NOVEMBER 15, 2011

CIPE Themes in Depth: Promoting Entrepreneurship through Institutional Reform

Increasingly, governments around the world talk about the importance of entrepreneurship and supporting small business, recognizing that in many cases it is the only option that can meet the growing youth demand for jobs in the private sector. Governments speak about establishing an entrepreneurial economy, adopting new technologies, and promoting innovation in national development plans, electoral campaigns, and policy debates.  However, such calls too often remain simply rhetoric, especially in those countries where the lack of democratic mechanisms leaves public officials largely unaccountable. Delivering on promises – not just making statements – requires a fundamental rethinking of how countries are governed.

In many parts of the world, institutional barriers prevent people from becoming an entrepreneur or render existing firms, especially small business, incapable of growing and creating jobs for others. As such, efforts to educate individual entrepreneurs, support individual firms, create venture capital funds, and help youth develop business plans and obtain financing are not sufficient. They can be quite effective in creating individual success stories but they often fail to address institutional barriers that are the core of the problem. Such efforts move some people out of poverty, but fail to reach many others.

There are many other barriers entrepreneurs may face between opening, running, and closing their business that prevent entrepreneurial activity in many countries. Entrepreneurs in developing countries face myriad problems: enforcing contracts, defending against criminal groups, struggling to overcome pervasive corruption, dealing with complex licensing procedures, navigating conflicting and burdensome customs regulations, seeking credit, finding reliable employees, complying with export requirements, striving to follow overly complicated laws and regulations.  Add to this lack of transparency, lack of trust, lack of market competition, and lack of the rule of law – and it becomes clear why doing business in emerging markets is so difficult.

The recipe for building entrepreneurial economies is simple: build market institutions, remove barriers to starting, operating, and growing a business, reform educational systems, and create a boarder awareness and understanding of what entrepreneurship means as well as appreciation for its contribution to the development of societies. It is more about systemic, institutional changes than individual success stories. Only when the right institutional climate is in place can individual success stories become prevalent; only then they become a norm rather than the exception.

As simple as the recipe for entrepreneurship-driven development may be, the implementation of necessary reforms is a much more complex matter. Institutional change takes time, effort, determination, and, above all, dedicated reformers.  Governments are often regarded as the leading force in building entrepreneurial economies; and although the political will to implement reforms is key, no government can legislate the creation of entrepreneurial economy from the top down. By definition, such economy needs active and engaged entrepreneurs who can work with the government and provide guidance on reform priorities and policy solutions. Otherwise you get the informal sector disconnect – there are rules, procedures, and initiatives on the one hand, and majority of the economic system operating outside of those rules, procedures, and initiatives on the other. Therefore, business can and should become the leading force of reform.

As countries around the world face a growing youth unemployment crisis, governments must look for new solutions to create jobs. Public sector jobs – the traditional engine of employment in many developing countries – can no longer absorb millions of new graduates who instead end up chronically unemployed with their hopes and aspirations for a better future crushed. Entrepreneurship can provide a much-needed alternative for those young people and reinvigorate the economies of their countries, but only if institutional shortcomings that make starting and growing business difficult are addressed.

CIPE’s experience around the world shows that entrepreneurs themselves can become a driving force for reform. When they work together and make their voices heard through business associations and chambers of commerce, they can formulate concrete reform recommendations and engage in a constructive dialogue with the government. In doing so, businesses can go beyond the immediate value of goods and services they deliver to their customers and provide greater value to the country as a whole. They can become an integral part of the complex institutional transformation necessary for democratic and entrepreneurial economies to flourish.

 

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NED  

CIPE is a core institute of the National Endowment for Democracy, which provides funding for many of CIPE's projects. CIPE is also an affiliate of the U.S. Chamber of Commerce.

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