Entrepreneurship Essay Example

the market. This destroys existing markets and creates new ones, which will in tum be destroyed by even newer products or services. Schumpeter called this process 'creative destruction'.(Filion, 2011)

 Opportunity Recognition

One of the most critical distinction between entrepreneur and non-entrepreneur is the intentional pursuit of opportunity. Howard Stevenson pointed that the 'heart' of entrepreneurship is the seeking of and acting upon opportunities. To understand entrepreneurship, then, requires understanding how we learn to see opportunities and decide to pursue them. Opportunity recognition involves matching both sources of supply and demand either in an existing company or a new firm.

The notion of opportunity recognition has to do with exploitation of existing markets.Entrepreneurial opportunity recognition can be viewed from three dimensions; possibility of putting resources to a good use to achieve a given end, possibilities of correcting errors in the system and creating new ways of achieving a given end and possibility of creating new means as well as new ends(Ács & Audretsch, 2003)

Risk

Entrepreneurial and business activities are intrinsically affected by uncertainties. Risk-taking is almost synonymous with entrepreneurship. Risk and uncertainty bearing: According to Hozelist an entrepreneur performs the function of risk and uncertainty bearing. Every decision pertaining to development of new products, adapting new technologies, opening up new markets involves risk. Decision-making in an environment of uncertainty requires anticipation of risk. Profit is said to be the reward for anticipating and taking such risks. However it is pertinent to mention that the entrepreneur is not a gambler, he only takes calculated risks. An entrepreneur develops the art of decision-making under conditions of uncertainty as a matter of survival(Hatten, 2009).

Use of Resources

Entrepreneurs uses resources economically in order to design

innovative products or services with a competitive edge based on differentiation. Entrepreneurs use an effectuation process, which means they take what they have (who they are, what they know, and whom they know) and select among possible outcomes in order to realize their objectives. This thus differentiate them from other business people.(Hisrich, Peters, & Shepherd, 2017)

Financial Intermediaries

Financial institutions intermediate between savers and borrowers, and so their assets and liabilities are primarily financial instruments. Various sorts of banks, brokerage firms, investment companies, insurance companies, and pension funds all fall into this category.

These are the institutions that pool funds from people and firms who save and lend them to people and firms who need to borrow, transforming assets and providing access to financial markets. They funnel savers’ surplus resources into home mortgages, business loans, and investments. Financial intermediaries are involved in both direct finance where borrowers sell securities directly to lenders in the financial markets—and indirect finance, in which a third party issues claims to those who provide funds and acquires claims from those who use them.

Intermediaries investigate the financial condition of the individuals and firms who want financing to figure out which have the best investment opportunities(Cecchetti & Schoenholtz, 2015a).Financial intermediaries are classified into three distinct categories. The first is the institutions that accepts and manages deposits from its customers and make loans, the second category is the institutions that do not issue deposits to its members, this are typically institutions such as insurance companies and pension funds, the third category is the investment funds and other intermediaries such as mutual funds and investment dealers(Makinen, 1981).

Commercial Banks

Commercial bank specializes in making commercial loans to businesses. In

most cases commercial banks issue short term debt for working capital that is, to enable firms to buy and carry inventories of raw materials and finished good as well as to pay salaries. The credit facilities available for small businesses from commercial banks includes, overdraft facility where one is allowed by the bank to overdraw their account up to a certain limit, term loans where one is issued with a loan and pays a periodic payment of loan and interest(Makinen, 1981).

Government

The government is one of the biggest funder of small businesses in kenya. It has established institutions that finance small businesses either through grants or loans. These institutions are sometimes specialized in specific area of production such as agriculture and industrialization, while others focus on a specific sector of the population such as youth and women who may be interested in entrepreneurial activities. Examples of these institutions includes, agricultural finance corporation, uwezo fund, women enterprise fund, the youth fund, Kenya industrial exchange and industrial and commercial development corporation (ICDC).

Savings and Credit Cooperative Organization

Savings and credit associations represents an attempt by members to organize the savings of individuals of modest mean as a source of future funds. They pool small amounts of savings to make low cost loans for their members. Individual can take advantage of such credit unions to finance their small businesses especially for startup capital or to buy equipment and machineries for their businesses(Makinen, 1981). There are credit union which are open to all public members such as stima sacco.

Micro Financing Institutions

These are institutions that accepts deposits offer loans to small businesses and individuals. They are mostly localized in certain regions. In kenya

we have seen development of micro financing such that small loans are offered through mobile phones. This enables micro businesses to finance their working capital through this soft loans. Examples of micro financing institutions includes Safaricom through their Mshwari services, SMEP, KIVA.

Insurance Companies

Insurance companies are a form of contractual type financial intermediary that offer the public protection against the financial costs associated with the loss of life, health, or property. For a fee, called a premium, insurance companies agree to make a payment contingent upon the occurrence of a certain event. Premiums are used to purchase financial assets until policyholders present their claims. As long as a company’s combined premium revenue and investment earnings are greater than the insurance claims made against it, the company will earn a profit(Burton, Nesiba, & Brown, 2010).

Securities Firms

Securities firms’ aid in the smooth functioning of the financial system. There are two main functions of securities firms: investment banking and buying and selling previously issued securities. Investment banking deals with the marketing of newly issued securities in the primary market. Brokers and dealers assist in the marketing of previously issued securities in the secondary market. Some securities firms provide both functions; others provide only one or the other(Burton et al., 2010).

Investments Bank

Investment banks are financial institutions that design, market, and underwrite new issuances of securities stocks or bonds in the primary market. The design function of the investment bank is important because a business may need assistance in pricing the new financial instruments that it will issue in the open market. The businesses looks to the investment bank to provide advice about the design of the new offering.

In return for

their services, the investment bank is paid a fee. In addition to their primary market activity, many investment banks are also brokers and dealers in the secondary markets. Investment banks also handle private placement. This is sale of new securities to a limited number of large investors. Private placements occur more frequently with bonds than with stocks. Private equity firms have recently increased in importance in funding start- ups and distressed companies(Burton et al., 2010).

Hedge Funds

This is a nontraditional type of mutual fund formed as a partnership of wealthy investors with large minimum investments.  The funds are used to make direct investments in businesses with potential for substantial growth(Burton et al., 2010).Examples of hedge funds in kenya include fanisi capital and savannah fund.

Nairobi Securities Exchange

The stock market refers to the collection of markets and exchanges where the issuing and trading of equities (stocks of publicly held companies), bonds and other sorts of securities takes place, either through formal exchanges or over-the-counter markets. Also known as the equity market, the stock market is one of the most vital components of a free-market economy, as it provides companies with access to capital in exchange for giving investors a slice of ownership(Staff, 2005).

Stocks play a prominent role in our financial and economic lives. For individuals, they provide a key instrument for holding personal wealth as well as a way to diversify, spreading and reducing the risks that we face. Importantly, diversifiable risks are risks that are more likely to be taken. By giving individuals a way to transfer risk, stocks supply a type of insurance enhancing our ability to take risk(Cecchetti & Schoenholtz, 2015b)For companies, they are one

of several ways to obtain financing. Beyond that, though, stocks and stock markets are a central link between the financial world and the real economy.

Stock prices are fundamental to the functioning of a market-based economy. They tell us the value of the companies that issued the stocks and, like all other prices, they allocate scarce investment resources. The firms deemed most valuable in the marketplace for stocks are the ones that will be able to obtain financing for growth. When resources flow to their most valued uses, the economy operates more efficiently(Cecchetti & Schoenholtz, 2015a)

The Role of Nairobi Securities Exchange

The roles of Stock Exchanges are varied and highly important in the development of economy of a country. They measure and control the growth of a country. Stock exchange apart from being hub of primary and secondary market, they have very important role to play in the economy of the country and growth of businesses. These roles are as follows.

Raising Capital for Businesses

The exchange helps companies to capitalize by selling shares to the investing public; the companies raise capital which is used in expansion of various sectors of the companies. This leads to a direct effect to the economy as many people are employed when the companies expands hence reducing the unemployment problem(Muley, n.d.).

Mobilizing Savings for Investment

When people draw their savings and invest in shares, it leads to a more rational allocation of resources because funds, which could have been consumed or kept in unused deposits with banks, are mobilized and redirected to promote commerce and industry.This also helps public to mobilize their savings to invest in high yielding economic sectors, which results in higher yield,

both to the individual and to the national economy.

Control of Company Management

The role of the stock exchange is also to monitor the market to ensure that it is working efficiently, fairly and transparently. Over the decades, the stock exchange has been raising requirements for new corporations seeking listing. These requirements relate to the submission of all financial information regarding companies whose securities are sold on the stock exchange. Such requirements exercise a control on a company management and keep its malpractice in check. This prevents companies from running bankrupt or being mismanaged hence leading to their failure.

Spread of Financial Risks

They provide a key instrument for holding personal wealth as well as a way to diversify, spreading and reducing the risks that we face. Importantly, diversifiable risks are risks that are more likely to be taken. By giving individuals a way to transfer risk, stocks supply a type of insurance enhancing our ability to take risk(Cecchetti & Schoenholtz, 2015b)

A Measure of Company’s Future Prospects

The stock market plays a crucial role in every modern capitalist economy. The prices determined there tell us the market value of companies, which guides the allocation of resources. Firms with a high stock-market value are the ones investors prize, so they have an easier time garnering the resources they need to grow. In contrast, firms whose stock value is low have difficulty financing their operations(Cecchetti & Schoenholtz, 2015a).

Factors That Influence the Issuance of Shares

Several reasons exist that prevent SME’s from going into the public market to raise capital through the sale of securities. The principal reasons include

Company Law Limitations

Private companies in Kenya are limited to no more than 50 shareholders the securities

are nontransferable, and they cannot offer any shares or debentures to the public except where a provision is made for the same in a company’s memorandum. More significant as impediments to capital raising are the public offering provisions of most company and securities laws. Any offering of securities, regardless of size or number of purchasers, must comply with the full registration process set forth in the Legal Framework. SME’s desiring to raise a relatively small amount of capital must go through the same costly, time-consuming process of registration as if it were a multimillion offering. SME capital requirements are often too low, too sporadic, and too immediate to warrant the required registration process(Capital, n.d.)

The Problems of Listing on the Stock Exchange

Two serious problems exist in this area for SME’s. The first is that many SME’s, even after the sale of shares in a public offering, will be too small to meet exchange listing standards. The Stock exchanges listing requirements are quite stringent with regard to company assets, number of shareholders, and market capitalization. The NSE, recognizing the problem and seeking to attract smaller companies into their fold, introduced listing tiers. Tier I, MIMS, is composed of large companies that meet the regular listing requirements. Tier II, AIMS, is composed of smaller companies who qualify under modified listing standards(Capital, n.d.).

Lack of an Over-the-Counter Market

The inability to meet exchange listing requirements would not be a serious impediment to a public offering by SMEs if those companies could assure potential investors that an over-the-counter (“OTC”) market would be created for secondary trading. An OTC market provides a liquidity function for shareholders similar to that of an exchange. Unfortunately,

an OTC market does not exist in Kenya, nor have rules governing its operation been established.

Tax and Financial Disclosure Concerns

An often stated major impediment to attracting SME’s to make public offerings is the concern that the required disclosure of audited financial statements will alert government authorities to possible prior underreporting of taxable income.

Control Concerns

Owners of SMEs are understandably reluctant to sell securities to the public if the result is a diminution or loss of management control. This is a very real personal problem, especially for SME’s developed and nurtured within family units. It is a problem, however, that can be addressed through education of company owners as to alternative offering techniques, and through changes to existing statutes and regulations to permit more diversified ownership interests(Capital, n.d.).