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?