Characteristics of Business and Entrepreneurship in Papua New Guinea

Nature of Business Activities and Entrepreneurship in PNG

• Business Definition: A business is an organization or entity purposely established to make profits.
• Owner Income: Profits represent the income of the business owner.
• Economic Role: Beyond profits, businesses provide essential goods and services to consumers within the economy.
• PNG Economy: Papua New Guinea operates as a mixed economy. In this system, both the government and private organizations or individuals have the right to own and operate businesses.

Classification of Business

Businesses are classified based on two main criteria:

• Ownership: This refers to the type and structure of how the business is owned (e.g., by an individual, group, or corporate institution).
• Motive: This refers to the specific reason or purpose for which the business was established.

Types of Business Ownership

1. Sole Trade (Sole Proprietorship)

• Definition: A business owned, managed, and controlled by one individual. It is the simplest type of business to start.
• Characteristics:
  • Owned by one ($1$) person.
  • Management and all decision-making are handled by the owner.
  • The owner incurs all profits or losses.
  • Features unlimited liability (the owner is personally responsible for all debts).
  • Sometimes these businesses are not subject to taxation.
• Advantages:
  • Easy to form.
  • Can start with limited capital.
  • Allows for quick decision-making.
  • Protection of business secrets.
  • Flexibility in operations.
• Disadvantages:
  • Limited capital available for growth.
  • Requires heavy personal commitment.
  • Decisions are based solely on personal judgment.
  • Limited capacity for large-scale operations.
  • Unlimited liability puts personal assets at risk.

2. Partnership

• Definition: Legally defined by the Partnership Act as "any relationship that subsists between persons carrying on business in common with a view to a profit."
• Characteristics:
  • Owned and formed by more than two people, typically up to a maximum of $20$ partners.
  • Partners contribute capital and resources.
  • Profits and losses are shared among partners.
  • Partners generally have unlimited liability.
• Advantages:
  • Relatively easy to form.
  • Access to more capital than a sole trader.
  • Ability to utilize the diverse experience of partners.
  • Sharing of business risks.
• Disadvantages:
  • Capital remains limited compared to larger corporations.
  • Potential for conflict between members.
  • Unlimited liability for partners.
  • Difficulty in protecting business secrets due to multiple people involved.

3. Companies

• Definition: A business formed by shareholders who contribute capital (shares). Legally, it is an "artificial person" created by law with a separate legal entity and is an incorporated body.
• Characteristics:
  • Owned by many shareholders.
  • Features limited liability (shareholders are not personally responsible for debts).
  • The business has continuity; changes in shareholders do not affect its existence.
  • Profits are distributed as dividends based on the number of shares contributed.
  • It operates as an artificial person with legal rights.
• Advantages:
  • Continuity: Business continues regardless of the death or insolvency of shareholders.
  • Legal Entity: Being a separate entity means shareholders are not liable for legal implications caused by the company.
  • Limited Liability: Financial responsibility for debts is limited to the investment in shares.
  • Transferability: Shares can be transferred to others.
  • Efficient Management: Can hire experts to run the business separate from the owners.
• Disadvantages:
  • Complex Formation: Involves strict legal procedures and is harder to start than other types.
  • Strict Legal Control: Operations are tightly regulated by laws.
  • Lack of Flexibility: Changing the aims and objectives is difficult.
  • Lack of Personal Interest: Shareholders may not be as invested because the entity is separate from them.

4. Business Groups

• Context: A special business unit developed specifically for Papua New Guinea.
• Purpose: Encourages members of the same customary group to form their own business.
• Requirements: Formed by people of similar origin and interests; every group must have a constitution to guide activities.

5. Cooperative Societies

• Definition: An association of persons united to meet common economic, social, and cultural needs.
• Relevance to PNG: Suited to rural people with low income; allows individuals to pool funds for assets they could not afford alone.
• Benefits: Makes use of abundant resources (land and labor) to achieve growth. Enables ordinary community members to participate in business.
• Disadvantages: Often unable to attract large capital investments and do not appeal to large investors. They are highly controlled and supervised by government officials.

Privatization and Government Support

Privatization

• Definition: The process of transferring the ownership of public property or state-owned businesses to private parties.
• History in PNG: Policy work began in $1990$. Significant event included the sale of PNG Banking Corporation in $2001$. Many other state-owned enterprises are still undergoing this process.

Government Aids to Business

• Infrastructure: The government provides public utilities including roads, bridges, harbors, electricity, water, and communications. Funding is channeled through the national budget.
• Tax Exemptions: Temporary relief from paying tax (e.g., "tax holidays" for new businesses) to help reduce losses or increase profit for expansion.
• Protection of Industries: Used to protect new (infant) local industries through:
  • Quotas: Limits on the importation of certain goods produced locally.
  • Bans: Complete stoppage of imports for goods produced locally.
  • Tariffs: High import taxes on foreign goods to favor local production.
• Loan Guarantee Schemes: Provided through the National Development Bank (NDB), Pipol’s Micro Bank, and commercial banks. Features "soft loans" with low interest and long repayment periods.

Financial Institutions in PNG

Financial institutions assist individuals and businesses by providing, mobilizing, and lending finance, as well as offering investment advice.

Types of Financial Institutions

• Banking Institutions:
  • Commercial banks.
  • Finance companies.
  • Microfinance companies.
  • Savings & loans societies.
• Non-Banking Financial Institutions:
  • Investment and pension funds.
  • Insurance companies and brokers.
  • Stock brokers.
  • National Development Bank (NDB).

Commercial Banks

• Licensed Institutions: Maintain savings, cheque accounts, and lend money.
• Examples in PNG: Bank South Pacific (BSP), Kina Bank, Australian & New Zealand Banking Group (ANZ), and Westpac Bank.
• Services Offered:
  • Mobilizing savings.
  • Maintaining cheque accounts.
  • Lending money.
  • Foreign exchange operations.
  • Facilitating international trade.
  • Investing in securities.
  • Non-fiduciary services.

Methods of Entering Business

1. Starting a New Business from Scratch

• Definition: An entrepreneur begins with a new idea and manages everything from planning to operation. The business is in "start-up stage" until revenue covers all operating costs.
• Advantages: Complete control over policies, product choice, pricing, location, and recruitment. Ability to use personal creativity and passion.
• Disadvantages: High risk of failure due to uncertain demand. Costly and risky without a proven formula. Requires a detailed business plan for capital.

2. Taking Over a Family Business (Inheritance)

• The transcript identifies this as a known method of entry.

3. Buying an Existing Business

• Components: Purchase includes location, premises, equipment, stock, staff, and "goodwill" (reputation).
• Advantages: Thriving businesses have higher success rates. suitable locations and experienced staff are already secured. Provides immediate income.
• Risks: One may be "buying someone's mistake." Potential issues include poor past management, bad reputation (takes long to fix), or outdated equipment and stock.

Franchising

Definitions

• Franchising: The practice of giving permission to another business to sell a company's goods/services in another area.
• Franchise: A system where a larger, established business (franchiser) gives a smaller one (franchisee) the rights to its brand and products.
• Franchiser: The controlling business that grants license rights in exchange for a "franchisee fee" and sales commissions.
• Franchisee: The smaller company operating under the franchiser's brand.
• Brand: A name, term, or symbol that identifies a seller as distinct (e.g., Diana Tuna, Dolly, Besta, $777$).
• Trademark: A recognizable sign or design identifying the source of products (e.g., Trukai Rice logo).

Types of Franchise

• 1. Dealership or Distribution: Paying for the sole right to sell products in an area (e.g., Boroko Motors, Ela Motors, Puma Energy fuel stations).
• 2. Manufacturing Franchise: Buying a license to produce and sell a product using the franchiser’s patents and methods. Example: Papua New Guinea Coca Cola Amatil Pty Ltd (syrup mixed with water and CO2).
• 3. Retail Store Franchise: Independent stores stocking franchiser merchandise. Often have similar store fronts. Example: Courts (household items/furniture).
• 4. Service Franchise: Selling services according to a franchiser's system. Examples: Budget or Avis rent-a-car, Price Water House Coopers, and fast-food outlets like Big Rooster and Kenmaity Fried Chicken.

Franchise Standards and Manuals

• All outlets in a chain are standardized regarding products, methods, hours, and stock control.
• The Operational Manual covers recipes, portions, menus, food storage, and handling.
• Field Representatives visit franchises to ensure standards are maintained.

Advantages and Disadvantages of Franchising

• Pros (Franchiser): Low-cost entry into new markets; income from licenses.
• Pros (Franchisee): Benefit from established brand name and goodwill; easier than starting from scratch.
• Cons (Franchiser): Risk of brand reputation being ruined by incompetent franchisees.
• Cons (Franchisee): Must follow strict guidelines; high fixed license fees; agreements are often skewed in favor of the franchiser.

Business Sectors and Government Categories

Formal vs. Informal Sectors

• Formal Sector: Businesses following government requirements and legal recognition.
• Informal Sector: Activities outside government regulation.
  • Examples in PNG: Selling vegetables, ice-blocks, carvings, buai/daka, weaving baskets, and selling newspapers.
  • Characteristics: Unregulated, no permanent location, irregular hours, no permanent employees, potential for poor hygiene or illegal trading.

Government as Business

• The government regulates private business through departments and statutory bodies.
• Government Departments: Part of central government implementing decisions. Led by a Minister (political head) and Secretary (administrative head).
  • Example: Minister for Education Department (Hon. Jimmy Ugoro) and Secretary (Dr. Uke Kombra).
• Statutory Bodies: Organizations established under an Act of Parliament (e.g., Mineral Resource Authority, National Fisheries Authority).
• State-Owned Enterprises (SOE): The business arm of government that generates revenue. Examples: Air Niugini, PNG Power, Post PNG, Telikom, and PNG Ports.
• Joint Ventures: Contractual arrangements between the state and private business for specific functions (e.g., Porgera Joint Venture, Ramu Nickel/Cobalt Project).

Non-Profit Organizations (NPOs)

• Provide goods and services not for profit, often for free or low cost.
• Churches: Estimated to provide $50\%$ of education and health services in PNG.
• National NGOs: Ramu-Bismark Group, Ecotourism Association of PNG, Komora Foundation.
• International NGOs: International Red Cross, World Vision, Greenpeace, Save the Children, Transparency International.