Journal of Entrepreneurship in Emerging Economies

Why businesses succeed or fail: a study on small businesses in Pakistan

Shabir Hyder Robert N. Lussier

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JEEE
8,1

Why businesses succeed or fail:

a study on small businesses
in Pakistan

82
Received 3 March 2015
Revised 5 August 2015
Accepted 9 August 2015

Shabir Hyder
Department of Management Sciences,
COMSATS Institute of Information Technology, Attock, Pakistan, and

Robert N. Lussier

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Department of Management, Springfield College, Springfield,

Massachusetts, USA
Abstract
Purpose The aim of this paper is to examine the factors that lead to either success or failure of small
firms in Pakistan.
Design/methodology/approach This study methodology is a survey research applying the
Lussier Model of business success and failure with a sample of 143 small businesses to better
understand the reasons of their success or failure using logistic regression statistical analysis.
Findings Results indicate that business planning, proper employee staffing, adequate capital
inflows and partnerships are important for the viability and success of small businesses in Pakistan.
Practical implications Results provide further support for the validity of the Lussier Model in
Pakistan and globally. Thus, small business owner/managers can use the model to help improve their
chances of success and to avoid failure. Other stakeholders, including parties that assist and advise
them, investors and institutions who/that provide them with capital and other resources and
communities and society by and large, can also benefit from this model. The results and discussion also
provide information to assist public policymakers in developing programs to support small business
development.
Originality/value This is the first study on success and failure of small businesses in Pakistan.
With the great discrepancy in the literature as to which variables, in fact, distinguish success from
failure, there is no accepted theory. Thus, this study contributes to the literature to better understand
why some businesses succeed and others fail, and it supports the use of the Lussier Model globally.
Keywords Pakistan, Small enterprises, Lussier Model, Small business policy
Paper type Research paper

Journal of Entrepreneurship in
Emerging Economies
Vol. 8 No. 1, 2016
pp. 82-100
Emerald Group Publishing Limited
2053-4604
DOI 10.1108/JEEE-03-2015-0020

Introduction
Small businesses are known by governments worldwide for their contribution to the
economic stability and growth, employment and new job creation and social cohesion
and development (Morrison et al., 2003; OECD, 2004), and a small business is especially
important in developing countries (Rao, 2014; Ratten, 2014; Ul Haq et al., 2014).
Unfortunately, the failure rate of small businesses is high globally. Because
entrepreneurship leads to economic growth, we need more successful entrepreneurs to
grow economies and fewer failures wasting valuable resources. It is logical to conclude
that if we can better understand why entrepreneurs fail, we should be able to increase
the success-to-failure ratio. However, it has proven extremely difficult to predict which

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ventures will succeed or fail. It has recently become a hot topic because researchers have
failed to understand, explain and predict why some businesses succeed and others fail
(Olaison and Sorensen, 2014).
Small and medium enterprises (SMEs) are essential for the economic stability of the
country, and they act like a cushion to economic shocks. For example, during the
economic recession of the past several years and the debt crisis in the euro zone, SMEs
have retained their position as the backbone of the European economy accounting for
more than 98 per cent of all enterprises, for 67 per cent of total employment and 58 per
cent of gross value added (EU, 2012). Similarly, in the USA, small businesses make up
99.7 per cent of US employer firms, 48.5 per cent of private-sector employment, 63 per
cent of net new private-sector jobs and 33 per cent of exporting value. About half of all
new establishments survive 5 years or more and about one-third survive 10 years or
more (SBA, 2014).
Although, latest SME data are not available in Pakistan, according to the
government of Pakistan (2013), the gross domestic product (GDP) share of retail and
wholesale businesses is 18.2 per cent, with an annual growth rate of 2.5 per cent.
Pakistan, like other developing countries, is an agriculture-based economy. Trade is the
second largest sector in terms of labor force employment, employing about 15 per cent of
labor force. These figures suggest the crucial importance of trade for economic
development in Pakistan. Thus, creation and existence of SMEs is crucial for the
stability of the economy, size and quality of employment and socio-political structure of
a nation (Nooteboom, 1988). Unfortunately, Ul Haq et al. (2014) found limited small
business research and suggested the need for further entrepreneurial research in
Pakistan. In Pakistan, most of the small businesses can be classified as micro employ
up to ten employees (State Bank of Pakistan, 2012).
Small businesses are so important to economic development that public
policymakers and other stakeholders have put efforts to boost the creation of new small
businesses and reduce the incidents of failure and bankruptcy (Carter and Van Auken,
2006). Therefore, predicting the fate of small businesses in terms of success and failure
has become an important area of research (Davidsson and Klofsten, 2003; Pompe and
Bilderbeek, 2005). Such research on the prediction of success versus failure (S/F) would
benefit current and would-be entrepreneurs, as well as a variety of other stakeholders
including parties that assist and advise them, investors and institutions who/that
provide them with capital and other resources and communities and society by and
large (Dennis and Fernald, 2001). However, assessment of the factors that lead to the
success and failure of small businesses is still an ongoing and unfulfilled effort that
research continues to pursue (Rogoff et al., 2004).
Prior S/F models have been developed (Cooper et al., 1991; Dennis and Fernald, 2001:
Pompe and Bilderbeek, 2005; Reynolds and Miller, 1989). However, the Lussier (1995)
S/F model is among the most extensive because it is based on 15 variables that have been
identified previously by numerous studies to be influential factors on the success and
failure of small businesses (Lussier, 1995, 1996a, 1996b; Lussier and Corman, 1996;
Lussier and Pfeifer, 2000; Marom and Lussier, 2014). To date, the Lussier S/F model has
been validated in different parts of the world including the USA (North America), Chile
(South America), Israel (Middle East) and Croatia (Central and Eastern European).
Why do some businesses succeed and others end up bankrupt is an important
research question to answer. There is great discrepancy in the literature as to which

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businesses
succeed or fail
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84

variables, in fact, lead to success; thus, there, currently, is no theory (Lussier and Halabi,
2010). Also, as stated by Bono and McNamar (2011), there is a need to test models in
multiple countries to assess the robustness of the findings. To move the field in that
direction, the goal of this research was to test the Lussier 15 variable S/F model in
Pakistan (South Asia), where there are no prior S/F research studies that could be found,
which can further qualify its robustness for wide use as a global prediction model.
Pakistan represents not only a different location on the globe but also differs from others
by size, age, economy, geo-political situation and highly diverse society and culture.
The Pakistan economy and government assistance for SMEs
Pakistan is located in South Asia, with a population of around 180 million and per capita
gross national income of US$1,260. Pakistan is a developing country with an
agriculture-based economy, followed by the business sector, both in terms of its share in
GDP and labor force employment. Because of the important role of trade and commerce,
the Pakistan Government established a body to help establish, as well as promote,
SMEs. This government body is called the Small and Medium Enterprises Development
Authority (SMEDA), and it has the main responsibility of formulation of policies related
to SMEs promotion, as well as facilitation of financing. SMEDA also helps in provision
of training and education to entrepreneurs.
One of the main problems in small business promotion is the lack of capital and credit
availability (Raj, 2011). Previously, the Small Business Finance Corporation was
established to provide loans to small businesses. Commercial banks also provide small
business loans. Overtime, several specialized banks working specifically in small and
micro financing such as Khushali Bank, Kashaf Microfinance Bank and Tameer
Microfinance Bank were established to cater to the growing demands of small
businesses. Currently, nine microfinance banks are working to help finance small
businesses. Recently, the Pakistan Government started a program to encourage young
entrepreneurs to start their own business called the Prime Ministers Youth Business
Loan Scheme. This program will provide Rs. 3.7 billion to young entrepreneurs.
Despite these efforts, small businesses in Pakistan are still struggling. Ul Haq (2007)
listed various reasons for the dismal conditions of the small business sector, including
criticizing the Pakistan Government for being a cause of impediment to innovation.
According to the study, Pakistan initially followed the planning model during the 1960s,
which is based on the assumption that markets fail. This fear of market failure led the
government to make policies that were not supportive of innovation, which is a critical
ingredient for entrepreneurship. Further, the cost of doing business is higher in Pakistan
because the land acquisition for commercial purposes is difficult because of restrictive
local government bylaws. The high cost of commercial land resulted in shifting of
interest from other businesses to real estate that allocated funds to expensive
commercial land that could have been used for business growth. Moreover, government
policies favored big businesses while neglecting smaller entrepreneurial new ventures.
In the late 1980s, Pakistan started decreasing the governments role in businesses
through deregulation and privatization for greater free markets (Zaidi, 1999). The
growth rate of GDP was around 4 per cent in the 1990s, which was maintained until the
initial years in the 2000s. However, during the five years from 2008 to 2012, the GDP
growth rate deteriorated to just 2.5 per cent (World Bank, 2014a). The two major
problems that Pakistans economy faced in the 2000s were electricity shortages and

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deteriorating law and order because of terrorism. Both of these problems have severely
affected the business and investment environment. For example, the net foreign direct
investment inflows in Pakistan for the five years period from 2003 to 2007 was 2.11 per
cent of GDP, which came down to just 1.34 per cent of GDP during the similar period, i.e.
2008-2012 (Government of Pakistan, 2013). Both these factors resulted in slowing the
growth of all size businesses.
According to the World Banks Doing Business report, Pakistan was ranked 110
out of 189 countries in 2014 (World Bank, 2014b). The report presents another measure
of doing business Distance to Frontier (DTF)[1]. The DTF measure of doing business is
illustrated in Table I. This table compares Pakistans performance vis-a`-vis countries in
South Asia as well as some Organisation for Economic Co-operation and Development
(OECD) countries.
As shown in Table I, the business environment in Pakistan has only improved by 1
percentage point over the past five years. Pakistans performance, as compared to other
South Asian countries, is relatively better with the exception of Sri Lanka. However,
there is still much room for improvement if we compare Pakistan with OECD countries
such as Norway, Germany or the UK. According to the report, a score of 80 indicates
improvement in economic growth. Pakistans performance needs to come to par with the
OECD countries. The World Bank report on entrepreneurship activities also provides
quantitative data on new firms entry (World Bank, 2014c)[2]. These data are presented
in Table II to compare Pakistan with other South Asian and OECD countries regarding
new firm entry.
Table II indicates the dismal position of new entrepreneurial firms in the market.
Pakistans position as compared to its South Asian counterparts is the lowest. New firm
entry in Pakistan is almost half of that of its close competitors Bangladesh and India.
Over the five-year period from 2008 to 2012, Pakistans position remains more or less
stagnant. OECD countries are performing much better. Specifically, the UK is at the top
Year

Pakistan

Bangladesh

Sri Lanka

India

Norway

Germany

UK

2010
2011
2012
2013
2014

56.93
56.96
57.77
57.76
57.93

50.84
52.56
51.2
51.3
51.8

57.25
56.25
57.22
60.87
61.83

48.46
49.65
51.88
52.26
52.74

81.82
81.96
81.98
83.06
83.16

79.95
79.91
80.05
79.7
79.97

82.67
83.49
83.62
83.66
83.52

Source: World Bank report on Doing Business (2014b)

Year

Pakistan

Bangladesh

Sri Lanka

India

Norway

Germany

UK

2008
2009
2010
2011
2012

0.04
0.03
0.03
0.03
0.04

0.08
0.08
0.09
0.10
0.09

0.32
0.30
0.44
0.55
0.51

0.11
0.06
0.08
0.09
0.12

5.54
4.07
4.37
5.01
7.83

1.21
1.37
1.37
1.32
1.29

9.17
8.09
8.92
9.73
11.04

Source: World Bank report on entrepreneurship (2014c)

Why
businesses
succeed or fail
85

Table I.
Pakistans
comparison of DTF
in doing business
with South Asian
and OECD countries

Table II.
Comparison of new
density firms in
Pakistan with South
Asian and OECD
countries

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86

of the table. There are many causes for such dismal performance of Pakistan businesses,
and small businesses can help improve the economy.
Barriers to conducting business in Pakistan
According to the enterprise survey conducted by the World Bank (2007; Yang, 2011), the
top barriers that business firms consider as obstacles to business performance are the
lack of consistent electricity and political instability. The percentage of firms
considering electricity shortage as the largest obstacle increased from 44 per cent of the
firms in 2007 to 66 per cent in 2010 (Yang, 2011). Electricity load shedding is common in
Pakistan, ranging from 6 h-18 h a day. Demonstrations against electricity problems are
common in Pakistan. Although there is relative calmness on the political front, after the
end of military regime in 2007, the first democratic government has completed its tenure
of five years. The democratic government is in power, but there still exists the fear of
military intervention in Pakistan. This is the reason that businesses consider political
instability as the second largest obstacle to conducting business in Pakistan.
Entrepreneurial intentions
Pakistani entrepreneurs are different from those in other countries. Ali et al. (2010)
reported the impact of Pakistans culture on entrepreneurial intentions. Using
Hofstedes cultural dimensions, results indicate that cultural elements, for instance,
uncertainty avoidance and collectivism, are adversely affecting the growth of
entrepreneurial intentions in Pakistan. The uncertainty avoidance seems obvious
because, in a developing country like Pakistan, the lack of social security measures by
government means many difficulties in the case of business failure. Also, in Pakistan,
where most people value collectivism, individualism is still lacking. Another study by
Azhar et al. (2011) further documented that professional attraction of self-employment
affects the entrepreneurial intentions. Pakistani society, in general, prefers jobs over
self-employment. These findings suggest differences between Pakistani entrepreneurs
and their Western counterparts.
A recent article of entrepreneurial activity in China and Pakistan by Ul Haq et al.
(2014) identified limited small business research and suggested further research in
Pakistan. In Pakistan, perception of opportunities is not a significant predictor of
entrepreneurial intentions to engage in starting a business, whereas being male is a
significant predictor of entrepreneurial activity. Recommendations include the need to
create awareness among people about the rewards of self-employment, the need to
encourage women participation in business and that the government should support
business startups and create an environment that is conducive for conducting business
in Pakistan.
Theoretical background of the model
The Lussier (1995) model was based on an extensive review of the literature to better
understand why some businesses succeeded and others failed. To be included in the
Lussier (1995) S/F model, a variable had to have been included in a study that had at
least three variables identified as contributing factors to success and failure. In total, 15
variables were identified in the literature, and for each of the variables, a hypotheses was
developed to explain the relationship between the independent and dependent variables
performance S/F. Because a model was developed and tested, the 15 variable
hypotheses are not tested and reported separately.

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A literature review results in finding little consistency in identifying which variables,

in fact, explain and predict success or failure. Of the studies, the variable listed most
frequently as a contributing factor to S/F was the need for planning. However, planning
was only cited in 16 (55 per cent) of the studies. See Table III for a comparison of 30 S/F
studies illustrating the large discrepancy in the literature. Because of such a large
discrepancy in the literature, there is no strong unifying theory of S/F. Thus, this study
is an attempt to help clarify which variables, in fact, explain and predict S/F as we move
toward a unifying theory that does not exist today (Lussier and Halabi, 2010).
As shown in Table III, prior models have been developed and tested. However, the
Lussier (1995) Model was selected to be used in this study for the following reasons. The
Lussier Model was the most extensive one because the study examined the efficacy of 15
variables identified from 20 prior studies. The model has been published in more
journals (Lussier and Pfeifer, 2000; Lussier, 1995, 1996a, 1996b; Lussier and Corman,
1996). The Lussier Model is a non-financial model that is more appropriate for small
business research (Dennis and Fernald, 2001). Also, most financial models use sales as a
predictor, and are thus not appropriate to use with start-up businesses (Scherr, 1989).
The Lussier (1995) Model includes all 15 variables identified in the literature review.
Although prior researchers concluded that the success factors vary in different
countries (Benzing et al., 2009), the S/F model was significant in four very different
countries and parts of the world. Thus, the primary research hypothesis was that the
model would also predict S/F in Pakistan.
Methodology
Survey instrument
The primary methodology of this study was a personal interview survey research using
the previously validated Lussier (1995) research study questionnaire in Pakistan. The
questionnaire was translated into Urdu. Based on a panel of experts, minor word
changes were made to ensure local context understanding of the questions.
Measurement
The dependent variable for testing the model was success or failure. A business that was
currently making industry average profits was considered a success, and any business
currently not making a profit was considered to be a failure. See Table III for a list of the
15 independent variables with their measurement levels.
Sample data collection
Questionnaire data were collected through personal interviews because Pakistani
business owners are reluctant to complete mail/email surveys, plus interviewers could
provide additional information to ensure that small business owners understood all of
the questions. Interviewers visited 150 small businesses, and only 7 refused to respond
or did not provide data to complete the survey, for a response rate of 95 per cent. Of the
143 small business respondents, 42 (30 per cent) had failed and 101 (70 per cent) were
successful.
The sample frame varied by the area of the country. In the larger cities such as
Peshawar (n 34/24 per cent), Gujranwala (n 24/17 per cent) and Gujrat (n 19/13
per cent), a list of businesses was obtained through the Chambers of Commerce and
Industry. For smaller cities, such as Attock (n 13/9 per cent), Kohat (29/20 per cent)
and Nowshera (24/17 per cent), the list came from Anjuman Tanzeem Tajiran (small

Why
businesses
succeed or fail
87

F
F
F

F
N
F
F
F
N

F
F

F
F
F

Rkfc
F

N
F
F
F
F
F
F

N
N
N
F
N
F

F
F

Inex
F
F
N
N

F
F
F
N
F
F
N
F
N
N
N
F

F
F
F
F
F
F

Maex
F
F
F

F
N
F
F
F
F
F
F
F

F
F

F
F
N
F

Plan
F

F
F
F

F
F
F

F
F
F
F
F

Prad

N
F
F

N
F

F
N
N
F
F

N
F

F
F

F
F
F
N
F
F

N
N

F
F

F
F
N

N
N
F
N
N

F
F

F
F

Independent variables
Educ
Staf
Psti

F
F
N
N
F

N
F
F
F
N

Ecti

F
N
N

N
N
F
N
N

Age

F
N

N
F
N
N
N

Part

F
F
N
F
N

Pent

F
F

N
N
N
F
N

Mior

N
F
N
N
N
F
N

F
F

Mrkt

Notes: F supports variable as a contributing factor; N does not support variable as a contributing factor; does not mention variable as a contributing
factor; Capt: working capital; Rkfc: record keeping and financial control; Inex: industry experience; Maex: management experience; Plan: planning; Prad:
professional advice; Educ: formal education; Staf: staffing; Psti: product service timing; Ecti: economic activity; Age: age; Part: partners; Pent: parents; Mior:
minority; Mrkt: marketing efforts

F
F
F
F

F
F
N

F
F
N
N
N
F
N
F
F
F
F

N
F

Barsley
Bruno
Cooper 90
Cooper 91
Crawford
DB St.
Flahvin
Gaskill
Hoad
Kennedy
Lauzen
Lussier 95
Lussier 96a
Lussier 96b
Lussier & C 96
Lussier & Pf 01
McQueen
Reynolds 87
Reynolds 89
Sage
Sommvers
Thompson
Vesper
Woodv
Wight

Table III.
A comparison of
variables identified
in 30 articles as
factors contributing
to business success
versus failure

Capt

88

Authors (First)

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JEEE
8,1

business traders associations). All the larger businesses were removed from the list to
ensure a sample of only small businesses. From the reduced list of businesses,
participants were randomly selected to make the sample representative of the
population.
Most of the data were collected from micro enterprises with one to five full-time
employees because of the fact that most businesses in Pakistan have five or fewer
employees. The mean (M 2.42 vs 2.31) and standard deviations (SD 1.09 vs 0.95)
were similar between the successful and failed firms.

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Statistical analysis
Three levels of statistical analyses were completed. The process began with descriptive
statistics. Second, t-tests were run to compare the differences between all 18 variables.
Last, the model was tested by using logistic regression, using success for failure as the
dependent variable with the 15 independent variables.
Results and discussion
Table IV contains the descriptive statistics frequencies and percentages of respondents
among the 18 variables and the 15 variables in the regression equation for the 143
Pakistan small businesses, and t-tests of differences between the successful and failed
firms. The results of the logistic regression analysis appear in Table V.
Test of differences
As shown in Table IV, the successful firms had higher levels of positive measures on 14
variables, with the failed firms having 4. However, of the four, only one of the differences
was significant at the 0.05 level years of management experience prior to starting the
business. The mean difference is only approximately 1 years. Thus, we should not
conclude that having an extra one and a half years of management experience will
decrease their chances of success.
Variable differences between Pakistan and the USA
The following are the variable differences between Pakistan and the USA:
Variable 2 record keeping and financial control: Pakistan businesses use a single
entry accounting system called the Khata System.
Variable 5 business planning: Pakistani business owners are not well educated
regarding starting a business. Therefore, very few actually develop a startup
business plan. Also, of those who had a business plan, almost all had a friend or
relative prepare the business plan for them.
Variable 7 use of professional advice: As startups, almost none of the business
owners used professional advice of lawyers. However, when operating their
businesses, if they ran into legal problems, they sought legal advice. Business
owners with bank loans did use the advice of bankers. However, none of the
respondents stated that they used accountants as advisors.
Test of the model
The 2 log likelihood (LL) for the model is 92.280. The large 2 LL statistic indicates
that the model does not differ significantly from the perfect model. The logistic
regression results testing the model chi-square was 80.875, with the model significance

Why
businesses
succeed or fail
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JEEE
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Variables

Classified

Mean

SD

p-value

Capital (1 enough 7 not enough)

Success
Fail
Success
Fail
Success
Fail
Success
Fail
Success
Fail
Success
Fail
Success
Fail
Success
Fail
Success
Fail
Success
Fail
Success
Fail
Success
Fail
Success
Fail
Success
Fail
Success
Fail
Success
Fail
Success
Fail
Success
Fail

3.51
5.62
4.01
2.98
1.61
0.79
2.87
4.43
4.57
4.36
4.95
5.31
1.22
1.50
3.54
2.62
4.25
5.12
3.81
3.19
33.86
32.81
1.24
1.33
1.46
1.74
1.78
1.76
3.23
2.69
3.00
3.74
10.83
6.36
2.42
2.31

1.695
0.731
1.670
1.522
2.502
1.298
3.396
3.703
1.722
1.479
1.284
0.950
0.820
0.741
1.858
1.229
1.424
0.889
1.369
0.943
5.152
5.008
0.428
0.477
0.500
0.445
0.415
0.431
1.618
1.047
1.778
1.683
6.564
3.567
1.098
0.950

0.000

Record Keeping Financial Control (1 poor7 good)

90

Years Industry Experience (No. years)

Years management experience (No years)
Plans (1 yes-7 no)
Advisors (1 used-7 not used)

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Education (0 grade, 1 HS, 2 BS, 3 MS, 4 PhD)

Staff (1 difficult7 easy)
Product stage (1/2 intro, 3/4 grow, 5/6 mature, 7 decline)
Economic stage (1 recession7 expansion)
Age (No years)
Partner (1 owner 73%-2 partners 27%)
Parents (1 yes parent owned bus 46%-2 no 54%)
Minority (1 yes 33%2 no 77%)
Marketing skills (1 unskilled7 skills)
Area (1 Kohat 20%, 2 Peshawar 24%, 3 Nowshera 17%,
4 Attock 9%, 5 Gujrat 13%, 6 Gujranwala 17%)
Years in business (No years)

Table IV.
Descriptive statistics
and test of
Employees (No of employees)
differences

0.001
0.011

0.016
0.449
0.068

0.056
0.001
0.000
0.002
0.264

0.264
0.001
0.793
0.020

0.023
0.000
0.585

level less than 0.01 (p 0.000). Thus, the model has empirical validity, as 99 per cent of
the time, it will be more accurate than random guessing of which businesses are
successful and which have failed. Results support the models ability to predict success
and failure in Pakistan. Thus, if small businesses have adequate capital, maintain good
record keeping and financial control, have industry and management experience, have
specific plans, use professional advice, have more education, have an easier time
staffing, have better product stage and economic timing and have marketing skills, their
chances of success will increase.
Many published regression model studies using large sample sizes are supported
with significant p-values, but are not supported by having low R2 values. The validity of

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Model parameter estimates

Variables name
1. Capital
2. Record-keeping and financial control
3. Years industry experience
4. Years management experience
5. Business plan
6. Use professional advice
7. Education
8. Staffing
9. Product stage
10. Economic stage
11. Age
12. Partners
13. Parents owned a business
14. Minority
15. Marketing
Constant

Model

Significance

1.177
0.034
0.058
0.222
0.106
0.163
0.584
0.634
0.033
0.178
0.147
1.506
1.054
0.826
0.357
5.204

0.001
0.866
0.746
0.641
0.000
0.583
0.108
0.013
0.908
0.600
0.143
0.049
0.110
0.220
0.167
0.934

Model test results

2 log likelihood
Model chi-square
Model significance
Nagelkerke R2

92.280
80.875
0.000
0.615

Classification results
Correctly classified cases %
Success
Failed
Overall

88.1%
66.7%
81.8%

Note: The italic (bold) data was merely representing the statistical significance i.e. when p-value is less
than 0.05

the Lussier (1995) Model is also supported by the high Nagelkerke R2 (0.615), indicating
that 38 per cent of the variance in S/F is explained by other variables not in the model.
Thus, based on the model, small business owners in the USA and Pakistan need to focus
on the variables to improve their chances of success and decrease their chances of
failure.

Individual variables in the model

The parameter-estimated beta coefficients appear in Table V. Of the 15 variables in the
model, the parameter estimates for the logistic regression model found only 4 of the 15
variables to be significant. This indicates that businesses that started with (1) adequate
capital (p 0.001), (5) developing business plans, (8) proper staffing (p 0.013) and
having partners (p 0.049) have a significantly greater chance of success from failure in
Pakistan.

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Table V.
Logistic regression
model test results

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Near multicollinearity and test of differences

The most likely reason for the lack of significance for the other individual independent
variables is because the model has near multicollinearity. Near multicollinearity, also
called faced or just multicollinearity, exists when one independent variable is linearly
dependent to one or more other independent variables; without the variable(s), the
estimators would not exist. For example, the number of years of business experience, the
number of years of management experience and the age of the owner are exceedingly
likely to be correlated. Returning to Table IV, the results of 12 out of the 18 test of
differences between the successful and failed resources are shown. Only planning, use of
advice, age, being minority and the number of employees are not significantly different
using independent t-tests. Also, as shown in Table V, the significance of the model
supports the Lussier (1995) Models validity for use in Pakistan.
Multicollinearity and common method bias
Correlation analysis was run to assess the degree of multicollinearity among the 15 test
variables. The correlation matrix shows that all of the correlations are relatively low,
being below the problematic covariance of 0.40. Also, more important is the ability of the
model to accurately predict a specific business as either successful or failed; the model
has an overall accuracy of 81.8 per cent. Thus, the covariance is low and
multicollinearity should not be problematic in the model (Lussier, 2011).
Conway and Lance (2010) identified four methods to help avoid common method
bias. To this end, the self-reporting survey research is appropriate because it is
commonly used in entrepreneurial research, and, with subjective measures in the model,
it is the best methodology. Second, the survey instrument model questionnaire used in
this research has been published as a valid measure of the variable constructs, and it has
little overlap in items for different constructs. Lastly, as just indicated, steps to mitigate
threats of common method bias effects were taken.
Implications and recommendations
The need for capital
Results include four statistically significant variables in the model. Capital is one of
those important factors because lack of capital is usually the first and most important
determinant of business failure. Most of the failed businesses in the survey indicated
lack of capital as one of the important reasons for failure. Even with sufficient funds at
the start up, this does not indicate cash flow of capital afterwards to continue operations
and grow the business. As found by Tatiana et al. (2009), in Pakistan, the mode of
financing from formal sources for smaller businesses is limited, and these businesses
have more reliance on informal sources. Only 14 per cent of Pakistanis have access to
formal financial institutions. The important reason for the lack of access to formal
finance is lack of collateral and/or guarantee that restricts those firms from acquiring
sufficient capital. This seems true for other South Asian countries as well; for example,
Dulal et al. (2008) showed for Nepal that micro finance is relatively easily available to the
wealthy as compared to the poor. In Pakistan, the formal channels including
microfinance banks and other banks can enhance their outreach by relaxing the
collateral conditions and the reduced documentation. There needs to be more focus on
the potential success of the proposed business model/idea, rather than simply on

collateral. To this end, the government could provide subsides and loan guarantees like
the US Small Business Administration.

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The need for business plans

As has been indicated earlier, most small business owners have no idea of how to
develop a business plan. One of the reasons is the lack of education, especially business
education, among the small business owners. Anecdotal evidence suggests that most of
the youth applying for the new youth finance government scheme loans were
unsuccessful because of the lack of proper business plans. In the new Prime Ministers
Youth Finance Scheme for small business promotion, one requires a standardized
proper formal business plan to get government support. The government and other
policymakers can introduce workshops and training materials for new startups, as well
as for those already in business. Those applicants should attend such training.
The need for proper staffing
Another difficulty faced by firms is the staffing problem. Usually, there is a higher
turnover rate among employees working in smaller businesses. The reasons include
lower wages and a heavy work load. According to the Government of Pakistan (2009),
Pakistans economy in terms of employment is dominated by the informal sector, where
usual labor laws do not apply. Javed (2005) noted that there is a tendency among
the employers to hire workers on a daily wages basis. These workers can simply be
disowned by employers at any time because these are workers who are usually illiterate
and have no idea of their constitutional and legal rights and thus have no recourse to
their lawful rights. This seems true for workers in the small businesses. These rigid laws
not only affect smaller businesses, but, on a larger scale, can also affect the industrial
sector. For example, Saha (2006) found that rigid labor laws have a deteriorating effects
on Indias attempt to deregulate its industrial sector. It is, therefore, recommended to
make and implement relevant and flexible labor laws to reduce the high turnover rates.
This can help reduce employee turnover as well as make the business environment more
employee friendly.
The need for partners
Businesses started as partnerships in the sample had a higher success rate, as it is
evident that that these firms usually lack sufficient funds and pooling of resources by
partners may result in success. The government and other policymakers when
introducing workshops and training materials for new startups, as well as those already
in business, can encourage entrepreneurs to consider partners and help them find each
other.
Comparison with previous research
This is the first S/F prediction study conducted in Pakistan, so the current study results
cannot be compared with that of other studies conducted here. It is also difficult to
compare the results of this study using the Lussier (1995) Model with those of prior
studies not using the same model because of the wide discrepancy among prior research
identifying which variables, in fact, predict success or failure (Lussier and Halabi, 2010).
Also, only four other studies actually developed a non-financial model to predict S/F
using logistic regression (Cooper et al., 1990, 1991; Reynolds, 1987; Reynolds and Miller,
1989). Other studies tried to determine factors of S/F without models and logistical

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regression. For example, Gaskill et al. (1993) conducted a factor analytic study of the
perceived causes of small business failure. Reynolds (1987) and Reynolds and Miller
(1989) used age of the business and first-year sales as predictors of success or failure,
which are unknown variables in predicting success or failure of a new venture. Cooper
et al. (1990, 1991) did not actually survey failed businesses.
However, we can compare Pakistans results with previous studies using the original
Lussier Model in the USA (Lussier, 1995) and then in Croatia (Lussier and Pfeifer, 2001),
Chile (Lussier and Halabi, 2010) and Israel (Marom and Lussier, 2014). One of the critical
criteria is the accuracy of prediction of S/F businesses using logistics regression. The
ability of the model to accurately predict a specific business as either successful or failed
overall in Pakistan was 81.8 per cent of the businesses. The model had a different
prediction level of business failure (66.7 per cent) and success (88.1 per cent). The
predictive results are more accurate than the Lussier (1995) US study (70 per cent), the
Lussier and Pfeifer (2001) Croatian study accuracy (72 per cent) and the Lussier and
Halabi (2010) Chile study accuracy (63 per cent), but they are slightly lower than the
Marom and Lussier (2014) accuracy rate (85 per cent) in Israel.
Another criterion comparison can be made is the statistical significance of various
variables used in the Pakistan study. As has been provided in Table III, we can compare
the Pakistan results with the other studies results that used the Lussier Model. Capital
inadequacy is our first significant variable, and if we compare it with other studies using
the Lussier Model, it was insignificant in the other studies. It may be inferred that those
studies were mainly in capital-rich countries as compared to Pakistan; thus, in a
capital-starved country such as Pakistan, the business need for adequate capital is
critically important.
The second significant variable in our study is business plans, which is also
significant in all other studies except that of Lussier and Halabi (2010). This seems
interesting because the majority of respondents in our study were not able to prepare the
business plans themselves. It appears that, although they could not prepare those plans
themselves, they realized the importance of planning, and were able to find others to
make the plans for them.
The third significant variable is staffing, which also was significant in the majority of
other studies. It appears that small business owners are not effective in either acquiring
or retaining employees. In our case, as anecdotal evidence suggest, it seems that low
wages are responsible for staffing problems.
The fourth significant variable in Pakistan is the need for business partners, which
was found to be insignificant in the majority of other studies. It may be noted that capital
inadequacy is one of the major problems in Pakistan. The significance of this variable
may indicate that low capital is usually compensated through pooling of resources by
business partners, thus making this variable significant.
Public policy implications
This study has various implications for public policy. As recommended by Ul Haq et al.
(2014), the Pakistani Government should create awareness of the rewards of
self-employment, encourage women participation in business, it should support
business startups and the government should create a conducive environment for
conducting business in Pakistan.

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In Pakistan, the SMEDA is a policy-making institution for SMEs, but it has limited
resources and has only helped a small percentage of SME owners. The government
needs to understand that allocating more resources into SME development is not an
expense, but rather an investment that will have great returns in growing the economy,
if managed effectively. Thus, it is suggested that SMEDAs role should be enhanced by
providing more resources. Moreover, despite the existence of the SMEDA, there is no
stated government policy on entrepreneurship. The provision of such a policy should be
the starting point to coordinate efforts to enhance an entrepreneurial environment in the
country.
Another problem faced by Pakistani entrepreneurs is the lack of commercial land,
resulting in congestion, as well as a higher cost of doing business than other countries,
making business difficult. It is suggested that local governments rationalize their urban
zoning policy, and these authorities could be involved in framing the entrepreneurial
policy. For example, the government could create incubators and malls with low rent for
startups.
Over the larger scale, historically, the government remained focused on the
development of larger businesses and industries, while the small businesses were
traditionally given low priority. Because of its significant role in the economy, the
government needs to improve its macroeconomic SME policies.
One of the key missing areas is the lack of expertise in small businesses, e.g. our
sample indicates that small businesses use the primitive single-entry system for
accounting, while very few businesses adopt business plans. Entrepreneurs need
training and education; however, limited resources prohibit the government from
providing the education and training for them to succeed and grow the economy. It is
suggested that the government can coordinate with the local Chambers of Commerce
and industry and traders associations in their effort to enhance business-specific
education among SME owners.
Limitations and areas of future research
This study, like others, has limitations. First, the study considered cities from two
regions of Pakistan. Cities included in this study have one important difference, i.e. some
cities are badly affected by terrorist activities, while others are not. It is, thus, suggested
that future study, while measuring success/failure of businesses, can compare the
regions, taking into account the law and order situation. Furthermore, as had been noted
earlier that electricity shortage is cited as a major problem. Problem of shortage of
electricity is more severe in smaller cities as compared to larger ones. Therefore, this
problem may have different impacts on businesses according to their location. Previous
research has more or less focused on a single country study, where data are collected
from various regions which were considered homogenous. However, even within a
single country, there may be differences across the regions. It is, therefore, suggested
that future research should take into account the variations in the regions from which
data are collected.
The Lussier Model, although studied in other countries for its global application,
needs to take into account the country-specific social and economic environment.
Furthermore, it is suggested that this model should be studied in countries with similar
culture, and/or level of development to further validate the model predictability.
Moreover, historically, countries have adapted different development policies, i.e. some

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countries adopted policies with more focus on government role in economic

development, while others have policies that were supportive of the market
environment. Different growth patterns can be observed across different countries
depending on their historical background. Therefore, judging a country based only on
cross-sectional data collected at one point of time may not be appropriate. It is, therefore,
suggested that analyzing the model with time series or longitudinal data can help in
better understanding of the phenomenon.
Most of the variables are measured subjectively on a Likert-type scale, and decisions
based on an analysis of these data is subjective. Although subjective in nature, this
model can be further calibrated to each business requirements. For example, the model
can be made more business specific by judging the variables where business has a
competitive advantage and then assessing those variables where business is
comparatively weaker by a rating system. These variables afterward could be combined
to make an overall rating. The score after rating could help businesses in assessing their
probability of success. However, businesses differ among each other in terms of strength
of those variables; therefore, this rating system should be complemented by previously
used decision criteria by entrepreneurs, lenders and policymakers.
The model can be improved if the questions to measure the variables are more
objective with precise measures. For example, questions about startups operating
capital can be improved by including a numerical measure for adequacy of capital, e.g.
how much operating capital in terms of percentage was available at startup is more
objective rather than just asking With what amount of capital this business was
started with Likert scale answers. Similarly, the item of staff recruitment and retention
difficulty can be improved by the more objective measure of employee turnover rate.
These numerical measures can further be related to the success or failure of businesses
and could provide better decision criteria for the entrepreneurs.
The model has identified various variables that explain the success/failure of small
businesses; however, not all the variables were found to be statistically significant. It
can be easily seen from the model that the model has more focus on variables that are
intrinsic to it, i.e. either they relate to entrepreneurs human capital or only to the
business. These intrinsic variables have the tendency to correlate with each other; after
all, these variables are capturing the effects of characteristics of or decisions made often
by one person. The model can be improved if extrinsic variables that define external
socio-economic environment of the business were also incorporated. These extrinsic
variables can capture the effects of local business environment to national economic
situation. For example, the model could include intensity of competition, local
government help in terms with land acquisition and central government support in
terms of loans subsidy.
Conclusions
Early recognition and understanding of risks of business failure are important for
establishing, sustaining and growing a business. The S/F prediction model developed
for and tested in Pakistan is supported by statistical testing. Entrepreneurs need to
understand the risks of failure and acquire the variable resources identified in this study
to improve their probability of success. Thus, the findings of this study are important
because they help potential, nascent and existing entrepreneurs and other business
leaders, policymakers and regulators, credit agencies (money lending institutions),

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business consultants and investors better understand how a business in Pakistan can
succeed and avoid failure.
With the importance of economic growth coming from small businesses,
understanding business S/F is a critical issue in Pakistan. The results of this study can
help these government agencies and institutions do a better job of understanding why
some businesses succeed and others fail, and teaching this to new entrepreneurs. More
importantly, these institutes can help entrepreneurs get the proper training and
resources they need to succeed and avoid failure. Thus, this study can be used to help
formulate strategies to increase business success and economic development in
Pakistan.
Notes
1. An economys DTF is reflected on a scale from 0 to 100, where 0 represents the lowest
performance and 100 represents the frontier. For example, a score of 75 in DB 2013 means an
economy was 25 percentage points away from the frontier constructed from the best
performances across all economies and across time. A score of 80 in DB 2014 would indicate
that the economy is improving.
2. To measure entrepreneurial activity, annual data are collected directly from 139 company
registrars on the number of newly registered firms over the past nine years. Data are provided
on new business entry density, defined as the number of newly registered corporations per
1,000 working-age people (those aged 15-64 years).
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Further reading
Cressy, R. (2006), Why do most firms die young?, Small Business Economics, Vol. 26 No. 2,
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About the authors
Shabir Hyder is an Assistant Professor at the Department of Management Sciences at COMSATS
Institute of Information Technology, Pakistan. His interests include migration, small business
and international trade. He has published on these subjects in various journals. Shabir Hyder is
the corresponding author and can be contacted at: hydershabir@ciit-attock.edu.pk
Robert N. Lussier is a Professor of Management at Springfield College, USA. He is the author
of more than 425 publications, including articles published in the Academy of Entrepreneurship
Journal, Entrepreneurship Theory and Practice, Family Business Review, Journal of Management
Education, Journal of Small Business and Enterprise Development (winner of two Awards for
Excellence), Journal of Small Business Management, Journal of Small Business Strategy and
several others. Robert Lussier also has ten textbooks including Management 6e and Human
Resource Management 2e (Sage), Human Relations (Irwin/McGraw-Hill), Leadership 6e and Small
Business 3e (South-Western/Cengage), Entrepreneurship 3e and Business, Society and
Government 2e (Routledge), Research Methods and Statistics (Waveland Press) and Publish Dont
Perish: 100 Tips to Improve Your Ability to Get Published (Information Age Publishing).

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