Risk Attitudes, Risk Management and Business Success of Micro and Small Informal Agribusiness Entrepreneurs in Ghana: the Case of Agri-food Processors



Entrepreneurs operating micro and small informal firms including agribusinesses in Ghana face many risks which adversely affect the growth of their firms and subsequent business success. Although risk management is very critical to agriculture related firms, agricultural policies in Ghana have been designed without much consideration to this important aspect of firm management. The impending ‘one-district-one-factory’ policy of the current government for example would need to consider risk management of the firms that would be involved since risk management would influence managerial decisions. The success of the policy would partly be hinged on the ability of entrepreneurs involved to manage risks in a more informed position. The aim of this study was three-pronged. First, it elicited the risk attitudes of entrepreneurs, assessed the factors that influenced the attitudes and examined how entrepreneurs perceived certain risk sources as important to the agribusiness environment in Ghana. Second, the study sought to estimate the effect of entrepreneurs’ risk management practices on agribusiness firm growth. Linear regression models were utilised in achieving these two objectives. Third, the study sought to understand the personality traits of entrepreneurs and what accounted for their business success applying the personality trait theory as attribution to business success of the entrepreneur using an ordered logit model. To elicit entrepreneurs’ risk attitudes, the psychometric theory was utilised. The Domain-Specific Risk-Taking (DOSPERT) instrument which lists hypothetical questions that elicit risk perception and risk propensity was used to elicit the risk attitudes of entrepreneurs. Risk attitude was measured as a combination of the scores from risk perception and propensity. The sample analysis utilised data from 159 entrepreneurs (owners) of micro and small firms in agri-food processing in the Greater Accra and Ashanti regions of Ghana. The results showed that about 61% of entrepreneurs were risk seeking individuals. Using a linear regression model, aged and married entrepreneurs showed more risk aversion behaviour. Education exerted no effect on risk attitudes. Male entrepreneurs were more risk seeking compared to females. Results showed that aged entrepreneurs do not give much credence to general economic/political risk as an important risk source to affect them but considered human risk (sickness and death) as important. Female entrepreneurs did not consider market risk as important enough to affect the business environment probably because they had found innovative ways in marketing and these innovations reduced the effect of market risks on their businesses. Subscription to formal insurance showed a positive and highly significant impact on firm growth. To further understand the underlying factors responsible for levels of business success achieved by entrepreneurs, their personality traits using three dimensions (locus of control, self-efficacy and motivation) were estimated. The general conclusion was that the entrepreneur’s psychological disposition has significant effects on business success. Recommendations for this study include initiation and facilitation for the development of marketing cooperatives (as a risk management tool for entrepreneurs) to negotiate fair prices to help mitigate marketing risks. Again, targeted education on the importance of subscription to insurance packages (a risk management tool which significantly and positively affected firm growth) to alert entrepreneurs of the need to insure their businesses and enjoy the inherent benefits is suggested.


 1.0  Background


  • Risk management, firm growth and Business Success in the global context Entrepreneurs whether they establish large or small businesses are not immune to the issues of risk1 in decision making especially those that directly affect the management of their businesses and how they perform. As elaborated by some authors (Stokes, 2000; Watson & Everett, 1996; Jennings & Beaver, 1997), the risk behaviour of the entrepreneur and management of small firms are highly correlated. Economic decision making under uncertainty means that the attitude of the individual with regards to risk aversion plays a role in a variety of contexts that are critical to understanding their behaviour. This highlights the importance of risk management especially in the management of the



There are two reasons highlighted by Cross (2000) which suggest why emphasis on risk management continues to be paramount in the management of the firm. First, the increased pace of change in the business environment has rendered decisions based on past experiences more and more unreliable mainly because new issues keep cropping up in business and entrepreneurs now need to consider a whole range of futures in order to minimize losses in the uncertain and changing environment. Second, surge in the number of disasters have made public liability insurance more expensive and changes to liability laws implies that business managers and entrepreneurs (firm owners) may now be held legally and personally responsible for any losses arising from poor risk

1 Risk is defined as the occurrence of an event or a situation in which a business entity (represented by the owner/entrepreneur) takes a decision which has the probability of more than one outcome and the probability of occurrence of any of the outcomes can be estimated and can also have influence on business objectives


management decisions by the firm. To counter these, risk management becomes apparent.


There seem wide variations in definition of risk management by various authors although they all aim at tools that are employed by entrepreneurs (business owners) in reducing the exposure of their firms to risk while targeting maximum benefits from their economic activities. For example Manab et al., (2012) define risk management as an organizational tool employed by the business towards achieving set goals and objectives, and strengthening corporate governance, while fulfilling its obligation toward shareholders. Conversely, Chance & Brooks (2010) define risk management as a firm’s decision with regards to the practice of setting a level the firm desires by identifying its current risk level and using various methods and instruments to adjust the actual level of risk it faces so the risks can be minimised. The definition by Manab et al., (2012) fits better in the direction of this study and will therefore be adopted. This study does not delve into the concept of entrepreneurship but looks at risk attitudes of entrepreneurs, their risk management practices that impact on the growth of their firms (micro and small firms) and the subsequent business success achieved.



The aim of risk management is geared towards firm growth and ultimately the firm’s business success. The focal point in firm growth and success is the personality characteristics of the entrepreneur in terms of their risk attitudes and this demonstrates the inherent strength with which they manage the risks that face their businesses (Ciavarella et al., 2004). Environmental factors and firm characteristics are also very significant contributors to small firm growth but the entrepreneur’s personality characteristics hold (Chittithaworn, Islam, Keawchana, & Yusuf, 2011)sway in the hierarchy of factors that influence firm growth. For instance, the entrepreneur’s resolve


to take certain decisions in the face of risks and turn inherent threats to opportunities determines their risk attitudes and invariably affect their firm growth and their business success.



There are divergent views as concerns how important the entrepreneur’s risk attitudes influence firm growth and success. Some authors (Carland & Carland, 2015; Kim-Yin et al., 2015; Zhao & Seibert, 2006) elevate the individual (entrepreneur) above all  other factors when studying firm growth and conclude that there is a positive correlation between risk attitudes and firm growth (Caliendo et al., 2010) and therefore there is the need for further studies to understand the personality characteristics of entrepreneurs that contribute to firm growth. The crust of entrepreneurship is the  ability to quickly identify business opportunities and the willingness at seizing such opportunities by way of investing in them. The failure or success of Micro and Small Enterprises (MSEs) the world over is greatly influenced by the decisions and capabilities of entrepreneurs and is manifested by their different management strategies and skills. This implies that successful businesses are managed by entrepreneurs who have strategies to take risks linked to the investment opportunities available to them and ultimately impact on the success of their businesses. However, as Drichoutis & Lusk (2012) point out, firms do not operate in isolation but are closely linked with the macroeconomic, political, and social environment. This implies that as much as the socio-demographic characteristics of entrepreneurs are important, their environment is equally important to ensure the success of their ventures.


  • Risk management, firm growth and Business Success in the Ghanaian context Although the FAO (2005) describes the nature of the agro industrial sector (which encompasses the agribusiness sector) in Ghana as rudimentary and artisanal, there are prospects of becoming robust if policies especially those related to trade and aimed at promoting the private sector are promptly pursued. The development of the agribusiness sector is critical to sustaining the overall development of the economy. Within the agribusiness sector are Micro and Small Enterprises (MSEs) which make up a significant portion of private investments in the agro industrial sector of the Ghanaian economy( Setsoafia et al., 2015). MSEs are very critical for economic growth (Abor & Quartey, 2010). In Ghana, they represent a significant portion of privately owned firms (Abotsi et al., 2014) and are extremely important economic players in employment provision, enhancing food security and sustaining the overall growth of the Ghanaian economy. Despite their importance, there is evidence (Bannock, 2002; Berry et al., 2002; Setsoafia et al., 2013) to show that most of them especially those in the agro industrial sector fail to survive the first year of their existence. This is corroborated by Stokes (2000) who concludes that survival rates for small businesses across the globe are



Numerous constraints including limited access to finance, poor public infrastructure, higher input costs, increased regulatory burden, high bureaucracy, increasing competition in the output market, and unfavourable prices received by primary producers have been attributed to the failure rate of MSEs in the agribusiness sector (Setsoafia et al., 2015). Apart from these constraints, entrepreneurs operating these MSEs face risks which threaten the growth and success of their businesses. The ability of the entrepreneur to address the dynamics of the Ghanaian market is largely


influenced by their ability to carefully identify and analyse the type of risks their business faces as well as examine the strategies that are necessary to manage them (Abotsi et al.,2014). Severe losses are incurred when businesses are exposed to risks with unfavourable outcomes. The risk associated with market price of commodities is one of the obvious areas in risk management that has received much attention in research but is still important especially in the Ghanaian context (Dellor, 2009). In addition, other risks entrepreneurs face (financial, institutional, and personal/human risks), form the basis of the business environment in which informal small businesses  in Ghana operate. The risks enumerated influence informed judgments made by entrepreneurs (owners) in terms of strategies to manage the risks they face. It also positions their businesses to capture the benefits that will accrue in future due to the management decision taken to mitigate the effect of risks.



The risk attitude of entrepreneurs has received considerable attention in research the world over but is scant in the Ghanaian context. Dellor (2009) suggests that Ghanaian entrepreneurs are generally risk averse in their investment decisions but are over- confident with their abilities to manage risks and this pre-disposes them to economic risks. The extent to which individual risk attitudes of entrepreneurs and their risk management practices might impact on firm growth and consequent success is largely unexplored although empirical research has paid more attention to differences in risk attitudes between entrepreneurial and non-entrepreneurial groups (Caliendo et al., 2010)


  • Characteristics and Definition of Micro and Small Enterprises in Ghana


The role played by Micro and Small Enterprises (MSEs) in economic development in many countries across the world is significant (Fuseini, 2015) . The existence of a strong small business sector is necessary for rapid economic development. They have been ascribed the role of efficient and prolific job creators, the foundation of big businesses and the fuel of national economic engines (Abor & Quartey, 2010). Their importance to economic development is even more paramount since they form a large portion of the informal sector in developing countries (Nichter & Goldmark,  2005). The Ghanaian economy is dominated by the informal sector. It is estimated that about 70% of Ghanaian enterprises are micro to small sized (GSS, 2015).



There is no consensus on the definition of MSEs in Ghana. The Ghana Statistical Service (GSS) defines these enterprises based on the number of employees and value of fixed assets. Micro firms are those that employ up to five employees and have fixed assets (excluding realty) not exceeding the value of $10,000 while Small firms employ between six and twenty nine employees with fixed assets up to $100,000 (excluding realty). The National Board for Small Scale Industries (N.B.S.S.I) defines a micro enterprise (firm) as one with less than five employees and a small firm as one with a total value fixed assets (excluding land, buildings and vehicles) not exceeding GH¢ 10 million and up to nine employees. The working definition of this study as used in the Ghanaian context is hinged on a definition by the Regional Project on Enterprise Development Ghana (RPED), which classified firms into: micro enterprise as firms with less than five employees; small enterprise as firms with employees between five and twenty nine employees; medium enterprises as those with employee number


between thirty and ninety-nine; and large enterprises which have hundred and more employees (Teal, 2002).



  • Context of business success in this study


In business management, success is a key term even though it is not always explicitly stated (Chittithaworn et al., 2011). The classical concept of business success has been associated with a firm’s financial performance but this is not universally accepted. Studies in relation to the issue of success in business consider that it is much more than just financial fulfilment. For example, Foley & Green (1989) and (Oyeku et al,. 2014) suggest personal satisfaction such as being their own boss, independence, and realizing creativity and innovative potential as measures of success. Storey (1994) concludes that employment growth could be used as a standard to measure business success. Again, Dunkelberg et al., (1987) define business success as growth in both the sales of the firm’s product and number of employees as more reliable criteria in assessing business success of small firms.



Trondsen (2002) argues that business success is measured by net profit but with stringent accounting principles that consider regular depreciation in the value of the currency. Chittithaworn et al., (2011) consider business success from a different angle by reviewing a number of variables which include socio-demographic characteristics of entrepreneurs, management and know-how, products and services, customer and market, the way of doing business and cooperation, resources and finance, Strategy, and external environment. Boit et al., (2014) in Kenya also measured business success in terms of growth in volume of sales, profits, firm reputation, and increase in number of employees on annual basis.




Considering the vastness in the different facets in assessing and defining business success, this study uses a two-pronged approach in defining business success. First, subjective business success defined as the assessment of the owner’s objectives for setting up the business and his current level of satisfaction in meeting those objectives (Foley & Green, 1989; Oyeku et al., 2014). This is subjective because it is influenced by the owner’s personal assessment. The second part, objective business success is defined as mean increases in objective indicators of small firm growth (growth in sales volume, productivity per employee based on volume of sales and employee size) over a period. The term objective business success is used because the indicators for measuring business success of the firm are not subject to the views of the owner but are based on figures which measure small firm growth




1.1  Problem Statement


MSEs in Ghana face many risks in their ventures and this is especially aggravated with those directly related to agriculture (agri-food processing firms) because the progress of their production activities is contingent on primary agricultural production which is prone to many natural disasters. Again, price volatility of farm output (as raw materials) is of major concern to entrepreneurs in agri-food processing since the former have direct effects on the cost of production. Between 2012 and 2016, Ghana faced major economic challenges and this was manifest in the rapid depreciation of the currency and precipitated by the energy crisis. The cost of the energy crisis to the Ghanaian economy was estimated to be between US$ 320 and US$ 924 million (excluding indirect cost) and translated to be 2% and 6% of GDP (Ackah, 2014). The adverse impact of the crisis escalated the operating costs of businesses and limited


production and hence output growth. Indeed, the informal sector which is dominated by MSEs was hard hit by this situation which is debilitating to their progress in general.



These bring to fore, the issue of risk and uncertainly that many agribusiness MSE entrepreneurs face. The risk situation is complicated by the fact that they operate in an environment characteristic with weak markets (Dellor, 2009). They do not have access to sufficient support institutions that can help them cope with risks. Among the remedies prescribed for business operators for managing risk is to subscribe to risk sharing institutions like national insurance and credit schemes or private insurance products that help reduce the burden of risk to society (Zawoyski et al., 2015). However, insurance penetration in Ghana is generally low. Insurance coverage in Ghana is about 1.5 percent owing to low levels of insurance literacy among majority of the Ghanaian population (Nduna, 2013). Again, private sector insurance products in agriculture and its related sectors are not well developed and rolled out in Ghana, compelling MSE entrepreneurs to choose self insurance strategies that include social mechanisms and diversification for coping with risk. The major goal for any MSE entrepreneur in risk management is the ability to identify those risks and evaluate them so that informed strategies can be adopted to minimise their effect. Thieke (2000) indicates that such actions of the entrepreneur are both offensive and defensive because good risk management enhances a business person’s risk capacity and shields the business from unwanted risk. Consequently, it is crucial that individual risk attitudes and their influencing factors are assessed and better understood in order to design effective policy instruments to support the agribusiness sector so as to promote economic growth (Harrison et al., 2010; Nielsen et al., 2013) in Ghana.


The one-district-one-factory policy is an initiative of the current Ghanaian government and aims at establishing at least one factory in every district in Ghana under a Public- Private Partnership (PPP) model with entrepreneurs (as private partners) and was launched in mid 2017. The processing factories are agriculture-related and will target the widely cultivated agricultural produce in their catchment areas. This implies that the management of such factories will require a plethora of competence including the ability to effectively manage risk in order to succeed. Almost all government programmes (especially those in agriculture) within the current Fourth Republican dispensation of Ghana have been designed without much credence to risk management of the actors in the whole continuum – from primary to post primary production (examples include GPRS I & II; FASDEP I & II; and the recent ‘Planting for Food and Jobs policy’ launched in April 2017). It is a known fact that activities related to agricultural production are prone to risk and uncertainty (Musser & Patrick , 2002; Ayinde et al., 2008). They have devastating effects if the main risk – natural disasters strike. The risk attitude of those responsible for managing primary production firms (i.e. farms) and secondary production firms (processing plants) in the one-district-one- factory policy is crucial to the success of the one-district one- factory policy. The reason is to enable them understand how these firms can grow and become successful with regards to managerial decisions mainly because such decisions would be predicated on risky choices. The risk attitude of the management (entrepreneurs) will  be a telling effect on the kind of decisions taken and the business success of the firms (Binici et al., 2003) that will participate in the policy initiative. It stands to reason that one of the pillars of the policy will be risk management.


Ghana’s agribusiness sector is not well developed and its contribution to the country’s agricultural GDP is widely undocumented (although the whole agricultural sector contributed about 19% to Ghana’s GDP in 2015) but new markets and business opportunities exist for the sector to become a major income earner for actors in the sector, while creating thousands of jobs and these require investments (GSS, 2015; Setsoafia et al., 2015). However, there seems to be a dearth of knowledge on what drives agribusiness entrepreneurs especially those operating micro and small  enterprises in their managerial decisions and factors that influence the growth of their firms and consequently their success. Studies on small enterprise success are largely disjoint across the world. With the presupposition that there tend to be common underlying factors that are associated with success (Hills & Narayana, 1990), many small business studies have been undertaken to identify these success factors in different countries. However most of these previous studies were based on the experience of small firms operating in the western world (Luk,1996).



The style of MSE management especially for those in the informal sector in the non- western world differs significantly from the conventional methods used by the western world (Tung & Aycan, 2008). Again, Amaeshi et al., (2008) concludes that local managers tend to combine different contextual approaches, as opposed to adopting purely western managerial practices in small business management in Kenya. This study therefore focuses on indigenous risk management practices of small firms in the African context. It further applies dimensions of the personality trait (also known as psychological disposition) from psychology literature as causal attribution to ascribe the causes of business success from the perspective of the entrepreneur in order to


obtain a clear picture of the underlying reasons for their current levels of business success.



1.2  Research questions


From the on-going, the following research questions become necessary.


  1. What factors determine the risk attitudes of entrepreneurs and perceived sources of risk to their businesses?
  2. What risk management practices do entrepreneurs employ and do these practices have any effect on their firm growth ?
  3. What factors do entrepreneurs attribute to their business success?




1.3  Research Objectives


The primary objective of this study is to elicit and assess risk attitudes of entrepreneurs (owners of MSEs), estimate the effect of identified risk management practices on firm growth and determine which factors are attributed to business success of micro and small informal agri-food processors in the Greater Accra and Ashanti Regions of Ghana.


Specifically, the study seeks to:


  1. Elicit the risk attitudes of entrepreneurs and assess the factors that influence the risk sources    they perceive as important in the context of their business environment
    1. Elicit the risk attitude of entrepreneurs using their risk perception and risk propensity
    2. Estimate the effect of factors that influence entrepreneurs’ risk attitudes


  • Estimate determinants of risk sources entrepreneurs perceive as having


significant effect on their businesses.


  1. Estimate the impact of risk management practices used by entrepreneurs on firm growth
  2. Estimate the determinants of business success applying the dimensions of the


entrepreneur’s personality trait as attribution to business success


  1. Apply indicators of business success to categorise levels of business success for entrepreneurs
  2. Estimate the effects of the dimensions of the entrepreneur’s


personality trait as attribution to the levels of business success they have attained.

1.4  Relevance of the study


Based on nascent literature on indigenous firm management especially as regards risks and the management practices to be adopted, the contribution of this thesis is three- pronged. First, risk management practices identified to have significant influences on firm growth would have important implications for owners of micro and small enterprises as regards their risk management practices in the Ghanaian economy. Eventually, this could positively affect the levels of output of their firms and contribute to general economic growth in Ghana through creation of employment. The creation of employment would be triggered by the proper risk management practices which engender firm growth. Second, the results from this study will be important  information that can be incorporated in policy to assist entrepreneurs cope with potential risks in the business environment of the whole Ghanaian economy. Finally, the application of entrepreneur’s personality trait (from psychology literature) to business success makes a contribution to the existing literature on business success. Therefore, this thesis becomes relevant and innovative in that it extends the on-going


development of literature in understanding the current shift towards indigenous management theories and practices. The main beneficiaries of this research which will serve as reference material will be the many entrepreneurs who currently dominate Ghana’s informal sector and who currently are not able to manage risk.



1.5  Scope of the study


Throughout this study, the term ‘entrepreneur’ is used interchangeably with the ‘owner’ of the firm. The concept of entrepreneurship (which is a whole study on its own) is not the focus of this thesis and therefore the subject is not discussed. Only owners of micro and small firms (MSEs) form the sample used for analysis. Again, micro and small enterprises are often referred to as ‘small firms’ for ease of communication. This study defines risk as the occurrence of an event or a situation in which a business entity (represented by the owner/entrepreneur) takes a decision which has the probability of more than one outcome and the probability of occurrence of any of the outcomes can be estimated and can also have influence on business objectives (Terzi, 2010; Essinger & Rosen, 1991). Risk propensity is defined as the tendency to take risky actions, where entrepreneurs with high risk propensity are more likely to engage in risky behaviour. Risk perception refers to how risky a decision is perceived by the entrepreneur, where a higher risk perception leads to less risky behaviour. Risk management involves anticipating outcomes and planning a strategy in advance given the likelihood and consequences of events. Targeted agri-food processors in this study are grain, fruit, beverage, tuber, nuts and pulses, oil palm, meat and dairy processors operating  informal micro and small firms in Ghana.


1.6  Organisation of the thesis


The thesis is divided into five chapters. While Chapter one introduces the background, the research problem and objectives, Chapter two provides a review of relevant literature on methods of risk attitude elicitation and sources of risk in business especially those that affect micro and small firms, and the effect of risk management practices on firm growth. The literature review also considers the link between business success and application of theory of personality traits from the psychology literature. Chapter three presents the theoretical framework and the methods of analysis of each specific objective. The data and description of the process of data acquisition as well as hypothesis for this study are also presented. In Chapter four, the results of the analysis and hypotheses tested are presented. Chapter five summarises the main findings of the thesis, draws conclusions and provides policy recommendations.


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