Building Entrepreneurship Ecosystems

Entrepreneurship is a powerful force that many strive to harness. Countries around the world aspire to make their economies more competitive by boosting entrepreneurship. Yet in most countries entrepreneurs still struggle with the basics of operating and growing their businesses because the attention and resources devoted to entrepreneurship promotion tend to focus on singular interventions, not systemic change.

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.

Building a truly competitive entrepreneurship ecosystem requires an environment where businesses 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; each country must find its own unique approach to reform. That requires an open, democratic dialogue where policymakers and entrepreneurs come together to discuss barriers and find solutions.

Building entrepreneurship ecosystems

Any ecosystem involves a number of interconnected key elements that constantly interact and mutually reinforce. An entrepreneurship ecosystem is no different. 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 emerging ways of thinking about entrepreneurship ecosystems’ structure.

Daniel Isenberg, 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.1 Isenberg emphasizes that even though any country’s entrepreneurship ecosystem can be mapped out using the same domains, each 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. That is why it is usually ineffective to simply take one country’s model of entrepreneurial development and blindly apply it to another.

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.”2 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 entrepreneurship ecosystems. His Six + Six Model highlights the six pillars essential to a successful entrepreneurship ecosystem: identify, train, connect & sustain, fund, enable, and celebrate entrepreneurs; and the six participants who must be involved in their implementation: nongovernmental organizations (NGOs), corporations, foundations, government, academic institutions, and investors.3 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.4 Often there is too much emphasis on “the idea” in entrepreneurship support initiatives. Countries need to consciously build ecosystems that help the 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. In practice, that is rarely feasible because all countries face limited resources and all governments 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.

Designing Business-Friendly Policies: Recommendations for Policymakers

Business Entry – simplify business registration and licensing procedures

Disclosure – establish proper disclosure requirements so that information is readily available to consumers and investors

Information – provide equal access to government information on regulations, requirements, and financial resources

Property Rights – define and ensure strong enforcement of property rights

Financing – establish a strong domestic financial system by privatizing state banks and introducing private sector governance principles

Labor – establish simple and efficient labor laws; allow wages to be determined by market forces

Competition – remove restrictions on competition, eliminate subsidies to inefficient enterprises, open up industries reserved for state-owned enterprises

Trade – reduce tariffs and non-tariff barriers, eliminate export-import licenses granted to a select few

Taxes – simplify procedures and/or reduce tax rates, which can increase tax revenues through increased compliance

Price controls – remove price controls and let markets determine prices

Bankruptcy – establish proper bankruptcy procedures

Capacity-building – establish programs that provide entrepreneurs with technological, managerial, and financial skills

Source: John D. Sullivan, Aleksandr Shkolnkov, “The Prosperity Papers #1: Entrepreneurship” Economic Reform Issue Paper No. 0401, Oct 1, 2004, http://www.cipe.org/sites/default/files/publication-docs/IP0401.pdf

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. What is less obvious is how to tailor these policies to local circumstances. The quality of policy solutions depends 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 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.5 At the same time, much of this economic activity remains secretive as entrepreneurs fear expropriation and resort to bribing local officials to stay afloat.

Involving broad-based private sector participation in the policymaking process, in a transparent and representative way, is of particular importance to fostering an 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.6

Another key consideration in building a policy framework that supports the entrepreneurship ecosystem is focusing not just on passing entrepreneur-friendly laws but also on how they are implemented. Implementation gaps, or the difference between laws on the books and their applications in practice, affect 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, it directly undermines their livelihoods.

In recent years one of the most striking examples of an implementation gap hampering economic prospects 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.7 However, many of these laudable reforms remained only on paper while ordinary Egyptians continued to struggle with making a living.

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 strengthened.8

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.

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 economic and political freedom and citizen-led innovation. While government 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 entrepreneurship 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.

The private sector can provide invaluable input into the design of 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 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 Director for Multiregional Programs at the Center for International Private Enterprise.

Endnotes

1 Daniel Isenberg, “Introducing the Entrepreneurship Ecosystem: Four Defining Characteristics,” Forbes, May 25, 2011, http://www.forbes.com/sites/danisenberg/2011/05/25/introducing-the-entrepreneurship-ecosystem-four-defining-characteristics/.

2  Daniel Isenberg, “The Big Idea: How to Start an Entrepreneurial Revolution” Harvard Business Review, June 2010, http://hbr.org/2010/06/the-big-idea-how-to-start-an-entrepreneurial-revolution/ar/1/

3 Koltai & Company, The Six + Six Entrepreneurship Ecosystem Model, http://koltai.co/about-us

4 World Peace Through Entrepreneurship: Steven Koltai at TEDxDirigo, published on Nov 23, 2012, http://www.youtube.com/watch?v=SpH7cBEK0So&feature=youtu.be.

5Let a Million Flowers Bloom,” The Economist, May 10, 2011, http://www.economist.com/node/18330120.

6 CIPE Leading Practices: Montenegro Business Alliance, http://leading-practices.cipe.wikispaces.net/Legislative+and+Regulatory+Reform.

7 Most Improved in Doing Business 2008, http://www.doingbusiness.org/reforms/top-reformers-2008.

8 Improving Public Governance: Closing the Implementation Gap between Law and Practice, CIPE and Global Integrity, 2012, http://www.cipe.org/sites/default/files/publication-docs/GI%20CIPE_Implementation%20Gap_for%20web.pdf. 

Publication Type: 

CIPE

Center for International Private Enterprise
1155 15th Street NW, Suite 700
Washington, DC 20005
Tel: 202-721-9200    Fax: 202-721-9250