Entrepreneurship for Economic Growth

Entrepreneurship for Economic Growth A Review of Current Findings and Implications

The Argument • If there is a causal relationship between entrepreneurial development and economic growth, then government policy should support entrepreneurial development • There is a causal relationship between entrepreneurial development and economic growth • Therefore, Government policy should support more entrepreneurial development

Inherent Assumptions and Challenges • Is there a causal relationship between entrepreneurial development and economic growth. What evidence is there to support this? • What are the determinants of this causal relationship? • Does Government Policy currently support entrepreneurial development, and how? • What further steps should be taken to support entrepreneurial development?

Contents • Causal Relationship: Evidence • Determinants: GEM 2000 study • Determinants: IADB study • Characteristics of LA entrepreneurs • Characteristics of Dynamic Enterprises • Policy Implications: GEM 2000 • Policy Implications: IADB study • Conclusions for Managers and Policy Makers

Causal Relationship: Evidence • The GEM 2000: Significant relationship controlling for import/export and agricultural economies. • Half of the difference in levels of economic growth can be explained by variation in levels of entrepreneurship. • There is no single catalyst to economic growth (i.e. entrepreneurship is not the single key) • Between nascent firms and new firms, new firms tend to have the strongest association with economic growth

Causal Relationship: Evidence * GEM 2000

Demography Population growth or decline Structure of the population Economic Order Government Presence Employment Education Participation of Woman Entrepreneurial Framework Conditions Entrepreneurial Opportunity Entrepreneurial Capacity Social Legitimacy Finance Information Technology Determinants: GEM 2000 Study

Demographic * GEM 2000

Economic Order • Government Presence • Tax revenue as a % of GDP is lowest in “High” group • Role of the state in the overall economy is less in countries with “High” levels of entrepreneurs • Employment • High cost of employment, rigid labor markets are deterrents to new, growing firms • Education • Strong link between post-secondary education and entrepreneurship

Economic Order • Participation of Woman * GEM 2000

Entrepreneurial Framework Conditions • Entrepreneurial Opportunity • Perception of opportunity is highly correlated with Entrepreneurial Activity • Entrepreneurial Capacity (Motivation and Skill) • Expert opinion indicates a relationship between experts perceived lack of entrepreneurial skill and new business creation • Social Legitimacy • In entrepreneurial countries, people are less likely to resent wealthy entrepreneurs.

Entrepreneurial Framework Conditions • Social Legitimacy * GEM 2000

Entrepreneurial Framework Conditions • Finance * GEM 2000

Entrepreneurial Framework Conditions • Information Technology * GEM 2000

Determinants: IADB Study • Culture does NOT play an active role • Educational system does not promote the learning of a whole set of competencies • Previous work history is relevant, indicating differing productive capacities may affect entrepreneurship • Productive structures and entrepreneurial strategies influence opportunities available • Network are fundamental • Financial conditions are often a bottleneck • Regulatory obstacles and red tape negatively affects startup.

Characteristics of L.A. Entrepreneurs • Number of partners at start-up (see graph) • Middle aged man, average 42, with high level of education (60% had a professional degree) • 1 in 10 was a woman • Often formerly employed in similar sector • 4 in 10 have founded previous business

Characteristics of L.A. Enterprises • 2 in 3 become dynamic enterprises with 15 workers • On average around 6 years old • 75% are located in metropolitan areas • Mostly conventional manufacturing activities • Knowledge based sector accounts for 1/3 of enterprises • Dynamic firms show stronger growth and export drive • 75% of the cases had initial investment < $100,000

Inception Stage: Network of contacts Role Models Start ups Presence of teams of entrepreneurs with specialized skills and functions Generalized use of personal savings Generally started companies around age of 30 Numerous networks for non-monetary resources Early Stage Development Presence of entrepreneurial teams Distinctive problems and challenges hiring managers and certifying quality Characteristics of Dynamic Enterprises

Current Government Policy in Latin America • Strengthen mature companies to face prevailing challenges • Micro-enterprise level support through training and consulting services. • Facilitate access to credit through subsidized interest rates, deposit guarantee schemes, and micro-financing, but; • ECLAC study concluded these programs were insignificant.

Policy Implications: GEM 2000 • Gear Policy towards enhancing entrepreneurial capacity (skills and motivations) • Increase the participation of woman in entrepreneurship. • Encourage involvement of people younger than 25 • Ensure conducive economic system (less government, low tax rates, flexible labor markets, fewer regulatory burdens) • Encourage formal venture capital, and private investment in early stage business • Invest in educational system • Make system “Incentive based” verse “Support based” • Create a strong culture of entrepreneurship that values and is supportive of entrepreneurs

General Implications: IADB • The number of Dynamic enterprises must be increased and the conditions for growth must be improved. • Work experience and networks are key factors to consider in policies to promote dynamic new enterprise • Promotion must address the critical factors which affect the entrepreneurial process, and be adjusted to appropriate institutional and national context • Promotion should be viewed as a social investment with long term impact: though short-term initiatives are useful to demonstrate results

Specific implications and recommendations • Broaden the base of future dynamic entrepreneurs • Develop two key assets: entrepreneurial networks and teams • Make the inception period shorter in order to accelerate the business creation process • Reduce barriers to the creation and development of new companies • Build a solid infrastructure of venture finance • Reduce red tape and compliance costs involved in start-up • Help entrepreneurs resolve the initial problems of business start-up • Modify the existing incentives for SME’s to meet the specific needs of new businesses • Strengthen the institutional context to promote entrepreneurship

Conclusions for Managers and Policy Makers • Entrepreneurship is not the only tool, but a significant tool in shaping government policy to drive economic growth • Entrepreneurial growth is dynamic, and dependent on country specific variables and initiatives. (E.S.I) • Entrepreneurship support initiatives should be developed at the Government and NGO level to further manage the variable identified in these reports.

Backup Slides

TEA Index (Total Entrepreneurial Activity) • Computed by adding the proportion of adults involved in the creation of nascent firms and the proportion involved in surviving firms • Standardized Index

Causal Relationship: Entrepreneurial Development and Economic Growth * GEM 2000

Factors and Stage in Entrepreneurial Growth

Entrepreneurship for Economic Growth