Building Entrepreneurship Ecosystems

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Center for International Private Enterprise

Building Entrepreneurship Ecosystems

Article at a glance

• Entrepreneurshipisattheverycoreofvibrantmarketeconomiesanddemocraciesthatdeliveropportunitytotheircitizens.Bystrengtheningeconomicpluralismentrepreneurshipprovidesastrongcontextforhealthypoliticalcompetitionandchecksongovernmentpower.

• Whileglobalizedeconomycreatesnew,unprecedentedopportunitiesforentrepreneursworldwide,challengespersistespeciallyforlargenumbersofdevelopingcountryentrepreneursstuckintheinformalsector.Helpingcitizensmovefromnecessitytoopportunityentrepreneurshipiskeytodemocraticdevelopment.

• Buildingentrepreneurshipecosystemsrequiresattentiontomultipleandinterconnectedelements,withaparticularfocusonlocallydrivenpolicyreforms.Privatesector,throughbusinessassociationsandchambersofcommerce,canprovideinvaluableinputintothedesignofsuchreformsaswellastheirimplementation.

February 14, 2013

Anna NadgrodkiewiczSenior Program Officer, Global Programs


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To comment on this article, visit the CIPE Development Blog: www.cipe.org/blog

Center for International Private Enterprise 1155 15th Street, NW | Suite 700 | Washington, DC 20005ph: (202) 721-9200 | fax: (202) 721-9250 | www.cipe.org | [email protected]

Center for International Private Enterprise Building Entrepreneurship Ecosystems

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Introduction

Entrepreneurship is among the most basicand fundamental human endeavors. Every day,peoplearoundtheworldseeknewand innovativeways tomake a living, to start a new venture, tocapitalize on an idea. From street vendors to hi-tech innovators, entrepreneurs come in all shapesandforms.Whatunitesthemisthedesiretoapplytheirtalentsandavailableresourcesinthebestwaytheycan.Whatdistinguishesthemisthedegreetowhichtheycanrealizetheseaspirationsdependingontotheenvironmenttheyoperatein.

The importance of entrepreneurship goesbeyond the immediate, individual achievement.If a proper supporting environment exists toproductively channel the entrepreneurial spirit,suchindividualeffortsadduptosystemicimpact.As demonstrated by successful country examplesfrom Ireland to Chile, entrepreneurship has thepower of moving economies to new stages ofdevelopment and helping societies become moreparticipatoryandinclusive.

This article addresses the significance ofentrepreneurship to democratic and economicdevelopment by focusing on two key elements ofentrepreneurship-driven transformations. First,the focus on entrepreneurship must start withentrepreneurs themselves. What does it meanto be an entrepreneur?The article examines thisconcept, its evolution in recent years, as well asnew opportunities and persistent challenges thatentrepreneurs face. Second, for entrepreneurs tothrive,thereneedstoexistasupportiveecosystemof intertwined factors ranging from infrastructureto financial access. Policy frameworks andinstitutions play a particularly important rolein entrepreneurship ecosystems and this articlediscusses ways of shaping such policies andinstitutions, focusing on how entrepreneurscan be constructively engaged in dialogue withdecision-makers.

The importance of entrepreneurship to democratic and economic development

Entrepreneurship isat theverycoreofvibrantmarket economies. It propels innovation andgrowth,createsjobs,andprovidesconsumerswithnew and better goods and services. Crucially, incountrieswhose economies are dominated by thestate,entrepreneurshiphelpsovercomedependenceon government and strengthens economic andpersonal freedom. In so doing, entrepreneurs notonly advance their own business vision but also,cumulatively,creategreatereconomicpluralismasanalternativetocentralizedstatecontrol.

Economic pluralism in turn provides a strongcontext for healthy political competition andchecks on government power. An economy thatenables considerable business diversity impliesthateconomicpowerisdispersedbeyondthestatesector,thatoligopoliesarekeptincheck,andthatcronyinterestsaredeniedpreferentialaccesstothegovernment.1 Therefore entrepreneurship plays akeyroleinbuildingnotjustprosperouseconomiesbut democracies that deliver opportunity totheircitizens.

Democracy does not offer an automaticsolution toapoor entrepreneurshipenvironment.Many new and emerging democracies – just likemany authoritarian states – struggle with a largeproportionof their citizensbeing confined to theinformalsectorasamatterofmeresurvivalbecausethebarriers to entry into the formal economyarejusttoohighformost.Oftenuncertainofpropertyrights and lacking legal protection, entrepreneursinthesecountriesfightanuphillbattleevenwhilethey function as the backbone of the economy.However,thereisanimportantdifferencebetweendemocraticandnon-democraticenvironments.Themechanismsoftransparencyandaccountabilitythatthedemocraticprocessentails–howeverimperfecttheymay be in new and emerging democracies –provide an important avenue for citizens to pushfor policy reforms that make entrepreneurshipeasierforeverybody.

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Entrepreneurshipisapowerfulforcethatmanystrivetoharness.Countriesaroundtheworldaspireto make their economies more competitive byboosting entrepreneurship.Newways of thinkingabout entrepreneurship drive innovators who usebusiness acumen to advance greater social goals.Sourcesoffinancearebecomingmoreaccessibletostart-ups than ever before. Yet in most countriesentrepreneurs still struggle with the basics ofoperatingandgrowingtheirbusinessesbecausetheattentionandresourceddevotedtoentrepreneurshippromotiontendtofocusonsingularinterventions,notsystemicchange.

Buildingatrulycompetitiveentrepreneurshipecosystemrequiresanenvironmentwherebusinessescanoperateonalevelplayingfield,wheretheirrightsareprotected,andthesamerulesapplytoall.Thereisnoone-size-fit-alltemplateforbuildingsuchecosystems.Whilepowerfulexamplesofsuccessstoriesexist,eachcountrymustfinditsownuniqueapproachtoreform.Thatrequiresanopendialoguewherepolicymakersandentrepreneurscometogethertodiscussbarriersandfindsolutions.Itisnotaneasyprocessbut–asexamplesofcountriesthatmanagedtocreatethrivingentrepreneurshipecosystemsshow–itcanbeatransformationalone.

What does it mean to be an entrepreneur?

InWealth of NationsAdamSmithdemonstratedthat societies prosper thanks to division of laborthough specialization. Extrapolating from hisinsight, entrepreneurship can be defined as thestudy of human actions that lead to innovativechangesinthedivisionoflabor,andentrepreneursare individuals who initiate such actions.2 Jean-Baptiste Say, another early proponent of freeenterprise, added that entrepreneur signifies “theperson who takes upon himself the immediateresponsibility, risk, and conduct of a concern ofindustry, whether upon his own or a borrowedcapital.”3Incidentally,healsopointedoutthatthe

termentrepreneur wasdifficulttorenderinEnglishgiventhatthecorrespondingword,undertaker,hadalreadybeenappropriatedtoaspecificuse.Whileentrepreneur bynowcomfortably inhabitsEnglishvocabulary,similarchallengespersistinsomeotherlanguages,occasionallymakingentrepreneurshipadifficultconcepttograsp.

The understanding of entrepreneurship hasbeen evolving beyond the traditional definitionsof risk-taking innovative action that generatesprofit through creative use of capital to satisfy amarket need. In recent years, for instance, socialentrepreneurshipgainedprominence,highlightingotheraspectsofmotivationthatdrivesentrepreneurs.Although specific definitions vary, it is generallyrecognized that social entrepreneurs deploybusinessskillsandtoolstosolvesocialproblemsinavarietyoffields.Theymayincludeventuressuchascompaniesbuildingmobilesoftwaretohelptrainrural health workers, producers of biodegradablepackagingmaterials,makersofsolarlightbulbsforthemarketswhereelectricityisscarce,orinvestorscommittedtoimpactlending.4

Organizations such as the Skoll Foundationor the Acumen Fund have popularized the ideaby supporting, connecting, and celebrating socialentrepreneurs around the world. What is more,many universities now offer courses in this areato professionalize key skills and approaches. Associalentrepreneurshipcontinuestogeneratenewbusinesses,theirinnovativenaturehasevenfoundrecognition in a new corporate legal structure:benefitcorporation.

In the United States, benefit corporation is anewtypeofcorporateentitysimilartoatraditionalfor-profit corporation but with the followingcharacteristics: a requirement to have a corporatepurpose to create a material positive impact onsociety and the environment; an expansion ofthedutiesofdirectors to require considerationofnon-financial stakeholders aswell as the financialinterestsofshareholders;andanobligationtoreportonitsoverallsocialandenvironmentalperformance



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using a comprehensive, credible, independent,and transparent third-party standard.5 To-datebenefit corporation laws have been enacted in 12states and are under consideration in 13 othersplus Washington, DC, and about 200 benefitcorporationshavebeencreatedaroundthecountry.6

Theconceptofsocialentrepreneurshiphasbeendrivinganewgenerationofbusinessesfocusedoncreating shared value that simultaneously yieldsmoreprofitandgreatersocialimpact.7Butsharedvalue isnot just something embracedby sociallyand environmentally conscious start-ups. Manylarge and established companies have embracedthebenefits of creating economic value in awaythatalsocreatesgreatervalueforsocietythroughtheir core operations. As Michael Porter andMarkKramernote,sharedvalueis“anewwaytoachieveeconomicsuccess.Itisnotonthemarginof what companies do but at the center. Andaddressing societal harms and constraints doesnotnecessarilyraisecosts for firms,becausetheycan innovate through using new technologies,operatingmethods, andmanagement approaches– andas a result, increase theirproductivity andexpandtheirmarkets.”8

One example is Nestlé’s work focused onjoint value creation inwater, nutrition, and ruraldevelopment–areascrucialtoboththecompany’scorebusinessesandgreatersocialgood.Initscoffeebusiness, for instance, Nestlé resolved to doublethe amount of Nescafé coffee purchased directlyfrom farmers and their associationsby2015.Thecompanyispursuingthisgoalthrougharedesignedprocurement process making it easier for smallsuppliers by providing growers with advice onbest farming practices, guaranteeing bank loans,andhelping secure key agricultural inputs.9 Thishelpedincreaseyieldsperhectare,qualityofcoffee,and farmers’ incomes. At the same time, Nestlé’sgainedareliablenetworkofhighqualitysuppliers.

It that context it is important to keep inmind that starting anewbusiness isnot theonlyform of entrepreneurship available to innovators.One can also become an entrepreneur in the

existing enterprise – an intrapreneur. In fact,Global Entrepreneurship Monitor, which is thelargest and longest-standing globally focusedentrepreneurship research program in the world,considers intrapreneurship alongside other typesof entrepreneurship it measures as a part of itstotal early-stage entrepreneurial activity (TEA)indicator.TEArepresentsthepercentageofworkingage population involved in establishing businessactivities (nascent) or running an enterprise forless than 3.5 years (new), while intrapreneurshipisentrepreneurshipwithinexistingorganizations.10

Notsurprisingly,GEMfoundthatintensityoforganizationalentrepreneurshipincreaseswiththelevelofacountry’seconomicdevelopmentsinceinmoreadvancedeconomiestherearemoremedium-sizedandlargeenterprisessearchingfornewanglesoncompetitiveness.Insuchenterprises,employeescan use business opportunities in the existingstructures to pursue new ideas. In the factor-driven economies only 1.7 percent of employeesare involved in intrapreneurship, whereas ininnovation-driven economies that rate goes up to9.1percent.11

Entrepreneurshipbyitsverynatureentailsinnovationandchangethatcantakevariousforms.Regardlessoftheformittakes,orthetermitisdescribedby,entrepreneurshiphasbeentheengineofthesocio-economicdevelopmentaroundtheglobeanditremainscountries’besthopeforprosperity.

New possibilities and persisting challenges

Globalizedeconomycreatesnew,unprecedentedopportunities for entrepreneurs worldwide.Remittances, for instance, are other area wheregreat entrepreneurshippotential canbeunlocked.In 2011, remittances to developing countriesreached $325 billion and annual increases areexpectedtobearound7-8percentinthefuture.12With more than 200 million migrants globally,these are powerful numbers. While currently

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these fundsaremainlyused for consumptionanddebt repayment, they couldbemoreproductivelychanneled. Many countries are realizing thecollective power the diaspora and encouragingthe use remittance flows for investment throughinstruments such as ‘diaspora bonds.’13 In theU.S. InternationalDiasporaEngagementAlliance(IdEA) is an example of a platform that bringstogether various communities, the private sector,andpublicinstitutionstoprovideopportunitiesfordiasporamemberstogivebacktotheircountriesoforiginorancestry.IdEA’sworkspansfiveprincipalpillars,includingentrepreneurship.14

Dovetailing with such efforts are variouscrowdfunding solutions. Through crowdfunding,which usually happens over the Internet, like-minded individuals can form networks and pooltheirfinancialresourcestosupportvariousinitiativesbuilt around a particular theme or cause. Manyof them involve ideas for new business ventures.WebsitessuchasKickstarter.comorIndiegogo.comprovide easy platforms for aspiring entrepreneurswhootherwisemaynotbeabletoaccesstraditionalfinance. Using the same concept, Kiva.org focusesspecificallyonentrepreneursindevelopingcountries,enabling individuals to raise money toward smallmicrofinance loans to borrowers who pitch theirideastoglobalaudiencesthroughKiva’swebsite.

Yet as the definition of entrepreneurshipexpands, new forms of it make strides, and newresources become available, it is importantto remember that there exists a vast group ofentrepreneurswhostrugglewithmakingthemostbasic kinds of business work. Providing fundingin and of itself does not solve the underlyingissues inplaceswhere theentrepreneurial climateremainsdifficult. From street vendors inNairobitohandicraftmakersinthePeruvianAndes,manyentrepreneursdonotevenconsider themselvesassuchbecausetheydonotthinkofwhattheydoasan innovative venturewith prospects for growth.Theysimplydowhattheyknowinordertosurvive.

There is an important distinction betweenformalentrepreneurswhosebusinessesareofficially

registeredandthereforehaveaccesstolegalprotectionor bank credit, and informal entrepreneurs whohave no such access to the institutions that makethemarket economywork.The implications of somanyentrepreneursbeinglockedoutoftheformalmarketsystemarecrucialfortheglobaldevelopmentprospects,giventhemassivescaleofinformality.TheWorldBankestimatesthattheweightedaveragesizeoftheshadoweconomyasapercentageoftheGrossDomestic Product in Sub-Saharan Africa is 38.4percent; inEurope andCentralAsia 36.5 percent,andinhigh-incomeOrganisationforEconomicCo-operation and Development (OECD) countries,13.5percent.15

Informal businesses operate outside of whatHernando de Soto, president of the Institute forLiberty andDemocracy in Lima, called Braudel’sbelljar.FrenchhistorianFernandBraudel,quotedby de Soto in his seminal book The Mystery of Capital, famously asked why at its inceptionWesternindustrializedeconomiesweredominatedbyaprivilegedelitemuch theway theeconomiesofmanydevelopingcountriesaretoday,“whythatsectorofsocietyofthepast(…)shouldhavelivedasifinabelljar,cutofffromtherest;whywasitnotabletoexpandandconquerthewholeofsociety?”16De Soto posits that the answer to Braudel’squestion lies in the lack of access to propertyrightsandtheotherkeyinstitutionsofaninclusivemarket economy.Without them entrepreneurshipis a matter of necessity as opposed to choice;entrepreneurs remain stuck in the informal sectorwithoutrealisticprospectsforgrowth.Theycannotbreak out of the cycle of poverty to become fullstakeholdersintheirsocieties.

De Soto’s insight illustrates that entrepreneurs,whether traditional or social, formal or informal,do not operate in a vacuum. They work withinthe framework of opportunities and constraintscreatedbyavarietyoffactorsintheirenvironment.Shaping these factors in a manner conduciveto starting and growing new businesses, andencouraging innovation more broadly, is theessence of building entrepreneurship ecosystems.


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Building entrepreneurship ecosystems

Any ecosystem involves a number ofinterconnectedkeyelementsthatconstantlyinteractandmutuallyreinforce.Entrepreneurshipecosystemis no different in how it encompasses a numberofmoving parts – components that have to cometogethertofacilitateinnovationandgrowth.While

differentmodelsexist,thefollowingtwoexamplesillustrate the common emerging way of thinkingaboutentrepreneurshipecosystems’structure.

Daniel Isenberg, a Professor of ManagementPractice at Babson Global and founder of theBabson Entrepreneurship Ecosystem Project,outlines six key domains of the entrepreneurship

1. Stop Emulating Silicon Valley: Developing “knowledge-based industry” – the mantra of governments everywhere—is an admirable aspiration but achieving it requires a generation-long investment in education and the ability to develop world-class intellectual property. 2. Shape the Ecosystem around Local Conditions: The most difficult yet crucial thing is to tailor solutions to fit local entrepreneurship dimensions, style, and climate. 3. Engage the Private Sector from the Start: Governments cannot build ecosystems alone. Only the private sector has the motivation and perspective to develop self-sustaining, efficient markets. 4. Favor the High Potentials: Many programs in emerging economies spread scarce resources among quantities of bottom-of-the-pyramid ventures. But focusing resources there to the exclusion of high-potential ventures is a mistake. 5. Get a Big Win on the Board: Even one success can have a surprisingly stimulating effect on an entrepreneurship ecosystem by igniting the imagination of the public and inspiring imitators. 6. Tackle Cultural Change Head-On: Changing a deeply ingrained culture is enormously difficult, but both Ireland and Chile demonstrate that it is possible to alter social norms about entrepreneurship in less than a generation.

7. Stress the Roots: New ventures must be exposed early to the rigors of the market. Just as grape growers withhold water from their vines to extend root systems and make their grapes produce more-concentrated flavor, governments should “stress the roots” of new ventures by meting out money carefully, to ensure that entrepreneurs develop toughness and resourcefulness. 8. Don’t Overengineer Clusters; Help Them Grow Organically: Popularized by Michael Porter, cluster strategies have been promoted by governments throughout the world. Though entrepreneurial clusters do exist naturally and can be important elements of an ecosystem, there is only questionable anecdotal evidence that governments can play a major role in breeding them. 9. Reform Legal, Bureaucratic, and Regulatory Frameworks: The right legal and regulatory frameworks are crucial to thriving entrepreneurship. Research points to a number of reforms that have a positive impact on venture creation: decriminalizing bankruptcy, shielding shareholders from creditors, allowing entrepreneurs to quickly start over, shifting workers’ unemployment protection from making termination difficult to providing support for the unemployed, creating and liberalizing capital markets, and simplifying tax regimes.

Nine Prescriptions for Creating an Entrepreneurship Ecosystem

Source: Daniel Isenberg, “The Big Idea: How to Start an Entrepreneurial Revolution” Harvard Business Review, June

2010, http://hbr.org/2010/06/the-big-idea-how-to-start-an-entrepreneurial-revolution/ar/1

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ecosystem: conducive culture, enabling policiesandleadership,availabilityofappropriatefinance,quality human capital, venture-friendly marketsfor products, and a range of institutional andinfrastructural supports.17 Thesedomains inturngrouphundredsofsmallerelements.

Isenberg emphasizes that even though anycountry’s entrepreneurship ecosystem can bemapped out using the same domains, each suchecosystem remains unique because it is a resultof hundreds of elements interacting in complexways.Thesefactorsarebasedinhistoricallyshapedinstitutions that give different countries uniquecompetitive advantages but also unique sets ofchallenges to overcome in order to becomemoreentrepreneurshipfriendly.Thatiswhyitisusuallyineffective to simply take one country’smodel ofentrepreneurial development and blindly apply ittoanother.Successfulmodelsareuseful,buteachcountrymustfinditsownway.

Therefore, the aspiration to become the nextChileorthenextTaiwandoesnotnecessarilymeancopyingthemdirectly.AsIsenbergexplains,“manygovernmentstakeamisguidedapproachtobuildingentrepreneurship ecosystems. They pursue someunattainable ideal of an ecosystem and look toeconomiesthatarecompletelyunliketheirsforbestpractices.”18 Each country instead must examineits own circumstances, strengths, and weaknessesand design approaches that are rooted in theselocalrealities.

Steven Koltai, who created and ran theGlobal Entrepreneurship Program for the U.S.DepartmentofState,providesanotherexampleofmapping out core components of entrepreneurialecosystems. His Six + Six Model highlights thesix pillars essential to a successful entrepreneurialecosystem: identify, train, connect & sustain,fund, enable, and celebrate entrepreneurs; andthesixparticipantswhomustbeinvolvedintheirimplementation: non-governmental organizations(NGOs), corporations, foundations, government,academic institutions, and investors.19 SimilarlytoIsenberg’sapproach,Koltai’smodelrestsonthe

premise that no single factor alone can spur andsustain entrepreneurship. Instead, entrepreneursthrive when multiple sectors and actors worktogether to create a supportive environmentforentrepreneurship.

Koltaipointsouttheinterconnectednessofallthe elements of the entrepreneurship ecosystemand stresses the need for various actors to worktogether in order to cultivate entrepreneurs. Healso emphasizes that it is a mistake to think ofentrepreneurspurelyasinventorsofnewproducts.Infact,onlyabout20percentofentrepreneursareinnovators in that narrow sense. Eighty percentare commercializers who bring new ideas tomarket.Therefore,thevastmajorityofsuccessfulentrepreneurs did not think of their innovation,whichcanbeanewproductorprocess,butratherthoughtofawaytomakesomebodyelse’sinnovativeidea reality.20 Often there is toomuchemphasison“theidea”invariousentrepreneurshipsupportinitiatives. The inventors are then flooded withfundsbut theydonotreceiveenougheducation,mentorship, and other forms of support neededtomaketheirideacommerciallyviable.Countriesneed to consciously build ecosystems that helpthese different kinds of entrepreneurs succeed.

Focus on policy reforms

Becauseallentrepreneurshipecosystemscontainmultipleandinterconnectedcomponents,buildingsuchecosystemsimpliesabalancedapproachwhereequalattentionisgiventokeypillars.However,inpracticethatisrarelyfeasiblebecauseallcountriesface limited resourcesandallgovernmentpossessonly finite political capital to spend on reforms.As a result, focus often shifts to the elements oftheentrepreneurshipecosystemthatarerelativelyeasy to implement such as entrepreneurshiptraining programs or special funds to provideentrepreneurswithseedmoney.Whilevaluableintheirown right, suchprograms rarely lead to theentrepreneurial take-off of an economy becausetheydonotreachbeyondhelpingindividualsandthey fail to address the larger underlying factorsthatstifleentrepreneurship.


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Addressing these barriers is at the heart ofa public policy and institutional frameworkconducive to entrepreneurship. Yet even thoughpublicpolicy and institutions are included as keyfactors in different entrepreneurship ecosystemmodels, in practice it is frequently the mostneglected element.The reason is simple: while itis easy to pay lip service to the need for policiesthat supports entrepreneurship, it is much moredifficulttoachievethem.

Thetypesofneededpoliciesarebroadlyagreedupon by development experts and entrepreneursalike, and they include protection of privatepropertyrights,enforceablecontracts,andefficientgovernmentadministration.Anotherkeybutoftenoverlookedsetofpolicieshastodowithbankruptcylaws. It ishardlya surprise that inplaceswhereabusinessfailurecanlandoneinjail–likeinEgyptandanumberofcountriesintheMiddleEastandNorthAfrica–entrepreneurshipdoesnotflourish.21

What is less obvious is how to tailor thesepolicies to local circumstances. The quality ofpolicy solutions that governments pursue dependgreatly on the nature of a given political system.Some argue that authoritarian governmentsmay be better suited to spur entrepreneurship,pointingtorapideconomicgrowthratesofChinaor South Korea’s dictatorial past. History shows,however,thatdictatorstendtobemoreconcernedwith staying in power than with developingentrepreneur-friendlypolicies.Whatismore,basicrequirements for entrepreneurship such as creditaccess are often controlled by the government inauthoritarian countries and dispensed based onpolitical consideration rather thanmerit. In suchcountriestrueentrepreneurialcultureisstifledandfrequentlyhiddeninundergroundbecausebeingintheformaleconomyoftenmeansbecomingutterlydependentongovernmentfavors.

In the case of China, much of its economicvitality comes from the entrepreneurial sector.The number of registered private businesses inthe countrygrewbymore than30percent a yearbetween 2000 and 2009, and enterprises that are

Business Entry – simplify business registration and licensing procedures Disclosure – establish proper disclosure requirements so that information is readily available to consumers and investors Information – provide equal access to government information on regulations, requirements, and financial resources Property Rights – define and ensure strong enforcement of property rights Financing – establish a strong domestic financial system by privatizing state banks and introducing private sector governance principles Labor – establish simple and efficient labor laws; allow wages to be determined by market forces Competition – remove restrictions on competition, eliminate subsidies to inefficient enterprises, open up industries reserved for state-owned enterprises Trade – reduce tariffs and non-tariff barriers, eliminate export-import licenses granted to a select few Taxes – simplify procedures and/or reduce tax rates, which can increase tax revenues through increased compliance Price controls – remove price controls and let markets determine prices Bankruptcy – establish proper bankruptcy procedures Capacity-building – establish programs that provide entrepreneurs with technological, managerial, and financial skills

Designing Business-Friendly Policies: Recommendations for Policymakers

Source: John D. Sullivan, Aleksandr Shkolnkov, “The Prosperity Papers #1: Entrepreneurship” Economic Reform Issue Paper No. 0401, Oct 1, 2004, http://www.cipe.org/sites/default/files/publication-docs/IP0401.pdf

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notmajority-ownedby the stateaccount for two-thirdsofindustrialoutputandabout75-80percentof profit in Chinese industry and 90 percent innon-financial services.22 At the same time,muchof this economic activity remains secretive asentrepreneurs fear expropriation and resort tobribinglocalofficialstostayafloat.

Onecrucialelementofsoundpolicymakingthatauthoritariangovernmentslackisconsultation.Indemocratic countries, shaping public policy maysometimes appear disorderly, noisy even, withvarious groups freely expressing their ideas. Asa result, though, policies that emerge enjoy thebenefitof thoroughexaminationandquestioningasthegovernmentsareforcedtotakeintoaccounttheneeds and concernsof abroad sectionof thesociety. In authoritarian states where freedom ofspeechiscurtailedandthegovernmentcontrolstheflowofinformation,littlesuchdebateispossible.Instead, policies are passed behind closed doorsand the main consideration – beyond staying inpower–isrewardingcronies.

Involving broad-based private sector inthe policymaking process in a transparent andrepresentative way is of particular importance tofostering entrepreneurship climate. Independentchambersofcommerceandbusinessassociations,if properly and consistently engaged in a policydialogue with the government, can providedecision-makers with first-hand informationon the barriers that entrepreneurs face and withpractical solutions to removing them. In CIPE’sexperienceworkingwithhundredsoflocalpartnerorganizationsaroundtheworld,suchdialoguecanbringimportantimprovementstotheenvironmentsinwhichentrepreneursoperate.

Montenegroisagoodexample.In2001,agroupoflocalbusinessleadersfoundedtheMontenegroBusiness Alliance (MBA) with the vision to seeksustainable economic growth reform throughlegislative and regulatory reform. MBA createda National Business Agenda created throughextensiveconsultationswithbusinessesthroughoutMontenegro on their top reform priorities and

recommendations.MBAthenorganizedforumsinall themajor cities inMontenegrowith businessleaders,membersofparliament,relevantministers,localgovernmentleaders,themedia,andacademiatoadvocateforadoptingpolicysolutionsoutlinedintheagenda.

This was the first timemany business peoplein Montenegro had ever expressed their viewspublicly and the National Business Agenda wasthe first document of its kind in all of South-East Europe. As a result of the initial agendaand subsequentones thatMBAhas continued topublish, the government accepted many of theproposed solutions. Now Montenegro has thelowest corporate and personal tax rate inEurope(9percent),theunemploymentratedroppedfrom30to12percent,thesizeoftheinformaleconomydecreasedto15percentofGDP,andthecountryhas new, more flexible labor laws, concessionlaws, lower local taxes, and fewer procedures forregistering a business. What is more, the localbusinesscommunitynowunderstandsthatitsvoicecanmakeadifferenceinthepublicpolicydebate,asillustratedbythegrowthinMBAmembership.It grew from only 10members in 2001 tomorethan500dues-payingmembersin2011.23

Anotherkeyconsiderationinbuildingapolicyframework that supports the entrepreneurshipecosystem is focusingnot just onpassing variousentrepreneur-friendly laws but also on how theyarebeingimplemented,especiallyatthelocallevel.Implementation gap, or the difference betweenlaws on the books and their actual applicationsin practice, affects countries across the globe. Atthe local level, citizens tend to feel the effectsof implementation gaps most painfully becausewhen regulations enabling an entrepreneurialenvironmentremainunimplementedthatdirectlyunderminestheirlivelihoods.

In recent years one of the most strikingexamples of implementation gap hamperingeconomicprospectsofmuchofthesocietyhasbeenEgypt.In2008,Egypttoppedthelistofreformersin the World Bank’s annual Doing Business


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ranking, making improvements in areas such astheminimumcapitalrequiredtostartabusiness,fees for registering property, and constructionpermits.24 However, many of these laudablereforms remained on paper only while ordinaryEgyptians continued to struggle with making aliving.ThefactthatreformsfailedtoreachthevastsegmentsofthesocietycontributedtothepopularragethatboiledoveronTahrirSquareandspelledHosniMubarak’sdownfall.

Thesolutiontoaddressingimplementationgapsultimatelyistopreventthemfromhappeninginthefirst place bybuilding sound legal and regulatoryframeworks.Theyneedtoincludemechanismsforcost-benefit analysis of proposed legislation andharmonizedifferentlawstofosterimplementation.The key pillars of integrity in public governancemustalsobestrongertocreateasystemwheretheincentivestructureforgovernmentofficialsandothersocialactorsdrivesproperimplementationoflaws.25

Conclusion

Entrepreneurship provides the creative forceof economic development. Entrepreneurs leadeconomicchangebycreatingnewgoodsandservices,newfirms,andinnovativesolutionstolocal–andglobal–needs.Atthesametime,entrepreneurshipplaysavitalroleinthedevelopmentofdemocracy.It expands opportunity, unleashes individualinitiative,andcultivatesindependentcitizenswhohaveastakeinsocietyanddemocraticgovernance.

Entrepreneurship is a grassroots globalphenomenonthatstemsfromindividualingenuity,courage, and often – as is the case withmillionsof informal entrepreneurs – the basic need forsurvival.Helping citizensmove from necessity toopportunity entrepreneurship is the responsibilityof governments because they put in placeinstitutionalframeworksthateitherhelporhinderentrepreneurship. For entrepreneurial ventures totakerootandgrow,therightenvironmentmustbeinplace.Startupsrequirelowbarriersattheoutset;toachievescaletheyrequirealegalandregulatoryframework that rewards entrepreneurial initiative,

ensures fair competition, and protects privatepropertyrights.

Entrepreneurs embody Friedrich Hayek’sidea that harnessing dispersed local knowledgeby individuals is crucial to both economic andpolitical freedom and citizen-led innovation.Whilegovernmentalsohasakeyrole toplay, toomanyentrepreneurshippromotioneffortsresemblefailed top-down planning limited to investmentsinparticular industries,clusters,or incubators. Ina sustainable entrepreneurial ecosystem, financial,educational and other supports must be backedby a favorable policy environment. Governmentsshould therefore focus on building the legal andinstitutional basis for supporting bottom-upefforts of entrepreneurs, making sure that lawsand regulations are implemented in practice, andenforcingtherulesfairly.

All too often much of the emphasis is placedonstartups,especiallyintechnology,insearchforthe next big thing – the next Facebook, the nextGoogle. Governments should also stop trying toblindly emulate the Silicon Valley or countriesconsidered the champions of entrepreneurship.Theyinsteadneedto looktotheirowncountries’competitive advantage and make the operatingenvironmenteasierforentrepreneursinareassuchas fisheries or agribusiness, not just IT or otherknowledge-drivensectors.

Theprivatesectorcanprovideinvaluableinputintothedesignofsuchspecificpoliciesandreformsaswellastheirimplementation.Throughanopen,transparent, and democratic dialogue with thegovernment, business organizations in countriesaround the world can become representativevoices of business and key partners in reform.Engagement with the business community canthereforehelpshapeanentrepreneurshipecosystemthat is uniquely tailored to the local needs andcircumstances. Within that ecosystem, given thechance, entrepreneurswill find theirway forwardand bring economic dynamism to democracythatdelivers.

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Endnotes

1CIPE,“HelpingBuildDemocracythatDelivers,”http://www.cipe.org/sites/default/files/publication-docs/DemocracyDelivers07.pdf.

2StevenC.Michael,“Entrepreneurship,Growth,andAdamSmith,”Strategic Entrepreneurship Journal,1:287–289,2007,publishedonlineinWileyInterScience,http://onlinelibrary.wiley.com/doi/10.1002/sej.31/pdf.

3Jean-BaptisteSay,A Treatise on Political Economy,1803.4“America’sMostPromisingSocialEntrepreneurs2012,”

BusinessWeek,http://images.businessweek.com/slideshows/2012-06-21/americas-most-promising-social-entrepreneurs-2012

5WilliamH.Clark,Jr.,DrinkerBiddle&ReathLLP;LarryVranka,CanonchetGroupLLC(principalauthors),“TheNeedandRationalefortheBenefitCorporation:WhyItIstheLegalFormThatBestAddressestheNeedsofSocialEntrepreneurs,Investors,and,Ultimately,thePublic,”Whitepaper,January26,2012,http://benefitcorp.net/storage/documents/The_Need_and_Rationale_for_Benefit_Corporations_April_2012.pdf.

6SarahA.Altshuller,“BenefitCorporations:TwelveStatesandCounting,”Mondaq,January9,2013,http://www.mondaq.com/unitedstates/x/215408/Directors+Officers/Benefit+Corporations+Twelve+States+and+Counting.

7PublishedinHarvard Business Review,January/February2011,http://www.fsg.org/tabid/191/ArticleId/241/Default.aspx?srpush=true

8MichaelE.PorterandMarkR.Kramer,CreatingSharedValue,HarvardBusinessReview,January2011,http://hbr.org/2011/01/the-big-idea-creating-shared-value/ar/11.

9NestléCreatingSharedValueReport2011http://www.nestle.com/asset-library/Documents/Library/Documents/Corporate_Social_Responsibility/2011-CSV-report.pdf.

10See:http://www.gemconsortium.org/.11GlobalEntrepreneurshipMonitor:Poland,2012,http://

www.gemconsortium.org/docs/download/2627.In2011fifty-fourcountriesparticipatedintheGEMresearch,including25Europeancountries,12Asiancountries,12SouthAmericancountries,UnitedStatesofAmerica,Mexico,Australiaandonly3Africancountries.SinceresearchintheintrapreneurshipareaisoptionalinGEM,findingsarenotavailableforallcountriesparticipatingintheproject.

12Ratha,Dilip,andAniSilwal.RemittanceFlowsin2011:AnUpdate.Rep.Washington,D.C.:WorldBank,2012.

13NgoziOkonjo-IwealaandDilipRatha,ABondfortheHomeland,Foreign Policy,May24,2011http://www.foreignpolicy.com/articles/2011/05/24/a_bond_for_the_homeland?page=full.

14http://diasporaalliance.org/15FriedrichSchneider,AndreasBuehn,andClaudioE.

Montenegro,“ShadowEconomiesAllovertheWorld:NewEstimatesfor162Countriesfrom1999to2007,”

PolicyResearchWorkingPaper5356,TheWorldBankDevelopmentResearchGroupPovertyandInequalityTeam&EuropeandCentralAsiaRegionHumanDevelopmentEconomicsUnit,July2010,http://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2010/10/14/000158349_20101014160704/Rendered/PDF/WPS5356.pdf.

16FerdinandBraudel,The Wheels of Commerce,UniversityofCaliforniaPress,1992.

17DanielIsenberg,“IntroducingtheEntrepreneurshipEcosystem:FourDefiningCharacteristics,”Forbes,May25,2011,http://www.forbes.com/sites/danisenberg/2011/05/25/introducing-the-entrepreneurship-ecosystem-four-defining-characteristics/.

18DanielIsenberg,“TheBigIdea:HowtoStartanEntrepreneurialRevolution”HarvardBusinessReview,June2010,http://hbr.org/2010/06/the-big-idea-how-to-start-an-entrepreneurial-revolution/ar/1

19Koltai&Company,TheSix+SixEntrepreneurshipEcosystemModel,http://koltai.co/about-us

20WorldPeaceThroughEntrepreneurship:StevenKoltaiatTEDxDirigo,publishedonNov23,2012,http://www.youtube.com/watch?v=SpH7cBEK0So&feature=youtu.be.

21JonathanCuster,„ThePowerofFailure,”CIPEDevelopmentBlog,http://www.cipe.org/blog/2013/01/30/the-power-of-failure/#.UQ7zCXPjls8.

22“LetaMillionFlowersBloom,”The Economist,May10,2011,http://www.economist.com/node/18330120.

23CIPELeadingPractices:MontenegroBusinessAlliance,http://leading-practices.cipe.wikispaces.net/Legislative+and+Regulatory+Reform.

24MostImprovedinDoingBusiness2008,http://www.doingbusiness.org/reforms/top-reformers-2008.

25Improving Public Governance: Closing the Implementation Gap between Law and Practice,CIPEandGlobalIntegrity,2012,http://www.cipe.org/sites/default/files/publication-docs/GI%20CIPE_Implementation%20Gap_for%20web.pdf.

_____________________________________________________________________________

Anna Nadgrodkiewicz is a senior program officer for Global Programs at CIPE, where she works on projects involving democratic and market-oriented reform around the world. Prior to joining CIPE, she worked as a business consultant in her native Poland on the issues of competitiveness and market entry in Central and Eastern Europe. She holds a master’s degree in German and European Studies from Georgetown University in Washington, DC.

The views expressed by the author are her own and do not necessarily represent the views of the Center


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Building Entrepreneurship Ecosystems

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