Building Entrepreneurship Ecosystems

Article at a glance

  • Entrepreneurship is at the very core of vibrant market economies and democracies that deliver opportunity to their citizens. By strengthening economic pluralism entrepreneurship provides a strong context for healthy political competition and checks on government power.
  • While globalized economy creates new, unprecedented opportunities for entrepreneurs worldwide, challenges persist especially for large numbers of developing country entrepreneurs stuck in the informal sector. Helping citizens move from necessity to opportunity entrepreneurship is key to democratic development.
  • Building entrepreneurship ecosystems requires attention to multiple and interconnected elements, with a particular focus on locally driven policy reforms. Private sector, through business associations and chambers of commerce, can provide invaluable input into the design of such reforms as well as their implementation.

Introduction

Entrepreneurship is among the most basic and fundamental human endeavors. Every day, people around the world seek new and innovative ways to make a living, to start a new venture, to capitalize on an idea. From street vendors to hi-tech innovators, entrepreneurs come in all shapes and forms. What unites them is the desire to apply their talents and available resources in the best way they can. What distinguishes them is the degree to which they can realize these aspirations depending on to the environment they operate in.

The importance of entrepreneurship goes beyond the immediate, individual achievement. If a proper supporting environment exists to productively channel the entrepreneurial spirit, such individual efforts add up to systemic impact. As demonstrated by successful country examples from Ireland to Chile, entrepreneurship has the power of moving economies to new stages of development and helping societies become more participatory and inclusive.

This article addresses the significance of entrepreneurship to democratic and economic development by focusing on two key elements of entrepreneurship-driven transformations. First, the focus on entrepreneurship must start with entrepreneurs themselves. What does it mean to be an entrepreneur? The article examines this concept, its evolution in recent years, as well as new opportunities and persistent challenges that entrepreneurs face. Second, for entrepreneurs to thrive, there needs to exist a supportive ecosystem of intertwined factors ranging from infrastructure to financial access. Policy frameworks and institutions play a particularly important role in entrepreneurship ecosystems and this article discusses ways of shaping such policies and institutions, focusing on how entrepreneurs can be constructively engaged in dialogue with decision-makers.

The importance of entrepreneurship to democratic and economic development

Entrepreneurship is at the very core of vibrant market economies. It propels innovation and growth, creates jobs, and provides consumers with new and better goods and services. Crucially, in countries whose economies are dominated by the state, entrepreneurship helps overcome dependence on government and strengthens economic and personal freedom. In so doing, entrepreneurs not only advance their own business vision but also, cumulatively, create greater economic pluralism as an alternative to centralized state control.

Economic pluralism in turn provides a strong context for healthy political competition and checks on government power. An economy that enables considerable business diversity implies that economic power is dispersed beyond the state sector, that oligopolies are kept in check, and that crony interests are denied preferential access to the government.1 Therefore entrepreneurship plays a key role in building not just prosperous economies but democracies that deliver opportunity to their citizens.

Democracy does not offer an automatic solution to a poor entrepreneurship environment. Many new and emerging democracies – just like many authoritarian states – struggle with a large proportion of their citizens being confined to the informal sector as a matter of mere survival because the barriers to entry into the formal economy are just too high for most. Often uncertain of property rights and lacking legal protection, entrepreneurs in these countries fight an uphill battle even while they function as the backbone of the economy. However, there is an important difference between democratic and non-democratic environments. The mechanisms of transparency and accountability that the democratic process entails – however imperfect they may be in new and emerging democracies – provide an important avenue for citizens to push for policy reforms that make entrepreneurship easier for everybody.

Entrepreneurship is a powerful force that many strive to harness. Countries around the world aspire to make their economies more competitive by boosting entrepreneurship. New ways of thinking about entrepreneurship drive innovators who use business acumen to advance greater social goals. Sources of finance are becoming more accessible to start-ups than ever before. Yet in most countries entrepreneurs still struggle with the basics of operating and growing their businesses because the attention and resourced devoted to entrepreneurship promotion tend to focus on singular interventions, not systemic change.

Building a truly competitive entrepreneurship ecosystem requires an environment where businesses can operate on a level playing field, where their rights are protected, and the same rules apply to all. There is no one-size-fit-all template for building such ecosystems. While powerful examples of success stories exist, each country must find its own unique approach to reform. That requires an open dialogue where policymakers and entrepreneurs come together to discuss barriers and find solutions. It is not an easy process but – as examples of countries that managed to create thriving entrepreneurship ecosystems show – it can be a transformational one.

What does it mean to be an entrepreneur?

In Wealth of Nations Adam Smith demonstrated that societies prosper thanks to division of labor though specialization. Extrapolating from his insight, entrepreneurship can be defined as the study of human actions that lead to innovative changes in the division of labor, and entrepreneurs are individuals who initiate such actions.2 Jean- Baptiste Say, another early proponent of free enterprise, added that entrepreneur signifies “the person who takes upon himself the immediate responsibility, risk, and conduct of a concern of industry, whether upon his own or a borrowed capital.” Incidentally, he also pointed out that the term entrepreneur was difficult to render in English given that the corresponding word, undertaker, had already been appropriated to a specific use. While entrepreneur by now comfortably inhabits English vocabulary, similar challenges persist in some other languages, occasionally making entrepreneurship a difficult concept to grasp.

The understanding of entrepreneurship has been evolving beyond the traditional definitions of risk-taking innovative action that generates profit through creative use of capital to satisfy a market need. In recent years, for instance, social entrepreneurship gained prominence, highlighting other aspects of motivation that drives entrepreneurs. Although specific definitions vary, it is generally recognized that social entrepreneurs deploy business skills and tools to solve social problems in a variety of fields. They may include ventures such as companies building mobile software to help train rural health workers, producers of biodegradable packaging materials, makers of solar light bulbs for the markets where electricity is scarce, or investors committed to impact lending.

Organizations such as the Skoll Foundation or the Acumen Fund have popularized the idea by supporting, connecting, and celebrating social entrepreneurs around the world. What is more, many universities now offer courses in this area to professionalize key skills and approaches. As social entrepreneurship continues to generate new businesses, their innovative nature has even found recognition in a new corporate legal structure: benefit corporation.

In the United States, benefit corporation is a new type of corporate entity similar to a traditional for-profit corporation but with the following characteristics: a requirement to have a corporate purpose to create a material positive impact on society and the environment; an expansion of the duties of directors to require consideration of non-financial stakeholders as well as the financial interests of shareholders; and an obligation to report on its overall social and environmental performance using a comprehensive, credible, independent, and transparent third-party standard.5 To-date benefit corporation laws have been enacted in 12 states and are under consideration in 13 others plus Washington, DC, and about 200 benefit corporations have been created around the country.

The concept of social entrepreneurship has been driving a new generation of businesses focused on creating shared value that simultaneously yields more profit and greater social impact.7 But shared value is not just something embraced by socially and environmentally conscious start-ups. Many large and established companies have embraced the benefits of creating economic value in a way that also creates greater value for society through their core operations. As Michael Porter and Mark Kramer note, shared value is “a new way to achieve economic success. It is not on the margin of what companies do but at the center. And addressing societal harms and constraints does not necessarily raise costs for firms, because they can innovate through using new technologies, operating methods, and management approaches – and as a result, increase their productivity and expand their markets.”

One example is Nestlé’s work focused on joint value creation in water, nutrition, and rural development – areas crucial to both the company’s core businesses and greater social good. In its coffee business, for instance, Nestlé resolved to double the amount of Nescafé coffee purchased directly from farmers and their associations by 2015. The company is pursuing this goal through a redesigned procurement process making it easier for small suppliers by providing growers with advice on best farming practices, guaranteeing bank loans, and helping secure key agricultural inputs.9 This helped increase yields per hectare, quality of coffee, and farmers’ incomes. At the same time, Nestlé’s gained a reliable network of high quality suppliers.

It that context it is important to keep in mind that starting a new business is not the only form of entrepreneurship available to innovators. One can also become an entrepreneur in the existing enterprise – an intrapreneur. In fact, Global Entrepreneurship Monitor, which is the largest and longest-standing globally focused entrepreneurship research program in the world, considers intrapreneurship alongside other types of entrepreneurship it measures as a part of its total early-stage entrepreneurial activity (TEA) indicator. TEA represents the percentage of working age population involved in establishing business activities (nascent) or running an enterprise for less than 3.5 years (new), while intrapreneurship is entrepreneurship within existing organizations.

Not surprisingly, GEM found that intensity of organizational entrepreneurship increases with the level of a country’s economic development since in more advanced economies there are more mediumsized and large enterprises searching for new angles on competitiveness. In such enterprises, employees can use business opportunities in the existing structures to pursue new ideas. In the factordriven economies only 1.7 percent of employees are involved in intrapreneurship, whereas in innovation-driven economies that rate goes up to 9.1 percent.

Entrepreneurship by its very nature entails innovation and change that can take various forms. Regardless of the form it takes, or the term it is described by, entrepreneurship has been the engine of the socio-economic development around the globe and it remains countries’ best hope for prosperity.

New possibilities and persisting challenges

Globalized economy creates new, unprecedented opportunities for entrepreneurs worldwide. Remittances, for instance, are other area where great entrepreneurship potential can be unlocked. In 2011, remittances to developing countries reached $325 billion and annual increases are expected to be around 7-8 percent in the future. With more than 200 million migrants globally, these are powerful numbers. While currently these funds are mainly used for consumption and debt repayment, they could be more productively channeled. Many countries are realizing the collective power the diaspora and encouraging the use remittance flows for investment through instruments such as ‘diaspora bonds.’13 In the U.S. International Diaspora Engagement Alliance (IdEA) is an example of a platform that brings together various communities, the private sector, and public institutions to provide opportunities for diaspora members to give back to their countries of origin or ancestry. IdEA’s work spans five principal pillars, including entrepreneurship.

Dovetailing with such efforts are various crowdfunding solutions. Through crowdfunding, which usually happens over the Internet, likeminded individuals can form networks and pool their financial resources to support various initiatives built around a particular theme or cause. Many of them involve ideas for new business ventures. Websites such as Kickstarter.com or Indiegogo.com provide easy platforms for aspiring entrepreneurs who otherwise may not be able to access traditional finance. Using the same concept, Kiva.org focuses specifically on entrepreneurs in developing countries, enabling individuals to raise money toward small microfinance loans to borrowers who pitch their ideas to global audiences through Kiva’s website.

Yet as the definition of entrepreneurship expands, new forms of it make strides, and new resources become available, it is important to remember that there exists a vast group of entrepreneurs who struggle with making the most basic kinds of business work. Providing funding in and of itself does not solve the underlying issues in places where the entrepreneurial climate remains difficult. From street vendors in Nairobi to handicraft makers in the Peruvian Andes, many entrepreneurs do not even consider themselves as such because they do not think of what they do as an innovative venture with prospects for growth. They simply do what they know in order to survive.

There is an important distinction between formal entrepreneurs whose businesses are officially registered and therefore have access to legal protection or bank credit, and informal entrepreneurs who have no such access to the institutions that make the market economy work. The implications of so many entrepreneurs being locked out of the formal market system are crucial for the global development prospects, given the massive scale of informality. The World Bank estimates that the weighted average size of the shadow economy as a percentage of the Gross Domestic Product in Sub-Saharan Africa is 38.4 percent; in Europe and Central Asia 36.5 percent, and in high-income Organisation for Economic Cooperation and Development (OECD) countries, 13.5 percent.

Informal businesses operate outside of what Hernando de Soto, president of the Institute for Liberty and Democracy in Lima, called Braudel’s bell jar. French historian Fernand Braudel, quoted by de Soto in his seminal book The Mystery of Capital, famously asked why at its inception Western industrialized economies were dominated by a privileged elite much the way the economies of many developing countries are today, “why that sector of society of the past (…) should have lived as if in a bell jar, cut off from the rest; why was it not able to expand and conquer the whole of society?”16 De Soto posits that the answer to Braudel’s question lies in the lack of access to property rights and the other key institutions of an inclusive market economy. Without them entrepreneurship is a matter of necessity as opposed to choice; entrepreneurs remain stuck in the informal sector without realistic prospects for growth. They cannot break out of the cycle of poverty to become full stakeholders in their societies.

De Soto’s insight illustrates that entrepreneurs, whether traditional or social, formal or informal, do not operate in a vacuum. They work within the framework of opportunities and constraints created by a variety of factors in their environment. Shaping these factors in a manner conducive to starting and growing new businesses, and encouraging innovation more broadly, is the essence of building entrepreneurship ecosystems.

Building entrepreneurship ecosystems

Any ecosystem involves a number of interconnected key elements that constantly interact and mutually reinforce. Entrepreneurship ecosystem is no different in how it encompasses a number of moving parts – components that have to come together to facilitate innovation and growth. While different models exist, the following two examples illustrate the common emerging way of thinking about entrepreneurship ecosystems’ structure.

Daniel Isenberg, a Professor of Management Practice at Babson Global and founder of the Babson Entrepreneurship Ecosystem Project, outlines six key domains of the entrepreneurship ecosystem: conducive culture, enabling policies and leadership, availability of appropriate finance, quality human capital, venture-friendly markets for products, and a range of institutional and infrastructural supports.17 These domains in turn group hundreds of smaller elements.

Isenberg emphasizes that even though any country’s entrepreneurship ecosystem can be mapped out using the same domains, each such ecosystem remains unique because it is a result of hundreds of elements interacting in complex ways. These factors are based in historically shaped institutions that give different countries unique competitive advantages but also unique sets of challenges to overcome in order to become more entrepreneurship friendly. That is why it is usually ineffective to simply take one country’s model of entrepreneurial development and blindly apply it to another. Successful models are useful, but each country must find its own way.

Therefore, the aspiration to become the next Chile or the next Taiwan does not necessarily mean copying them directly. As Isenberg explains, “many governments take a misguided approach to building entrepreneurship ecosystems. They pursue some unattainable ideal of an ecosystem and look to economies that are completely unlike theirs for best practices.”18 Each country instead must examine its own circumstances, strengths, and weaknesses and design approaches that are rooted in these local realities.

Steven Koltai, who created and ran the Global Entrepreneurship Program for the U.S. Department of State, provides another example of mapping out core components of entrepreneurial ecosystems. His Six + Six Model highlights the six pillars essential to a successful entrepreneurial ecosystem: identify, train, connect & sustain, fund, enable, and celebrate entrepreneurs; and the six participants who must be involved in their implementation: non-governmental organizations (NGOs), corporations, foundations, government, academic institutions, and investors.19 Similarly to Isenberg’s approach, Koltai’s model rests on the premise that no single factor alone can spur and sustain entrepreneurship. Instead, entrepreneurs thrive when multiple sectors and actors work together to create a supportive environment for entrepreneurship.

Koltai points out the interconnectedness of all the elements of the entrepreneurship ecosystem and stresses the need for various actors to work together in order to cultivate entrepreneurs. He also emphasizes that it is a mistake to think of entrepreneurs purely as inventors of new products. In fact, only about 20 percent of entrepreneurs are innovators in that narrow sense. Eighty percent are commercializers who bring new ideas to market. Therefore, the vast majority of successful entrepreneurs did not think of their innovation, which can be a new product or process, but rather thought of a way to make somebody else’s innovative idea reality.20 Often there is too much emphasis on “the idea” in various entrepreneurship support initiatives. The inventors are then flooded with funds but they do not receive enough education, mentorship, and other forms of support needed to make their idea commercially viable. Countries need to consciously build ecosystems that help these different kinds of entrepreneurs succeed.

Focus on policy reforms

Because all entrepreneurship ecosystems contain multiple and interconnected components, building such ecosystems implies a balanced approach where equal attention is given to key pillars. However, in practice that is rarely feasible because all countries face limited resources and all government possess only finite political capital to spend on reforms. As a result, focus often shifts to the elements of the entrepreneurship ecosystem that are relatively easy to implement such as entrepreneurship training programs or special funds to provide entrepreneurs with seed money. While valuable in their own right, such programs rarely lead to the entrepreneurial take-off of an economy because they do not reach beyond helping individuals and they fail to address the larger underlying factors that stifle entrepreneurship.

Addressing these barriers is at the heart of a public policy and institutional framework conducive to entrepreneurship. Yet even though public policy and institutions are included as key factors in different entrepreneurship ecosystem models, in practice it is frequently the most neglected element. The reason is simple: while it is easy to pay lip service to the need for policies that supports entrepreneurship, it is much more difficult to achieve them.

The types of needed policies are broadly agreed upon by development experts and entrepreneurs alike, and they include protection of private property rights, enforceable contracts, and efficient government administration. Another key but often overlooked set of policies has to do with bankruptcy laws. It is hardly a surprise that in places where a business failure can land one in jail – like in Egypt and a number of countries in the Middle East and North Africa – entrepreneurship does not flourish.

What is less obvious is how to tailor these policies to local circumstances. The quality of policy solutions that governments pursue depend greatly on the nature of a given political system. Some argue that authoritarian governments may be better suited to spur entrepreneurship, pointing to rapid economic growth rates of China or South Korea’s dictatorial past. History shows, however, that dictators tend to be more concerned with staying in power than with developing entrepreneur-friendly policies. What is more, basic requirements for entrepreneurship such as credit access are often controlled by the government in authoritarian countries and dispensed based on political consideration rather than merit. In such countries true entrepreneurial culture is stifled and frequently hidden in underground because being in the formal economy often means becoming utterly dependent on government favors.

In the case of China, much of its economic vitality comes from the entrepreneurial sector. The number of registered private businesses in the country grew by more than 30 percent a year between 2000 and 2009, and enterprises that are not majority-owned by the state account for two-thirds of industrial output and about 75-80 percent of profit in Chinese industry and 90 percent in non-financial services.22 At the same time, much of this economic activity remains secretive as entrepreneurs fear expropriation and resort to bribing local officials to stay afloat.

One crucial element of sound policymaking that authoritarian governments lack is consultation. In democratic countries, shaping public policy may sometimes appear disorderly, noisy even, with various groups freely expressing their ideas. As a result, though, policies that emerge enjoy the benefit of thorough examination and questioning as the governments are forced to take into account the needs and concerns of a broad section of the society. In authoritarian states where freedom of speech is curtailed and the government controls the flow of information, little such debate is possible. Instead, policies are passed behind closed doors and the main consideration – beyond staying in power – is rewarding cronies.

Involving broad-based private sector in the policymaking process in a transparent and representative way is of particular importance to fostering entrepreneurship climate. Independent chambers of commerce and business associations, if properly and consistently engaged in a policy dialogue with the government, can provide decision-makers with first-hand information on the barriers that entrepreneurs face and with practical solutions to removing them. In CIPE’s experience working with hundreds of local partner organizations around the world, such dialogue can bring important improvements to the environments in which entrepreneurs operate.

Montenegro is a good example. In 2001, a group of local business leaders founded the Montenegro Business Alliance (MBA) with the vision to seek sustainable economic growth reform through legislative and regulatory reform. MBA created a National Business Agenda created through extensive consultations with businesses throughout Montenegro on their top reform priorities and recommendations. MBA then organized forums in all the major cities in Montenegro with business leaders, members of parliament, relevant ministers, local government leaders, the media, and academia to advocate for adopting policy solutions outlined in the agenda.

This was the first time many business people in Montenegro had ever expressed their views publicly and the National Business Agenda was the first document of its kind in all of South- East Europe. As a result of the initial agenda and subsequent ones that MBA has continued to publish, the government accepted many of the proposed solutions. Now Montenegro has the lowest corporate and personal tax rate in Europe (9 percent), the unemployment rate dropped from 30 to 12 percent, the size of the informal economy decreased to 15 percent of GDP, and the country has new, more flexible labor laws, concession laws, lower local taxes, and fewer procedures for registering a business. What is more, the local business community now understands that its voice can make a difference in the public policy debate, as illustrated by the growth in MBA membership. It grew from only 10 members in 2001 to more than 500 dues-paying members in 2011.

Another key consideration in building a policy framework that supports the entrepreneurship ecosystem is focusing not just on passing various entrepreneur-friendly laws but also on how they are being implemented, especially at the local level. Implementation gap, or the difference between laws on the books and their actual applications in practice, affects countries across the globe. At the local level, citizens tend to feel the effects of implementation gaps most painfully because when regulations enabling an entrepreneurial environment remain unimplemented that directly undermines their livelihoods.

In recent years one of the most striking examples of implementation gap hampering economic prospects of much of the society has been Egypt. In 2008, Egypt topped the list of reformers in the World Bank’s annual Doing Business ranking, making improvements in areas such as the minimum capital required to start a business, fees for registering property, and construction permits.24 However, many of these laudable reforms remained on paper only while ordinary Egyptians continued to struggle with making a living. The fact that reforms failed to reach the vast segments of the society contributed to the popular rage that boiled over on Tahrir Square and spelled Hosni Mubarak’s downfall.

The solution to addressing implementation gaps ultimately is to prevent them from happening in the first place by building sound legal and regulatory frameworks. They need to include mechanisms for cost-benefit analysis of proposed legislation and harmonize different laws to foster implementation. The key pillars of integrity in public governance must also be stronger to create a system where the incentive structure for government officials and other social actors drives proper implementation of laws.

Conclusion

Entrepreneurship provides the creative force of economic development. Entrepreneurs lead economic change by creating new goods and services, new firms, and innovative solutions to local – and global – needs. At the same time, entrepreneurship plays a vital role in the development of democracy. It expands opportunity, unleashes individual initiative, and cultivates independent citizens who have a stake in society and democratic governance.

Entrepreneurship is a grassroots global phenomenon that stems from individual ingenuity, courage, and often – as is the case with millions of informal entrepreneurs – the basic need for survival. Helping citizens move from necessity to opportunity entrepreneurship is the responsibility of governments because they put in place institutional frameworks that either help or hinder entrepreneurship. For entrepreneurial ventures to take root and grow, the right environment must be in place. Startups require low barriers at the outset; to achieve scale they require a legal and regulatory framework that rewards entrepreneurial initiative, ensures fair competition, and protects private property rights.

Entrepreneurs embody Friedrich Hayek’s idea that harnessing dispersed local knowledge by individuals is crucial to both economic and political freedom and citizen-led innovation. While government also has a key role to play, too many entrepreneurship promotion efforts resemble failed top-down planning limited to investments in particular industries, clusters, or incubators. In a sustainable entrepreneurial ecosystem, financial, educational and other supports must be backed by a favorable policy environment. Governments should therefore focus on building the legal and institutional basis for supporting bottom-up efforts of entrepreneurs, making sure that laws and regulations are implemented in practice, and enforcing the rules fairly.

All too often much of the emphasis is placed on startups, especially in technology, in search for the next big thing – the next Facebook, the next Google. Governments should also stop trying to blindly emulate the Silicon Valley or countries considered the champions of entrepreneurship. They instead need to look to their own countries’ competitive advantage and make the operating environment easier for entrepreneurs in areas such as fisheries or agribusiness, not just IT or other knowledge-driven sectors.

The private sector can provide invaluable input into the design of such specific policies and reforms as well as their implementation. Through an open, transparent, and democratic dialogue with the government, business organizations in countries around the world can become representative voices of business and key partners in reform. Engagement with the business community can therefore help shape an entrepreneurship ecosystem that is uniquely tailored to the local needs and circumstances. Within that ecosystem, given the chance, entrepreneurs will find their way forward and bring economic dynamism to democracy that delivers.

Anna Nadgrodkiewicz is a senior program officer for Global Programs at CIPE, where she works on projects involving democratic and market-oriented reform around the world. Prior to joining CIPE, she worked as a business consultant in her native Poland on the issues of competitiveness and market entry in Central and Eastern Europe. She holds a master’s degree in German and European Studies from Georgetown University in Washington, DC.

The views expressed by the author are her own and do not necessarily represent the views of the Center for International Private Enterprise (CIPE). CIPE grants permission to reprint, translate, and/or publish original articles from its Economic Reform Feature Service provided that (1) proper attribution is given to the original author and to CIPE and (2) CIPE is notified where the article is placed and a copy is provided to CIPE’s Washington office.

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