Entrepreneurship and economic growth?

Throughout the South-East Asian region entrepreneur creation has almost unquestionably been seen as a viable policy instrument for promoting economic growth. Entrepreneurship has been glorified by media stories, biographies of successful entrepreneurs, and events like ‘entrepreneurship week’, ‘business plan competitions’, and ‘entrepreneurship awards’. Business schools have developed inspiring spiels about becoming an entrepreneur[1] and many governments have made entrepreneurship the centerpiece of regional development policy[2].

Entrepreneurship has been turned into a myth where realities don’t support the image portrayed. The stories about successful entrepreneurs have contributed to the creation of ideas which have promoted the misconception that entrepreneurship actually creates economic growth where data in most developing South-East Asian countries just doesn’t seem to support this[3].

The truth of the matter may be very different. Entrepreneurship can be more aptly described as a narrative about survival and subsistence, than growth and glory.

Are Asian policy makers fooled by the hype that entrepreneur development creates economic growth?

There appears to be an unquestioned assumption that entrepreneur development is a driver of with economic growth. Evidence seems to point to a different story about the role entrepreneurship may play within a developing economy, completely counter-intuitive to what we believe.

The case that entrepreneurship doesn’t contribute to economic growth

When one looks at entrepreneurship on the ground across South-East Asia, very little innovation can actually be seen. The majority of new SMEs do not create any new innovation and as a consequence do not contribute to economic growth.

The Global Entrepreneurship Monitor (GEM), a body founded by Babson College and the London Business School which intensively surveys entrepreneurship activity around the world has found that the majority of new enterprise start-ups within most South-East Asian economies were of a non-innovative nature[4]. In fact most new firm start-ups occur within the service and retail industries[5].

To further understand why entrepreneurship doesn’t add to economic growth, one must consider what types of opportunities people exploit. It appears that very few people actually formally scan the environment for opportunities. If people did, they would not start-up in industries with high competition and low profit margins, like the majority do[6].

Most people have a natural inclination to imitate others employing no innovation whatsoever. The Global Entrepreneurship Monitor Thailand Executive Report indicates that most of the entrepreneurial ventures in Thailand are small and focus on the consumer service sector in retailing, restaurants, and personal services, such as health and beauty services[7].Like the rest of the region, these businesses are the prime source of income of most entrepreneurs and operated for the purpose of earning a living. Local entrepreneurs select an activity that is very locally orientated suggesting that they are opportunistic in the limited sense of the word. There is little, if any value created by these ventures[8].

The reality is that most new businesses formed employ existing technologies and create no new technologies at all. Creating new entrepreneurs does may actually be dampening economic growth, a far sight from the creative economies many governments aspire to develop. Although so much entrepreneurship literature focuses on high tech start-ups, these types of firms are only a very small percentage of new firm start-ups.

Entrepreneurship creates less employment than many people think[9]. From data provided by the Global Entrepreneurship Monitor 2011 Global Report it can be seen that less than 2% of firms in most countries expect to provide more than 20 jobs, about the same percentage 5–19 jobs, with the overwhelming majority of firms expecting to employ between 0–4 people[10]. This is strongly supported by SME data in Malaysia where almost 80% of firms in the country are self employed micro-enterprises, employing no one outside the family. An additional 19% of existing enterprises employ less than 4 persons per enterprise, indicating the SMEs actually contribute little to the growth in employment[11].

According to another piece of research most entrepreneur incomes are lower than what they would earn working for someone else, with less benefits[12], and longer hours of work[13].This is logical given that most entrepreneurial ventures enter into highly fragmented, localized markets, with no source of competitive advantage.

Not only is the average entrepreneur earning less than their salaried counterparts, but income is spasmodic. Income varies from day to day, week to week, month to month, and year to year. Consequently there is a good chance that a person and their family will drop down into a lower socioeconomic group during their tenure as an entrepreneur[14].In the region many owner operator firms are seen as part of the marginal or informal economy.

There is also little chance that an entrepreneur will be able to sell his or her business and make any substantial capital gain. Therefore many South-East Asian countries over the next few years will face the problem of how to support elderly populations with little means to survive. On the whole, starting a business will make a person and their family relatively worse off than if they were working for someone else.

Due to the low profitability of SMEs there is little reinvestment thus insuring that firms remain with a low technology base. As a consequence very few SMEs transform into something bigger and better in the future. This can be attributed to SMEs entering non-attractive, low growth industries, resembling the present mix of industries, i.e., no product and economic evolution[15], high levels of competition, competing on price[16], using resources inefficiently[17], and haphazard management[18].

Most new enterprises do not last very long. It is not difficult to understand these high rates of failure when the majority of new firms seek to compete in highly fragmented markets with heavy competition, where the market environment provides very low profitability levels. In addition, 80% of new products fail after being launched[19], although this sometimes takes some time to acknowledge. Other products may partially fail and not generate enough revenue, provide sufficient level of consumer satisfaction, or return on investment[20]. Many new firms are particularly vulnerable because the strategies founders select to exploit opportunities do not create any new value within the competitive marketplace. These casualty statistics would not be acceptable to any military general on the battlefield, nor would the low success rate be acceptable to any college football coach.

With these images of SMEs the concept of Schumpeter’s ‘creative destruction’ is not apt here. It is more a case of ‘enterprise stagnation’ with SMEs having undifferentiated products, locked in small fragmented markets with little ambition for growth and marginal income ability. Entrepreneurs are far from the heroes of capitalism as Alfred Marshall suggested[21]. The majority resemble the survivors of capitalism, in no way achieving the espoused freedom and empowerment often associated with the rhetoric of entrepreneurship.

As a consequence, entrepreneurship does not necessarily drive economic evolution, and it is questionable whether entrepreneurship is a major source of innovation. Entrepreneurship may actually inhibit growth and even decrease GDP per-capita.

The implications to policy makers

The above issues are of the upmost importance to policy makers.

Although the data presented above may come from diverse sources, debate about the real benefits of entrepreneurship to the economy is an overdue one. Many policy planners have incorrectly formulated their economic strategies utilizing entrepreneurship as a vehicle of growth. The danger of not grappling with this issue could lock the economy into an imitative malaise where firms are only capable of providing a meager living for its proprietors rather than catalyzing new enterprises into the much desired creative base for the economy.

In this scenario the economy will underperform relative to its potential and in absolute terms fall behind its trading competitors. Creating economic growth and diversity is not just about creating new businesses which look good as KPIs, but about developing new skills on a regional scale that enable a large number of these businesses to create news forms of value greater than what is currently harvested out of existing resources. Although this may be achieved within a sprinkling of firms, this is extremely difficult to do at any aggregate level. And this is the real challenge facing both policy makers and those charged with implementation.

In fact some entrepreneurship development programs like promoting the ‘birdsnest’ industry, already growing naturally without government intervention, by the Ministry of Agriculture in Malaysia may be actually be increasing the disparity of incomes. ‘Birdsnest’ is an industry where the wealthy get wealthier and kampong (village) families are shut out due to the high capital costs.

A further example of entrepreneurship development policy widening the income gap goes back to when the them Malaysian Premier Mahathir Mohamed and deputy Premier Anwar Ibrahim during the 1990s created “crony” entrepreneurs who they intended to share wealth and business opportunities with those around them. This “policy in action” still operating today seems to be adding to rent seeking activities rather than innovative businesses with little flow on benefits to the community.

Other programs like OTOP in Thailand may be transferring skills to communities where these skills may create only limited value, leading to no real economic growth. Entrepreneurship development only creates self employment at an income level far below what people could earn while working for others.

Economic growth only comes out of creating more value from existing resources and/or creating new resources through innovation which the majority of Asian enterprises are not doing. It could be argued the income disparities between rural and urban groups are contributing to the present structural conflict occurring in Thailand today (if one accepts this economic paradigm as a partial explanation).

As competition within SMEs is very competitive and in many cases price based, it doesn’t add value to the economy, create employment other than the proprietor, where most of the pursued opportunities don’t require value adding strategies. Other than replicating someone else’s idea, there is no increase of economic diversity and entrepreneurship actually tends to reallocate income rather than add value to the economy.

Policy makers in Asia have adopted the premise that entrepreneurship creates economic growth from consultants and emulated western government policies without question. Although this policy principle has been adapted to local contexts in the implementation mode, the assumptions behind the actual policy remain unquestioned in this policy ‘cut and paste’. It’s time to look critically at the connection between entrepreneurship development and economic growth.