Description
Business discontinuation is an important feature of dynamic economies, and entries and exits of businesses are closely connected.
African Journal of Business Management Vol. 5(17), pp. 7488-7498, 4 September, 2011
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM11.402
ISSN 1993-8233 ©2011 Academic Journals
Full Length Research Paper
An empirical study on the causes of business failure in
Iranian context
Zahra Arasti
Faculty of Entrepreneurship, University of Tehran, Tehran, Iran. Email: [email protected]. Tel: +98-2161119227.
Accepted 3 August, 2011
Business discontinuation is an important feature of dynamic economies, and entries and exits of
businesses are closely connected. A majority of entrepreneurship literature have focused on
successful ventures, therefore, little is known about why ventures fail. Previous studies showed
significant inter-country differences in SME failure rates, while most researches on business failure
have been conducted in developed countries, and there is limited knowledge on the causes of business
failure in other countries with different economical, political, social, and cultural conditions. As
entrepreneurship is a newly developed phenomenon in Iran, considering the economical, social, and
cultural conditions of the country, analysis of the entrepreneurship process, and the causes of failure
and success, would provide critical information for individual entrepreneurs, venture financiers, and
government policy-makers. The purpose of the present study is to identify the main causes of business
failure based on an empirical study in Iran. This empirical study on the sample of failed business-
owners/managers pointed out that the main causes of business failure are due to lack of good
management, no support from banks and financial institutions, inadequate economic sphere, and
insufficient governmental policies. In addition, this study indicates differences in some causes of
business failure influenced by gender and business sector.
Key words: Entrepreneurship, business, causes of business failure, Iran.
INTRODUCTION
New firms create new jobs, open up opportunities for
upward social mobility, foster economic flexibility, and
contribute to competition and economic efficiency (Liao et
al., 2009). Although the failure of an individual SME will
never attract the media’s attention; the consequences of
the failure of smaller companies are certainly a serious
matter for directly involved stakeholders (FEE, 2004).
Business discontinuation is an important feature of
dynamic economies, and entries and exits of businesses
are closely linked (Bosma et al., 2009). It is impossible to
talk wisely about a theory of entrepreneurship without first
acknowledging the pivotal role of entrepreneurial failure.
Most entrepreneurship literature focuses on successful
ventures. As a result, little is known about why ventures
fail. Even less is known about how they fail. Our under-
standing of entrepreneurship will never be completed
until we have a clear understanding of what causes dis-
continuation. Developing a deeper understanding of new
venture failures should provide critical information for
several key stakeholders in a new venture - individual
entrepreneurs, venture financiers, and government
policymakers (Liao et al., 2009).
There is a limited but growing body of knowledge on
the topic of failure, on which researchers can base their
investigations, especially in the small business domain.
The research articles are, however, scattered across
business, management, financial, psychology, entrepre-
neurial and many other journals, and no proof could be
found that these investigations have ever been
comprehensively reviewed. There is no specific body of
science to which failure exclusively belongs (Pretorius,
2009).
The health of a firm in a highly competitive business
environment is dependent upon its capability of achieving
profit and financial solvency.
When a firm loses competence to maintain profit and
financial solvency, it becomes unhealthy, or deteriorates
to the point where it is in danger of suffering business
failure. Business failure is not only common with new
start-ups, but also with listed companies, and can easily
happen to firms of any and all sizes (Wu, 2010).
The annual report of Global Entrepreneurship Monitor
(Bosma et al., 2009) shows that there is significant inter-
country differences in SME failure rates. Discontinuance
rates are relatively high in factor-driven economies (in
Uganda for example, the reported rate is as much as
24%) and relatively low in innovation-driven economies.
Failure rates are somewhat higher in efficiency-driven
countries as a proportion of discontinuation, reflecting the
increasing importance of scale and efficiency in business
in these countries. Failure rates, both in absolute terms
and in proportion to all discontinuations, are lowest in
innovation-driven economies, because entrepreneurs
have better skills and environments are more favorable.
In Iran, the business discontinuation rate (6%) is almost
higher than average of efficiency-driven economies
(4.9%). Denmark and Italy in innovation-driven econo-
mies have the lowest business discontinuation rate
(1.1%) (Bosma et al., 2009).
On the other hand, most of the researches in business
failure have been conducted in developed countries, and
there is limited knowledge on the causes of business
failure in other countries with economical, political, social,
and cultural differences. In order to know more about the
business environment of Iran, we address the annual
report of World Bank in 2011.Doing Business 2011 is an
annual report investigating the regulations that enhance
business activity and those that constrain it. Doing
Business presents quantitative indicators on business
regulations and the protection of property rights that can
be compared across 183 economies over time. Regu-
lations affecting 11 areas of the life of a business are
covered: starting a business, dealing with construction
permits, registering property, obtaining credit, protecting
investors, paying taxes, trading across borders, enforcing
contracts, closing a business, getting electricity and
employing workers. Iran with 72.9 million population and
GNI per capita (US$ 4.530), is 129 from 183 countries in
the ranking on the ease of doing business.
The ranking of starting a business in Iran is 42 while in
obtaining credit is 89. We must mention that the Islamic
Republic of Iran eased business start-up in 2011 by
installing a web portal allowing entrepreneurs to search
for and reserve a unique company name, the establish-
ment of a new private credit bureau improved access to
credit information. The Islamic Republic of Iran made
enforcing contracts easier and faster by introducing
electronic filing of some documents, text message
notification and an electronic case management system
(World Bank, 2011).
These data show that the business environment in Iran
is not encouraging for entrepreneurs and makes a lot of
barriers to them. Therefore, a study on business failure
and the factors that cause failure in Iranian context could
help policy makers to identify the most important chal-
lenges of business that lead to business discontinuance.
This paper aims to discuss the causes of business
Arasti 7489
failure in a different context of a developing country.
LITERATURE REVIEW
It has been widely recognized that business growth and
survival depend both on external and internal factors.
While most of the challenges which a business will face
may be foreseeable, some will be completely unpredict-
able. However, if a business is to succeed, management
must be mindful to all matters which are likely to have a
material impact on its viability, and must then demon-
strate skills both in exploiting opportunities and mitigating
threats (FEE, 2004). There is a vast literature review on
business failure, mostly on the prediction of failure by
using financial models, but in this paper, we focus on the
causes of business failure.
Definition
The Oxford English Dictionary defines the term “failure”
as “to become deficient, to be inadequate”. In general,
many different terminologies are related to business
failure, such as firm closures, entrepreneurial exit,
dissolution, discontinuance, insolvency, organizational
mortality and bankruptcy. Normally, entrepreneurial
failure is referred to as the cease of an operation for
financial reasons. Since we examined nascent entre-
preneurs during the firm’s gestation process, one type of
entrepreneurial failure is the discontinuance of venturing
efforts by entrepreneurs (Liao et al., 2009), but business
failure can be defined as wanting or needing to sell or
liquidate, to avoid losses or to pay off creditors, or the
general inability to make a profitable go of the business
(Gaskill et al., 1993).
Pretorius, at the end of his review of business failure
definition, proposed a universal definition for the failure
phenomenon - a venture fails when it involuntarily
becomes unable to attract new debt or equity funding to
reverse decline; consequently, it cannot continue to
operate under the current ownership and management.
Failure is the endpoint at discontinuance (bankruptcy)
and when it is reached, operations cease and judicial
proceedings take effect (Pretorius, 2009).
There are problems relating to the use of various terms
involved in research in business failure. In particular,
definitions of business “disappearance”, “closure”, “exit”,
and “failure” are confused and often overlapping. “Dis-
appearance” of a business may occur because the
business failed, or because the business was acquired by
or merged into another company, or because the owners
voluntarily closed it (Cardozo and Borchert, 2004).
“Closure” can be categorized as the inability of a
business to survive and thus represents a discontinuation
of a business. “Exit” refers to several different meanings;
it can refer to the exit of a business from trading in a
7490 Afr. J. Bus. Manage.
specific market or from producing a particular product. It
also refers to the end of the owner’s participation in the
business, as in the search for “exit routes” by entrepre-
neurs wishing to sell or exit from a business (Stokes and
Blackburn, 2002). “Failure” is generally regarded as the
discontinuance of the business due to the lack of
adequate financial resources (Everet and Watson, 1998),
cessation of operations with loss to creditors (Cardozo
and Borchert, 2004), cessation of operations, and exit
from business population because it is no longer a viable
concern (Bickerdyke et al., 2000).
Causes of business failure
The causes of business failure are many and varied, and
may stem both from the external environment as well as
from factors internal to the business. Internal causes of
business failure may in many cases be capable of being
foreseen in advance, while on the other hand some
external causes are not so predictable. In most cases, a
complex mixture of causes contribute to business failure;
it is very rare for one single factor to be involved (FEE,
2004).
Earliest empirical studies on business failure examined
the role of various owners and firm characteristics to
explain business failures. The numerous characteristics
shared by failed firms, are directly related to personal
decision-based characteristics of the owner (lack of
insight, inflexibility, emphasis on technical skills, etc.),
managerial deficiencies (lack of management skills and
appropriate managerial training, etc.) and financial short-
comings (no accounting background, cash flow analysis,
financial records, etc.). Many aspects of poor manage-
ment are reported to be connected to several related
issues, such as poor financial circumstances, inadequate
accounting records, limited access to necessary
information, and lack of good managerial advice (Gaskill
et al., 1993). Some studies focused more on the mana-
gerial causes of failure and listed some 25 causes and
categorized them simply as poor management, and
concluded that poor management combined with the
personality traits of the owner-manager, and external
factors cause business failure (Berryman, 1983). A
business failure may happen as a result of poor manage-
ment skills, insufficient marketing, and lack of ability to
compete with other similar businesses. It can also be the
result of a domino effect caused by business failures of
suppliers or customers (Wu, 2010).
In the annual report of GEM, financial problems were
cited as the reason for quitting the business by no more
than 55% of all respondents; it was cited more often by
respondents in the factor- and efficiency-driven econo-
mies (just over 50%) than innovation-driven countries
(just over 40%) (Bosman et al., 2009).
The effect of the environment depends upon the time
period, geographic area, and market sector in which the
firm operates (Burns, 2001). Government and
government-related policies is also an important factor
affecting business failures, and is discussed in some
studies. The scholars found that failure rates increased
due to the heavy burden of taxation and regulation, while
the growth in money supply (higher growth decreased the
failure rate) and the volume of bank lending (higher
volume of bank lending reduced the rate of business
failures) are significant factors (Gaskill et al., 1993;
Burns, 2001; Oparanma et al., 2010). They discussed the
negative internal and external environmental factors
including pressure from competitors or new entrants,
poor improvement in modern technology and poor sales,
the outbreak of pests, and farm diseases etc (Oparanma
et al. 2010).
A conceptual failure model was presented by Ooghe
and Waeyaert in 2004 expounding the causes of failure
and mutual relations between the general and immediate
environment of the company as external causes, and the
company’s management and policy as internal causes of
failure (Ooghe and De Prijcker, 2008). In this model, the
causes of failure can be grouped into five interactive
aspects. These include general environment (economics,
technology, foreign countries, politics, and social factors),
immediate environment (customers, suppliers, compe-
titors, banks and credit institutions, stockholders, and
misadventure), management/entrepreneur characteristics
(motivation, qualities, skills, and personal characteristics),
corporate policy (strategy and investments, commercial,
operational, personnel, finance and administration, corpo-
rate governance), and company characteristics (size,
maturity, industry, and flexibility) (Ooghe and Waeyaert,
2004). Liao (2004) also mentioned the effects of four
groups of factors-individual characteristics of the founder,
resources, structural characteristics and strategies of the
firm, and environmental conditions in which a firm
operates on business failure.
The European Federation of Accountants has identified
the following internal and external causes of business
failure. Accordingly, internal causes include poor
management, deficit in accounting, poor cash flow
management, inappropriate sources of finance, depen-
dency on customers or suppliers, impending bad debt,
fraud/collusion and external causes of business failure
are economy, catastrophic unpredictable events,
governmental measures and international developments,
environmental protection and other regulatory require-
ments, and the bankruptcy of main customer or supplier
(FEE, 2004).
Inter-country difference
Some inter-country studies show that there are significant
inter-country differences in SME failure rates and causes
of business failure. In their inter-country study of business
failure in Malaysia and Australia, Ahmad and Seet (2009)
found that some reasons for business failure were given
more emphasis in one country than the other. Australian
participants attributed their failure to reasons such as the
inability to manage a large number of employees, the
inability to manage the fast growing firm, and the inability
to administer a large firm. This may perhaps provide an
insight into why the participants preferred to stay small in
business. Malaysian participants, by contrast, highlighted
softer issues such as the lack of personal contacts and
the failure to maintain close personal relationships with
customers, providing evidence of the importance of
maintaining good personal relationships with others.
According to the annual report of GEM, evidence show
that business discontinuance rates are relatively high in
factor-driven economies (in Angola, for example, the
reported rate is as much as 23%) and relatively low in
innovation-driven economies. Among high-income
countries, Norway, United States of America, Republic of
Korea, Iceland and Ireland have the highest rates of
business discontinuation. The business not being
profitable on its own was the most reported financial pro-
blem. Problems with raising finances were considerably
lower in innovation-driven countries where the “Entrepre-
neurial Framework Condition” and “Entrepreneurial
Finance” are generally more developed. “The opportunity
to sell” and in particular “retirement” were mentioned
more often in innovation-driven countries as the most
important reason to discontinue the business. Personal
reasons caused around 20 to 25% of all discontinuations.
Such reasons could include sickness, family, death of a
business partner, divorce, the need to finance an event
such as a wedding, through sale of business assets
rather than the business itself, or simply boredom.
They were more prevalent in factor- and efficiency-
driven countries (Bosma et al., 2009).
Research questions
As indicated in the literature, several factors cause
business failure; some of them are internal and could be
controlled by the entrepreneur, while others are external
and rather unpredictable. There are factors on which
more emphasis has been given in prior studies. Prior
studies focused only on some internal or external factors
without a general view. This is an investigation on
different internal and external causes of business failure
in a developing country with different socio-cultural,
economical, and political context. The following are the
research questions:
1. What are the characteristics of failed business
owners/managers and their businesses?
2. What are the personality characteristics of failed
business owners/managers?
3. What are the main causes of business failure in Iranian
context?
4. How does gender of a business owner/manager
influence the causes of business failure?
Arasti 7491
5. How does the business sector influence the causes of
business failure?
METHODOLOGY
Some researchers have expressed difficulty in studying failed ven-
tures (Liao, 2004; Bruno et al., 1987). They argue that it is difficult
to locate ventures that failed because of poor performance, and
homogenous samples are hard to find. Entrepreneurs are reticent
about failure and they are more likely to attribute failure to external
causes than to internal ones. As it is extremely difficult to obtain
feedback from entrepreneurs who have experienced business
failure, this approach is hardly utilized by researchers. In this
research, we used this approach to obtain the point of view of failed
business-owners/managers concerning causes of business failure.
This survey is implemented based on a face-to-face question-
naire. In the first part, the failed business-owners/managers were
questioned about their background, experience, education, and
family. Then a personal characteristic test examined six entrepre-
neurial characteristics including tolerance of ambiguity, need for
achievement, risk taking, creativity, locus of control, and indepen-
dence. The questionnaire on the personal characteristics was
obtained from the Entrepreneurship Development Institute of India
and had been used many times in Iranian context (Ahmadpour and
Moghimi, 2006). The participants finally reported on their causes of
business failure. The questionnaire on causes of business failure
was obtained from a previous study on the causes of business fai-
lure in Iranian context (Gholami, 2008) in which both authors were
involved. This questionnaire was developed based on a literature
review and interview with 13 Iranian entrepreneurs whose
businesses had failed. The validity of the questionnaire was
significantly revised by 7 experts in entrepreneurship. Reliability or
internal consistency of the items within the structure of this study
was assessed by indication of Cronbach’s alpha. Each item in the
questionnaire was accompanied by a Likert-type scale, allowing
perceived indication of the extent to which the item contributed to
the business failure. The Likert-type scale ranged from 1 (to very
little extent) to 5 (to great extent). Responses to this measure were
based on perceptions of ex-business owners/managers.
Sample
Sample group is the business owner/manager who has
experienced business failure and stops his/her business activities
voluntary or involuntary. One of the greatest barriers to study about
business failure is to identify ex-owners/managers who failed in
their business. In this study, we developed our own sampling frame
that sought to be as representative as possible of the range of
business failure and exit types, rather than relying on one source,
such as official receivers’ data that reflects only a limited number of
types of closure. This was derived with the help of entrepreneurship
masters students in our faculty who are dispersed all over the
country. We did not put the limitation in the business sector, failure
phase and geographical location of business, to study more cases
of failed businesses. In total, a database of 150 ex-owners/
managers was created. The questionnaire was sent to a random
sample of 80 ex-owners/managers. 51 complete and valid question-
naires were obtained and analyzed using SPSS software.
Variables
The research variables are classified in three categories:
i. Characteristics of failed business-owner/ manager (age in start
7492 Afr. J. Bus. Manage.
up, age in failure’s time, gender, level of education, marital status,
previous experience in the sector, previous entrepreneurial
experience, and personal characteristics, tolerance of ambiguity,
need for achievement, risk taking, creativity, internal locus of control
and independence);
ii. Characteristics of failed businesses (business sector, business
age, business life cycle);
iii. Causes of business failures (lack of financial support from banks
and financial institutions, inaccurate evaluation of project, unclear
determination of business sector, inconsideration of market issues,
problems in product or service supply, lack of related experience,
expertise and good work relationships, management deficiency,
cheating and fraud, substituted products or services, government
policies, inconsideration of legal issues, inadequate financial
circumstances, problems of partnership and teamwork, lack of
interest and dissatisfaction in work or at the work place, and
negative influences by the family).
Validity and reliability
Content validity of the questionnaire on the causes of business
failure was estimated by submitting the questionnaire to several
experts in entrepreneurship, all of whom approved the content of
the questionnaire. To test the reliability, the internal consistency of
the questionnaire was assessed by Cronbach's alpha coefficient
that was 0.81 for the questionnaire on the causes of business
failure, and alpha equal to or greater than 0.70 was considered
satisfactory.
RESULTS
Results of this research contain four sub-sections: first, a
description of sample, then, the results of Friedman’s test
on causes of business failure, and finally, the role of gen-
der and business sectors on the causes of business
failure were further presented.
Sample description
Most of the failed business owners/managers were aged
between 25 and 45 years old (Mean = 32.9, SD = 6.43).
84.3% of them were men. They were well educated and
most of them were married. 64.4% had experience in the
related sector and 35.3% were experienced in business.
The number of businesses in the manufacturing and
services sector were equal (47%), while 6% were in the
agriculture sector. 76.1% of businesses failed within three
years and 55.1% failed in the phase of establishment
(Table 1).
Personal characteristics of failed business
owners/managers
The results of the chi-square test on personal charac-
teristics of failed business owners/managers show
significant difference in the level of some personal
characteristics. This difference is significant for "tolerance
of ambiguity", "need for achievement", "creativity", and
"internal locus of control". These results point out that
failed business owners/managers have low level of
tolerance of ambiguity, while they have high level of
creativity and internal locus of control and moderate level
of need for achievement (Table 2).
Main causes of business failure
Given the fact that our data regarding the causes of
business failure is in the Likert scale, we used non-para-
metric Friedman analysis of variances to identify the main
causes of business failure. The results show significant
variable differences in mean rank (2, N = 51) = 105.180,
p<0.001).
Table 3 illustrates the main causes of business failure.
These results point out that management deficiency is
the first cause of business failure, although failed
business owners/managers prioritize other factors like
financial support, inadequate economic sphere and
insufficient government policies as the main causes of
business failure. They also mentioned other internal and
external factors that cause business failure.
Gender and causes of business failure
In this study, we are interested in knowing how gender
influences the causes of business failure. For this reason,
we used t-test in which grouping variable is gender of
failed business owner/manager. The result in Table 4
indicates that gender difference in the causes of business
failure is significant for two of the business failures, which
are “lack of financial support from banks and financial
institutions” and “problem of partnership and team work".
These results point out that the mean of "lack of financial
support from banks and financial institutions" is higher for
women and the mean of "problem of partnership and
team work" is higher for men.
Business sector and causes of business failure
The other question of this study was to know how the
business sector could influence causes of business
failure. In this regard, we used the ANOVA analysis. The
results are presented in Table 5.
These results point out that the difference in mean is
significant for two of business failure causes which are
"inaccurate evaluation of project" and "lack of interest and
dissatisfaction in work or at the work place".
Table 6 indicates that the mean of “inaccurate evalua-
tion of project” is higher for agriculture business in
comparison to the manufacturing sector. Although the
mean of “lack of interest and dissatisfaction in work or at
the work place” is lower for the manufacturing business in
comparison to the service sector.
DISCUSSION
This study is the first study on the causes of business
Arasti 7493
Table 1. Descriptive statistics of Iranian failed business owners/managers (n = 51).
Variable Percentage
Characteristics of failed business-owner manager
Age in failure time
Under 25 years old 9.8
Between 25 and 45 years old 84.3
More than 45 years old 5.9
Gender
male 84.3
female 15.7
Level of education
Diploma and under diploma 27.5
B.Sc. 51
M.Sc. 17.6
Ph.D. 3.9
Marital status Married 81.6
Previous experience in related sector 64.4
Previous entrepreneurial experience 35.3
Characteristics of failed business
Business sector
Manufacturing 47
Service 47
Agriculture 6
Business age
Under 3 years 76.1
Between 3 and 5 years 10.9
More than 5 years 13
Business life cycle
Establishment 55.1
Growth 44.9
Table 2. Personal characteristics of failed business owners/managers.
Personal characteristics High Moderate Low Chi-square Sig
Tolerance of ambiguity 15 8 27 11.08 0.004
Need for achievement 15 26 9 8.92 0.012
Risk taking 16 18 16 0.16 0.923
Creativity 28 7 15 13.48 0.001
Internal locus of control 40 5 5 49 0
Independence 15 13 22 2.68 0.262
failure in Iranian context. Findings show that most failed
business owners/managers are in the middle age and
failed in the phase of establishment. Most of their
businesses do not survive more than three years. The
results on their personal characteristics show the signifi-
cant difference in the level of some personal
characteristics.
The results of this research indicate that four main
causes of business failure in Iranian context are
management deficiency, lack of financial support from
banks and financial institutions, inadequate economic
sphere and insufficient government policies. These
results show the effect of external factors on the success
and failure of businesses in Iranian context. In other
words, the entrepreneurship environment in Iran is not
encouraging. The World Bank report on doing business
confirms this result. Despite of efforts that the Islamic
Republic of Iran makes to ease business start-up, Iran is
7494 Afr. J. Bus. Manage.
Table 3. Main causes of business failure.
Causes of business failure Mean Mean rank
management deficiency 3.33 10.59
lack of financial support from banks and financial institutions 3.29 10.09
inadequate economic sphere 3.24 10.09
insufficient government policies 3.00 9.48
inconsideration of market issues 2.92 9.18
problems in product or service supply 2.65 8.45
lack of interest and dissatisfaction in work or at the work place 2.63 8.21
inaccurate evaluation of project 2.47 7.72
lack of related experience, expertise and good work relationships 2.43 7.43
problems of partnership and team work 2.39 7.19
unclear determination of business sector 2.27 7.16
substituted product/service 2.18 6.53
negative influences by the family 2.00 6.42
inconsideration of legal issues 1.92 5.91
cheating and fraud 1.84 5.57
Table 4. Difference in the causes of business failure by gender.
Causes of business failure Gender Mean Mean difference t Sig
Lack of financial support from banks and
financial institutions
M 3.09 1.41108
-2.464 0.017
F 4.37 0.91613
Inaccurate evaluation of project
M 2.44 1.25930
-0.371 0.712
F 2.62 1.40789
Unclear determination of business sector
M 2.25 1.31100
-0.239 0.812
F 2.37 1.18773
Inconsideration of market issues
M 2.93 1.40400
0.101 0.920
F 2.87 1.55265
Problems in product or service supply
M 2.74 1.43250
1.155 0.254
F 2.12 1.12599
Lack of related experience, expertise and
good work relationships
M 2.56 1.41929
1.483 0.144
F 1.75 1.38873
Management deficiency
M 3.39 1.29357
0.783 0.437
F 3.00 1.41421
Cheating and fraud
M 1.93 1.36966
1.084 0.284
F 1.37 1.06066
Substituted product or service
M 2.30 1.48861
1.465 0.149
F 1.50 0.92582
Insufficient government policies
M 3.05 1.46309
0.535 0.595
F 1.37 1.28174
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Table 4 Contd.
Inconsideration of legal issues
M 2.00 1.19523
1.102 0.276
F 1.50 1.06904
Inadequate economic sphere
M 3.25 1.51332
0.222 0.825
F 3.12 1.64208
Problems of partnership and team work
M 2.60 1.59074
4.629 0.000
F 1.25 .46291
Lack of interest and dissatisfaction in work
or work place
M 2.60 1.31184
-0.282 0.779
F 2.75 1.48805
Negative influences by the family
M 2.07 1.20308
0.936 0.354
F 1.62 1.40789
129 from 183 countries in the ranking on the ease of
doing business. The ranking of starting a business in Iran
is 42 while in getting credit is 89 (World Bank, 2011).
Other studies on the causes of business failure mention
some internal and external factors that cause business
failure. The results of this study confirm some prior
researchers, concerning management deficiency
(Berryman, 1983; Gaskill et al., 1993; FEE, 2004; Ooghe
and De Prijcker, 2008; Pretorius, 2009; Wu, 2010), lack
of financial resources (Gaskill et al., 1993; Everet and
Watson, 1998; Ooghe and De Prijcker, 2008; Bosma et
al., 2009; Liao et al., 2009; Wu, 2010), inadequate
economic sphere (Berryman, 1983; Burns, 2001; Liao,
2004; Ooghe and De Prijcker, 2008), and government
policies (FEE, 2004; Oparanma et al., 2010), while the
current study indicates other causes of business failure
that marginally developed in prior studies like
inconsideration of market issues, problems in product or
service supply, lack of interest and dissatisfaction in work
or at the work place, inaccurate evaluation of a project,
lack of related experience, expertise and good work
relationships, problems of partnership and team work,
unclear determination of the business sector, substituted
products or services, negative influences by the family,
inconsideration of legal issues, and cheating or fraud.
Concerning the gender of business owners/managers,
findings of this study point out the difference on the
causes of business failure by gender, though "lack of
financial support from banks and financial institutions"
influence women more than men, while men are more
susceptible to "problems in partnerships and team work".
The studies on women's entrepreneurship show that
access to financial resources is the most important
challenge of women entrepreneurs, so it is no surprise
when this factor influences more women than men. About
the problem of partnership, results could be discussed in
relation to gender difference in business management,
though insufficient study requires more research in this
arena.
This research also points out that the causes of
business failure differ by business sector so much that
"inaccurate evaluation of the project" is more severe for
businesses in agriculture in comparison to manufacturing.
On the other hand, "lack of interest and dissatisfaction in
work or at the work place" is more important for
manufacturing businesses in comparison to businesses
in the service sector.
CONCLUSION
Most entrepreneurship studies have been conducted in
western countries and focused on successful ventures.
As indicated in several studies, a deep understanding of
new venture failures in a different context would provide
critical information for individual entrepreneurs, venture
financiers, and government policymakers. This first study
on the causes of business failure in Iranian context
focused on the influence of several internal as well as
external factors by using a hard approach to obtain
feedback from entrepreneurs who have experienced
business failure.
Contrary to the belief that failed entrepreneurs will
attribute their failure to external factors, the respondents
in this research ranked their management deficiency as
the main cause of business failure and it may be due to
their high internal locus of control. While the external
factors such as lack of financial support, inadequate
economic sphere and insufficient government policies
were also mentioned as the main causes of business
failure. These results could help policymakers to identify
the problematic areas of entrepreneurship and indicate
need for a support system in financial management,
competition and growth strategies, and most importantly
entrepreneurial skills training programs.
This study is one of the limited studies of business
7496 Afr. J. Bus. Manage.
Table 5. Difference in the causes of business failure by business sector.
Causes of business failure Business sector Mean Mean difference F Sig
Lack of financial support from banks and
financial institutions
Manufacturing 3.75 1.19
2.786 0.072 Service 2.96 1.57
Agriculture 2.33 0.58
Inaccurate evaluation of project
Manufacturing 2.29 1.23
3.886 0.027 Services 2.42 1.21
Agriculture 4.33 0.58
Unclear determination of business sector
Manufacturing 2.38 1.31
0.156 0.856 Services 2.17 1.27
Agriculture 2.33 1.53
Inconsideration of market issues
Manufacturing 3.13 1.62
0.601 0.552 Services 2.79 1.18
Agriculture 2.33 1.53
Problems in product or service supply
Manufacturing 2.63 1.50
0.380 0.686 Services 2.75 1.36
Agriculture 2.00 1.00
Lack of related experience, expertise and
good work relationships
Manufacturing 2.83 1.61
1.852 0.168 Services 2.08 1.14
Agriculture 2.00 1.73
Management deficiency
Manufacturing 3.46 1.25
0.213 0.809 Services 3.21 1.38
Agriculture 3.33 1.53
Cheating and fraud
Manufacturing 2.00 1.47
0.435 0.650 Services 1.75 1.26
Agriculture 1.33 0.58
Substituted product or service
Manufacturing 2.46 1.61
1.165 0.321 Services 2.00 1.29
Agriculture 1.33 0.58
Insufficient government policies
Manufacturing 2.79 1.64
0.490 0.616 Services 3.17 1.13
Agriculture 3.33 2.08
Inconsideration of legal issues
Manufacturing 1.79 1.06
0.430 0.653 Services 2.08 1.32
Agriculture 1.67 1.15
Inadequate economic sphere
Manufacturing 2.88 1.62
1.302 0.281 Services 3.54 1.28
Agriculture 3.67 2.31
Problems of partnership and team work
Manufacturing 2.25 1.51
0.648 0.528 Services 2.42 1.56
Agriculture 3.33 2.08
Arasti 7497
Table 5 Contd.
Lack of interest and dissatisfaction in work
or at the work place
Manufacturing 2.17 1.24
3.538 0.037 Services 3.13 1.26
Agriculture 2.33 1.53
Negative influences by the family
Manufacturing 3.75 1.19
1.872 0.165 Services 2.96 1.57
Agriculture 2.33 0.58
Table 6. Influence of business sector on the causes of business failure.
Causes of business failure Business sector Business sector Mean difference
Inaccurate evaluation of project
Manufacturing
Service -0.13
Agriculture -2.04*
Services
Manufacturing 0.13
Agriculture -1.92
Agriculture
Manufacturing 2.04*
Service 1.92
Lack of interest and dissatisfaction in work
or at the work place
Manufacturing
Service -.958*
Agriculture -0.17
Services
Manufacturing 0.958*
Agriculture 0.79
Agriculture
Manufacturing 0.17
Service -0.79
failure in different context of a developing country and
could be an introduction to future studies. In this study,
we used an unlimited sample to study more cases of
failed businesses. Future studies on a large and homo-
genous sample can lead to a better result.
We examined the entrepreneurial characteristics of
failed business-owners/managers and found a low or
moderate level in most of these characteristics. Other
studies could investigate on the impact of failed business
owner/ manager's characteristics in business failure.
This study indicated the influence of gender on the
causes of business failure. More investigation on a
sample of unsuccessful women business owners/
managers is needed to better understand the phenol-
menon of business failure in this particular population.
The difference in the causes of business failure by
business sector asks for more investigation on each
business sector. In addition, future researches could
study the causes of business failure in different phases of
establishment or growth.
Future research can study the influence of push and
pull factors that motivate people to start a business to
know whether those different motivations at start-up
influence business failure. The inter-country study on
business failure and post-failure process is also an
interesting area of research.
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Owner-Managers who have closed their Businesses. J. Small Bus.
Enterp. Dev., 9(1): 17-27.
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doc_454450294.pdf
Business discontinuation is an important feature of dynamic economies, and entries and exits of businesses are closely connected.
African Journal of Business Management Vol. 5(17), pp. 7488-7498, 4 September, 2011
Available online at http://www.academicjournals.org/AJBM
DOI: 10.5897/AJBM11.402
ISSN 1993-8233 ©2011 Academic Journals
Full Length Research Paper
An empirical study on the causes of business failure in
Iranian context
Zahra Arasti
Faculty of Entrepreneurship, University of Tehran, Tehran, Iran. Email: [email protected]. Tel: +98-2161119227.
Accepted 3 August, 2011
Business discontinuation is an important feature of dynamic economies, and entries and exits of
businesses are closely connected. A majority of entrepreneurship literature have focused on
successful ventures, therefore, little is known about why ventures fail. Previous studies showed
significant inter-country differences in SME failure rates, while most researches on business failure
have been conducted in developed countries, and there is limited knowledge on the causes of business
failure in other countries with different economical, political, social, and cultural conditions. As
entrepreneurship is a newly developed phenomenon in Iran, considering the economical, social, and
cultural conditions of the country, analysis of the entrepreneurship process, and the causes of failure
and success, would provide critical information for individual entrepreneurs, venture financiers, and
government policy-makers. The purpose of the present study is to identify the main causes of business
failure based on an empirical study in Iran. This empirical study on the sample of failed business-
owners/managers pointed out that the main causes of business failure are due to lack of good
management, no support from banks and financial institutions, inadequate economic sphere, and
insufficient governmental policies. In addition, this study indicates differences in some causes of
business failure influenced by gender and business sector.
Key words: Entrepreneurship, business, causes of business failure, Iran.
INTRODUCTION
New firms create new jobs, open up opportunities for
upward social mobility, foster economic flexibility, and
contribute to competition and economic efficiency (Liao et
al., 2009). Although the failure of an individual SME will
never attract the media’s attention; the consequences of
the failure of smaller companies are certainly a serious
matter for directly involved stakeholders (FEE, 2004).
Business discontinuation is an important feature of
dynamic economies, and entries and exits of businesses
are closely linked (Bosma et al., 2009). It is impossible to
talk wisely about a theory of entrepreneurship without first
acknowledging the pivotal role of entrepreneurial failure.
Most entrepreneurship literature focuses on successful
ventures. As a result, little is known about why ventures
fail. Even less is known about how they fail. Our under-
standing of entrepreneurship will never be completed
until we have a clear understanding of what causes dis-
continuation. Developing a deeper understanding of new
venture failures should provide critical information for
several key stakeholders in a new venture - individual
entrepreneurs, venture financiers, and government
policymakers (Liao et al., 2009).
There is a limited but growing body of knowledge on
the topic of failure, on which researchers can base their
investigations, especially in the small business domain.
The research articles are, however, scattered across
business, management, financial, psychology, entrepre-
neurial and many other journals, and no proof could be
found that these investigations have ever been
comprehensively reviewed. There is no specific body of
science to which failure exclusively belongs (Pretorius,
2009).
The health of a firm in a highly competitive business
environment is dependent upon its capability of achieving
profit and financial solvency.
When a firm loses competence to maintain profit and
financial solvency, it becomes unhealthy, or deteriorates
to the point where it is in danger of suffering business
failure. Business failure is not only common with new
start-ups, but also with listed companies, and can easily
happen to firms of any and all sizes (Wu, 2010).
The annual report of Global Entrepreneurship Monitor
(Bosma et al., 2009) shows that there is significant inter-
country differences in SME failure rates. Discontinuance
rates are relatively high in factor-driven economies (in
Uganda for example, the reported rate is as much as
24%) and relatively low in innovation-driven economies.
Failure rates are somewhat higher in efficiency-driven
countries as a proportion of discontinuation, reflecting the
increasing importance of scale and efficiency in business
in these countries. Failure rates, both in absolute terms
and in proportion to all discontinuations, are lowest in
innovation-driven economies, because entrepreneurs
have better skills and environments are more favorable.
In Iran, the business discontinuation rate (6%) is almost
higher than average of efficiency-driven economies
(4.9%). Denmark and Italy in innovation-driven econo-
mies have the lowest business discontinuation rate
(1.1%) (Bosma et al., 2009).
On the other hand, most of the researches in business
failure have been conducted in developed countries, and
there is limited knowledge on the causes of business
failure in other countries with economical, political, social,
and cultural differences. In order to know more about the
business environment of Iran, we address the annual
report of World Bank in 2011.Doing Business 2011 is an
annual report investigating the regulations that enhance
business activity and those that constrain it. Doing
Business presents quantitative indicators on business
regulations and the protection of property rights that can
be compared across 183 economies over time. Regu-
lations affecting 11 areas of the life of a business are
covered: starting a business, dealing with construction
permits, registering property, obtaining credit, protecting
investors, paying taxes, trading across borders, enforcing
contracts, closing a business, getting electricity and
employing workers. Iran with 72.9 million population and
GNI per capita (US$ 4.530), is 129 from 183 countries in
the ranking on the ease of doing business.
The ranking of starting a business in Iran is 42 while in
obtaining credit is 89. We must mention that the Islamic
Republic of Iran eased business start-up in 2011 by
installing a web portal allowing entrepreneurs to search
for and reserve a unique company name, the establish-
ment of a new private credit bureau improved access to
credit information. The Islamic Republic of Iran made
enforcing contracts easier and faster by introducing
electronic filing of some documents, text message
notification and an electronic case management system
(World Bank, 2011).
These data show that the business environment in Iran
is not encouraging for entrepreneurs and makes a lot of
barriers to them. Therefore, a study on business failure
and the factors that cause failure in Iranian context could
help policy makers to identify the most important chal-
lenges of business that lead to business discontinuance.
This paper aims to discuss the causes of business
Arasti 7489
failure in a different context of a developing country.
LITERATURE REVIEW
It has been widely recognized that business growth and
survival depend both on external and internal factors.
While most of the challenges which a business will face
may be foreseeable, some will be completely unpredict-
able. However, if a business is to succeed, management
must be mindful to all matters which are likely to have a
material impact on its viability, and must then demon-
strate skills both in exploiting opportunities and mitigating
threats (FEE, 2004). There is a vast literature review on
business failure, mostly on the prediction of failure by
using financial models, but in this paper, we focus on the
causes of business failure.
Definition
The Oxford English Dictionary defines the term “failure”
as “to become deficient, to be inadequate”. In general,
many different terminologies are related to business
failure, such as firm closures, entrepreneurial exit,
dissolution, discontinuance, insolvency, organizational
mortality and bankruptcy. Normally, entrepreneurial
failure is referred to as the cease of an operation for
financial reasons. Since we examined nascent entre-
preneurs during the firm’s gestation process, one type of
entrepreneurial failure is the discontinuance of venturing
efforts by entrepreneurs (Liao et al., 2009), but business
failure can be defined as wanting or needing to sell or
liquidate, to avoid losses or to pay off creditors, or the
general inability to make a profitable go of the business
(Gaskill et al., 1993).
Pretorius, at the end of his review of business failure
definition, proposed a universal definition for the failure
phenomenon - a venture fails when it involuntarily
becomes unable to attract new debt or equity funding to
reverse decline; consequently, it cannot continue to
operate under the current ownership and management.
Failure is the endpoint at discontinuance (bankruptcy)
and when it is reached, operations cease and judicial
proceedings take effect (Pretorius, 2009).
There are problems relating to the use of various terms
involved in research in business failure. In particular,
definitions of business “disappearance”, “closure”, “exit”,
and “failure” are confused and often overlapping. “Dis-
appearance” of a business may occur because the
business failed, or because the business was acquired by
or merged into another company, or because the owners
voluntarily closed it (Cardozo and Borchert, 2004).
“Closure” can be categorized as the inability of a
business to survive and thus represents a discontinuation
of a business. “Exit” refers to several different meanings;
it can refer to the exit of a business from trading in a
7490 Afr. J. Bus. Manage.
specific market or from producing a particular product. It
also refers to the end of the owner’s participation in the
business, as in the search for “exit routes” by entrepre-
neurs wishing to sell or exit from a business (Stokes and
Blackburn, 2002). “Failure” is generally regarded as the
discontinuance of the business due to the lack of
adequate financial resources (Everet and Watson, 1998),
cessation of operations with loss to creditors (Cardozo
and Borchert, 2004), cessation of operations, and exit
from business population because it is no longer a viable
concern (Bickerdyke et al., 2000).
Causes of business failure
The causes of business failure are many and varied, and
may stem both from the external environment as well as
from factors internal to the business. Internal causes of
business failure may in many cases be capable of being
foreseen in advance, while on the other hand some
external causes are not so predictable. In most cases, a
complex mixture of causes contribute to business failure;
it is very rare for one single factor to be involved (FEE,
2004).
Earliest empirical studies on business failure examined
the role of various owners and firm characteristics to
explain business failures. The numerous characteristics
shared by failed firms, are directly related to personal
decision-based characteristics of the owner (lack of
insight, inflexibility, emphasis on technical skills, etc.),
managerial deficiencies (lack of management skills and
appropriate managerial training, etc.) and financial short-
comings (no accounting background, cash flow analysis,
financial records, etc.). Many aspects of poor manage-
ment are reported to be connected to several related
issues, such as poor financial circumstances, inadequate
accounting records, limited access to necessary
information, and lack of good managerial advice (Gaskill
et al., 1993). Some studies focused more on the mana-
gerial causes of failure and listed some 25 causes and
categorized them simply as poor management, and
concluded that poor management combined with the
personality traits of the owner-manager, and external
factors cause business failure (Berryman, 1983). A
business failure may happen as a result of poor manage-
ment skills, insufficient marketing, and lack of ability to
compete with other similar businesses. It can also be the
result of a domino effect caused by business failures of
suppliers or customers (Wu, 2010).
In the annual report of GEM, financial problems were
cited as the reason for quitting the business by no more
than 55% of all respondents; it was cited more often by
respondents in the factor- and efficiency-driven econo-
mies (just over 50%) than innovation-driven countries
(just over 40%) (Bosman et al., 2009).
The effect of the environment depends upon the time
period, geographic area, and market sector in which the
firm operates (Burns, 2001). Government and
government-related policies is also an important factor
affecting business failures, and is discussed in some
studies. The scholars found that failure rates increased
due to the heavy burden of taxation and regulation, while
the growth in money supply (higher growth decreased the
failure rate) and the volume of bank lending (higher
volume of bank lending reduced the rate of business
failures) are significant factors (Gaskill et al., 1993;
Burns, 2001; Oparanma et al., 2010). They discussed the
negative internal and external environmental factors
including pressure from competitors or new entrants,
poor improvement in modern technology and poor sales,
the outbreak of pests, and farm diseases etc (Oparanma
et al. 2010).
A conceptual failure model was presented by Ooghe
and Waeyaert in 2004 expounding the causes of failure
and mutual relations between the general and immediate
environment of the company as external causes, and the
company’s management and policy as internal causes of
failure (Ooghe and De Prijcker, 2008). In this model, the
causes of failure can be grouped into five interactive
aspects. These include general environment (economics,
technology, foreign countries, politics, and social factors),
immediate environment (customers, suppliers, compe-
titors, banks and credit institutions, stockholders, and
misadventure), management/entrepreneur characteristics
(motivation, qualities, skills, and personal characteristics),
corporate policy (strategy and investments, commercial,
operational, personnel, finance and administration, corpo-
rate governance), and company characteristics (size,
maturity, industry, and flexibility) (Ooghe and Waeyaert,
2004). Liao (2004) also mentioned the effects of four
groups of factors-individual characteristics of the founder,
resources, structural characteristics and strategies of the
firm, and environmental conditions in which a firm
operates on business failure.
The European Federation of Accountants has identified
the following internal and external causes of business
failure. Accordingly, internal causes include poor
management, deficit in accounting, poor cash flow
management, inappropriate sources of finance, depen-
dency on customers or suppliers, impending bad debt,
fraud/collusion and external causes of business failure
are economy, catastrophic unpredictable events,
governmental measures and international developments,
environmental protection and other regulatory require-
ments, and the bankruptcy of main customer or supplier
(FEE, 2004).
Inter-country difference
Some inter-country studies show that there are significant
inter-country differences in SME failure rates and causes
of business failure. In their inter-country study of business
failure in Malaysia and Australia, Ahmad and Seet (2009)
found that some reasons for business failure were given
more emphasis in one country than the other. Australian
participants attributed their failure to reasons such as the
inability to manage a large number of employees, the
inability to manage the fast growing firm, and the inability
to administer a large firm. This may perhaps provide an
insight into why the participants preferred to stay small in
business. Malaysian participants, by contrast, highlighted
softer issues such as the lack of personal contacts and
the failure to maintain close personal relationships with
customers, providing evidence of the importance of
maintaining good personal relationships with others.
According to the annual report of GEM, evidence show
that business discontinuance rates are relatively high in
factor-driven economies (in Angola, for example, the
reported rate is as much as 23%) and relatively low in
innovation-driven economies. Among high-income
countries, Norway, United States of America, Republic of
Korea, Iceland and Ireland have the highest rates of
business discontinuation. The business not being
profitable on its own was the most reported financial pro-
blem. Problems with raising finances were considerably
lower in innovation-driven countries where the “Entrepre-
neurial Framework Condition” and “Entrepreneurial
Finance” are generally more developed. “The opportunity
to sell” and in particular “retirement” were mentioned
more often in innovation-driven countries as the most
important reason to discontinue the business. Personal
reasons caused around 20 to 25% of all discontinuations.
Such reasons could include sickness, family, death of a
business partner, divorce, the need to finance an event
such as a wedding, through sale of business assets
rather than the business itself, or simply boredom.
They were more prevalent in factor- and efficiency-
driven countries (Bosma et al., 2009).
Research questions
As indicated in the literature, several factors cause
business failure; some of them are internal and could be
controlled by the entrepreneur, while others are external
and rather unpredictable. There are factors on which
more emphasis has been given in prior studies. Prior
studies focused only on some internal or external factors
without a general view. This is an investigation on
different internal and external causes of business failure
in a developing country with different socio-cultural,
economical, and political context. The following are the
research questions:
1. What are the characteristics of failed business
owners/managers and their businesses?
2. What are the personality characteristics of failed
business owners/managers?
3. What are the main causes of business failure in Iranian
context?
4. How does gender of a business owner/manager
influence the causes of business failure?
Arasti 7491
5. How does the business sector influence the causes of
business failure?
METHODOLOGY
Some researchers have expressed difficulty in studying failed ven-
tures (Liao, 2004; Bruno et al., 1987). They argue that it is difficult
to locate ventures that failed because of poor performance, and
homogenous samples are hard to find. Entrepreneurs are reticent
about failure and they are more likely to attribute failure to external
causes than to internal ones. As it is extremely difficult to obtain
feedback from entrepreneurs who have experienced business
failure, this approach is hardly utilized by researchers. In this
research, we used this approach to obtain the point of view of failed
business-owners/managers concerning causes of business failure.
This survey is implemented based on a face-to-face question-
naire. In the first part, the failed business-owners/managers were
questioned about their background, experience, education, and
family. Then a personal characteristic test examined six entrepre-
neurial characteristics including tolerance of ambiguity, need for
achievement, risk taking, creativity, locus of control, and indepen-
dence. The questionnaire on the personal characteristics was
obtained from the Entrepreneurship Development Institute of India
and had been used many times in Iranian context (Ahmadpour and
Moghimi, 2006). The participants finally reported on their causes of
business failure. The questionnaire on causes of business failure
was obtained from a previous study on the causes of business fai-
lure in Iranian context (Gholami, 2008) in which both authors were
involved. This questionnaire was developed based on a literature
review and interview with 13 Iranian entrepreneurs whose
businesses had failed. The validity of the questionnaire was
significantly revised by 7 experts in entrepreneurship. Reliability or
internal consistency of the items within the structure of this study
was assessed by indication of Cronbach’s alpha. Each item in the
questionnaire was accompanied by a Likert-type scale, allowing
perceived indication of the extent to which the item contributed to
the business failure. The Likert-type scale ranged from 1 (to very
little extent) to 5 (to great extent). Responses to this measure were
based on perceptions of ex-business owners/managers.
Sample
Sample group is the business owner/manager who has
experienced business failure and stops his/her business activities
voluntary or involuntary. One of the greatest barriers to study about
business failure is to identify ex-owners/managers who failed in
their business. In this study, we developed our own sampling frame
that sought to be as representative as possible of the range of
business failure and exit types, rather than relying on one source,
such as official receivers’ data that reflects only a limited number of
types of closure. This was derived with the help of entrepreneurship
masters students in our faculty who are dispersed all over the
country. We did not put the limitation in the business sector, failure
phase and geographical location of business, to study more cases
of failed businesses. In total, a database of 150 ex-owners/
managers was created. The questionnaire was sent to a random
sample of 80 ex-owners/managers. 51 complete and valid question-
naires were obtained and analyzed using SPSS software.
Variables
The research variables are classified in three categories:
i. Characteristics of failed business-owner/ manager (age in start
7492 Afr. J. Bus. Manage.
up, age in failure’s time, gender, level of education, marital status,
previous experience in the sector, previous entrepreneurial
experience, and personal characteristics, tolerance of ambiguity,
need for achievement, risk taking, creativity, internal locus of control
and independence);
ii. Characteristics of failed businesses (business sector, business
age, business life cycle);
iii. Causes of business failures (lack of financial support from banks
and financial institutions, inaccurate evaluation of project, unclear
determination of business sector, inconsideration of market issues,
problems in product or service supply, lack of related experience,
expertise and good work relationships, management deficiency,
cheating and fraud, substituted products or services, government
policies, inconsideration of legal issues, inadequate financial
circumstances, problems of partnership and teamwork, lack of
interest and dissatisfaction in work or at the work place, and
negative influences by the family).
Validity and reliability
Content validity of the questionnaire on the causes of business
failure was estimated by submitting the questionnaire to several
experts in entrepreneurship, all of whom approved the content of
the questionnaire. To test the reliability, the internal consistency of
the questionnaire was assessed by Cronbach's alpha coefficient
that was 0.81 for the questionnaire on the causes of business
failure, and alpha equal to or greater than 0.70 was considered
satisfactory.
RESULTS
Results of this research contain four sub-sections: first, a
description of sample, then, the results of Friedman’s test
on causes of business failure, and finally, the role of gen-
der and business sectors on the causes of business
failure were further presented.
Sample description
Most of the failed business owners/managers were aged
between 25 and 45 years old (Mean = 32.9, SD = 6.43).
84.3% of them were men. They were well educated and
most of them were married. 64.4% had experience in the
related sector and 35.3% were experienced in business.
The number of businesses in the manufacturing and
services sector were equal (47%), while 6% were in the
agriculture sector. 76.1% of businesses failed within three
years and 55.1% failed in the phase of establishment
(Table 1).
Personal characteristics of failed business
owners/managers
The results of the chi-square test on personal charac-
teristics of failed business owners/managers show
significant difference in the level of some personal
characteristics. This difference is significant for "tolerance
of ambiguity", "need for achievement", "creativity", and
"internal locus of control". These results point out that
failed business owners/managers have low level of
tolerance of ambiguity, while they have high level of
creativity and internal locus of control and moderate level
of need for achievement (Table 2).
Main causes of business failure
Given the fact that our data regarding the causes of
business failure is in the Likert scale, we used non-para-
metric Friedman analysis of variances to identify the main
causes of business failure. The results show significant
variable differences in mean rank (2, N = 51) = 105.180,
p<0.001).
Table 3 illustrates the main causes of business failure.
These results point out that management deficiency is
the first cause of business failure, although failed
business owners/managers prioritize other factors like
financial support, inadequate economic sphere and
insufficient government policies as the main causes of
business failure. They also mentioned other internal and
external factors that cause business failure.
Gender and causes of business failure
In this study, we are interested in knowing how gender
influences the causes of business failure. For this reason,
we used t-test in which grouping variable is gender of
failed business owner/manager. The result in Table 4
indicates that gender difference in the causes of business
failure is significant for two of the business failures, which
are “lack of financial support from banks and financial
institutions” and “problem of partnership and team work".
These results point out that the mean of "lack of financial
support from banks and financial institutions" is higher for
women and the mean of "problem of partnership and
team work" is higher for men.
Business sector and causes of business failure
The other question of this study was to know how the
business sector could influence causes of business
failure. In this regard, we used the ANOVA analysis. The
results are presented in Table 5.
These results point out that the difference in mean is
significant for two of business failure causes which are
"inaccurate evaluation of project" and "lack of interest and
dissatisfaction in work or at the work place".
Table 6 indicates that the mean of “inaccurate evalua-
tion of project” is higher for agriculture business in
comparison to the manufacturing sector. Although the
mean of “lack of interest and dissatisfaction in work or at
the work place” is lower for the manufacturing business in
comparison to the service sector.
DISCUSSION
This study is the first study on the causes of business
Arasti 7493
Table 1. Descriptive statistics of Iranian failed business owners/managers (n = 51).
Variable Percentage
Characteristics of failed business-owner manager
Age in failure time
Under 25 years old 9.8
Between 25 and 45 years old 84.3
More than 45 years old 5.9
Gender
male 84.3
female 15.7
Level of education
Diploma and under diploma 27.5
B.Sc. 51
M.Sc. 17.6
Ph.D. 3.9
Marital status Married 81.6
Previous experience in related sector 64.4
Previous entrepreneurial experience 35.3
Characteristics of failed business
Business sector
Manufacturing 47
Service 47
Agriculture 6
Business age
Under 3 years 76.1
Between 3 and 5 years 10.9
More than 5 years 13
Business life cycle
Establishment 55.1
Growth 44.9
Table 2. Personal characteristics of failed business owners/managers.
Personal characteristics High Moderate Low Chi-square Sig
Tolerance of ambiguity 15 8 27 11.08 0.004
Need for achievement 15 26 9 8.92 0.012
Risk taking 16 18 16 0.16 0.923
Creativity 28 7 15 13.48 0.001
Internal locus of control 40 5 5 49 0
Independence 15 13 22 2.68 0.262
failure in Iranian context. Findings show that most failed
business owners/managers are in the middle age and
failed in the phase of establishment. Most of their
businesses do not survive more than three years. The
results on their personal characteristics show the signifi-
cant difference in the level of some personal
characteristics.
The results of this research indicate that four main
causes of business failure in Iranian context are
management deficiency, lack of financial support from
banks and financial institutions, inadequate economic
sphere and insufficient government policies. These
results show the effect of external factors on the success
and failure of businesses in Iranian context. In other
words, the entrepreneurship environment in Iran is not
encouraging. The World Bank report on doing business
confirms this result. Despite of efforts that the Islamic
Republic of Iran makes to ease business start-up, Iran is
7494 Afr. J. Bus. Manage.
Table 3. Main causes of business failure.
Causes of business failure Mean Mean rank
management deficiency 3.33 10.59
lack of financial support from banks and financial institutions 3.29 10.09
inadequate economic sphere 3.24 10.09
insufficient government policies 3.00 9.48
inconsideration of market issues 2.92 9.18
problems in product or service supply 2.65 8.45
lack of interest and dissatisfaction in work or at the work place 2.63 8.21
inaccurate evaluation of project 2.47 7.72
lack of related experience, expertise and good work relationships 2.43 7.43
problems of partnership and team work 2.39 7.19
unclear determination of business sector 2.27 7.16
substituted product/service 2.18 6.53
negative influences by the family 2.00 6.42
inconsideration of legal issues 1.92 5.91
cheating and fraud 1.84 5.57
Table 4. Difference in the causes of business failure by gender.
Causes of business failure Gender Mean Mean difference t Sig
Lack of financial support from banks and
financial institutions
M 3.09 1.41108
-2.464 0.017
F 4.37 0.91613
Inaccurate evaluation of project
M 2.44 1.25930
-0.371 0.712
F 2.62 1.40789
Unclear determination of business sector
M 2.25 1.31100
-0.239 0.812
F 2.37 1.18773
Inconsideration of market issues
M 2.93 1.40400
0.101 0.920
F 2.87 1.55265
Problems in product or service supply
M 2.74 1.43250
1.155 0.254
F 2.12 1.12599
Lack of related experience, expertise and
good work relationships
M 2.56 1.41929
1.483 0.144
F 1.75 1.38873
Management deficiency
M 3.39 1.29357
0.783 0.437
F 3.00 1.41421
Cheating and fraud
M 1.93 1.36966
1.084 0.284
F 1.37 1.06066
Substituted product or service
M 2.30 1.48861
1.465 0.149
F 1.50 0.92582
Insufficient government policies
M 3.05 1.46309
0.535 0.595
F 1.37 1.28174
Arasti 7495
Table 4 Contd.
Inconsideration of legal issues
M 2.00 1.19523
1.102 0.276
F 1.50 1.06904
Inadequate economic sphere
M 3.25 1.51332
0.222 0.825
F 3.12 1.64208
Problems of partnership and team work
M 2.60 1.59074
4.629 0.000
F 1.25 .46291
Lack of interest and dissatisfaction in work
or work place
M 2.60 1.31184
-0.282 0.779
F 2.75 1.48805
Negative influences by the family
M 2.07 1.20308
0.936 0.354
F 1.62 1.40789
129 from 183 countries in the ranking on the ease of
doing business. The ranking of starting a business in Iran
is 42 while in getting credit is 89 (World Bank, 2011).
Other studies on the causes of business failure mention
some internal and external factors that cause business
failure. The results of this study confirm some prior
researchers, concerning management deficiency
(Berryman, 1983; Gaskill et al., 1993; FEE, 2004; Ooghe
and De Prijcker, 2008; Pretorius, 2009; Wu, 2010), lack
of financial resources (Gaskill et al., 1993; Everet and
Watson, 1998; Ooghe and De Prijcker, 2008; Bosma et
al., 2009; Liao et al., 2009; Wu, 2010), inadequate
economic sphere (Berryman, 1983; Burns, 2001; Liao,
2004; Ooghe and De Prijcker, 2008), and government
policies (FEE, 2004; Oparanma et al., 2010), while the
current study indicates other causes of business failure
that marginally developed in prior studies like
inconsideration of market issues, problems in product or
service supply, lack of interest and dissatisfaction in work
or at the work place, inaccurate evaluation of a project,
lack of related experience, expertise and good work
relationships, problems of partnership and team work,
unclear determination of the business sector, substituted
products or services, negative influences by the family,
inconsideration of legal issues, and cheating or fraud.
Concerning the gender of business owners/managers,
findings of this study point out the difference on the
causes of business failure by gender, though "lack of
financial support from banks and financial institutions"
influence women more than men, while men are more
susceptible to "problems in partnerships and team work".
The studies on women's entrepreneurship show that
access to financial resources is the most important
challenge of women entrepreneurs, so it is no surprise
when this factor influences more women than men. About
the problem of partnership, results could be discussed in
relation to gender difference in business management,
though insufficient study requires more research in this
arena.
This research also points out that the causes of
business failure differ by business sector so much that
"inaccurate evaluation of the project" is more severe for
businesses in agriculture in comparison to manufacturing.
On the other hand, "lack of interest and dissatisfaction in
work or at the work place" is more important for
manufacturing businesses in comparison to businesses
in the service sector.
CONCLUSION
Most entrepreneurship studies have been conducted in
western countries and focused on successful ventures.
As indicated in several studies, a deep understanding of
new venture failures in a different context would provide
critical information for individual entrepreneurs, venture
financiers, and government policymakers. This first study
on the causes of business failure in Iranian context
focused on the influence of several internal as well as
external factors by using a hard approach to obtain
feedback from entrepreneurs who have experienced
business failure.
Contrary to the belief that failed entrepreneurs will
attribute their failure to external factors, the respondents
in this research ranked their management deficiency as
the main cause of business failure and it may be due to
their high internal locus of control. While the external
factors such as lack of financial support, inadequate
economic sphere and insufficient government policies
were also mentioned as the main causes of business
failure. These results could help policymakers to identify
the problematic areas of entrepreneurship and indicate
need for a support system in financial management,
competition and growth strategies, and most importantly
entrepreneurial skills training programs.
This study is one of the limited studies of business
7496 Afr. J. Bus. Manage.
Table 5. Difference in the causes of business failure by business sector.
Causes of business failure Business sector Mean Mean difference F Sig
Lack of financial support from banks and
financial institutions
Manufacturing 3.75 1.19
2.786 0.072 Service 2.96 1.57
Agriculture 2.33 0.58
Inaccurate evaluation of project
Manufacturing 2.29 1.23
3.886 0.027 Services 2.42 1.21
Agriculture 4.33 0.58
Unclear determination of business sector
Manufacturing 2.38 1.31
0.156 0.856 Services 2.17 1.27
Agriculture 2.33 1.53
Inconsideration of market issues
Manufacturing 3.13 1.62
0.601 0.552 Services 2.79 1.18
Agriculture 2.33 1.53
Problems in product or service supply
Manufacturing 2.63 1.50
0.380 0.686 Services 2.75 1.36
Agriculture 2.00 1.00
Lack of related experience, expertise and
good work relationships
Manufacturing 2.83 1.61
1.852 0.168 Services 2.08 1.14
Agriculture 2.00 1.73
Management deficiency
Manufacturing 3.46 1.25
0.213 0.809 Services 3.21 1.38
Agriculture 3.33 1.53
Cheating and fraud
Manufacturing 2.00 1.47
0.435 0.650 Services 1.75 1.26
Agriculture 1.33 0.58
Substituted product or service
Manufacturing 2.46 1.61
1.165 0.321 Services 2.00 1.29
Agriculture 1.33 0.58
Insufficient government policies
Manufacturing 2.79 1.64
0.490 0.616 Services 3.17 1.13
Agriculture 3.33 2.08
Inconsideration of legal issues
Manufacturing 1.79 1.06
0.430 0.653 Services 2.08 1.32
Agriculture 1.67 1.15
Inadequate economic sphere
Manufacturing 2.88 1.62
1.302 0.281 Services 3.54 1.28
Agriculture 3.67 2.31
Problems of partnership and team work
Manufacturing 2.25 1.51
0.648 0.528 Services 2.42 1.56
Agriculture 3.33 2.08
Arasti 7497
Table 5 Contd.
Lack of interest and dissatisfaction in work
or at the work place
Manufacturing 2.17 1.24
3.538 0.037 Services 3.13 1.26
Agriculture 2.33 1.53
Negative influences by the family
Manufacturing 3.75 1.19
1.872 0.165 Services 2.96 1.57
Agriculture 2.33 0.58
Table 6. Influence of business sector on the causes of business failure.
Causes of business failure Business sector Business sector Mean difference
Inaccurate evaluation of project
Manufacturing
Service -0.13
Agriculture -2.04*
Services
Manufacturing 0.13
Agriculture -1.92
Agriculture
Manufacturing 2.04*
Service 1.92
Lack of interest and dissatisfaction in work
or at the work place
Manufacturing
Service -.958*
Agriculture -0.17
Services
Manufacturing 0.958*
Agriculture 0.79
Agriculture
Manufacturing 0.17
Service -0.79
failure in different context of a developing country and
could be an introduction to future studies. In this study,
we used an unlimited sample to study more cases of
failed businesses. Future studies on a large and homo-
genous sample can lead to a better result.
We examined the entrepreneurial characteristics of
failed business-owners/managers and found a low or
moderate level in most of these characteristics. Other
studies could investigate on the impact of failed business
owner/ manager's characteristics in business failure.
This study indicated the influence of gender on the
causes of business failure. More investigation on a
sample of unsuccessful women business owners/
managers is needed to better understand the phenol-
menon of business failure in this particular population.
The difference in the causes of business failure by
business sector asks for more investigation on each
business sector. In addition, future researches could
study the causes of business failure in different phases of
establishment or growth.
Future research can study the influence of push and
pull factors that motivate people to start a business to
know whether those different motivations at start-up
influence business failure. The inter-country study on
business failure and post-failure process is also an
interesting area of research.
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