Entrepreneurship and development challenges in Papua New Guinea.


Entrepreneurship has been recognized as a micro driver of innovation and economic growth. What is meant by entrepreneurship, innovation and economic growth is often not clear. This paper discusses the nature of entrepreneurship and its relation to innovation and provides an overview of theory on the relation between entrepreneurship, innovation and economic growth. The paper continues with a study on rural entrepreneurship in Papua New Guinea (PNG) with conceptual, theoretical investigations. PNG is a resource rich nation but failed to develop to its full potential, as well as produce the entrepreneurial class which is usually a necessary prerequisite for economic growth? An attempt is made to explain the mystery behind the backwardness. It outlines the development of PNG in recent years by examining some of the major challenges for the entrepreneurship development. The paper also discusses some of the future prospects for increasing entrepreneurial activities in the country and provides some implications for policy development.

Keywords:  Entrepreneurship, Innovation, Economic Growth, Papua New Guinea.

Author: Rena, Ravinder
Pub Date: 01/01/2009
Publication: Name: Asia-Pacific Business Review Publisher: Asia-Pacific Institute of Management Audience: Academic Format: Magazine/Journal Subject: Business; Business, international Copyright: COPYRIGHT 2009 Asia-Pacific Institute of Management ISSN: 0973-2470
Issue: Date: Jan-March, 2009 Source Volume: 5 Source Issue: 1
Accession Number: 200410498
Full Text: Introduction

The innovation of products, services and processes and the formation of new business enterprises are crucially important to every economy. Innovation and new business development can be initiated by independent individuals or by existing enterprises. Entrepreneurship is considered as a valuable instrument for rejuvenating and revitalizing the economy. It is brought into practice as a tool for business development, revenue growth, and profitability enhancement and for pioneering the development of new products, services and processes. Entrepreneurship is often defined as a process that goes on inside an existing firm and that may lead to new business ventures, the development of new products, services or processes and the renewal of strategies and competitive postures. As such, it can be seen as the sum of a company’s innovation, venturing and renewal efforts (Kirzner, 1997; Rena, 2007).

Innovation and entrepreneurship are often regarded as overlapping concepts. This can be traced back to probably the most well known definition of entrepreneurship, by Schumpeter (1934), who defines entrepreneurs as individuals that carry out new combinations (i.e. innovations). Schumpeter distinguishes four roles in the process of innovation: the inventor, who invents a new idea; the entrepreneur who commercializes this new idea; the capitalist, who provides the financial resources to the entrepreneur (and bears the risk of the innovation project); the manager, who takes care of the routine day-to-day corporate management. These roles are most often executed by different persons. The literature on entrepreneurship recognizes a variety of entrepreneurial roles in economic change, such as: (i) The person who bears uncertainty (Knight, 1921); (ii) An innovator (Schumpeter, 1934); (iii) A decision maker (Casson, 2003); (iv) An industrial leader (Schumpeter, 1934); (v) An organizer and coordinator of economic resources (Marshall, 1890); (vi) These roles all implicitly carry an economically positive connotation with them. However, if entrepreneurs are defined to be persons who are ingenious and creative in finding ways that add to their own wealth, power, and prestige (Baumol, 1990), then it is to be expected that not all of their activities will deliver a productive contribution to society (Murphy et al., 1991). For other reasons, many entrepreneurs do not directly contribute to an increase in for example national income: some entrepreneurship is more adequately characterized as a non-profit seeking activity (Benz, 2006). Greater independence and self-fulfilment are more often mentioned as important motivations to become self-employed than increasing earning power (EOS Gallup, 2004).

The definition of entrepreneurship as the introduction of new economic activity by an individual that leads to change in the marketplace, we can formulate several necessary conditions for entrepreneurship (Shane, 2004):

(i) Existence of entrepreneurial opportunities (environmental changes: technological, political/ regulatory, social/demographic);

(ii) Difference between people (in their willingness and ability to act upon an opportunity);

(iii) Risk bearing; uncertainty until the entrepreneur pursues the opportunity (does demand exist?; can the entrepreneur compete with others?; can the value chain be created? etc.);

(iv) Organizing (new way of exploiting the opportunity); either creating a firm, or using the market mechanism (for example, licensing); and

(v) Innovation: recombination of resources into a new form that is by implication not a perfect imitation of what has been done before and thus involves a change in the marketplace.

These are necessary conditions for entrepreneurship. It is however contingent whether the individuals discovering an opportunity are employees or independent individuals, and whether new firms or incumbent firms are used for the exploitation of the opportunity. Studies conducted by Economic Commission for Latin America and Caribbean (ECLAC), and Food and Agricultural Organization (FAO) in the Latin American and Caribbean region have indicated that rural enterprises can be an important modernizing agent for small agriculture. Governments have supported this process by creating incentives for agro-industry to invest in such regions. This has not only been attempted in developing countries, but it has also been a clear policy of the European Union (EU) which channels a large part of the total common budget to develop the backward and poor regions of Europe.

In 2004, APEC Ministers endorsed the “Santiago Agenda on Entrepreneurship” with the aim to promote entrepreneurial culture in APEC member economies and promote member economies’ competitiveness. (1) The Santiago agenda has identified best entrepreneurial practices and developing human capital as one of these important components. The Santiago agenda set the objective of creating a culture of entrepreneurship through the training of students from different disciplines and at different educational levels. Peru has developed a theme for 2008 “A new commitment for the development of the Asia Pacific”. Under this theme, Peru aims to “highlight the educational program role on the social and economic development of the member economies.” The Project aims at raising awareness on the issue of training students with entrepreneurship skills at University level to promote entrepreneurial culture amongst young people, making them more employable and helping train a future labour force for the economy. The Global Entrepreneurship Monitor (GEM) has developed a conceptual model. The central aim of the model is to understand the relationship between entrepreneurship and economic growth. This model is in contrast to the conventional model of economic growth that focuses on the impact of major established firms on economic growth. The GEM model set out key elements of this relationship, and the way in which the elements react (Figure 1). The GEM model recognises five groups of variables that affect entrepreneurial activities and their impact. As of 2001, the model was modified with the introduction of an additional variable, “Entrepreneurs Opportunity / Necessity”, to differentiate the reasons motivating entrepreneurs who started businesses (Wong, et al., 2007, pp.12-13).


Lyson (1995) emphasized the prospects of small-enterprise framework as a possible rural development strategy for economically disadvantaged communities, and provides this description of the nature of small-scale flexibly specialized firms: “First, these businesses would provide products for local consumption that are not readily available in the mass market. Second, small-scale technically sophisticated enterprises would be able to fill the niche markets in the national economy that are too small for mass producers. Third, small, craft-based, flexibly specialized enterprises can alter production quickly to exploit the changing market conditions.”

According to a study conducted in the United States, it has been found that the rural poverty has become as intense as that found in the inner cities, and has stubbornly resisted a variety of attempts at mitigation through economic development policies. The latest strategy for addressing this problem is the encouragement of emerging home-grown enterprises in rural communities. The expectation is that these new ventures: a) will provide jobs or at least self-employment; b) will remain in the areas where they were spawned as they grow; and c) will export their goods and services outside the community, attracting much-needed income (Davidsson, 2004). Gavian et al., (1999), in a study on the importance of SME development in rural employment in Egypt, have suggested that SMEs are traditionally thought of as well poised to respond to increased demand by creating jobs. It is important to stress here that rural entrepreneurship in its substance does not differ from entrepreneurship in urban areas. Entrepreneurship in rural areas is finding a unique blend of resources, either inside or outside of agriculture. The economic goals of an entrepreneur and the social goals of rural development are more strongly interlinked than in urban areas. For this reason entrepreneurship in rural areas is usually community based, has strong extended family linkages and a relatively large impact on a rural community. According to Petrin (1994), the creation of such an environment starts at the national level with the foundation policies for macro-economic stability and for well-defined property rights as well as international orientation. The policies and programs targeted specifically to the development of entrepreneurship do not differ much with respect to location. In order to realize their entrepreneurial ideas or to grow and sustain in business, they all need access to capital, labour, markets, and good management skills. What differs is the availability of markets for other inputs.

The inputs into an entrepreneurial process capital, management, technology, buildings, communications and transportation infrastructure, distribution channels, and skilled labour, tend to be easier to find in urban areas. Professional advice is also hard to come by. Consequently, entrepreneurial behaviour, which is essentially the ability to spot unconventional market opportunities, is most lacking in those rural areas where it is most needed, i.e., where the scarcity of ‘these other inputs’ is the highest. Rural entrepreneurship is more likely to flourish in those rural areas where the two approaches to rural development, the ‘bottom up’ and the ‘top down’, complement each other. The ‘top down’ approach gains effectiveness when it is tailored to the local environment that it intends to support. The second prerequisite for the success of rural entrepreneurship, the ‘bottom up’ approach, is that, ownership of the initiative remains in the hands of members of the local community. The regional development agencies that fit both criteria can contribute much to the rural development through entrepreneurship. A study conducted by Smallbone and North (1997), reveals that firms that demonstrated the highest level of innovative behaviour were growing in terms of sales and also generating employment, although it is important to stress that the relationship between innovation and growth is an inter-dependent and mutually reinforcing one, rather than a simple cause and effect relationship.

Empirical studies have even shown that (on average) entry into self-employment has a negative effect on the monetary income of individuals (Hamilton 2000; Parker 2004). Being an entrepreneur may be rewarding because it entails substantial non-monetary benefits, like greater autonomy, broader skill utilization, and the possibility to pursue one’s own ideas; i.e. more freedom (Sen 1999).

Entrepreneurial Opportunities

Every entrepreneur who starts a new business has great new ideas. The real challenge is to discover a real opportunity that is more than just a good idea. These opportunities can have a radical nature (Schumpeterian) or relatively incremental (Kirznerian). Schumpeterian opportunities originate from changes in the environment (Shane, 2004). These can be technological, social / demographic, and political / regulatory changes. First, technological change, often based on progress in the research base of society, is a prime source of entrepreneurial opportunities for new technology-based firms (for example in the ICT and biotech industries). Second, social and demographic changes can be quantitative changes like an ageing population that offers new opportunities for entrepreneurs. It may also involve more qualitative changes: changing preferences or wants, for example reflected in the rise the creative industries that satisfy new wants, or in the trend toward health and nutrition and the supply of diet and ecological food. In that sense people’s necessities are few but their wants are endless. Third, deregulation, privatization, and liberalization have opened up many opportunities for entrepreneurship. (2) An example of deregulation is labour market flexibility policy. Flexibilisation of the labour market has opened up several opportunities for entrepreneurship. One the one hand many employees have become self-employed, partly lured by the lower tax rates in comparison to wage-labour. On the other hand, there have been high-growth start-ups that have used this new trend of labour flexibility to specialize in temporary staffing. Other examples of privatization as sources of entrepreneurial opportunities are the downsizing of municipal services and the privatization of the care market, which have provided opportunities for high-growth start-ups.

The discovery of an entrepreneurial opportunity can be made by an employee or an independent individual. The latter situation is reflected in so-called user-entrepreneurship: i.e. a personal need as a consumer is the source of the opportunity. Empirical research has shown that the prior situation occurs much more often, as most founders start a new business in an industry that is similar or related to their prior experience. “Producer-entrepreneurship” is thus a much more widespread phenomenon than user-entrepreneurship. In organizational terms the most important question is whether this opportunity is pursued and exploited within or outside the organization of origin: i.e. in the form of a spin-off or of corporate venturing. Spin-offs involve the exploitation of an opportunity by an employee who leaves an organisation to start a firm of her own that is independent of the parent organisation. Corporate venturing or corporate entrepreneurship has been defined as “the process whereby an individual or a group of individuals in association with an existing organization, create a new organization or instigate renewal or innovation within that organization” (Nooteboom, 2000).

Objective of the Study

PNG is a developing and poor country in the South Pacific. It is rich in terms of natural resources but the people are poor since its independence in 1975. Majority of the people live in rural areas and depend on agriculture as their main stay. PNG has vast natural resources and substantial potential for economic growth, particularly in agricultural and industry. For the last one decade, the country has become a major commodity producer. Despite this, economic development and private entrepreneurship has had only limited success (Schaper, 2002). Today, the country has one of the lowest levels of per capita GDP in the South Pacific. Why has such a resource rich nation failed to develop to its full potential, as well as produce the entrepreneurial class which is usually a necessary prerequisite for economic growth? An attempt is made in this article to explain the mystery. It outlines the development of PNG in recent years. It examines some of the major challenges for the entrepreneurship development. The paper discusses some of the future prospects for increasing entrepreneurial activities in the country and provides some implications for policy development.

The total number of self-employed persons is about 5 per cent of formal national work force (National Statistics Office 2000). It would be interesting and useful to study the entrepreneurship and its challenges in developing country like Papua New Guinea. This paper is based on the following objectives:

(i) To explore the prospects for entrepreneurship in PNG;

(ii) To discuss challenges and threats for entrepreneurship development in PNG and thus provide some implications.

The paper has been divided into five sections. The first section provides introduction, definitions and literature survey on the subject matter. Second section discusses the relationship between entrepreneurship, innovation and economic growth. Section three deals with the country background and entrepreneurship in Papua New Guinea, it also analyses the important issues in PNG entrepreneurship. Section four presents various challenges for entrepreneurship development in PNG and the last section provides summary and conclusion.

Entrepreneurship, Innovation and Economic Growth

Entrepreneurship, innovation and economic growth: mechanisms

How can we explain the relation between entrepreneurship and economic growth? Several mechanisms may be at work here, which explain why new and small firms in combination with large organisations may drive innovation and ultimately economic growth. These mechanisms are knowledge spillovers, decentralization, experimentation, and competition. New scientific and technological knowledge is an important source of entrepreneurial opportunities. Organisations investing in research or technology development often end up facilitating other agents’ innovation efforts, either unintentionally, as when inventions can be imitated, or intentionally as where scientists report on their research. Economists have termed this knowledge spillover: “any original, valuable knowledge generated somewhere that becomes accessible to external agents. This knowledge is absorbed by an individual or group other than the originator”. There has been much empirical research showing that firms located near knowledge sources introduce innovations at a faster rate than rival firms located elsewhere. These can be incumbent firms, but more likely involve firms that have been set-up by prior employees of the knowledge producing organisations. They are the Schumpeterian entrepreneurs that commercialise inventions. Many major inventions have been reshaped, speeded, and expanded by new firms with different objectives, interests, and ideas from those of the original inventor (Shane, 2000). These innovative new firms are started because their innovations would have been turned down or severely delayed in the organizations in which the initial idea was developed. Diversity of enterprise is a necessary condition for economic growth and prosperity. History has shown that long-term economic growth and prosperity depends on a mix of large and especially small enterprises (Rosenberg and Birdzell, 1986; Landes, 1969). Many types and sizes of enterprise are useful under the right conditions circumstances, but what matters is the diversity of economic organization in economic systems–the variety of the system’s organizational repertoire rather than the size of particular enterprises (Rosenberg and Birdzell, 1986). The role of diversity of enterprise in economic growth and prosperity has two key elements (Rosenberg and Birdzell, 1986) experimentation and decentralization.

The experiment is important in economic change; a great part of the activity in progressive economies will be conducted on a small scale. Economic growth implies change and adaptation, and much of this adaptation takes place through the formation of firms that are, initially small. New firms are useful devices for experimenting with innovation, because they can be established at a small, experimental scale at relatively low cost and therefore in large numbers, and their efforts can be intensively focused on a single innovation. The experimental aspect of new firms is reflected in the facts that they usually start small, their number is large, and as with other kinds of experiment, most of them fail. High rates of firm entry and exit can even be regarded as a necessary price to pay in order to allow “exploration” of new technological and market possibilities: failures at the micro level may be consistent with social benefit at the aggregate level (Saxenian, 1994; Dosi and Lovallo, 1997; Kirzner, 1997). A high level of new variety is needed to produce a few very successful new innovative industry leaders, like Microsoft, Yahoo, Google, and Ebay. The experimental approach to the organization of economic activity is a key mechanism for economic progress. New firms often provide the seedbed for the emergence of new industries. They have been instrumental in the introduction of electricity, the internal-combustion engine, automobiles, aircraft, electronics, aluminium, petroleum, plastic materials, and many other advances (Rosenberg and Birdzell, 1986; Baumol, 2002; Audretsch, 1995).

Second, a fundamental characteristic of organization in highly developed economies is decentralization–a diffusion of authority and responsibility and a limitation of the pyramiding of managerial hierarchies. The resistance to agency costs and the complexities of controlling those costs are not limited to that part of the pyramid that extends from a government board of planning and control down to individual enterprises; they are reflected in the organization of economic activity at all levels. The organizing principle is that the costs and benefits of hierarchy must be balanced out (Nooteboom, 1994; Langlois and Robertson, 1995). Although a large part of economic change is brought about by the expansion and conversion of old firms, innovative change is to a large degree brought about by new firms (Rosenberg and Birdzell 1986). That small firms have played a large part in economic growth is not accidental; it can be explained, by their smaller agency costs. Innovation is more likely to occur in a society that is open to the formation of new enterprises than in a society that relies on its existing organizations for innovation (Rosenberg and Birdzell, 1986). (3) New, usually small, firms have an important role in bringing about change–a role that may well depend on the degree of inertia accumulated in older bureaucracies.

Competition has been the principal source of diversity in enterprise organization: differentiation via the development of unique products, methods of production and distribution, and forms of organization is central to the strategy of competition. Diversity of enterprise is closely related, both as cause and consequence, to diversity of products and services available to customers. (4) See Parker (2004) on the micro-economic, and Helpman (2004) on the macroeconomic relevance (5) of product differentiation.

New firms played a direct role in economic growth, with the introduction of new products, but also an important indirect role in triggering old firms to improve or restructure their activities. The easy formation of new firms acts as a disciplinary device for existing firms (Aghion et al., 2006). New innovative firms circumvent bureaucratic rigidity and supply older firms with an incentive–self-preservation–for taking internal measures to avoid the habits and practices that eventually lead to rigidity. This is for example reflected in the rise of corporate venturing, as a means for corporate renewal.

Empirical evidence on the relationship between entrepreneurship and economic Growth

Already at the start of the 20th century the economist Schumpeter made a plea for the entrepreneur as the person who brings new ideas to the market and in that way causes economic renewal and progress. A necessary condition is that these innovations have to offer more (or the same for a lower price) than the pre-existing supply. If this condition is fulfilled there might even be creative destruction: innovations that make the ‘old economy’ superfluous (Baumol, 1993). A recent example in the Dutch economy is the success of the digital TomTom route planner that has substituted a large part of the production of roadmaps. An indirect effect of the introduction of these innovations by new firms is that incumbents are triggered to upgrade their product offerings in order to remain competitive. How and to what extent does entrepreneurship lead to innovation and economic growth? Why should entrepreneurs start with an uncertain innovation process at all? A recent study of the Netherlands Statistical Agency shows that entrepreneurs innovate because they want to improve the quality of goods and services, to offer a broader range of goods and services, and in the end they want to access new markets or a larger market share. A recent study shows mixed evidence on the assumption of the relatively high innovativeness of small and new firms. They conclude that “entrepreneurs and their counterparts contribute equally importantly to the innovativeness of societies. However, they serve different goals in terms of quality, quantity and efficiency, as well as in terms of producing more radical innovations”. They show that new and small firms have relatively high levels of innovative sales, and are relatively less likely to adopt high cost innovations.

A key question is whether and how entrepreneurship causes economic growth. Before we can answer this question with empirical research, we have to choose empirical indicators for entrepreneurship and economic growth. Traditionally, economic growth has been referred to as the growth of employment or national income, while recently productivity growth is seen as a more relevant indicator. The two dominant empirical definitions of entrepreneurship are the creation of new organisations and self-employment (performing work for personal profit rather than for wages paid by others). Some studies also take into account people with a preference for entrepreneurship (‘latent entrepreneurship’), or people that take steps to start a new business (‘nascent entrepreneurship’). The latter two indicators can be seen as potential entrepreneurship. Corporate entrepreneurship is not easily identified, and is unfortunately largely an invisible aspect of entrepreneurship in empirical research. In addition to these operational definitions of entrepreneurship, there are several measures of performance, like survival, growth, profitability and experiencing an initial public offering of the business. These performance measures are indicators of entrepreneurship to a lesser or greater degree. Take for example survival: new firms that survive on a long term but remain relatively small often become more conservative (i.e. less innovative) while new firms that grow into substantial corporations often revolutionize the economic structure (Schumpeter, 1934). In addition, there are habitual entrepreneurs that ‘specialize’ in setting up new firms and often leave the newly created firms to set up other ones.

The review of recent research on entrepreneurship and economic growth reveals that high levels of new growing firms are strongly related with economic growth. (6) This positive relation can hardly be found with new firms in general or the level of self-employment. The latter outcome is not that remarkable: many new firms are a continuation of the activities that were done as an employee before–so these involve no new economic activities. The decision to enter self-employed is hardly driven by innovation, and relatively often by lifestyle reasons, like the combine labour and care tasks and a focus on a particular craft (Aghion et al., 2006). Next to economic growth, a more relevant indicator may be welfare (Layard, 2005). Unfortunately, the relation between entrepreneurship and welfare has not been researched to a large extent. However, there are several indications that entrepreneurs are on average more satisfied with their occupation than employees are.

Entrepreneurship in Papua New Guinea

Background of PNG

Papua New Guinea (PNG) is a developing nation with approximately 15 percent of the population engaged in the market economy and the remaining 85 percent of people engaged in the subsistence farming and mostly live in rural areas. It got independence on 16 September 1975 from Australia. It comprises the eastern half of the second largest island in the world and extends to an approximate land area of 476,000 sq. km. It is located just south of the Equator and north of the eastern tip of Australia. The country has over 600 islands with a population over 6.2 million people (2007). Administratively, the country has 20 provinces and 89 districts Papua New Guinea has made some progress in social development over the last 33 years. It is a country of enormous physical and social diversity. It has many natural resources. Mining, forestry and oil dominate the economy. In 2001, total external aid amounted to US$ 24 per capita (WHO, 2006:10; World Bank, 2007). Around 800 languages (not dialects) are spoken in PNG, one third of the world’s languages are spoken in PNG. This diversity underpins the challenges for effective land management.

PNG is classified as a low middle-income country with a Gross Domestic Product (GDP) per capita of US$ 660 (2007). Although literacy rate has improved from 32 per cent to 65 per cent, only half of all women aged 15 years and above and two-thirds of all men aged 15 years and older have ever attended school, and enrolment rates vary significantly across provinces. Life expectancy at birth has also increased from 43 to 57 years and Human Development Index from 0.43 to 0.54 and PNG ranked 145(of 177 countries assessed). However, in recent years, progress has slowed. In short, Papua New Guinea has a number of important achievements in its socio-economic development but many challenges ahead, such as poverty, still remain. Currently, about 40 percent of the population live within or below the poverty line. About 90 percent of the poor live in rural areas. Subsistence farmers, fishermen and hunters constitute the poorest segments of the population (UNDP, 2006; WHO, 2006).

Limited opportunity in a changing economic and social environment has also increased and contributed to the emergence of debilitating societal issues such as the serious rise in crime and inter-communal instability in Papua New Guinea, the HIV/AIDS epidemic, the unsustainable use of resources and the decline in environmental conservation. Papua New Guinea has the highest incidence of HIV/AIDS in the Pacific region, with the highest percentage of 15-24 year olds living with HIV/AIDS in South-east Asia and the Pacific. The poverty of access and opportunity highlights entrenched gender disparity in many aspects of life in Papua New Guinea (UNDAF, 2002: 10).The Small Business Development Corporation (SBDC) was established in 1990 and become operational in 1992 to assist Papua New Guineans start and improve small-scale business for employment creation and to improve the standard of living in the country. SBDC has been working hard for improving the small-scale business sector’s employment generating capacity for meeting the present and future job creation needs of the country and to improve the standard of living. However, the problems remained high due to economical, social and political reasons.

There has been a little development of entrepreneurial class in PNG. Within the formal economy, most of the people work for public sector or major mining companies like Oktedi, Ramu sugar, Lihir, etc. The dependence on such mining and energy companies has created a source of wage employment for many people, but the economic benefits have not been effectively utilised to create a potential and vibrant small business sector. It is difficult to have the credit access from the financial institutions in the country. (7) Although, comprehensive and reliable data on wage and business activity are limited but several studies revealed that most of the self-employed are engaged in farming and its associated activities. A record number of new firms have been started in PNG in 2008: 15,000. The number of new firms has almost been tripled since independence in 1975. On the basis of these numbers one tends to say that PNG has become more entrepreneurial in the last one decade. If one assumes that these new firms also supply something that is sufficiently new and different from the existing supply of goods and services, and even make a profit, than it is not such a strange idea to regard new firms as the driving force of an innovative economy. In spite of this record number of new firms, there is still a common opinion that there is still a shortage of entrepreneurship in PNG, especially in comparison with Asia-Pacific economies like Indonesia, Thailand, Australia and New Zealand.

Rural Entrepreneurship in PNG

Importance of Rural Entrepreneurship in PNG

In order to understand the role played by entrepreneurs in PNG economy, it is important to comprehend the concept of entrepreneurship. While choosing a definition for entrepreneurship most appropriate to the rural and semi-urban context, it is important to bear in mind the skills that are needed to improve the quality of life for individuals, and to sustain a healthy economy and environment (Rena 2007). Development of entrepreneurs can be stimulated through a set of supporting institutions, and through deliberate innovative action which stimulates changes and fully supports capable individuals or groups in the rural and urban areas of PNG. Therefore, the Government of PNG should design the policies and programs specifically for entrepreneurship promotion can greatly affect the supply of entrepreneurs, and thus, indirectly represent an important source of entrepreneurship. This view has important implications for entrepreneurship development in rural areas of PNG. If currently entrepreneurial activities in a given rural area are not thriving, it does not mean that entrepreneurship is something inherently alien to rural areas. While this feeling could have some legacy due to the slower pace of changes occurring in rural areas of PNG compared to urban ones, proper action can make a lot of difference with respect to entrepreneurial behaviour of people living in the rural areas. According to the Global Entrepreneurship Monitor Report (2000), about 70 per cent of an area’s economic performance is dependent upon how entrepreneurial the area’s economy is. Entrepreneurial orientation in rural areas is based on stimulating local entrepreneurial talent, and subsequent growth of indigenous companies. This, in turn, would create jobs, and add economic value to the country and the region as well, and at the same time it will keep scarce resources within the PNG community. According to Petrin (1994), to accelerate economic development in rural areas, it is necessary to build up the critical mass of first generation entrepreneurs.

Another aspect of the external environment in the remote rural areas of PNG is the labour market, in which relatively low wage levels in comparison with urban areas combined with qualitative characteristics of the rural labour force reduce the incentive for firms to invest in labour saving process innovations, particularly in the more craft-based sectors. The PNG entrepreneurs in micro and small enterprises are trying to use significant portions of their profits for expanding their enterprises, and others have been borrowing from the informal sector. Borrowing from the informal sector is only a short-term solution because such loans cannot finance the sort of long-term investments that are required to develop and grow their enterprises. This situation will tend to constrain the rural entrepreneurs’ abilities to grow their businesses. Business strategies of expansion, diversification and maintaining market share all require sources of funds, and yet the women entrepreneurs have to rely primarily on their own resources and the profits from their enterprises. Clearly this situation provides both an opportunity and a challenge for support agencies like PNG Banking Corporation (PNGBC), Agricultural and Industrial Development; Small Business Development Corporation have sought to promote various programmes favourable to small enterprise sector development. They are able to offer suitable loan products to rural entrepreneurs engaged in both micro and small enterprise undertakings. The rural entrepreneurs are engaged in services, trade, and production of handicrafts which are basically sold in the cities like Port Moresby, Lae, etc.

Although, savings are one of the means of accumulation of capital, many rural entrepreneurs in PNG reported that savings alone were not always sufficient for running and expanding their business operations because of the high inflation in the country. The growth of the enterprises can be restricted due to a lack of finance for working capital and for long-term capital investments. The rural entrepreneurs found it very difficult to access credit from the banks due to the requirements of the banks, such as the collateral, the expected level of contribution from the rural entrepreneurs themselves. The majority of entrepreneurs have experienced difficulties in finding and acquiring financial resources for production or provision of services, as well as for selling purposes. Most run their businesses from rented premises, but the relatively high rents and low levels of security pose critical problems for them and can hinder their expansion and diversification in the country.

Challenges for Rural Enterprise Development in PNG

Due to its rich endowment of its natural resources, PNG’s disappointing economic performance is quite often described as a paradox. However, there are substantial reasons that explain this anomaly. Some of them are enlisted below.

(i) The bureaucracy of government regulations and red tape, the largely negative attitudes towards business, and the overall lack of transparency prevent the development of a real public-private partnership for business.

(ii) There are great differences between the laws and customary practices as regards gender equality in society, and this impact negatively on the operations and effectiveness of women entrepreneurs.

(iii) The licensing procedures relating to business are overly bureaucratic, and obtaining accessible information about new laws and legislation in a timely manner is a major inhibitor for business development.

(iv) Attitudes to business owners, including women entrepreneurs, are in general negative in so far as they are seen as being unethical.

(v) Rural entrepreneurs’ associations need to be supported to be more, representative, member-based, open and effective. There is a need for better networking within and between different business associations.

(vi) The informal economy needs to be recognized in some way. It is a dominant sector in the PNG economy and employs many poor people. Poor working conditions and little income security for those engaged in the informal economy makes them very vulnerable (Rena 2008).

Threats in the Rural Entrepreneurship Development

(i) Efforts to enhance the rural entrepreneurship development in PNG has been hampered by high magnitude and occurrence of natural disasters (Tsunami, earthquakes, drought) in the context of global climate change.

(ii) The spread of HIV/AIDS constitutes a major threat where more than 3 per cent of the people affected by the disease. More people living with HIV reside in rural areas engage in the rural entrepreneurship too.

(iii) The vibrant poverty, corruption, social security constitute a major threat to the entrepreneurial and rural development in the country.

(iv) Insufficiency of investment, funding is not in harmony with the economic importance of agriculture and rural economy in PNG.

(v) Weak sustainability of development programmes, projects and networks beyond donor support and the paucity of Public-Private Partnership in conducting the development activities in the country leave the rural sector in destitute (Rena, 2007).

Implications for Rural Entrepreneurship Development

Despite the Government efforts in mitigating the threats and improving the rural entrepreneurship with the Small Business Development Programme (SBDP), the problems remain high. Hence, PNG has a long way to go in developing the rural enterprises like India and Bangladesh. The Government of PNG should give special emphasis to the allocation of land and financial resources to the potential entrepreneurs. Improve the entrepreneurs’ access to resources by, for example, encouraging associations of the entrepreneurs to help their members to access Business Development Services (BDS) through referral systems. The Government should take the lead in a number of initiatives aimed at (as the PNG is more diverse and traditional society) changing the attitudes of society towards the rural entrepreneurs and creating a more positive and constructive environment for their expansion and growth. In line with this, there is a need to strengthen the capacities of Micro Finance Institutions, in order that they are better able to:(i) Extend their activities to more rural areas of the country; (ii) Improve the coverage of their services across the country; (iii) Improve their products and lending services to meet the needs of growth-oriented; (iv) Business entrepreneurs by providing larger loans and longer repayment periods; and (v) Review interest rates with a view to offering variable rates based on business needs.

As the informal economy is largely (over 80%) dominated by the rural population in the country, it is important that steps are taken by the Government and BDS providers to improve their economic and social protection position by: (i) Providing some form of ‘official’ recognition to informal workers to protect them from harassment and provide basic forms of social protection; (ii) Providing financial and non-financial support to rural entrepreneurs in the informal economy so that they can more easily access and navigate the steps involved in formalizing their businesses; (iii) Special efforts should be made to improve partnerships between all actors who influence the socio-economic environment for the rural entrepreneurs; (iv) There is a need to promote and support the practice of good governance by all, in Government, business and non-government organizations. Besides, to encourage the spirit of enterprise positively, among the youth in PNG, PNG University of Technology, University of PNG and other higher learning institutions must be encouraged to become more commercially focused, and more entrepreneurial. In line with this, all the six Universities in the country have to introduce some entrepreneurship development and/or business development programmes. It is also important that they should be encouraged to develop more ties with local businesses, and hold more business related activities on the campus. University students (concerned to the filed) should be encouraged to take business studies modules as part of their main courses. This will help develop the interest in business, and provide the basic understanding of what to expect when going into business. The knowledge gained will help provide students with a ready option when they graduate, rather than wasting their time looking for the jobs that are not available. This will ultimately help to reduce the pool of unemployed young people in the country.

It is important to establish a Small Business Development Bank (SBDB) in PNG to concentrate solely on the funding of indigenous businesses, and thus promote entrepreneurship. The SBDB will help to combat the problem of under-capitalisation, by providing the necessary, cost effective, and easily accessible funding for businesses.


Entrepreneurship is a corner stone which rejuvenates and revitalizes the economy. Entrepreneurs are persons who are industrious and creative thus find ways to empower themselves and eventually contribute to the economic development. Indeed, small firms in combination with the large enterprises drive innovation and ultimately economic growth. New firms play a direct role in economic growth, with the introduction of new products. Recent research on entrepreneurship and economic growth reveals that high levels of new growing firms are strongly related with economic growth. Entrepreneurship is important in PNG with a lot of potential. The PNG entrepreneurs in micro and small enterprises are trying to use significant portions of their profits for expanding their enterprises, and others have been borrowing from the informal sector. However, the challenges for new and small businesses in PNG are complex. As stated earlier, entrepreneurship development is often thwarted by a complex mix of economical, political, social and geographic factors. At the macro level, economic and political instability, poor quality of government infrastructure, low levels of support for new enterprise development, underdeveloped or semiskilled work force all contribute to the nation’s current economic problems. The national, provincial and local governments should work hard to encourage both the domestic and foreign capital investments, which stimulate the cash flow in the economy and thus develop entrepreneurial class in the country. Making the transition from a traditional subsistence economy to a developed economy is a long and slow process, and it’s a journey on which PNG has a long way to go.


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(1.) The Asia Pacific Economic Cooperation has organised a workshop on the theme “APEC Workshop on Embedding Entrepreneurship in University Curriculum” which was held at Sunway Hotel, Ha Noi, Viet Nam 22-23 July 2008. All 21 APEC member economies including Papua New Guinea were attended the Workshop.

(2.) See Phillips (1985) for evidence on the positive effects of deregulation on new firm formation in the US and Berkowitz and Holland (2001) on the positive effects of privatization on new firm formation in Russia.

(3.) According to Pasinetti (1993) an economy that does not increase the variety of industries over time will suffer from structural unemployment, and will ultimately stagnate. In this view, the development of new industries in an economy is required to absorb labour that has become redundant in pre-existing industries. This labour has become redundant due to a combination of productivity increases and demand saturation in pre-existing industries, characterizing the product lifecycle dynamics in each sector.

(4.) In comparison to other small economies like Belgium and Denmark, the Netherlands has a ‘water head’: relatively many large dominant firms, which have a more than proportional influence on public policy, and have received a more than proportional part of government spending. This overrepresentation of large dominant firms is likely to constrain the experimental nature of the Dutch economy. More research is needed to confirm (or reject) this hypothesis.

(5.) The very limited variety of products that was available in communist economies seems to confirm this generalization. Wealth can even be defined as the range of choice people have, not just the quantity of supply.

(6.) Funke and Ruhwedel (2001) found that a greater degree of product variety is highly correlated to per capita GDP levels and TFP growth in OECD countries.

(7.) Financial institutions that provide credit in PNG include: the Rural Development Bank (RDB), Women’s Credit Scheme, Small Business Guarantee Facility (SBGF) of the Small Business Development Corporation (SBDC), PNG Credit Guarantee Scheme (CGS) administered by the Department of Finance, Savings and Loans Societies and NGO-supported credit schemes. An informal financial sector has also been emerged.

Ravinder Rena *

* Department of Business Studies, Papua New Guinea University of Technology, Morobe Province, Papua New Guinea

* E-mail: ravinder_rena@yahoo.com, drravinderrena@gmail.com

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