Entrepreneurial Endeavor

By Simon Johnson

Below is a summary of points from Class #4 of Entrepreneurship without Borders, a course at MIT Sloan.  Use this link to look at earlier sessions.

The conventional view about entrepreneurship in emerging markets is that it is difficult or perhaps impossible for new start-ups to have a great deal of impact.  Local markets are dominated by big players who have a great deal of power and who can make life difficult for young competitors (e.g., a frequent complaint in South Korea).  Weak institutions, such as contracts that are hard to enforce, tip the balance towards large incumbents – many of which are based on a long-standing family business.

There is also often a culture (social norms and expectations) that does not view failure as a positive learning experience.  And access to capital and other critical inputs (e.g., talented workers) may be limited or not available to entrepreneurs at a price that makes the firm viable – or that allows for rapid growth.

Endeavor is an organization that works hard to address these issues, particularly by creating a local and global network of people who want to help entrepreneurs.  These communities have done very well in some countries – including in South America (see this visual representation of Endeavor’s impact in Argentina). 

Direct state financial support to specific entrepreneurial firms – or even to particular sectors – is rarely successful.  Subsidies often lead to unintended consequences, come under political pressure, and prove hard to sustain – for example, when there is a change in government.

In contrast, creating a strong technology development environment can be very helpful.  In part this can be based on activities by large local companies and even multinationals (e.g., early in the case of software development in India), as long as people and ideas can migrate into the start-up sector.  Endeavor has had great success – see their metrics – by focusing on developing trust among key people, including entrepreneurs, influential established business leaders, and governments.  (I’ve been an adviser to Endeavor in the past, and I highly recommend participation in their International Selection Panels – where outside experts interview candidates and determine which specific people should receive Endeavor support.)

Universities often play a critical role in this regard – with government policy having an important role, in terms of supporting research and also facilitating technology licensing and transfer (e.g., see the work of Ed Roberts on MIT).  There also needs to be a culture of cooperation between universities and business.  Reportedly, one difference between southern Germany and northern Italy is that universities and companies work together closely in the former but not as much in the latter.  This matters for productivity growth rates, innovation, and the changing basis of international competitiveness.

For any country, competing on the basis of cheap labor alone is not a good idea.  Sooner or later, alternative suppliers will develop with even lower wage costs.  Companies – and countries – need to develop an ability to develop and apply technologies to local conditions, and to figure out where else they can sell the same or similar ideas.

Helping entrepreneurs go global is a great idea, but definitely not easy to implement.  Endeavor input often helps entrepreneurs think this through carefully (and this is often where teams of MIT students, for example as part of our GLAB course, prove helpful).

Applying Daron Acemoglu’s approach to economic development (on which I have also worked), the biggest positive impact must be when the broader political and economic institutions in the country – as well as human capital and culture – tilt towards supporting private business development.  This is one lesson from the success of manufacturing exports in East Asia since 1960.

When entrepreneurs are successful, based on becoming internationally competitive, they have an interest in maintaining an open economy and a relatively fair playing field.  But how broadly are those benefits shared, both immediately and over time?

9 responses to “Entrepreneurial Endeavor

  1. Thank-you for your earnest work. I’m wondering what you think about the Trans-Pacific Partnership? Many of us see this as the final frontier for TBTF banksters and other corporate coup d’etat pioneers.

  2. There’s very little reference here to the influence of corruption on start up entrepreneurial ventures. I’m quite familiar with the matter in Thailand, where I live, and where one must address corrupt individuals and institutions from the very top of government (currently under the thumb of a felon in Abu Dhabi), through a maze of bureaucratic stationmasters right down to the cop on the corner. Competing with established companies, who have paid handsomely for their positions, can be downright dangerous; and your innovative start up has to include “attorneys” (who often never went to law school) and assorted “experts” who show up knocking one day with palms out. The fees and fines that appear out of the blue every few days cannot be negotiated and are seldom mentioned in any official documentation, but they remain a big part of the cost of doing business.

    Laos, next door, has its own corruption issues, which I’ve only heard mentioned in soft tones, but being a highly protective Communist government the chances for any entrepreneur who is not a Lao are virtually nil. Nice country to live in, though. Burma, of course, is opening up wonderfully, though there are definitely gatekeepers there, and business costs for entrepreneurs can be staggering (I learned over dinner up on the northern border just a few nights ago from a very disillusioned young Australian).

    Cambodia is another story, a very long and sad one, but at least there are some honest authorities in that country. However, there seems to be very little non-Cambodian entrepreneurship outside the tourism industry. To the East, in Vietnam, the situation seems hugely complex (another one-party state) and I know little about it, though the country, of course, has a vibrant commercial economy. I have been told that the only foreign business possibilities there involve highly-controlled partnerships.

    And finally, in Yunnan, SE Asia’s “ghostly presence”, where I’ve had some first-hand experience, only a very wealthy, brave and patient individual would invest in any enterprise. At least there is usually some recourse through the Beijing bureaucracy if things go terribly wrong (though that distant capital can definitely turn against you unexpectedly).

    My point, though, is that in the emerging economies with which I’ve had some experience, and where a businessman might want to set up shop, he’s likely to find himself endlessly taxed (and worse) by endemic corruption — and in the worst case scenarios, by squinty-eyed local thugs.

  3. I think you are quite correct there Mr. Smith. And Simon, if what you preach is really true, then how did Rossi’s cold fusion machine factory end up in Greece after having been (or trying to be) under the control of the MIT administraton? Those story’s remind me of today’s Obama administration and how they buckle to the 1% demands every time. No, I think the corruption factor is a much greater concern than simply high hopes and an MIT title to it. I’m actually tougher on my own folks in private so don’t feel badly by my statements.

  4. Here’s a novel idea, instead of listening to academics and bureaucrats about how entrepreneurship works, ask someone who actually has first hand experience;

    http://projects.wsj.com/soty/week/13/carly-fiorina-on-getting-started-in-startups

  5. @Paddy – yeah, cause what Carly did is some way compares to the achievements of connecting USA states up for commerce through infrastructure in the 20th century are equal.

    Gen X are such retards.

    How much more BILLIONS do you nimrods think you are going to rip off the cable guy’s taxes to get another shiny spy center that also serves as a research center to design an app for your smartass phone that will wash, sanitize and dry the dirty diaper your nanny waves over it at the wi-fi node at McDonalds?

    @Kent Smith – thank you for the post. I love reality checks. Traders never had it easy. Might not even be a real option – or at least, not a real entrepreneurial option for beating swords back into ploughshares in USA.

    Just by the numbers, slave labor is a higher % of the global elite’s portfolio that it has ever been on the planet – 3 billion people are at that backward stage of “commerce”….

  6. Okay – here, I fixed the top paragraph of the rant:

    @Paddy – yeah, because what Carly did is in some metaphysical way comparable to the achievements of the labor and planning and vision that connected USA States through the infrastructure that made for smooth commerce. Fraud and corruption don’t build dreams or have a vision.

    Fraud and corruption certainly depend more on technology for their survival than any other business interest activities do these days – go figure.

  7. It did seem like an ungraceful exit for the former economic advisor, but skeletons keep revealing themselves (http://tinyurl.com/ms9gwev ).

    Roger Lowenstein in Bloomberg suggest hiring an (independent, fresh face) Banker–not being of politics, regulators, or an insider from the Fed (http://tr.im/4f8fk ).

    Liberals miss the mark when they try and argue on the merits of anyone other than Mr. Summers. There are no shortages of “qualified” candidates. But by now, most come to the realization that it has been more about which personality is most amenable, most likely to defer to Wall Street influence and their political hacks in Congress (and less about experience, educational obtainment, or possessing a Nobel Prize in Economics). So explains the dithering….. The powers of the presidency knows better, but the President owes some of his success to those who largely funded his candidacy; and let’s get candid for a moment, even the president acknowledges his race was and is a factor (and was used by political operatives), even if he was qualified in every other way.

    Reports estimate 3% GDP growth for 2014, with the unemployment rate projected to be around 6.75%:

    Timothy Lavin ✔ @TimothyBLavin
    The Fed made the right move today. But its decision illustrated a very big problem: http://ow.ly/oZXPI

  8. That’s great! I’m already thinking about how we can use that for clients