Entrepreneurial Capabilities Reduce Fear of Failure

Entrepreneurial Capabilities

In countries where more of the population perceives that they have the abilities and skills to start businesses, a smaller fraction of people is deterred from founding companies by fear of failure at entrepreneurship, data from the 2014 Global Entrepreneurship Monitor (GEM) report reveals.

The GEM researchers surveyed a representative sample of 206,000 people in 69 countries about their entrepreneurial beliefs, intentions and attitudes, and created national averages of the responses based on the answers to their questions. Two of those national measures were the percentage of the adult-age population that believes “they have the required skills and knowledge to start a business” and the fraction of the adult-age population that reports “that fear of failure would prevent them from setting up a business.” The percentage of the population deterred from entrepreneurship by fear of failure ranged from a low of 12.6 percent in Uganda to a high of 61.6 percent in Greece. The fraction of the population that believes it has the capabilities to start a company varied from a low of 21.4 percent in Singapore to a high of 84.9 percent in Uganda.

Across the 69 countries, the two measures correlate -0.59, which is a moderately high level of statistical association. In the figure above, I have produced a scatter plot of the fraction of each country’s population that said their fear of failure inhibited their entrepreneurial efforts (vertical axis) against the share that thought they had entrepreneurial capabilities (horizontal axis). As you can see from the figure, the percentage of the population deterred by failure declines as the fraction of the population with entrepreneurial capabilities increases.

Of course, this association is only a correlation. Having a higher fraction of the population with entrepreneurial capabilities might cause a lower percentage of would-be entrepreneurs to hold back on starting businesses because of fear of entrepreneurial failure, or having a larger slice of the population deterred from entrepreneurship because of a fear of failure might cause a smaller fraction of the population to perceive they have entrepreneurial capabilities. A third factor might cause both the fraction of people perceiving that they have entrepreneurial capabilities to rise and the portion holding back on starting companies for fear of entrepreneurial failure to fall.

But academic research suggests a direction to this correlation. Self-efficacy is an important precondition for starting a business. People who don’t believe that they have the skills and ability to found and run companies won’t start businesses even if they have identified what they think are good business opportunities.

Aggregating this pattern across a country’s population, it’s not a stretch to think that entrepreneurial self-efficacy causes the observed patterns. Increasing the share of people with entrepreneurial capabilities causes fewer would-be entrepreneurs to hold back from business formation because of a fear of failure.

Source: Created from data from the Global Entrepreneurship Monitor

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Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.