. 5 we compare the estimates with results from other methods. The last section of the report summarises the conclusions that we can draw from the results and identifies some policy implications.

2 Methods Used in Constructing the Index 2.1

The Survey of Entrepreneurs

The size of the shadow economy in Moldova and Romania was computed drawing on surveys of company owners/managers. The surveys in Moldova and Romania were conducted during February–March 2017 and contain questions about shadow activity during the previous 2 years (2016 and 2015). We use random stratified sampling to construct samples that are representative of the population of firms in each country. In Moldova, based on the computer-assisted telephone interviewing (CATI) method and the random sampling selection procedure, a total number of 503 phone interviews were conducted. In the case of Romania, we used random stratified sampling to construct sample that is representative at the national level for companies with more than five employees. Four hundred twenty respondents were interviewed using the CATI method. The questionnaire form (see Appendix 1) contains four main sections: (1) external influences and satisfaction, (2) shadow activity, (3) company and owner characteristics, and (4) entrepreneurs’ attitudes. To increase the response rate and truthfulness of responses, the questionnaire begins with non-sensitive questions about satisfaction with the government and tax policy before moving on to more sensitive questions about shadow activity and deliberate misreporting. This ‘gradual’ approach is recommended by methodological studies of survey design in the context of tax evasion and the shadow economy (e.g. Gerxhani 2007; Kazemier and van Eck 1992). Further, the survey is framed as a study of satisfaction with government policy, rather than a study of tax evasion and misreporting (similar to Hanousek and Palda 2004). We also guarantee respondents 100% confidentiality with respect to their identities. In the first survey block, ‘external influences’, respondents are asked to express their satisfaction with the State Revenue Service, tax policy, business legislation, and government support for entrepreneurs in the respective country. The questions use a five-point Likert scale from ‘1’ (‘very unsatisfied’) to ‘5’ (‘very satisfied’). The first section of the questionnaire also includes two questions related to entrepreneurs’ social norms: entrepreneurs’ tolerance towards tax evasion and towards

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bribery. The measures of tolerance serve a second important role as control variables for possible understating of the extent of shadow activity due to the sensitivity of the topic. The second section of the questionnaire, ‘informal business’, is constructed based on the concepts of productive, unproductive, and destructive entrepreneurship by Baumol (1990), assessment of ‘deviance’ or ‘departure from norms’ within organisations (e.g. Warren 2003), and empirical studies of tax evasion in various settings (e.g. Fairlie 2002; Aidis and Van Praag 2007). We assess the amount of shadow activity by asking entrepreneurs to estimate the degree of underreporting of business income (net profits), underreporting of the number of employees, underreporting of salaries paid to employees and the percentage of revenues that firms pay in bribes. We employ the ‘indirect’ approach for questions about informal business, asking entrepreneurs about ‘firms in their industry’ rather than ‘their firm’.3 This approach is discussed by Gerxhani (2007) as a method of obtaining more truthful answers and is used by Hanousek and Palda (2004), for example. A study conducted by Sauka (2008) shows that even if asked indirectly, entrepreneurs’ answers can be attributed to the particular respondent or company that the respondent represents.4 Furthermore, experience from Sauka (2008) suggests that phone interviews are an appropriate tool to elicit information about tax evasion.5 The second section of the questionnaire also elicits entrepreneurs’ perceptions of the probability of being caught for various forms of shadow activity and the severity of penalties if caught deliberately misreporting. In addition to measuring the shadow economy involvement of registered businesses, we include a question that measures the amount of unregistered business. We ask owners/managers of registered businesses the following question (see Q12 in Appendix 1): ‘In some industries, in addition to registered companies such as

3

Even when asked indirectly, some entrepreneurs choose not to answer sensitive questions about shadow activity. One way to avoid providing truthful answers to such questions is by simply answering ‘0’ to all of them, suggesting that no shadow activity of any kind has taken place during the past 2 years. We view it as much more likely that these responses reflect avoidance of sensitive questions as truthful opinions and therefore treat these cases as non-responses, in order to minimise the downward bias in estimates of shadow activity. 4 Sauka (2008) used the following approach: in the follow-up survey (1 year after the initial survey), respondents are ‘reminded’ that in the initial survey they stated that, for example, the degree of involvement in underreporting business income by ‘their firm’ (not by ‘firms in their industry’ as formulated in the initial survey) was, for example, 23%. Each respondent is then asked whether the degree of underreporting in their companies is the same this year and if not, to what extent it has changed. The conclusion from using this method is that respondents tend to state the amount of underreporting in ‘their firm’ when asked about ‘firms in their industry’. 5 Sauka (2008) uses both face-to-face and phone interviews and concludes that willingness to talk about sensitive issues like tax evasion in Latvia does not differ significantly between the two methods.

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yours, unregistered enterprises also operate but do not report any of their activity to authorities. In your opinion, what percentage of your industry’s total production of goods/services is carried out by unregistered enterprises . . . ?’ Even though we ask this question of owners/managers of registered businesses, we believe that being experts in their industry, they are likely to know approximately how many unregistered businesses operate in their industry. Registered companies compete with unregistered ones and therefore should be aware of such companies. We do not include the production of unregistered businesses in the Shadow Economy Index as their activity does not fit within our definition of the shadow economy. Yet, by including Q12, we are able to provide a more in-depth picture of the unobserved economies in the two countries. As illustrated in Appendix 2, the key components of the unobserved economy are: 1. Unreported income of registered producers. This is what we refer to as the ‘shadow economy’ and measure in the Index. 2. Unreported income of unregistered producers. This component is measured but is not included in the Index. 3. Income from production of illegal goods/services. We do not measure this component of the unobserved economy since it requires different methods. The third section of the questionnaire asks entrepreneurs about the performance of their companies (percentage change in net sales profit, sales turnover, and employment during the previous year), company age, industry, and region. The fourth section of the questionnaire elicits entrepreneurs’ opinions and attitudes towards tax evasion. This year we have included additional questions relating to entrepreneurs’ tax morale. We draw on Torgler and Schneider (2009), who define tax morale as a moral obligation to pay taxes and ‘a belief in contributing to society by paying taxes’ (Torgler and Schneider 2009: 230). Similar to the approach we take for other questions relating to tax evasion, we phrase the tax morale question indirectly, asking company managers to what extent they would agree or disagree with the statement ‘Companies in your industry would think it is always justified to cheat on tax if they have the chance’ using a scale from 1 (‘strongly disagree’) to 5 (‘strongly agree’). We also include a question on community belonging (Q22c) and a question on perceived contribution to the growth of the economy and society in general (Q22a), both of which are factors associated with tax morale. Finally, we also include questions from the Business Environment and Enterprise Performance Survey (BEEPS) run by the World Bank/European Bank for Reconstruction and Development (EBRD) to measure environmental influences such as institutions. We ask respondents to what extent factors such as tax administration, tax rates, trade and customs regulation, business licencing and permits, functioning of the judiciary/courts, uncertainty about regulatory policies, corruption, anticompetitive practices of other competitors, and political instability affect the current operations of a business (Q23).

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Calculation of the Index

The Index measures the size of the shadow economy as a percentage of GDP.6 There are three common methods of measuring GDP: the output, expenditure, and income approaches. Our Index is based on the income approach, which calculates GDP as the sum of gross remuneration of employees (gross personal income) and gross operating income of firms (gross corporate income). Computation of the Index proceeds in three steps: (1) estimate the degree of underreporting of employee remuneration and underreporting of firms’ operating income using the survey responses; (2) estimate each firm’s shadow production as a weighted average of its underreported employee remuneration and underreported operating income, with the weights reflecting the proportions of employee remuneration and firms’ operating income in the composition of GDP; and (3) calculate a production-weighted average of shadow production across firms. , is In the first step, underreporting of firm i’s operating income, UROperatingIncome i estimated directly from the corresponding survey question (Q7). Underreporting of employee remuneration, however, consists of two components: (1) underreporting of salaries or ‘envelope wages’ (Q9) and (2) unreported employees (Q8). Combining the two components, firm i’s total unreported proportion of employee remuneration is7: ) ( )( Employees Salaries UREmployeeRenuneration ¼ 1 ― 1 ― UR 1 ― UR i i i In the second step, for each firm we construct a weighted average of underreported personal and underreported corporate income, producing an estimate of the unreported (shadow) proportion of the firm’s production (income): þ ð1 ― αc ÞUROperatingIncome ShadowProportioni ¼ αc UREmployeeRenuneration i i where αc is the ratio of employees’ remuneration (Eurostat item D.1) to the sum of employees’ remuneration and gross operating income of firms (Eurostat items B.2 g and B.3 g). Putniņš and Sauka (2015) calculate αc for each country, c, in each year using data from Eurostat. Due to the lack of data for Moldova, we have used the figures for Hungary on employees’ remuneration and gross operating income (49.12% in 2015 and 50.59% in 2016). In Romania, the ratio of employees’ remuneration to the sum of employees’ remuneration and gross operating income was 36.62% in 2015 and 38.08% in 2016. Taking a weighted average of the

6

Two caveats are worth noting: (1) because we do not measure shadow activity in the state (public) sector, our estimates refer to private sector shadow activity as a percentage of private sector domestic output; and (2) we do not measure the ‘black economy’, i.e. illegal goods and services. 7 In deriving the formula, we make the simplifying assumption that wages of unreported employees are on average equal to those of reported employees.

Shadow Economy Index for Moldova and Romania Table 1 Distribution of the companies in the Moldavian sample by number of employees

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Employees 1 ¼ 1–5 2 ¼ 6–10 3 ¼ 11–20 4 ¼ 21–40 5 ¼ 41–60 6 ¼ 61–100 7 ¼ 101–150 8 ¼ 151–200 9 ¼ 201–250 10 ¼ more than 250 Missing Total

Number 192 93 69 66 28 14 9 9 3 7 13 503

% 38.2 18.5 13.7 13.1 5.6 2.8 1.8 1.8 0.6 1.4 2.6 100.0

Source: Authors’ own table

underreporting measures rather than a simple average is important to allow the Shadow Economy Index to be interpreted as a proportion of GDP.8 In the third step of the Putniņš and Sauka (2015) methodology one takes the weighted average of underreported production, ShadowProportioni, across firms in country c to arrive at the Shadow Economy Index for that country: ¼ INDEXShadowEconomy c

Nc X

wi ShadowProportioni

i¼1

The weights, wi, are the relative contribution of each firm to the country’s GDP, which we approximate through the relative amount of wages paid by the firm. Similarly to the second step, the weighting in this final average is important to allow the Shadow Economy Index to reflect the proportion of GDP.9 Yet since such information is not available for Moldova and Romania, we instead use a simple arithmetic mean of the ShadowProportioni for both countries. Table 1 shows the distribution of the Moldavian sample by number of employees, showing that more than 38% of the companies have less than 5 employees, while only 13% have more than 40 employees. Only 1.4% of the firms have more than 250 employees. 8

For example, suppose in a given economy wages amount to 80 and corporate income amounts to 20, resulting in true GDP of 100. Suppose that wages are underreported by 50% and corporate income is underreported by 10%, resulting in an official reported GDP of 40 + 18 ¼ 58. In this example the shadow economy is 42% of true GDP, i.e. (100–58)/100. A weighted average of the two underreporting proportions accurately estimates the size of the shadow economy: (0.8) (50%) + (1–0.8)(10%) ¼ 42%. However, neither of the two underreporting proportions themselves correctly represent the size of the shadow economy (50% and 10%) nor does an equal weighted average: (0.5)(50%) + (1–0.5)(10%) ¼ 30%. 9 For example, consider the previous footnote, replacing the two sources of income with two firms: a large one that produces income of 80 and a smaller one that produces income of 20.

96 Table 2 Distribution of the companies in the Romanian sample by number of employees

T. J. Putnins et al. Employees 1 ¼ 1–5 2 ¼ 6–10 3 ¼ 11–20 4 ¼ 21–40 5 ¼ 41–60 6 ¼ 61–100 7 ¼ 101–150 8 ¼ 151–200 9 ¼ 201–250 10 ¼ more than 250 Total

Number 6 53 98 91 37 29 20 11 22 53 420

% 1.4 12.6 23.3 21.7 8.8 6.9 4.8 2.6 5.2 12.6 100.0

Source: Authors’ own table

Table 2 presents the distribution of the Romanian sample by number of employees, showing that more than 20% of the sample data are firms with 11–20 employees, another 20% are firms with 21–40 employees, and 12.6% of the companies are considered to be large companies with more than 250 employees.

3 Shadow Economy Index for Moldova and Romania 2015–2016 Table 3 presents the aggregate size of the shadow economies in Moldova and Romania as well as in the Baltic States (Estonia, Latvia, and Lithuania) and Poland for 2015 and 2016. The table shows that the shadow economy in Moldova was 29.8% of GDP in 2015 and 29.7% in 2016. The shadow economy in Romania, however, is considerably larger: 35.6% in 2015 and 33.3% in 2016 (an annual decrease of ―2.3%). As shownin Table 3, the shadow economy in the Baltic countries accounts for 15–20% of GDP, whereas in Poland it was around 25% in 2016. Figure 1 illustrates the relative size of the components of the shadow economy in Moldova and Romania. The largest components of the shadow economy in Moldova in 2016 were unreported business income (38.5%) and envelope wages (31.9%), followed by unreported or unregistered employees (29.6%). In Romania the main component of the shadow economy was also unreported business income, which accounted for 56.8% of the total in 2016, whereas the proportion of envelope wages and underreported employees was comparably lower: 20.7% and 22.5%, respectively. In 2015, unreported business income in Moldova was 39.7% and envelope wages were 31.8%, followed by unreported or unregistered employees (28.6%). In Romania, the main component of the shadow economy was also unreported business income, which accounted for 57.6% of the total shadow economy in 2015, whereas the proportion of envelope wages and underreported employees was again comparably lower: 20.1% and 22.3%, respectively (Fig. 2).

Romania

―2.3% (―3.4%, ―1.7%)

33.3% (30.4%, 36.3%) 35.6% (32.2%, 39.0%)

Moldova

―0.1% (―0.6%, 0.3%)

29.7% (26.9%, 32.5%) 29.8% (27.0%, 32.6%)

Latvia

20.3% (18.0%, 22.6%) 21.3% (19.0%, 23.7%)

―1.0% (―3.4%, 1.3%)

Estonia

15.4% (13.1%, 17.8%) 14.9% (12.4%, 17.4%)

+0.5% (―1.9%, 2.9%)

Lithuania

16.5% (14.8%, 18.3%) 15.0% (13.8%, 16.3%)

+1.5% (―0.1%, 3.0%)

Poland

25.0% (n/a) 24.5% (n/a)

+0.5% (n/a)

This table shows point estimates and 95% confidence intervals (in parentheses) for the size of the shadow economies as a proportion of GDP using the method of Putniņš and Sauka (2015). The first row shows the change in the relative size of the shadow economy from 2015 to 2016 Sources: For Moldova and Romania: Davidescu (2018); for Estonia, Latvia and Lithuania: Putniņš and Sauka (2017); for Poland: Lechman and Nikulin (2018)

Change (2016–2015) 2016 2015

Table 3 Size of the shadow economies for the period of 2015–2016

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Romania

Fig. 1 Components of the shadow economies in Moldova and Romania, 2016. Source: Authors’ own figure Moldova

Romania

Fig. 2 Components of the shadow economies in Moldova and Romania, 2015. Source: Authors’ own figure

Figures 3 and 4 illustrate the degree of underreporting of business income (profits) in Moldova and Romania. Figure 3 shows the dynamics of underreporting profits from 2015 to 2016, while Fig. 4 shows the distribution of underreporting levels in 2016. Figure 3 shows that in Moldova, the proportion of profits that are intentionally concealed from authorities experienced a small increase in 2016. In contrast, Romania experienced a small decline in underreporting of business income during the same period. In Moldova, underreporting of business income in 2016 was estimated to be 24.98% (24.89% in 2015), whereas in Romania it was estimated to be 31.54% (33.41% in 2015). Approximately 29% of respondents from Moldova stated that underreporting ‘in the industry’ in 2016 was 0%, i.e. that companies reported 100% of their actual profits (see Fig. 4). In Romania only 13.8% of respondents stated that 100% of actual profits were reported to authorities. Approximately 16% of respondents in Moldova and Romania, however, stated that 11%–30% or 31–50% of actual profits were concealed from authorities. Furthermore, as many as 10.5% of respondents from

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Fig. 3 Underreporting of business income (percentage of actual profits) in Moldova and Romania, 2015–2016. Source: Authors’ own figure

Fig. 4 Underreporting of income (percentage of actual profits) in Moldova and Romania, 2016. The vertical axis measures the percentage of each country’s respondents underreporting within the range given on the horizontal axis. Source: Authors’ own figure

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Romania admitted that underreporting of profits was extremely high—in the range of 75–100%. Regarding 2015, almost 29.6% of respondents in Moldova stated that they did not underreport at all, while only 13.1% of Romanians stated the same. Nearly 15.9% of Moldavians and 13.1% of Romanians stated that 31–50% of actual profits were concealed from authorities. Approximately 6.2% of Moldavian respondents and 10.5% of Romanians indicated a very high (75–100%) proportion of underreporting. Figures 5 and 6 illustrate the level of underreporting of the number of employees. Figure 5 shows that the estimated underreporting of employees in Moldova increased slightly from 18.56% in 2015 to 18.72% in 2016, while underreporting of the number of employees decreased in Romania by almost 2.0 percentage points to 20.28% of employees in 2016. According to our findings, approximately 39.6% of respondents from Moldova stated that underreporting of the number of employees in 2016 was 0%, that the employees of all companies had legal contracts (see Fig. 6). In Romania, only 23.3% of respondents stated that 100% of their employees were registered with the authorities. Approximately 12.3% of respondents in Moldova and 10.5% in Romania, however, stated that 31–50% of actual employees were underreported to authorities and only a very small proportion, 4% of both Moldavians and Romanians, indicated a very high level of employee underreporting—75–100%. Finally, in 2015, 40.2% respondents in Moldova and half of them in Romania indicated not underreporting at all, while almost 12.9% of Moldavians and 8.6% of Romanians stated that 31–50% of their employees were underreported to authorities. Figures 7 and 8 show estimated underreporting of salaries or so-called ‘envelope wages’ as a proportion of actual wages. Figure 7 shows a decline in underreporting

Fig. 5 Underreporting of the number of employees (percentage of the actual number of employees), in Moldova and Romania, 2015–2016. Source: Authors’ own figure

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Fig. 6 Underreporting of the number of employees in Moldova and Romania, 2016. The vertical axis measures the percentage of each country’s respondents underreporting within the range given on the horizontal axis. Source: Authors’ own figure

Fig. 7 Underreporting of salaries (percentage of actual salaries) in Moldova and Romania, 2015–2016. Source: Authors’ own figure

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Fig. 8 Underreporting of salaries in Moldova and Romania, 2016. The vertical axis measures the percentage of each country’s respondents underreporting within the range given on the horizontal axis. Source: Authors’ own figure

of salaries in both countries in 2016, with a decrease of 0.5% for Moldova and an even greater one for Romania (―2.6%). About 36.6% of Moldavian companies reported 100% of their actual salaries (see Fig. 8), while in Romania the proportion of companies was just over half that size (19%). Figure 8 shows that Romanian companies most often underreport 11–30% of actual salaries (27.1%), while Moldavian ones most often underreport 31–50% of their salaries (17.9%). In 2015, the difference between the two countries was even greater regarding the lack of underreporting of salaries; in Moldova 36.6% of companies reported 100% of their actual salaries, while in Romania only 16% indicated doing this. Regarding the proportion underreporting most of their salaries in 2016, there are some small decreases compared with 2015; 22.1% of Romanian entrepreneurs indicated most often underreporting 11–30% of their salaries, while 17.5% of Moldavians indicated underreporting 31–50% of their salaries. Altogether, the findings shown in Figs. 3, 4, 5, 6, 7, and 8 lead to the conclusion that the levels of envelope wages and unreported employees were relatively similar in both countries in 2016, and the main reason for the larger shadow economy in Romania was more underreporting of business income. This is an area on which policymakers should focus their attention in developing and implementing strategies to decrease the size of the shadow economy. Figure 9 indicates that the magnitude of bribery (percentage of revenue spent on ‘getting things done’) decreased slightly in both countries, by 0.25%, in 2016.

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Fig. 9 Bribery (percentage of revenue spent on payments ‘to get things done’) in Moldova and Romania, 2015–2016. Source: Authors’ own figure

Moldova registered a higher incidence of bribery. According to our data, approximately 37.2% of Moldavian companies (compared to 21% in Romania) reported no bribery at all (Fig. 9). Most entrepreneurs (28.8%) in Romania stated that they pay 1–10% of their revenues to get things done, while in Moldova this share was considerably smaller (18.9%) (Fig. 10). Figure 11 illustrates the distribution of the percentage of the contract value that firms typically offer as a bribe to secure a contract with the government. According to our data, entrepreneurs in Romania on average pay approximately 13% of the contract value as unofficial payments to secure the contract. In Moldova, however, the average level of bribery to secure the contract is 8.2% of the contract value. About 54% of respondents in Moldova and less than a quarter of respondents in Romania stated that they do not pay any bribes to secure a contract, while 25.5% of Romanians and 12.5% of Moldavians indicated paying 1–10% of the contract value to secure the contract (Fig. 12). Finally, we also measure the proportion of unregistered enterprises in Moldova and Romania. According to our data (Table 4), it accounts for 15.5% of all enterprises in Moldova and 14.4% in Romania (2016).

4 Determinants of Shadow Activity In this section we examine the factors that influence firms’ decisions to participate in the shadow economy. We start by reporting the size of the shadow economy in subsamples formed by operating region, sector, and firm size. Next, we report descriptive statistics of how the size of the shadow economies varies with attitudes

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Fig. 10 Bribery (percentage of revenue spent on payments ‘to get things done’) in Moldova and Romania, 2016. The vertical axis measures the percentage of each country’s respondents underreporting within the range given on the horizontal axis. Source: Authors’ own figure

Fig. 11 Percentage of the contract value paid to the government to secure the contract, Moldova and Romania, 2016. Source: Authors’ own figure

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Fig. 12 Percentage of the contract value paid to the government to secure the contract, Moldova and Romania, 2016. The vertical axis measures the percentage of each country’s respondents underreporting within the range given on the horizontal axis. Source: Author’s own figure Table 4 Proportion of unregistered enterprises in Moldova and Romania, 2015–2016 2016 2015

Moldova 15.5% (13.3%, 17.7%) 15.7% (13.5%, 17.9%)

Romania 14.4% (12.3%, 16.4%) 15.3% (13.0%, 17.7%)

The table shows point estimates and 95% confidence intervals of unregistered enterprises as a percentage of all enterprises in Moldova and Romania Source: Authors’ own table

and perceptions towards tax evasion. We explore entrepreneurs’ tax morale, perceived probability of being caught and potential consequences, entrepreneurs’ satisfaction with the government and tax authority, social identity, and the strength of the institutional environment in Moldova and Romania. Finally, we use regression analysis to identify the drivers of firms’ involvement in the shadow economy, while controlling for a range of factors.

4.1

Company Characteristics

Figures 13 and 14 show the size of the shadow economy by region in Moldova and Romania. Figure 13 shows that the highest levels of shadow activity in Moldova in 2016 are in Calarasi, Hincesti, and Ocnita. In contrast, Soldanesti, Basarabeasca,

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Utag Ungheni Telenesti Taraclia Straseni Stefan Voda Soroca Soldanesti Singerei Riscani Rezina Orhei Ocnita Nisporeni Mun Chisinau Leova Ialoveni Hincesti Glodeni Floresti Falesti Edinet Drochia Donduseni Criuleni Cimislia Causeni Cantemir Calarasi Cahul Briceni Basarabeasca Balti Anenii Noi 0

10

20

30

40

50

60

70

80

%

Fig. 13 Size of the shadow economy (% of GDP) by region in Moldova in 2016. Source: Authors’ own figure

29.99

bucharest-ilfov

32.28

centre

35.72

north-west

38.18

west

36.74

south-west

33.28

south

40.11

south-east

26.99

north-east 0

5

10

15

20

25

30

35

40

45

%

Fig. 14 Size of the shadow economy (% of GDP) by region in Romania in 2016. Source: Authors’ own figure

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Criuleni, and Anenii Noi have the lowest levels of shadow activity in Moldova. As shown in Fig. 14, Romania also has variations at the regional level. The highest proportion of shadow activities is in the South-East, West, and North-West regions, while North-East, Bucharest-Ilfov, and the Centre have the lowest levels of shadow activities. Figure 15 summarises how the size of the shadow economy varies by sector. It shows that the sectors associated with high levels of shadow activity in Moldova are the construction sector (40.6%) followed by manufacturing (31.5%) and retail (31.3%). In Romania, the highest proportion of the shadow economy is in wholesale (37.4%), services (34.6%), and construction (34%). In Moldova, wholesale is the sector with the lowest incidence of shadow activities, while in Romania, the retail sector shows the lowest proportion of such activities. Figure 16 shows that although there is a modest tendency for the level of shadow activity to be higher at smaller companies, shadow activity is not a phenomenon that is limited to small companies. In Romania, the highest proportion of shadow activity occurs at companies that employ up to 100 employees. In Moldova, shadow activities seem to be most prevalent at companies that employ 40–60 employees.

26.41 Other

25.35

34.01 Construction

40.64

34.62 Services

28.28

32.89 Retail

31.30

37.39 Wholesale

26.72

33.30 Manufacturing

31.50

0

5

10

15

20

25

30

35

40

45

% Romania

Moldova

Fig. 15 Size of the shadow economy (% of GDP) by sector in 2016. Source: Authors’ own figure

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30.85

251 and more

23.53

201-250

20.83 23.20 28.15 28.56

151-200

29.44 101-150

25.83 43.00

61-100

18.77 37.60

41-60

41.73 36.11

21-40

28.30 31.02

11-20

23.57 36.91

6-10

28.25 16.80

1-5

31.35 0

5

10

15

20

25

30

35

40

45

% Romania

Moldova

Fig. 16 Size of the shadow economy (% of GDP) by firm size (number of employees), in 2016. Source: Authors’ own figure

4.2

How Attitudes and Perceptions Affect Shadow Activity

According to the tax evasion literature, the decision to evade taxes and participate in the shadow economy is affected by the detection rates, the size and type of penalties, tax morale, firms’ attitudes towards risk-taking, and the strength of the institutional framework. We measure these factors in the survey. In this section, we report how they vary across Moldova and Romania and through time.

4.2.1

Probability of Being Caught and Potential Consequences

The rational choice theory of crime (e.g. Becker 1968), applied to tax evasion, argues that individuals make decisions about whether or not to evade taxes by weighing the expected benefits of not paying taxes on the one hand against the risk of being caught and the penalties if caught on the other (e.g. Allingham and Sandmo 1974; Yitzhaki 1974). To measure such influences, we include questions about entrepreneurs’ perceptions of the likelihood of being caught for underreporting business profits, number of employees, and salaries, as well as for involvement in bribery. We also ask entrepreneurs to evaluate potential consequences for the firm if it were caught for

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deliberate misreporting. Figures 17, 18, 19, and 20 summarise the results on perceived probabilities of being caught and expected consequences. Our results suggest that the perceived risk of being caught when underreporting income, salaries, and employees is relatively high among both Moldavian and Romanian entrepreneurs. In the case of underreporting profits, 52.5% of respondents from Moldova and 47.4% respondents from Romania stated that the probability of being caught is very high (76–100%), while 5.8% and 11%, respectively, reported that there is no chance of being caught (Fig. 17). Almost half (49.1% in Moldova and 46.2% in Romania) of the respondents also evaluated the risk of being caught while underreporting the number of employees as very high (Fig. 18). The perceived probability of being caught while underreporting salaries seems to be considerably higher in Moldova than in Romania. Our results suggest that as many as 47.5% of respondents from Moldova consider such a probability as very high, while the corresponding proportion for Romania is 36.4% (Fig. 19). The probability of being caught for making payments to ‘get things done’ is reported as being very high by 33.4% of Moldavians and 30.5% of Romanian entrepreneurs, while a higher percentage of respondents from Romania stated that there is a low probability of being caught while ‘getting things done’ (Fig. 20). Figure 21 shows that the expected penalties for deliberate misreporting are similar in Moldova and Romania; approximately 50% of respondents expect that the penalty would be a serious fine that would impact competitiveness. A small share of respondents (approximately 4%) in both countries expect that the consequence

Fig. 17 Probability of being caught for underreporting business profits in Moldova and Romania, 2016. The vertical axis measures the percentage of each country’s respondents in each category. Source: Authors’ own figure

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Fig. 18 Probability of being caught for underreporting number of employees in Moldova and Romania, 2016. The vertical axis measures the percentage of each country’s respondents in each category. Source: Authors’ own figure

Fig. 19 Probability of being caught for underreporting salaries in Moldova and Romania, 2016. The vertical axis measures the percentage of each country’s respondents in each category. Source: Authors’ own figure

would be ‘nothing serious’, while almost 12% expect the penalty for tax evasion to be extremely severe, i.e. that the company would have to cease operations if caught deliberately underreporting.

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Fig. 20 Probability of being caught for making payments to ‘get things done’ in Moldova and Romania, 2016. The vertical axis measures the percentage of each country’s respondents in each category. Source: Authors’ own figure

Fig. 21 Most likely consequences if caught deliberately underreporting in Moldova and Romania, 2016. The vertical axis measures the percentage of each country’s respondents in each category. Source: Authors’ own figure

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Tax Morale

The existing empirical evidence suggests that higher levels of tax morale lead to less involvement in tax evasion (Blanthorne and Kaplan 2008; Wenzel 2005) and thus smaller shadow economies at the aggregate level (Torgler and Schneider 2009; Halla 2012). Tax morale is usually defined as a moral obligation to pay taxes and ‘a belief in contributing to society by paying taxes’ (Torgler and Schneider 2009: 230). Overall, tax morale has been recognised as a complement of conventional rational choice explanations of tax evasion (e.g. Allingham and Sandmo 1974; Yitzhaki 1974). Empirical studies find that the actual amount of tax evasion is considerably lower than predicted by rational choice models. The difference is often attributed to the second, broader, set of tax evasion determinants—attitudes and social norms, including tax morale. According to Alm and Torgler (2011: 636): ‘. . . it is not possible to understand fully an individual’s compliance decisions—or indeed, an individual’s choices more broadly—without considering in some form these ethical dimensions and their implications for behaviour’. We measure tax morale through a series of questions that elicit company managers’ views about tax evasion. The first of these questions asks managers to what extent they would agree or disagree with the statement ‘Companies in your industry would think it is always justified to cheat on tax if they have the chance’ (Q22b in Appendix 1) using a scale from 1 (‘strongly disagree’) to 5 (‘strongly agree’).This question is an adjusted version of a World Values Survey (WVS) question that has been used widely in research on tax evasion (Torgler 2016).10 Our results suggest that the level of tax morale (i.e. responses to the above statement) is slightly higher in Romania than in Moldova. Namely, respondents from Moldova averaged 2.6, while respondents from Romania averaged 2.4 (on the scale of 1–5 mentioned above, where ‘1’ is interpreted as very high tax morale, while ‘5’ is interpreted as very low tax morale). Figure 22 shows the proportions of respondents from both countries according to how they evaluated the statement. We see that 31.2% of respondents from Moldova and almost 38% of respondents from Romania stated that they ‘strongly disagree’ (representing high tax morale). The proportion of respondents that reported they ‘agree’ or strongly agree’ (representing lower tax morale) is higher in Moldova than in Romania. Another, somewhat more general, way of measuring the level of tax morale is by assessing the extent to which entrepreneurs tolerate involvement in the shadow economy (Luttmer and Singhal 2014). We measure this aspect of tax morale by asking respondents whether they believe that tax avoidance is tolerated behaviour in their country (Q5 in Appendix 1). We calculate the level of tolerance towards tax evasion as country averages measured on a scale from 1 to 5, where ‘1’ means that the respondent strongly disagrees that tax avoidance is tolerated behaviour (higher

10

Instead of asking the question directly, i.e. whether respondents think it is justifiable to cheat on tax if one has the chance (as in the WVS survey), we phrase the question indirectly, for the same reasons that we phrase the other questions related to tax evasion indirectly.

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Fig. 22 Tax morale: responses to the statement ‘Companies in your industry would think it is always justified to cheat on tax if they have the chance’ in Moldova and Romania, 2016. The vertical axis measures the percentage of each country’s respondents in each category. Source: Authors’ own figure

tax morale) and ‘5’ means that the respondent strongly agrees that tax avoidance is tolerated behaviour (lower tax morale). As shown in Fig. 23, tax morale is relatively low in both countries, yet on average, according to this measure, there is somewhat better tax morale in Moldova than in Romania. Figure 23 shows that considerably more respondents from Romania consider tax evasion as tolerated behaviour, which somewhat contradicts the first measurement of tax morale level (i.e. responses to the statement ‘Companies in your industry would think it is always justified to cheat on tax if they have the chance’). We also ask respondents whether they believe that bribery is tolerated behaviour in their country using the same measurement scale as in the previous question. Even though tolerance towards bribery might not be directly related to tax morale as defined above, it can still have an influence on the shadow economy. The country means for tolerance of bribery are 3.6 for Moldova and 3.7 for Romania, showing that bribery is rather tolerated behaviour in both countries. The distributions of responses are presented in Fig. 24, showing that approximately 60% of respondents from Moldova and Romania stated that bribery is highly tolerated behaviour. To summarise, the results show that tax avoidance and bribery are perceived to be relatively tolerated behaviour in both Moldova and Romania.

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Fig. 23 Tax morale: tolerance towards tax avoidance in Moldova and Romania, 2016. The vertical axis measures the percentage of each country’s respondents in each category. Source: Authors’ own figure

Fig. 24 Responses to the statement ‘bribery is tolerated behaviour’ in Moldova and Romania, 2016. The vertical axis measures the percentage of each country’s respondents in each category. Source: Authors’ own figure

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Satisfaction with the Government and the Tax Authority

An increasing number of studies show that trust in public officials (e.g. Torgler 2003) and entrepreneurs’ satisfaction with tax policies and business legislation (e.g. Marien and Hooghe 2011; Scholz and Lubell 1998; Torgler et al. 2010) are among the factors that foster higher tax compliance. Distrust and dissatisfaction are associated with higher levels of shadow activity. We measure firms’ attitudes using four questions about their satisfaction with the State Revenue Service, the government’s tax policy, business legislation, and the government’s support for entrepreneurs (Q1–Q4 in Appendix 1). The dynamics of satisfaction for 2016 (country averages, measured on a scale from 1 to 5, where ‘1’ is very low satisfaction and ‘5’ is very high satisfaction) are presented in Fig. 25. The distributions of responses in 2016 are shown in Figs. 26 and 27. As shown in Fig. 25, entrepreneurs in both countries tend to be more satisfied with the State Revenue Service (3.2 in Moldova and 2.8 in Romania) and less satisfied with the government’s support for entrepreneurs (2.2 in Moldova, 2.1 in Romania). Overall satisfaction with the government’s tax policy and with the quality of business legislation is somewhat higher in Moldova (2.7 and 2.8) than in Romania (2.1 and 2.0). The distributions of responses in 2016, shown in Figs. 26 (for Moldova) and 27 (for Romania), suggest that the majority of Moldavian and Romanian entrepreneurs (almost 60%) tend to be very unsatisfied and unsatisfied with the government’s

Fig. 25 Satisfaction with the State Revenue Service, the government’s tax policy, business legislation, and the government’s support for entrepreneurs in Moldova and Romania, 2016. This figure displays country averages, measured on a scale from 1 to 5, where ‘1’ is very low satisfaction and ‘5’ is very high satisfaction. Source: Authors’ own figure

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Fig. 26 Satisfaction with the State Revenue Service, the government’s tax policy, business legislation, and the government’s support for entrepreneurs in Moldova, 2016. The vertical axis measures the percentage of each country’s respondents in each category. Source: Authors’ own figure

Fig. 27 Satisfaction with the State Revenue Service, the government’s tax policy, business legislation, and the government’s support for entrepreneurs in Romania, 2016. The vertical axis measures the percentage of each country’s respondents in each category. Source: Authors’ own figure

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support for entrepreneurs. A considerably higher proportion of respondents from Romania is either very unsatisfied or unsatisfied with tax policy and business legislation (Fig. 27) compared to entrepreneurs from Moldova (Fig. 26).

4.2.4

Institutional Environment

According to Baumol (1990), the context within which companies operate determines what they can do and find profitable to do. Namely, the allocation of resources to either productive or unproductive activities varies depending on the strength and stability of laws and regulations as well as norms and societal values. The institutional perspective (North 1990; Scott 2014) has been recognised as a useful theoretical framework for analysing the influences of both formal (e.g. laws and regulations) and informal (e.g. attitudes and culture) institutions on productive and unproductive entrepreneurship (Feige 1997; Van de Mortel 2002). North emphasises that the incentive structures provided through the institutional environment directly affect outcomes: ‘If the institutional framework rewards piracy then piratical organizations will come into existence; and if the institutional framework rewards productive activities then organizations and firms will come into existence to engage in productive activities’ (North 1994: 361). To assess the strength of formal and informal institutions in Moldova and Romania, we ask company managers to evaluate whether a range of formal and informal institutions are ‘no obstacle’ (0), ‘a minor obstacle’ (1), ‘a moderate obstacle’ (2), ‘a major obstacle’ (3), or ‘a very severe obstacle’ (4) to the current operations of their company. We draw on the World Bank BEEPS questions in asking about the following factors: tax administration, tax rates, trade and customs regulation, and business licencing and permits (all formal institutions), functioning of the judiciary/courts, uncertainty about regulatory policies, corruption, anticompetitive practices of other competitors, and political instability (Q23 in Appendix 1). Figure 28 summarises the results. Our findings suggest that in Moldova political instability is perceived to be a very severe obstacle, followed by corruption and tax rates, while in Romania the main obstacles seem to be corruption, the anticompetitive practices of other competitors, and tax rates. Entrepreneurs in Moldova, however, admit that ‘business licencing and permits and tax administration’ are merely moderate obstacles. Tax administration and trade and customs regulations are of relatively less concern for developing business in Romania.

4.3

Multivariate Tests of the Determinants of Shadow Activity

Using regression analysis, we test the determinants of firms’ involvement in shadow activity (the unreported proportion of production is the dependent variable). The regression results for both countries are reported in Appendix 3 (Table 5).

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Fig. 28 Strength of formal and informal institutions in Moldova and Romania. Source: Authors’ own figure

In both countries, tolerance towards tax evasion is positively associated (statistically significant in Moldova) with the firm’s involvement in the shadow economy, highlighting the fact that entrepreneurs that view tax evasion as tolerated behaviour tend to engage in more informal activity. Further, satisfaction with the country’s tax system and government tends to decrease a company’s involvement in shadow activity, with the impact being highly statistically significant in both countries. This effect stands out as a very strong determinant of shadow activity. The effect of perceived detection probabilities on the tendency for firms to engage in deliberate misreporting is negative but not statistically significant, while higher perceived penalties for detection tend to decrease involvement in shadow activity (statistically significant in Moldova). In both countries, the coefficient on firm age is negative (and statistically significant in Moldova), suggesting that younger firms engage more in shadow activity than older firms. Younger firms might use tax evasion as a means of being competitive against larger and more established competitors. The sector dummy variables and the change in profit variables do not appear to have a significant effect on the level of shadow activity (with the exception of a statistically lower level of shadow activity in the ‘other’ sector in Romania).

5 Comparison with Estimates from Other Methods Recent estimates of the shadow economy available from various sources are summarised in Figs. 29 (Moldova) and 30 (Romania).

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Fig. 29 Estimates of the size of the shadow economy (% of official GDP), various sources, Moldova. Source: Authors’ own figure

As shown in Figs. 29 and 30, different methodologies offer somewhat different estimates of the size of the shadow economy. For example, the MIMIC method estimates the size of the shadow economy in Moldova as approximately 39.7% during 2015 (Medina and Schneider 2017). This estimate is higher than the corresponding MIMIC estimate of Romania’s shadow economy (23.0%). The estimates reported by Medina and Schneider (2017) are considerably higher than the estimates provided by the National Bureau of Statistics in both Romania and Moldova. According to the National Bureau of Statistics, the size of the shadow economy in Moldova was 23.7% of GDP in 2015 and 28% in 2016. The Moldavian National Anticorruption Centre estimates the size of Moldova’s shadow economy as approximately 30% of GDP in 2016. In Romania, the National Institute of Statistics estimates the size of the shadow economy as approximately 20% (in 2008, most recently available data) of the official GDP. The differences in the various estimates are due to a number of factors including (1) different time periods for some of the estimates, (2) different methods with different assumptions, and (3) slightly different definitions of what is included in the ‘shadow economy’. An alternative estimate for the Romanian shadow economy produced by Schneider (2016) suggests the size was 28.0% in 2015 and 27.6% in 2016, pointing to a small decrease during these years. Davidescu and Schneider (2018) also provide an alternative estimate for the Romanian shadow economy, namely, 29% for the year 2015. Our estimates, following the method developed by Putniņš and Sauka (2015), suggest a small decrease in the size of the Romanian shadow economy during the

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Fig. 30 Estimates of the size of the shadow economy (% of official GDP), various sources, Romania. Source: Authors’ own figure

period of 2015–2016 (a drop of 2.5%). Despite the differences in the estimated aggregate size of the shadow economies using the various methods, we tend to see similar dynamics across the various methods, supporting the estimated decrease in the shadow economy in 2016.

6 Discussion and Conclusions This report presents estimates of the size of the shadow economies in Moldova and Romania during 2015–2016, including misreported business income, unregistered or hidden employees, and unreported ‘envelope’ wages. The method applied in this report has been used in the Baltic countries to measure the size of the shadow economies annually since 2010. There, the annual shadow economy reports11 have been used by policymakers and economists to monitor trends in the shadow economies and guide various interventions and policy measures to reduce the amount of economic activity ‘in the shadows’. We hope that measures of the size and determinants of the shadow economies in Moldova and Romania will prove equally useful to policymakers.

11

See http://www.sseriga.edu/en/centres/csb/shadow-economy-index-for-baltics/.

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The findings reveal modest decreases in the size of the shadow economies for both Moldova and Romania. Our estimates indicate that the size of the shadow economy in Moldova and Romania is approximately 29.7% and 33.3% of GDP in 2016, respectively. The slight contraction of the shadow economies in both countries has been driven mainly by small decreases in underreporting of business income, which is the largest component of the shadow economy. Policymakers might pay particular attention to this component given its magnitude. The level of underreporting of salaries (payment of ‘envelope wages’) and employees is similar in both countries, whereas underreporting of business income explains most of the difference in the size of the shadow economies across the countries. The proportion of unregistered companies is around 14 to 16% of all enterprises. Moldova is estimated to have slightly more bribery in business in general, although when it comes to bribery in the specific context of winning government contracts, Romania is estimated to have a higher amount. The highest estimated levels of shadow activity in Moldova are in Calarasi, Hincesti, and Ocnita, while in Romania the South-East, West, and North-West regions are estimated to have the highest levels of shadow activity. The construction sector has the highest level of shadow activity in Moldova, while in Romania the highest proportion of shadow activity is in wholesale. Small companies tend to operate ‘in the shadows’ slightly more than large companies; however, the differences across company size categories are not large. In terms of attitudes, companies tend to be more satisfied with the activity of the State Revenue Service than with the government’s tax policy and support for entrepreneurs. Moldavian entrepreneurs tend to have a higher degree of satisfaction regarding the government’s tax policy and the quality of business legislation compared to Romanians. Political instability is perceived to be a very severe obstacle to doing business in Moldova, while in Romania the main business obstacle is corruption. Regarding the determinants of involvement in the shadow sector, the strongest determinant in both Moldova and Romania is the company’s level of satisfaction with government authorities and policies. More satisfied companies tend to engage in less shadow activity. Tolerance of tax evasion is also positively associated with involvement in the shadow economy—companies tend to be in the shadows if they perceive tax evasion as tolerated behaviour. Detection probability and perceived penalties for being detected evading taxes indicate that enforcement of tax rules and punishment of companies caught evading taxes do serve as deterrents to involvement in shadow activity. Acknowledgements We are grateful to the Centre for Sustainable Business at SSE Riga for the generous financial support that made data collection in Moldova possible as well as to the National Scientific Research Institute for Labour and Social Protection for funding data collection in Romania within the project PN 16440102 entitled ‘The impact of labour market institutions on informality. Micro and macro approaches’. We would also like to extend our gratitude to all entrepreneurs who agreed to participate in the interviews.

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Appendices Appendix 1: Questionnaire Form Used in Moldova and Romania Entrepreneurs’ Satisfaction with the Business Climate/Informal Entrepreneurship in Moldova and Romania My name is . . . from . . .. We are conducting a survey aimed at understanding entrepreneurs’ satisfaction with the entrepreneurship climate in Romania and Moldova. The main interest of the study is to find out how various policy initiatives implemented within the country and entrepreneurs’ satisfaction with the business climate influence entrepreneurial behaviour, including tax avoidance. I would like to emphasize that we are only interested in your expert opinion and in no way are we indicating, for instance, that your company is involved in any type of tax avoidance activities. The interview will last approximately 15 min. We guarantee 100% confidentiality as neither your name nor your company’s name will appear in the data analysis. Data will be analysed using a computer programme without any reference to the data source. If you are interested, we can also send you the summary of the survey results once the survey is complete. If the respondent hesitates or says ‘no’: This survey is very important for fostering knowledge about entrepreneurship in (Romania/Moldova). By participating in this survey, you are helping to improve such knowledge. All your answers will be 100% confidential and no one will be able to trace them back to you or your company. Moreover, we are interested in your expert opinion, and what you say will be attributed to the industry or your competitors, not your firm.

Questionnaire Form External Influences 1. Please evaluate your satisfaction with the performance of the State Revenue Service with regard to tax administration. 1 Very unsatisfied

2 Unsatisfied

3 Neither satisfied nor unsatisfied

4 Satisfied

5 Very satisfied

2. Please evaluate your satisfaction with the government’s tax policy in (insert country). 1 Very unsatisfied

2 Unsatisfied

3 Neither satisfied nor unsatisfied

4 Satisfied

5 Very satisfied

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3. Please evaluate your satisfaction with the quality of business legislation in (insert country). 1 Very unsatisfied

2 Unsatisfied

3 Neither satisfied nor unsatisfied

4 Satisfied

5 Very satisfied

4. Please evaluate your satisfaction with the government’s support for entrepreneurs in (insert country). 1 Very unsatisfied

2 Unsatisfied

3 Neither satisfied nor unsatisfied

4 Satisfied

5 Very satisfied

5. Tax avoidance is tolerated behaviour in (insert country). 1 Completely disagree (Entrepreneurs do not tolerate involvement in tax avoidance)

2 Disagree

3 Neither agree nor disagree

4 Agree

5 Completely agree (Entrepreneurs highly tolerate involvement in tax avoidance)

6. Bribing is tolerated behaviour in (insert country). 1 Completely disagree

2 Disagree

3 Neither agree nor disagree

4 Agree

5 Completely agree

Government Policy and the Amount of Informal Business 7. Please estimate the degree of underreporting business income (in percent) by firms in your industry in 2016_______ % and in 2015 _______ %. 8. Please estimate the degree of underreporting number of employees (% of actual number of employees) by firms in your industry in 2016_______ % and in 2015 _______ %. 9. Please estimate the degree of underreporting salaries paid to employees by companies in your industry (for instance, if in reality an employee receives EUR 400, but the reported salary is EUR 100, then underreporting is 75%; if EUR 400 and EUR 200, then underreporting is 50%). Firms underreported actual salaries by approximately ____ % in 2016 and ____ % in 2015. 10. On average, approximately what percent of revenue (turnover) did firms in your industry pay in unofficial payments to ‘get things done’ in in 2016_______ % and in 2015 _______ %. 11. When other firms in your industry do business with the government, approximately how much of the contract value do firms typically offer in unofficial payments to ‘secure’ the contract? (year 2016)_____%.

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12. In some industries, in addition to registered companies such as yours, unregistered enterprises also operate but do not report any of their activity to authorities. In your opinion, what percentage of your industry’s total production of goods/services was carried out by unregistered enterprises in 2016?_____% in 2015? _____%. 13. For a typical company in your industry, what would you say is the approximate probability (0–100%) of being caught if the company were to: (i) (ii) (iii) (iv)

Underreport its business income? ______% Underreport its number of employees? _____% Underreport the amount it pays to employees in salaries? _____% Make unofficial payments to ‘get things done’? _____%

14. If a company in your industry was caught for deliberate misreporting, what would typically be the consequence for that company? Nothing serious 1

A small fine 2

A serious fine that would affect the competitiveness of the company 3

A serious fine that would put the company at risk of insolvency 4

The company would be forced to cease operations 5

Company/Performance/Value Creation 15. What is the approximate percentage change in your operating profit, turnover, and total employment in 2016 compared to 2015? 1. Operating profit

2. Turnover

3. Total employment

Change (increase or decrease in %) compared to 2015. For example: +20%, ―15%, 0 (no change)

16. What was the approximate operating profit of your company in 2016? EUR__________ 17. What was the approximate turnover of your company in 2016? EUR__________ 18. Approximately how many employees are currently employed at your company (full time equivalent, including you)? _________ employees 19. In what year did your company start operating? Year________. 20. What is the main activity (i.e. sector) that your company is engaged in? ⃞ Manufacturing ⃞ Wholesale ⃞ Retail

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⃞ Services (please specify______________________________) ⃞ Construction ⃞ Other (please specify______________________________) 21. What is the place in (insert country) where: (a) Your company is located (headquarters/main office): (Place: town/city) ______________________ Postal code _________________________ (To be provided by the vendor in case the respondent cannot answer) (b) Your company does most of its business: (Place: town/city) ______________________ Postal code _________________________ (To be provided by the vendor in case the respondent cannot answer) (c) Your company is registered: (Place: town/city) ______________________ Postal code _________________________ (To be provided by the vendor in case the respondent cannot answer) Attitudes/Tax Morale/Barriers to Business 22. For each of the following statements, please indicate on a scale of 1 to 5 whether you agree (1 means you completely disagree, 5 means you completely agree):

(a) Businesses such as yours contribute a lot to growth of the (insert country) economy and society in general (b) Companies in your industry would think it is always justified to cheat on tax if they have the chance (c) Being a member of the local community is important to me

Strongly disagree 1

Disagree 2

Neither/ nor 3

Agree 4

Strongly agree 5

1

2

3

4

5

1

2

3

4

5

23. As I list some factors that can affect the current operations of a business, please tell me if you think that each factor is no obstacle, a minor obstacle, a moderate obstacle, a major obstacle, or a very severe obstacle to the current operations of this establishment.

(a) Tax administration (b) Tax rates (c) Trade and customs regulation

No obstacle 0 0 0

Minor obstacle 1 1 1

Moderate obstacle 2 2 2

Major obstacle 3 3 3

Very severe obstacle 4 4 4 (continued)

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(d) Business licencing and permits (e) Functioning of the judiciary/ courts (f) Uncertainty about regulatory policies (g) Corruption (h) Anticompetitive practices of other competitors (i) Political instability

T. J. Putnins et al. No obstacle 0

Minor obstacle 1

Moderate obstacle 2

Major obstacle 3

Very severe obstacle 4

0

1

2

3

4

0

1

2

3

4

0 0

1 1

2 2

3 3

4 4

0

1

2

3

4

Thank you!

Appendix 2: Observed and Non-observed Components of GDP

Notes on some of components 1–7 follow. Income refers to both business income and employee income. Illegal production (3) includes production of goods/services that are illegal regardless of who produces them (e.g. narcotics, prostitution) and production of goods that themselves are legal but the production is illegal because it is carried out by an unauthorised producer (e.g. unlicensed surgeons, unlicensed production of alcohol). Goods/services that are produced legally (2) can still involve breaches of the law at the registration or reporting stage (e.g. intentional underreporting of profit to evade taxes). Most of the income generated from producing legal goods is reported by registered firms and therefore fully captured in official GDP (6). However, some proportion of income is intentionally hidden from authorities either by not registering the enterprise (5) or by misreporting wages or company earnings (7). Following other studies, we refer to the latter (7) as the ‘shadow economy’ and use the term ‘non-observed’ economy in a broader sense, referring to illegal goods/services, activities of unregistered enterprises, and the shadow economy (Fig. 31).

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1. Income from all economic production (theoretical GDP)

2. Income from production of LEGAL goods/services

4. Income of REGISTERED producers

6. Income that isREPORTED and fully OBSERVED income

5. Income of UNREGISTERED producers

7. Income that isNOT REPORTED

SHADOW ECONOMY

OBSERVED ECONOMY

3. Income from production of ILLEGAL goods/services

UNREGISTERED ENTERPRISE

NON-OBSERVED ECONOMY

Fig. 31 Observed and non-observed components of GDP. Source: Authors’ own figure

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Appendix 3: Regression Results

Table 5 Determinants of firms’ involvement in shadow activity

Constant Tolerance_TaxEvasion Satisfaction Detection Probability PenaltyForDetection ln(FirmAge) Ln(Employees) ChangeInProfit D_Wholesale D_Retail D_Services D_Construction D_OtherSector

Moldova Coefficients 48.037*** 1.892* ―4.714*** ―1.634 ―2.696* ―5.334***

P-values 0.00 0.10 0.00 0.28 0.09 0.00

0.003 ―3.511 1.340 ―3.434 5.164 ―4.006

0.96 0.60 0.81 0.39 0.43 0.53

Romania Coefficients 42.794*** 1.848 ―5.915*** ―2.929 ―2.286 ―3.206 ―0.119 ―0.016 3.423 ―0.251 2.468 1.549 ―9.938*

P-values 0.000 0.13 0.00 0.24 0.13 0.17 0.92 0.78 0.53 0.96 0.51 0.76 0.08

The table shows coefficients from regressing firms’ unreported proportion of production (average for 2015–2016) (dependent variable) on various determinants of shadow activity: Tolerance_TaxEvasion is the firm’s response to Question 5, with higher scores indicating more tolerance; Satisfaction is the first principal component of the firm’s responses to Questions 1–4, with higher scores indicating higher satisfaction with the country’s tax system and government; Detection Probability and PenaltyForDetection measure the firm’s perception of the probability of being caught for shadow activity and the severity of penalties conditional on being caught (calculated as the first principal component of responses to Questions 13(i)–13(iv) and the response to Question 14, respectively); ln (FirmAge) and ln (Employees) are the natural logarithms of the firm’s age in years and number of employees, respectively; ChangeInProfit is the firm’s percentage change in net sales profit relative to the previous year (Question 15.1); D_Wholesale to D_OtherSector are sector dummy variables with manufacturing as the omitted category *** and * indicate statistical significance at the 1% and 10% levels Source: Authors’ own table

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Survivability and Sustainability of Traditional Industry in the Twenty-First Century: A Case of Indonesian Traditional Furniture SME in Jepara Danu Patria, Petrus A. Usmanij, and Vanessa Ratten

Abstract Traditional industry is important and it has been existence as a source of employment and as a way of poverty reduction, particularly for people in rural developing country. This study presents an interesting case of a Indonesian rural Central Java traditional furniture making industry which is able to survive based on their orientation towards sustainability. Traditional furniture making Jepara in this study is able to survive the challenge of limited timber material sources and other constraints, except with practices to survive that consider to indicate sustainability issues. A livelihood theoretical framework is applied to analyze this traditional industry survivability case study. The finding of this study presents two significant factors behind the survivability, which is cultural reasons and the otherwise is no options.

1 Background 1.1

Traditional Industry Essentials and Its Importance

Traditional industry produces unique, aesthetics, or cultural merchandises associated with a particular ethnic group of people (Burenhult 1994; Zulaikha and Brereton 2011). Traditional industry performs an important role for local rural economies in developing countries as a source of employment and method of poverty reduction (Tambunan 2009a, b). The term traditional industry refers to the manual production methods of the pre-industrial period and the replication of such production methods even during the growth of factory-based industrialization (Stearns 2008). A traditional industry consumes natural resources such as cotton or wood, is labor-intensive, and operates D. Patria Universitas Teknologi Surabaya, Surabaya, Indonesia P. A. Usmanij (*) · V. Ratten Department of Entrepreneurship, Innovation and Marketing, La Trobe University, Melbourne, VIC, Australia e-mail: [email protected]; [email protected] © Springer Nature Switzerland AG 2019 V. Ratten et al. (eds.), Subsistence Entrepreneurship, Contributions to Management Science, https://doi.org/10.1007/978-3-030-11542-5_8

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mostly with traditional handmade production methods with the assistance of simple machines such as a saw, press, or cutting tools. Initially, traditional industry was originally adapted to the needs of rural agricultural cycle (Stearns 2008). Many traditional industries are characterized by sweatshops and home workers that predominantly rely on married women, and these forms of production are particularly prominent in rural-based needlework and clothing trade. Piecework payment is common, and wages are invariably low, and the casual and irregular nature of this work was advantageous to employers. These flexible production arrangements are frequently accompanied by much fluidity of local labor markets, manifested in relation with elevated rates of turnover, extensive part-time and temporary work, and high proportions of politically marginal workers such as immigrants, women, and adolescents in the labor force (Scott 1988). The adoption of simple machinery for traditional industry production occurs especially in lower-income economies and economically disadvantaged countries. This situation occurs as a consequence of how entry barriers for entrepreneur being minor and barely few requirements for technological know-how (Scott 2006). Traditional industry is important today as it is mainly related to these reasons. First, traditional industry is widely recognized as playing an important role of enabling employment opportunities which can reduce the rural urban gap in household income in many developing countries (Mottaleb and Sonobe 2013). The second reason of traditional industry importance in developing country is the instrumental transformation in eradicating extreme poverty that can lead to promoting sustainable growth and positive social outcomes (Underwood et al. 2012). Allen Scott (2006) mentioned that though traditional industries are often marked by low wages, unskilled work, and sweatshop conditions of employment, this low technology and labor-intensive sector may achieve surprising levels of performance in terms of job growth and foreign earning capacity in globalizing world today. China is an example of quite successful rural poverty eradication through the development of small enterprise townships and villages (Mottaleb and Sonobe 2013).

1.2

Traditional Industry Constraints While Confronting to Twenty-First-Century Challenges and Pressures

While traditional industry has their potentials, Tambunan (2009a, b) mentioned that major constraints are common to all developing countries’ traditional industries ranging from lack of capital, human resources, technology, and information and also the difficulties in procuring raw materials, marketing, and distribution. Traditional industries also confront with high transportation costs, problems caused by cumbersome, and costly bureaucratic procedures, while policies and regulations for them are considered being disadvantageous. The products produced from traditional industry are in fact different from most products that are available in the market and consumed by current modern

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Fig. 1 Model for understanding traditional industry pressures today. Source: authors’ own figure

consumers today. With most of traditional industry inherited a system of production from the early period of world industrialization, challenges confronted by traditional industry in modern world are many (Stearns 2008). Currently, a range of social, economic, and political pressures are identified as presenting larger challenges for the industry. Some of these pressures are global, national, and local. In this section, these challenges contemplate the global and local pressures identified by other researchers. Specifically, challenges faced by the traditional industry are found at three levels: the globalized economy, the regional/developing countries, and the local level where the traditional industry is located. All these challenges are testing the survivability of traditional industry and their unique production outputs. In addition to challenges face by traditional industry, contemporary world conditions are also adding to complexities for this industry which they need to confront in order to survive and sustain their existence. Figure 1 identifies the surrounding contemporary business environment of traditional industry and the challenges emerging from global, national, and local contexts.

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Globalization Challenge on Traditional Industry

One of the critical challenges for traditional industry is globalization pressures. Globalization also tends to create a homogenized culture (Held 2004) which can threaten this type of industry. The first challenge of globalization is that it creates a gap between businesses that are able to compete internationally and those that cannot. Smaller traditional industries with business constraints in capital and infrastructure ability often cannot compete and deliver products that suit global markets and access global logistics network. Globalization of the world economy is also associated with a growing implication of income inequality (Jones and Zeitlin 2008). Income gaps are found in indigenous businesses in Asia, Africa, and Latin America that are less able to absorb foreign capabilities of knowledge and capital (Jones and Zeitlin 2008). In contrast with traditional and indigenous businesses, large corporations with capital can transform their business achievements worldwide. Large corporate organizations in the world understand the extraordinary impact of globalization by building, identifying, and exploiting resources all over the globe and adopt methods to control and manage geographically dispersed operations (Gerber 2010). The second globalization challenge for traditional industry is product adaptation. Adaptation is concerned with the competition in meeting and maintaining the niche market for their products. Some traditional industry products are considered as “authentic” and have their own vernacular attractions. The further problem is the product market adaptability in translating this unique traditional product into a viable source of commercial goods (Anon 2008). The later traditional industry consequence is the inability in maintaining their niche market, and they will be losing customers. It is estimated that traditional furniture producers in Indonesia are losing market value at a rate of 6% annually, due to lack of marketing skills, institutional capacity, and value chain efficiency (Purnomo 2013). The third globalization challenge is associated with cultural changes brought about by emergence of a world economy. Views on this point can be best illustrated by considering the contrasting differences between “globalists” and “traditionalists.” Globalist points to the emergence of a new global structure whose rules determine how countries, organizations, and people operate (Held 2004). The globalist view understands that globalization is a real and tangible phenomenon and an inevitable development that cannot be resisted by human intervention, particularly through traditional political institutions, such as the nation-state. Consequently, local and national differences are disappearing with the emergence of a homogenous global culture and economy (Held 2004). This view suggests that traditional industry will struggle with the rise of homogenous global culture delivered by many multinational global companies.

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Regional Challenges for Traditional Industry in Developing Countries

The regional challenges can also weaken traditional industry with the prevalent aspects of the society’s characteristics, economy, and political aspects that greatly impact on the survivability and growth potential of this type of industry. The first aspect to be considered for national issues is the higher population found in many developing countries. As the population is higher in developing countries, the uneven distribution also occurs (Todaro and Smith 2009). The consequence for traditional industry is the vast increase of labor supply that is happening in developing countries which can contribute to low-income absorption. As wages in traditional industry tend to be low, the competitiveness of traditional industry in developing countries could only reside on prices which originated on cheap labor utilization. The second aspect of issues in developing countries is economic disparity. Most traditional industry in developing countries are located in rural areas with limited infrastructure. Roads, railways, port, and other physical facilities are unavailable in some locations. The problem of infrastructure then results in additional costs for small businesses and traditional industry for products and services, delays in delivering the traded merchandise to the market, and many other infrastructure problems could make them uncompetitive (Punnett 2011). The third aspect is political, with the influence of corruption. Developing countries are more likely to be ruled by a powerful individual or an elite (Fukuoka 2012). Linkage between major business leaders and government policymakers is often common in developing countries where these ruling elite create particular privilege for their benefit and traditional industries are often excluded from the benefits of these networks (Punnett 2011). Corruption in developing country can also cut the wealth and assistance provided to the rural remote economy traditional industry (Newman 2011).

1.5

Local Traditional Industry Challenges

There are also challenges at the local level which impact on the survivability of traditional industry. Nichter and Goldmark (2009) address three characteristics that are most common with traditional industry in their locality context: firm age, informality of firms, and access to finance.

1.5.1

The Firm Age

Small firms in the traditional industry in developing countries can be relatively unstable, and it often relates to the age of the firm. Micro- and small enterprises

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may witness rapid growth, while the older firms tend to experience less growth and suffer productivity challenges (Nichter and Goldmark 2009). Berry et al. (2002) also mention that small and medium enterprises in the traditional industry have high entry and exit rates.

1.5.2

Informality (Informal Firms)

Informal business is common in developing countries. It refers to businesses that are unregistered and derive income from the production of legal goods and services (Nichter and Goldmark 2009). Consequently, the informal type of business reduces the chances for growth and development with their unregistered firm status. Informal firms may therefore need to keep their head down and avoid becoming large and rapid growth as they need to maintain close relations with formal firms. The further significant problem of informal firms is the access to financial and legal assistance and its systems. Informal enterprises then face even greater difficulties in obtaining formal credit and assistance from law enforcement agencies (Nichter and Goldmark 2009).

1.5.3

Lack of Access to Finance

Financial regulations from bank and other lending institutions can sometime function against the interests of small firms such as those in the traditional industry (Hill 2001). Specific illustration for this is the regulation imposing a ceiling on lending rates that often penalize smaller enterprises. As an example that per unit transaction costs in processing and screening loan applications will inevitably decline with the scale of lending amount of money, then only larger firms can take advantage. If banks are unable to provide lending because of unsupported government policies, the banks will be reluctant to lend to some small to medium firms such as those found in traditional industry (Hill 2001). The result of this situation is that firm members may have to apply creative mechanisms to leverage tangible and intangible assets, which is known as “bootstrapping” (Nichter and Goldmark 2009).

2 Literature Review 2.1

Traditional Industry Opportunities and the Concept for Sustainable Growth (High Road) or the Opposite (Low Road) in Global Value Chain

In the opposite of constraints and challenges on traditional industry, David Held (2004) addressed the development of opportunities that arise in current global

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twenty-first-century business. The transformationalist view recognizes a shift in the production processes of large manufacturing industry toward smaller, higher-end, and more efficient production in the creative industries (Held 2004). As a matter of fact, the redirection of the preparation and production of traditional handmade products toward niche markets are also occurring worldwide (Wolfe Wilson 2010). With the fact that traditional industry emerges as creative industries, some traditional industry may find a particular position in the global market today (Flew 2002). Moreover, the transformationalist view, which moves beyond the debate between globalists and traditionalists, describes the consequences of contemporary global interactions as complex, diverse, and unpredictable. Transformationalist proposes new forms of intense interdependence and integration which collated global and local while presenting an evolutionary process of mixed interdependent and integrated cosmopolitan societies (Held 2004). Under this viewpoint, traditional industries have a greater chance of growth and development by finding its niche opportunities and settling their products in modern twenty-first-century businesses. Theoretically, the opportunities for traditional industry for being able to develop are determined by the concept of high road and low road. Two contrasting growth paths, the “high road” and the “low road” (Schmitz 1995), provide a way to think about traditional industries development. The high-road industry upgrade concept represents successful industrial districts in Europe which are synonymous with innovation, high quality, and functional flexibility with good working conditions. The high-road industry upgrade refers to those European cluster of firms or “industrial districts” in four regions, the Third Italy, Baden-Württemberg in Southern Germany, West Jutland in Denmark, and South West Flanders in Belgium (Schmitz and Musyck 1994). These European industrial districts have become major reference point for industrial policy in the 1990s for both developed and developing countries and in their local economies (Sengenberger and Pyke 1990). The keys to these European industrial districts are competition by innovations, new technology adoptions, better product development, and speedy reactions to market changes. High-road upgrade in these European district is conducted through a series of improvements which range from provision of credit/lending, training development, real services, and the negotiation of wages and working conditions (Sengenberger and Pyke 1990; Schmitz and Musyck 1994). Oppositely, low-road industry development means competing on the basis of low prices, low-quality products, cheap materials, vast numbers of labor with flexible arrangements, and low wages. The low-road industry emphasis is on seeking competitiveness through low labor cost, cheap material productions, and deregulated market environment. It is believed the low road with cost cutting will boost productivity and profits and create new employment (Sengenberger and Pyke 1990). Essentially, differences between high-road and low-road approaches are:

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High road Constructive competition, based on efficiency enhancement and innovations, leading to economic gains that further create wage gains and improvements in better social standards of workers through social protection and worker rights (Sengenberger and Pyke 1990) Positive reciprocal between manufacture of quality products, higher standards skills, service, and good employment conditions (Bosch and Lehndorff 2005)

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Low road Competitiveness through low labor costs and low material costs, believing that cost cutting will boost productivity and profits (Sengenberger and Pyke 1990)

Poor wages and precarious employment hinder firms in acquiring and keeping the labor required for efficiency and flexibility. Cost cutting results in lack of investment for labor skills development. In the absence of better performance and upgrade, further cost cutting may become inevitable resulting in vicious, downward spiraling circle (Sengenberger and Pyke 1990; Bosch and Lehndorff 2005)

Source: authors’ own table

The differences between industry clusters in developed and developing countries, however, appear to confront different challenges in pursuing high-road paths. Innovative and dynamic clusters in developed countries tend to specialize in higher value niches, while clusters in developing countries tend to serve the lower end of the market where competitiveness is determined by price (Wang 2007). The literature of traditional industry cluster studies suggested that in order to avoid “the race to bottom,” traditional industry should embrace high-road industry upgrade (de Oliveira 2008). Moreover, high-road industry upgrade would raise traditional industry economic dynamism while benefitting them and the broader dependent aspects of local people, workers, and local governments. Indeed, under globalization competition from elsewhere, a weak position in global value chain can exacerbate the poor business condition of traditional industry with low road and further losing their little profit while reducing workers low salaries and heading to race of the bottom pathway. As if some traditional industry with low-road development in developing countries can still survive with subsidies, when they compete with high-quality imports, low-road traditional industry products can only diminish (de Oliveira 2008). If gains from globalization and its competitions imply uneven distribution between firms particularly in developing countries, the value chain is an effective means of conceptualizing the forms of integration between firms and companies in developed countries and the firms including small traditional businesses in developing countries (Gereffi et al. 2001). As global trade today mainly organized by global buyers who organize global production networks may work for, or act on behalf of, major retailers or brand name companies, access to developed country markets has become increasingly dependent on lead firms situated in developed countries (Humphrey and Schmitz 2002). The lead firms are predominantly located in developed countries and include not only multinational manufacturers but also large retailers and brand name firms. They play a significant role in specifying what is to be produced, how, and by whom (Gereffi et al. 2001). The growth of value chains clarifies some important concepts about how product and service markets grow in global trade. The concept is used to

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refer to the interfirm relationships and institutional mechanisms through which nonmarket coordination of activities in the chain takes place (Humphrey and Schmitz 2002). A value chain is a supply chain made up of a series of actors, from input suppliers to producers and processors to exporters and buyers, engaged in the full range of activities required to bring a product from its conception to its end use (Kula et al. 2006). Global trade today is conducted within multinational enterprises or through systems of governance that link firms together in a variety of sourcing and contracting arrangements (Gereffi et al. 2001). Value chain activities can be contained in a single geographical location or spread over wider areas. The chain operates in a business enabling environment that can be at once global, national, and local. The global business enabling environment can include trade multi- and bilateral agreements and worldwide standards (Kula et al. 2006). Understanding how value chains operate which implies to traditional industry is very important because the way chains are structured has consequences for the local, regional, and greater sustainability.

2.2

Rural Concept of Survival for Traditional Industry (Livelihood Concept)

Determining traditional industry to growth and prosper for sustainability could use the frame of “high-road” industry upgrade. Conversely, there are less explanations of how traditional industry progressed through the way of industry “low road” which then be able to transform to “high road.” One of the small industrial districts in Bangladesh garment could not only depend on the “high-road” strategy to ensure their survival and profitability (Rahman 2009). Bantai was a Bangladeshi company that manufactured sportswear, caps, hats, and sun visors at its factory in Kallyanpur, Dhaka. Bantai provides enlightened working conditions in the industry with highroad strategy. However, the company may remain vulnerable in the globalized economy. Many other traditional industries in developing country simply use the low-road industry for the method of business survival for their competitiveness by lowering the price of their products and holding down wages. de Oliveira (2008) mentioned that one of the fundamental problems of industry upgrade is the lack of precise knowledge on how traditional industry firms progressed. The questions then, what can be the strategies of traditional industry to describe before this industry type can be categorized as in the pathway of “high road” if they are able to do so. Apparently, some traditional industry in developing countries often cut across these two distinctive paths in order to survive (Loebis and Schmitz 2005). Schmitz and Musyck (1994) also consider that high- and low-road concept of industry development ignores the effects of changing macroeconomic environment overtime. In fact, traditional industry in developing countries is highly influenced by those macroeconomic changes, including the survival of traditional industry firms in anticipating those changes.

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In order to understand how traditional industry survives in the low-road method, an investigation to the survival components of traditional industry is important. Furthermore, understanding the drivers which enable the traditional industry survival in the twenty-first century while they confront challenges and pressures is important. The livelihood framework is one of the concepts applicable to urban as to rural survival strategies (Ellis 1999). Therefore, livelihood in this study is utilized to investigate the traditional industry survivability in confronting the twenty-firstcentury livelihood challenges. Frank Ellis (1999) mentioned that livelihood is defined as the activities, the assets, and the access that jointly determine the living gained by an individual or household (Fig. 2). The livelihood activities then refer to the process by which households construct a diverse portfolio of activities and social support capabilities for survival and in order to improve their standard of living. Thus, the opportunity of traditional industry to gain for the living refers to the concept of livelihood. The livelihoods approach was initially a response to overtly technical and technocratic approaches to rural development, which were concerned primarily in improving the efficiency and productivity of agricultural practices in developing countries (Levine 2014). Chambers and Conway (1992) and also De Haan (2000) stated that people need five vital resources or assets in order to achieve a sustainable livelihood: those five vital resources are human, natural, physical, financial, and social capital. In rural areas, these assets ranging from human skills, natural resource use, and physical resources available with considerable saving and social connections are vital to exercise livelihood activities. People at the center of livelihood process pursue or gaining livelihood outcomes while drawing in these ranges of assets and adopting variety of activities. The activities adopted and the ways people reinvest asset building are driven in part by their own preferences and priorities (Farrington et al. 1999). Despite adopting activities, people are also influenced by some types of vulnerabilities, including shocks (shocks such as food price increases, environmental hazards, and ill health, which can easily drive them into poverty), overall trends, and seasonal variations. Options of livelihood are also determined by the structures (roles of government and private sectors) and processes (such as institutional policy and cultural factors). In aggregate, conditions of these determine the access to assets and livelihood opportunities and the way in which these can be converted into outcomes (Farrington et al. 1999) (Fig. 3). As a matter of fact, livelihood diverse activities for many rural areas in developing countries include both on and off-farm occupations (Ellis 2000). These activities are initially undertaken to support income from the main household agricultural activities or nonagricultural household activities. Nonagricultural household activities refer to those microenterprises, where many of the diversification activities pursued by rural people are usually in the format of microenterprises (Hussein and Nelson 1998). Moreover, the importance of microenterprises in generating employment and income in developing countries’ rural areas is highly recognized. Nonagricultural household activities running on the basis of household and smallscale industry are definitely what traditional industry organized. Instead, many developing countries place huge attention to the small farm household in rural

Organisations Associations NGOs Local admin State agencies

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Fig. 2 Framework of sustainable livelihood by Ellis (A framework for micropolicy analysis of rural livelihood) (Source: Ellis 2000, p. 20)

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Fig. 3 Framework of sustainable livelihood adopted from DFID (Source: Ashley and Carney 1999; Solesbury 2003)

area, in concern to its efficiency as an agricultural enterprise, and in the removal of barriers associated with constraints in order to raise rural household income (Ellis 1999). The appropriateness of livelihood diversifications involves the maintenance and continuous adaptation of a highly diverse portfolio of activities in order to secure survival which distinguish the feature of rural livelihood strategies in contemporary developing countries (Ellis 2000). To sum up, the “low-road” type of traditional industry, which is based on micro-household small-scale industry and its operating cost cutting, labor-intensiveness, and informality, is highly suitable with the livelihood concept of analysis.

2.3

How Livelihood Provides Better Understanding of Traditional Industry Survival

Because livelihood concept is mainly devoted to address rural areas in developing countries, using this concept to investigate traditional industry diversification practice in purpose of their survival is relevant. The concern of addressing problems of rural areas in developing countries, poverty, inequality, and population pressures lead to the use of sustainable livelihood concept (Ellis 2000; World Bank 2015).

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Moreover, sustainable livelihood was emerging since the early 1990s as the concept to address global south which mainly rural poor people in developing countries (Solesbury 2003). Concerning how livelihood concept is able to exercise traditional industry assets, those assets need to be modified through their organizational and social relation to cope vulnerabilities from shocks or industry trends and manifested to their livelihood strategies and place it on their portfolios of activities for their sustainable purpose outcomes (Ashley and Carney 1999; Ellis 2000). Vulnerabilities affecting traditional rural industry are not merely local shocks such as conflict and declining of production resources, but it may arrived from external influences such as trends of changing consumer demand, economic, and greater institutional power relations affecting this industry (Serrat 2008). As Schmitz and Musyck (1994) mentioned that the low-road concept of industry development ignores the effects of changing macroeconomic environment, livelihood could investigate the influence of external vulnerabilities under the macroeconomic environment context. In order to understand external vulnerabilities, there is a need of understanding global to local challenges that affect the livelihood strategies of rural traditional industry. Further then, in understanding the vulnerability of local reactions toward diversification strategies, it is necessary to know the power structure that influences this type of industry. Essentially, the reason why livelihood is suitable for analyzing traditional industry on rural developing country areas is grounded in its ability to investigate people livelihood and people diverse activities and its strategies toward sustainable purpose outcomes.

3 Case Study of Jepara Furniture Industry Using Livelihood Concept to Analyze Rural Developing Countries’ Traditional Industry In order to understand how traditional industries survive twenty-first-century pressures and challenges and in what method this industry survives, an investigation to this industry type is necessary. An appropriate place to investigate how traditional industry survives global to local challenges, where they utilize prices, cheap labor, and informality for competitiveness, is Jepara traditional furniture making industry. Inadvertently, Jepara in this study is a traditional furniture making industry which particularly considers using the method of low-road development. Jepara traditional furniture making industry is located in Central Java province in the country of Indonesia and in the district regency of Jepara city. The district or regency of Jepara city is located on the northern tip of Central Java provincial area, in the island of Java, Indonesia. Jepara is the largest traditional furniture industry cluster in Indonesia, covering almost the whole area of Jepara district. Traditional furniture making industry in Jepara is renowned as a long existed furniture industry cluster, while the productions are devoted for both domestic and export market. The furniture industry according to survey in 2004 contains at least 15,271 units (enterprises), with 14,091

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small units (92%), 871 medium units (6%), and 309 large units (2%) (Roda 2007). However, according to recent data in 2013, Jepara has decreased to 11,981 wooden furniture workshops, showrooms, and warehouses (Purnomo 2013). The furniture trade at Jepara has brought considerable prosperity to local people, well above the average of Central Java other districts. Despite the fact of traditional cluster conditions, Tambunan (2009a, b) mentioned that Jepara furniture industry can also be categorized as advanced cluster, because of their export-oriented industry, complex structure in production, and the degree of interfirm specialization and cooperation. Tambunan assumed that the degree of interfirm specialization and cooperation is high in Jepara. Some firms at Jepara may have developed business networks with suppliers of raw materials, components, providers of business services, trader, distributors, even banks, and other supporting institutions. As it is mentioned previously that there is a traditional industry in developing country which cuts across high-road and low-road distinctive path of development for survival, Jepara is an appropriate example for the study. How Jepara traditional industry cuts across high-road and low-road industry development is through upgrading some of the production process by embracing some facilities and modern equipment available at the large firms or simply using modern treatment. Eventually, at the same time, in order to compete on prices, they may lower wages and conditions, using illegal raw materials and avoiding taxes as a way of cost minimization (Loebis and Schmitz 2005). The study of Jepara traditional industry survivability is conducted with over 41 participants ranging mostly from small households’ traditional industry participants. Only 1 participant was considered as a medium firm with less than 100 employees. Semi-structured interview fieldwork study was conducted in Jepara for 9 weeks, which occurred in mid-2015. Of those 41 participants, 20 participants represented furniture firms, 4 participants represented raw material suppliers (timber), 7 were artisans, 5 were workers employed in the industry, and 5 participants represented key informants. Of the 20 firm representatives, 19 were from firms currently operating, and 1 was from a firm that had gone out of business. Among four raw material suppliers, three represented businesses still in operation, and one represented a firm that had closed its business. As part of the research design, the inclusion of representatives from firms no longer operating was done to better understand the reasons behind businesses closures. In this study, qualitative interpretive case study approach is adopted. Qualitative method used in order to understand the industry livelihood and its diverse activities conducted by research participants in this traditional industry. With interpretive approach, the knowledge and understanding of traditional furniture making Jepara emerges as the theory develops from data. Specifically, theory, categories, and concepts developed as data is collected and analyzed (Shipman 2014). Findings in this study derived from participant most regular pattern of statements which constructed to emergent themes in diversification strategies as a practice of survival. As this study used livelihood concept for analysis, the first part of research is an identification of industry vulnerabilities, challenges that people participant

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confronts, constraints, and the locality issues that the participant experiences. The 41 participants with 4 different categories summarize the common challenges as: – Raw material costs increased, while selling price remains Increasing raw material price for productions, while the selling furniture product prices remain relatively the same. Most of small firms are unable to afford higher costs of raw materials, while the selling furniture product prices are considered to be relatively static. – Difficulties in obtaining good timber raw materials Most of small furniture makers are not able to competitively sell their furniture product domestically or internationally as their raw material timber used are considered as inferior and in defected conditions. Indonesian larger or multinational timber companies cut off Jepara small furniture maker opportunities in attaining proper timber materials sourcing from Indonesian State Forestry resources. This problem resulted from Indonesian State Forestry preferential treatment toward larger timber factories which are simply grounded to their better upfront payments (Tambunan 2009a, b). – Unfair rivalries among traditional industry firms No government assistance and no furniture associations able to resolve their problems or being able to assist or improve their conditions. Current free and open competitions at Jepara resulted in the incursion of brokerage role in furniture order to those smaller furniture maker. These local and international brokerages consider suppressing prices and quality down, resulting to an unfair rivalry among firms for furniture orders. Source: authors’ own table From these common challenges that in livelihood considered as vulnerabilities, traditional furniture makers in Jepara, as research participants, need to exercise their livelihood assets. Those assets are ranging from limited capital, considerably inferior materials for productions, limited human resources knowledge, and limited capabilities. With all of these constraints and limitations, traditional industry furniture makers at Jepara response to challenges as part of activities and transform their human, financial, natural, and social assets into livelihood strategies. Prior to the strategies, the institutional and social role of traditional furniture making in Jepara also modifies the portfolio livelihood strategies. Since 2009, the Indonesian Ministry of Forestry as an institutional structure regulates timber supply for traditional furniture making in Jepara with the introduction of SVLK (wood certification for timber materials). This effectively applies for any furniture makers with export orientations and restrained unanimous local supplies of timber toward small furniture makers. However, because Jepara from the very beginning exists as an industry with strong familial connection or kinship (Alexander and Alexander 2000), the

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local reaction response on diversification strategy is conducted in conjunction with government timber restrictions and characterized with kinship relation businesses. Challenges and pressures with the influence of institutional role at traditional furniture making in Jepara resulted in diverse portfolios of activities and social support capabilities for survival in order to improve their standard of living (Ellis 2000). Diversifications as part of livelihood strategies occur as a construction of diverse portfolios of activities and assets in order to survive and to improve their standard of living (Ellis 1999). Specifically all descriptions of livelihood strategies and diversifications conducted by traditional furniture making participants are: 1. Timber treatment Timber treatment is an activity conducted by furniture makers, artisans, and furniture laborers in order to fix the mediocre log wood material they can only use. Most of participants cannot afford proper raw material timber from state forestry, while the timber material available is lower in qualities. Since the declining supplies of timber occurs to Jepara traditional furniture making industry, participants interviewed explain that one way to survive their furniture business is through treating their raw material timber in order to continue productions. This activity is driven by rural traditional industry diversification strategy to support the livelihood of this industry. Coping adaptive type is also the reason why this wood treatment applies as one of the diversification strategies. Wood and timber treatment conducted by participants comprises three types: chemical, oven, and wood grain 2. Reduce product qualities for low segment market Despite timber treatment, the second method of diversification strategies is to lower their production quality, which participants in this type consider to devote their productions for low segment market buyers. Product quality reductions conducted by participants comprise two types: good and bad timber mix and product size reductions

3. Innovation/product transform In contrast to timber treatment and lowering quality, there also some furniture makers and artisans who devoted their diversifications with product change and innovation strategy. Innovations and product transform are expressed by some of the furniture makers and artisans during interview. Innovations conducted by

- Chemical applications. Chemical applications use different chemical mixtures to improve the furniture products, as a way of adapting to lower and mediocre raw materials participants can only obtain - Oven dry treatment Oven dry treatment conducted for exported furniture product to dry their timber materials before furniture making process for the better results of product. Oven dry treatment may borrow from larger firm facilities - Wood grain carving based Wood grain carving based is simply the applications of carving to the raw material log wood when the log wood is too soft or not strong enough for the product to be made

- Mixing of good and bad timber Good and bad raw material timber mixing is the most common practice of small furniture maker to survive. This practice conducted by some small furniture maker participants in order to maintain their low segment market, as a way of business survival - Reducing product size measurements Furniture firms at Jepara are considered to reduce the size of their products due to the need of surviving their business, although in the long term they know it will not last for long - Renewing and changing furniture design Some furniture makers with education background try to renew and change the furniture design, although they are confronted with plagiarism and constraint financial capability - Timber leftover usage for furniture making Surviving furniture makers who operated as wood lathing consider using leftover timber (continued)

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from larger factories which they initially produce only for furniture components. Some of them improvise products and created wood souvenirs or detachable furniture out of the leftover timber - Wood scraps for furniture making Timber leftover and wood scrap collections are similar to product recycle activities. Participants in this production method use timber waste from larger furniture producers and apply to their type of furniture productions. Leftover wood log and wood scrap collection are resources applied to those artisans and firm participants who produce statues, sculpture, wood relief, and also souvenir product

Source: authors’ own table

Complete descriptions of the study findings on traditional furniture industry in Jepara are depicted as research diagram in Fig. 4. Interestingly, the survivability of Jepara traditional industry is devoted to two main reasons, cultural preservation reason and no option reason. When participants are questioned over why they are striving to survive their business with considerable challenges and difficulties, these two main reasons appear: • Cultural preservation reason consists of classic furniture makers who insisted to maintain cultural and historical value of furniture carving traditional industry. Those furniture makers at Jepara with classic carving production type resist to challenges and continue business with whatever they can. Cultural perseverance is the main reason why these furniture makers insist to survive their furniture business. Carving cultural value is important for some furniture makers at Jepara, and it is distinguished as intangible—non-materialistic and nonobservable elements of culture (e.g., values, customs, beliefs, networks, and norms) (Throsby 1997). Participants with cultural reasons assert that they need to inherit their carving skills to their children. Preserving classic furniture making to successor is important for them, although this is becoming more difficult as it requires proper teakwood timber materials which are now in decline. The consequences of surviving carving classic furniture making are obvious through treating timber for productions or reducing the quality of furniture products. • No option reason-type furniture makers at Jepara are classified as continuing their rural household traditional furniture making as it is their only source of income. This type of furniture makers has no choice except to continue business and compete with whatever they can and their only skills in traditional furniture making. However, they accept challenges and adapt (continued)

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with innovations and product changes. The innovations developed by this furniture maker type range from using timber leftover, renewing or changing furniture product design, and using wood scraps. When interviewed, some participants of this type of furniture making are optimistic with their developed furniture making technique, developed specialization skills, and product innovation. Source: author’s own table These two main significant reasons of survival remark how the practice of “lowroad” industry development in combination with “high road” enabled this furniture industry livelihood diversification strategy. Livelihood diversifications in this study may carry implications, and it may also create positive or negative visible aspects (Chambers and Conway 1992). The negative aspects of livelihood may contribute to declining environment, deforestations, soil erosions, and so on. On the positive side, livelihood activities can improve productivities of renewable resources like water, soil, soil fertility, and trees. Additional positive and negative aspects of livelihood are the positive and negative diversification adaptations. Positive adaptation diversification resulted if it is by choice and reversible and increases security. On the other hand, it may create negative aspect when the rural poor can no longer cope with adverse shocks arriving from vulnerabilities (Ellis 1998). Overall, combining the realistic challenges and pressures off the Jepara traditional furniture industry with how livelihood provides diversification strategies as a response, the survivability is graphically described as in Fig. 5.

4 Concluding Remarks Findings in this traditional industry survivability study are interesting because it presents two reasons behind their survivability: cultural reasons and no options. Apparently, it is the no options in these findings which consider to revolve with innovations and product changes, toward more sustainable industry. However, cultural reasons for survival indicate resistance toward change and adaptations and even innovations. Those industry participants in this study who stand on cultural reasons consider to resist change, and it is relatively unsustainable due to declining resources of timber and industry competitions. Indeed, literature of cultural capital should actually be considered as a driver of sustainability due to its tangibility and intangibility factors (Throsby 1997). Cultural capital consists of two forms, tangible and intangible. Tangible includes existing culture in the form of buildings, locations, objects, and art works, which are endowed with cultural significance. It could also include tangible cultural heritage. Intangible includes intellectual capital in the form of ideas, practices, beliefs, and values which are shared by a group. In the stocks of

Fig. 4 Schematic diagram of Jepara traditional furniture making livelihood findings. Source: authors’ own figure

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Fig. 5 Overall diagram of traditional furniture Jepara challenges, pressures, and livelihood diversification findings. Source: authors’ own figure

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cultural capital of both physical and intellectual we inherited from our ancestors, it is compulsory we all need to hand it over to future generations (Throsby 1997). It is also suggested that equity of access to cultural capital should be regarded just as important as equity in the intergenerational distribution of benefits from any other sort of capital. This study finding remarks different indications on a situation of rural manufacture traditional industry furniture making in Indonesia. Further analysis and study are needed to clarify the contradicting discovery arriving from this traditional industry survivability study.

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The Minimum Wage Fuels Romania’s Shadow Economy? Adriana Ana Maria Davidescu and Friedrich Schneider

Abstract The recent increases in the minimum wage in Romania represent a popular topic at the national level, which indicated that aggressive increases in the minimum wage could create a competitiveness problem in the context of a relatively high level of informal economic activities. The main objective of this chapter is to measure the effects of the minimum wage on Romanian informal activities based on the sharp increases in the minimum wage observed in the recent periods and the new increase planned by the government in the future using quarterly data for the period 2000–2015. The size of the SE was estimated using the MIMIC model, and the empirical results reveal that unemployment, self-employment, indirect taxation and lack of trust in government can be considered causes of Romanian informality. The empirical results indicate that an increase in the minimum wage can be considered a longterm supporting factor for the shadow economy because it increases informal economic activities, as firms will seek alternative methods of circumventing authorities.

1 Introduction The increase in the minimum wage has drawn increasing attention from policymakers in the context of the potential effects of the minimum wage, which is the subject of continued debate in the literature. An increase in the minimum wage will initially cause a loss of jobs primarily among low-skilled employees because of the greater number of individuals seeking employment at a higher salary; thus, the

A. A. M. Davidescu, ph.d (*) Department of Statistics and Econometrics, Bucharest University of Economic Studies, Bucharest, Romania Department of Labour Market Policies, National Scientific Research Institute for Labour and Social Protection, Bucharest, Romania F. Schneider Johannes Kepler University of Linz, Linz, Austria e-mail: [email protected] © Springer Nature Switzerland AG 2019 V. Ratten et al. (eds.), Subsistence Entrepreneurship, Contributions to Management Science, https://doi.org/10.1007/978-3-030-11542-5_9

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number of jobs will decrease, which directly affects low-skilled workers (Maloney and Mendez 2004). Aggressive increases in the minimum wage could create an issue with competition in the context of a relatively high level of informal economic activities. Among the main causes of the shadow economy are the poor quality of institutions, the inefficient application of tax laws and the bureaucracy and corruption; in these areas, Romania ranks last in the EU (Schneider et al. 2010). In addition, the level of unemployment and self-employment1 are directly related to a higher level of informality. The level of the official economy is very important in this context because a higher degree of official economic development could be associated with a decreasing level of informality (Schneider 2005). Moreover, a rapid increase in the minimum wage could lead to the expansion of the unofficial sector. A vicious cycle is observed in which high tax evasion leads to poor public finances, which is a primary cause of increased taxes, and a higher tax burden will lead individuals to avoid tax payments by moving to the informal sector. The minimum wage has an adverse influence on living standards through its effects on employment, earnings’ structure, productivity and social cohesion (Pirciog et al. 2015; Andreica et al. 2011; Cameiro and Corseuil 2001; Popescu et al. 2015). The impact of the minimum wage on employment is mixed. For employees with salaries close to the minimum level, this type of increase will lead to higher wages; however, those with the lowest wage rates will not find jobs and will become unemployed, or they will find an alternative in the informal sector. Studies by Neumark and Wascher (1992), Gindling and Terrell (2005, 2007), Neumark et al. (2000), Currie and Fallick (1996) and Abowd et al. (1999) provided empirical evidence for the negative effects of the minimum wage on employment. However, Machin and Manning (1994), Dickens et al. (1999) and Card and Krueger 1995a, b, 2000) found a positive impact of the minimum wage when considering the workbased opportunities offered to employees, such as training and skill development, which help prevent unemployment that could be caused by a potential increase in the minimum wage. For Romania, Andreica and Cataniciu (2009) revealed a negative effect of increases in the minimum wage on employment for youth and low-skilled employees. Similar results were revealed by the study of Zamfir et al. (2012, 2015) for Germany and the United Kingdom. These controversial results may be based on the accuracy of the methodological approaches used in the analyses (time series models vs. panel data models), which present different results. The effect of an increase in minimum wage is unclear in countries that have a high proportion of low-wage earners, a high level of informality and relatively modest law enforcement. The empirical evidence associated with the hypothesis that an increase in the minimum wage will encourage people to leave the official sector and move to the unofficial sector is mixed. The studies by Carneiro (2004), Comola and De Mello (2011) and Muravyev and Oshchepkov (2013) confirmed the validity of the previous hypothesis, whereas the

1

PFA (Authorized Physical Person) or those who work in agriculture.

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research of Magruder (2013) noted that when the minimum wage was introduced in Indonesia, it took on the role of an “efficiency wage” and attracted people to the official economy and thus decreased the informal sector. In their papers, Khamis (2013) and Boeri et al. (2011) noted the effect of wage growth in the informal sector as a consequence of increases in the minimum wage in the official sector as a “lighthouse effect2”. The main purpose of this chapter is to analyse the relationship between the minimum wage3 and the size of the shadow economy in Romania by determining whether the labour market regulations (the impact of minimum wage) could lead to a significantly higher incidence of informality. This relationship was investigated using vector error correction model (VECM), Granger causality analyses and an impulse response function for quarterly data covering the 2000–2015 period. An estimation of the Romanian shadow economy was obtained using the MIMIC model. The term “shadow economy” used in this chapter is consistent with the definition by Schneider et al. (2010, pp. 3–4), who defined it as “all market-based legal production of goods and services that are deliberately concealed from public authorities for the following reasons: to avoid payment of income, value added or other taxes; to avoid payment of social security contributions; to avoid certain legal labour market standards, such as minimum wages, maximum working hours and safety standards; and to avoid complying with certain administrative procedures, such as completing statistical questionnaires or other administrative forms”. In accordance with the definition, the underground economic activities (i.e. illegal actions) and the informal household economy are not regarded as components of the shadow economy. This chapter is organized as follows. Section 2 presents a literature review of the main studies on the relationship between minimum wage and informality. Section 3 offers a short description of the institutional background of the minimum wage at the European and national levels. Section 4 is the empirical research presenting the data and methodology and the most important empirical results along with the last section of conclusions and short recommendations.

2 The Relationship Between Minimum Wage and Shadow Economy in the Literature In the research by Tokman (2001) and Rei and Bhattacharya (2008, p. 1), informality can be considered “a form of survival through low quality and low earning occupations for individuals primarily as a result of a lack of productive employment opportunities and lack of access to the market and productive resources”.

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The lighthouse effect means that the official minimum wage is regarded as a benchmark for the entire economy and the uncovered sector. 3 In addition, the minimum wage is defined as the lowest remuneration that employers may legally pay to workers, and it is considered the price floor below which workers may not sell their labour.

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The theoretical considerations regarding the impact of the minimum wage on formal and informal sectors were captured in the literature by dual sector models, in which the size of the minimum wage fixed above the equilibrium places a limitation on the labour demand. With increases in the minimum wage, certain workers will lose their jobs and become unemployed; thus, the informal sector can be viewed as a solution for low-skilled marginal productivity workers at least in the short term. This situation will lead to a decline in wages and a rise in employment in both formal and informal sectors. Thus, the increase in the minimum wage can have a positive effect on the probability of becoming an informal worker (Krstić and Schneider 2014; Hohberg and Lay 2015). Betcherman (2012) noted two perspectives associated with minimum wage. The first perspective relates to a “fair wage” and a social policy instrument, whereas the second implies that a minimum wage could attract employees with low productivity into the informal sector, thus negatively affecting those people who were meant to benefit from the policy. Therefore, the presumed effect of an increase in the minimum wage (at least for developing countries) is a reduction in formal employment followed by an increase in unofficial employment. The main consequence of this increase in the informal labour supply will be a decrease in the wages of this sector. In the standard models incorporating both sectors, informal workers “were seen as the disadvantaged sector of a labour market affected by the minimum wage increase, and as consequence, some workers were forced into jobs where they earn below what they did before” (Maloney and Mendez 2004, p. 111). Analysing the situation in Brazil, Mexico, Argentina and Uruguay, Maloney and Mendez found that the influence on minimum wage is significantly higher in the informal sector than the formal sector. In an attempt to explain the role of the informal sector, Maloney (1998, p. 9) noted that it can be viewed as “a way of avoiding the inefficiencies of labour market regulations as the regulations themselves”. Maloney and Mendez (2004) also noted that when it is not imposed by law, the minimum wage had the role of “fair remuneration”, and the absorption of official workers assigned to the informal sector becomes debatable. Such a sentiment is similar to the second hypothesis, which states that the minimum wage leads to job loss and reduces the capacity of the informal sector to absorb unemployed persons. Although the main focus in the literature was on employment and wage effects, a number of empirical studies focussed on the impact of informality. In this context, the optimal level of minimum wage must be determined by considering the negative effects that a very large minimum wage could have on the labour market. Moreover, the extent of the benefit provided by the minimum wage must be determined if it is proposed as a policy measure to help poor people. Relatively few empirical studies have focussed on the effects of the minimum wage on the informal sector. The empirical evidence in the literature related to the potential effects of the minimum wage on wages and employment in the informal sector is mixed and accompanied by a certain amount of ambiguity. Most of the studies have been formalized in Latin America using dual models based mainly on kernel density and cumulative distribution techniques.

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Packard et al. (2012) and Hazans (2011) noted that the manner in which the minimum wage affects informal work is very different among EU countries. For new member states and southern economies, the effect is positive and leads to an increase in the proportion of workers without contracts. For the older EU countries, the effect is negative, and an increase in the minimum wage leads to a decrease in employment without a contract, with the minimum wage having the role of an “efficiency wage”, which entices employees back to formal jobs. Studies by Neri (1997), Muravyev and Oshchepkov (2013), Maloney and Mendez (2004) and McIntyre (2002) confirmed that an increase in the minimum wage will augment the incidence of the informal sector. As Carneiro and Henley (2001) previously noted, in a country with a relatively small level of social security, individuals choose to have informal jobs that pay less than official jobs instead of remaining unemployed. Gindling and Terrell (2002) highlighted that the main reaction to increases in the minimum wage in Costa Rica was an increase in the number of full-time labourers (by increasing the working time of certain part-time employees and dismissing other employees). These dismissed workers may be drawn towards the informal sector, where the increase in the supply leads to a decrease in the wages of the sector. Studies by Lemos (2004), Fajnzylber (2001), Khamis (2013) and Carneiro (2000) quantified the effects on wages and employment in both official and unofficial sectors and revealed significantly greater effects in the unofficial sector than in the official sector and mixed effects on employment, which was negative for both sectors. This finding was highlighted by the results of Fajnzylber (2001) and Lemos (2004). The negative effects observed for the official sector and the positive effects observed for the unofficial sector were emphasized by the findings of Carneiro (2000) and Khamis (2008). Muravyev and Oshchepkov (2013) revealed that in Russia, increases in minimum wage can be related to increases in youth unemployment and the proportion of individuals who are trapped in the informal sector. Another interesting result was the relatively quick response of the labour market to a shock in the minimum wage: after only one-quarter, the effects were attenuated. Dinkelman and Ranchhod (2012) analysed the impact of the minimum wage on domestic workers and revealed that in South Africa, domestic workers earn less than the minimum wage. Bhorat et al. (2013) also analysed other sectors (retail, security and forestry) and observed a positive impact on wages. The empirical results obtained by Hohberg and Lay (2015) for Indonesia revealed that the minimum wage has a direct impact on formal sector wages and no effect on informal workers. Fialová and Schneider (2011) found a negative association with informal production, highlighting the role of the fiscal channel of minimum wage; thus, growth in the minimum wage could constrain firms and employees to a higher degree of tax compliance when declaring their revenues. In short, most studies emphasized negative effects of the minimum wage on formal employment and found that the influence of the minimum wage on the informal sector varied considerably between EU countries. An increase in the

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minimum wage most likely leads to an increase in the informal sector, at least for new EU member states and southern countries. A legislated minimum wage increases the labour costs for companies; in addition, the most affected group will be workers with low productivity, who are mainly young and low-skilled workers who will encounter difficulties finding a formal job. These individuals will either become unemployed or will move into the informal sector. For the longer-tenured EU countries, the potential impact is the opposite, with the minimum wage playing the role of an “efficiency wage” and attracting workers into formal jobs.

3 Minimum Wage at the European Level and National Level Nearly all EU countries have a form of minimum wage that was established by the authorities or through a bargaining process between employers and trade unions. According to ILO (2004), “the national minimum wage applies to all employees, without taking into account the self-employed and unpaid family members”. On 1 January 2016, 22 EU countries and 54 candidate states had a national minimum wage, whereas only 5 countries did not have such a labour regulation (Denmark, Sweden, Finland, Austria and Italy). Significant variations are observed between member states regarding the amount of the minimum wage, which ranges from 215 EUR for Bulgaria to 1923 EUR for Luxembourg. An analysis of the values at the 2016 level shows that the countries can be classified as follows: countries with minimum wages lower than 500 € per month (Albania, the Republic of Macedonia, Montenegro and Serbia as candidate countries and Bulgaria, Romania, Lithuania, Hungary, the Czech Republic, Latvia, Slovakia, Croatia, Estonia and Poland as members), with Romania occupying fourth place in this low minimum wage group at a value of 233 € per month (Fig. 1); countries with minimum wages below 800 € per month (Turkey, Portugal, Greece, Malta, Spain and Slovenia); and countries with minimum wages above 1000 € per month (France, Germany, Belgium, the Netherlands, the United Kingdom, Ireland and Luxembourg). Considering the price levels, the differences between countries are much more salient. The group of countries with low minimum wages tends to have higher wages expressed in PPS because of low price levels, whereas the countries with high minimum wages tend to have lower minimum wages expressed in PPS.5 The monthly minimum wages range from 445 PPS in Romania to 1597 PPS in Luxembourg. As previously stated, Romania is within the low minimum wage country group, with the value of 445 PPS (Appendix 1).

4 5

Turkey, Serbia, Montenegro, Albania and former Yugoslav Republic of Macedonia. Main source is the Earnings Database of Eurostat.

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2,000

1,750

EUR per month

1,500

1,250

1,000

750

500

GROUP 1

GROUP 2

Ireland

Luxembourg

United Kingdom

Belgium

Netherlands

France

Germany

Slovenia (³)

United States

Malta

Spain

Greece

Turkey

Portugal

Poland

Croatia

Estonia

Latvia

Slovakia

Hungary

Czech Republic

Lithuania

Serbia

Montenegro (³)

Bulgaria

Romania

Albania

0

FYR of…

250

GROUP 3

Fig. 1 The distribution of minimum wages by EU countries in 2016. Source: Eurostat, Earnings Database

An analysis of the ratio of minimum wage as a percentage of the average gross monthly earnings in 20146 across the EU member states shows that the highest values occur for Slovenia (51.3%), Greece (50.1% in 2011) and Turkey (50% in 2010). In contrast, the Czech Republic and Spain reduced the level of their minimum wage to below the threshold of 35% of average earnings. Romania is much closer to these countries and presented a proportion of mean gross monthly earnings of 38.5% in 2014. In terms of increases, Romania exhibited the largest increase in the percentage during the period 2008–2015 (95%) and was followed by Bulgaria (64%), Slovakia (58%) and Lithonia (57%). However, with all this growth, Romania had the second lowest wages in the EU in 2016 after Bulgaria. After the governmentimplemented increase in the minimum wage from 1050 to 1250 lei starting on 1 May, Romania will remain second from the bottom of the table after Lithuania, which has a level of 300 € (Appendix 2). At the national level, the minimum wage level was established by Government Decision no. 1017/2015 after consultation with trade unions and employers. Government decisions and minimum wage fluctuations are presented in Appendix 3.

6 The main reason for selecting this year was the lack of available data for the last 2 years 2015 and 2016.

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According to a European Commission (2015, pp. 20–21), “wage growth has been moderate but uneven, with the wage distribution becoming increasingly compressed at the bottom due to strong increases in minimum wages. It has been increasing sharply since 2012 and is expected to reach close to 48% of average gross earnings at the end of 2016”. Approximately 2.4 million Romanian workers representing 40% of total active employees received the minimum wage or less in 2015. Of these workers, 1.6 million were full-time workers, and 0.8 million were part-time workers. If the wage achieves 46% of the gross average earnings, it will not have the capacity to guarantee the minimum standard of living for employees. A portion of these workers is paid at the minimum wage or less to avoid a tax payment to authorities. Since 2000, the minimum wage has increased constantly yearly or several times per year. Figure 2 shows the evolution of the nominal and real minimum wages for the period 2000–2016. Both the nominal and real minimum wages have followed a consistent upward trend with short periods of stagnation in real terms (the period 2009–2010 highlighting the impact of the economic crisis). An analysis of the evolution of the real and nominal minimum wages for the period 2000–2016 shows that in nominal terms, the minimum wage increased by 20 times in 2016 compared with 2000. In real terms, the wage increased by nearly five times. To clarify the growth of the minimum wage during the analysed period, it worth examining the ratio of the minimum wage to the average gross earnings. A steady increase was observed in the average gross earnings to a value of 39.6% in the first quarter of 2003, and it declined sharply to 24.7% at the end of 2007. Starting from 2008, the ratio of the minimum wage begins to increase slowly, registering a value of 38.6% at the end of 2015, with a value of 48% the average earnings expected at the end of 2016. 1400 1200

real monthly minimum wage(2005-reference year) nominal monthly minimum wage

RON

1000 800 600 400 200 0

Fig. 2 The evolution of the minimum wage for the period 2000–2016

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Currently, the introduction of an adjustment mechanism for the minimum wage that relates the value to productivity or economic growth has been discussed. However, the unions claim that in such a mode, any increase will be relatively small because the minimum wage amount does not have the capacity to guarantee a minimum standard of living of employees. Conversely, employers highlighted that these increases will lead to employment loss. Policymakers are concerned about this negative effect associated with raising the minimum wage because it is likely to affect the competitiveness level, business environment, taxation and informal sector. The minimum wage does not follow a transparent mechanism and is based more on hidden interests (electoral interests). Furthermore, increases in the minimum wage that are not connected to economic growth and labour market performance have created additional pressure on wage distribution by pushing low-skilled and youth workers into unemployment or informality.

4 The Minimum Wage Fuels the Romanian Shadow Economy? An Empirical Investigation Based on Granger Causality Analysis 4.1

Data and Methodology

To estimate the effect of the minimum wage on informality, quarterly data for the period 2000Q1–2015Q2 have been used. The MIMIC structural equation model has been used to determine the size of the Romanian shadow economy (SE). Using this model, the SE is considered “a latent variable, related on the one hand to a number of observable indicators (reflecting changes in the size of the SE) (the measurement model) and on the other hand to a set of observed causal variables considered the main determinants of shadow activity (the structural model)” (Dell’Anno 2003; Dell’Anno and Solomon 2007; Dell’Anno et al. 2007). In an estimation of the Portugal SE, Dell’Anno (2007) noted the following mathematical specification of the MIMIC model: Y ¼ λη þ ε

ð1Þ

η ¼ γ0X þ ξ

ð2Þ

where η is the size of the SE; Y0 ¼ (Y1, . . .Yp) is the vector of indicators; X0 ¼ (X1, . . . Xq) is the vector of causes; λ( p × 1) and γ (q × 1) are vectors of parameters; and ε( p × 1) and ξ( p × 1) are vectors of scalar random errors. For Romania, in the process of estimating the size of the SE, we have considered the following: fiscal regime and its components (direct taxes, indirect taxes and social contributions), government consumption as a percentage of GDP, government employment as the ratio of labour force, part-time employment as a ratio of total

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employment, unemployment rate, self-employment and perception indices7 (particularly, regulatory quality and rule of law). We used three indicator variables: the real gross domestic product index (2005¼100), the currency ratio C/M1 and the labour force participation rate. The data sources are Eurostat databases, monthly bulletins of the National Bank of Romania and the Tempo database of the National Institute of Statistics. The series exhibiting seasonality have been seasonally adjusted using the Census X-13 method. The non-stationarity of the series has been tested using unit-root tests (ADF and PP tests). The empirical results revealed that the series are I(1), and they have been differenced to achieve stationarity. Several specifications of the model were estimated in STATA 13 because certain causal variables cannot be simultaneously included in the model, as they are highly correlated. As the estimation method, we used the robust maximum likelihood8 method because the results of Mardia (1970), Doornik-Hansen (2008) and Henze-Zirkler’s (1990) revealed a rejection of the hypothesis of multivariate normality. To estimate the model, in accordance with Giles and Tedds’ (2002) perspective, we normalized the index of the real GDP to ―1, which implied that an inverse relationship occurs between the official economy and the SE. The optimal model is a 4-1-2 MIMIC model in which the main drivers of SE are the unemployment rate, self-employment, indirect taxation and regulatory quality, and the presence of SE is best reflected by increases in currency reported to the monetary aggregate M1. Indirect taxation has a significant influence on the size of the SE, and the significant positive sign of the unemployment rate highlighted that the SE is considered a “buffer” for the official economy (Davidescu and Strat 2015). As a portion of the “officially” unemployed move to the informal sector to supplement their earnings, Dell’Anno and Solomon (2007) stated that “there is a flow of resources from the official sector to the SE in recession cycles”. The sign reveals the significant impact of self-employment on the SE because these individuals have various opportunities to avoid paying taxes. The regulatory quality index has an expected negative sign, which revealed that a high level of the official economy was associated with a higher quality of regulations. According to Razmi et al. (2013, p. 5), “institutional instability, lack of transparency and rule of law undermine the willingness of frustrated citizens to be active in the formal economy. Citizens will feel cheated if they believe that corruption is widespread, their tax burden is not spent well, their government lacks accountability and that they are not protected by the rules of law, increasing the probability to enter the informal sector”.

7 In the model, we have also included other perception indices (economic freedom, freedom from corruption, fiscal freedom, labour freedom, rule of law, government effectiveness and control of corruption); however, their coefficients were not statistically significant. 8 The main advantage is that it offers the same parameters as the ML estimates, although the standard errors are corrected.

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The empirical results revealed that at the beginning of 2000, the size of the SE was 36.5% and followed a declining trend, with a value of 27.8% at the end of 2008, which is considered the beginning of the economic crisis in Romania. From this point forward, the size of the SE followed a slow increase at nearly 30.2% of the official GDP in the third quarter of 2010. Until the beginning of 2011, the size of the SE decreased slowly, whereas from 2011 to the end of 2013, we noted a slowly increasing trend. For recent quarters, a slowly decreasing trend can be highlighted, and the ratio of the unofficial economy was 29% of the official GDP in 2015. Furthermore, we expressed the SE as the natural logarithm of the real SE activity per capita9 divided by CPI (2005¼100) for the first model and SE activity per capita % of GDP per capita for the last two. For the minimum wage, we used three proxies: the log of the real monthly minimum wage10 (RON per capita), the minimum wage as a ratio of average gross earnings (%) and the minimum wage as a ratio of GDP per capita (%). A detailed description of the variables is provided in Appendix 4. We also considered the potential impact of the unemployment rate, the employment rate, the proportion of people having second jobs (percentage of total employment), the part-time employment as a ratio of total employment, the proportion of workers with temporary contracts (percentage of employment), the inflation rate, the real labour productivity per hour worked, the index 2010¼100 and a series of dummy variables: d1, the introduction from the second quarter of 2011 of a Labour Code amendment (a collective labour agreement was eliminated, and undeclared work was criminalized), and d2, the impact of the economic crisis (from 2010Q3–2013Q1, salaries in the public sector decreased by 25%; from 2010Q3, the VAT increased from 19% to 24% until 1 January 2016, when the VAT decreased to 20%). The series has been seasonally adjusted using the Census X-13 method. The Tempo database of the NIS and quarterly databases11 of Eurostat have been used as data sources. To quantify the potential effect of the minimum wage increase on the size of the SE, we used the Granger causality under VECM and the following econometrical techniques analysis of non-stationarity tests, Johansen cointegration test, VECM and Granger causality method with the impulse response function. The unit-root tests ADF and PP were used to identify the order of integration of the variables. Furthermore, the occurrence of long-run relationship has been tested using a VAR model in level to determine the optimal lag length using informational criteria such as the AIC or SCH to assure the absence of a serial correlation in the residuals. If the variables are not cointegrated, a VAR model in difference must be estimated, and the Granger causality will be tested under the results of this model. If the variables have the same order of integration and are cointegrated, then a cointegrated VAR model incorporating an error correction mechanism must be estimated.

9

By dividing it to the total population (15 years and over). It was obtained by dividing the nominal monthly minimum wage (RON) to CPI (2005¼100). 11 Employment and unemployment and consumer price index. 10

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According to Johansen (1991) and Lütkepohl (2007), “the vector error correction model (VECM) restricts the long-run behaviour of the endogenous variables to converge to their cointegrating relationships while allowing for short-run adjustment dynamics. The cointegration term is known as the error correction term because the deviation from long-run equilibrium is corrected gradually through a series of partial short-run adjustments and indicates the speed of adjustment of the model from the short run to the long run”. The estimated VECM can be defined as follows12: ΔX t ¼ μ þ Γ1 ∙ ΔX t―1 þ ∙ ∙ ∙ þ Γp―1 ΔX t―pþ1 þ Π ∙ X t―1 þ εt

ð3Þ

where Δ is the difference operator; X is the set of I(1) variables; μ is a drift parameter; εt ≈ niid(0, Σ); Π is a (n × n) coefficient matrix decomposed as Π ¼ γ ∙ β0 ; γ, β are both n × r matrices of full rank, where γ represents the adjustment coefficients and β contains the r cointegrating vectors; and Γ denotes a (n × n) matrix of coefficients and contains information regarding the short-run relationships among the variables. The Granger causality has the following form: ΔY t ¼ C 0 þ

p X

βi Y t―i þ

i¼1

ΔX t ¼ C 0 þ

p X i¼1

p X

αi X t―i þ pi ECTt―1 þ ut

ð4Þ

ζ i Y t―i þ ηi ECTt―1 þ εt

ð5Þ

i¼1

γ i X t―i þ

p X i¼1

where pi, ηi is the adjustment coefficient and ECTt ― 1 is the error correction term. Within a VECM, both long-run and short-run causalities can be observed. To confirm whether long-run Granger causality occurs, the ECM coefficients must be negative and statistically significant in terms of the t-test. The short-run Granger causality is confirmed when the lagged coefficients are jointly statistically significant in terms of the Wald test or the F-test. We can state that in Eq. (4), X Granger causes Y if αi is significantly different from zero, and Y Granger causes X in Eq. (5) if ζ i is significantly different from zero. After the Granger causality has been confirmed, Pesaran and Shin (1998) generalized impulse response functions have been used to measure the effect and the time lag of a shock in the minimum wage on the Romanian informality.

4.2

Empirical Results

An analysis of the changes of the indicators during the period 2000–2015 shows that a co-movement relationship occurs between the real minimum wage and real SE per

12

Adam and Tweneboah (2009), Anastassiou and Dritsaki (2005).

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capita and between the minimum wage as a percentage of GDP per capita and SE as a percentage of GDP per capita (Figs. 3 and 4). To analyse the potential impact of the minimum wage on informality, the first step is to analyse non-stationarity according to the ADF and PP tests, which revealed that the variables are non-stationary at their levels and integrated to order one, I(1). Then, we investigated whether a long-run relationship occurred between these variables using the multivariate Johansen cointegration test under a VAR model at level. We selected the optimal lag length using the informational criteria AIC and SBC and considering the stability condition and the hypotheses of residuals (non-autocorrelation, homoscedasticity and normality). According to the information criteria, for all three models, the optimal lag length was 1. The empirical results of the cointegration test revealed the presence of a long-run equilibrium relationship between the real minimum wage and the real SE per capita (model 1) and between the minimum wage as a percentage of average gross earnings and the minimum wage as a percentage of GDP per capita and the SE as a percentage of GDP per capita (model 2 and model 3), respectively. Based on the occurrence of a cointegration relationship, we estimated three VECM for each proxy of the minimum wage. Several specifications for each model have been tested, with the optimal specification quantifying the impact of the minimum wage on informality in the presence of the official economy (Table 1). In the first model, the long-run coefficient of minimum wage is positive and statistically significant at 1%, which indicates that if the minimum wage increased by 1%, the size of the informality per capita will increase by 0.14% in the long run,

2.5

thousands RON per month

2

1.5

1

0.5

0 Q1 2000

Q3 2002

Q1 2005

real monthly minimum wage

Q3 2007

Q1 2010

Q3 2012

Q1 2015

real shadow economic activity per capita

Fig. 3 The evolution of the real monthly minimum wage versus real shadow economy per capita. Source: Tempo database, National Institute of Statistics, Quarterly databases of Eurostat

A. A. M. Davidescu and F. Schneider 45

40

40

35

35

30

30

25

25 20 20 15

15

10

10

5

5 0 Q1 2000

Q3 2002

Q1 2005

Q3 2007

Q1 2010

Q3 2012

0 Q1 2015

size of shadow economy and minimum wage (% of off.GDP per capita)

minimum wage as (% of average gross earnings)

168

minimum wage as % of average gross earnings shadow economic activity per capita % of GDP per capita minimum wage as %of GDP per capita

Fig. 4 The evolution of the minimum wage as percentage of GDP per capita versus SE as percentage of GDP per capita. Source: Tempo database, National Institute of Statistics, Quarterly databases of Eurostat

ceteris paribus. The negative long-run relationship between the official and unofficial economies quantified by the coefficient ―0.61 indicates that both sectors are substitutes in the long run and the SE can be considered a buffer or a safety valve for the official sector. When the official economy decreases, the activity in the informal sector should increase. Most short-run coefficients do not reveal statistical evidence because the minimum wage does not impact informality in the short run. However, in the short run, both economies are more likely to represent complements rather than substitutes with a positive relationship. The error correction term is negative and highly significant, which indicates that causality occurs in at least one direction. The term’s value of ―0.36 indicates that deviation from the long-term equilibrium is restored by 36% each quarter. The model is well-specified in terms of the F-test, and the degree of determination is 29.9%. The Granger causality analysis was tested using the VECM. For model 1, we only identified a long-run unidirectional Granger causality that runs from the real minimum wage to the shadow activity per capita (t-ratio of the ECT is statistically significant at 1% and negative). The short-run causality has been infirmed because of the lack of significance of the F-test. In the second model, the long-run coefficient of the minimum wage is positive and statistically significant at 1%, which reveals that if the ratio of the minimum wage in average gross earnings increases by 1%, the size of informality as a percentage of GDP per capita would increase by 0.15% in the long run, ceteris paribus. The negative long-run relationship between the official and unofficial economies shows that both sectors are substitutes in the long run.

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Table 1 Empirical results of VECM

Model Long-run results log (real SEt ― 1 per capita) SEt ― 1 log(realMW)t ― 1

Model 1 Real minimum wage and real SE per capita

Model 2 Minimum wage (percentage of average gross earnings) and SE as percentage of GDP per capita

Model 3 Minimum wage (percentage of GDP per capita) and SE as percentage of GDP per capita

1.00

1.00

1.00

0.14* (0.055) 0.156* (0.03)

MQCSt ― 1

―0.61* (0.12) 4.97*

―20.73* (2.68) ―194.05

0.56* (0.12) ―21.50* (3.14) ―200.30

―0.36* (0.139) ―0.03 (0.04)

―050* (0.14)

―0.47* (0.12)

MWGDP _ capitat ― 1 log (real _ gdp _ capita)t ― 1 Cons. Short-run results ECTt ― 1 D(log(realMW))t ― 1

―0.028 (0.029)

D(MQCSt ― 1)

0.038 (0.14)

―0.18 (0.20) ―0.019 (0.13)

2.91 (4.96) ―0.25* (0.10) 0.24 (0.18) 0.21 (0.21) 24.6%

3.08 (5.02) ―0.26* (0.10) 0.28 (0.18) 0.18 (0.21) 26.6%

0.56 3.88**

0.55 3.21**

13.66 [0.13] 75.56 [0.00]

7.01 [0.63] 55.81 [0.00]

D(MWGDP _ capitat ― 1) D(SE)t ― 1 D(logrealSEt ― 1) percapita D(log (real _ gdp _ capita))t ― 1 C Labour code mod. dummy Dummy crisis

―0.12 (0.17) 0.72* (0.24) 0.008 (0.0050) ―0.0058 (0.008) ―0.0028 (0.009) 29.9%

R-2 s.e. 0.024 F-stat 3.17** The short-run diagnostic test statistics Autocorrelation LM test 19.12 [0.26] Normality test 2235.85 [0.00]

(continued)

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Table 1 (continued)

Model White test AIC SBC

Model 1 Real minimum wage and real SE per capita 323.25 [0.59] ―4.47 ―4.19

Model 2 Minimum wage (percentage of average gross earnings) and SE as percentage of GDP per capita 126.76 [0.91] 1.80 2.04

Model 3 Minimum wage (percentage of GDP per capita) and SE as percentage of GDP per capita 121.30 [0.95] 1.77 2.01

Note: Standard errors are in parentheses. s.e. is the standard error of the equation. [ ] denote the prob. levels. *, **, *** indicates significance at the 1%, 5%, 10% levels Source: Authors’ own table

The short-run estimates indicate a potential relationship between the minimum wage and SE as well as between both sectors. The long-run causality was confirmed by the negative sign and the significance of the error correction term, meaning that the SE converged to its long-run level by the contribution of the minimum wage and the official economy at 50% of the speed of adjustment. The model is well-specified in terms of the F-test, and the degree of determination is 24.6%. A long-run Granger causality was identified from the minimum wage as an average gross earnings ratio to the SE as a percentage of GDP per capita because the error correction term is negative and statistically significant. The short-run causality was disproven because of the lack of significance of the F-test. In the last model, the long-run coefficient of minimum wage is positive and statistically significant at 1%, which indicates that an increase in the minimum wage by 1% of GDP per capita will increase the size of informality as a percentage of GDP per capita by 0.56% in the long run, ceteris paribus. The negative long-run relationship between the official and unofficial economies shows that both sectors are substitutes in the long run. The short-run estimates indicate a potential relationship between the minimum wage and SE as well as between both sectors. The long-run causality was also confirmed for this last model, with the SE converging to its long-run level by 47% of the speed of adjustment. The model is well-specified in terms of the F-test, and the degree of determination is 26.6%. The negative sign and the significance of ECT confirm the presence of a long-run Granger causality running from the minimum wage to the SE as a percentage of GDP per capita. The short-run causality has been disproven because of the lack of significance of the F-test. In all models, the hypotheses on the residuals have been validated. The dummy variables do not present any impact on the size of the informality in Romania (Table 2). We applied the generalized impulse response functions of Pesaran to measure the effects on informality of a shock in the minimum wage. The empirical evidence is presented in Fig. 5. The results presented in the first line suggest that the real SE per

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Table 2 Granger causality test results

Null hypothesis/lag level Model 1 Real minimum wage does not Granger causes real SE per capita Model 2 Minimum wage (percentage of average gross earnings) does not Granger causes SE as % of GDP per capita Model 3 Minimum wage (percentage of GDP per capita) does not Granger causes SE as percentage of GDP per capita

1 Fstat

t ECTt―1

Results

0.66

―2.60*

Long-run causality

0.91

―3.55*

Long-run causality

0.82

―3.81*

Long-run causality

Source: Authors’ own table Asterisks indicate highly statistically significant at 1% significance level

capita will increase by approximately 0.86% with a 1% increase in the real minimum wage shock, and the shock will achieve its full potential at the level of the fourth quarter; thereafter, the trend flattens. The second figure presents the effects on the SE of a one SD shock increase in the minimum wage as a percentage of the average gross earnings, and the results also reveal that the SE will increase by 0.18% in the third quarter level under a 1% shock in the minimum wage. Subsequently, the trend flattens. A positive shock in the minimum wage as a percentage of the official GDP per capita leads to an increase of 0.31% in the size of the SE as a percentage of GDP per capita manifested in the fifth quarter; then, the trend flattens. Overall, the empirical results showed that in the long run, the minimum wage has a positive and statistically significant impact on the size of the SE; however, in the short run, the empirical results do not support an effect of the minimum wage. The empirical results revealed that a negative relationship occurs between official and unofficial economies for all three models, thus highlighting that the informal economy could represent a buffer for certain periods of time and certain categories of individuals (young or low-skilled workers).

5 Discussion and Conclusion The main objective of this chapter was to measure the effects of the minimum wage on Romanian informal activities based on the sharp increases in the minimum wage observed in the recent periods and the new increase planned by the government for January 2017. In this context, the impact of an increase in the minimum wage must be determined because although it is proposed a social policy instrument, such an increase will create additional pressure on wage distribution and push low-skilled and youth workers into unemployment or informality.

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Fig. 5 Generalized impulse responses of informality to one SD shock in the minimum wage

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The size of the SE was estimated using the MIMIC model, and the empirical results reveal that unemployment, self-employment, indirect taxation and lack of trust in government can be considered causes of Romanian informality. The figures mainly show a decreasing trend over the period, with a slight reverse trend. The empirical results of the effect of the minimum wage on informality show that an increase in the minimum wage can be regarded as a long-term supporting factor for the SE; i.e. an increase in the minimum wage will lead to an increase in informal economic activities because firms will seek alternative methods of circumventing authorities. However, in the short run, the empirical results do not indicate an effect of increasing the minimum wage. The results of this study are consistent with the results of most similar studies in the literature, which emphasized the role of minimum wage as a supporting factor of shadow activities. The empirical results also revealed a negative relationship between official and unofficial economies, highlighting that the informal economy could act as a buffer for certain periods of time and certain categories of individuals (young or low-skilled workers). Furthermore, the main focus should be on encouraging economic growth and increasing the attractiveness of the official economy for individuals who will return to the formal sector. Policy recommendations for reducing the incidence of informal activities include refining the taxation structure and labour regulations, improving incentives offered to low-wage earners, establishing and strengthening the trust of people in government and increasing tax compliance. These types of measures could help authorities improve the formalization of the SE in countries like Romania. Formulating labour market policy guidance to create a balance between the degree of regulations (minimum wage) and the size of shadow activities could be very risky, and the risk increases when minimum wage increases do not follow a transparent mechanism and are inconsistent with the evolution of the labour market. Nevertheless, the following recommendations provide a mix of incentives for both firms and workers: – Introduce a lower minimum wage for young people that consider the risk of reducing the attractiveness of the work but also the advantage of stimulating their employment. – Maintain the minimum wage for low-skill jobs at a low level relative to average wages to assure the social role of the minimum wage. – Improve and increase the amount of subsidies received by employers who engage unemployed persons. – Introduce a tax exemption for those employees who are at or near the minimum wage and reduce labour costs for those employers who have workers who earn at levels close to the minimum wage. Acknowledgements We are grateful to the National Scientific Research Institute for Labour and Social Protection Romania for funding the empirical research within the project PN 16440102 entitled “The impact of labour market institutions on informality. Micro and macro approaches”.

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Appendix 1 Minimum Wages, January 2016 (PPS per Month)

Group 1

Group 2

Group 3

Albania Romania Bulgaria FYR of Macedoniaa Serbia Montenegrob Latvia Lithuania Czech Republic Estonia Slovakia Croatia Hungary Portugal Poland Greece Spain Malta Turkey Sloveniab United States United Kingdom Ireland France Netherlands Belgium Germany Luxembourg

(PPS per month) 329 445 449 458 480 519 528 557 564 569 597 618 625 756 792 800 828 900 947 968 1028 1133 1265 1361 1373 1382 1451 1597

Source: Eurostat (online data code: earn_mw_cur) Note: Estimates. Denmark, Italy, Cyprus, Austria, Finland and Sweden: no national minimum wage a January 2015 b July 2015

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Appendix 2 The Distribution of Proportion of Minimum Wages by EU Countries in 2014

60

50

%

40

30

20

10

Slovenia

Greece (4)(6)

Turkey (3)(4)

France (2)

Lithuania

Luxembourg

Poland

Hungary

Portugal (5)

Malta

Belgium (3)(4)

Latvia

Netherlands (2) Serbia

Ireland

Bulgaria

United Kingdom

Croatia

Romania

Slovakia

Spain

Estonia

Czech Republlic

0

Notes: (1) NACE Rev. 2 Sections B–S. Denmark, Germany, Italy, Cyprus, Austria, Finland and Sweden: no national minimum wage in 2014. (2) 2013. (3) 2010. (4) Excluding NACE Rev. 2 Section O. (5) Excluding NACE Rev. 2 Sections O–Q. (6) 2011. Source: Eurostat (online data code: earn_mw_avgr2)

Appendix 3 National Minimum Gross Guaranteed Wage, 2000–2016 Starting date 1 May 2016 1 July 2015 1 January 2015 1 July 2014 1 January 2014 1 July 2013 1 February 2013 1 January 2012 1 January 2011 1 January 2009

Value in lei 1250 RON 1050 RON 975 RON 900 RON 850 RON 800 RON 750 RON 700 RON 670 RON 600 RON

Value in EUR 275 236 216 205 189 179 171 155 159 142

Legislation HG 1017/2015 HG 1091/2014 HG 871/2013 HG 23/2013 HG 1225/2011 HG 1193/2010 HG 1051/2008 (continued)

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Starting date 1 October 2008 l January 2008 l January 2007 1 January 2006 l January 2005 I January 2004 l January 2003 1 March 2002 1 March 2001 1 December 2000 1 February 2000 1 May 1999

Value in lei 540 RON 500 RON 390 RON 330 RON 310 RON 2,800,000 ROL 2,500,000 ROL 1,750,000 ROL 1,400,000 ROL 1,000,000 ROL 700,000 ROL 450,000 ROL

Value in EUR 142 140 114 90 85 70 65 62 56 45 39 28

Legislation HG 1051/2008 HG 1507/2007 HG 1825/2006 HG 1766/2005 HG 2346/2004 HG 1515/2003 HG 1105/2002 HG 1037/2001 HG 231/2001 HG 1166/2000 HG 101/2000 HG 296/1999

Source: Author’s own table

Appendix 4 The Description and Source of the Data Variables Description Variables used in the estimation of the shadow economy Fiscal regime Total fiscal revenues/GDP, % Direct taxes Indirect taxes Social contributions Unemployment rate

Self-employment

Current taxes on income, wealth/ GDP, % Taxes on production and imports/ GDP, % Net social contributions/GDP, % Unemployment rate represents the ratio of the unemployed, according to international definition (ILO*), in economically active population, % Self-employed persons are the ones who work in their own business, farm or professional practice. A self-employed person is considered to be working if she/he meets one of the following criteria: works for the purpose of earning profit, spends time on the operation of a business or is in the process of setting up his/her business Self-employed persons/active population, %

Sources Quarterly Government Finance Statistics, Eurostat Quarterly Government Finance Statistics, Eurostat Quarterly Government Finance Statistics, Eurostat Quarterly Government Finance Statistics, Eurostat Labour Force Survey, Eurostat

Labour Force Survey, Eurostat

(continued)

The Minimum Wage Fuels Romania’s Shadow Economy? Variables Government consumption

Part-time employment as a percentage of the total employment Government employment Regulatory Quality (X10)

Rule of law (X11)

Description Final consumption expenditure of general government/GDP, %. It is a proxy for the size of government General government final consumption expenditure (formerly general government consumption) includes all government current expenditures for purchases of goods and services (including compensation of employees) Part-time employment rates represent persons employed on a parttime basis as a percentage of the same age population, % Government employment/active population, % Worldwide Governance Indicators, WB

Worldwide Governance Indicators, WB

177 Sources Quarterly Government Finance Statistics of Eurostat

Labour Force Survey, Eurostat

Labour Force Survey, Eurostat Reflects perceptions of the ability of the government to formulate and implement sound policies and regulations that permit and promote private sector development The scores of this index lie between ―2.5 and 2.5, with higher scores corresponding to better outcomes Reflects perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police, and the courts, as well as the likelihood of crime and violence Quarterly National Accounts database of Eurostat Monthly Bulletins of National Bank of Romania

Chain-linked volumes, index 2005¼100 C/M1, %. It corresponds to the currency outside the banks as a proportion of M1 Labour force particiLabour force participation rate, % Labour Force Survey, Eurostat pation rate It corresponds to the labour force participation rate, total (percentage of total population). Labour force participation rate is the proportion of the population that is economically active: all people who supply labour for the production of goods and services during a specified period Variables used in the analysis of the relationship between minimum wage and the size of the shadow economy

Index of real GDP (2005¼100) C/M1

(continued)

178 Variables Ln SE per capita

SE per capita Log(realMW) MQCS

A. A. M. Davidescu and F. Schneider Description Natural logarithm of the real SE activity per capita divided by CPI (2005¼100) SE activity per capita percentage of GDP Log of the real monthly minimum wage (RON per capita) The minimum wage as a ratio of average gross earnings (%)

MWGDP per capita

The minimum wage as a ratio of GDP per capita (%)

Official economy

GDP per capita

Sources

Tempo database, National Institute of Statistics Employment and unemployment and consumer price index databases of Eurostat, Tempo database, National Institute of Statistics Employment and unemployment and consumer price index databases of Eurostat, Tempo database, National Institute of Statistics National Accounts database, Eurostat

Source: Author’s own table

References Abowd JM, Kramarz F, Margolis DN (1999) Minimum wages and employment in France and the United States (No. w6996). National Bureau of Economic Research Adam AM, Tweneboah G (2009) Foreign direct investment and stock market development: Ghana’s evidence. Int Res J Financ Econ 26:178–185 Anastassiou T, Dritsaki C (2005) Tax revenues and economic growth: an empirical investigation for Greece using causality analysis. J Soc Sci 1(2):99–104 Andreica ME, Cataniciu N (2009) Models of minimum wage impact upon employment in Romania. Revista “Calitatea – Acces la succes”, vol 10, nr. 101 Special, Editura Cibernetica MC, Bucureşti, ISSN 1582-2559. http://conferinta.academiacomerciala.ro/sIMPOZION%202009. pdf. BDI (SCOPUS, EBSCO, CABELL’S, PROQUEST) Andreica ME, Cristescu A, Pirciog S (2011) Simulation scenarios of employment on the Romanian labor market. In: Proceedings of the 2nd international conference on applied informatics and computing theory, pp 260–264 Betcherman G (2012) Labor market institutions: a review of the literature. World Bank Policy Research Working Paper, 6276 Boeri T, Garibaldi P, Ribeiro M (2011) The lighthouse effect and beyond. Rev Income Wealth 57 (S1):S54–S78 Bhorat H, Kanbur R, Mayet N (2013) The impact of sectoral minimum wage laws on employment, wages, and hours of work in South Africa. IZA J Labor Dev 2(1):1 Card D, Krueger AB (1995a) Myth and measurement: the new economics of the minimum wage. Princeton University Press, Princeton, pp 1, 6–1, 7 Card D, Krueger AB (1995b) Time-series minimum-wage studies: a meta-analysis. Am Econ Rev 85 (2):238–243 Card D, Krueger AB (2000) Minimum wages and employment: a case study of the fast-food industry in New Jersey and Pennsylvania: reply. Am Econ Rev 90(5):1397–1420

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Khamis M (2008) Does the minimum wage have a higher impact on the informal than on the formal labor market? Evidence from quasi-experiments. IZA Discussion Papers 3911. Institute for the Study of Labor (IZA), Bonn Khamis M (2013) Does the minimum wage have a higher impact on the informal than on the formal labour market? Evidence from quasi-experiments. Appl Econ 45(4):477–495 Krstić G, Schneider F (2014) Formalizing the shadow economy in Serbia. Springer, Cham. ISBN: 978-3-319-13436-9 Lemos S (2004) The effects of the minimum wage in the formal and informal sectors in Brazil. IZA Discussion Paper No. 1089. Bonn Lütkepohl H (2007) New introduction to multiple time series analysis. Springer, New York Machin S, Manning A (1994) The effects of the minimum wages on wage dispersion and employment: evidence from the U.K. wage councils. Ind Labor Relat Rev 47(2):319–329 Magruder JR (2013) Can minimum wages cause a big push? Evidence from Indonesia. J Dev Econ 100(1):48–62 Maloney WF (1998) Are labor markets in developing countries dualistic? The World Bank, Washington, DC Maloney W, Mendez J (2004) Measuring the impact of minimum wages. Evidence from Latin America. In: Law and employment: lessons from Latin America and the Caribbean. University of Chicago Press, Chicago, pp 109–130 Mardia KV (1970) Measures of multivariate skewness and kurtosis with applications. Biometrika 57:519–530 Mcintyre F (2002) How does the minimum wage affect market informality in Brazil. Unpublished Paper Mocanu C, Zamfir AM, Lungu E, Militaru E (2012) School-to-work transition of higher education graduates in four Eastern European countries. Maastricht School of Management, Working Paper (2012/15) Muravyev A, Oshchepkov AY (2013) Minimum wages and labor market outcomes: evidence from the emerging economy of Russia. Higher School of Economics Research Paper No. WP BRP, 29 Neri M (1997) A Efetividade Do Salario Minimo No Brasil: Pobreza, Efeito-Farol E Padroes Regionais. Unpublished Paper Neumark D, Wascher W (1992) Employment effects of minimum and subminimum wages: panel data on state minimum wage laws. Ind Labor Relat Rev 46(1):55–81 Neumark D, Schweitzer M, Wascher W (2000) The effects of minimum wages throughout the wage distribution (No. w7519). National Bureau of Economic Research Packard TG, Koettl J, Montenegro C (2012) In from the shadow: integrating Europe’s informal labor. World Bank Pesaran HH, Shin Y (1998) Generalized impulse response analysis in linear multivariate models. Econ Lett 58(1):17–29 Popescu ME, Stanilă L, Cristescu A (2015) A gender analysis of the minimum wage effects upon employment in Romania. In: Proceedings of the IE 2015 international conference, pp 444–449. ISSN 2284–7472. https://ideas.repec.org/a/agr/journl/vxxy2013ispecial-iip417-429.html. BDI (EBSCO, REPEC, CABELL'S, ISI Web of Knowledge) Pirciog S, Ciuca V, Popescu ME (2015) The net impact of training measures from active labour market programs in Romania–subjective and objective evaluation. Procedia Econ Finance 26:339–344 Razmi MJ, Falahi MA, Montazeri S (2013) Institutional quality and underground economy of 51 OIC member countries. Universal Journal of Management and Social Sciences, 3 Rei D, Bhattacharya M (2008) The impact of institutions and policy on informal economy in developing countries: an econometric exploration. ILO, Geneva Schneider F (2005) Shadow economies around the world: what do we really know? Eur J Polit Econ 21(3):598–642 Schneider F, Buehn A, Montenegro CE (2010) New estimates for the shadow economies all over the world. Int Econ J 24(4):443–461

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Tokman VE (2001) Integrating the informal sector in the modernization process. SAiS Rev 21(1):45–60 Zamfir AM, Maer-Matei MM, Mocanu C (2015) “Skills proficiency and wages in Germany and UK” in The Turkish Online Journal of Educational Technology, July, Special Issue 2 for INTE 2015, pp 487–492. ISSN: 2146-7242

Further Reading Earnings Database, Eurostat Employment and Unemployment database, Eurostat EurWORK Network of European correspondents. http://www.eurofound.europa.eu/observatories/ eurwork/articles/working-conditions-industrial-relations/statutory-minimum-wages-in-the-eu-2016 Eviews 8.1 software ILO, World employment report 2004-05. Employment, productivity and poverty reduction, 2004. http://www.ilo.org/global/publications/ilo-bookstore/order-online/books/WCMS_PUBL_ 9221148130_EN/lang%2D%2Den/index.htm Ministerul Muncii. www.mmuncii.ro Monthly Bulletins of National Bank of Romania, 2000–2015. www.bnr.ro Quarterly Government Finance Statistics database, Eurostat Quarterly Labor Force Survey database, Eurostat Quarterly Monetary and Financial Statistics database, Eurostat Quarterly National Accounts database, Eurostat Stata 13 software Tempo database, National Institute of Statistics

Gamifying Innovation and Innovating Through Gamification Agnessa Shpakova, Viktor Dörfler, and Jill MacBryde

Abstract Gamification is a new and rapidly growing trend impacting a wide range of areas, such as education, marketing, personal development and others. It can be an innovative output when applied to these fields. We can also see early examples of gamification being used to spark innovation activities in an organisation—i.e. be part of the process of innovating. The impact of gamification on the area of innovation is multidimensional, and this chapter explores the variety of ways for synergy of gamification and innovation: as an aspect of innovation, as an outcome or as a facilitation of ideas, creation and selection. This synergy might help the companies bridge different sectors with the help of gamification embodied in the product or service, as well as lead to further value-added outcomes, such as improved knowledge sharing and improved cross-sector collaboration.

1 Introduction The UK Department for Work and Pensions implemented a gamified platform for collecting and sharing cost-saving ideas called ‘Idea Street’. On this platform, employees can post their ideas, are rewarded with virtual coins for sharing their ideas, can invest their coins in the ideas of others and receive profit in virtual coins in case the idea of their choice is selected and implemented (Vezina 2011). By the end of the first year, cost savings generated from implemented ideas amounted to 20 million GBP, and this number could have been even higher if the agency had the capacity to implement a larger number of ideas that were designated worthy (Lawrenson 2013). It seems sensible to assume that the success of the initiative was enabled by the dynamics created with the help of game elements, primarily virtual coins, or, at least, that gamification played an important role in this success. It is important to note that the virtual coins were not linked to any monetary rewards. Curiously, it A. Shpakova (*) Heriot-Watt University, Edinburgh, Scotland, UK e-mail: [email protected] V. Dörfler · J. MacBryde University of Strathclyde, Glasgow, Scotland, UK © Springer Nature Switzerland AG 2019 V. Ratten et al. (eds.), Subsistence Entrepreneurship, Contributions to Management Science, https://doi.org/10.1007/978-3-030-11542-5_10

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appears that this rule was key to the success: the developer of the initiative subsequently implemented a similar initiative in a bank; the only difference was that the gamification coins could be exchanged for real money. It was observed that the monetary attachment sparked a greedy behaviour and pushed the participants into fierce competition, and, as a result, the initiative turned into a disaster (Gardner 2012). Although it would be far-fetched to infer a strict causality here, the reasoning offered by James Gardner, the mastermind behind this initiative, seems at least plausible. In both cases, gamification was used to support (or even facilitate) the process of innovating; when for the participating individuals the game ended in game rewards, it was a success, when there was an associated real-world reward, it was a disaster. Another example—Foursquare1—embodied game elements in its service. Foursquare is a search service to find places for leisure activities: apart from leaving a feedback and rating a place, users can check-in every time they visit a place, collect badges for their activities or gain a status of a ‘mayor’ if they are the most frequent visitor in a particular place, but this status is taken as soon as someone else beats their score. The badges and types of statuses are constantly updated and redesigned in order to maintain the interest of the users. Furthermore, the clever design of the statuses reinforces competitive elements, such as trying to achieve or retain a status, helps getting the users deeper involved. Thus, embodying gamification in the innovative output helped turning Foursquare into a successful business. These examples are different from each other in that the first example suggests ways to enhance innovative activities (i.e. the process of innovating), while the second one illustrates an innovative output. What they have in common is gamification. In both examples, gamification helped to influence the dynamics of the users of the gamified systems. In the first case, gamification was used to push employees towards putting new ideas forward, thereby helping the organisation’s process of innovating, as well as for evaluating one another’s innovative ideas. In the second case, gamification was used to influence the users in an attempt to retain them as service customers, and thereby gamification became an innovative component of the service. Following these application examples, in order to establish the relationship between innovation and gamification at a conceptual level, we need to examine both the concept of innovation and the concept of gamification. If we seek for a definition of innovation in the literature, we can identify two distinct perspectives: innovation can be viewed as an output or as a process (Crossan and Apaydin 2010). Both perspectives take a retrospective approach. The former perspective is concerned with attempts to define innovation (Daft 1982; Utterback 1974) and understand the characteristics of the known innovation examples in order to help identify future innovations (Christensen 1997; O’Reilly and Tushman 1996). There are related attempts to establish connections between innovativeness (or the capacity to produce innovative results) and organisational characteristics, such as the architecture, structure or culture (Miles et al. 1978; Mintzberg 1980; Tidd et al. 2005).

1

https://foursquare.com

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The latter perspective is concerned more with the process of defining a problem and finding a solution in the form of an innovative output (Lam 2005; Swan and Scarbrough 2001). Related to this view, there are also often attempts to examine the possible further implementations of the particular innovative outcomes (Van de Ven et al. 2000). Gamification emerged as a concept from a process view with the purpose to enhance the process of doing routine operations in more enjoyable ways. In the early 2000s, several game designers started thinking about the ways in which the excitement and joy of playing games could be transferred into the real world, including organisations and work (McGonigal 2011). This process was given different names, such as playful design (Ferrara 2012) or gameful design (McGonigal 2011), but the term ‘gamification’ was adopted by the majority of researchers and practitioners, initially coined by Nick Pelling in 2002 to signify ‘applying game-like accelerated user interface design to make electronic transactions both enjoyable and fast’ (Pelling 2011). Although originally gamification was seen as a tool to improve user interface with game elements, later it was adopted in a wider range of areas. Today gamification can be broadly defined as ‘the process of making activities in non-game contexts more game-like’ (Shpakova et al. 2017a: 145). Some solutions incorporate just a few game elements to improve their user interface, for example, LinkedIn that increased the level of profile completion by 20% by integrating a progress bar with a feedback mechanism (Gossen 2013). Other companies centre their business around gamification, such as the above described Foursquare. Again, others employ gamification to facilitate the process of innovating, like in the above example of the Department for Work and Pensions. In this chapter, we examine examples of using gamification for innovation from both perspectives: as an output and as a process; for distinction, the output we call innovation, while the process we call innovating. Through the analysis of these examples, we discuss a variety of ways in which gamification can benefit innovation/innovating.

2 Gamification for Innovation Innovation as an output can be viewed, in relation to technology, as being incremental or radical (O’Reilly and Tushman 1996) or as being sustaining or disruptive (Christensen 1997). In relation to the organisation, based on Schumperter (Swan et al. 1999), it can be seen as product/service (external to the organisation), process (internal within the organisation) or business model (the organisation itself) innovation. With regard to the customer, we can distinguish product, solution or experience innovations (Prahalad and Ramaswamy 2003, 2004a, b). But quite often, the examples of innovation that we find are difficult to allocate to a pure type. The variety of interrelated innovation types can be well observed at the example of Duolingo2—a 2

https://www.duolingo.com

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gamified web-based service for learning foreign languages that promises to bring some fun and enjoyment into the process of studying. By advancing through a course, a user collects coins to track the progress and receives badges to acknowledge the completion of the next language level, all of which are graphically displayed on a tree, while in the comments section, for each exercise, peers help each other to understand the nuances of the studied language. And the best part of it is that the service is entirely free. Instead, the company initially generated revenues from the translation of the documents with the help of the learners (by chunking the text, having it translated by multiple learners and aggregating the results). Today, the primary source of the revenues comes from advertisements and collaboration with educational institutions. In this example, we can observe different types of innovation connected together and bound with gamification. The service of teaching a foreign language was aimed to be free and accessible for anyone around the world through the Internet. Subsequently, the traditional course and the form of delivery had to be redesigned in order to retain the users; since they do not pay for the course, the learners drop out easier. This dynamic was enabled by game elements, such as: • With pop-up characters, such as a sad owl, and fading achievements if the exercises are not regularly practiced • Daily goals that can be customised • Easy to interpret visual statistics of the progress with a progress bar indicating the level of fluency of the studied language • Leaderboards that compare your progress with that of ‘friends’ (other learners that you connect to) in order to add an element of competition Since the entire course is free, the company had to reinvent their business model and the underlying business processes: the language courses are being developed by volunteers, and the learning support is organised through peer help. The latter is done in the comment section for each of the exercises, where students can ask questions or help each other by clarifying confusing words and phrases and indicating inaccuracies in the task solutions. Gamification is not embodied in all the aspects of Duolingo’s business, but it remains a key component that indirectly enables other types of innovation. We can find other examples in the service sector and education built around gamification. In other sectors, gamification is typically used as a helpful addition that triggers the change in the ecosystem around the main innovation. For instance, the energy sector is a relatively dynamic industry facing significant environmental challenges and responding to them with innovative technological solutions, such as smart grids, but their impact is often limited by the response of the end users. In the case of smart grids, higher output in terms of savings and efficiency was achieved, when their implementation was combined with gamified applications for end users (Koutsopoulos et al. 2015; Rottondi and Verticale 2016). One such application, ‘Shamir’s Secret Sharing’, was designed to enable and promote collaboration among the users of smart meters and to keep groupaggregated consumption below a predefined level. Using this application, various

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groups compete with each other, trying to achieve the lowest consumption in return for points and awards. Within the group, they can monitor the overall consumption only by sharing their consumption level with the others, and the total amount needs to be submitted to the game administrator at the end of each game. The administrator verifies the results with readings from the smart meters and identifies the winner (Rottondi and Verticale 2016). The game is based on the combination of collaboration and competition. On the one hand, within each group, honest reporting helps to benchmark and adjust the user patterns of each individual as well as acts as peer pressure. On the other hand, competition between the groups pushes each individual to reduce energy consumption and reinforces peer pressure. Other user interface applications are focused on the individual behaviour, through offering a wider range of feedback tips. An example is offering recommendations for scheduling the best time for operating household electronic goods, in order to match the constraints of the grid, and these recommendations are represented in a form of points that can be potentially earned (Gnauk et al. 2012). But all these applications are aimed at offering a more game-like experience rather than calling for more conscious and responsible behaviour. The above examples illustrate the power of gamification that changed the perception of the users, and similar examples can be found in other sectors as well. For instance, the New-York-based ‘Quest to Learn’ school has integrated game elements throughout the whole education process. Instead of being graded, pupils get upgraded; instead of completing assignments, they complete secret missions; and so forth. The shift in attitude makes the users (pupils) strive for learning and achieving more (McGonigal 2011), demonstrating that fun infused into the classrooms through games may have a transformative power (Jorge and Sutton 2017). User experience enriched through gamification may act as a bridge between different sectors enabling cross-sector collaboration. In the school example described above, a traditional learning process has been transformed into a quest, which also required adequate IS support and a different approach to educating/ preparing teaching staff. In the smart meter application, energy-saving behaviour was enabled by a gamified user interface with meaningful and engaging rules behind it. Similarly, Ford introduced the ‘SmartGauge’ dashboard in hybrid cars, which ‘grows digital leaves’ in response to more energy-efficient driving (Xu 2011), bridging driving user experience and more sustainable driving behaviour. All these examples clarify the phenomenon of gamification and illustrate how gamification has become an innovative component or an enabler of innovation in products, services, processes and business models. But what is equally important is looking at the other side of innovation—innovating processes. As the complexity of the environment increases, innovation fitness, i.e. conscious choosing of innovative behaviour, will be crucial for companies’ survival (Dörfler 2010). Gamification can have a profound effect on the innovative activities and innovativeness of companies with their own chosen innovation fitness.

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Fig. 1 Types of ideas. Source: authors’ own figure

Result new Improving

Innovating

Process known

new

Adopting

Adapting

known

3 Gamification for Innovating At the very beginning of the chapter, we discussed the example of a gamified innovating process at the UK Department of Work and Pensions that demonstrated how gamification helped to enhance the initiative and achieve significant cost savings by collecting, selecting and implementing promising ideas with the help of employees. Innovating starts with ideas, and this initiative aimed at gathering new ideas. But ideas can be very different in nature. Here, we provide a classification codeveloped with an expert from Tekora,3 a consulting company specialised in innovation management; elsewhere (Shpakova et al. 2016a) we have used Bessant’s model for a similar discussion. In this study, we opted for this particular classification because it suggests differences in the requirements for collecting ideas, which might influence the role of gamification in supporting ideation. In our interview, an innovation management consultant suggested a different way of looking at ideas based on the result and the process. Depending on the result/ impact of an idea when implemented and the process of implementing this idea being known or unknown (including innovation as an outcome), ideas can be classified into four categories: improving, innovating, adopting and adapting (Fig. 1). Improving comes from the discovery of a deficiency in a process and an idea of how to improve it; however, the results are not known at the time of the idea being proposed and can only be anticipated. Innovating is related to something novel, where we know neither the outcome nor the process of developing and implementing it; this type of ideas is the closest to the traditional understanding of innovation. Adopting refers to replicating ideas that have already been used elsewhere; thus, the process is considered known and produces a known result; a typical example is benchmarking best practices. And finally, adapting refers to the ideas which seem attractive because of the results that we know they have produced elsewhere; however, they require developing a product/service/process to achieve this result, as the implementation process is unknown. Reverse engineering would be a typical example of this category.

3 Tekora is a consulting company providing software solutions and professional advice in various areas including innovation management (http://www.tekora.ru).

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Looking at ideas through this framework helps practitioners acknowledge different types of ideas and their purpose and therefore develops different requirements for idea proposals. For example, demanding to describe the process of utilising adapted ideas might result in reduced number of ideas, since the author of such idea might not be the best person to develop this process. Similarly, the author of an improvement is likely to have a good understanding of the development process but often can only vaguely anticipate the impact that it might have and the results that it can produce; therefore, the requirements for submitting such an idea should be adjusted accordingly. According to the interviewed consultant, in the view of the practitioners, this classification covers all types of the ideas that can emerge during the ideation phase. The logic of the dimensions of this classification sounds sensible, because they embody not only the description of a desired outcome of the innovating process but also the impact that the outcome might create, the articulation of which Tidd et al. (2005) call a ‘capture’ phase of the innovating process. Therefore, we adopt this classification and build the gamification layer on the top of it by showing the ways in which gamification can facilitate the creation of different types of ideas. Adopting is perhaps the easiest type of ideas for companies to handle, since it does not require further development, and its outcomes are known. Gamification can facilitate this process in two ways: rewarding employees for sharing and facilitating through a competition (contest). Some companies use the mechanics of peer reward for employees to express the gratitude for the help they have received from their colleagues or acknowledge their colleagues’ achievements. If these rewards have a visual representation (e.g. points or badges) and can be shared through a corporate system (e.g. a corporate social network), sharing these rewards and achievements might start a viral effect and encourage curiosity among others to find out what their colleagues are rewarded for (Shpakova et al. 2016b). At the same time, the informal nature of this way of sharing is more likely to cause positive feelings rather than envy and initiate a reciprocating behaviour among the colleagues (Hamari and Koivisto 2013). Through such curious inquiries, employees are more likely to learn about new ideas and best practices and therefore more willing to adopt them, than if ideas were shared through the traditional top-down approach of disseminating ideas and practices. Another way of gathering adoption ideas can be facilitated through contests, as was described in the case of UK Department of Work and Pension. This approach is also suitable for the next two types of ideas (adapting and improving) that require an extra effort to develop and implement an idea and consequently need a more structured approach to collecting them. Therefore, this way of gamifying innovating activities is reviewed for all three types of ideas together. A contest in itself is not a new approach; it has historically been used by the companies to spur engagement in innovative activities among employees or attract them from the outside (Hutter et al. 2011). But game elements are an additional component that can influence the dynamics of the participants and make the initiative extremely successful or turn it into a complete failure.

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One of the gamification elements that was described before and is successfully used in idea contests in other companies is the mechanics of investing points in the most promising ideas, which are received back as a return on investment (in points) if the idea gets selected. As the example at the beginning of the chapter demonstrated, this feedback mechanism can spark curiosity to such an initiative and attract more meaningful attention from the employees. This, in turn, can engage and promote high-quality contributions and provide positive reinforcement. This mechanics also opens possibilities for using additional types of ‘currency’, such as one’s time, and in this setting, such an investment can indicate an interest in participating in the further development of the idea. The mechanics of betting can create similar dynamics to that observed in investing. In one study, when the mechanics of betting on project proposals was trialled on a group of students, it allowed to predict two of the three best as well as worst proposals judged by a jury of experts at the end of the experiment (Petersen and Ryu 2015). Apart from influencing the dynamics of the participation, these elements can also help identify different types of participants, such as the most creative employees, those who are good at identifying ideas with potential, critical minds or networkers. This information can then be useful in designing subsequent initiatives or building a community of innovators who become the drivers of the organisational innovativeness in the future. A ‘softer’ version of investing in ideas is the mechanics of rating ideas. This gamification element does not restrain participants from rating any number of ideas and can potentially open doors for nepotism, but this mechanics can be a risk-averse alternative to investing and betting and still have a similar positive influence on the group dynamics. An innovation manager in a large telecom company noted that the ability to rate ideas during the competition, and therefore to have an impact on the outcome of the competition, stimulated participants to read more ideas and provide feedback. By spending time on the open innovative platform, many participants learned more about the activities in other parts of the business and joined their projects, establishing more links across the business. It was also noted that shared ideas were of limited novelty only, therefore falling in the category of adopting, adapting or improving. As this example shows, depending on the size of the company and the breadth of its activities, innovation contests might act as a catalyst of cross-sector collaboration within the boundaries of one company and build a bridge between the divisions as well as improve communication. The format of competition allows a great degree of flexibility through different calls for ideas tailored to the specific needs of a company and types of ideas that the company is interested in (improving, adopting or adapting). And since these ideas are unlikely to be radically novel, potentially more participants have the capacity to understand them and give a more meaningful feedback. The feeling of usefulness might have a positive impact on the level of involvement because it creates a sense of belonging to something bigger than them, which is one of the factors that explains the addictiveness of some games (McGonigal 2011). With regards to the other ideas, which we call novel, they resemble the remaining category of ideas—innovating.

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Innovating in its classical understanding might require a different approach. According to the innovation manager from the telecom company, radically, new ideas are highly unlikely to come from ideas competitions. If employees have exceptionally good and/or radically new ideas, they will most probably keep these for themselves and try to implement them outside the company, unless it is part of their job (e.g. in an R and D department). However, we can find examples of ‘thinking outside the box’ through games as well. For instance, a massive multiplayer foresight ‘World Without Oil’ suggested a scenario in which the world starts experiencing oil shortages. In this game, participants were invited to develop strategies for dealing with the oil shortage; to speculate about all the areas which might experience disruptions, including indirect impact; and to suggest solutions. Through the course of 6 weeks of the simulation, 2000 participants were challenged with disruptive events and shared their ideas with each other in a collaborative effort to overcome these challenges. The game stimulated negative as well as wishful thinking and pushed participants collectively outside the boundaries of the most obvious and traditional solutions. Some of the participants reported it to be a lifechanging experience that influenced their behaviour afterwards (McGonigal 2011). This type of immersive games can engage the participants for a limited amount of time and is unlikely to be maintained as the participants get exhausted, but radically new ideas are not born in a company on a regular basis either.

4 Multiple Impacts of Gamification In this study, we have shown that gamification can have an impact on innovation in multiple ways. On the one hand, it is used as a part of the outcome, where it can become an essential innovative component of a product or service. Furthermore, it can become a bridge between different sectors embodied in the product or service. On the other hand, gamification can support the process of innovating in a variety of ways for different types of ideas being created, selected and implemented. But the impact of gamification on innovating stretches beyond its immediate area of application. Gamified initiatives such as an idea contests facilitate knowledge sharing as a side effect of idea sharing and evaluating (Shpakova et al. 2017b). As a result, initiated conversations between different divisions of a large organisation and discoveries of the variety of activities that run across the company improve visibility of work. Similarly, gamified processes can run across multiple companies and therefore lead to cross-sector collaboration. These insights show that the effect of gamification is multidimensional. A number of researchers have tried to contribute to the ongoing discussion about the impact of gamification on a system by examining gamification elements separately and testing the changes that they bring to the system (e.g. introducing the points in a university course). However, testing elements in isolation and trying to find statistical correlation between the elements and the results can be ambiguous and sometimes even misleading. Conversely, this may render the use of the gamification elements

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meaningless. Furthermore, the combination of elements might influence the system in a very different manner than the sum of impacts of each element alone. And in addition to that, this type of studies is less likely to discover side effects, like that of the impact on knowledge sharing. For example, if a study examines the effect of points on the participants, in which their collection is pointless if not aligned with any rewards or recognition, it is no surprise that the study demonstrates very modest positive results (De-Marcos et al. 2014; Zuckerman and Gal-Oz 2014). Finally, although we can often find an apparently causal relationship between introducing some gamification elements and/or mechanisms, these must not be considered examples of strict causality. By this, we mean that the ‘cause’ may provide an explanation in a particular case, and this explanation may be right, but we cannot assume that implementing the same gamification variant elsewhere will have the same ‘effect’. The reason is not only the systemic nature of gamification as described above; in addition to this, the gamification elements and mechanisms also interact with all the other contextual forces, and as we are talking about people and organisations, we have to count on decisions, mood, attitudes and organisational culture, just to name a few. To conclude, gamification has proven to have a high potential in supporting innovation, but unveiling this potential is only possible when studying meaningful existing examples and creating new ones.

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Work Hard, Play Hard: Work-Life Balance in Small Business Robyn Young, Lorelle Frazer, Scott Weaven, Maurice Roussety, and Park Thaichon

Abstract This chapter concerns work-life balance in small business models and compares work-life balance situations for both the owners of franchised and independently owned non-franchised small businesses. It provides a framework to assist and empower individuals to take control of their own outcomes, whilst managing the multiplicity of roles that constitute work and life. The research project follows a qualitative research method in the realist paradigm using case studies. It comprises a variety of data sources such as in-depth interviews, personally administered questionnaires, and interviewer observations. The concept of work-life balance has different meanings for many different people. Generally, most individuals in small business reconcile competing work and life demands on an ad hoc basis. This research is unique. It is the first empirical analysis conducted in Australia that compares the work-life balance of franchised and independent small business owners.

1 Introduction Participation in small business ownership is motivated by a variety of personal reasons but most do so to seek control (Buttner and Moore 1997; Daniel 2004; Smith 2000; Walker et al. 2008). Being one’s own boss, having the freedom to make decisions, and determining one’s own rewards are key determinants of control that are important to both franchise business owners (franchisees) and independent small R. Young · M. Roussety Department of Marketing, Griffith University, Nathan, QLD, Australia e-mail: r.young@griffith.edu.au; m.roussety@griffith.edu.au L. Frazer School of Business, University of the Sunshine Coast, Sippy Downs, QLD, Australia e-mail: [email protected] S. Weaven · P. Thaichon (*) Department of Marketing, Griffith University, Southport, QLD, Australia e-mail: s.weaven@griffith.edu.au; p.thaichon@griffith.edu.au © Springer Nature Switzerland AG 2019 V. Ratten et al. (eds.), Subsistence Entrepreneurship, Contributions to Management Science, https://doi.org/10.1007/978-3-030-11542-5_11

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business owners (independents) (Frazer et al. 2015; Kaufmann 1999). However, the extent that control is accomplished can be influenced by the choice of business models. Franchisees express a desire for systems, support, and a proven business, whereas independents prefer the freedom to choose. Nonetheless, in pursuing worklife balance, these business owners encounter common problems with staffing, generational disparities on work ethic, role conflicts, and their own ability to balance work and life. Expectedly, this path-breaking research found that the concept of work-life balance meant different things to different people. Generally, most small business owners reconcile competing work and life demands on an ad hoc basis without a planned approach. The complex socio-economic demands of modern society have redefined the notion of work-life balance. More people are trying to do more each day. Both work and life are worthy competitors for time. The path to attaining the right balance between doing work and living life is fast gaining intellectual currency, with a focus on how forward-thinking organisations can empower their employees to attain and sustain that balance. In fact, contemporary empirical research has extensively investigated the role of work-life balance initiatives at retaining employees of large organisations (Evans 2000; Hacker and Doolen 2003). As it stands, there is a paucity of research effort when it comes to small businesses. Australia’s economy is substantively powered by small businesses. They employ most of the country’s labour force and contribute significantly to the national economy. In its broadest sense, small businesses are operated either independently or as a franchise system. Despite their structural differences, research suggests that both models are magnets to individuals who repel the pressure-cooker setting of master-servant relationships and instead strive to regain control over their life and gain work-life balance. Given that De Villiers Scheepers et al. (2014) argue that businesses in the early stage of their life cycle should be diligent in adopting formal structures to align processes, structure, and the environment to maximise opportunities and performance, it could be argued that work-life balance strategies should form part of these structures. Whilst the approach adopted by independents towards work-life may be partially explained by research in entrepreneurial behaviour (Bird et al. 2012; Helmle et al. 2014), such research cannot be generalised to franchisees because they exhibit a different type of risk taking (Posner 2000; Seawright et al. 2011). Kaufmann (1999) suggests that purchasing a franchise is a means of achieving self-employment rather than demonstrating entrepreneurial behaviour. Consequently, this motivation raises research issues relating to the perception of work-life balance, the implications of control in small business ownership, and the choice of business model on work-life balance. This chapter is structured as follows. Firstly, the literature on work-life balance is reviewed, leading to a discussion of the research questions. Next, the choice of qualitative methodology is explained and justified, and the research findings are presented. Finally, the contribution to the body of knowledge, implications for small business, and recommendations for future research are discussed.

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2 Literature Review The genesis of interest in work-life balance stems from the organic structural changes of the workforce spawned by the entry of women in the workforce during World War II (Robert 2007). Indeed, the advance of globalisation during the last 20 years has created organisational challenges such as ethnocentric competition, workforce diversity, total quality management practices, customer sovereignty, and employee empowerment. Yet still amongst the many challenges facing organisations large and small, there is no bigger, no more complex challenge, than the need to understand better and how to create a workplace that offers work-life balance. Researchers such as Daniel (2004), Kinman and Jones (2008), and Weaven and Frazer (2006) have investigated similar issues relating to work-life balance, independents, and franchisees; extant research has not comprehensively synthesised the three together. Much of the research concerning work-life balance has focused on occupational differences (Forson 2013; Ekinsmyth 2013) and large organisations (Hyman and Summers 2004; Moore 2007) with emphasis on how employees can improve their work-life balance by accessing various policies implemented by their employers to promote a balanced lifestyle (Clutterbuck 2004; Posig and Kickul 2004; Wise and Bond 2003). In contrast, research about work-life balance in small businesses has traditionally emphasised the challenges for and benefits to employees (Maxwell et al. 2007), rather than considering the impact on employers as business owners. Concepts of small business, franchises, independents, work, life, and work-life balance manifestly frame our research and as such are reviewed in context of extant literature.

2.1

Small Business

As there is no settled definition of a small business in Australia, leading government departments have devised their own. Whereas the Australian Taxation Office (ATO) delineates a small business in terms of revenue, the Australian Bureau of Statistics (ABS) deems a small business to employ less 20 people under an independent ownership and control regime and where the proprietor(s) risk capital and are in effective control (ABS 2004). The ABS reports the presence of more than two million small businesses in Australia as of June 2013 (ABS 2013), whilst the ATO estimates the number of businesses with a turnover equal to or more than $1 million and less than $2 million for the same period to be around 3 million. The majority of small business operators were aged between 25 and 54 years with male operators outnumbering female operators by 26%. Notwithstanding the measure, it is clear that small businesses occupy a foundation role in the Australian economy. In the interest of comprehensiveness, the ABS’ definition of small business has been adopted in our research. To that end, according to the ABS the number of active franchisees operating in 2012 amounted to 10.7% of the total number of small businesses (ABS 2012) with the remainder being independents.

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Franchises and Independents

The decision to become an employer rather than an employee is based on many different factors but particularly the desire to be “one’s own boss” (Felstead 1994, p. 50), which is also dependent on the choice of operative either as an independent or a franchisee. Autonomy can empower individuals to regain control and manage more effectively all the things they wish to achieve (Gerber 2001; Protta 2008; Van Geldren and Jansen 2006). Inevitably, several factors influence the choice of business model. Whilst a franchise relationship is strictly governed by contract, the independent owner is an unconstrained agent who enjoys more autonomy. This means that the franchisee is constrained in innovation, free-thinking, and work-life balance obligations which could be problematic for the entrepreneurially minded and can influence business outcomes (Paswan and Young 1999). Indeed, the perception of risk, the availability of support structures, and level of autonomy are key differentiators of franchise and independent businesses. Previous research has found that risk takers are also more entrepreneurial in their outlook because they also have higher levels of self-efficacy (Hao et al. 2005). However, we do not know whether these differentiators also differentiate the level of work-life balance obtainable under each model.

2.3

Work-Life Balance

In examining the “work” construct, Dex and Scheibl (2001) showed the allocation of time between work and leisure varies significantly according to the individual’s needs and motivations. Some feel they are free to choose the amount of time they spend at work, whereas others feel compelled to working longer hours (Porter 2004). The definition of work can be as narrow as paid employment or as broad as any activity that involves effort. To make the point, Porter (2004, p. 425) suggests that “the meaning of work has varied across time and culture—a curse, a calling, a social obligation, a natural activity, a means to a better life or simply what we do because we have to”. This definition, as with many others is broad and inclusive and acknowledges the eclectic suite of work situations that may be encountered. In particular, Lewis (2003, p. 344) claims that “work is often defined in terms of obligated time, whether paid or unpaid”. Nonetheless, our research views work as an exchange of time and effort for valuable compensation. In so doing, clarity of purpose is ensured when distinguishing life activities. In that sense, individual perceptions of work will influence how they feel about and how this will play out in generating positive outcomes for the organisation (Douglas and Morris 2006). Work is sometimes framed as an unavoidable undertaking in earning an income and is perceived as an intrusion into one’s ability to perform preferred activities (Eikhof et al. 2007). That being the case, our work mindset can exacerbate feelings of dissatisfaction and frustration with consequential loss of productivity and positive

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outcomes for the individual and the organisation. Conversely, researchers such as Eikhof et al. (2007) demonstrate that work can be a positive stimulus in the lives of many individuals. Whilst work can be elegantly distinguished as paid activities, the concept of life is much more complex to intellectualise, which is frustrated even more by the advent of technology and labour-saving devices (Lewis et al. 2003). These technological marvels have redefined our lives, from doing leisure, to doing work, to enjoying family. Contextually, leisure is couched in terms of the unallocated time available for the activities we freely choose to do and the time we spend doing the activities we associate with enjoyment (Lewis 2003). Accordingly, the life component of worklife balance is “what we do when we are not committed to a work schedule and that which we freely choose to do”. Thus, individuals need to take the opportunity to make choices about how time is allocated to maximise satisfaction from life. This idiosyncratic allocation of time between work and life is what shapes work-life balance. It is the ability of individuals to get into a flow and to combine successfully the demands of work and nonwork activities irrespective of age or gender (Hughes and Bonzionelos 2007). The term work-life balance distinguishes between the concept of life and work. Unlike work, life comprises leisure activities that are freely chosen (Lewis 2003). However, according to Ezzedeen (2004) the delineation between work and life is not practically achievable. Historically this distinction could be made simply because work could only be conducted in a designated workplace. However, this limitation no longer exists for many occupations (Towers et al. 2006) such as accountants, retailers, and supermarkets. The proliferation of virtual offices, off-site, and homeoffice work may be of benefit to firms but not necessarily to the individual (Evans 2000; Lewis 2003; Sheridan and Conway 2001; Tomlinson 2004). In fact, although employees were motivated by increased flexibility of working at home, they are demotivated by the inevitable overlapping of work time and personal time (Hill et al. 1998) and are spending more hours working because they now work in the evenings, on the weekend, and even when on holidays (Towers et al. 2006). The upshot of this practice meant that organisations could now infiltrate what might have otherwise been life time (Lewis 2003). Extant research efforts have generally spotlighted employees and their ability to achieve work-life balance only for large organisations. This gap allows the current research to explore the role of small business owners and their employees in the context of creating and managing policies to deliver work-life balance. Furthermore, knowledge is sought as to whether accessing these policies affects careers and whether gender-based differences in attitudes and realities with respect to worklife balance matter. In a broader sense, the motivations of those entering a small business are considered, whether they seek work-life balance, whether their expectations are met by small business ownership, and whether a franchised or an independent business provides better outcomes. Consequently, this opportunity gives rise to the overarching research problem: How and why does work-life balance differ between a franchised business and an independently owned (non-franchised) small business? To explore this knowledge gap, the research poses the following

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research questions: (a) to what extent do individuals determine their work-life balance?, (b) to what extent is work-life balance of concern to these individuals?, (c) how does starting a small business provide an opportunity for individuals to improve their work-life balance?, (d) to what extent does business ownership provide individuals with greater control over their lives?, and (e) to what extent does the business model (franchised versus independent) affect work-life balance?.

3 Methodology The research into work-life balance in small business involves many variables including the business type, structure, customers, other stakeholders, and the many perceptions of the cohorts. These complexities coupled with the multivariate nature of the research indicate that the positivist paradigm is inappropriate. Consequently, this research was not aimed at theory testing, rather at seeking data and interpreting it, in order to make sense of a contemporary issue. As a result, the research project followed a qualitative research method in the realist paradigm using case studies. It comprised a variety of data sources, such as in-depth interviews, personally administered questionnaires, and interviewer observations, all of which are techniques consistent with the paradigm and case study method (Healy and Perry 2000). Purposeful sampling was used to determine if the interviewees were going to provide the rich and useful information required in the study (Alam 2005; Cavana et al. 2001; Gummesson 2000). The population comprised franchised and independently owned coffee shops in the State of Queensland. These businesses were selected for the large population (over 13,000 units), their national geographic spread, and the significant contribution they make to the Australian economy (ABS 2005). In all ten franchised and ten independent cases were chosen as matched pairs selected from ten different locations in both urban and regional areas which featured a spread of ownership by men, women, husband and wife teams, parent and child teams, siblings, and non-related partnerships. It is expected that these cohorts manifest different work-life balance challenges and should therefore generate different data for replication (Eisenhardt 1989; Hyde 2000; Miles and Huberman 1994; Sobh and Perry 2006; Yin 2003) drawn from the business model, the ownership structure, and the location. The size of the sample used in this research fell within the normal range for qualitative research. According to Perry (1998, p. 794), 15 case studies with a range of 35 to 50 interviews provide adequate data except in the case of small business where “more than one interview” is difficult to achieve. The current research incorporated 30 interviews, as all cases were interviewed once, and half were reinterviewed at a later stage. In addition, 40 data sources including 20 questionnaires and 20 interviewer observations were used in the data collection process. Thus, there were 70 data sources for the complete project. Although the number of small businesses included is limited, the sample size is consistent with the requirements for this type of research (Table 1).

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Table 1 Research cohorts Sample characteristic Sole ownership—male Sole ownership—female Joint family ownership—husband and wife Family ownership—father, mother, and child(ren) Sibling ownership—brother and sister Joint nonfamily ownership—arms-length partners Total

Franchises 4 – 1 3 – 2 10

Independents 3 2 1 – 2 2 10

Source: authors’ own table

4 Findings The research focused on how work-life balance differs for franchised and independent business owners and on finding evidence that explained whether small business owners were interested in pursuing a goal of positive work-life balance and what that actually meant to them. This required an understanding of whether owning a franchised or independent business would provide a better opportunity for worklife balance as compared to owning a job, and whether it influenced the attainment of independence, control, and balance. The data patterns emerging from the questionnaires, in-depth interviews, and interviewer observations are presented below.

4.1

Work and Life Priorities

Only six of the interviewees made work-life balance a priority when establishing their businesses, and the five who had families unequivocally stated that their choice to be in business was driven by the choice and capacity to allocate time to family. Many interviewees were unable to articulate where their lives were out of balance, although they expressed concern for having to forgo or compromise on some activities. Terms such as time poor, burdened, and frustrated were used to describe their feelings when juggling priorities, indicating a level of work-life balance discontentment. However, strong evidence emerged that most interviewees had not correlated their state of frustration to their lack of opportunity to allocate time effectively. For example, Fra7 manifested this lack of clarity by stating: “Getting up to go to work because you want to. Knowing there’s a light at the end of the tunnel, knowing you’re in control of your own destiny. . . I kid you not, it has been three years of hell”. Many of the interviewees experienced frustration with the myriad demands of business/work. However, they admitted not having previously recognised this as a work-life balance issue. It is therefore highly likely that worklife balance is a concern for them although they saw it more in terms of excessive work demands rather than forgone opportunities for participation in other esteemed

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Table 2 Work and life priorities Question How do you allocate your time between work and “life” activities? How do you feel about how you allocate your priorities? How would you describe your work-life balance? What are the factors limiting your opportunity for work-life balance?

Most popular answer Work is the priority/ work dominates

% 45

Satisfied/business ownership requires commitment Some days very poor, some days good Cannot let go of the responsibility for the business

40

40 30

Second most popular answer Desire to include other activities but work can take over Frustrated work dominates Better with business ownership Cannot rely on my staff to run the business satisfactorily

% 30

35

20 25

Source: authors’ own table

activities. Table 2 reports the most common responses from interviewees regarding their attitudes to work-life balance and prioritising activities. The determination of work-life balance appears to be related to the individual’s priorities. Irrespective how work, family, or community are prioritised in a work-life balance model, interviewees reported a sense of imbalance when they lose control in setting and achieving their priorities. Interestingly, factors identified by the business owners as limiting their opportunity for work-life balance were also the factors that minimised their discretion when making choices, particularly in allocating their time. This suggests a need to feel “in-control”, which Ind3 articulated: “Ok if I was owning a franchise for example . . ., probably I would have to open from 6 am until 10 pm whether I am busy or not. In my business here, I open from 8 am to 5.30 pm and there you are. I’ve got my own right to shut the business whenever I want and I’m there for my kids at home”. Another influencer of work-life balance is the multiplicity of roles, and how to preference those roles. Acknowledging that there are tradeoffs was also difficult for some. The way these individuals determined their work-life balance was the same for all, requiring an understanding of what they want to achieve, how these objectives take priority, and then allocating energy to those priorities. There is a need to feel in control of their own lives in whichever role they play.

4.2

The Opportunity to Improve Work-Life Balance

The use of technology to alleviate work pressures, such as access to flexible working hours and work conditions was not an option for the cohorts interviewed. Although there are certain administrative duties that can be conducted remotely, servicedelivery work must be conducted at the coffee shop. If anything, technological advances may have caused some degradation in the work-life balance of these coffee

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shop owners, as they tended to spend long hours at the shop during the day and then continue work at home on the accounts, rosters, ordering, and other administrative tasks. However, the critical factor in achieving work-life balance is driven by one’s own perception of what constitutes balance. Once formed, this perception is likely to change in line with changing circumstances, which may also trigger a re-evaluation of priorities. In fact, individuals viewed their role priority differently—some deliberately balanced their lives in favour of work and others more towards life. It is a personal choice, and a point well illustrated by Ind3 who spent 70 to 80 hours a week working as it provided a great source of satisfaction. Similarly, Fra2 expressed genuine enjoyment from being on call 24/7, and Ind9 said he was “passionate about coffee” and would gladly prioritise his time to his business. Indeed research has shown that most small business owners cite “independence” as the main reason for seeking self-employment (Dawson and Henley 2012). On the other hand, some coffee shop owners like Ind6 were not deriving the expected satisfaction level and were now divesting “In all honesty I hate it. It ruined my marriage and there’s no time for anything else. I’m now at the stage of putting together information for brokers to list the business. It’s something I don’t want to do but I have to do in order to regain control of my life, to get back on track”. These attitudes indicate that the balance is not about the commitment of time but more about how the individual feels about their choice of priorities. This is a key factor in whether they think they have work-life balance as indicated in Table 3. Furthermore, there was clear evidence of the difficulty for coffee shop owners to achieve work-life balance in the same way as employees who have access to multiple lifestyle policies. Owners have the ultimate responsibility for managing the business as well as having to carry the financial risks. On the other hand, if individuals feel they have the ability to allocate priorities, and have the freedom to do so, then it is possible for them to achieve a successful outcome. When asked if it was the right decision to open a coffee shop, 18 out of 20 respondents agreed. This reply was consistent amongst franchisees and independent owners even though four owners in the sample had decided to sell their businesses, three experienced a failed marriage whilst owning the business, three were under financial stress, and the majority were regularly working 60 hours or more each week. Therefore, it would appear that the traditional way of viewing work-life balance and determining how one achieves this may not apply in these cases.

4.3

Control Over Work Versus Control Over Life

Most interviewees agreed that the work required to operate a successful business was adequately compensated by financial rewards. They reported an improvement in their financial position, which had created new opportunities to make choices about work-life balance, such as the shedding of some work functions by employing a manager or even expanding their business interests. This seems to support the view that ownership of a small business provided most individuals with greater control

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Table 3 Opportunity to improve work-life balance

45

Second most popular answer Desire for the rewards, financial, personal Excited

35

30

Rely on staff

25

45

Not sure my staff are reliable Owners create own situation so it is their responsibility

20

Question Why start a small business?

Most popular answer Desire to be own boss

% 50

What were your feelings about the decision to start the business? What are the available support networks? How do you feel about the support available? Do you think the support you have enhances or reduces your work-life balance? Has your opportunity for work-life balance improved since owning a coffee shop?

Scared, anxious, nervous, challenged Rely on a combination of family, staff, and/or franchisor It is sufficient, family and/or staff are supportive To an extent but business ownership means the responsibility can’t be left to anybody else Yes because due to increased control over decision-making

35

45

Probably not because the business occupies most of the time

% 45

25

40

Source: authors’ own table

over the work aspect of their lives. In fact, many chose a small business to gain control, leading Ind2 to state “I went into my own business because I wanted to be my own boss and have more flexible hours because I had a young family so I thought this would be it. I could spend more time doing it the way I wanted to do it”. Fra7 also expressed similar sentiment when asked about his motivation to own a business: “To be my own boss and have a go I guess. Rather than read about it, have a go”. However, this research goes beyond work. It looks at each person’s whole life and considers to what extent business ownership provides greater control over his or her life. Many of the interviewees felt overwhelmed in coping with a multiplicity of roles. Some indicated they experienced a loss of control which could only be regained by selling the business. Ind6 indicated he was unable to continue, and although he was running a financially successful business, he felt it had “ruined” his life. Similarly, Ind2 decided to divest, as she could not cope with the lack of control over the time available for her family. In the same vein, Ind1 resolved to sell up as she had underestimated the demands of the coffee shop and felt guilty for not spending much time with her husband. These themes continued with Fra3 maintaining that he would probably work 18 hours each day had it not been for his children asking him to come home; Fra2 lamented she was not able to start a family whilst running the business, whilst Fra9 and Ind8 believed the business had contributed to a breakdown of their marriages. Speaking in favour, Ind10 and Fra10 expressed that they still felt pressures with work-life balance whilst owning their businesses but that their work-life balance had improved compared to their previous roles. Fra10 confirmed that he chose to be in business to “mostly just to be my own

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boss and take control of my life”. On the other hand, Ind3 had found the perfect balance and was managing to incorporate all his roles of business owner, family person, community person, and friend. This was also the case for Ind5, Ind7, Fra5, and Ind9. Interestingly, Ind9 expressed satisfaction with his work-life balance because he was living his passion; the only other thing he wanted to do was play cricket in summer, and the business allowed that degree of flexibility.

4.4

Choice of Business Model

It is apparent that interviewees face similar challenges and achieve similar rewards for running the business. However, the quality and quantity of accessible support were the main differentiating factors between franchised and independent business owners when it came to evaluating work-life balance. Fra10 praised the franchise model for improving his finances: “I’ve got no doubt they have improved my business like financial planning and following profit and loss a lot more closely than I would have once upon a time. . .I was making a profit but I had nothing in the bank and didn’t understand why. The franchisor helped me sort that out”. The independents could only rely on family and staff, whereas the franchisees could leverage a support structure provided by their franchisor. In the main, the support structure of the subject franchise systems allowed most franchisees to assimilate quickly in the business and to manage its operations effectively. Table 4 compares the choice of franchised and independent small business models. Franchisor support also attracted criticism, such as the requirement to attend meetings at the end of a long day. Some interviewees highlighted that some support was misguided, such as the provision of hospitality training (which most already had) rather than business management and administrative training which were lacking. Many reported the need to outsource mandatory administrative functions due to lack of skill. Fra1 commented on the high cost of outsourcing, which placed added pressure on the business. Many franchise owners criticised the timing of support provided. Often support came too late (up to 2 months after the request), for too short a duration, or not in good time. Some even reported no support for the first 2 months, whilst Fra8 experienced a cessation in support after only a short time in business, despite representations to the contrary by the franchisor “as new franchisees we saw them for the first two days we opened and we didn’t see them again until July. . . seven months later”. Most acknowledged the potential benefits of franchisor support but cautioned that inappropriate or nondelivery of promised support adversely affected their attitude towards the franchisor. In defence of their choice of operating as an independent, Ind5 explained: “I make most of my decisions and I don’t rely on anybody to make decisions”. Similarly, Ind1detailed: “We looked at the other model as well, the franchise. We like to have control of our own destiny. I think that’s the main reason. We steer the ship where we like to, total control”. In the same vein, Fra4 commented on the excessive demands of his franchisor: “I just think of this from a different

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Table 4 Choice of business model Question Why choose a franchised business? Why choose an independent business? Does the benefit of having a franchise justify the royalties?

Most popular answer Support Freedom to choose menu and suppliers It depends on a variety of factors

% 20 20 30

Second most popular answer Proven success Did not want to pay costs of franchise Yes

% 15 15 25

Source: authors’ own table

perspective you know, from their point of view on doing things which for them is reasonable but from mine it is hard. They actually put me under more stress, under more pressure”. Interestingly, nine of the interviewees were unable to preference one of the two models for work-life balance.

5 Discussion 5.1

Work and Life Priorities

Despite the obvious attraction of work-life balance to individuals and organisations, the research revealed that it was not a dominant factor for many when deliberating on the decision to buy and operate a coffee shop. Whilst a few respondents considered work-life balance when choosing a business, many were frustrated with their job situation and explained that they had not previously considered it in context of worklife balance. They articulated that staffing and operating hours were at times overwhelming but failed to recognise that these factors were limiting their opportunities to pursue other activities. These frustrations were caused by having a multiplicity of roles or from owning a role that dominated others, thus limiting the opportunity to broaden their lives. The research findings emphasise the lack of understanding of the role of work-life balance for owner-operators of small businesses who are employers rather than employees (Maxwell et al. 2007). Although interviewees expressed a lack of control over their desired outcomes, they acknowledged that control was one of the identified reasons for becoming a business owner. This implies that the creation of work-life balance requires better consideration of the multiplicity of roles at hand and a better system to allocate preference to those roles. In fact, there seems to be commonality in the way these individuals determine their work-life balance, which needs to be modified to resolve an understanding of what they want to achieve, how these objectives take priority, and how to allocate energy to realise these priorities. Clearly, there is a need to feel in control of their own lives in whichever role they play.

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207

The Opportunity to Improve Work-Life Balance

The research has revealed that many of the policies designed to enhance work-life balance are employee focused and do not apply to owners of coffee shops or similar type businesses. The potential to improve life balance, by accessing flexible hours and work environment, does not apply to these businesses as hours are mostly predetermined, and the place of business is where business occurs. In fact, contrary to the context of the large organisation (Lewis 2003), the use of technology at home has subliminally extended the workday for these owners as they prolifically engage in more business-related work at home. As such, if work-life balance is determined by access to policies, then owning one of those small businesses will not improve work-life balance (Clutterbuck 2004). Alternatively, the traditional way of considering work-life balance may be viewed as inappropriate for small business owners. The satisfaction they derive from operating their own business may affect their evaluation of the opportunity cost of time allocated to discharging their work obligations. In particular, business owners felt a sense of control and being empowered about decisions about their lives rather being subject to the prescript of an employer (Felstead 1994). Some interviewees reported contentment at working long hours as they were benefiting themselves, and they derived a sense of achievement from self-employment.

5.3

Control Over Work Versus Control Over Life

It is clear from the results that business ownership allows individuals to control the work aspect of their lives. However, there is evidence to suggest that this is not always the case with their other roles, and occasionally the only way to regain control was by divesting of the very business that they bought to give them back control. As already identified, the issue of control significantly affects work-life balance. Some identified factors such as franchise agreements, shopping centre leases, and the onerous demands of customers and suppliers as being unmitigated hindrances to control. Despite these challenges, several respondents expressed a sense control over many aspects of their own decision-making. Some identified control over their financial future as a significant factor, and many indicated that this either was in the process of being achieved or was achievable in the future. In that context, they cited staffing and occupancy costs, together with royalties as being key financial concerns. Strong evidence emerged that interviewees felt they were in control when the decisions they choose to make were based on what they wanted to achieve. This issue of control is therefore one of choice and determining whether the resources are available to make the preferred choices. Some interviewees felt they had control of the business but less so of other aspects of their lives, but nonetheless felt burdened with the demands of business. This suggests that there are opportunities to be in

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control in the business, but, at times, the responsibility for the business dominates to such a degree that control is lost in other areas. The dichotomy of control over work versus control over life has been downplayed in the prior literature which equates business ownership with independence but fails to differentiate between these very different and important aspects of an individual’s existence.

5.4

Choice of Business Model

Prior studies into work-life balance failed to provide any insights into how and why work-life balance might be affected by different business models. The current research compared franchised and independently owned small business and identified access to support networks as one of the key enablers of work-life balance. By design, franchise systems ought to offer business owners better support than that which independent owners can readily access. Even though once in business, this was not always experienced by franchisees, support was a dominant reason for choosing a franchise. Lack of promised support leads to feelings of disappointment and loss of trust in the franchising relationship (Grace et al. 2016). More precisely, whilst some franchisees expressed satisfaction with the support and felt they were receiving value for money, many others expressed dissatisfaction about the ability, appropriateness, timing, consistency, access to, and duration of support provided by the franchisor. This is more a failure of the franchisor rather than franchising as a business model (Bennett et al. 2010). Given that the independent owners identified family and staff as their main support, there is an implication that franchisees ought to be better off since they can extend their support base beyond the family and lean on the franchisor. Previous research has identified spousal support as being critical to an entrepreneur’s success (Blenkinsopp and Owens 2010). Remarkably, only five franchisees emphatically agreed that the payment of royalties was fair consideration for the benefits derived from belonging to a franchise system. This seems to suggest that the support given by franchisors does match franchisee expectations and falls short of delivering benefits that outweigh those enjoyed by independent coffee shop owners.

6 Conclusions Small business owners have full responsibility for business outcomes whether they operate franchised or independent businesses. Consequently, they find it difficult to remove themselves from the daily operations unless they have reliable support to stand in their shoes. Whilst relief staff allowed these business owners to be physically removed from the business, it neglected to provide them any psychological relief, as they would still be preoccupied with the operations and frequently questioned whether it is best to be at work. This dilemma is further complicated

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by the additional cost of employing relief staff, thereby limiting the appeal of taking leave. Despite these drawbacks, this research has highlighted the importance of the individual’s ability to make decisions of the type afforded to business owners to the enjoyment of a sense of life balance. Indeed, this awareness of work-life balance can lead people to making positive changes in their lives and their families. The research has implications for small business management, particularly when dealing with staff and setting work-life balance goals that are conscientiously implemented for enduring success. To that end extant literature and our research rank support networks highly in the maintenance of work-life balance, with several interviewees deeming their staff as a key source of this support. Given the challenges identified in managing different generations, management practices that target the performance and retention of younger employees may benefit small business owners with work-life balance. This could begin with an understanding of the characteristics of Generation “X” and “Y” employees. Generally, it can be concluded that the contributions to management practice for business owners centre upon heightened awareness of their own situations and the employment of different strategies to make improvements in managing their work-life balance. There are several limitations of the research which must be considered. Data were gathered in one sector of small business which, although a relatively large sector in the Australian economy (ABS 2006–07), is not representative of all small businesses. These organisations face certain limitations in time and place with the delivery of their product and service; the results of our research may not be generalisable to all small businesses. However, the findings may be relevant in many retail settings as there are similarities in the requirements faced by many businesses in terms of customer demand, lease hold requirements, and franchise agreements. Previous research has found that self-employment in a consumeroriented business (such as coffee shops in the current research) is more demanding than other businesses (Annink et al. 2016). This is because customers require hightouch and individualised support. According to Frazer et al. (2014), at least 1180 home-grown business format systems with over 79,000 franchisees operated in Australia in 2014. Comments about the disparity between franchisee expectations and franchisor delivery of support may not be applicable to all franchise systems in all industry sectors. Thus, the ability to extrapolate the recommendations for franchisors to re-evaluate the type and relevance of the support provided may be limited. The study has been conducted in Queensland, a state in Australia, so the relevance of the findings to the rest of Australia and internationally is another possible limitation. Whether the challenges faced by the business owners in this research are similar to those in other locations is not determined in our research. However, the inclusion of both urban and regional locations was a deliberate strategy to ensure locative diversity. The limitations outlined above facilitate a clearer understanding of opportunities for further research. This research was welcomed by many of the respondents as demonstrated by their willingness to participate in the process. It indicates the value of work-life balance research and encourages further research along the following lines:

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1. Interviewees regularly expressed a desire to discuss their situations and often explained that there was limited opportunity to express concerns relating to their lifestyles or the business challenges they faced. Hence, an expansion of the current research into a greater selection of small businesses, including additional franchise systems, would add further depth to knowledge. Research would need to include other retail small businesses that are not involved in the hospitality industry and should include businesses that have access to flexibility options such as knowledge workers who can conduct their business at different locations at different times. 2. Generation “X” and “Y” employees need to be better understood. Insights into why these employees tend to be less committed and why strategies such as providing regular feedback, ongoing training, and team meetings might benefit the business and assist in reducing staff turnover and absenteeism are worthy of further research. 3. The facets of “lifestyle franchising” are recommended for further research as the findings reveal franchisees did not perceive that they are receiving adequate levels of support relative to the size of their royalty contributions. Hence, research into how franchisors can design their systems to provide a lifestyle choice for potential franchisees is recommended. 4. Lifestyle franchising research would be useful for individuals wanting to purchase a franchise, and if these issues are communicated to potential franchisees early in the recruitment process, this may go some way to minimising future disputation due to perceived gaps between expected and actual work-life balance demands. This research has demonstrated the importance of work-life balance theory and practice. The findings have highlighted similarities and differences between previous organisational research on work-life balance and the current study. The implications for management practice are relevant for owners to self-manage their work and the rest of their life commitments by providing guidance in managing employees, which is a significant factor in work responsibilities. Franchisors can also benefit from the implications for management practice in managing current franchisee relationships and for the improvement of the organisational management. Our research has contributed to the existing body of knowledge relating to work and life balance in small business including franchised businesses and is the first empirical analysis conducted in Australia that compares the work-life balance of franchised and independent small business owners. In short, our research has directed effort to (1) synthesise existing cross-discipline perspectives on work-life balance, (2) investigate work-life balance from a business owner’s perspective, (3) compare work-life balance outcomes between independent and franchised business owners, (4) use a qualitative methodology to explore and explain different ways of viewing work-life balance, such as considering the impact of personal control, rather than focusing on quantifying time spent on different tasks, (5) investigate the importance and role of control in managing work-life balance, (6) identify means for franchisors to improve the opportunities for their franchisees to have better lifestyles, and (7) investigate

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how managing the intergenerational attitudes towards work may affect the business owner’s ability to obtain work-life balance and provide recommendations for managing Generation “X” and “Y” employees.

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Stay Ahead of a Game or Stay Still: The Impact of Learning and Development on Business Performance Janette Timms, Lorelle Frazer, Scott Weaven, and Park Thaichon

Abstract The focus of this chapter is in investigating solutions to known problems associated with poor levels of participation and engagement in franchisor-initiated learning and development activities that have impacted franchise system performance. Learning and development research in the franchising sector has been lacking; however, this chapter extends research conducted in the small and medium-sized enterprises (SMEs) context on barriers to participation and engagement with training. We used a qualitative case study approach, targeting 60 players across four franchise groups, and present an integrative framework of knowledge transfer in franchising relationships, providing actionable insights to the franchising sector and human resources fields.

1 Background Learning and development are widely used to improve the business performance of enterprises around the world, and organisational learning and development activities are linked with higher business performance. For instance, in studies by Lashley (2002) and Eaglen et al. (2000), business training was found to provide numerous benefits, and evidence was presented that training interventions lead to improved service, staff satisfaction, functional flexibility and productivity as well as reduced staff turnover. Organisations in the USA have increased both expenditures on learning and learning hours per employee for 4 consecutive years, spending $1273 per employee in 2016 in comparison with $1252 in 2015; in addition, the average number of formal learning hours per employee increased from 33.5 in 2015 to 34.1in 2016 (State of the Industry Report 2017). In contrast, participation in training in Australia decreased by 5.6% from 2005 to 2016 (Australian Bureau of Statistics 2017) J. Timms · L. Frazer School of Business, University of the Sunshine Coast, Sippy Downs, QLD, Australia e-mail: [email protected]; [email protected] S. Weaven · P. Thaichon (*) Department of Marketing, Griffith University, Southport, QLD, Australia e-mail: S.Weaven@griffith.edu.au; p.thaichon@griffith.edu.au © Springer Nature Switzerland AG 2019 V. Ratten et al. (eds.), Subsistence Entrepreneurship, Contributions to Management Science, https://doi.org/10.1007/978-3-030-11542-5_12

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which is a reversal of the trend reported from 1997 to 2002 whereby businesses providing training increased by 26% (Australian Bureau of Statistics 2003). Learning and development is a particular issue in franchising because franchise businesses are managed and organised differently from other businesses, and it is postulated that franchising represents a unique organisational arrangement in which continuous training programmes for all levels of individuals are necessary (Mitsuhashi et al. 2008; Sarantinoudi and Karamanoli 2013). Franchising is based on standardised service provision, and training is necessary to support this and ensure uniformity of service and support for the franchise brand. Hence, business training is often prescribed and in some cases purchased from the franchisor as part of the franchise agreement (Mitsuhashi et al. 2008), and poor learning and development strategy is a factor which leads to franchise failure (Bates 1998; Sarantinoudi and Karamanoli 2013). However, many franchise groups do not provide sufficient training due to cost constraints and lack of learning and development expertise, and more learning and development in franchising is needed (Mitsuhashi et al. 2008; Sarantinoudi and Karamanoli 2013). Little research has been conducted in the area of learning and development within the franchising sector. However, a research study by Susomrith and Coetzer (2015) found that small businesses are significantly less likely to provide employees with access to learning, development and training participation. In fact, firms with more than 100 employees twice as likely to have participated in training programmes as those from SMEs (Storey and Westhead 1997). Therefore, we draw on the SME literature relating to the key barriers that influence training participation by SMEs (Lange et al. 2000) to provide a framework for examining whether the barriers to participation identified in the SME literature also relate to franchising (as anecdotal and empirical evidence suggests). Additionally, despite significant investment in learning and development strategy reported by several franchising groups, an observed phenomenon has emerged whereby training interventions have not been enthusiastically embraced in-line with franchisor expectations (Dallimore 2014; Edwards 2014; Post 2014; Saar 2013). It is imperative that franchisees entering the system be provided with the knowledge they need to run the business as quickly as possible and therefore successful knowledge transfer is an identified challenge in franchising. Furthermore, learning and development strategy has been identified as a factor that influences the purchasing decision of prospective franchisees (Sarantinoudi and Karamanoli 2013) as they often lack previous experience and knowledge of the franchise system, operations or business generally (Williams 1999). On the other hand, franchises that fail to create, share and transfer knowledge effectively lose their competitive positioning (Hunt and Morgan 1997; Minguela-Rata et al. 2010; Nonaka and von Krogh 2009; Paswan and Wittmann 2009; Vargo and Lusch 2008; Weaven et al. 2014), which may lead to underperforming franchisees and franchisees leaving the system which has been identified as an issue in franchising (Frazer and Terry 2015). Whilst franchising success is reliant upon uniform quality delivery, which is dependent upon effective learning and development, there is evidence that this is not being delivered across all systems, leading to system underperformance,

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franchisee exit and negative perceptions of franchising. To date, this issue has not been fully investigated, and this research fills this gap by investigating the following research question: What factors influence participation and engagement with learning and development initiatives and their subsequent ability to achieve enhanced channel outcomes? Hence, this research focuses on learning and development in the franchising sector and the factors that influence the effectiveness of learning and development in promoting enhanced channel outcomes. We address recent calls to investigate solutions to suboptimal participation and engagement of franchisees with franchisorinitiated learning and development initiatives in the franchising sector (Frazer et al. 2012). Currently, the Australian franchising sector plays a major role in its contribution to the Australian economy and comprises approximately 1120 franchisors with 79,000 outlets employing over 470,000 people and generating revenues of $66.5 billion (Frazer et al. 2016), and thus, it is worthy of being examined in the context of achieving enhanced channel outcomes through the implementation of the learning and development strategy. This chapter is organised as follows: a summary of the background, followed by a description of the research design which uses a combined positivist and interpretive epistemology, collecting data from 60 participants across four Australian franchise systems from similar industries and concluding with a thorough discussion of the results. A number of overarching research themes were identified enabling us to present a monological framework for knowledge exchange and transfer that will guide the implementation of learning and development strategy in franchise networks, thus providing actionable insights that will be of value to the franchising sector as well as personnel in the human resources and workforce development fields.

2 Methodology The research adopted a combined positivist and interpretive epistemology using a framework developed by Lee (1991) that uses subjective, interpretive and positivist understanding to capture the benefits of both approaches. The aim was to establish a meaningful epistemological framework for research into the ‘real-world’ phenomenon of poor participation and engagement in learning and development initiatives and ascertain reasons for this phenomenon. However, it is recognised that the phenomenon is impacted by social relativity as what is real to one person is not necessarily real to another (Berger et al. 2007), so an interpretive orientation was also required. It is argued that the use of an integrated approach is mutually supportive rather than mutually exclusive as it helps to contribute information that may have been missed by adopting only one perspective, as each strengthens the other (Lee 1991; Roth and Mehta 2002). We, therefore, adopted a qualitative research strategy in order to construct social reality with an interpretivist perspective, which will provide insight into the cultural understandings of this research topic within the franchising community in Australia (Roth and Mehta 2002).

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The research design aimed to maintain an appropriate tension between theorydriven research (TDR) and phenomenon-driven research (PDR). This approach facilitates focus on real problems that have been identified as important and then develop a conceptual framework designed to question existing underlying assumptions relating to the research phenomenon. This approach to combining TDR and PDR espoused by Shubik (1987) and Schwarz and Stensaker (2014) provides a balance of both theory and practice, leading to an advancement of knowledge that will be of value for both academics and industry practitioners.

2.1

Data Collection

‘Stage One’ of this research investigated 20 industry experts comprising a mix of franchisors, franchisees, training and education specialists and suppliers to the franchising sector (Table 1). It was determined that the issue of poor participation in and lack of engagement with learning and development initiatives is widespread within the broader business format franchising community in Australia. Twelve propositions emerged from ‘Stage One’ which were examined and tested in the ‘Stage Two’ results reported in this chapter. ‘Stage Two’ was exploratory in nature (Yin 2014) adopting an interpretive line of enquiry. Exploratory research was used in order to drill down into the issues

Table 1 Respondent profile Respondent profile Gender Job role of the interviewee

Participant experience in franchising Excluding suppliers, customers and mystery shoppers Source: authors’ own table

Male Female Founder/CEO/director/owner Senior managers Learning and development professionals Field managers Franchisees Franchise employees Suppliers Customers/mystery shoppers Less than 5 years 5 to 10 years 10 to 20 years 20 plus years

48 12 7 5 7 7 16 8 5 5 4 22 15 9

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Table 2 Case study profiles

Current size (total units) Average turnover per unit Years franchising in Australia Origin of franchisor Multiunit franchisors Company-owned units

Franchise Group 1 149 A$711k

Franchise Group 2 38 A$592k

Franchise Group 3 101 A$809k

Franchise Group 4 32 A562k

37

17

35

10

Australia 9 12

Australia 3 3

USA 8 0

USA 4 4

Source: authors’ own table

surrounding learning and development within Australian franchise systems; to determine factors that influence the level of engagement with training interventions; and to ascertain whether investment in learning and development is having a positive or neutral impact on franchise system outcomes. The sample selected for this research comprised 60 players across four franchise groups providing business services in Australia and operating for greater than 10 years (Table 2). This approach is consistent with a call from MacKenzie and Woodruff (2014) to reduce the heterogeneity and focus on firms within one industry and collect more frequent time series data. Participants included past and present CEOs, learning and development managers, field support managers, franchisees, franchise employees, customers, mystery shoppers and suppliers. The exploratory interviews were 60 to 90 minutes in duration. The questions were semi-structured, ensuring that key themes could be explored but also allowing flexibility for new concepts to be raised. Notes were taken, supported by an electronic recording which was used to produce a transcript.

2.2

Data Analysis

It is imperative that the data collected through qualitative research be analysed in a methodical manner to produce worthwhile results (Attride-Stirling 2001). The data were initially coded manually into categories that either emerged from the literature review or were discovered during the research (Carson et al. 2001). Emergent themes were analysed using qualitative data analysis software (NVivo) in order to assist the development of theoretical ideas (Gibbs 2002) and provide a rigorous analysis. Data collection and analysis occurred concurrently enabling us to generate pattern codes (Miles et al. 2013) and compare and contrast the findings; then the broad spectrum of data was critically analysed rather than relying on particular examples.

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3 Results and Discussion 3.1

Channel Outcomes Achieved Through Learning and Development Strategy

Service-dominant logic provided a framework for considering channel outcomes from the perspective of the trichotomy of relationships in franchising, being a franchisee, franchisor and customer (Vargo and Lusch 2004, 2008, 2014). However, ‘Stage One’ research indicated that this is extended to various additional players in the franchising relationship, incorporating franchise employees, suppliers and industry, as well as the whole franchise sector.

3.1.1

Franchisee and Franchisor Welfare

Participants were asked to describe some history regarding training in their franchise group and discuss training strategies implemented. They were then asked to reflect on success and factors that have resulted in the achievement of enhanced channel outcomes. There was both consensus and hard evidence that tied investment in learning and development strategy with positive business results as the following (franchisor) statement indicates: You can definitely see there was ROI when we invested in training because now there is no training, you can go back and compare the results and you can see the difference that training made.

As this study is qualitative, there is limited statistical evidence to conclusively demonstrate that investment in learning and development in the franchising sector will lead to enhanced channel outcomes; however, we compared investment in learning and development with turnover per franchise unit across four franchise groups, and the study revealed that a higher investment resulted in enhanced business results in terms of turnover per unit, and we can also see that when investment in learning and development was reduced by franchise Groups 1 and 2, turnover per unit also reduced. The statistical evidence reported in Table 3 supports the notion that investment in learning and development strategy is positively linked to enhanced channel outcomes and improves franchisee and franchisor revenue. However, the majority of the franchisor and some franchisee participants expressed frustration about the difficulty in gaining franchisee participation and engagement with training interventions. Furthermore, there was a consensus that those that do participate achieve better business results. The following (franchisor) statement is indicative of the majority: We run franchisee performance groups quarterly to develop skills and business acumen, we require a minimum commitment of 2 years but most participate for 5 or 6 years. We have 80% participation and the participating franchisees outperform those not involved by a mile.

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Table 3 Investment in learning and development vs turnover Franchise Franchise Franchise Group 1 Group 2 Group 3 Average annual investment in learning and development per unit Period 1—2002 to A$4000 A$694 A$2850 2007 Period 2—2008 to A$787 A$3545 A$3335 2012 Period 3—2013 to A$335 A$1315 A$4950 2017 Average annual turnover per unit Period 1—2002 to A$1080k A$580k A$670k 2007 Period 2—2008 to A$880k A$970k A$720k 2012 Period 3—2013 to A$711k A$592k A$809k 2017

Franchise Group 4 Formed in 2007 A$892 A$3125

Formed in 2007 A$425k A562k

Source: authors’ own table

3.1.2

Customer Welfare

A key outcome of high participation and engagement with training interventions was identified as improved sales and customer service behaviour on the job. This was examined by reviewing mystery shopping results conducted by independent service providers across all four franchise groups plus some independent SMEs in the same industry sector, to measure key aspects of customer service behaviour. A direct correlation was identified between the results shown in Fig. 1 and the levels of investment in learning and development strategy. The following (franchisor) comment also links mystery shopping performance to business results: We started a mystery shopping program and could see that our higher performing outlets achieved higher scores so behaviour in handling enquiries, following up, upselling, offering advice could be tied to business results.

Additionally, five mystery shoppers were interviewed to provide insights into the customer experience. All are genuine experienced business people and have been actual customers of the franchise groups involved in this study. The mystery shoppers were asked to comment on performance levels between the franchise groups and the independents. They all expressed the view that you cannot generalise between the franchise groups; however, there was a consensus that franchise groups perform better than independent businesses as illustrated in Fig. 1. The mystery shoppers did not know whether franchise outlets they were shopping participate in training initiatives; however, they were asked to comment on the impact they believe training has on the customer experience. The following comment sums up majority feelings: ‘The top performers come across as highly trained and knowledgeable. They seem to follow a system’. Mystery shoppers were also

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90% 80% 70% 60%

Franchise Group 1

50%

Franchise Group 2 Franchise Group 3

40%

Franchise Group 4 30%

Independent

20% 10% 0% 2002 2003 2004 2005 2006 2007 2008 2009 2013 2014 2015 2016 2017

Fig. 1 Mystery shopping result comparisons. Sources: Consolidated archival evidence from Franchise Groups 1 and 2 and authors’ own figure

asked to comment on how they feel when the customer experience was good versus bad. The following comments sum up the feelings of all: ‘Getting quotes is a pain to have to do—it’s a hassle. So, when someone does it well and shows an interest it makes them stand out. It is much more important than a few dollars price difference’. There was also evidence from all four franchise groups that training focused on customer service behaviour is tied to improved business results. The following (franchisor) comment is indicative of many: ‘Customer service behaviour in handling enquiries, following up, upselling, offering advice etc could be tied to business results. Outlets involved in training grew by 5.1% others who did not participate had a negative growth of 2.4%’.

3.1.3

Supplier and Industry Welfare

The main equipment suppliers to this industry sector are very proactive in working with the franchise groups that operate in their industry. They are regarded by all four groups as strategic partners. They contribute financially and attend the franchise group conferences, provide training to franchisees and franchise staff and work closely with the franchisors to support individual franchise outlets achieve business success. The following comment sums up the cycle of improved welfare across the key players from a supplier’s perspective: Equipment is at the heart of this business and will help them be successful and attract and retain customers so business success is influenced by a highly trained operator. . . .. If an operator continues to learn over time they can get better output even from old equipment. Our field service engineers get fewer call outs when a business has well-trained staff. This means lower service costs to us and less downtime for the franchisee. . . . A person who has

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learned well and applied it well and continued to learn on the job is very valuable. It means they can offer better solutions to their customers and it also improves productivity.

One of the suppliers interviewed reflected on their performance during the time that franchise Group 1 was at its peak and the current situation: ‘Back then we were getting twice as much revenue from the group as we do currently—it has definitely dwindled over the years and this has impacted on our performance’.

3.1.4

Franchise Employee Welfare

Several employees were interviewed to discuss their experience with learning and development initiatives. One later became a franchisee and the other a manager of a company-owned outlet. A third later moved on to enjoy a successful career outside of franchising. They all enjoyed participating and appreciated the investment in developing them professionally as the following comment illustrates: I started out my career with this company, it was my first job after university and it started with a two-week training program followed by coaching and ongoing short courses at regular intervals over the next two years. I earned a business qualification. I owe my successful ongoing career to these foundations.

Several of the (franchisor) participants espoused the belief that employee welfare is improved by the awarding of formal qualifications for training as this enhances their career paths: Employee career paths benefit from accredited training where they are rewarded with a formal qualification. A sales training course with no qualification attached has no validity. We employ millenniums and this is what they look for.

Many franchisee participants expressed the view that ongoing professional development for their employees is needed, and if not provided, employee welfare suffers as a result. The following sentiment is indicative of many: We used to develop employees and they benefited from the professional development they received, they stayed with us longer and developed the skills to step up and take on management responsibilities. Now we have nothing and it’s much harder to attract and keep good employees.

3.1.5

Franchising Sector Welfare

There was a consensus in the belief that when franchise groups are successful, the franchising sector as a whole benefits in terms of business growth, employee retention and fewer disputes, and franchise brands are in the position to share knowledge and learn from each other, as the following (franchisor) comment illustrates: The franchising sector benefits from successful franchise systems. We all benefit from learning from each other. Many skills are transferable, so employees can move and take

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their skills with them. Hard to measure but transferable skills apply across industries and sectors.

On the other hand, whilst there was consensus on this point in this research study, there is insufficient evidence from four case studies to project the effect on the franchising sector welfare as a whole, and further research on this topic is needed.

3.2

Dominant Themes

We then turned the line of questioning to explore factors that influence franchisee participation and engagement with learning and development initiatives. The research findings have been grouped into five thematic categories (i.e. strategic holistic approach, knowledge management strategy, field support strategy, communication strategy and franchisee management strategy), which provide greater insights into the examination of participation and engagement and together form a synergistic model for an effective knowledge exchange framework, which is recognised as a critical component of competitive advantage (Hunt and Morgan 1997: Vargo and Lusch 2008: Weaven et al. 2014).

3.2.1

Theme 1: Strategic Holistic Approach to Learning and Development

During the course of the interviews, the various elements of the learning and development strategy discussed were explored in detail, with the aim of identifying the critical elements for successful implementation. The interviews revealed a number of common elements which are illustrated in Table 4.

Table 4 Elements of learning and development strategy Elements Flexible, time efficient, cost-effective, blended delivery modes Measurable learning outcomes Relevant, useful and high-quality content Enterprise specific not necessarily accredited Skilled training specialists OTJ coaching and reinforcement Investment in learning and development resources Knowledge, skills and practical assessment Continuous ongoing professional development Gamification Source: authors’ own table

No. of participants 52

References to topic 208

46 39 37 37 39 31 27 27 6

169 78 71 70 75 120 71 69 15

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A key issue seems to be that the success of training interventions was not measured well, and therefore, it was difficult to identify what was working and what was not, resulting in short-term thinking and lack of continuity. The following statement is from a participant (franchisor) who has worked in one of the franchise groups for over 20 years: Consistency was an issue, we set very short-term goals for trying things and if there was no immediate result it was deemed as not working and then changed. The average time less than 12 months. Too quick across a large and diverse network—it should be a 2 to 3 year investment and we should expect these results at the end not immediately. We never measured training well and this was a big issue.

In ‘Stage One’ research, we proposed that the identification of measurable and assessable learning outcomes to facilitate the transfer of learning to on-the-job behaviour would have a positive impact on the achievement of enhanced channel outcomes. There was the consensus with the franchisor participants that generally this was not done well. The following (franchisor) comment is indicative of many: This is a failing of our group; our measures weren’t as good as they could have been. Too much emphasis on bums on seats and eyeballs on screens for online, this is ludicrous. We should have placed more emphasis on behavioural change and results.

There were a few examples of where this had been done to some extent as the following (franchisor) comment illustrates: We ran a sales campaign with training to support it. We were able to see changes in behaviour as people made sales calls, we were also able to track improved results in getting appointments and 6 months down the track we measured the sales revenue generated from the sales campaign.

Several of the franchisees interviewed have been in the system for many years and reported high participation levels when they believed that the training interventions were relevant, useful and of high-quality lending support to the proposition that ensuring that training content is relevant and useful to franchisees will have a positive effect on participation and engagement with learning and development strategies, as this (franchisee) comment illustrates: When the franchisor got it right, in the early days, we participated, the training was really good and relevant to my business and our staff were also sent to training to improve their knowledge and skills.

In contrast, if franchisees do not perceive training interventions to be relevant, useful and of high-quality, participation levels drop as the following (franchisee) comment illustrates: The training quality deteriorated when we lost our training manager who had a lot of industry experience and knew how to bring it to life in the training materials and engaging delivery. The trainers that stayed were good at delivery but could not create new relevant content, so relevance to my business deteriorated over time. In the end it was useless, so we didn’t participate.

All of the franchisee participants agreed that it is very difficult to find the time to attend training interventions or send employees along. Their businesses run very

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lean, so flexible training interventions need to be provided in bite-sized chunks and outside of business hours as this (franchisee) example demonstrates: As the majority of our franchise outlets now run with 2 or fewer staff members, out of hours training for group sessions is the only opportunity to get a good turn out.

There was agreement that learning and development strategy must be blended encompassing online, webinars and face to face, with strategies to ensure behaviour change is achieved on the job such as follow-up behavioural assessment and coaching. Online training is flexible and relatively inexpensive to deliver but if it has not done well it will fail. It must be interactive so that participants need to do things, and incorporate tone of voice as well as non-verbal components and mini video clips. The following (supplier) opinion was expressed by many: eLearning must be interactive, or people don’t learn. We get better feedback on eLearning that is fast paced, requires engagement (listening, watching and doing) and includes short ‘how to’ videos—this is well received. Short sharp impact training has instant learning and benefit. Franchisee is asking for more of this as they see the benefits.

There was agreement that an essential element of learning and development strategy is the employment of skilled training professionals; operational experts are needed to ensure the training content is enterprise specific so that it is relevant and useful and also contribute tacit knowledge from the field and on-the-job coaching and behavioural assessment. However, there must also be high-level learning and development expertise in the mix as this (supplier) comment illustrates: Training is a highly skilled job and skilled facilitation results in more learning. Too many franchise groups use their operational experts to train but they just feed information into people’s heads training is not engaging.

When the line of questioning turned to whether training should be accredited and associated with nationally recognised qualifications, there were mixed feelings as this (franchisor) comment demonstrates: No doubt in my mind that if you have accredited training it’s a real incentive to participate, you get better participation, better interaction and better results and more support from the franchisees of their people.

Those not espousing accredited training were objecting to the way that accredited training is used by RTOs to obtain government funding stating that too much emphasis and resource allocation are placed on the funding rather than on ensuring the training is high quality and enterprise specific. The following (franchisor) sentiment was expressed by many: My experience with RTOs offering accredited training that attracts government funding is that it was very poor. The hurdles we had to jump to release the funding at every stage became the main issue they didn’t have our interests at heart. It was all about the funding not the quality of training.

On a final note, franchise Group 4 has recently implemented a new eLearning platform to support the introduction of new products and services into the Australian market. Their learning and development strategy incorporated the introduction of

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gamification in order to encourage intrinsic motivation and employee engagement. Results to date indicate that this is proving to be a cost-effective, efficient way of improving participation in the training interventions necessary to achieve their desired channel outcomes. They have achieved a 100% participation rate in the training programme coupled with 100% completion by participants of training introduced to date. Furthermore, they have reported observed on-the-job behaviour change resulting from participation of the training interventions indicating widespread engagement with the learning outcomes and a 63% increase in revenue derived from the new products and services introduced. The topic of gamification did not arise in ‘Stage One’ of this research and has only been introduced in the last 4 months in one of the franchise groups studied, so it is too soon to draw conclusions; however, early indications suggest that gamification in relation to participation and engagement would benefit from further research. Furthermore, gamification could be useful at different stages of the knowledge management process.

3.2.2

Theme 2: Knowledge Management Strategy

The knowledge management initiatives appear to have focused on capturing tacit knowledge and then sharing through the implementation of an information management system. Over the years, they evolved from hard copy operating system procedures in binders that were placed in every outlet to a fully searchable information management system. All four franchise groups have invested in their information management system, but there was agreement that the biggest challenge is keeping the content accurate and up to date. There was also consensus that inaccurate outdated content leads to lack of credibility resulting in reluctance to use the system as the following (franchisor) comment illustrates: We need to invest more in the content on our knowledge management system. This is our operations manual, but it is never current and is not integrated with our training materials. We need a fully populated knowledge management system that everyone uses and it fully up to date—a best practice ‘how to’ model for success in our business system. This is what business format franchising is all about and we don’t do this well enough.

All four franchise groups reported the loss of valuable tacit knowledge over the years, as the following (franchisor) comment illustrates: There is a huge amount of IP with experience and knowledge, but no strategy to capture or document it. This was recognised, but no one knew how to capture it. Over the last few years an inordinate amount of tacit knowledge has left the business, the cost in $ terms is huge, we will make the same mistakes all over again, this is frustrating.

One of the franchise groups had introduced a number of strategies to capture and share knowledge made; there have been various attempts at knowledge capture by some of the groups as illustrated by the following (franchisor) comment: We studied best practice and also our own history, things we did in the past that worked well. We put together leadership groups of successful franchisees, our marketing council and speak easy forums were used to gather tacit knowledge from franchisees. It was all about

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growing the grapevine of franchising. Also, video fireside chats, that’s how they share. Our marketing manager would be the moderator and help get the right stuff out of people. People like seeing panels of their peers at conferences too.

It was also recognised by some franchisor participants that it is beneficial for knowledge management to extend beyond their own franchise group and to include knowledge sharing with other franchise groups and outside of their own industry sector: We formed an alliance with other franchise groups so we could learn from each other, interaction gives learnings from different groups. We even interviewed each other’s Franchisees. Learning came from this and also some validation that we are on the right track.

One of the franchise groups introduced an initiative where the franchisor management team worked in a franchise outlet twice a year, facilitating the opportunity for two-way knowledge sharing as the following (franchisor) reflected: All managers had to work in a franchise outlet twice a year, they were allocated to outlets, not allowed just to pick their favourites. This was a great two-way learning process.

A common complaint from the franchisees interviewed was that there is an overall lack of understanding and failure to tap into the knowledge and experience of franchisees and this in some instances is leading to poor operating system decisions. The following (franchisee) comment is indicative of the views of many: The franchisor is naïve, only people that have no idea of what is going on in an outlet could say something like that. My business would fall in a heap if I did what they say.

In summary, there was wide recognition from franchisor and franchisee participants that knowledge management is an area of weakness that needs to be addressed as part of the organisation’s strategy and that failure to address this issue could be detrimental to the group as the following comment illustrates: We don’t have the mechanisms in place to capture the wealth of knowledge and experience that exists in our group and so much has been lost over the years. So many wheels have been re-invented and so much waste of resources. We are missing out on the opportunity to become a learning organisation and only when we can achieve this, we will reach the level of greatness we desire. Our MIS just doesn’t cut it we need an integrated knowledge management system that provides the ‘Why’, ‘What’, ‘When’, and ‘How’ for every aspect of running a franchise business

As the various aspects of knowledge management were discussed, the interviews revealed a number of common elements which are illustrated in Table 5.

3.2.3

Theme 3: Role of Field Support

The proposition that high-calibre field support staff will positively influence the successful implementation of learning and development strategy and subsequent enhanced channel outcomes was explored, and there was agreement that high-calibre field support is an essential element of success in franchising. However, it was

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Table 5 Elements of knowledge management strategy Elements Comprehensive and current information Systems and processes for capturing and sharing tacit knowledge Fully integrated with training content Dynamic fully searchable operations manual Knowledge sharing with other franchise groups Franchisor working in franchise outlets Knowledge sharing outside of franchising

No. of participants 51 50

References to topic 161 128

45 44 39 15 9

118 89 52 43 17

Source: authors’ own table

widely recognised by the franchisor participants that field support is a challenging area to get right. The following (franchisor) sentiment sums up the opinion of many: It’s a critical but difficult role, done right there is the opportunity for enormous difference but it’s not always been done right and our calibre of field support managers has dropped. We don’t pay them well and don’t train them well.

Several participants expressed the opinion that too much is expected of the field support team and the resourcing levels are not aligned with the workload expectations as the following comment illustrates: There is too much onus on the field team and its beyond their capability—all roads seem to lead back to field team and there is only so much they can do. There is also too much emphasis on delivering information. The more they are used to deliver messages the less there is focus on the Franchisee’s business.

All franchisee and the majority of franchisor participants described the desired learning and development aspect of the field support role as on-the-job coaching and reinforcement of training, identification of training needs, encouraging participation and on-the-job practical assessment as the following comment describes: It must be a strategy including ongoing on the job coaching, assessment of learning etc. The training needs to be part of a coaching program and get behaviour change on the job. We need more practical small business coaches who know what it is like to walk in a franchisee’s shoes.

Participants were asked to rate the calibre of the field support team on a scale of 1 to 10 for each period. Table 6 reports the average score for each period. Franchise Group 1 reported that there is not enough collaboration between field support and learning and development and effectively these two areas work in individual silos, resulting in duplication and inefficiencies as the following franchisor comment illustrates: Part of the solution to that challenge is to integrate what we do in the training role with what field managers do locally. It needs to be a joint effort, historically, we haven’t done that as well as we could, we haven’t implemented plans where the whole company buys into it so we keep reinventing the wheel.

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Table 6 Calibre of field support rating

Period 1—2002 to 2007 Period 2—2008 to 2012 Period 3—2013 to 2017

Franchise Group 1 8.5

Franchise Group 2 6

Franchise Group 3 5

Franchise Group 4 Formed in 2007

5

5

7

7

2.5

8

8

7

Source: authors’ own table

The other three franchise groups seem to work more collaboratively and described strategies designed to gain greater leverage from training interventions by integrating them with on-the-job support, coaching and assessment as the following(franchisor) comment illustrates: It was recognised that we needed support from the field, on the job coaching and practical assessment. We started a train the trainer program for the field team as we had agreement that the silos needed to be broken down to achieve greater collaboration.

Positive results in relation to working collaboratively to identify training needs were also reported from franchisor participants as the following comment illustrates: We introduced a training needs analysis process and worked very closely with the field support team to get those happening. This was a great tool to bridge the gap between departments as we were working side by side with the field team, looking for solutions and gaps that training could help with. They then started to play an active role in supporting training.

There are large differences in field support levels between franchise groups; however, franchise Group 4, who have the lowest level of field support, are experiencing very high participation and engagement levels which they attribute to the close collaboration with learning and development and senior management which presents to the franchisees as a holistic approach from the franchisor as the following (franchisor) comment illustrates: We all work together to achieve our objectives, training develops the content based on feedback from the field and delivers the training then we encourage participation and coach them on the job.

Table 7 shows the level of field support provided by the franchisor in terms of the number of units to field support managers. It was also noted by two of the franchise groups that the level of collaboration between learning and development and field support differed between the regions and was dependent upon the individuals concerned rather than being a part of the culture and structure as the following (franchisor) participant commented: In some regions field support was very proactive when training was delivered and often sat in on the program to see what covered so they could support in the field afterwards with participants. In other regions, field support never showed an interest, so it differed in the regions and depended on the person.

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Table 7 Level of field support

Period 1—2002 to 2007 Period 2—2008 to 2012 Period 3—2013 to 2017

Franchise Group 1 15:1

Franchise Group 2 9:1

Franchise Group 3 30:1

Franchise Group 4 Formed in 2007

20:1

25:1

15:1

20:1

30:1

14:1

20:1

32:1

Source: authors’ own table Table 8 Critical elements of the field support role Elements Business skills and operational skills OTJ coaching and reinforcement Capturing tacit knowledge OTJ practical assessment (behaviour and system compliance) Identify training needs and encourage participation Continuous professional development of the field team Implementers not messengers

No. of participants 45 42 39 38 24 21 12

References to topic 172 125 92 95 73 53 28

Source: authors’ own table

Learning and development for the field support team was something that all groups described as a necessity, but none of them had done very much in relation to this during the period examined; however, one of the franchise groups had recognised that investment in developing field management resources was needed as illustrated by the following (franchisor) comment: Field managers are critical, they are a confidant, coach, mentor and policeman, they wear so many different hats and all the hats they wear they need to show really keen judgement not to stereotype or box franchisees in. We need to give them the tools in analytics and the coaching skills to identify good behaviour. We have had a poor franchisee experience and it’s because we’ve not done enough development of field managers.

We also investigated the opportunity for the field team to play a critical role in capturing and sharing tacit knowledge. The majority expressed a belief that this should be, but isn’t occurring, as part of the field support role. This (franchisor) comment is indicative of the majority: They (the field team) are ideally placed to listen and learn what is working well and share that with others. There should be a structure put in place so that we can all listen, learn and share.

The interviews revealed a number of common elements that participants believe should be incorporated into the field support strategy in order to support learning and development strategy. These are illustrated in Table 8.

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Theme 4: Communication Strategy

The findings from ‘Stage One’ showed that a relational structure with a supportive organisational culture that focuses on learning orientation and knowledge sharing is more effective than the use of power to support learning and development strategies. Participants from each case study were asked to describe the channel conditions (structure, climate, power and degree of tacitness) that exist within the group in relation to the communication strategy adopted to enable us to examine the match between extant channel conditions and their communication strategy. The majority of the participants from three of the four franchise groups concurred in support of this proposition as illustrated by the following (franchisee) comment: Our culture is one of support for each other and has been for many years, franchisor and franchisees work together, we are very collaborative, issue are nipped in the bud quickly and there is no need for the franchisor to exert power, we have shared goals and franchisees help each other too.

However, the findings were inconclusive in relation to franchise Group 1 due to broad differences in opinion between various players in the franchising relationship. This phenomenon is consistent with a subtheme of differing perspectives that emerged from ‘Stage One’ of this research in relation to collaboration, culture and use of power, and further research is needed in this area.

3.2.5

Theme 5: Franchisee Management Strategy

‘Stage One’ clearly identified the quality and calibre of franchisees as a factor in participation and engagement with learning and development strategy, and there was also consensus on this in ‘Stage Two’. It was widely reported that the higher-calibre franchisees tend to be the ones that support franchisor training initiatives. As the following (franchisor) comment indicates: ‘We know that the most successful franchisees supported training and always sent people along, or attended themselves when it was franchisee training’. Furthermore, it was observed by many that lower-calibre franchisees tend to be the ones that don’t embrace learning and development: For some reason the less successful franchisees are the ones that don’t turn up and embrace training. They are the ones who need it most, but they think they know it all and they have nothing to learn.

There was wide recognition from franchisee and franchisor participants that continuous professional development is needed throughout the franchising journey for a franchise group to optimise the success of their franchisees. However, getting long-standing franchisees to recognise the need for professional development and embrace training remains a challenge as the following (franchisor) comment illustrates:

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Some franchisees think they know it all, they have been around for a long time and have nothing to learn, but the world is always changing, learning should be continuous so as a franchise system we continuously learn. Some just don’t get that. The most successful ones do.

Moreover, it was observed by many that this lack of openness to learning by the long-standing franchisees hampers the ability to embrace the necessary changes in order to evolve and succeed, as expressed by the following (franchisor) comment: We need franchisees to be engaged and have openness to learning. Over the long-term, business changes and we must evolve and change. If you don’t have franchisees with the right attitude to learning they won’t embrace change and we will fall behind. This erodes our competitive advantage

The proposition that selection of high-quality franchisees with a high learning orientation was regarded by many as being equally important to the learning and development strategy. Many espoused the importance of selecting only high-calibre franchisees with identified competencies and behavioural attributes. The following (franchisor) comment is indicative of many: The calibre of franchisees in the system is also critical. B grade people suck up field resources, so we should only recruit high quality franchisees. We should look at openness to learning as a key attribute when recruiting.

Only one of the franchise groups reported that they use a rigorous recruitment and selection process for new franchisees. The remaining three recognised this as a weakness in their system, concurring that in mature franchise systems new franchisees are usually purchasing existing units and it’s difficult for the franchisor to interfere with a sale. It was also recognised that the manner in which the field team were rewarded for selling franchises impacted their desire to change and embrace new behaviours as suggested by this (supplier) participant: The way the field managers are rewarded is a factor, KPIs are financially based rather than on lead indicators and developing soft skills. This creates too much focus on franchise sales and not enough on the franchisee quality.

One of the trainers reflected that low-calibre franchisees could be recognised during induction training and the granting of a franchise was subject to successfully passing the induction training programme, but this was also never enforced: We could usually tell that a franchisee was low calibre and wouldn’t make it during training. I raised concerns about the abilities several new franchisees but they were still granted franchises which later failed sadly.

In summary, it was unanimous that it’s critical to get ‘the right people on the bus and the wrong people off the bus’. However, it’s equally critical that the franchisor ‘drives the bus better’ by managing performance and supporting current franchisees and exiting the disengaged poor performers. Table 9 summarises these elements. To sum up, communication strategy was examined in depth, and whilst there is evidence to support the proposition that a relational structure with a supportive

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Table 9 Critical elements of franchisee management strategy Elements Accept only high-calibre franchisees Rigorous selection criteria based on identified competencies and behaviour attributes Exit disengaged franchisees Manage and support current franchisees No compromise

No. of participants 51 38 33 33 21

References to topic 179 141 89 87 52

Source: authors’ own table

organisational culture that focuses on learning orientation and knowledge sharing is more effective than the use of power to support learning and development strategies, the findings were inconclusive in relation to one of the groups, due to inconsistent channel conditions and broad differences in opinion between players in the franchising relationship. Further research is called for in this area to more rigorously test the proposition. A model of best practice has emerged from this research which captures the essential elements required to implement a knowledge exchange framework to achieve successful channel outcomes from learning and development strategy. This model is illustrated in Fig. 2.

4 Conclusions This chapter provides a solid foundation for future research into the factors that influence successful learning and development execution in terms of achieving enhanced channel outcomes in the franchising sector. The results of this study clearly indicate the importance of adopting a strategic rather than ad hoc approach to learning and development strategy and identified the critical elements to consider in such a strategy. In addition, the need to adopt a fully integrated knowledge exchange framework was identified to capture share and transfer knowledge. Furthermore, the calibre and nature of field support were confirmed as an effective mediator to the success of learning and development strategy as well as facilitating the capture of valuable tacit knowledge that exists within franchise systems, to support the conversion to explicit knowledge and subsequent sharing and transfer. Finally, it was recognised that a franchise management system is needed to attract and develop high-calibre franchisees and create satisfaction and engagement with the franchise system.

• • • • • •

• • • • • • • • •

Share Knowledge

Investment in L&D Resources Relevant, Useful & High Quality Content Flexible Time Efficient Blended Delivery Modes Enterprise Specific not necessarily accredited Skilled Training Specialists OTJ Coaching & Reinforcement Knowledge, Skills & Practical Assessment Measurable Learning Outcomes Continuous Professional Development

Learning & Development Strategy

Collaborative High Frequency Bidirectional Formal & Informal modes Indirect & direct contact High information richness

Communication Strategy

• •

• • • •

•

Convert to Explicit Knowledge

Capture Tacit Knowledge

• •

•

Franchise Sector

Customers

Franchisor

Systems & processes for capturing and sharing tacit knowledge Dynamic Operations Manual Comprehensive & Current Information Fully Searchable Fully Integrated with Training Content (Why, What, When & How) Management working in franchise outlets Knowledge sharing with other franchise groups and outside of franchising

Knowledge Management Strategy

Suppliers and Industry

Franchise Employees

Franchise Owners

Accept only high calibre franchisees Rigorous selection criteria based on identified competencies & behaviour attributes Manage and support current franchisees Exit disengaged franchisees No compromise

• •

Relational Structure Supportive Culture Interchangeable Power Use High Tacitness

Channel Conditions • • • •

Fig. 2 Model for best practice. Source: authors’ own figure

Participation & Engagement Knowledge Transfer Behaviour Change

• • •

• • • • • •

Customer Welfare Franchisee Welfare Franchise Staff Welfare Supplier Welfare Franchisor Welfare Franchise Sector Welfare

Qualitative Outcomes

Quantitative Outcomes

Communication Strategy

Knowledge Exchange Framework

Franchisee Management Strategy

Capturing Tacit Knowledge Implementers not messengers OTJ Practical Assessment OTJ Coaching & Reinforcement ID training needs & encourage participation • Business & Operational Skills • CPD of field team

Field Support Strategy • • • • •

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