entrepreneurial key success factors and entrepreneurial success and failure reasons and remedies
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
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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.
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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.
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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
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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
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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
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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.
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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
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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
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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
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Creating the Environment for Entrepreneurial Success
market competition. The transfer of control rights References
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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
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governments played a significant role in law-making
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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
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Shirley, Mary M. 2008. Institutions and
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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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