Latecomer Entrepreneurship:

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•  Latecomer Entrepreneurship
• a Policy Perspective
•   Mike Hobday and Fernando Perini
• Freeman Centre Seminar
• October 5th 2007

Based on Paper Prepared for The Task Force on
Industrial Policies and Development Initiative
for Policy Dialogue (IPD) directed by Joseph
Stiglitz Columbia University, New
York  Forthcoming M. Cimoli, G. Dosi and J.
Stiglitz (eds) Industrial Policies and
Development, (provisional title) Oxford
University Press, Oxford.
Latecomer Presentation4.doc
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Key Questions

• What does entrepreneurship really mean in
  developing countries (DCs)?
• What policies are out there to promote
  entrepreneurship how effective are they?
• What do the success cases of East Asia tell us
  about successful entrepreneurship? and useful
  polices?

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Rationale for the research

• entrepreneurship should play an important role in
  business growth and catching up in the DCs
• current policies based on Washington Consensus
  - DCs should adopt policies of the successful
  countries - de Soto (Mystery of Capital, 2000)
  too much bureaucratic red tape - unclear
  property rights remove barriers and
  entrpreneurship, innovation and development
  follows Doing Business (World Bank)
• support for small and medium sized enterprises
  (SMEs) and venture capital programmes
• problem - little evidence on the specific
  innovative functions played by entrepreneurs in
  DCs (vs developed)

4
Entrepreneurs and Entrepreneurship Policies

• Definitions and Functions of the Entrepreneur
• differ across economics, development economics,
  psychology, sociology, business and innovation
  studies
• many observers have adopted their own definitions
  according to their particular needs
• even within economics there are many definitions
• 44 refereed journals, one on Developmental
  Entrepreneurship (focuses on micro-enterprise,
  not DCs)

5
  Definitions of Entrepreneurs and
Entrepreneurship
In the modern literature little conceptualisation
of DC entrepreneur as distinct from advanced
country entrepreneur
 
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Schumpeterian Model(s)

• policy makers/business leaders tend to adopt a
  Schumpeterian vision of the entrepreneur - risk
  taker and innovator whose actions lead to
  creative destruction at core of growth of the
  economy.
• two types of Schumpeterian Entrepreneur (1934)
  Mark I (or heroic) individual entrepreneur who
  establishes a temporary monopoly in an output
  (product) or input (process) markets and obtains
  super profits from innovation via higher output
  prices and lower input costs.
• Mark II, recognises the role of large firms,
  Schumpeter (1943) emphasised the corporate
  research and development (RD) laboratory in
  large firms - innovation more of a routine
  function

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Policies Towards Entrepreneurship in DCs

•  Policies to Reduce and Reform Government
  Bureaucracy
• de Soto (2000) highly critical of impact of
  Government bureaucracy in DCs
• a typical example to license a small garment
  shop (with one worker) in Lima Peru, de Sotos
  well educated team of researchers
• took six hours a day for 289 days
• cost US1,231 in total (31 times the monthly
  minimum wage) and required 207 administrative
  steps, involving 52 government offices.
• to obtain legal title for the small piece of land
  took a further 728 steps, a total of 26 months of
  red tape.
• de Soto provides many similar examples for the
  Philippines, Egypt, Haiti, Mexico and other DCs
• Informality entrepreneurs and businesses are
  forced to operate outside the formal capitalist
  system - huge amount of dead capital in DCs
  cannot borrow/invest/tax etc.

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Policy Response

• reform government/reduce public bureaucracy
  give rights to informal workers - ideas adopted
  by World Bank, IMF, UNDP, IBRD
• World Banks Doing Business database measures
  state of business regulations across 155
  economies (2006 data) - poor DCs impose far more
  obstacles to business than most developed
  economies - owning property, starting-up
  businesses, declaring bankruptcy, protecting
  investors, legal rights etc
• Doing Business (2005) key argument more than 2
  could be added to the growth of the most
  difficult countries to do business if they
  adopted the regulations of the least difficult
  ones (Djankov and McLiesh 2005, p3) citing
  Toronto, Helsinki, Tokyo and Singapore
• Informality - over-regulation etc. leads to a
  large informal sector, low taxes etc.

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Three problems with doing business approach

• 1. no explanation of why bureaucracy - possible
  explanations (e.g)
• a). expanding government bureaucracy may be one
  response to unemployment a kind of social
  safety net
• b). Krueger (1974) - means of rent extraction by
  particular groups (granting of licences by
  government officials can lead to competition for
  very large rents/bribery etc.)
• If the cause is (b) then an entire structure of
  corruption/unhealthy firm-state relations will
  need to be addressed deep political/economic
  changes needed (recommending best practices of
  advanced countries likely to have little effect)
• Key point need to know the cause of bureaucracy
  if you want to cure it.
•  

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2nd problem with doing business approach

• 2. no establishment of any causal relationship
  between excessive regulation/bureaucracy and low
  rates of development/entrepreneurship this is
  simply assumed
• a) can be many other reasons for poor development
  (e.g. macro/trade problems, Rodrik, 2004), dev.
  strategy failure, export failure, war, famine,
  etc.
• b) could actually be reverse causation low
  rates of development/economic stagnation lead to
  low rates of entrepreneurial activity/high levels
  of bureacracy, Reynolds et al (2004)
• c) China and India (two of fastest growing
  economies, at bottom of Doing Business 2005
  rankings (91 and 115 out of 155 countries)
• Key point cannot simply assume bureaucracy is
  the problem it may be one of many problems, may
  not be a key problem if so, solving it will not
  enable development China and India developed
  without fixing bureacracy and bureacracy did
  not stop them developing!

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3rd problem with doing business approach
policy problem

• 3. Gerschenkron 1962 - latecomers cannot and
  should not adopt the policies of currently
  developed economies
• Latecomers face very different external (market
  and technology) circumstances than earlier
  developers
• They have (usually) more limited and less
  developed institutional capabilities (compared
  with developed countries) - what works in
  advanced does not nec. work in DCs could well
  be entirely inappropriate for stage of
  development
• DC path of development must build on its own
  resources and capabilities, opportunities
  cannot simply imitate best practices of more
  developed economies
• Key point policy solutions must be tailored to
  the problems/needs of each country - growth
  calculations therefore misleading and naïve

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SME Policies as Entrepreneurship Policies

• SME/micro-finance programmes very common
  especially incentives to SMEs in high-tech
  industries - World Bank Group approved more than
  US10 billion in SME programmes in five years
  1998-2002 (Beck 2002)
• confusion should not conflate (a) genuine
  entrepreneurial entry with (b) survival/poverty
  self-employment (e.g. in response to recession).
  An increase in SMEs/new entrants can be a measure
  of stagnation and dev. failure vital not to
  lump (a) with (b) in analysis, data, or policy
• Fehr and Henrik (1995) research in Zambia (survey
  of 215 firms in manufacturing) shows that small
  firms (large in numbers) remained small - were
  relatively unimportant in output/employment/source
  of future growth
• need to create an external business environment
  that fosters growth of all firms (large, medium
  and small) not just SMEs need for healthy
  industrial structure(nb Korea, Singapore mostly
  large firm growth)

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Venture Capital Policies

• support for venture capital as means of
  increasing high techn. entrepreneurship (e.g.
  Brazil, Korea, India, Hong Kong)
• But Reynolds (2003) and GEM (2003) show that even
  in the case of the most developed countries,
  venture capital is only ever a very minor source
  of funds for start-up investments
• formal venture capital market is often
  overestimated in its importance, - investments
  for start-ups often from other sources

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Insights from Recent Research on Entrepreneurship

• Motivations - risk taking/profit making view (led
  to the creation of centres for entrepreneurial
  training and education in DCs)
• research shows entrepreneurs often come from
  traditional trading/business communities - little
  formal training and education (e.g. India,
  Pakistan, Africa, China)
• risk-taking view? Statistical evidence from US on
  financial risk propensity nascent entrepreneurs
  often have non-pecuniary motives
• (a)    autonomy in professional and personal life
  financial independence
• (b)    identity fulfilment desire to
  challenge themselves
• often risk-averse to avoid business closure
  happy to stay small cannot assume profit
  maximisation or desire to grow perhaps even
  more true in DCs

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Embededdness

• entrepreneurship often based on class and ethnic
  background in DCs - and embedded in close
  social/economic networks
• sometimes these networks are restrictive and
  dont allow entry/competition (Sverrisson, 1993,
  Kenya and Zimbabwe) - traditions retarded
  adoption of new technologies etc
• in other cases (e.g. China, Chan 2001),
  entrepreneurial networks share common values
  which promote growth and investment
• Schak (2000) research on Taiwan - SMEs operated
  in groups in response to unfavourable government
  policies in favour of big business

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Evolution of informalality into formal
arrangements

• overseas Chinese networks - informal business
  networks evolved over centuries to manage and
  mitigate risk-taking activities (Chan 2001, Chan
  and Chiang, 1994).
• today, formalised overseas Chinese businesses
  control a large proportion of formal listed
  equity in South East Asian economies (81 in
  Thailand and Singapore).
• informality can be a stage of development issue

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  Overseas Chinese Holdings in Listed Companies
in South East Asia  


Chinese holdings in listed companies not under
state or foreign control, as percentage of market
value of all shares in such firms.   Source
Sakura Bank, Nomura Research Institute, in
Asiaweek, Oktober, 20, 1993      
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Successful Firm-Level Growth in East and South
East Asia

• two key sets of questions re entrepreneurship in
  Asian NICs
• 1. Local firms - what is the nature and path of
  technological progress of domestically-owned,
  indigenous firms (e.g Korea and Taiwan)? What do
  local entrepreneurs actually do? What
  business/technological function do they perform?
• 2. TNCs - what is the entrepreneurial role (if
  any) of TNCs in South East Asia (where they
  dominate exports)? Is there evidence of any
  intrapreneurship or are TNCs
  passive/assembly only?
• (own) research focus - electronics, the largest
  export sector in East and South East Asia

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1. Local Firms
Evolution of OEM system in Korea and Taiwan -
from OEM to ODM to OBM  
   

• original equipment manufacture (OEM) system -
  where large TNCs sub-contract production to local
  Asian firms TNCs provide production and design
  in return for low cost assembly/manufacture

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Local Firms Entrepreneurial Implications

• core technological activity involved was not, in
  the main, a Schumpeterian/RD-centred process
  little radical innovation - gradual catch up via
  small, incremental improvements to existing
  products and processes
• latecomer kind of entrepreneurship based on
  learning of manufacturing organisation (and its
  internationalisation) centred on technician and
  engineering skills
• Entrepreneurial innovation was in organisation
  of basic manufacturing for exports (ie. OEM/ODM
  system new to the world).

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2. Foreign Firms/TNCs
Technological Progress in South East Asia
China enters in 1970/80s with mix of FDI (80)
and OEM compressing cycle of catch up
  Notes Process Engineering Product
Development
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Foreign Firms Implications for Entrepreneurship
in DCs

• latecomer, catch-up function (enabling
  international technology transfer) again
  centred on organisation of manufacturing
  (involving technicians, engineers and managers)
  slow and gradual technological accumulation over
  20-30 years or so - core technological activity
  not Schumpeterian/RD-centred, or new product
  development little if any radical innovation
• passive/screwdriver plants vs technologically
  dynamic? evidence suggests the latter ie.
  purposeful catch-up activities by managers in TNC
  plants (not investment or RD risk, but
  important)
• some studies (e.g. in Malaysia) show that
  managers in the subsidiaries had to overcome
  major obstacles (e.g. skill shortages) to acquire
  technology also rates of progress differ
  linkages often weak with local economy

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Policies for entrepreneurial failure in Asia

• i.e. coherent development strategy but
  insufficient supply of capable firms and managers
  alternative, overlooked, role for policy
• South Korean Government supported a big
  business Japanese style Zaibatsu model
  creating a class of latecomer entrepreneurs and
  managers
• Singapore, Government subsidized entry of foreign
  TNC subsidiaries (also Malaysia and Thailand),
  again creating entrepreneurial capacity
• these acts were important (if implicit) policies
  towards entrepreneurship - part of a wider
  strategy towards industrialisation (including
  export-led growth, internal market competition,
  macro economic stabilisation, basic
  education/technical education)

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Conclusions and Policy Implications

• conventional policies (implicitly?) based on a
  Schumpeterian model of entrepreneurship which
  imitates business functions now carried out in
  highly advanced countries
• problem dynamic advanced Schumpeterian context
  does not yet exist (yet) what is needed is
  latecomer entrepreneurial development
• Washington Consensus approach of transferring
  best practices from the now advanced countries
  does not address needs of individual DCs
  (Gerschenkron, 1962) - latecomer institutional
  capabilities/stage of development/context etc.
  must be accounted for
• Bureaucracy/over regulation? there can be many
  other causes of development failure e.g. macro
  instability/inward looking policies/low value
  commodity exports (Rodrik, 2004)

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Conclusions Lessons from Asia?

• Cannot generalise to other DCs entrepreneurial
  circumstances and needs differ - in Asia,
  entrepreneurial role was to enable catch up,
  learning and behind the frontier incremental
  innovation - rather than Schumpeterian or radical
  technological advances
• entrepreneurs (in new and existing firms local
  and foreign firms) were the main agents for
  acquiring technology from abroad and learning
  also for integrating manufacturing into
  international value chains/networks
• latecomer entrepreneurship centred on very
  basic learning - not a Schumpeterian (leadership)
  innovation function - but a highly specialised
  catch up function distinctive feature of
  catch up
• No model for other countries, but important to
  consider the role of the entrepreneur in each
  particular context

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Key Questions for Workshop on Entrepreneurship

• 1. When would the definition of an entrepreneur
  be the same in a developing country as in an
  industrially advanced economy?

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Key Questions for Workshop on Entrepreneurship

• 1. When would the definition of an entrepreneur
  be the same in a developing country as in an
  industrially advanced economy?
• When the DC entrepreneur is not engaged in
  technology transfer or catching up, but instead
  developing new products and technologies for the
  world market place this does occur, but not
  very often. It is also not a major part of the
  development history of East and South East Asia,
  which was based on latecomer, catching up
  entrepreneurship.
• e.g. if an entrepreneur in Africa was designing a
  new diagnostic system for a local disease, or if
  in Brazil an entrepreneur was developing a new
  3rd generation bio-techn. process for
  agriculture.

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Key Questions for Workshop on Entrepreneurship

• 2. Why have India and China grown so rapidly
  over the past 20 or more years when they are
  ranked no 115 and 91 respectively (ie near the
  bottom) of the 2006 Doing Business database?

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Key Questions for Workshop on Entrepreneurship

• 2. Why have India and China grown so rapidly
  over the past 20 or more years when they are
  ranked no 115 and 91 respectively (ie near the
  bottom) of the 2006 Doing Business database?
• the Doing Business data-base is irrelevant to the
  core development processes of both economies -
  countries can grow and develop despite problems
  of bureaucracy and over regulation
• entrepreneurs can get around regulations and
  bureaucracy if they see an important opportunity
  in the market place
• the reform of bureaucracy and regulation follows,
  rather than precedes, economic development (as
  appears to be the case in the Indian Software/IT
  industry, which is a role model for other sectors
  in India - with government following behind.

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Key Questions for Workshop on Entrepreneurship

• 3. Why is the copying of best practices of the
  advanced economies by developing countries
  probably not advisable for DCs?

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Key Questions for Workshop on Entrepreneurship

• 3. Why is the copying of best practices of the
  advanced economies by developing countries
  probably not advisable for DCs?
• DCs are at a different stage of development and
  need different kinds of policies appropriate to
  them (Geschenkron, 1962)
• DCs may have weak and poorly financed
  institutional capabilities
• Because policies must be based on specific
  development needs these needs must be assessed
  before prescriptions can be put forward
• Developed countries might already be becoming
  over-bureaucratic

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Key Questions for Workshop on Entrepreneurship

• 4. Which entrepreneurship policies would you
  recommend for DCs?

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Key Questions for Workshop on Entrepreneurship

• 4. Which entrepreneurship policies would you
  recommend for DCs?
• Depends on the country and its particular
  circumstances (internal and external)
• Policies depends especially on what major
  development problems/constraints the DC faces
  (Rodrik)
• What ever the policy is, it must be part of and
  integrated into a coherent overall strategy for
  development