Entrepreneurial success and failure

entrepreneurial key success factors and entrepreneurial success and failure reasons and remedies
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PatrickWood,United Kingdom,Researcher
Published Date:16-07-2017
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Creating the Environment for Entrepreneurial Success Center for International Private Enterprise 1155 15th Street, NW Suite 700 Washington, DC 20005 ph: (202) 721-9200 fax: (202) 721-9250 www.cipe.org Center for International Private Enterprise Creating the Environment for Entrepreneurial Success development accumulate, it is becoming clear Introduction that initiatives to finance, educate, and connect Kim Eric Bettcher entrepreneurs are outpacing improvements in the business environment. The majority of Senior Knowledge Manager, CIPE entrepreneurship programs struggle to incorporate the business environment pillar into the ecosystem. Entrepreneurship drives economic change This special report, Creating the Environment and innovation while at the same time expanding for Entrepreneurial Success, highlights the crucial opportunity and unleashing the initiative of environmental dimension of entrepreneurship citizens. Entrepreneurs are crucial to building ecosystems. Improving the conditions for prosperous societies that deliver opportunity to all. entrepreneurship and leveling the playing field goes In emerging economies around the world, interest in beyond the effort to help promising entrepreneurs. It entrepreneurship is currently higher than ever amid expands the pool of potential entrepreneurs, builds burgeoning youth populations and a desire to move incentives for entrepreneurship, eases the costs of up value chains. doing business, and generates healthy competition. Policy and regulatory reforms should be integrated Unfortunately, in many developing economies, obstacles in the business environment close off with comprehensive services to educate, finance, advise, and encourage entrepreneurs. entrepreneurial opportunities to huge swathes of the population. For example, a rural Kenyan An international group of experts contributed to entrepreneur must incur the cost of travel to Nairobi the report, reflecting experiences and lessons from to register a business. In Lebanon, 65 percent of developing countries and the United States. The small and medium-sized enterprises must pay a bribe 1 insights and examples shared by these thought leaders to conduct government procedures. Tunisian street will have practical applications, yet the broader vendors, most of whom cannot attain legal status, theme is to illuminate how these various components “live in constant fear of being evicted or harassed by 2 interact within the entrepreneurship ecosystem. local officials.” Even bankruptcy can be considered a crime in some places. Part one of the report gives an overview of why and how environments influence possibilities for These barriers add to the usual challenges entrepreneurial success. Hernando de Soto and Mary that entrepreneurs face with regard to capacity, Shirley explain how fundamental institutions such financing, and market access. To be sure, some as rule of law and property rights shape the context entrepreneurs prevail in spite of the obstacles. We for innovation and investment. Robert Litan argues should celebrate the successful cases that inspire that an entrepreneurial capitalist system provides future entrepreneurs. However, most would-be the drivers for disruptive innovation and long-run entrepreneurs face restricted options because they growth. The lessons in building entrepreneurship lack the connections, status, and resources enjoyed ecosystems are then spelled out by John D. Sullivan by established businesses and elite families. Women, and Anna Nadgrodkiewicz. youth, and non-elite individuals face higher hurdles to growing a business. The second part of the report delves into approaches for strengthening specific features of Experts, policymakers, and entrepreneurs ecosystems. Research by Leora Klapper and Douglas have now turned their attention toward building Randall demonstrates that reforms to the business entrepreneurship ecosystems. This attention reflects environment do have an impact on the creation a recognition of the need for multifaceted support of new firms – provided that they are of sufficient for entrepreneurial activity, as well as interactive scale. Drawing on the experience of the Global effects within communities that accelerate efforts Entrepreneurship Congress, Jonathan Ortmans of individual entrepreneurs. As lessons in ecosystem – 7 – Center for International Private Enterprise Creating the Environment for Entrepreneurial Success describes how growing awareness of entrepreneurship • Entrepreneurs fare best in a policy and has led to productive discussions on policies for regulatory environment that keeps barriers low, ecosystems. Daniel Cordova examines the potential rewards innovation, and protects private property. for financing entrepreneurs in informal as well as • Entrepreneurs themselves must take a formal sectors of the economy, while Lynda de la Viña leading role in building ecosystems, by creating shares current models for educating entrepreneurs. entrepreneurial communities and providing input Finally, John Murphy considers the implications of into policy. a global trading environment for entrepreneurship, • Policymakers should engage in open and Andrew Sherman sums up what this all means dialogue with entrepreneurs to find ecosystem for entrepreneurial growth decisions. solutions that are appropriate to local circumstances. Four case studies of actual ecosystems in • The different actors in an entrepreneurship developing economies round out the report. The ecosystem should cooperate and network with authors of the country studies combine their expert other stakeholders to make the most of their diagnosis of strengths and weaknesses in each respective strengths. ecosystem with their recommendations for reform • Educators and community leaders must based on their experience as practitioners. These foster a culture that supports entrepreneurial respective priorities and initiatives are outlined aspirations and celebrates success stories. by Ryan Evangelista (Philippines), Majdi Hassen • Diversity and access to opportunity (Tunisia), Majid Shabbir (Pakistan), and Robin should be promoted by empowering women, Sitoula (Nepal). youth, and informal business owners to pursue entrepreneurial ambitions. ♦ From the rich set of insights and perspectives featured in this report, several general lessons emerge about effective ways to improve environments for Endnotes entrepreneurship. While there is no single template 1 Reach International survey conducted for the Lebanese Trans- available, all stakeholders in entrepreneurship parency Association, June 2013. promotion can benefit from these lessons: 2 Hernando de Soto, Foreign Policy, 16 December 2011. – 8 – Center for International Private Enterprise Creating the Environment for Entrepreneurial Success I. Overview of Entrepreneurship Ecosystems Under what conditions can entrepreneurship thrive? Can entrepreneurs in developing countries innovate and generate wealth just as entrepreneurs in developed countries? What makes a healthy entrepreneurship ecosystem possible? The principles explained in Part One of the report are central to the emergence of scaleable, sustainable solutions to innovation and growth. In fact, an environment for entrepreneurial success requires more than the core ingredients of technology, infrastructure, and investment. It requires institutions that provide incentives and opportunities for entrepreneurs to create and take risks. These institutions evolve through dialogue, experimentation, and a combination of grassroots and high-level reform initiatives. – 9 – Center for International Private Enterprise Creating the Environment for Entrepreneurial Success seek it, but for the rich rewards it gives to the 1. Entrepreneurship and most successful. Economic Growth Entrepreneurial capitalism is the most effective Robert Litan driver of economic growth because it provides Director of Research, Bloomberg Government opportunities for new firms to innovate and create new markets. The advantage of new firms is their Economies grow through some combination of independence. Because founders of companies do greater inputs — more educated labor and additional not often have a vested interest in the status quo, capital — and through advances in technology. they are more likely to commercialize the disruptive Whether it is home grown or imported from abroad, innovation that is responsible for the lion’s share of technological advances are useful from an economic long-run growth. point of view only when they are commercialized, applied to make new products, make existing Other types of capitalism have different effects. products more efficiently, or deliver new services. Oligarchic capitalism, where resources and power in the economy are concentrated in the hands of a Both established and new firms commercialize few, tends not to maximize economic growth but these advances, but the historical record makes clear to maximize the welfare of the powerful. State- that new firms, without a vested interest in the status guided capitalist systems, which channel resources quo, are disproportionately responsible for disruptive to industries deemed most likely to be successful, or radical innovations while established firms tend can lead to rapid early growth, but are likely to stall to focus more on incremental advances. Examples as they approach the technological frontier. Big- of entrepreneurial advances in the United States firm capitalist systems benefit from economies of include the telegraph, the telephone, the computer, scale, resources for research and development, and the car, the airplane, much computer software, air capital to deploy, yet big firms hesitate to invest conditioning, and Internet search, to name some of in new products or services that can make their the most obvious. This list also, not coincidentally, current profit centers obsolete. We must be careful includes technologies that define modern life and to properly align incentives in a capitalist system in a power advances in growth and living standards. way that encourages entrepreneurial solutions. Entrepreneurs are also crucial in developing Conditions for encouraging entrepreneurship countries, where they either may be copying and and innovation importing advanced country ideas, or developing and commercializing their own “bottom of the pyramid” The basic ingredients for encouraging products and services tailored for the income levels entrepreneurship and innovation are easier to of their countries. state than to ensure: basic education for all and access to higher education, increasingly online, for Entrepreneurial economies provide opportunities many; a minimum acceptable legal and physical Entrepreneurial economies are those driven by infrastructure, and a culture that encourages entrepreneurial pursuits. There is a virtuous cycle individuals who choose entrepreneurship rather than accept a second-class career because they here: entrepreneurial success breeds more success, attracting individuals and capital to entrepreneurial can’t find a job. There is an element of culture that pursuits. is difficult to pin down, but in entrepreneurial economies, striking out on one’s own is seen as Entrepreneurial economies also require a not only an acceptable career path, but a desirable minimum of infrastructure, both physical and legal, one, not only for the control it gives to those who – 10 – Center for International Private Enterprise Creating the Environment for Entrepreneurial Success to be successful. It must be relatively easy to form proving to be essential. Even entrepreneurs in the a business legally, so legitimate businesses are most remote, poverty stricken areas of the world not forced underground. Property and contract can gain knowledge and access to markets, even rights must be secure, if not formally then at least the capital they need, if they have a connection informally. Likewise, there must be acceptable to the Internet. Increasingly, that access is mobile. means of resolving commercial disputes. Roughly half of the world’s population has a mobile phone and can use it to access the world. Laws protecting property and contracts and their effective enforcement are key, but it is not The foregoing conditions for effective necessarily the case that they be strictly formal entrepreneurship are universal, although there in the Western sense. China has proved that is room for differences across countries, taking entrepreneurship can flourish with effective account of unique histories, cultural conditions informal legal systems, although as economies grow and so forth. But entrepreneurial capitalism is richer, they can benefit from formalizing the legal flourishing throughout the globe in very different conditions enabling entrepreneurship. Also, it is countries, with different legal regimes: not just in key to be able to form a business, legally, easily, the United States, but in Eastern Europe, parts of quickly, and cheaply. Western Europe (the United Kingdom and Ireland), Chile, and Asia (Taiwan, China, Singapore and even As for physical infrastructure, roads and Vietnam). Other countries can gain insights from transportation are certainly essential, but in the U.S. experience but they can also increasingly our increasingly global, technologically driven look to other successful role models. ♦ economy, communications infrastructure is also – 11 – Center for International Private Enterprise Creating the Environment for Entrepreneurial Success are well-organized entrepreneurs who have very low 2. How do Institutions Facilitate transaction costs, who can make decisions quickly, Entrepreneurship? and can combine, recombine, and rethink the components of their business. However, in other Hernando de Soto places there are entrepreneurs who have absolutely President, Institute for Liberty and Democracy none of the contractual support that is necessary to Institutions facilitate entrepreneurship deal with people far away. And this difference is one major reason why some countries are rich and many Entrepreneurship is all about combining more are poor. things from different resources to create wealth, and institutions are crucial to facilitating that In other words, if you lack that rule of law — all those legal devices that allow you to connect to other combination. What do I mean by “combining things?” Consider Leonard E. Read’s famous example people, particularly property and business rights — you will be forced to do business on the basis of that to build a simple pencil involves numerous customary or fabricated agreements between you and countries, countless individuals, and hundreds of different ingredients: from graphite to the Oregon your relatives and neighbors. Such arrangements will limit your business activity to a physical area within wood which sandwiches it in, to the copper of Chile and the zinc of Peru and the black nickel of South a circumference of maybe 25 miles. Expanding your markets to areas where you are not personally known Africa, which hold the eraser close to the pencil is impossible without the identity mechanisms that itself, to the lacquer that is on the pencil. The wood requires kilning and dyeing. It must be cut and only the law can provide. So, while urban areas of developing countries are teeming with small, shaped and glued. Or take a look at your watch, which is likely to involve more than 500 parts, also informal enterprises, without the rule of law those entrepreneurs will never pull themselves, or their provided by suppliers from all over the world. countries, out of poverty. To create the trust to combine all those resources and people to make even the most common objects In fact, the most important part of the business environment is rules. Everybody has rules, even requires many legal institutions. Good contracts, for example — a clear definition of who has the property those who work outside the legal system. They have business practices that their fellow “extralegal” rights over the materials, and confirmation that you entrepreneurs accept; they have created their own are not buying from a crook. If you do not have the appropriate legal environment, you will have norms to make transactions and protect their assets. But to divide labor to increase productivity, very poor entrepreneurship. Successful countries have created the rule of law with its property and to use their property as collateral to obtain credit, to protect their personal from business assets, to entrepreneurial rights, which, in turn, have allowed expand their markets or create the kind of economies them to combine all sorts of things and people and thereby create wealth. of scale that generate wealth — to do all the things that entrepreneurs in developed countries take for Wherever I go in the world, entrepreneurship is granted — they need the standards that only legal already there — even in developing countries where institutions can provide. most of the people are poor. Whenever I walk on Universal standards are fairly new — only about a street in Mexico City or Cairo, for example, I encounter somebody trying to sell something or build 120 years old. Greenwich Mean Time, for example, the standard that has allowed us to establish time a business. People are, by nature, very entrepreneurial — particularly the poor, who typically have no differences — and business meetings — across the globe, has existed only since 1884. Similarly, 19th alternative for feeding their families other than Century legal reformers in Europe and the United going into business for themselves, as street vendors or shantytown entrepreneurs. In some places, there States began to set the standards for doing business – 12 – Center for International Private Enterprise Creating the Environment for Entrepreneurial Success that put the West on a fast track to economic Another problem is that most of the lawmakers growth over the next century. As a result of the who draft the rules do not understand the spread of such standards, the global economy has importance of bringing all their citizens, particularly grown more since the end of World War II than in the poorest among them, into the legal system. the previous 2,000 years. Thomas Jefferson understood. So did Washington, Franklin, and Madison. All the attention given to Moving toward the rule of law constitutions and to rule making that benefitted all Americans proves that they gave the law a huge In the Third World and in most former Soviet amount of importance. That is no longer true among nations, the majority of entrepreneurs are still political leaders, in my experience. So, we must start waiting for their own legal reformers to give them convincing lawmakers that law is important — for access to those standards — the same ones their everyone. The reason that people behave differently elites already have. They are forced to operate in in the Peruvian Amazon than in Lima, for example what I call anarchy. This does not mean that they is not just cultural; they own things, and they have are lawless; they have, in fact, too many systems businesses. But discriminatory, burdensome and of rules, different business standards every mile just plain bad laws force them to operate in the or two. extralegal economy. Policymakers need to promote entrepreneurship Mobilizing small entrepreneurs by establishing and spreading standards. At the center of the ILD’s mission is to create awareness In order to get the majority of people in throughout the developing and former Soviet developing countries moving in the same direction, world that entrepreneurship has nothing to do with the first thing I’ve found useful to tell them is culture, that the idea that certain groups of people that they are “entrepreneurs.” In many countries are incapable of entrepreneurship is a myth, that where I go, I find an entrepreneurial class that religion is not a factor. Over the past three decades, just does not believe they are entrepreneurs. The the ILD has worked in Latin America, Asia, Africa, wealthy have managed to convince the poor, no ex-Soviet Europe, and the Middle East. Our matter how talented or enterprising they are, that researchers have found that people everywhere they are inferior, that they need more education want basically the same thing — to protect their or luck or were born in the wrong ethnic group. property and grow their businesses so that they Even politicians on the left are inclined to say that can move out of poverty. Once policymakers have indigenous peoples are “different” — and are not understood that, we can be on our way. interested in participating in the market economy. Think of the migrants that flowed into the Our research has punctured such myths. After United States from Europe, or those coming from a violent conflict in the Peruvian Amazon in 2009 the hinterland to cities in Peru. Everybody is going between indigenous communities and the police to where there are standards and where there are protecting the interests of private companies with economies of scale. In the case of Peru, for example, legal concessions to exploit the region’s natural 90 percent of the managers who have industries resources, the ILD sent a team into the region outside Lima actually live in Lima, because it is to determine the causes. We soon found that the more important to be close to the standards and to local people had their own private property and the lawmakers than it is to be supervising your own businesses; they were already in the market, just factory. The question is, “How does everybody get not the legal one. We also discovered that they had to participate in this?” gone to war to protest their lack of legal control over the property rights of their communities. – 13 – Center for International Private Enterprise Creating the Environment for Entrepreneurial Success To demonstrate to indigenous leaders — can’t patent them or get a loan to turn his garage and Peru — that native peoples were capable of into a real business — or get any of the 18 other operating in the legal market economy, the ILD things that Steve Jobs did to turn his idea into brought down indigenous leaders of enterprises Apple. This is the kind of process that it takes to in Alaska worth more than 2 billion each. They prove to ordinary people that even the world’s most arrived in full tribal regalia and said that the key successful entrepreneurs are not culturally superior; to their success was having property rights, which they just have access to superior legal institutions. made it possible for them to turn their tribes into There is no doubt that people can grow from multi-national corporations. “I am an Indian of the being small-scale, informal entrepreneurs to large- Kamloops tribe,” declared Manny Jules, the famous scale entrepreneurs. That is the history of the activist for Canada’s aboriginal peoples, “and I am world. And one cannot foretell where it is going proud of my tradition. But I am not a museum to happen or who is going to do it. Let me offer piece. Let me tell you why.” Then, his Peruvian one final example from my native Peru, where I audience started to understand. returned to live 30 years ago. Those who were rich As I said, I find entrepreneurs everywhere; but and powerful then are completely different from too often they need to be convinced of their status. those who are rich and powerful today. Yes, people “I only work from my garage,” a man in a Lima grow from struggle to success. I do not know a shantytown might tell me. Interesting, so did Steve country where the opposite would be true, provided Jobs. And then he adds, “I did go to university, but everyone has access to the legal institutions essential I dropped out.” So did Steve Jobs. “Well, he had for prosperity and generating wealth. ♦ ideas.” You don’t? “Oh yes, I have ideas.” But he – 14 – Center for International Private Enterprise Creating the Environment for Entrepreneurial Success Functions of institutions 3. Why Institutions Are Essential to Entrepreneurship What institutions allowed the global market to develop? Some institutions were developed Mary M. Shirley and enforced by traders themselves, including President, Ronald Coase Institute commercial norms, written codes of conduct, and other rules designed to foster good behavior; bills An economy that is performing well at one of lading, contracts, and other ways to document particular point in time may be outperformed deals; and business associations, trade fairs, and in the long-run by an apparent laggard, if that similar ways to share information on reputation lagging economy proves better able to take and certify standards. Business organizations began advantage of changing circumstances (Schumpeter, to have lives, legal status, and reputations that 1942). What determines which economy lags or extended beyond those of the individual owners or prospers? The answer, according to Schumpeter, employees, further reducing the risks of exchange. is entrepreneurship: the constant creation of new These institutions and organizations not only goods, new markets, new methods of production, protected property, they reduced transaction costs. and new ways of organizing. And what determines Transaction costs are the costs of finding a buyer or whether entrepreneurship flourishes? The answer, seller, getting and providing information, striking I submit, is institutions: institutions that nourish a bargain, monitoring the terms, enforcing the rather than stifle innovation and change, as we can bargain, and punishing those who cheat. Without see in the history of the modern market economy. institutions to control transaction costs development would be stunted, since when “the costs of making Today we take it for granted that in developed countries like the United States we can usually buy an exchange are greater than the gains which that exchange would bring, that exchange would not take a car from a dealer, an apple from the supermarket, place.” (Coase, 1992, p. 197). goods over the Internet, or investments in the stock market without our money being stolen. But But businesses alone could only do so much. when we make these impersonal exchanges we are Markets based on impersonal exchange flourished relying on a host of institutions of relatively recent only when institutions began to be enforced by a vintage to protect our interests. For centuries third party wielding power: the state. The state put most exchanges were eyeball to eyeball, or else teeth into the merchants’ rules of good behavior restricted just to people you knew or someone and then went further, enacting laws that governed that your family, church, neighborhood, guild, or commercial behavior, adjudicating contracts, commercial network knew. Trading with strangers containing civil strife and theft, and protecting was risky, because strangers could not be trusted and property rights and individual rights. The state, with there were no low-cost ways to enforce bargains. its monopoly over the means of violence and treaties Trading over distances and time was even riskier with other states, expanded the safe environment for because of the ever-present threats of theft and production and trade. violence — consider the medieval etchings of the merchant and his goods surrounded by his private State enforcement was crucial to the expansion army or flotilla. Costly risks limited markets and of impersonal exchange, but it also created a stifled entrepreneurship. Although the bazaar still conundrum. A state strong enough to protect exists and networks are still important, the gradual property, trade, and individuals was also powerful emergence of institutions that reduce transaction enough to exploit them. Moreover, state actors were costs and protect property rights encouraged interested individuals, motivated to enhance their impersonal, long-distance trade to flourish. own and their cronies’ wealth at the expense of others. How could state actors be encouraged to control – 15 – Center for International Private Enterprise Creating the Environment for Entrepreneurial Success their own grasping hands? How could investors means and motivation to protect their institutions know whether to trust the state’s commitments? from being captured by elites because they have access to education, media, the franchise, and other Again the answer was institutions, specifically tools of civic engagement and voice. institutions to constrain the state’s ability to confiscate property or returns (Shirley, 2008). Open access societies are not the norm, however. These institutions include elections and other The vast majority of people live in limited access peaceful means of changing government, rights of societies, where only elite groups have the power free assembly and protest, norms of civic behavior, and the means to create new businesses or other rules of transparency and disclosure, individual organizations, only elites benefit from the rule of and corporate rights to sue the state and to be law, and only businesses with ties to the powerful compensated for seizures, an independent legal prosper. Entrepreneurs who try to challenge the system, and independent mass media. They also status quo are co-opted, squelched, or thwarted included federalism, which protects rights when by the costs of competing with privileged elite- different jurisdictions compete with one another dominated business. This is not to imply that for investment and residents by offering a better there are no threats to entrepreneurship in open business environmentand decentralization, when access economies. Unbridled monopoly power, different branches and levels of government act as costly and bureaucratic procedures for registering checks on arbitrary or capricious behavior by other new businesses, excessive protection of intellectual branches or levels. property, and other restrictions on entry can cripple entrepreneurship anywhere. Open access Open access societies economies have more self-correcting mechanisms that allow two guys in a garage to start a hugely These constraining institutions — elections, successful business and allow the market to punish civic rights, legal powers, and federalism can be the business when it loses its creative edge. found in some form in almost every country in the world today. You might then ask why businesses The China puzzle and markets in some of those countries are still so weak? The answer is that in most poor countries, This history of the development of the modern these constraining institutions exist in form only. market economy and open access societies argues that Business, politics, and society are dominated by a without strong institutions to reduce transaction few powerful elites who use the power of the state costs, protect individuals and property, and allow to favor their narrow interests and either overtly entry by non-elites, markets and entrepreneurship exclude the majority of citizens from access to will not flourish and long-run growth will suffer. sources of power and wealth or make it too costly Yet some observers look at China and conclude for them to try to get access (North, Wallis, and the opposite: institutions such as property rights, Weingast, 2009). Constraints on the state function constraints on the state, and rule of law in general effectively in practice only in the few most developed must not matter to business development because countries, which North, Wallis, and Weingast call China has managed spectacular growth without “open access societies.” As the name implies, open those very institutions. But that conclusion access societies allow relatively free entry into misreads China’s recent history. Under Mao, the politics, religion, education, and business. Citizens state arrested and executed private entrepreneurs. who are not powerful or rich can create different After 1978, the safety of proprietors (if not of kinds of organizations, from political parties to property) was comparatively secure; this in turn corporations to social clubs, at relatively low accelerated business development even though transaction costs. Non-elite property is protected constitutional protection of private property rights by the state in the same way that elite property is was only enacted in 2004 (Huang 2012). Another protected. Citizens of open access societies have the key ingredient in China’s economic growth was – 16 – Center for International Private Enterprise Creating the Environment for Entrepreneurial Success market competition. The transfer of control rights References to private actors, even though these rights were Coase, Ronald. 1992. “The Economic Structure not tradable, stimulated productivity and growth of Production.” American Economic Review. because these private actors were subject to the 82(September), 713-19. discipline of the market (Coase and Wang, 2012). Moreover, China did have some of the institutions Coase, Ronald and Ning Wang 2012. How necessary for entrepreneurial development but in China Became Capitalist. New York: Palgrave different guises. According to Xu (2011), subnational Macmillian. governments played a significant role in law-making and law enforcement. Competition among these Huang, Yasheng. 2012. “How Did China Take local authorities, who were promoted and rewarded Off?” Journal of Economic Perspectives. Vol 26(4) based on economic growth, encouraged them to Fall, 147-167. protect private entrepreneurs during the early years of reform as long as the entrepreneur was successful North, Douglass C., John J. Wallis, and Barry in the competitive market. R. Weingast. 2009. Violence and Social Order: A Conceptual Framework for Interpreting Recorded Finally, we should not forget that China Human History. New York: Cambridge University started from a very low base and therefore part Press. of its accelerated growth has been “catching up.” Zhu estimates that China’s total factor Shirley, Mary M. 2008. Institutions and productivity rose from 3 percent of U.S. total Development. Cheltenham, UK and Brookfield, factor productivity in 1978 to 13 percent in 2007 VT, US: Edward Elgar. (JEP p.121), a dramatic gain but still a long way from par. Many observers question whether China Schumpeter, Joseph A. 1942. Capitalism, can continue to catch up with open access societies Socialism and Democracy. New York: Harper and without a more independent judiciary, greater Brothers. government accountability, and an open market for ideas. Without institutional constraints on the Xu, Chenggang. 2011. “The Fundamental state’s grasping hands, business development will Institutions of China’s Reforms and Development.” begin to flag; some see signs of this already. In Journal of Economic Literature. Vol XLIX(4) the absence of institutional protections, investors December, 1076-1151. in China increasingly rely on ties to state-owned Zhu, Xiaodong. 2012. “Understanding China’s firms or powerful leaders in the Communist Party, Growth: Past, Present, and Future.” Journal of shown by the rise of the so-called princelings into Economic Perspectives. Vol 26(4) Fall, 103-124. dominant business positions. I have argued that entrepreneurship will flourish only in economies where institutions reduce transaction costs, protect property and individuals from private theft and state confiscation, and encourage innovation and risk taking. Economies without these institutions may temporarily surge ahead, but, as Schumpeter predicts, will eventually flag. Entrepreneurship is not a luxury good, but a fundamental driver of long-run economic performance. ♦ – 17 – Center for International Private Enterprise Creating the Environment for Entrepreneurial Success examples illustrate emerging ways of thinking about 4. Building Entrepreneurship entrepreneurship ecosystems’ structure. Ecosystems Daniel Isenberg, founder of the Babson Anna Nadgrodkiewicz Entrepreneurship Ecosystem Project, outlines six Director, Multiregional Programs, CIPE key domains of the entrepreneurship ecosystem: conducive culture, enabling policies and leadership, Introduction availability of appropriate finance, quality human capital, venture-friendly markets for products, and a Entrepreneurship is a powerful force that many 1 range of institutional and infrastructural supports. strive to harness. Countries around the world aspire to make their economies more competitive by Isenberg emphasizes that even though any country’s entrepreneurship ecosystem can be mapped out boosting entrepreneurship. Yet in most countries entrepreneurs still struggle with the basics of using the same domains, each ecosystem remains unique because it is a result of hundreds of elements operating and growing their businesses because the interacting in complex ways. These factors are based attention and resources devoted to entrepreneurship promotion tend to focus on singular interventions, in historically shaped institutions that give different countries unique competitive advantages but also not systemic change. unique sets of challenges to overcome. That is why For entrepreneurs to thrive, there needs to exist a it is usually ineffective to simply take one country’s supportive ecosystem of intertwined factors ranging model of entrepreneurial development and blindly from infrastructure to financial access. Policy apply it to another. frameworks and institutions play a particularly Therefore, the aspiration to become the next important role in entrepreneurship ecosystems and this article discusses ways of shaping such policies Chile or the next Taiwan does not necessarily mean copying them directly. As Isenberg explains, and institutions, focusing on how entrepreneurs “many governments take a misguided approach to can be constructively engaged in dialogue with decision-makers. building entrepreneurship ecosystems. They pursue some unattainable ideal of an ecosystem and look Building a truly competitive entrepreneurship to economies that are completely unlike theirs for 2 ecosystem requires an environment where businesses best practices.” Each country instead must examine operate on a level playing field, where their rights its own circumstances, strengths, and weaknesses are protected, and the same rules apply to all. and design approaches that are rooted in these There is no one-size-fit-all template for building local realities. such ecosystems; each country must find its own unique approach to reform. That requires an open, Steven Koltai, who created and ran the Global Entrepreneurship Program for the U.S. Department democratic dialogue where policymakers and of State, provides another example of mapping out entrepreneurs come together to discuss barriers and find solutions. core components of entrepreneurship ecosystems. His Six + Six Model highlights the six pillars Building entrepreneurship ecosystems essential to a successful entrepreneurship ecosystem: identify, train, connect & sustain, fund, enable, and Any ecosystem involves a number of celebrate entrepreneurs; and the six participants who interconnected key elements that constantly interact must be involved in their implementation: non- and mutually reinforce. An entrepreneurship governmental organizations (NGOs), corporations, ecosystem is no different. It encompasses a number foundations, government, academic institutions, of moving parts – components that have to come 3 and investors. Similarly to Isenberg’s approach, together to facilitate innovation and growth. Koltai’s model rests on the premise that no single While different models exist, the following two factor alone can spur and sustain entrepreneurship. – 18 – Center for International Private Enterprise Creating the Environment for Entrepreneurial Success Instead, entrepreneurs thrive when multiple sectors Designing Business-Friendly Policies: and actors work together to create a supportive Recommendations for Policymakers environment for entrepreneurship. Business Entry – simplify business registration Koltai points out the interconnectedness of all and licensing procedures the elements of the entrepreneurship ecosystem Disclosure – establish proper disclosure require- and stresses the need for various actors to work ments so that information is readily available to together in order to cultivate entrepreneurs. He consumers and investors also emphasizes that it is a mistake to think of entrepreneurs purely as inventors of new products. Information – provide equal access to govern- ment information on regulations, requirements, In fact, only about 20 percent of entrepreneurs are and financial resources innovators in that narrow sense. Eighty percent are 4 commercializers who bring new ideas to market. Property Rights – define and ensure strong en - Often there is too much emphasis on “the idea” forcement of property rights in entrepreneurship support initiatives. Countries Financing – establish a strong domestic financial need to consciously build ecosystems that help the system by privatizing state banks and introducing different kinds of entrepreneurs succeed. private sector governance principles Focus on policy reforms Labor – establish simple and efficient labor laws; allow wages to be determined by market forces Because all entrepreneurship ecosystems contain Competition – remove restrictions on multiple and interconnected components, building competition, eliminate subsidies to inefficient such ecosystems implies a balanced approach enterprises, open up industries reserved for state- where equal attention is given to key pillars. In owned enterprises practice, that is rarely feasible because all countries face limited resources and all governments possess Trade – reduce tariffs and non-tariff barriers, only finite political capital to spend on reforms. eliminate export-import licenses granted to a select few As a result, focus often shifts to the elements of the entrepreneurship ecosystem that are relatively Taxes – simplify procedures and/or reduce tax easy to implement such as entrepreneurship rates, which can increase tax revenues through in- training programs or special funds to provide creased compliance entrepreneurs with seed money. While valuable in Price Controls – remove price controls and let their own right, such programs rarely lead to the markets determine prices entrepreneurial take-off of an economy because they do not reach beyond helping individuals and Bankruptcy – establish proper bankruptcy they fail to address the larger underlying factors that procedures stifle entrepreneurship. Capacity-building – establish programs that pro- vide entrepreneurs with technological, manage- Addressing these barriers is at the heart of rial, and financial skills a public policy and institutional framework conducive to entrepreneurship. Yet even though Source: John D. Sullivan, Aleksandr Shkolnkov, public policy and institutions are included as key “The Prosperity Papers 1: Entrepreneurship” Eco- nomic Reform Issue Paper No. 0401, Oct 1, 2004, factors in different entrepreneurship ecosystem www.cipe.org/sites/default/files/publication- models, in practice it is frequently the most docs/IP0401.pdf neglected element. The reason is simple: while it is easy to pay lip service to the need for policies that supports entrepreneurship, it is much more The types of needed policies are broadly agreed difficult to achieve them. upon by development experts and entrepreneurs – 19 – Center for International Private Enterprise Creating the Environment for Entrepreneurial Success alike, and they include protection of private Business Alliance (MBA) with the vision to seek property rights, enforceable contracts, and efficient sustainable economic growth reform through government administration. What is less obvious is legislative and regulatory reform. MBA created how to tailor these policies to local circumstances. a National Business Agenda created through The quality of policy solutions depends greatly on extensive consultations with businesses throughout the nature of a given political system. Some argue Montenegro on their top reform priorities and that authoritarian governments may be better recommendations. MBA then organized forums in suited to spur entrepreneurship, pointing to rapid all the major cities in Montenegro with business economic growth rates of China or South Korea’s leaders, members of parliament, relevant ministers, dictatorial past. History shows, however, that local government leaders, the media, and academia dictators tend to be more concerned with staying to advocate for adopting policy solutions outlined in power than with developing entrepreneur- in the agenda. friendly policies. What is more, basic requirements This was the first time many business people in for entrepreneurship such as credit access are often Montenegro had ever expressed their views publicly controlled by the government in authoritarian and the National Business Agenda was the first countries and dispensed based on political document of its kind in all of South-East Europe. consideration rather than merit. As a result of the initial agenda and subsequent ones In the case of China, much of its economic that MBA has continued to publish, the government vitality comes from the entrepreneurial sector. accepted many of the proposed solutions. Now The number of registered private businesses in Montenegro has the lowest corporate and personal the country grew by more than 30 percent a year tax rate in Europe (9 percent), the unemployment between 2000 and 2009, and enterprises that are rate dropped from 30 to 12 percent, the size of not majority-owned by the state account for two- the informal economy decreased to 15 percent of thirds of industrial output and about 75-80 percent GDP, and the country has new, more flexible labor of profit in Chinese industry and 90 percent in laws, concession laws, lower local taxes, and fewer 5 6 non-financial services. At the same time, much procedures for registering a business. of this economic activity remains secretive as Another key consideration in building a policy entrepreneurs fear expropriation and resort to framework that supports the entrepreneurship bribing local officials to stay afloat. ecosystem is focusing not just on passing Involving broad-based private sector entrepreneur-friendly laws but also on how they participation in the policymaking process, in a are implemented. Implementation gaps, or the transparent and representative way, is of particular difference between laws on the books and their importance to fostering an entrepreneurship applications in practice, affect countries across the climate. Independent chambers of commerce and globe. At the local level, citizens tend to feel the effects business associations, if properly and consistently of implementation gaps most painfully because engaged in a policy dialogue with the government, when regulations enabling an entrepreneurial can provide decision-makers with first-hand environment remain unimplemented, it directly information on the barriers that entrepreneurs face undermines their livelihoods. and with practical solutions to removing them. In recent years one of the most striking examples In CIPE’s experience working with hundreds of of an implementation gap hampering economic local partner organizations around the world, such prospects has been Egypt. In 2008, Egypt topped dialogue can bring important improvements to the the list of reformers in the World Bank’s annual environments in which entrepreneurs operate. Doing Business ranking, making improvements Montenegro is a good example. In 2001, a group in areas such as the minimum capital required to of local business leaders founded the Montenegro start a business, fees for registering property, and – 20 – Center for International Private Enterprise Creating the Environment for Entrepreneurial Success 7 construction permits. However, many of these institutional basis for supporting bottom-up efforts laudable reforms remained only on paper while of entrepreneurs. ordinary Egyptians continued to struggle with The private sector can provide invaluable input making a living. into the design of policies and reforms as well as their The solution to addressing implementation gaps implementation. Through an open, transparent, ultimately is to prevent them from happening in the and democratic dialogue with the government, first place by building sound legal and regulatory business organizations in countries around the frameworks. They need to include mechanisms for world can become representative voices of business cost-benefit analysis of proposed legislation and and key partners in reform. Engagement with harmonize different laws to foster implementation. the business community can therefore help shape The key pillars of integrity in public governance an entrepreneurship ecosystem that is uniquely 8 must also be strengthened. tailored to local needs and circumstances. Within that ecosystem, given the chance, entrepreneurs Conclusion will find their way forward and bring economic dynamism to democracy that delivers. ♦ Entrepreneurship provides the creative force of economic development. Entrepreneurs lead Endnotes economic change by creating new goods and services, 1 Daniel Isenberg, “Introducing the Entrepreneurship Ecosys- new firms, and innovative solutions to local — and tem: Four Defining Characteristics,” Forbes, May 25, 2011, global — needs. At the same time, entrepreneurship http://www.forbes.com/sites/danisenberg/2011/05/25/introduc- plays a vital role in the development of democracy. ing-the-entrepreneurship-ecosystem-four-defining-characteris - It expands opportunity, unleashes individual tics/. initiative, and cultivates independent citizens who 2 Daniel Isenberg, “The Big Idea: How to Start an Entrepreneur - have a stake in society and democratic governance. ial Revolution” Harvard Business Review, June 2010, http:// hbr.org/2010/06/the-big-idea-how-to-start-an-entrepreneurial- For entrepreneurial ventures to take root and revolution/ar/1 grow, the right environment must be in place. 3 Koltai & Company, The Six + Six Entrepreneurship Ecosystem Startups require low barriers at the outset; to achieve Model, http://koltai.co/about-us scale they require a legal and regulatory framework that rewards entrepreneurial initiative, ensures fair 4 World Peace Through Entrepreneurship: Steven Koltai at competition, and protects private property rights. TEDxDirigo, published on Nov 23, 2012, http://www.youtube. com/watch?v=SpH7cBEK0So&feature=youtu.be. Entrepreneurs embody Friedrich Hayek’s idea 5 “Let a Million Flowers Bloom,” The Economist , May 10, 2011, that harnessing dispersed local knowledge by http://www.economist.com/node/18330120. individuals is crucial to economic and political 6 CIPE Leading Practices: Montenegro Business Alliance, http:// freedom and citizen-led innovation. While leading-practices.cipe.wikispaces.net/Legislative+and+Regulator government has a key role to play, too many y+Reform. entrepreneurship promotion efforts resemble failed 7 top-down planning, limited to investments in Most Improved in Doing Business 2008, http://www.doing- particular industries, clusters, or incubators. In a business.org/reforms/top-reformers-2008. sustainable entrepreneurship ecosystem, financial, 8 Improving Public Governance: Closing the Implementation Gap educational and other supports must be backed between Law and Practice, CIPE and Global Integrity, 2012, by a favorable policy environment. Governments http://www.cipe.org/sites/default/files/publication-docs/GI%20 should therefore focus on building the legal and CIPE_Implementation%20Gap_for%20web.pdf. – 21 – Center for International Private Enterprise Creating the Environment for Entrepreneurial Success and institutional change. Without a doubt, 5. CIPE’s Approach to Building entrepreneurship has made dramatic strides that were Environments for Entrepreneurial not conceivable in the preceding era of development. Success Progress has been highly uneven, though, and by now we have observed important patterns. John D. Sullivan Entrepreneurs are present everywhere, but the Executive Director, CIPE ones with access to market institutions, rule of law, Entrepreneurs drive change. They provide and economic freedom have a tremendous advantage. the ideas, initiative, and leadership to invigorate These fundamentals — more than any program or development and transform society. They are technology — help set apart entrepreneurial countries therefore pivotal partners of the Center for such as the United States, Canada, Chile, and International Private Enterprise (CIPE) in the Denmark. Moreover, within developing countries, pursuit of its mission: to strengthen democracy legal and institutional barriers largely explain why around the globe through private enterprise and a few entrepreneurs succeed while the majority are market-oriented reform. stuck in necessity, not growth, entrepreneurship. Where entrepreneurial firms adapt and grow, Reforms imposed by decree from above are hard they transform the structure and functioning of an to sustain. At times, governments have attempted economy. Indeed entrepreneurship — understood to unilaterally improve the business environment or as formation and rapid growth of new firms — invest in entrepreneurial clusters. The result too often represents probably the most important means for is that reforms are cosmetic, not implemented; that developing a vibrant private sector. It is closely benefits of reform are captured by cronies; or that linked to the evolution of a market economy. A popular backlash unravels the gains. A competitive market economy establishes a level playing field for entrepreneurial system should be constructed commerce and opens the way for new entrepreneurs. through an open policy process. As drivers of change, entrepreneurs often assume Entrepreneurship ecosystems cannot be built leadership roles in society. With their initiative, without input from the private sector. In fact, problem-solving ability, and new perspectives, entrepreneurial ingenuity is not limited to building entrepreneurs become a leading constituency for companies. Entrepreneurs weave networks, solve reform. As they raise independent voices, they resource constraints, and fill institutional voids. enhance democratic debate and participatory They themselves can drive reform and educate policymaking. policymakers about real business needs. Still, entrepreneurs need a little help. On Democracy provides fertile ground for their course to invent the future, they encounter institutional reforms. Democracy allows participants institutional voids, political resistance, knowledge in an ecosystem to voice their perspectives, allows gaps, and collective action problems. To help them freedom to experiment with new models of economic negotiate these challenges and accelerate momentum organization, and provides crucial feedback and for entrepreneurial change, policy leaders and private accountability in the policy system. These add up to sector stakeholders should heed the lessons of recent what Douglass North calls adaptive efficiency, the decades of transformation. hallmark of innovative societies. Lessons from 30 Years Ultimately, local entrepreneurs and business leaders know best the innovative potential of their CIPE’s history has coincided with massive communities and how to realize this potential. Their historical trends of privatization, democratization, insights and motivation are invaluable in targeting globalization, the rise of emerging markets, binding constraints to business and designing the – 22 – Center for International Private Enterprise Creating the Environment for Entrepreneurial Success infrastructure of ecosystems. CIPE gives private These associations reported a 30 percent increase sector reformers a voice though capacity building, in membership over the life of the project. The advocacy training, entrepreneurial education, and coalitions conducted 222 advocacy efforts related technical support. to 138 legislative changes. How to Catalyze Change Educate youth on entrepreneurship, fundamentals of market economies, and civic From advocating for reforms in the legal leadership system to guiding youth on entrepreneurship and leadership, CIPE and its partners strive to ensure Samriddhi, the Prosperirty Foundation in Nepal entrepreneurs can rely on a supportive environment. created the Arthalaya program, an intensive five- CIPE’s programs address several fundamental day workshop followed by alumni outreach to start dimensions of entrepreneurship ecosystems. 24 entrepreneurship clubs at universities. Over 360 students have graduated since Arthalaya began, and Advocate for business environment reforms that 40 graduates have started their own enterprises. lower the barriers to starting, operating, and These entrepreneurship programs also transform growing a business the way people think about the market economy. In Jordan, the Young Entrepreneurs Association In Peru, Instituto Invertir established championed an amendment to the company’s EmprendeAhora, a civic leadership and law that reduced minimal capital requirements entrepreneurship program for university students for limited liability companies. This led to over from rural areas. Since 2008, Invertir has trained 1,800 newly registered small and medium-sized over 530 students from 23 regions in Peru who enterprises (SMEs). have started more than 130 businesses. In Peru, the Institute for Liberty and Democracy In Afghanistan, CIPE’s Tashabos curriculum introduced solutions to simplify business for entrepreneurship and civics training reaches registration and administrative procedures, and 50,000 students in 44 schools across four provinces. formalize commercial property. From 1991 to As of 2012, 748 students either started their own 1994, 381,100 businesses were formalized. Newly businesses or improved family-owned businesses, formalized businesses saved 692.5 million in red creating 1,280 jobs. 1 tape and created more than 550,000 legal jobs. Empower women economically through In Egypt, the Federation of Economic entrepreneurship and advocacy for women in Development Associations — which represents over business 30,000 SMEs — advocated for repeal of ministerial decrees that disadvantaged small business. So far 84 The Bangladesh Women Chamber of Commerce decrees have been lifted, including restrictions on and Industry (BWCCI) has run a series of successful importing machinery for factories. advocacy campaigns built around its Women’s National Business Agenda. BWCCI has eased access Equip grassroots associations to serve small to credit for women entrepreneurs by advocating business needs and advocate for policies with the Central Bank to provide women with low- supportive of entrepreneurship cost loans with no collateral requirements. With USAID funding in Russia, CIPE helped Strengthen institutions such as property rights launch 17 regional coalitions that counted as and rule of law to foster entrepreneurship members 225 business associations representing firms with an estimated 2.2 million employees. The Business Advocacy Network in Armenia — – 23 – Center for International Private Enterprise Creating the Environment for Entrepreneurial Success developed by CIPE and the Association for Foreign has referred to this as the process of building Investment and Cooperation — successfully institutions that make possible impersonal advocated for simplified tax payment procedures, exchange. In each developing country, getting thus reducing opportunities for corruption, as well the right institutional framework in place will as a new law on state inspections, which should encourage entrepreneurs to invest in knowledge, reduce unnecessary inspections of SMEs and innovation, and higher productivity. By supporting related abuses. the evolution of this kind of ecosystem, we are enabling the widest possible opportunities for 2 Reduce economic informality by expanding creative entrepreneurship. ♦ access to opportunity Endnotes Kenya’s new Micro and Small Enterprises Bill 1 Kim Eric Bettcher, Martin Friedl, and Gustavo Marini, “From establishes a Small Business Authority to regulate the Streets to Markets: Formalization of Street Vendors in Met- small business and associations; creates a small ropolitan Lima,” CIPE Reform Case Study (May 21, 2009). The business fund to support innovation and research; U.S. Agency for International Development provided principal and establishes a tribunal to arbitrate commercial funding for ILD’s programs. CIPE supported ILD’s advocacy disputes. The Kenya Private Sector Alliance was initiatives with funding from the National Endowment for Democracy. instrumental in drafting the bill, with input from other CIPE partners. 2 Douglass C. North, Institutions, Institutional Change and Eco- nomic Performance. Cambridge University Press, 1990; North, These steps to improve the environment for “The Foundations of New Institutional Economics,” lecture on entrepreneurs are all about facilitating gains from CIPE Development Institute, www.developmentinstitute.org specialized innovation and trade within a market- oriented system. Nobel Laureate Douglass North – 24 – Center for International Private Enterprise Creating the Environment for Entrepreneurial Success II. Elements of Ecosystems Ecosystem models derive their power from a holistic view of factors influencing individual entrepreneurs as well as synergies that propel entrepreneurship as a phenomenon. Yet for the system as a whole to function, the component parts must play their proper roles and fit together. Knowledge, resources, motivations, rules, and opportunities each must be developed to serve and stimulate entrepreneurship. Part Two examines the effects of key elements such as business regulation, financing, education, and the trading environment. It also calls attention to priorities for advancing entrepreneurship in areas such as awareness raising, research, and promotional efforts. The models and lessons described here aid in gap analysis and illustrate a diversity of choices for building ecosystems. Policymakers and entrepreneurship promoters should diagnose entrepreneurial needs carefully and be open to the possibility that competing approaches have merit in different situations. – 25 –

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