Entrepreneurship Essays
Wow, what an interesting time we live in! Hundreds of millions of people's lives are dramatically becoming better all over the world as economic development and opportunities are being realized at an ever increasing pace. The world really is becoming a much better place to live. At the same time we see a lot of problems with poverty, diceases, starving people and environmental catastrophies. So, is the world really becoming a better place? The answer is yes. The seeming paradox is a consequence of globalization. Knowledge, information, technology, capital and people are connected and being able to be transfered on a global scale like we have never seen before. The result is richer people. Value is created through exchange between people with the result of everyone in the exchange getting better off. Nobody is getting poorer. Because of the openness, transparity and communicational possibilities that globalization brings, all of us are now able to imediately and continously see that there are problems such as poverty, violance, deceases and lack of water in all corners of the world where these problems occur. That does not mean that the probelms where not there before. Environmental problems are caused by changing consumption patterns and rapid growth on a global scale but globalization is also the key to solving these problems. The solution is entrepreneurship in a context of globalization.
Opportunities
When poor Chinese workers in a coal factory are causing environmental problems then there is an opportunity for a Chinese entrepreneur to import new environmental technology from the US and Europe to solve the problem. Another solution would be for the Chinese worker to work in a factory that manufactures cell phones or automobiles instead and for China to import environmentally friendly ethanol from Brazil. Today the world is in a better position then ever to reallize the potential in these kind of opportunities. Entrepreneurs are the agents at the forefront of this development.
Definition of entrepreneurship
Entrepreneurship can be defined as the process of individuals who seek and exploit economic opportunities. Entrepreneurship is all about creating business. It is about creating value that once it has been created will spread like rings on water through the financial systems to benefit all people in the economies who embrace it. Entrepreneurship is dependant on a capitalistic system in a legal framwork that protects property rights, efficient markets and access to resources such as capital, labour and knowledge. In order for a country to have entrepreneurs it has to establish such an environment. For entrepreneurship to flourish barriers such as trade regulations, a complex and heavy tax system, beaucracy, and poor legal enforcement has to be minimized. Entrepreneurs need to feel that their property rights are protected, that there is access to fundings from banks or venture capitalists, that they can employ skilled workers and do business in a contractual and a legal framework that can be trusted.
Are entrepreneurs needed?
Why does a country need entrepreneurs? Entrepreneurs are agents of change and growth. They are the engines of the economy. They are the ones behind the fenomenal GDP growth of around 10 percent in countries such as China and India and the change that they provide is a much welcome development in these countries. Well, this picture is not entirely true. Economic development in China is not mainly driven by Chinese entrepreneurs but by foreign direct investment (FDI) from multinational companies such as General Motors, Ford, AstraZeneca and IKEA to name a few. These companies pour in money into China to build factories employ Chinese workers and then sell their products around the world. Allthough there once was a successful entrepreneur behind all these companies this activity can not exactly be seen as Chinese entrepreneurship. The foreign manager setting up a factory in China most certainly has an entrepreneurial management style and can be seen as an intrapreneur within his company. But the manager is almost never Chinese. So what about Chinese entrepreneurs, do they exist and are they needed? This chapter will discuss entrepreneurship in a context of globalization and is based on my experiences and newfound knowledge from my global grand tour as part of the Stockholm Scool of Economics executive MBA. We have visited, experienced and learned about the four BRIC countries since they will encompass half the world's population and have a good chance of being the most powerfull economic block within fifty years from now. I start with China. Do Chinese entrepreneurs exist and are they needed?
Chinese entrepreneurs are very important. When foreign direct investments eventually start slowing down economic growth has to come from domestic consumption and entrepreneurship. So, in order for China to think ahead and plan for its future China needs to develop an environment that supports domestic entrepreneurship. Today China is completely focused on attracting global corporations to invest in China. This is for now a good strategy that makes sure forein capital, knowledge, technology and brands are being established in China. But growth fueled by FDI will eventuelly come to a halt and has to be replaced by highly skilled Chinese managers and entrepreneurs producing goods and services to rich Chinese consumers. Will this transition be easy? No, there will be problems and there already are problems with the strong growth that China has today. Strong growth so far has implied environmental problems and increasing income gaps between people in rich costal regions and poor inland regions. These are issues that Chinese leaders are very aware of and struggling with. The last thing Chinese leaders want is an uprising from poor Chinese farmers in central China who see the enormous wealth beeing created in Hong Kong and Shanghai. There is already a tradition in China to look at the Shanghainese with suspicion as they are sometimes seen as greedy businessmen and sometimes even referred to as “snakes”. Merchands have allways had low status in Chinese culture.
A large and diverse country
China is a very large and diverse country and people in China can not be seen as one homogenous group. There are huge differences between younger and older generations, between rural and urban areas, between cities and between costal and central regions. In order to avoid conflict between different groups in China Chinese leaders are talking about stability and a harmonious society. So, income gaps and the enviroment are very real probelms already. Seventy percent of all water in China is strongly pulloted and the ground water is decreasing since central China to large extent is a highland desert, wich means millions of households are out of water. Therefore future China will benefit from highly skilled Chinese environmental entrepreneurs who develop new environmental technology. These entrepreneurs will contribute to GDP growth and at the same time protect the environment. So once again, Chinese entrepreneurs are very important. This is something that the Chinese leaders seem to be at least vagly aware of since they are establishing and pouring money into Technology parks and creating special economic zones with incentives to promote and attract high tech entrepreneurship.
Will the Chinese culture support a capitalistic system with successful entrepreneurs? Even during the worst communist period when all private initiatives where banned there was some entrepreneurship in the black economy. Communism in China is, in a historical context, a very short but dramatic time. The communists took over the country in 1949 and by 1956 they had eliminated the private sector completely. After the catastrophic poverty and violence during the Cultural Revolution in the 1960s it became obvious that the country needed political and economical reforms. Deng Xiaoping therefore took steps towards market economy as early as 1978 (over a decade before the Soviet Union fell). Under Deng Xiaoping it became possible for Chinese entrepreneurs to start up manufacturing factories. This was something that Chinese entrepreneurs proved to be very successful at and today China is considered the factory of the world.
Chinese culture
I end with some last words about Chinese culture to wrap up the Chinese section of this chapter. Chinese culture is rooted in Confucianism which is a philosophy that emphazise relations. Since relations are very important Chinese prefer partnership solutions to market solutions. Market solutions can be seen as cold and not to be trusted in Chinese culture. Relationships in China according to Confucianism mean different duties to the parties in the relation. Young persons allways have a duty to respect elder persons for example. This becomes very important and can be sencitive if a young foreign manager is the boss of older Chinese workers.
Entrepreneurship in Brazil
Brazil is one of the most entrepreneurial countries in the world if you would define entrepreneurship as being self employed. Roughly one of eight adults are self employed and the rest are working for small companies. Unfortunately for Brazil most of these entrepreneurial minds do not operate growth companies but run small shops, restaurants and are street vendors. These entrepreneurs are entrepreneurs out of necessity in order to survive. In western countries most entrepreneurs are entrepreneurs out of opportunity. They spot an economic opportunity and exploit it. Of course, there is nothing wrong in running a small shop or being a street vendor. On the contrary this is proof of Brazilians being industrious. But in a global BRIC context Brazil is the weakest nation if you consider GDP growth and if you look into the future a couple of decades. Brazil would be much better off if Brazilian entrepreneurs could operate in a framework that promotes growth. Of course, on a government level, this is something that is discused on a daily basis in Brazil and the goverment has launched a country wide, government funded small business association that supports entrepreneurs and help them grow. There are also goverment programs to support women in starting up their own business and getting them more involved. Necessity based entrepreneurship is still on a high level but is beeing reduced and replaced with opportunity based entrepreneurship.
In order to run a growth company you need access to capital and skilled workers. The capital systems in Brazil suffer from high inflation (hyper inflation in some periods), high interest rates, corruption and beaurocracy and the state has large public and foreign depts. As a consequence almost all entrepreneurs rely on funding from friends and relatives instead of banks.
Foreign entrepreneurs
Foreign entrepreneurship is a rarity in Brazil. Because of heavy regulations, beaurocracy and trade barriers it is difficult for foreign entrepreneurs to do business in Brazil. To set up a new business in Brazil it it necessary to file 15 different forms to different authorities. To process this it takes the authorities five months on average (compared to four days in the United States). Local entrepreneurs speed up the process by corruption which is not an alternative for foreigners. Even if a foreigner would prefer to bribe someone they are subject to more sqrutiny simply by beeing foreigners and attracting more attention. It is very common for the foreign businessperson to hire a good despachante or broker to handle their interactions with government officials. You need to be carefull and make sure that you can trust any partner that you choose to work with.
The legal system is operating very slowly so if there is a conflict it can be dragged out for years or even decades before it is solved.
Trade barriers
Brazil has conciously introduced trade barriers because they want to protect domestic industries that are in its infancy. These industries can not compete with foreign companies and need a protected environment to develop. One result of this is the Brazilian company Embraer which makes aircrafts and now successfully competes with Boing and Airbus. Embraer is now the third largest manufacturer of aircrafts after Boing and Airbus. Another result is that foreing direct investment in Brazil is being hampered.
Infrastructure and education
Infrastructure and education are very important to support entrepreneurial activities, and this needs to be developed in Brazil (allthough it is much better than in India). This takes time to establish, especially an educational system that can support knowledge-intensive growth companies.
Pantry of the world
Brazil is the leading economic power in South America with a large and entrepreneurial pouplation of 180 million people that seek economic opportunities. Brazil is the pantry of the world with huge amounts of natural resources and the world's largest exporter of coffee, sugar and meat. Brazil is probably the most diverse economy of the four BRIC economies. Allthough it is profiled as a farmer country with vast amounts of natural resources it has an interesting Internet- and telecommunications sector and a promising manufacturing industry with industrial products such as aircrafts, trucks and cosmetics. Brazil is also well positioned for interesting future industries in the energy sector. Ethanol is a future industry where Brazil is emerging as a global leader. Allthough many things look promising for Brazil, there are some structural problems like education, infrastructure and income distribution that Brazil has to deal with. Beaurocracy in Brazil is also very bad and with it comes also the corruption. Despite this, Brazil ranks very high on the Global Entrepreneurship Model (GEM) list of countries with the highest entrepreneurial activity. More on this model later on in this chapter.
Malandro
I will close the Brazil section of this chapter with an illustration of the Brazilian Malandro. Brazilians have a word for being flexible in order to survive in an environment plauged with beaurocracy. The word Malandro means “not taking it to serious” and “bending the rules”. Malandro is a fictional person in Brazilian culture that pops up in samba lyrics, books, cinema and other media and is a bit of an old folk hero. Malandro is an outlaw, a bohemian that lives by his own rules. Brazilians believe that you sometimes have to be a little bit “Malandro” to survive. This also illustrates the way many people do business in Brazil.
Entrepreneurship in Russia
Russia is rich on gas and other natural resources and is emerging as a dominant exporter of natural resources to for example China and India. Russia is like Brazil benefiting from high commodity prices right now. Unlike India and China, Russia is not as successful in building up more or less knowledge-intensive industries for the future. This makes Russia very vulnerable and dependent on its natural resources. The risk of economic turmoil when commodity prices drop is imminent. Productivity in Russian assets that are needed to exploit natural resources is also diminishing and the country lacks the financial resources to invest in new assets. At the same time Russia is not willing to let in foreign investors to improve productivity.
After the collapse of the Soviet Union in 1991 Russia began to privatize and adopt its system to capitalism. There was an imediate surge in entrepreneurial activity with a few very rich Russian billionaires as a consequence. Since that entrepreneurship in Russia has come to a halt due to signifcant barriers including beaurocracy and new political and legal institutions beeing in its infancy. The number of entrepreneurs has decreased dramatically over the last several years. Entrepreneurship in Russia has come to have a somewhat different meaning in Russia then in other countries. Most of the wealthy businessman that own their firms and call themselves entrepreneurs, have become rich from the government. For example, if someone was in charge of a plant or a manufacturing facility during the Soviet Union, they basically took over it in the process of privatization, without funding it with sufficient amount of money.
Global Entrepreneurship Monitor
Global Entrepreneurship Monitor (GEM) is a global study to investigate the relationship between economic growth and entrepreneurial activity in different countries. GEM is a partnership between London School of Economics and Babson College and is the largest study of entrepreneurial activity in the world. Entrepreneurial activity is mainly measured by the amount of new businesses that are started and the number of people engaged in activities towards starting up new businesses. Entrepreneurial activity is illustrated by the Total Early stage entrepreneurial Activity (TEA) index wich makes comparisons over time and between countries easy. The BRIC countries have amongst the highest TEA values in the world since so much economic activity is happening in these countries right now. This indicates strong potential for entreprenuerial growth in these countries but it all depends on how these countries can create an environment that sustainably supports this.
LATVIA
When I visited Stockholm School of Economics in Riga, Latvia I spoke to a guy that started up his own business after not being able to get a job. After many disapointing visits to the goverment job agency he finaly decided to start his own business. This was at the time when Latvia recently had achieved its independence from the Soviet Union and was in a state of turmoil and rapid change (to the better). Latvia was in a phase of rapid transition from a centrally planned economy, commanded from Moscow, towards a western, market based economy. At the time I spoke to the guy he had a turnover of over 10 million USD and was planning an international expansion. This was possible because Latvia have been very successful in establishing the necessary institutions, including a contractual legal system that can be trusted, in a capitalistic framework that supports entrepreneurial growth. The closeness to the European Union and Latvia's historical ties to Europe has also helped in achieving a swift adoptation towards market economy. Swedish banks like Nordea and SEB has been in Latvia from the beginning and are now the largest banks in the country. This illustrates how a country can go from neccesity based entrerpeneurship to entrepreneurial growth and opportunity based entrepreneurship by introducing the right political reforms and establishing necessary institutions and a supporting framework.Entrepreneurship in India
I am walking around in Bangalore and it is my first day ever in India. I am overwhelmed with heat, moist, noisy traffic with rickshaws and a complete lack of cross walks, pavements and the entire infrastructure that we are so used to in the West. When I arrive at my hotel there are employees everywhere asking me if everything is OK or if I need anything. It is nice to leave my dirty shirts to the laundry guy who gets them cleaned and pressed in an hour. It turns out that in a couple of days I will visit a more traditional form of laundry service that many Indians use. I am visiting India as part of my Executive MBA program at Stockholm School of Economics and we are here for one week of experiences, lectures, company visits and social activities. When we as a group from Stockholm School of Economics together walk around the world's largest outdoor laundry, it is a strange, surreal feeling to see shining white skirts drying in the sun in the middle of the Mumbai ghetto. Flies are abundant when poor Indians work in their sweat to wash the daily supply of dirty laundry with their hands. A tall, thin guy with sunburned skin is taking a shower in the middle of it all. Since cheap workforce is in abundant supply and both easier and less expensive then machines, we do not see one single washing machine in this huge outdoor workplace although we do see one or two centrifuges. Later on in our global grand tour, when we visit China and a SonyEricsson factory that manufactures cell phones, we learn that the reason for using people instead of machines is not only cost but also flexibility. We were expecting to see a fully automated factory that spitted out cell phones at a raging pace, but found a factory packed with people instead of machines. Since the life cycle of cell phones are so short with new models developed constantly it is necessary to have flexibility in the production.
MindTree
MindTree is an Indian IT-company that has grown from zero to 3 000 employees in 6 years. We visited MindTree in Bangalore, India to meet with the founding group of entrepreneurs. A guy in his fourties, dressed in T-shirt and sandals with long, crazy hair meets with us. His name is Parthasarathy but everyone calls him Partha. He presents himself as the executive vice president, owner and co-founder of the company. His eyes shine and he is smiling. In indian style english he talks passionately to us about how he and his friends started the company only a few years ago and that they are now located in nine countries in Asia, USA and the Europian Union (including an office in Ã…kersberga, Sweden) and are selling for 150 million USD a year. They have been making profits from day one.
India has emerged as the global leader in off shoring (outsourcing to a low cost country) of IT-services. One thing that we learn from our experiences here is that you can not outsource your problems. You need to have all your routines in perfect shape before you outsource to an Indian company. Everything in your business process has to be standardized, documented and absolutely clear in every detail before you can even start thinking of outsourcing. The reason to outsource is to lower your cost. You have to add cost for administration, coordination and project management but at the end it is still less expensive in the long run. Sometimes it is also advantageous to be able to produce 24 hours a day. When you sleep they will work and vice versa. One company that we are visiting is prosperous because of this. They call themselves 24/7 and they run an Indian call center that answers customer service calls to western customers in perfect British English and they are open long after employees in the west has gone for the day.
One reason why India has been successful in the software industry is India's close ties to the UK and the US. The US is India's biggest and most important trading partner. Many Indians moved to the US and started companies in the Silicon Valley and then opened up subsidiaries in India. Many other just went to the US to work and then came back and started software companies in India. Entrepreneurship is the absolute key to India's success in the software industry.
India is the world's largest democracy and everyone understands English. This puts India in a good position to attract foregin trade and business. Four percent or about 50 million people even have English as their native language and do not know how to speak any other language. English is referred to as the unifying language since millions of Indians would not understand each other without the English language. Allthough there are many advantages for India in the ongoing globalization of the world, there are some problems that are huge and really troublesome that India has to adress. Almost half the population do not know how to read or write, there is a complete lack of infrastructure in rural areas (and the cities are not good either) and there is widespread poverty especially in rural areas, an income distribution among the most unequal in the world and lack of an educational system. India has some good universities and is now educating their IT-engineers themselves without them having to go to Europe or the Unites States for higher education. Higher education for a small percentage of the population (allthough millions of people) is good and not a problem. The real problem is the complete lack of primary and secondary schooling for kids in rural areas with hundreds of millions of people.
One thing about India is that the electricity goes down about every other hour. This is, as any problem is if looked upon with the right attitude, not only a big problem but also a big opportunity. One company that has noticed this is Nokia. The Finnish cell phone giant has about 70 percent market share in India, an extraordinary figure. The reason for the success is that Nokia has put more resources and energy in learning about the Indian market and its consumers. Nokia now about the electricity opportunity (problem) and therefore developed a torch to be integrated in their cell phones. It was a huge success. The lesson is that it is important to know your market and to do your job thoroughly when you go to India to do business. Another thing that you have to know is that doing business in India is all about cost and volume. India is poor so you most likely will need to charge low prices if you want to reach the Indian consumers. On the other side the consumers are counted in hundreds of millions so if your business model utilizes economies of scale you might have a good business case anyway. The IT-industry is full of business models that utilize economies of scale and eventually these Indian companies will look more to their own Indian market rather then looking to the west.
Some final words
The global economic landsacpe will look quite different in fifty years. The BRIC countries are changing their political systems towards embracing global capitalism. The result is fast growing market economies that will have passed slower growing countries in a couple of years. We are used to know that the world's largest economies are USA, Japan and Germany (in that order). Allready this year (2007) China will be of equal size as Germany. Together, the four BRIC countries will constitute almost half the world's population by 2050 and will be a very powerful economic block with extensive trade between the four countries. Brazil and Russia has the natural resources, China has the manufacturing capabilities and India has its IT-services. The main reason for this enormous economic power is that these four countries have huge populations. The second reason is entrepreneurship based on a strong desire in individual minds to make a better life.