Problems Faced by Entrepreneurs to Startup the MSMEs - A Case Study of Visakhapatnam City

Problems Faced by Entrepreneurs to Startup the MSMEs - A Case Study of Visakhapatnam City Abdolrahman Noorinasab 1, Hossein Shojaei Seifabad 2, and Alireza Zarei 3 1 (Research Scholar, Department of Commerce& Management Studies, Andhra University, India. Email: Rahman.9333@yahoo.com) 2 (Research Scholar, Department of Economics, Kerala University, India. Email: hossein.shojaei64@yahoo.com) 3 (Master of Business Administration, Islamic Azad University, Shiraz branch, Iran. Email: z919@yahoo.com) Abstract: An entrepreneur is one who plays significant role in the economic development of a country. Basically an entrepreneur can be regarded as a person who has the initiative, skill and motivation to set up a business or an enterprise of his own and who always looks for high achievement. But now there is so ma ny problems faced by entrepreneurs to start up the Units i.e., Lack of Skill Development and Training, Marketing and Procurement, Lack of Infrastructure, Poor Technology Base, etc. Case description: One of the requirements for growth, creativity as well as entrepreneurship within societies is to study their problems for establishing the business. Our sample includes 230 Micro, Small and Medium Enterprises that were established during 2004 to 2014 in District Industrial Centre in Visakhapatnam district. Data was collected through questioners around general manager/entrepreneur among all categories of micro, small and medium business. Discussion and Evaluation: The purpose of this study is to study the problems faced by entrepreneurs in establishing Micro, Small and Medium Enterprises sector. The results of this study are helpful to the policy makers to frame suitable entrepreneurship development strategies to develop entrepreneurs and to prevent business failure. Conclusions: Our findings revealed that there is significant difference in between the individual and administrative factors for establishing of the units. Keywords: Entrepreneurship, MSMEs, problems, India I. INTRODUCTION An entrepreneur is a person who finds out and evaluates a new situation in his environment and directs the making of such adjustments in the economic system as he deems necessary. He always searches for change, responds to it and exploits it as an opportunity. Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an opportunity for a different business or service. An entrepreneur is one who organizes, operates and assumes the risk of a business venture. The MSME sector in India is highly heterogeneous in terms of the size of the enterprises, variety of products and services produced and the levels of technology employed. W hile one end of the MSME spectrum contains highly innovative and high growth enterprises, more than 94 per cent of MSMEs are unregistered, with a large number established in the informal or unorganized sector. Besides the growth potential of the sector and its critical role in the manufacturing and value chains, the heterogeneity and the unorganized nature of the Indian MSMEs are important aspects that need to be factored into policy making and programme implementation. The intensity of the challenge to promote an entrepreneurship culture as well as to evolve new enterprises in a sustainable and competitive fashion varies between countries. Starting a business and becoming an entrepreneur is exciting it is also terrifying. While starting a new business entrepreneurs face so many problems; such as i) Credit and Finance, ii) Technology, iii) Infrastructure, iv) Marketing and Procurement, v) Skill Development and Training, and vi) Institutional Structure etc. In order to conduct an efficient business an entrepreneur must overcome the challenges. The main objectives of the study are to identify the problems faced by the entrepreneurs to start up the business and to offer suggestions to the entrepreneurs to overcome their problems and to strengthen their capabilities in making their enterprises successful. www.indusedu.org Page 41

II. OBJECTIVES 1. To study the problems faced by entrepreneurs in establishing MSMEs in Visakhapatnam City 2. To offer suggestions to the entrepreneurs to overcome their problems and to strengthen their capabilities in making their enterprises successful. III. REVIEW OF LITERATURE Malagawakar. P.D (1997)in his study entitled, Problems of Small Industry in Andhra Pradesh has found the lack of infrastructure as a general problem. The industrial estate alone cannot overcome the vocational disadvantages. The infrastructure facilities are either very weak or non-existent in rural areas. In urban areas with necessary industrial climate and infrastructure facilities, the growth of industries is relatively faster. The scarcity of indigenous raw materials has been a serious bottleneck. Scarce raw materials supplied through quotas are not sufficient to meet the demands of the units. There is a delay in the disbursement of the loans due to the existence of procedural delays and instances of tangible securities. Sudan, F. K. (2005)described the challenges in micro and small scale enterprises development and policy issues by arising different questions related to micro and small enterprises. The study explained the meaning, advantages, problems and policy options of MSE sector. The study concluded that all the policies which were opted by Government of India (GOI) were the efforts to form a dynamic MSE sector and a diversified economy providing expanded employment opportunities to absorb all new labour force and offer exciting. Chu, Kara and Benzing (2008)identified problems of Nigerian entrepreneurs. Unreliable employees, infrastructural problems (bad roads, poor electric supply and water shortage), unsafe location a nd lack of management training were some problems. In addition, the opportunities for advancement and growth in MSEs are limited. Good employees therefore are reluctant to join small businesses and normally leave their job when a better job is available stoneware else. Shambu Ghatak (2010)in his study, Micro, Small and Medium Enterprises (MSMEs) in India: An Appraisal explained some of the critical factors faced by Indian Micro, Small and Medium Enterprises. These factures included: accessing adequate and timely finance, lack of available information, access to skilled manpower, R&D facilities and limited marketing channels. Hussain and Yaqub (2010)revealed some business challenges faced by entrepreneurs in Pakistan. The findings were expected. This means the entrepreneurs in Pakistan were not different. They had similar challenges as faced by other entrepreneurs in developing countries. Scarcity of financial resources and/or lack of access to financial market were the most severe problems. Sherazi, Iqbal, Asif, Rehman and Shah (2013) examined obstacles to MSMEs in Pakistan, using principal component analysis approach. The study collected data from 107 manager/owner of MSME firms that are run in Statistical Package for Social Sciences (SPSS). The result of descriptive statistics indicate that among six major obstacles identified, financial constrains was ranked highest and the second ranked obstacle was corruption. Other obstacles respectively determined by the principal component analysis include social and technological obstacles, training obstacles, management and infrastructure obstacles. Problems faced by entrepreneurs while establishing the business Entrepreneurs are playing very important role in the development of economy. They face various problems in day to day work. As the thorns are part of roses, similarly every flourishing business has its own kind of problems. Some of the major problems faced by entrepreneurs are as under. Financial Problems Most Entrepreneurs Start Their Business from the Wrong Side of the Spectrum: They start by asking themselves how much money they have instead of fine-tuning a business idea and then soliciting for funds to meet the budget. Raising Capital for Start up After developing an idea, the next challenge that entrepreneurs are faced raising capital. An entrepreneur is the only one that knows business idea to the core. Trying to convince investors about something that does not exist is definitely a challenge. Trying to make them understand that they are trustworthy and equal to the task is not child s play especially when building the first business. Paucity of Funds Most of the entrepreneurs fail to get external funds due to absence of tangible security and credit in the market. The procedure to avail the loan facility is too time-consuming that its delay often disappoints the entrepreneurs. Major difficulties faced by entrepreneurs lack of finance to start business, reduced profits due to www.indusedu.org Page 42

competition, pricing of goods and services, financial statements are difficult to be maintained by entrepreneur, stringent tax laws, lack of guarantees for raising up of loans, difficulty in raising capital through equity, dependence on small money- lenders for loans for which they charge discriminating interest rates and huge rent and property cost. These all problems create a difficulty in raising money through loans. Management Problems Finding the Right Business Location: Finding a good business location at the right place is definitely not easy. An efficient location that has a rapidly growing population, good road network and other amenities at a good place. Poor Project Planning Poor project planning is another problem faced by small entrepreneurs. In the absence of education and experience, these entrepreneurs do not attach much significance to viability studies. They do not bother to study the demand aspect, marketing problems, sources of raw materials. Inexperienced and incompetent entrepreneurs often submit unrealistic feasibility reports and incomplete documents which invariably result in delays in completing promotional formalities. They cannot afford to avail services of project consultants due to limited financial resources. Lake of Knowledge of IT Information technology is not very common in rural areas. Entrepreneurs rely on internal linkages that encourage the flow of goods, services, information and ideas. The intensity of family and personal relationships in rural communities can sometimes be helpful but they may also present obstacles to effective business relationship s. Business deals may receive less than rigorous objectivity and intercommunity rivalries may reduce the scope for regional cooperation. Decision making process and lines of authority are mostly blurred by local politics in rural areas. Legal Formalities Entrepreneurs find it extremely difficult in complying with various legal formalities in obtaining licenses due to illiteracy and ignorance. Procurement of Raw Materials Procurement of raw materials is really a tough task for rural entrepreneurs. They may end up with poor quality raw materials, may also face the problem of storage and warehousing. Lack of Technical Knowledge Entrepreneurs suffer a severe problem of lack of technical knowledge. Lack of training facilities and extensive services crate a hurdle for the development of entrepreneurship. Finding Good Employees Business owners know how difficult to find hardworking, trustworthy employees. Most employees want to work less and get paid more. Finding a good employee who will be passionate about delivering his or her services is quite difficult. Finding good employees is a minor task compared to the business challenge. Poor Quality of Products Another important problem is growth of entrepreneurship is the inferior quality of products produced due to lack of availability of standard tools and equipment and poor quality of raw materials. Marketing Problems Major problems faced by marketers are the problem of standardization and competition from large scale units. They face the problem in fixing the standards and sticking to them. Competition from large scale units also creates difficulty for the survival of new ventures. New ventures have limited financial resources and hence cannot afford to spend more on sales promotion. These units are not having any standard brand name under which they can sell their products. Finding Good Customers In the process of building a business, an entrepreneur will come to find out that there are good customers as well as bad customers.. Good customers are really hard to find. A good customer will be loyal to the company and will be willing to forgive if the business make a mistake and apologize. A good customer will try to do the right thing that will benefit both himself and company mutually. Problem of Under Utilization of Capacity Most of the small entrepreneurs are suffering from the problem of under utilization of capacity. Small scale units are making only 40 to 50 per cent use of their installed capacities due to various reasons such as shortage of finance, raw-materials, power and under-developed markets for their products. www.indusedu.org Page 43

Other Problems Outdated technology Most of the small entrepreneurs depend upon old techniques and equipment. These units find it very difficult to modernize their plant and machinery due to limited capacity and capital. The quality of products and productivity tend be low in the absence of modern technology and that too at higher cost. They are in no position to complete with their better equipped rivals operating modern large scale units. Fo r example, Khaki products even after government subsidy seem to be costlier. Inadequate Infrastructure Insufficient quality and quantity of transportation, communication and other basic services particularly in backward areas is another problem. Inadequate infrastructure results in under-utilization of capacity and wastages. Inadequate infrastructures also adversely affect the quality, quantity and production schedule of the enterprises operating in these areas. Therefore, their functioning will become uneconomical and unviable. Bureaucracy Public offices are set up for the good of the people and the officials manning the posts are referred to as public servants. But, if left unchecked, these public officials can become self -serving and corrupt. Firstly, there are a large number of procedures to be followed and clearances to be obtained to start and operate a business. Secondly, each of these procedures can take an inordinately large amount of time. Procedures are established to safeguard the interest of the common man. But, sometimes, the rules and regulations stop serving the purpose they were designed for. Rules become tyrannical in nature and an enormous wasted effort is directed towards compliance with rules and regulations. Corruption Sometimes, people pay money to just hasten processes and do not ask for any undue favours. For example, the bank is not releasing money even though it has sanctioned release of funds. There might be some official who has raised an unwarranted objection. In such cases, some people are tempted to grease the palms to get things flowing. Many entrepreneurs have experienced a higher degree of corruption among employees of large private - sector companies than in the government. III. METHODS This study on a sample Micro, Small and Medium business in India (A case study Visakhapatnam District). The Micro, Small and Medium Enterprises Act, 2006, defines enterprises on the basis of investment in plant and machinery. According to the new Act, the MSMEs are defines as follows in two categories: 1) manufacturing 2) services. Category Investment (Plant & Machinery) for Micro Enterprises less than Rs. 25 lakhs (manufacturing), less than Rs.10 lakhs (servicing) and Small Enterprises less than Rs. 5crores(manufacturing), less than Rs.2crores(servicing) and Medium Enterprises less than Rs.10 crores (manufacturing) less than Rs. 5 crores (servicing) (Annual Reports Of MSMEs 2014). This sample consisted of 62 failure entrepreneurs (owner of failed businesses) and 168 successful entrepreneurs. An unsuccessful entrepreneur is the owner of a failed business. Based on Pretorius (2009) definition, a venture fails when it cannot continue to operate under the current ownership and management. A successful entrepreneur is a business owner who succeeds to overcome different challenges and problems and still can survive in difficult situation. During the study period 2004 to 2014, 3,039 MSMEs have been registered in District Industrial Centre (DIC) in Visakhapatnam district, and the same has been taken as total population for the study. Out of 3,039 units registered, 1,829 are micro, 1,079 are small and 131 are medium enterprises. The researcher has adopted purposive random sampling technique to take up the sample from population having different nature activities and categories of units. Thus the total sample size is 230 businesses for this study Many methods are used for research works. The study has adopted personal interview and observation method for collecting the primary data from the respondents. Structured questionnaires for collecting the data from respondents have been used. The questionnaire is drafted by using five-point Likert Scale. The five-point Likert scale was assigned in the manner (1) strongly disagree, (2) disagree, (3) neutral, (4) agree, and (5) strongly agree. 230 questionnaires were personally distributed and also collected all of them. The validity of the questionnaire used in this study was examined by previous studies, university professors and experts and Reliability was measured by Cronbach s alpha which was 0.89 for the whole questionnaire. www.indusedu.org Page 44

Data analysis was done on 230 completely filled questionnaires by 21th version of SPSS Software package for analyzing Statistics. According to central limit theorem, regarding high sample size, sample means have normal distribution so we can use t-test. IV. ANALYSIS & RESULTS In this section, the data analysis is presented. There were 230 questionnaires collected from different MSMEs Entrepreneurs in Visakhapatnam city. The questionnaires were coded for statistical analysis using the SPSS 21.0 to analyze profile of the respondents, descriptive statistics of the variables, and inter-correlations of the variables Table-1: Profile of Res pondents Demographic variables Frequency Percentage Gender of the Entrepreneur Male Female Age of the Entrepreneur Below 30 Years 30-40 Years 40-50 Years 50-60 Years 60 Years & above Education of the Entrepreneur No formal Education 10th Class/Inter Graduation PG or above Nature of the Enterprise Manufacturing Services Trading 187 43 65 93 35 22 15 16 67 128 19 91 70 69.81.19 28.3 40.4 15.2 9.6 6.5 7.0 29.1 55.7 8.3 39.6 30.4 30.0 Source: Compiled from Primary data The table reveals the in depth details regarding a) Gender of the entrepreneur b) Age of the Entrepreneur c) Educational of the Entrepreneur d) Nature of the enterprise. Here it can be observed that.81per cent of entrepreneurs are male, 68.7 percent of entrepreneurs are below the age of 40 years, 64 per cent of entrepreneurs are above graduation level education and 39.6 per cent of the enterprise are manufacture. It is inferred that mostly entrepreneurs are in first generation, below the age of 40 years, above graduation level and having experience before they start their business and most of them are male. Table 2: Individual Problems Faced by Entrepreneurs While Establishing the Units Individual problems SDA DA N A SA Mean SD PS Not knowing how to plan the business 54 (23.5) 96 (41.7) 74 (32.2) www.indusedu.org Page 45 6 (2.6) 2.14 0.80 28.48 Not knowing legal and 36 69 69 29 27 2.75 1.21 43.70 regulatory frame work (15.7) (30) (30) (12.6) (11.7) Not knowing to acquire 26 69 84 37 14 2.76 1.05 43.91 capital and other resources (11.3) (30) (36.5) (16.1) (6.1) Problems in marketing the 29 74 85 31 11 2.66 1.02 41.41 products (12.6) (32.2) (37) (13.5) (4.8) Lack of motivation to start business 20 (8.7) 55 (23.9) 90 (39.1) 44 (19.1) 21 (9.1) 2.96 1.07 49.02 Lack of training and 15 47 99 50 19 3.05 1.01 51.20 incubation facilities (6.5) (20.4) (43) (21.7) (8.3) Overall 2.72 0.45 42.95

Source: Primary data Note :( Figures in parentheses indicate percentage) Table2 depicts the individual problems faced by entrepreneurs and also indicates the weighted scores, means and standard deviations of the factors. It can be observed that Lack of training and incubation facilities(51.20 per cent)andlack of motivation to start business(49.02 per cent) have more affect as problems, the following other factors not knowing to acquire capital and other resources (43.91 per cent), Not knowing legal and regulatory frame work(43.70 per cent), Problems in marketing the products(41.41 per cent), Not knowing how to plan the business(28.48 per cent) areinfluencing low effect as individual problems of entrepreneurs. Overall mean of the all factors is 2.72. It says individual problems have below average mean and which do not influence as pro blems to the entrepreneurs. Figure 1:Individual Problems Faced by Entrepreneurs while Establishing the Units Source: Primary data Figure1 reveals that individual problems faced by entrepreneurs while establishing the units and also shows the percentage scores of the problems. It shows that which factor is contributing high and which one is contributing low relatively. It is given in descending order, 1)Lack of training and incubation facilities, 2)Lack of motivation to start business, 3)Not knowing to acquire capital and other resources, 4) Not knowing legal and regulatory frame work,5) Problems in marketing the products, 6) Not knowing how to plan the business are contributing and influencing as problems to entrepreneurs. It is inferred that Lack of training and incubation facilities has relatively high influencing factor than other factors, and not knowing how to plan the business has relatively low influencing problem factor for entrepreneur. Table 3: Administrative Problems Faced by Entrepreneurs Administrative problems SDA DA N A SA Mean SD PS Start-up problems 1 23 66 90 50 3.72 0.93 67.93 (0.4) (10) (28.7) (39.1) (21.7) Bureaucracy and corruption 2 3 59 108 58 3.94 0.80 73.59 (0.9) (1.3) (25.7) (47) (25.2) Competition and volatile 2 3 55 119 51 3.93 0.77 73.26 environment (0.9) (1.3) (23.9) (51.7) (22.2) Not availability of suitable labour 1 3 60 109 57 3.95 0.77 73.70 (0.4) (1.3) (26.1) (47.4) (24.8) Free trade markets and 2 2 132 89 5 3.40 0.60 60.11 internationalization (0.9) (0.9) (57.4) (38.7) (2.2) Not availability of suitable 2 3 30 110 85 4.19 0.77 79.67 technology (0.9) (1.3) (13) (47.8) (37) Overall 3.86 0.52 71.38 Source: Primary data Note :( Figures in parentheses show percentage) Table 3 depicts the administrative problems faced by entrepreneurs and also indicates the weighted scores, means and standard deviations of the factors. It can be observed that Not available of suitable technology (79.67 per cent), www.indusedu.org Page 46

Not availability of suitable labour (73.70 per cent), Bureaucracy and corruption (73.59 per cent), Competition and volatile environment (73.26 per cent), Start-up problems (67.93 per cent) and Free trade markets and internationalization (60.11 per cent) are influencing high effect as problems of entrepreneurs. Overall mean of the all factors is 3.86. It says administrative factors have high average mean and which have high influence as problems to the entrepreneurs. Figure 2: Administrative Problems Faced by Entrepreneurs Source: Primary data Figure 4.8 reveals that administrative problems chosen for this study and also shows the percentage scores of the problems. It shows that which factor is contributing high and which one is contributing low relatively. It is given in descending order 1)No available of suitable technology, 2) Not availability of suitable labour, 3) Bureaucracy and corruption, 4) Competition and volatile environment, 5) Start-up problems and 6) Free trade markets and internationalization are contributing and influencing as problems to entrepreneurs. It is inferred that Not available of suitable technology has relatively high influencing problem factor than other factors, and Free trade markets and internationalization has relatively low influencing problem factor for entrepreneur. H1 0 : There is no significant difference in between individual and Administrative problems faced by entrepreneurs in establishing the units. Table 4: Individual and Administrative Problems problems n Mean SD T-Value P-Value Decision Individual 230 2.718 0.453-24.88 0.000 Significant Administrative and Environmental 230 3.855 0.525 Source: Computed table (5% level of significance) Result: T- Value:-24.88P-value: 0.000 (Significant - If p value < 0.05) The study revealed the difference in between individual and administrative problems faced by entrepreneurs in establishing the units. T-Test has been conducted for overall means of the internal factors and administrative factors. It is declared that T- value -24.88 and the p value is 0.000. Reject the null hypothesis and accept the alternative hypothesis saying that there is significant difference in between the individual and administrative factors for establishing of the units. It is concluded that administrative factors have impact more problems than individual factors for establishing units (Table 4). www.indusedu.org Page 47

Opinion Score Abdolrahman Noorinasab et al., International Journal of Research in Management, Economics and Figure 3: Individual and Administrative Problems Comparison of respondents opinion on Individual and Administrative & Environmental factors 4.5 4.0 3.5 3.0 2.5 2.0 1.5 Individual Factors Administrative & Environmental factors Source: primary data This has made visual understanding of the mean score value of administrative factors (3.855) is significantly greater than mean score value of internal factors as problems for establishing units. These are mentioned above as a box plot with circled plus indicates the mean value, middle line indicates the median value, the upper end and lower end of the lines designates the higher and lower opinion scores of the respondents respectively, the upper end of the box and the lower end of the box specifies the 75 per cent and 25 per cent respectively. DISCUSSION AND CONCLUSION This study has been done to identify success and failure of entrepreneurs about factors influencing business success and failure on a sample of 230 registered MSMEs in District Industrial Centre (DIC) in Visakhapatnam city in during 2004-2014. The study revealed that the entrepreneurs are facing problems in identifying a right business location, project planning, and understanding legal formalities. Hence, it is suggested that the entrepreneurs are to be guided by the DIC s in identifying a right business location, making a proper project planning and various legal formalities which are essential to start up an enterprise. The study has revealed that the entrepreneurs are facing various the problems while running their units. It has been observed that 28.48 per cent of the entrepreneurs have not a business plan at the time of establishment of the units, around 43.91 per cent of the entrepreneurs are not aware of the source of capital and other resources. The study revealed that these problems are mainly responsible for sickness in MSMEs. Hence, it is suggested that the entrepreneurs who are the willing to start a business or a unit should go for at least a short term training program and understand how to prepare a business plane and know about various source of capital. Thereby, the sickness in MSMEs can be minimized. The study revealed that Non available of suitable technology(79.67 per cent), Non availability of suitable labour (73.70 per cent), Bureaucracy and corruption (73.59 per cent), Competition and volatile environment (73.26 per cent), Start-up problems (67.93 per cent) and Free trade markets and internationalization (60.11 per cent)are the serious problems faced by the entrepreneurs. Hence, reducing administrative and regulatory burdens would constitute a major improvement in the business environment for MSMEs. India has been implementing measures to achieve this goal by reducing red tape, simplifying administrative procedures, streamlining and/or eliminating regulations, improving the information available to enterprises about administrative obligations, drawing up special rules for those enterprises (usually smaller enterprises) that are most affected by administrative burdens, improving the quality of regulations, etc. So, Entrepreneurs have to improve their knowledge regarding administrative procedure for establishing the units. REFERENCES 1. Malagawakar. P.D, Problems of Small Industry-A Study in Andhra Pradesh, SIET Institute, Hyderabad, (1997) 2. Sudan, F. K, Challenges in Micro and Small Scale Enterprises Development: Some Policy Issues, Synergy: I. T. S. Journal of IT and Management, Vol. 3, No. 2, 67-81.(2005) 3. Chu et al. An Empirical Study of Nigerian Entrepreneurs: Success, Motivation, Problems, and Stress, International Journal of Business Research, Vol. 8(2), pp. 52-68.(2008) www.indusedu.org Page 48

4. Ghatak, S. Micro, Small and Medium Enterprises (MSMEs) in India: An Appraisal,(2010), http://www.legalpundits.com/content_folder/smearti150610.pdf, 8:32:41 P 5. Hussain, D. and Yaqub, M. Z. Micro-Entrepreneurs: Motivation Challenges and Success Factors, International Research Journal of Finance and Economics, issue 56, pp. 22-2.(2010) 6. Sherazi, S.K. Iqbal, M.Z. Asif, M,Rehman, K. and Shah, S.S.H. Obstacles to Small and Medium Enterprises in Pakistan. Principal Component Analysis Approach. Middle-East Journal of Scientific Research, ISSN 1990-9233, Vol.13, No.10, pp: 1325-1334. (2013). 7. www.msme.gov.in - Ministry of MSME, New Delhi 8. www.dcmsme.gov.in-development Commissioner (MSME), New Delhi 9. www.msmehyd.ap.nic.in- State level MSME Development Institute 10. www.nsic.co.in- National Small Industries Corporation (NSIC), New Delhi www.indusedu.org Page 49