6. Entrepreneurship, Domestic Investment, and Services

Entrepreneurship is an activity that results from the perception of a business opportunity and subsequent creation of an organization to pursue it. Agents of entrepreneurship (individual entrepreneurs or firms) make difficult or complex decisions about the allocation of resources in an environment of uncertainty (Bygrave and Zacharakis, Entrepreneurship, John Wiley & Sons, 2010). The coordination of these resources (often achieved through innovation) gives rise to new products, processes, markets, business models, or services. Innovation is an essential ingredient for successful entrepreneurship. In fragile states, the business sector often operates in an institutional vacuum where governments lack the ability to make or enforce rules. Markets find it difficult to effectively function in an environment of persistent disruption and disorder. Firms maybe afraid of putting too much capital at risk and shift the composition of their assets from fixed capital stocks to more liquid ones. In most fragile states, there is limited access to external financing and entrepreneurs have to rely on internally generated funds to commence or expand their businesses. Ethiopia is a factor-driven economy with a) low rates of entrepreneurship activity, b) high proportion of opportunity-driven entrepreneurs, and c) low youth participation rates. Entrepreneurs face rigid bureaucratic conditions, political and economic instability, corruption, lack of access to credit, and underdeveloped infrastructure. In many countries, private sector investment is crowded out by the public sector and has limited access to credit or foreign exchange. Services now account for an increasing share of GDP in most fragile states and appear to be the future path to growth.