By Simon Johnson
This is a summary of class #5 in Entrepreneurship without Borders, a course at MIT Sloan. For links to the course syllabus and summaries of earlier sessions, see this post.
Chile has experienced strong and relatively sustained economic growth in recent decades. The economy has also proved more resilient to outside shocks (including to the price of copper, the largest export) than many others. This is a case of good macroeconomic management, including by the central bank. But there remains the question of how to create enough jobs and increase income levels – including for people at the lower end of the income distribution.
Start-Up Chile is an innovative approach to changing the culture about new ventures (see these FAQS). By enticing would-be entrepreneurs with relatively small grants to spend at least 6-7 months in Chile, this initiative hopes to create role models and stronger connections between young Chilean people and global business opportunities. If the entrepreneurs move on – as many do – perhaps this just helps build Chile’s position in global networks. See this recent assessment, or the organization’s own 3 minute video pitch.
Measured in terms of the World Bank’s Doing Business Indicators, Chile is good on average (ranked #37 overall and #32 on starting a business; contract enforcement seems acceptable). The weaker points include obtaining construction permits and how long it takes for a failed company to complete the process of insolvency. Remember that these data get at averages and are not location- or sector-specific within a country. Still, it is a noteworthy and somewhat disappointing that – despite a push towards entrepreneurship – Chile is moving down, not up, in the Doing Business rankings.
The major constraints on Chilean start-ups are likely: access to talent, willingness of customers to buy from start-ups, and the availability of venture capital on reasonable terms.
It is often better to locate close to demanding customers. There can also be advantages to being geographically close to tough competitors. Ability to attract and retain skilled labor and management talent may prove decisive. Agglomeration effects are strong and building a “hub” can be helpful.
Concern about family businesses having a lot of market power is standard in many emerging markets – and Chile is no exception. One advantage of Endeavor, as discussed in our last class, is that it builds on exactly this structure – encouraging the local “big fish” to behave more positively towards start-ups. This works because their founding board members watch each other and engage in the details. This is about nudging the culture of the business elite, in order to create the space for start-ups.
The application form at Start-UP Chile asks the right questions. It’s clear that the organizers have learned a great deal about how to run this process, and this is great (and fairly inexpensive) marketing for Chile. But are they selecting entrepreneurs with break through ideas?
What is the best return on public money and how can build private involvement? Are the Start-Up visitors sufficiently integrated with university activities, e.g., what students see and work on?